Divyadhan Recycling Industries Ltd Management Discussions

Our company is into the business of manufacturing of Recycled Polyester Staple Fibre (R-PSF) and Recycled Pellets. The recycled fibre and pellets are produced from post-consumer PET bottles also known as Polyethylene Terephthalate bottles. Our company started its operations in the financial year 2018-19, by manufacturing Recycled Polyester Staple Fibre (R-PSF) at their manufacturing facility based in Baddi, Himachal Pradesh.

As per mutual discussion between the Board of the Company and BRLM, in the opinion of the Board of the Company there have not arisen any circumstances since the date of the last financial statements as disclosed in the Red Herring Prospectus and which materially and adversely affect or is likely to affect within the next twelve months except as follows:

Our business is subjected to various risks and uncertainties, including those discussed in the section titled "Risk Factor" beginning on page 24 of this Red Herring Prospectus. Our results of operations and financial conditions are affected by numerous factors including the following:

The following discussion on results of operations should be read in conjunction with the Restated Financial Statements for the Financial Year ended March 31, 2024, March 31, 2023, & March 31, 2022 and Our revenue and expenses are reported in the following manner:

Other Income includes Interest income, Commission Income, and Grants received from Government.

Our employee benefits expense primarily comprises of Salaries and wages, Staff welfare expenses, Gratuity Expenses, ESI & PF.

Finance cost includes other interest cost.

Depreciation and Amortization Expenses include depreciation on assets.

Revenue from operation for the Financial Year 2023-24, stood at Rs. 5,612.99 Lakhs whereas in Financial Year 2022-23 it stood at Rs. 5,733.83 Lakhs representing a decrease of 2.11%.

Reason: This was primarily due to a significant increase in government grants, which was 216.30 lakhs in FY 2023- 24 and Rs. 60.98 Lakhs in FY 2022-23, as well as an increase in commission income, which were nil in FY 2023- 22 and Rs. 81.77 lakhs in FY 2023-24.

For the year ended March 31, 2024, the company earned commission income of Rs. 81.77 lakhs from Eppendrop India Pvt. Ltd ("EIPL"). EIPL was able to secure orders from various clients through the connections and expertise of the directors of our company.

Total Expenses for the period ended March 31, 2024, stood at Rs. 5583.48 Lakhs whereas in FY ended March 31, 2023 it stood at Rs. 5515.45 Lakhs representing an increase of 1.23%.

Employee benefit expenses for the Period ended March 31, 2024, stood at Rs. 90.16 Lakhs whereas in FY ended March 31, 2023 it stood at Rs. 96.52 Lakhs representing a decrease of 6.59%.

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Finance Cost for the Period ended March 31, 2024, stood at Rs. 64.61 Lakhs whereas in FY ended March 31, 2023 it stood at Rs. 56.33 Lakhs representing an increase of 14.71%.

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The Depreciation and Amortization Expenses for the Period ended March 31, 2024, stood at Rs. 176.18 Lakhs whereas in Financial Year 2022-23 it stood at Rs. 150.27 Lakhs representing an increase of 17.24%.

The Other Expenses for the Period ended March 31, 2024, stood at Rs. 165.09 Lakhs whereas for FY ended March 31, 2023 it stood at Rs. 115.28 Lakhs representing an increase of 43.20%.

Reason: The major increase in other expenses is from Auditors remuneration, Carriage outward, Commission & Brokerage, Directors Salary and Repair & Maintenance of Plat & Machinery. Increase and their respective change is as follows:

Our total tax expense also accordingly increased by Rs. 7.71 Lakhs from Rs. 83.89 lakhs in FY ended March 31, 2023 to Rs. 91.60 Lakhs in FY ended March 31, 2024.

21.61 Lakhs from Rs. 216.18 Lakhs in FY ended March 31, 2023 to Rs. 237.80 Lakhs for the FY ended March 31, 2024.

The reason for the increase in PAT margin is increase in Total income because of increase in other income resulting in an increase in Total Income by Rs. 97.36 Lakhs but a small increase in total expenses by Rs. 68.04 Lakhs relatively.

Reason: The capacity utilization in FY 2022 was 6,978.85 Metric Tonnes, representing 86.91%, whereas in FY 2023, it decreased to 6,688.28 Metric Tonnes, or 83.29%. Despite this 3.62% reduction in capacity utilization, the revenue from operations remained nearly the same between the two fiscal years. This indicates that although revenue from operations was Rs. 5,733.83 Lakhs in FY 2022 and Rs. 5,777.70 Lakhs in FY 2023, the capacity utilization decreased. This was primarily due to an increase in the sale price per unit of output, which rose from approximately Rs. 80 in FY 2022 to around Rs. 85 in FY 2023.

Further, the prices of recycled fibres range from Rs. 65 to Rs. 110 per kg depending upon quality and availability and pricing of raw material. Some fibers that trade at higher rates is extremely difficult to manufacture with very few players who are able to supply regularly the fiber of premium quality. Our Company is a key player in the Fibre market where we manufacture majorly two types of fibres, Hollow & Solid. Hollow Fibre which is used in industries like home furnishing, mattresses, furniture, cushions, toys etc. is typically more difficult to make than Solid Fibers which is used in industries like moisture insulation, filters, layers, and rope production. Thus, because of the quality of Hollow fiber and industry it caters to allows it to demand higher rate than Solid Fibers. Our company has made significant strides in establishing the product portfolio for the Hollow Fibers under which the process of manufacturing requires for the machines to operate at a bit slower speed to ensure the quality. The production output may reduce a bit but it is offset by the higher pricing from market. The reduction in production is natural consequence of manufacturing Hollow Fiber over SOLID Fiber. Also, the company is still fulfilling orders of Solid Fiber but only for the premium varieties of solid Fiber.

