Ganesha Ecosphere Ltd Management Discussions.

Management Discussion and Analysis

Global economic overview

In 2017, a decade after the global economy weakened, a revival became visible. Every major economy expanded: marked by Euro-zone growth, modest growth in Japan, late revival in China and improving realities in Russia and Brazil leading to an estimated 3.8% global economic growth in 2017, some 60 bps higher than the previous year.

A review of the various national economies is provided below:

The US: The world’s largest economy entered its ninth straight year of growth in 2017 (2.3% compared to 1.6% in 2016).

Euro zone: This region experienced the upside arising out of cheap money provided by the central bank. In 2017, Euro zone is estimated to grow by 2.4% compared with 1.8% in 2016.

China: The Chinese economy grew faster than expected in the fourth quarter (October to December) of 2017 at 6.8%, aided by a recovery in exports. This helped China celebrate its first annual growth in seven years (estimated at 6.9%, the highest since 2010). (Source: WEO, NBS data)

Emerging Asia: The GDP of emerging Asia is estimated at 6.5% in 2017, driven by infrastructure spending and stable economies.

GCC: The GCC countries were affected by the oil price decline (~60% since 2013), resulting in macro-economic instability that affected job creation and growth (growth subdued at 1.8% in 2017).

Russia: The economy appeared to have completed a two-year recession that proved shorter than previous downturns. In 2017, Russia was estimated to grow by 1.9% following negative growth of 0.6% in 2016 (WEO).

Brazil: In 2017, Brazil grew at 1.1% following a deceleration of 3.5% in 2016, the recovery boosted by the agricultural sector which grew by 13%.

Outlook

The outlook for advanced economies improved, notably for the Euro area, but in many countries inflation remained weak, indicating that the slack was yet to be eliminated and prospects for growth in GDP per capita were held back by weak productivity growth and rising old-age dependency ratios. Global growth forecasts for 2018 and 2019 were revised upward by 20 bps to 3.9%, reflecting improved momentum and impact of tax policy changes in the US. (Source: WEO, IMF)

Indian economic overview

After registering GDP growth of over 7% for the third year in succession in 2016-17, the Indian economy headed for slower growth estimated at 6.7% in 2017-18. The year under review was marked by various structural reforms by the Government. In addition to GST introduction, the year witnessed significant resolution of problems associated with bank non-performing assets, FDI liberalisation, bank recapitalisation and privatisation of coal mines.

(Source: ET, the hindu centre)

Outlook

World Bank projected India’s economic growth to accelerate to 7.3% in 2018-19 and 7.5% in 2019-20. Strong private consumption and services are expected to continue to support economic activity. Private investment is expected to revive as soon as the corporate sector adjusts to the GST.

Estimation for the FY2017-18 Vs. FY 2016-17

2017-18 2016-17
GDP growth 6.7% 7.1%
GVA growth 6.4% 9.0%
Farm growth 3.0% 9.0%
Manufacturing growth 5.1% 9.3%
Power and Gas growth 7.3% 6.5%
Mining growth 3.0% 1.9%
Construction growth 4.3% 3.5%
Trade, hotel, transport, telecom growth 8.3% 9.8%
Financials, realty growth 7.2% 9.8%
Public, admin, Defence growth 10.1% 16.6%
Per capita income growth 8.3% 9.7%
(Source: Press Information Bureau)

Global PET industry

Polyethylene Terephthalate commonly known as PET is the most used polymer in the world. It is a naturally transparent and semi-crystalline plastic used widely for products used in people’s day-to-day life. PET polymer is better termed as "Polyester" in the textile industry. It is widely used as a fiber for clothing as it is an excellent moisture barrier and also used for bottling and packaging on large scale.

The major share of PET plastic produced, comprises synthetic fiber (up to 60%) and the remaining is majorly used for bottle production of the total global demand.

