Emmbi Industries Ltd Management Discussions.

Forward Looking Statements

The report contains forward-looking statements, identified by words like plans, expects, will, anticipates, believes, intends, projects, estimates and so on. All statements that address expectations or projections about the future, but not limited to the Companys strategy for growth, product development, market position, expenditures and financial results, are forward-looking statements. Since these are based on certain assumptions and expectations of future events, the Company cannot guarantee that these are accurate or will be realised. The Companys actual results, performance or achievements could thus differ from those projected in any forward-looking statements. The Company assumes no responsibility to publicly amend, modify or revise any such statements on the basis of subsequent developments, information or events.

Economy and Outlook

Economic activity, that had been muted the year preceding Covid, and which took a turn for the worse the previous fiscal experienced a good growth of 8.70%, which incidentally was the highest experienced over the past 22 years. This however was not secular across all sectors, and parts of the country continued to reel under the effects of Covid, especially the first quarter of this fiscal. The benign interest rate scenario, availability of finances and the governments initiatives of building Aatma-Nirbhar-Bharat , the PLI schemes, and the Record-breaking vaccination roll-out, instilled confidence in the economy the following quarters. However, in Q4 of 22 a minor slow down, due to supply chain issues, a surge in the commodity prices, and the situation in Ukraine leading to higher input costs across the industry.

The World Economy experienced a good growth, especially in areas such as technology, pharmaceuticals, and bio-sciences spaces; the up-tick in commodities, resulted in prices firming up and after the previous years contraction of 3.10%, the global GDP experienced a 6.10% growth. This was driven essentially by the Developing Economies (China, India, parts of Asia and Latin America). Emmbis export zones, the US, and Europe witnessed good pick-up, and this coupled with our Sales effort culminated in a record growth of Exports.

The Domestic outlook is tempered optimism given uncertainties across the globe, inflation, and consumers hesitancy to spend; the Global outlook appears muted given the situation in Ukraine, and the spill-over effects of it across Europe. The IMF estimates the Emerging Markets and Developing economies to grow at 4.50%, and the Advanced Economies at 2.50% approximately.

Emmbis thought process had always been that of balanced overall growth with focus on margins, rather than just volumes, and the strategic decision to have flexible manufacturing capabilities, invest in upscaling people, and creating a robust distribution network within India for Avana and across the world for all other product lines. Continual innovation helped us to build resilience in 2021, translated into stupendous growth in fiscal 22.

Sector Performance

The world is witnessing an exponential growth in the usage and consumption of polymers. Production that used to range at 340 million tons p.a. in 2010, crossed 550 tons the turn of the decade (a CAGR of 10%). The completely man-made nature of polymers makes innovation and creation of new materials and applications limitless. The Polymer sector in India is estimated at over $75 billion, and this is expected to exhibit near double-digit growth in the next five years. Despite being one of the worlds largest economies, India lags in the consumption of polymers at just under 10kgs (World Average 30kgs).

During the period of the pandemic world has seen the immense role polymer products can play for the betterment of mankind. Responsible and sustainable polymer processing is going to be key to the future. World is now a very cautious place, and we understand and apricate that. Emmbi has turned its Special focus on making its manufacturing and products more sustainable and eco-friendlier with use of the theories of Circular Economy.

There has been a perceptible up-tick in the past two years the governments emphasis on infrastructure, the manufacturing pick-up, and the emphasis on water conservation products, are the primary double-digit growth drivers in the medium term. Impact of post Covid-19 world is yet to be studied on this sector. As large part of polymers is part of the essential class of the supply chain in the industry we have a feeling that the impact of the Covid-19 will be substantially lower on this sector than other sectors like Aviation or Hospitality.

Emmbi’s Industries International and Domestic Business: Product Range

We are proud to state that we have over 50 individual products that cater to a client base of over 200, spread across 70 countries .

B2B

International

Revenues from Exports stood at Rs. 3194.28 million, notably across 70 countries with North America being the largest contributor, followed by Europe. In addition to diversification across geographies, Emmbis clientele include a wide range of industries. This translated into an impressive 73% growth year on year, and it was an optimal mix of volumes, and margins.