Additionally, Other Income for FY 2023 saw a significant decline compared to FY 2022. It dropped from Rs. 203.82 Lakhs in FY 2022 to Rs. 81.69 Lakhs in FY 2023, with the major reductions occurring in Government Grants and Commission Income. As a result, the decrease in Other Income in FY 2023 has contributed to a decline in the companys Total Income.

Reason: Revenue from operation decrease primarily because of decrease in sales of goods in domestic as compared to previous financial year. Revenue breakup of the same is as follows:

Reason: This was primarily due to a significant decrease in commission income, which was 59.10 lakhs in FY 2021-22 and nil in FY 2022-23, as well as a decrease in grants, which were 143.07 lakhs in FY 2021-22 and 60.98 lakhs in FY 2022-23.

Total Expenses for the period ended March 31, 2023, stood at Rs. 5,515.45 Lakhs whereas in FY ended March 31, 2022 it stood at Rs. 5,909.26 Lakhs representing a decrease of 6.66%.

Cost of Material Consumed including change in inventory for the year ended March 31, 2023, stood at Rs. 5,097.04 Lakhs which represents 87.65% of Total Income whereas in year ended March 31, 2022 it stood at Rs. 5,482.13 Lakhs which represents 91.65% of Total Income. This represents a decrease of 4.10%.

Reason: The Cost of Material Consumed has decreased as a %age of Revenue from Operations by 6% and 4.10% as %age of Total Income. This is due to the fact that the Average Selling Price of each kg of fiber had increased by 6% i.e. from Rs. 80 per kg to Rs. 85 per kg.

• Employment Benefit Expenses

Employee benefit expenses for the Period ended March 31, 2023, stood at Rs. 96.52 Lakhs whereas in FY ended March 31, 2022 it stood at Rs. 85.52 Lakhs representing a, increase of 12.87%.

Finance Cost for the Period ended March 31, 2023, stood at Rs. 56.33 Lakhs whereas in FY ended March 31, 2022 it stood at Rs. 75.69 Lakhs representing a decrease of 25.58%.

The Depreciation and Amortization Expenses for the Period ended March 31, 2023, stood at Rs. 150.27 Lakhs whereas in Financial Year 2021-22 it stood at Rs. 141.69 Lakhs representing an increase of 6.05%.

The Other Expenses for the Period ended March 31, 2023, stood at Rs. 115.28 Lakhs whereas for FY ended March 31, 2022 it stood at Rs. 124.22 Lakhs representing a decrease of 7.20%.

Our total tax expense also accordingly increased by Rs.64.54 Lakhs from Rs. 19.35 lakhs in FY ended March 31, 2022 to Rs. 83.89 Lakhs in FY ended March 31, 2023

For the various reasons stated above and adjustments of tax expense, Our Restated profit after tax increased by Rs.

163.27 Lakhs from Rs. 52.91 Lakhs in FY ended March 31, 2022 to Rs. 216.18 Lakhs for the FY ended March 31, 2023.

Profit after tax for the year ended March 31, 2023 was Rs. 216.18 Lakhs i.e. 3.72% of Total Income and for year ended March 31, 2022 was Rs. 52.91 Lakhs i.e. 0.88% of Total income. The reason for increase in PAT for the periods is as follows:

The company was able to generate incremental revenue per unit sale price of output goods from ~Rs. 80 per kg to

~Rs. 85 per kg. Thus, if we take an effective increase in sales i.e. Rs 5 per kg on sales over sales price of Rs. 85 per Kg. i.e. 5.88%. Also, we if take into consideration the raw material, it has stayed at approximately Rs. 55 per kg. If we take both things into consideration, the benefit of Operational Expenses could be catered by this increase in per unit sale of finished goods.

If we analyze Table 1, the increase in Profit Before Tax (PBT) is primarily due to an improved gross margin at the operational level, driven by an increase in the sale price per unit of finished goods. A cumulative rise of approximately 6% in the sales price has directly contributed to the higher Gross Margin at the cost of goods sold (COGS) level. When examining other items before EBITDA, such as employee costs and other expenses, there is only minor fluctuation, given that the capacity utilization has not increased. Additionally, the companys purchase of assets has led to higher depreciation, and the repayment of borrowings has resulted in lower financial costs.

In Table 2, its important to note that the PBT margin (including Other Income) shows a variance of only 3.95%, compared to a 6% variance in Table 1. This 2% difference is due to a decrease in Other Income in FY 2023. The key differences in Other Income for FY 2023 are attributed to a lack of commission income, which was received in FY 2022 but not in FY 2023, and a reduction in government grants.

We face competition from existing and potential competitors which is common for any business. Over a period of time, we have developed certain competitive strengths which have been discussed in section titled "Our Business" on page 120 of this Red Herring Prospectus.