Ecoplast Ltd Management Discussions.

Ecoplast Ltd is one of Indias reputed suppliers of multilayer co-extruded polyethylene and co-polymer films to the flexible packaging industry as well as a variety of other Industrial Applications around the world.

The Company has had a major role in the development of the flexible packaging industry in India ; this industry uses multi layer polyethylene and co-polymer films for laminating to one or more substrates, such as polyester film, Biaxially Oriented Polypropylene film, often in combinations with aluminum foil and/or paper, depending upon the packaging system and the product to be packed. The multilayer film forms the inner most layer - the heat seal layer - of the laminate, which is in contact with the packed product and is a critical part of the laminate for ensuring shelf life of the packed product.

Since over three decades, The Company has been setting standards on high quality and innovation of multilayer film structures to provide the required film properties critical to pack, preserve and display a wide range of products world over.

Currently we serve following Applications

> Film for Aluminum Composite Panel

> Films for Surface Protection

> FMCG and Pharma Packaging

Currently, we also export products to developing and developed countries Key strengths

• Designing capabilities that create and sustain market differentiation

• State-of-the-art and integrated manufacturing capabilities

• Consistent quality focus to deliver safe, convenient and secure consumer packaging

• An engaged and experienced team

Global economic overview

According to the World Economic Outlook by the International Monetary Fund (IMF) published on April, 2020, The COVID-19 pandemic is inflicting high and rising human costs worldwide. Protecting lives and allowing health care systems to cope have required isolation, lockdowns, and widespread closures to slow the spread of the virus. The health crisis is therefore having a severe impact on economic activity. As a result of the pandemic, the global economy is projected to contract sharply by -3 percent in 2020, much worse than during the 2008-09 financial crisis.

In a baseline scenario, which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound, the global economy is projected to grow by 5.8 percent in 2021 as economic activity normalizes, helped by policy support. There is extreme uncertainty around the global growth forecast. The economic fallout depends on factors that interact in ways that are hard to predict, including the pathway of the pandemic, the intensity and efficacy of containment efforts, the extent of supply disruptions, the repercussions of the dramatic tightening in global financial market conditions, shifts in spending patterns, behavioral changes (such as people avoiding shopping malls and public transportation), confidence effects, and volatile commodity prices. Many countries face a multi-layered crisis comprising a health shock, domestic economic disruptions, plummeting external demand, capital flow reversals, and a collapse in commodity prices.

Indian economy

According to Crisil report published in June 2020, The Indian economy will contract 5% in fiscal 2021. with non-agricultural GDP to contract by 6% and agriculture could cushion the blow by growing at 2.5%. This is premised on the following: an extension of restrictions and lockdown, especially in states where Covid-19 cases are still rising; a normal monsoon that supports the kharif crop and agriculture incomes; softer crude oil prices; and, limited fiscal support to prop up an immediate growth revival. Overall, risks remain tilted to the downside and hinge on further extension in containment measures, slipping of global growth and a sub-normal monsoon.

> Bigger role for government. The heft of the government in driving growth was seen in Q4 data as well. Government consumption spending saw a double-digit growth for the third consecutive quarter. This will continue in fiscal 2021 as fiscal spending on stimulus measures gathers speed. The role of private sector in supporting growth will stay weak. In Q4, private consumption growth at 2.7% was the slowest in 21 quarters while fixed investments contracted for the third consecutive quarter.

The government extended the lockdown four times to deal with the rising number of COVID 19 cases, curtailing economic activity severely. Despite easing of restrictions, the first Half of this fiscal will be the worst affected. Not only will the First Half be a washout for the non-agricultural economy, services such as education, and travel and tourism among others, could continue to see a big hit in the quarters to come. Jobs and incomes will see extended losses as these sectors are large employers. CRISIL also foresees economic activity in states with high Covid-19 cases to suffer prolonged disruption as restrictions could continue longer.

The successive lockdowns have a non-linear and multiplicative effect on the economy - a two-month lockdown will be more than twice as debilitating as a one-month imposition, as buffers keep eroding. Partial relaxations continue to be a hindrance to supply chains, transportation and logistics. Hence, unless the entire supply chain is unlocked, the impact of improved economic activity will be subdued.

Therefore, despite the stringency of lockdown easing, their negative impact on GDP is expected to massively outweigh the benefits from mild fiscal support and low crude oil prices,

Industry overview

Global flexible packaging market

The global packaging market size during the COVID-19 pandemic is projected to grow from USD 909.2 billion in 2019 to USD 1,012.6 billion by 2021, at a Compound Annual Growth Rate (CAGR) of 5.5% as the most likely outcome during the forecast period, with the best-case scenario reflecting 9.2% growth and the worst-case scenario at 2.2% growth. The major drivers for the packaging industry include the increased demand for FMCG and pharmaceutical packaging, rising e-commerce sales due to lockdown.

