Gandhar Oil Refinery (India) Ltd Management Discussions

Global economy

Overview: Global economic growth weakened from 3.5% in 2022 to around 3.1% in 2023 and this may have been worse but for global growth from Asia, which was marked by a weaker-than- expected recovery in China and a better than expected growth in India.

The global economy was marked by a sustained weakness in USA, Britain and Japan entering a recession and most economies of Europe grappling with high energy costs, weak global consumer sentiment on account of the Ukraine-Russia war, and the Red Sea crisis resulting in higher logistics costs. A tightening monetary policy translated into increased policy rates and interest rates for new loans.

Growth in advanced economies is expected to slow from 2.6% in 2022 to 1.5% in 2023 and 1.4% in 2024 as policy tightening deepens. Emerging markets and developing economies, mainstay of the global economy, are projected to report a modest growth decline from 4.1% in 2022 to 4.0% in 2023 and 2024. Global inflation is expected to decline steadily from 8.7% in 2022 to 6.9% in 2023 and 5.8% in 2024, due to a tighter monetary policy aided by relatively lower international commodity prices. Core inflation decline is expected to be gradual; inflation is not expected to return to target until 2025 in most cases. The US Federal Reserve approved a much-anticipated interest rate hike that took the benchmark borrowing costs to their highest in more than 22 years.

Global trade in goods was expected to have declined nearly USD 2 trillion in 2023; trade in services was expected to have expanded USD 500 billion. The cost of Brent crude oil averaged USD 83 per barrel in 2023, down from USD 101 per barrel in 2022, with crude oil from Russia finding destinations outside the European Union and global crude oil demand falling short of expectations.

Regional growth (%)	2024	2023	2022
World output	3.2	3.1	3.5
Advanced economies	1.7	1.7	2.5
Emerging and developing economies	4.3	4.1	3.8

(Source: UNCTAD, IMF)

Outlook: Asia is expected to continue to account for the bulk of global growth in FY 2024-25. Inflation is expected to ease

Indian economy

Overview: The Indian economy was estimated to grow 7.8% in the FY 2023-24 fiscal (the country adding more than 8% in some quarters) against 7.2% in FY 2022-23 mainly on account of the improved performance in the mining and quarrying, manufacturing and certain segments of the services sector. India retained its position as the fifth largest economy. The Indian rupee displayed relative resilience compared to the previous year; the rupee opened at H82.66 against the US dollar on the first trading day of 2023 and on December 27 was H83.35 versus the greenback, a depreciation of 0.8%. Since February 2023, the RBI has maintained the repo rate at 6.5%. Tasked by the government to keep retail inflation around 4%, with a tolerance range of 2% on either side, the RBI aims to stabilize inflationary pressures. As of April 2024, retail inflation was recorded at 4.83%, highlighting the RBIs ongoing efforts to manage inflation within the specified target range.

In the 11 months of FY 2023-24, the CPI inflation averaged 5.4% with rural inflation exceeding urban inflation. Lower production and erratic weather led to a spike in food inflation. In contrast, core inflation averaged at 4.5%, a sharp decline from 6.2% in FY 23. The softening of global commodity prices led to a moderation in core inflation.

The nations foreign exchange reserves touched a milestone of USD 645.6 billion. The credit quality of Indian companies remained strong between October 2023 and March 2024 following deleveraged Balance Sheets, sustained domestic demand and government-led capital expenditure. Rating upgrades continued to surpass rating downgrades in H2 FY24. The Interim Union Budget FY 2024-25 retained its focus on capital expenditure spending, comprising investments in infrastructure, solar energy, tourism, medical ecosystem and technology.

Growth of the Indian economy

	FY 21	FY 22	FY23	FY24
Real GDP growth (%)	-6.6%	8.7	7.2	7.8 E

E: Estimated

Growth of the Indian economy quarter by quarter, FY 2023-24

gradually as cost pressures moderate; headline inflation in G20 countries is expected to decline. The global economy has demonstrated resilience amid high inflation and monetary tightening, growth around previous levels for the next two years (Source: World Bank).

	Q1FY24	Q2FY24	Q3FY24	Q4FY24E
Real GDP growth (%)	7.8	7.6	8.4	8E

(Source: Budget FY24; Economy Projections, RBI projections, Deccan Herald, Times of India)

As per the first advance estimates of national income released by the National Statistical Office (NSO), the manufacturing sector output was estimated to grow 6.5% in FY 2023-24 compared to 1.3% in FY 2022-23.

