DMCC Speciality Chemicals Ltd Management Discussions

GLOBAL ECONOMY

The global economy began its journey in 2022 with a weaker position than estimated, which is partly attributable to the threats from new COVID-19 variants from across the world, along with politically charged wars in Europe. Throughout 2021 and in January 2022, the world witnessed higher energy prices, disruption in supply chains and notably high global inflation. While the impact of COVID-19 was smoothened out globally on account of rapid vaccination drives and effective policy mechanisms, the war in Ukraine since February 2022 triggered a costly humanitarian crisis that is continuing to contribute to a significant slowdown in global growth and adding to inflation. Resultantly, fuel and food prices have increased rapidly, hitting vulnerable populations in low-income countries the hardest. Currently, the global growth is projected to slow down from an estimated 6.1 percent in 2021 to 3.6 % in 2022 and 2023, which is 0.8 and 0.2 % points lower for 2022 and 2023 than projected in January.^[1]

REAL GDP GROWTH PROJECTIONS

(H IN CRORE)

Note: Source: OECD Economic Outlook, Volume 2021 Issue 2

The outlook for the coming quarters and the year is heavily dependent on various downside risks that include simultaneous COVID-19 disruptions and war-driven economic disruptions, which may further block the supply chain bottlenecks, while de-anchoring inflation expectations and contributing to financial and climate-related stress, thereby weakening long-term growth drivers.

[1]https://www.oecd.org/economy/india-economic-snapshot/

INDIAN ECONOMY

After a disrupting second wave of COVID-19, Indias recovery is gaining momentum and GDP was expected to grow at 9.4 percent in FY 2021-22, before reverting to 8.1% in FY2022-23, and 5% in FY 2023-24. [2] However, the IMF was quick to slash Indias GDP prediction in January 2022 to 9 percent citing reasons of COVID-19 related virus spreads. Inflation continues to be on an upswing and is expected to ease as supply chain disruptions smoothen out. Financial markets remained strong through the year and capital inflows continued to support the build-up in reserves. The countrys last mile vaccination drives along with its stringent policies helped overcome the third wave of COVID-19 effectively, in the first half of 2022.

India will continue to be affected by the downsides in the global economy, as the financial environment remains volatile due to the humanitarian crisis in Europe. The macroeconomic policies remain unstable, as multiple sanctions by European and Western countries are being levied on Russia. Even though Indias economic and trade relations with Russia remains largely unimpacted, it may pose to be a threat for India in the future, if the war escalates and India is seen as having sided with Russia.

The Indian government is committed to invest in social and physical infrastructure, including reducing irrelevant regulations in product and labour markets, accelerating sale of public companies in non-strategic sectors and restructuring state-owned banks among other measures, which is expected to augment investment and employment within the country. Further, the RBI is resolved on acting forcefully if increment in global commodity prices negatively influence wages and core prices in India.

GLOBAL CHEMICALS INDUSTRY

The global chemicals market valued at around USD 5,027 Bn, had China leading in market share (39%) followed by European Union (15%) and United States (13%), while India accounted for ~4% of the market. This industry is expected to grow at 6.2% CAGR; reaching USD 6,780 Bn by 2025.

In the next five years, the commodity chemicals market which is presently valued at ~USD 3,745 Bn, is expected to grow at 5%-6% globally. APAC is anticipated to grow at the fastest rate of 7-8% during the period of 2020-25.

Moreover, rapid industrialisation in APAC countries like India and China, is expected to drive demand in this region for speciality chemicals. This surging demand is attributable to a huge customer base across the globe for exports, along with increasing industrial production and boom in the construction sector as witnessed in APAC.

The speciality chemicals market stood at ~USD 847 Bn in 2020, and is expected to witness a growth between 5-6% over the next five years.^[2]

INDIAN CHEMICALS INDUSTRY

The Indian chemicals market, valued at USD 186 Bn (~4% share in the global chemical industry), includes commodity chemicals accounting for almost 46% of the total share^[4]. This market is expected to reach ~USD 330 Bn in the next 5 years, with an anticipated growth of ~12.2% CAGR. The speciality chemical industry forms ~47% of the domestic chemical market, which is expected to grow at a CAGR of around 11% over the same period.