Based on material type, the plastic segment is projected to lead the packaging market during the forecast period.

The plastic packaging segment is expected to lead the market during the forecast period. The COVID-19 crisis has shown that, since the demand from many end-use industries is growing, mainly the food & beverage and healthcare segments, the use of plastic packaging will also see a rise during this crisis.

Based on application, healthcare is one of the fastest-growing segments of the packaging market amidst this pandemic

The world has awakened to the potential risks of COVID-19; there has been a massive effort to add capacity to the healthcare system rapidly. Healthcare packaging products, such as syringes, vials, and cartridges, are required on a large scale amidst this pandemic to fulfill the increasing global demand.

Indian packaging industry

Indian packaging industry is estimated to be valued around $70 billion by FY20. The covid19 pandemic has spurred a fresh spurt of growth in food retail and e-commerce, which will catalyze the demand for recycled flexible packaging in the food and beverage industry. Earlier, people in small towns had to come to a city to buy a big brand. With the convenience that flexible packaging offers in terms of lightness, flexibility and durability, transporting products or brands to the smaller towns or rural parts of the country has become much easier. This has also helped the growth of retail and e-commerce to smaller towns.

Also, as the covid19 pandemic rages unabated across the world, there is now more awareness today about the significance of buying packaged products, especially when it comes to foods items. People have come to realize and understand that packed foods are safer in comparison to products/produce sold loose. While the covid19 pandemic has certainly created a higher awareness about flexible packaging, the online retail boom that the crisis has fuelled has also created a big disruption in our shopping and consumption habit, especially among the rural folks who had hitherto been in the habit of buying loose. So, until a decade back, people in small towns and rural places used to buy most of the staple items such as salt, sugar or oil or atta in loose. There were issues of hygiene, spoilage and wastage due to the lower shelf life of loose items. However, thanks to the widespread use of flexible packaging today, rural and small towns have started buying packed, branded stuff of higher quality. In the immediate future, packaging technology will become so flexible that people will buy more of packed rice and wheat.

Flexible packaging over the past two decades has been growing in double digits and due to the factors mentioned above, will continue to grow impressively into the new decade. In advanced markets such as Europe and the US, nothing is sold loose. Thats why the per capita consumption of packed food products and packaging as a whole is much higher abroad than in India. The per-capita package consumption in India is still very low at around 9 kg in comparison to the Western markets, which is above 40 kg as per industry statistics. So, the potential for deeper penetration of packaging and higher adoption of packed food products in the country is tremendous. Packaging has evolved a lot over the past decade. Today, with barrier nano-coating technology in flexible packaging, the thickness has significantly reduced, resulting in far lesser amount of plastics used. The barrier for oxygen or moisture has also become better; power and water consumption, and wastage of materials have also been significantly brought down. Flexible packaging is also enabling easy e-commerce by making products lighter, thereby cutting down the freight bills. In retail, flexible packaging and digital printing technology are helping to make packaging attractive in terms of design and aesthetics.

Companies have been moving from rigid packaging such as containers, duplex cartons or bottles and ecofriendly flexible packaging. Loose-selling products such as salt, atta, sugar or other major staples are being moved to flexible packaging, which enjoys many advantages like:

Industrial Application of Plastics

Post COVID 19, demand of Plastic for Industrial Applications especially for Aluminum Composite Panel and Surface Protection Film, will largely depend upon the revival of Infrastructure projects as well as Reality Sector, where the consumption is large. The Government has declared various Fiscal and Non Fiscal Packages for revival of these sectors.

Recycled, biodegradable and sustainability: Flexible packaging could be easily recycled. The technology has been available for a while to recycle mono-layer plastics, be it polyester, polyethylene or poly propylene. However, today technologies are available for recycling multilayer plastics such as a combination of polyester, metallised layers, polyethylene and polypropylene. Government is also coming up with favorable policies to promote recyclability and sustainability. There is an active public campaign in India towards sustainability. People are investing in recycling technologies as sustainability is todays core mantra. Post recycling, the multi-layer plastics could be used to make roads, crates, dividers, furniture, etc. Government is also in the process of framing policies on bio-degradable plastics.

Biodegradable packaging can be categorized into compostable materials, Oxo-biodegradable, aerobically biodegradable and anaerobically biodegradable. Montage has developed biodegradable packaging, which when littered and made to come in contact with the soil attracts more bacteria, which converts the pack into a biomass. It can also be recycled.