Indias per capita disposable income is expected to be H2.14 lakh in FY 2023-24, an 8% increase in FY24. Indias gross national disposable income, which includes net primary income and global transfers, is expected to expand 8.9% in FY24 (after 14.5% in FY23). Indias gross savings were largely maintained around the earlier level of around 30%. The increase in disposable income is anticipated to stimulate demand across sectors, particularly benefiting fast-moving consumer goods (FMCG) and pharmaceutical products, as consumers have more spending power. This trend is expected to bolster domestic consumption and contribute to economic growth.

Indias exports of goods and services were expected to touch USD 900 billion in FY 2023-24 compared to USD 770 billion in the previous year despite global headwinds. Merchandise exports were expected to expand between USD 495 billion and USD 500 billion, while services exports were expected to touch USD 400 billion during the year.

Outlook: India withstood global headwinds in 2023 and is likely to remain the worlds fastest-growing major economy on the back of growing demand, moderate inflation, stable interest rates and robust foreign exchange reserves. The Indian economy is anticipated to surpass USD 4 trillion in FY 2024-25. The Asian Development Bank (ADB) upgraded Indias gross domestic product (GDP) growth forecast for 202425 (FY25) to 7% from 6.7% earlier, citing better prospects. With inflation moderating to a projected 4.6% in FY25, monetary policy could become less restrictive and catalyse bank credit.

(Source: Times News Network, Economic Times, Business Standard, Times of India)

Global oil sector overview

In 2023, oil demand reached 103 million barrels per day (MMb/d). However, this growth is not expected to be sustained for long, as peak demand is projected to occur before 2030 across four detailed energy transition scenarios.

These scenarios all indicate a relatively close timing for peak oil demand, likely between 2025 and 2030. This trend is driven primarily by efficiency improvements across various sectors and the increasing adoption of electric vehicles (EVs) in the passenger car market. Over the past two years, government investments in clean energy have predominantly been directed towards energy efficiency measures, including electrification. The ongoing electrification of transportation has notably contributed to the diminishing demand for oil. The rising popularity of EVs is forecasted to reduce oil demand by between 5 and 10 MMb/d by 2030, serving as a major distinguishing factor among the scenarios.

(Source: mckinsey.com)

Indian oil sector overview

India is forecast to be the single largest source of global oil demand growth from 2023 to 2030, narrowly ahead of China. Underpinned by strong economic and demographic growth, the country is on track to post an increase in oil demand of almost 1.2 mb/d over the forecasted period, accounting for more than one- third of the projected 3.2 mb/d global gains.

India oil demand growth in a global context, 2019-2030

Global industrial oil sector overview

The global industrial oil market size was valued at USD 60,410 million in 2023 and is anticipated to reach USD 78,610 million by 2030 growing at a CAGR of 3.7% during the forecasted period. The increasing industrialization and manufacturing activities, particularly in emerging economies, drive the demand for industrial oils to ensure smooth operation and maintenance of machinery, thereby boosting market growth.

The Asia-Pacific industrial oil market size was valued at USD

43.88 billion in 2023 and is expected to reach USD 70.44 billion by 2032, growing at a CAGR of 5.40% from 2023 to 2032. The Asia- Pacific region is expected to dominate the market for industrial oils in the coming years. Increased industrialization and increasing population will drive the growth of the market as the government in the Asia-Pacific region is increasing the amount of investment for setting up different industrial plans in order to get a row of the market demand.

Asia Pacific Industrial Oils Market Size 2022-2032

(Source: linkedin.com, precedenceresearch.com)

Global automotive oil sector overview

The global automotive oil market is anticipated to achieve a valuation of USD 53,523.0 million by 2023. Over the period from 2023 to 2033, themarketisforecastedtodemonstrateacompound annual growth rate (CAGR) of 2.6%, reaching an estimated value of USD 69,185.3 million by 2033. Key factors driving this market include the increasing demand for conventional oil due to its cost- effectiveness in comparison to modern lubricants. Additionally, the growing popularity of synthetic automotive lubricants is driven by their superior performance and long-lasting protective qualities. The global automotive oil sector is set to grow steadily, with an anticipated annual growth rate of 2.6% from 2023 to 2033, even as electric vehicles (EVs) become more popular. This growth is because traditional internal combustion engine (ICE) vehicles and other machinery still need lubricants. It shows that the sector remains important as automotive technology changes supporting industries and transportation worldwide. Throughout the assessment period, the global automotive oil market is expected to maintain a share of approximately 30% to 35% within the overall lubricants market. East Asia stands out as the leading region in terms of consumption within the automotive oil industry. (Source: futuremarketinsights.com)