The Indian Speciality chemicals industry, driven by both domestic consumption and exports, is expected to become the next great export pillar for the country. Indian companies are increasingly gaining favour with global MNCs, who are now looking at alternate sources for supply to reduce dependence on China. Presently, China accounts for ~15-17% of the worlds exportable speciality chemicals, whereas India accounts for merely 1-2%, indicating widespread opportunity for Indian companies.

Note: Indian chemical industry generally showcases Agrochemicals & Fertilizers and Pharmaceuticals API outside of Speciality chemicals. In the above graph the speciality chemicals section, however, is inclusive of the 2 categories to maintain consistency with the Global section. Agrochemical & Fertilizer and Pharmaceuticals API contribute to more than 55% of the speciality chemical space in India.

INDIAS ADVANTAGE

The Indian government is geared to augment the Indian Chemicals exports, leveraging its technical know-how and capabilities, to cater to the demand gap left behind by the Chinese companies. The government has enabled production ramp ups and exports, and is focused on dishing out incentives for Indian chemicals manufacturers to produce optimally.

141 https://www.ibef.org/industry/chemical-industry-india/infographic

COMPANY OVERVIEW

The Dharamsi Morarji Chemical Company Limited (DMCC) began its humble journey in 1919 with just one product and one manufacturing unit. Today, the Company is a global leader in manufacturing of speciality and bulk chemicals, and it supplies cost-effective and value-added products to over 25 countries across all 6 continents.

DMCCs product portfolio comprises speciality and bulk chemicals across sulphur, boron and ethanol chemistry. These chemicals find application in a wide range of industries, such as, pharmaceuticals, detergents, dyes, fertilizers, pigments, cosmetics among others. DMCC is proud of its 100+ years of expertise in sulphur chemistry, and has further diversified its operations across other downstream products as well.

The Company is geared on maintaining the highest standards of safety in its functioning, adopting practices and processes for safer and responsible manufacturing operations, all in a bid to reduce the impact of its operations on the environment. DMCC is acutely aware of the importance of focus on ESG and has been working diligently towards the goals set for reducing carbon emissions, replacing traditional fuel sources with nonconventional sources, and managing water and waste responsibly. As a result, the Roha facility has already achieved the status of being carbon negative.

BUSINESS REVIEW

Bulk Chemicals

As industries across the world increasingly look towards partnering with trusted manufacturers for their essential input requirements, DMCC is geared to leverage its strong foundation of its sulphuric acid business to grow and cater to its clientele. Due to the commodity nature of this segment, it operates on low margins and high volumes coupled with high price sensitivity. Performance in this segment is incumbent on uninterrupted raw material availability, high plant utilization levels, and strong logistics management. Domestically, these products are sold within a limited radius from the manufacturing site, and while approximately 50% of the production is sold at markets, the rest is consumed captively.

In FY22, Bulk chemicals contributed 46% to the top line as compared to 35% in the previous year with the commissioning of bulk chemical facility at Dahej. The bulk chemicals vertical experienced robust growth due to increased realisations. Since higher realisation resulted from higher input costs, the company passed on the price increases to its customers and maintained its profitability during the year. DMCC is geared toward adding further momentum to its performance through its incremental capacities, which have already been commercialised. As a result, this vertical is expected to deliver strong volumetric growth in FY23.

Speciality Chemicals

DMCC is focussed on scaling its speciality chemicals segment while retaining scale in its bulk chemicals business. The chemicals in this segment are knowledge- based, that mandates strong process competencies and technical abilities in handling hazardous reactions. Moreover, the growth in this segment is connected with maintaining long-term strategic relationships with customers. The best feature of the speciality chemicals business is its disconnect from raw material price volatility in the long term, which has very limited impact on the overall segment. Further, approximately 65-70% of the finished goods are exported.

In FY22, speciality chemicals contributed 54% to the top line as compared to 65% in the previous year. While the Company continued to increase its market share and volumes in FY22, the profitability was negatively impacted by the unprecedented increase in input costs. In addition, while the Company consistently passed on the raw material price rise to its customers with a quarterly lag, however, every quarter, the prices escalated higher than in the preceding one, resulting in depressed margins and concealing the businesss inherent strengths. The speciality chemicals business is projected to remain strong on account of robust demand from domestic and export customers. Furthermore, with expected commercialisation of incremental capacities during FY23, the Company expects to report volumetric growth in this vertical.