In retail, flexible packaging and digital printing technology are helping to make packaging attractive in terms of design and aesthetics. A major wave is currently sweeping when it comes to designing the pack and making it look unique, colourfully vibrant, secure and aesthetically appealing.

The packaging industry is a very dynamic industry that influences a lot of other industries as well. So, the industry which was once placed at $32 billion could get a compound growth of around 15% within the last 5 years.And the rate is expected to increase by more than 13%-15%. In fact, Indias packaging industry is the worlds fifth-largest industry in the entire world.

Opportunity

• Consumption boom

Rising income levels and rapid urbanisation have been at the core of Indias growth story. According to a report by Boston Consulting Group (BCG), Indias consumption growth is set to triple to $4 Trillion by 2025. Rural India has a huge helping hand in making this possible. In rural India, per capita consumption is expected to grow 4.3 times by2030, compared to 3.5 times in urban markets. This bodeswell for the sector.

• Premiumisation

By 2030, Indian middle-income and high-income households are likely to drive nearly $4 Trillion of incremental consumption spend. This is expected to lead upper middle and high-income consumers towards premiumisation and new category adoption. Hence, a substantial share of the incremental spends will be led by consumers upgrading to packaged, branded or higher priced offerings, or adding new products or services to their consumption pie. Growing disposable income will also drive a huge opportunity for packaged, branded offerings.

(source:https://www.bain.com/contentassets/3ac52373c0174fdbb991a85c016dd061/wef future of con sumption fast-growth consumers markets india report 2019.pdf )

• Growth of organised retail

Deloitte has projected that by 2021, organised retail share will reach 22% of the total Indian retail market from 12% in2017. According to Nielsen, FMCG sales at modern retail stores in India stood at ?41,416 Crore as of August 2018 and this helped the countrys organised grocery stores to register a strong 22% growth in sale. The positive trend with the burgeoning demand in the country is expected to help drive growth for flexible packaging in India.

• E-Commerce

As consumers increasingly prefer e-commerce is given its efficiencies and the ease of comparison shopping, it has created many opportunities for flexible packaging. Flexible packaging is a lightweight alternative that can be used to eradicate handling and shipping costs, making it a perfect solution for e- commerce companies. Besides, high-barrier flexible packaging solutions add an extra layer of safety and use of multi-layered films can provide enhanced protection against air, moisture and sunlight.

Threat

• Waste generation

India generates approximately 25000 tons of plastic waste every day, out of which only 60% is collected. Of this, 94% is thermoplastic content, which includes Polyethylene Terephthalate (PET), Low-Density Polyethylene (LDPE), High Density Polyethylene (HDPE) and Polyvinyl Chloride (PVC), all of this being recyclable. According to industry estimates plastic waste generation will amount to31.4 million tons annually by 2031. Rising quantity of waste remains a growing area of concern, necessitating immediate actions and policies around wastage collection and treatment.

• Recycling waste

In terms of plastic recycling players, India has approximately 4,000 unorganised and 3,500 organised units. Indias waste management involves several players that are part of the value chain. The responsibility of waste management is typically taken up by the municipality/ Urban Local Bodies (ULBs), formal private firms or the informal sector. While the municipality/ULBs are low-cost players

they have less effectiveness compared to the private and informal sector. While the private sector can significantly improve the situation, it needs to be carried out with support from the Urban Local Bodies and will come at somewhat higher cost.

• Rising input costs

Resins, films and adhesives are some of the common raw materials used by the packaging companies. In recent times, the packaging industry was hit by increasing prices of such raw materials and the industry remains exposed to volatility in crude oil prices.

Operational Performance Review

During the year under review, sales value increased by 4 % to Rs.96,22,24,762/- from Rs 92,72,59,073/- in the previous year.

The profit before tax increased by 26.22% to Rs.4,95,04,737 /-from Rs. 3,92,22,250 / in the previous year.

However the profit after tax increased by 0.23% to Rs. 3,39,69,876/- from Rs. 3,38,90,306/- in the previous year.

The Synergy Films Private Limited, wholly owned subsidiary of the Company has shut down its operations w.e.f 7th December 2019 for being economically unviable. As per Ind AS 36 Impairment of Assets , the investment in subsidiary has been tested for impairment and measured at the lower of carrying amount and recoverable amount and consequently, an impairment loss of Rs. 1,30,55,674 has been recognized in the standalone profit and loss for the financial year ended 31st March 2020.

Key Financial Ratios

31.03.2019 31.03.2020 Change
Debtors Turnover Ratio 5.97 6.00 1%
Inventory Turnover Ratio 7.30 8.79 20%
Interest Coverage Ratio 4.84 9.37 94%
Current Ratio 1.81 1.92 6%
Long Term Debt Equity Ratio 0.03 0.11 267%
Operating Profit Margin Ratio 4.13 4.03 -2%
Net Profit Margin Ratio 3.36 3.36 0%
Return on Net worth 11.68 11.04 -5%

• Interest Coverage Ratio has increased because of major reduction in the Interest cost and increase in PBDIT as compared to previous year.