Global white oil sector overview

In 2023, the global white oil market was valued at USD 43,723.23 million. The size of this market is expected to increase to USD 57,536.79 million by the year 2030, while growing at a compounded annual growth rate (CAGR) of 4.0%. Rising demand for personal care products such as skin care is expected to propel the growth of the mineral oil market. North America was the largest region in the white oil market in 2023. The Mineral oil market is driven by the pharmaceutical and personal care sector, contributing 40.50% and 35.91%, respectively. Together, these industries contribute to 76.41% of total revenue in the global mineral oil market. (Source: thebusinessresearchcompany.com, arizton.com)

Indian white oil market overview

The Indian white oil market size is expected to register a modest growth at a CAGR of 1.80% for the time spanning 2024 to 2032. The key market drivers are the growing utilisation of white oil in various applications such as personal care and cosmetics, pharmaceuticals, and food.

The moisture-resistant properties of white oil are fostering its adoption in personal care and cosmetic products in India. White oil finds extensive application in the production of various water- resistant personal care items such as moisturizers, cosmetics, skincare products, baby products, hair oils, shampoos, body lotions, fragrances, and creams.

In the pharmaceutical sector, pharmaceutical-grade white oil, known for its purity, is integral in the manufacture of vaccines, lubricants for capsules, pelletizing aids, base formulations for ointments, and laxative jellies. The burgeoning pharmaceutical industry and the continuous development of novel products are further driving growth in the Indian white oil market. (Source: Expert Market Research)

Global petroleum jelly market overview

The petroleum jelly market is expected to witness a year-over- year growth of 3.7% in 2023, reaching a value of about USD 525.1 million by the end of 2023. The global business is projected to witness a growth rate of 4.2% over the forecasted period.

Growing demand for petroleum jelly as USP and technical in various end-use industries like pharmaceuticals, cosmetics and personal care, food, and others are anticipated to bolster the consumption rate in the coming years. It is projected that the global petroleum jelly demand to reach a value of USD 770.3 million by the end of 2033. (Source: futuremarketinsights.com)

APAC market

The Asia Pacific Base Oil Market is projected to grow significantly, with an estimated size of 16.88 million tons in 2024, reaching 21.10 million tons by 2029 at a CAGR of 4.56% from FY 2024-29.

The markets growth is driven primarily by the increasing demand for high-grade oils in the automotive sector and the rising need for

lubricants across various industries. However, volatility in crude oil prices poses a challenge to its market growth.

China, with its substantial vehicle production and sales, is expected to dominate the Asia-Pacific market during the upcoming five years - FY 2024-29. (Source: Mordor Intelligence)

Growth factors

Rising disposable incomes: Indias gross national disposable income is expected to expand 14.5% in FY23 and further by 8.9% in FY24, reaching H2.14 lakh for the current fiscal year. This rise in disposable income is further anticipated to result in growth for the white oils segment in India.

Increase in population: The population in India increased by 13 million in 2023, resulting in a 1.44 billion strong people in the country. This ever-increasing population growth in the country is further anticipated to result in a rise in consumption for personal care and pharmaceutical products, resulting in higher usage of white oils.

Industry growth: The demand for white oil has increased in several developing and developed regions due to an optimistic outlook for expanding the pharmaceutical, personal care, food, and polymer processing sectors.

Increase in application: The product has witnessed a quick rise in the demand for adhesives and textile application areas.

Technical innovation: Despite a shortage of raw resources and a price decline, technical innovation will likely support the industrys steady growth over the next few years.

Increasing demand: With the growth of various industries such as pharmaceuticals, cosmetics, textiles, and plastics, there is a rising demand for white oils and mineral oils as raw materials.

Industrialisation and urbanisation: As the country continues to urbanise and industrialise, theres a parallel increase in the consumption of lubricants and specialty oils for machinery and automotive applications.

Automotive sector growth: The growth of the automotive sector, both in terms of manufacturing and usage, directly impacts the demand for lubricants and automotive oils.

(Source: Economic Times, DataReportal, Indiabudget.gov.in)

About the Company

Gandhar Oil Refinery India Limited is a leading manufacturer of White Oils by revenue with a growing focus on the consumer and healthcare end-industries.