FINANCIAL PERFORMANCE

The Company recorded a strong growth in revenues, as it increased from H 200.15 crores in FY21 to H 326.30 crores in FY22, charting a growth of 63.03% YoY. This growth was on the back of higher realisations and moderate volumetric growth coupled with commissioning of the Bulk Chemicals facility at Dahej Unit. The Companys EBITDA too grew from H 43.27 crores in FY21 to INR 46.10 crores in FY22, recording a 6.53% YoY growth. The EBITDA margins came in at 14.13% in FY22, as against 21.62% in FY21, which is attributable to higher raw material prices and increased distribution overheads observed through the year. The Companys PAT stood at INR 21.34 crores in FY22 as compared to INR 32.58 crores in FY21 due to deferred tax on account of expansion at both manufacturing units.

DMCC continued with its investment in diversifying its product portfolio and strengthening its infrastructure and processes, to drive greater efficiencies during the year.

On the CAPEX front, the Company is well underway with its capacity enhancement in value-added segments, with a portion of it being realised this financial year while the other part is expected to come into operations in FY23.

The strategy of de-risking the business model and making incremental CAPEX in more value-added assets will help deliver long-term value to all our stakeholders.

KEY FINANCIAL RATIOS

3 The Interest Coverage Ratio is adverse due to lower profit margin and payment of borrowing cost for the capex expansion at Roha and Dahej Units.

4 Your Companys Debt Equity Ratio (Net) has increased mainly on account of increase in debt for Capex expansion at Roha and Dahej Units.

6 Return on Net Worth is adverse due to lower profit margins.

RISKS AND CONCERNS

In todays VUCA world, individuals, communities, nations and even businesses are not without any risks and concerns. It is imperative for businesses to become more aware of its operating context, while also creating systems and processes that safeguard it from any exigencies. A robust risk management framework enables DMCC to predict, strategise and protect its business, while ensuring that the Company is moving towards a direction of growth and incremental success. The framework lays down clear

roles and responsibilities for various business segments, which offer a strong foundation for appropriate risk management procedures, their effective implementation as well as the independent monitoring and reporting, handled by its Internal Audit and top management team. The Company is focused on building distributed leadership and succession planning processes, and is also preparing for enhancement of its organisational capabilities.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACIES

DMCC has a robust internal control system that includes well-defined policies, guidelines and procedures. The Companys independent and adequate system of internal controls ensures that all its assets are safeguarded against loss from unauthorised use or disposal, and its transactions are authorised, recorded and reported appropriately. The internal control systems are supplemented by a programme of internal audit. The Audit Committee of the Board is entrusted with periodically reviewing the reports of the Internal Auditors, while also monitoring adherence of such policies and procedures by the operating Management. The Audit Committee is responsible for providing overall guidance and suggesting modifications and improvements on a continual basis.

HUMAN RESOURCE

The Company has continued with its drive to institutionalize and upgrade its HR processes. A crucial HR practice is to always maintain transparency and be open with employees regarding the success and failures of business. This open environment of communication makes employees feel trusted, respected and valued and drive the culture of the organization. The diversified skill sets of our employees add significant worth to the Company. Every organization which values and appreciates its Human Resource succeeds in its goals and receives positive results. At DMCC, we always believe in the concept of human empowerment. We firmly believe that human resource is the most important asset of the organization, as it influences growth, progress, profits and shareholders values. Special emphasis is being led continually on recruitment of multi -disciplinary and experienced staff to carry forward the growth objectives of the Company. During the year, we continued our efforts aimed at improving the HR policies and processes to enhance our performance. HR could get closer to the employees in extending the required support during the covid pandemic We have initiated a few online systems and digitization. Initiated a few employee engagement programs to keep our employees motivated and feel back to office and togetherness. Regular training programmes are being held for the benefit of the staff and the workmen. The Company believes in a collaborative approach and works closely with the unions, and Industrial relations have been cordial all along. The number of permanent employees on the rolls of the Company as on March 31, 2022 is 385.

CAUTIONARY STATEMENT

Statements in this "Management Discussion and Analysis Report" describing the Companys objectives, projections, estimates, expectations or predictions may be considered as "forward looking statements" within the meaning of applicable security laws and regulations. Many factors may affect the actual results, which could be different from what the Directors envisage in terms of the future performance and outlook.