B2B

Domestic Business

Domestic growth also witnessed a smart 42% over the previous year and stood at Rs. 1909.42 million for fiscal 22. We have been prudent in growing this segment, despite it providing a predictable stream of revenues, for we firmly believe that resources should be allocated to business lines or products, that helps in maximising ROCE. Moreover, this is a highly competitive segment, where the buyers are highly price elastic. This coupled with the fact that Emmbis manufacturing facilities are fungible, and we saw a margin driven growth in the export business, led us to focus on the International Segment.

B2C (Avana)

Consumer Durables

The agriculture sector that showed a good growth the previous year, slowed down in fiscal 22, and despite this Emmbis business showed a growth of over 20%. We are now well entrenched in Maharashtra, Rajasthan, Madhya Pradesh and Karnataka. Positive forays have been made into Punjab, Haryana, Andhra Pradesh and Telangana, with the introduction of shrimp ponds.

Consumer Goods

Revenues for fiscal 23, despite the uncertain situation in Eastern Europe, and

High Commodity Prices, seem sustainable on account of the following,

1. Emmbis innovation, track record, and distribution network makes it a first-choice provider for existing clients and serves as a referral base.

2. Increase in the Export demand of products under Advance Compos ites & Speciality Packaging.

3. The ability to travel and meet with clients and allowing for them to come across and visit our facilities, has further strengthened brand Emmbi in their minds and hearts.

4. Avana that has made a mark in few states, is expanding across Indian and introducing newer products, that have found tremendous acceptance.

5. The increased focus on hygiene, and food security augurs well for the product lines the company is present.

6. The Governments initiatives for improving farmers incomes, and a greater thrust across rural India on Pond manufacturing.

7. The Honourable PMs impetus on creating 50,000 ponds across India over the next few years, is very positive for Emmbi. We are today the Worlds largest pond lining company, and given our quality, and track record we are confident of winning a share of this business.

8. An increase in the consumption of polymer products across the globe.

9. Consumption Shift: both in B2C, and B2B - the increased usage of

e-commerce (Avanamart) polypropylene bags, polymer syringes, polymer lined tanks, polymer mixes in highways etc.

10. Our efforts at developing sustainable packaging that has found acceptance in the UK, and very soon we plan to roll this in Europe.

Emmbis Manufacturing Operations: Plant Capacity and Utilisation

Plant capacity remained at 27,440 MT/ Annum, and Capex spend, was on routine maintenance. Industry 4.0 standards (IoT), and Robotic Process Automaton (RPA) have increased operational efficiencies, improved product technicalities, and reduced wastage and scrap to a near zero levels.

Inventories Management

Emmbis strategy of managing business in a non-speculatve nature, translates down to its inventory management policies. We always make it a point to match the order pipeline to the inventory levels. Procurements of raw material is simultaneous to order booking, and that way neither the fluctuations in the prices of crude, and thereby its derivatives impact the income statement or capital in an adverse manner. More-over the relationship between crude prices, and polymer prices is not entirely direct. The floor cost of polymers, irrespective of the prices of crude can be pegged around US $ 1000-1050-1110 considering the fixed costs, and logistics. Finally, it is the many stages derivative Polypropylene that goes into our products, and the actual direct impact of crude price constitutes only under 15% of the total product component. Despite this linkage, we as a policy continue to apply effective hedge mechanisms.

Record Earnings

We crossed the Rs. 5 bn mark in revenues that translated into an EPS of Rs. 10.76.

Quality and Adherence

We adhere to the latest international standards and believe in adapting the best practices in the industry, be it people, processes, quality of our products or internal systems. We are in the process of "Integrated Management System" (IMS) a customised combination of ISO 9001:2015 for Quality Management system ISO14001:2015 for Environmental Management System and ISO 45001:2018 for Occupational Health and Safety Management. We have also reduced waste by 50%, and we plan to become a zero waste company over the next eight quarters.

People and Processes

We continue in investing and developing existing talent, and source human resources when needed. We continue to conduct workshops on both technical, and soft skills, with the help of internally created teams, and external experts. We have in place a Whistle Blower" policy keeping in check with the best practices (Detailed in the Boards Report).

Information Technology

All our plants across the nine locations are integrated, and they in-turn communicate to the head offices, and field employees through various software systems. We are one of the first to adopt Industry 4.0 standards that has led to process and operational improvements and geffing translated into financial savings.

Research & Development

We are a full-fledged R&D Development centre, accredited by the Department of Science and Technology, the Government of India. Our R&D department is staffed with a 30-member team. As a policy we allocate ~2.50% of revenues towards, research and development of product and processes. This not only helps us geffing tangible benefits like tax breaks, preferred bidder for Government projects, etc. We also get invaluable intangible benefits such as visibility in the international arena, through government initiatives.