The product categories and primary end-industries for our three main business divisions are as follows:

Business division	Product categories	Primary end-industries
Personal care, healthcare and performance oils (PHPO)	White oils, waxes and jellies	Consumer; healthcare; plastics; chemical; textiles; and fragrance
Lubricants	Automotive oils and industrial oils	Automobile; and industrial machines and equipment
Process and insulating oils (PIO)	Transformer oils and rubber processing oils	Transformer manufacturers; power generation and distribution; and tyre and rubber product manufacturers

The Company was involved in two main businesses: non-coking coal trading through Gandhar Oil & Energy DMCC (Gandhar DMCC) and specialty oils. However, as part of a strategic move to concentrate on the specialty oils sector, the Company decided to divest its interests in the coal trading business.

In light of this decision, the Company successfully sold Gandhar DMCC to a group company named Gandhar Coals & Mines Pvt. Ltd. The sale was executed with the intention of allowing Gandhar Coals & Mines Pvt. Ltd. to take over and manage the coal trading operations effectively.

Additionally, the company executed a slump sale of its entire coal business to Gandhar Coals & Mines Pvt. Ltd. This action was a component of the companys overarching strategy to redirect its focus and resources towards the specialty oils segment, which offers greater strategic significance for future growth and profitability.

Through these transactions, the company has rationalized its operations, enabling it to exclusively concentrate on the specialty oils business. This repositioning sets the stage for heightened success and sustainability in its chosen field.

Financial performance

Performance of the Company

The standalone total income of the Company during the year stood at H28,589.21 million compared to the total income of 29,462.13 million during the previous year, thereby resulting in a decline of H872.92 million.

The consolidated total income during the year stood at 41,231.04 million compared to the total income of 41,030.25 million during the previous year. The consolidated revenue thus increased by

200.79 million compared to previous year.

As per the standalone financials, the Company earned a net profit before tax of H1,636.21 million in the year under review as against a net profit before tax of H2,272.98 million in the previous year.

Petroleum products and specialty oil

The turnover of the oil segment decreased from H29,174.12 million to H28389.10 million in current year thereby resulting decline of 2.70%.

The turnover of other segment decreased from H33.08 Million to

H28.27 Million in current year.

Overall business performance

In millions	FY20	FY21	FY22	FY23	FY24
Revenue	25,163	22,355	35,788	41,030	41231
EBITDA	614	1,181	2,400	3,177	2,787
PAT	118	738	1,641	2,139	1653
D/E	0.33	0.17	0.28	0.23	0.17

Key ratios

Particulars	Consolidated		Standalone
	2023-24	2022-23	2023-24	2022-23
EBITDA/Turnover (%) (before exceptional items)	6.78	7.79	7.04	8.64
Return on net worth (%)	16.52	31.54	13.07	27.39
Book value/share (H)	12502.32	9728.82	11365.22	8796.75
Earnings per share (H)	16.27	23.86	13.75	17.32
Debtors turnover (days)	55	50	68	58
Inventory turnover (days)	40	40	36	35
Current ratio	2.52	1.61	3.11	2.04
Interest coverage ratio	4.44	5.81	4.84	6.34
Debt equity ratio	0.17	0.22	0.02	0.02
Operating profit margin (%)	6.53	7.93	7.10	9.08
Net profit margin (%)	4.02	5.24	4.18	5.80

SWOT analysis of Gandhar Oil and Refinery

Strengths

1. Diversified product portfolio

The Companys diversified product portfolio of white oil, waxes, automotive oil, lubricants, industrial oils, greases, rubber processing oils and other petroleum-based product enables it to mitigate risks associated with reliance on a single product line.

2. Established market presence

The Company has developed a strong market presence and a reputable brand, fostering a customer loyalty and ensured repeat business.

3. Strategic location

The Company benefits from its proximity to rapidly growing Asian markets. This strategic location also facilitates easier access to raw materials and distribution channels.

4. Strong R&D capabilities

The Company invests in research and development to innovate and enhance product quality. This commitment has led to the creation of more efficient and eco-friendly products, meeting the rising demand for sustainable solutions.

5. Robust customer relationships

The Company has cultivated strong relationships with a diverse clientele, including FMCG, pharmaceutical, manufacturing, automotive and other industrial sectors. These relationships help secure long-term contracts and ensure steady revenue streams.

Weaknesses

1. Dependency on raw material prices

The Companys business is driven by volatile raw material prices. Fluctuations in these costs can significantly impact operating margins and overall stability

2. Environmental and regulatory compliance

Adherence to stringent environmental regulations can be costly and time-consuming, posing a challenge to the company

3. Limited global presence

While the company has a solid presence in India and parts of Asia, Africa, the Middle East, and the Far East, its footprint in other regions remains limited.

4. Exposure to market fluctuations

The Companys profitability is vulnerable to economic cycles, changes in demand, and industry-specific downturns, leading to potential fluctuations in financial performance.