• Long Term Debt Equity Ratio has increased because of fresh borrowing of long term loans.

Details of change in return on net worth as compared to the immediately previous financial year along with a detailed explanation thereof:

There has been marginal decrease in return on net worth from 11.04% for the FY18- 19 to 11.68% for the FY19-20 because the net profit after tax has reduced because the Company has provided for an Impairment Loss of Rs.1,30,55,674 as per Ind AS 36 "Impairment of Assets" which has lowered the Net Profit After Tax

Segment information:

The Companys sole business segment is Plastic Films and all activities are incidental to this sole business segment. The Company services its domestic and export markets from India only

Risks and Concern.

The Companys risk management is an integral part of how to plan and execute its business strategies. The Companys business activities are exposed to a variety of risks, namely liquidity risk, market risks, commodity risk and credit risk. The Companys senior management has the overall responsibility for establishing and governing the Companys risk management framework. The Companys risk management policies are established to identify and analyze the risks faced by the Company, to set and monitor appropriate risk limits and controls, periodically review the changes in market conditions and reflect the changes in the policy accordingly. The key risks and mitigating actions are also placed before the Audit Committee of the Company.

i. Credit risk:

Credit risk is the risk of financial loss to the Company if a customer or counter-party fails to meet its contractual obligations. The Companys exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the customer and including the default risk of the industry, also has an influence on credit risk assessment. Credit risk is managed through credit approvals, establishing credit limits and continuously monitoring the creditworthiness of customers to which the Company grants credit terms in the normal course of business. However post COVID 19 situation company expects increase in credit risk.

ii. Liquidity risk:

Liquidity risk is defined as the risk that the Company will not be able to settle or meet its obligations on time, or at a reasonable price. Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has built an appropriate liquidity risk management framework for the management of the Companys short, medium and long term funding and liquidity management requirements. The Company manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities , by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. However in changed business scenario post COVID 19 liquidity position has become very critical. Company expects the payments getting abnormally delayed, which can result in liquidity issues for the company and pressure on working capital management.

iii. Market risk:

Market risk is the risk that changes in market prices - such as foreign exchange rates, interest rates and equity prices - will affect the Companys income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. The Company operates internationally and portion of the business is transacted in several currencies. Consequently the Company is exposed to foreign exchange risk through its sales and services in overseas and purchases from overseas suppliers in various foreign currencies. Exports of the company are significantly lower in comparison to its imports. The Company holds derivative financial instruments such as foreign exchange forward contract to mitigate the risk of changes in exchange rates on foreign currency exposure. The exchange rate between rupee and foreign currency has changed substantially in recent years and may fluctuate substantially in future. Consequently, the results of the Companys operation are adversely affected as the rupee appreciates/ depreciates against these currencies.

iv. Commodity Risk:

Principal Raw Material for Companys products is variety of plastic polymers which are Derivatives of Crude Oil. Company sources its raw material requirement primarily from US Middle East and Europe. Domestic market prices are also generally remains in sync with international market price scenario. Volatility in Crude Oil prices, Currency fluctuation of Rupee vis-a-vis other prominent currencies coupled with demand-supply scenario in the world market affect the effective price and availability of polymers for the Company. Company effectively manages with availability of material as well as price volatility through:

1. Widening its sourcing base

2. Appropriate contracts and commitments

3. Well planned procurement & inventory strategy

Internal Financial Control Systems:

The Companys internal financial control systems are commensurate with the nature of its business and the size and complexities of its operations. These systems are designed to ensure that all assets of the Company are safeguarded and protected against any loss and that all transactions are properly authorized, recorded and reported.

Human Resources

It is your Companys belief that people are at the heart of corporate purpose and constitute the primary source of sustainable competitive advantage. Your Companys belief in trust, transparency and teamwork improved employee productivity at all levels. The Company has 140 employees on its payroll.

Cautionary Statement :

Certain statements made in the Management Discussion and Analysis Report relating to the Companys objectives, projections, outlook, expectations, estimates and others may constitute ‘forward looking statements within the meaning of applicable laws and regulations. Actual results may differ from such expectations, projections and so on whether express or implied. Several factors could make significant difference to the Companys operations. These include climatic conditions and economic conditions affecting demand and supply, government regulations and taxation, natural calamities and so on over which the Company does not have any direct control.

For & on behalf of the Board
Mukul B. Desai
(Chairman)
Place : Mumbai
Dated : 29th June, 2020