Cautionary Statement

The estimation and expectation made in this report may differ from actual performance due to extraneous factors such as economic conditions, governmental policies, regulations, and other factors.

Statement of Income

Revenue from Operations

The Company recorded the highest revenues in history by crossing the Rs. 5 bn mark and stood at Rs. 5,104 million (Rs. 3,198 million), a growth of 60%. The growth was a mixture of volume, and margins with exports crossing the magical Rs. 5 bn. The fungibility, and flexibility of the factory, and the production lines, helped to migrate with ease to cope with the demand for value added margin accreting products. These aided in vast improvements in Gross Profits, EBIDTA, and a record Net Income of Rs. 190 million (Rs. 77 million).

Cost of Operations

Higher capacity utilisation, and margin aided growth helped in lowering the cost of operations, and improvement to gross margins. Cost of Material consumed stood at Rs. 2,819 million (Rs. 1,801 million) and Employee Costs at Rs. 197 million (Rs. 179 million), however as a percentage of Revenues improved to 64.72% (65.72%), and 4.53% (6.53%) respectively. Constantly engaging with and improving upon production techniques including- Robotic Process Automation (RPA), Industry 4.0, and Kaizen (Project Manthan) also helped in ensuring that there were no catastrophic setbacks either financially or operationally.

Cost of Finance

Finance costs stood at Rs. 147 million (Rs. 114 million), the improvement on account of lower finance costs, and as a percentage of revenues improved to 3.37% (4.15%). Interest coverage ratio remained a healthy 3.36x and Emmbis ratings remain investment grade. Depreciation and amortisation expenses stood at Rs. 87 million (Rs. 72 million).

Profits and Distribution

Emmbi Industries Limited reported a record after-tax profit of Rs. 190 million (Rs. 77 million), and the PAT margin stood at 4.37% (2.80%); this excluded any export incentives to be announced by the government. The Companys liquidity, and financial position continued to remain strong, with both un-utilised lines of credit, as well as healthy cash balances. The company declared a dividend of Re. 0.60 per share.

Balance Sheet Items

Emmbi prides itself in growing conservatively, with minimum risks to shareholders, and its stakeholders. Such a culture always holds good in the long-run, and especially good in challenging times. It has managed its debt at a very conservative level and shown a continual growth in net-worth. The significant growth in Revenues was achieved by only a net-increase in Rs. 50 million to the long term assets, leading to better RoCE.

Assets and Deployment

Assets for the year stood at Rs. 3,546 million (Rs. 3,285 million), the growth on account of core assets, required for business operations. Fixed assets addition pertained more towards routine maintenance and marginal capacity expansion (de-bottleneck capacity), which stood at 27,440 mtpa.

Current Assets

Inventories at the year-end stood at Rs. 977 million (Rs. 902 million); the increase on account of both higher prices, and volumes to match the demand. The average inventories holding is normally three to four months, the primary supplier of raw materials to the industry normally shutdown their plant for maintenance in March, so as a prudent principle the company maintains higher inventories in the last quarter. The year also saw a surge in demand for exports (reflected in the performance), and this also required the company to hold larger inventories.

Receivables stood at Rs. 759 million (Rs. 638 million), on account of higher exports. The companys exports are backed by ECGC guarantees and to-date it has not resorted to seeking a repayment from the same, as the quality of receivables are at 100% collection.

The Asset conversion cycle stood at 96 days (149 days), a significant improvement by almost two months.

Fixed Assets

The company invested very marginally in the creation of fixed assets, as the expansion plans were completed last year, and with the de-bottleneck the current capacity stands at 27,440 mtpa.

Capital and Borrowings

The growth was financed through a mix of internal accruals, additional term borrowings, and working capital. Debt-Equity was conservative at 0.94x, and the current ratio at a healthy 1.49x.

Total net worth increased to Rs. 1,534 million (Rs. 1,352 million), whilst overall bank borrowings stood at Rs. 1,441 million (Rs. 1,364 million). In the course of the year the company repaid its obligations, as per schedule.

For & On Behalf of the Board of Directors
Makrand Appalwar
Chairman & Managing Director DIN: 00171950
Place: Silvassa
Date: 16th May, 2022