Opportunities

1. Expansion into emerging markets

The Company has the potential to expand its presence in emerging markets such as Africa, Southeast Asia and Latin America, with rising industrial growth leading to growing demand for oil. Moreover, the USA presents a significant market opportunity for further growth.

2. Strategic partnerships and alliances

Forming strategic alliances with global players or entering joint ventures can enhance the companys technological capabilities, distribution network and product offerings

3. Innovation in eco-friendly products

With the growing demand for environmentally friendly and sustainable products, the company can capitalize on this trend by developing greener alternatives to traditional petroleum products.

4. Digital transformation

Adopting digital technologies and automation can enhance operational efficiency, reduce costs, and improve customer service, giving the company a competitive advantage.

Threats

1. Intense competition

The industry is highly competitive, with both local and global players vying for market share, potentially leading to price wars and squeezed profit margins.

2. Regulatory challenges

The industry faces increasing regulatory scrutiny related to environmental impact, safety standards and emission controls. Compliance can result in higher operational costs and potential legal liabilities.

3. Economic downturns

Global economic slowdowns or recessions can diminish demand for industrial oils and other products, adversely affecting the companys sales and profitability.

4. Technological disruption

Advances in alternative energy technologies, and a shift towards electric vehicles and renewable energy sources could reduce demand for traditional petroleum products, posing a long-term threat to the companys core business.

5. Geopolitical risks

The Company is exposed to geopolitical risks such as trade tensions, tariffs, and conflicts in key regions, which can disrupt supply chains, increase costs, and create market uncertainty.

Materiality in human resources

Materiality in human resources (HR) involves identifying and managing HR issues that are crucial to an organizations success and stakeholder interests. At Gandhar Oil, by focusing on key areas such as talent management, employee engagement, diversity, and compliance, we align our HR strategies with broader business goals, enhance risk management, and integrate social factors into our sustainability efforts. The process includes stakeholder engagement, assessing and prioritizing HR issues, and integrating these into strategic planning. Continuous monitoring and transparent reporting of material HR issues ensure that we remain responsive to evolving challenges and expectations, ultimately contributing to long-term business success. During the year under review, our talent strength was 381.

Risk management

Economic risk: Economic growth has the potential to impact the growth of the Company.

Mitigation: The Company aims to achieve growth by increasing its market penetration both in domestic and international markets.

Global base oil prices risk: The volatility of global base oil prices can significantly affect Gandhar Oil Refinerys revenue and profitability.

Mitigation: The Company may reduce this risk by diversifying its product portfolio to include more stability that can reduce dependency on oil prices.

Regulatory risk: Changes in environmental regulations, taxes, or policies related to the oil and gas sector could increase operational costs or limit business operations.

Mitigation: Maintaining a proactive and adaptive compliance program can help the company stay ahead of regulatory changes. Investing in cleaner, more sustainable technologies can also reduce the impact of stringent environmental regulations.

Environmental risk: The specialty lubricant industry is prone to environmental risks.

Mitigation: Implementing stringent safety protocols, regular equipment maintenance, and continuous employee training can minimize the risk of accidents. The Company complies with regulations set by central, state, and municipal authorities.

Currency risk: It can cause financial loss for businesses due to exchange rate fluctuations, impacting revenues, costs and cash flows, particularly in international trade or foreign investments.

Mitigation: Currency risk mitigation strategies include hedging with tools like forward contracts and options, diversifying currency exposure, netting payables and receivables and leveraging natural hedging, to help businesses shield themselves from financial losses due to exchange rate fluctuations.

Internal control systems and adequacy

The internal control and risk management system is structured and applied in accordance with the principles and criteria established in the corporate governance code of the organisation. It is an integral part of the general organisational structure of the Company and internal auditor who reports major observations to Audit Committees. The Board of Directors offers its guidance and strategic supervision to the Executive Directors and management, monitoring and support committees. The control and risk committee and the head of the audit department work under the supervision of the Board-appointed Statutory Auditors.

Cautionary statement

The statements made in this section describes the Companys objectives, projections, expectation and estimations which may be ‘forward looking statements within the meaning of applicable securities laws and regulations. Forward– looking statements are based on certain assumptions and expectations of future events. The Company cannot guarantee that these assumptions and expectations are accurate or will be realised by the Company. Actual result could differ materially from those expressed in the statement or implied due to the influence of external factors which are beyond the control of the Company. The Company assumes no responsibility to publicly amend, modify or revise any forward- looking statements on the basis of any subsequent developments.