The amorphous polyethylene terephthalate (APET) market was pegged at US$ 28.86 billion in 2017 compared to US$ 25.11 billion in 2016, registering a year-on-year growth of almost 15%. The growth of the APET market is marked by increasing demand for packaging materials manufactured from polyethylene terephthalate from the food & beverages industry. Moreover, the increasing purchasing power of consumers, changing lifestyle and food habits of the masses and growing popularity of ready-to-eat food items across the globe are also fueling the growth of the APET market. The market is projected to reach

US$ 40.85 billion by 2022, at a CAGR of 7.2% between 2017 to 2022.

(Source: https://www. marketsandmarkets.com/ PressReleases/amorphous-polyethylene-terephthalate.asp)

Indian PET industry

As per the TechSci Research report, "India PET Resins Market Study, 2011 – 2025", the market of PET resins in India is anticipated to cross US$9.1 billion by 2025. India is one of the fastest growing markets for PET resins in the world. Robust growth in packaging sector, rapid industrialisation and growing urbanisation are the major factors driving the country’s PET resins market. Furthermore, emerging economy, new capacity additions and increasing consumption of packaged food and beverages driven by growing disposable income are expected to aid the Indian market of PET resins during 2016-2025. With the government driving the ‘Make in India’ initiative, the country has emerged as one of the key producers in the world.

Indian recycled PET industry

As stated in a report by the country’s National Chemical Laboratory, nearly 70% of polyethylene terephthalate bottles are recycled in India, and the market is pegged at Rs. 35 billion (US$ 530+ million) per year.

Some 900,000 tonnes of polyethylene terephthalate (PET) is produced annually in India, 65% of which is recycled at registered facilities. 15% of recycling activity takes place within the country’s unorganised sector while approximately 10% of PET is reused at homes.

The country’s PET industry is expected to grow at a handsome rate, owing to the increasing demand of rapidly expanding consumer goods packaging and bottling industry.

(Source: www. recyclinginternational.com)

Global fibre market

The world fibre market is pegged at 103 million tonnes in 2017, which accounts for an expansion of ~4% year-on-year from 2016 which stood at 99 million tonnes. The demand for the same was marked by a decent acceleration in 2017-18, as compared to the previous 4 consecutive years. Natural fibres flaunted a year-on-year growth of 3% which was the fastest pace in eight years. The cellulosic business gained 3% in volume and synthetic fibres rebounded more than 4%. The market for wood-based fibres expanded by 5-6% year-on-year. Demand for wood-based cellulosic fibres, which remained at a high level, was encouraging. Production increased only slightly by 2.9% to around 6.6 million tonnes due to some capacity shut downs in Asia. Owing to the good economic condition and the positive mega-trends, demand for fibres is expected to remain stable in 2018. The synthetic fibre production also increased in 2017 and was pegged at 64.9 million tonnes reflecting a year-on-year growth of 4.2% which was stronger than the previous two years. Polyester fibre prices even increased substantially, a further indication of the overall robust market situation in 2017.

(Soucre: Lenzing investments, The fibre year)

Indian fibre market

India is the second largest manufacturer of textiles and garments across the world. The country’s textile and apparel industry can be broadly divided into two categories – fibre & yarn and processed fabrics and apparel. India accounts for 14% of the world’s production of textile fibres and yarns (largest producer of jute, second largest producer of silk and cotton, and third largest in cellulosic fibre). India has the highest loom capacity (including hand looms). The domestic textile industry in India was pegged at US$ 150 billion in 2017-18 and is estimated to reach US$ 250 billion by 2019.

In the Man-Made Fibre (MMF) segment, India is the second largest manufacturer after China. The Indian domestic market saw a slight downfall in the production of man-made fibres in 2017-18. The MMF market in India was pegged at 1.319 million tonnes in 2017-18 compared to 1.364 million tonnes in 2016-17.

(Source: IBEF)

Recycled fibre

At less than four million metric tonnes, recycled polyester (which is the key fiber in preferred synthetics) makes up for an estimated seven per cent of polyester fiber produced — these fibers are largely used in carpets, blankets, clothing and other textile applications.

Government initiatives, increased awareness, relatively low production cost and increase in polyester uptake has seen a surge in recycled polyester growth — which is expected to continue — with China, India, Japan and the US projected to account for the highest production.

(Source: Textile Exchange)

Growth drivers

High demand of recycled PET bottles: Billions of non-biodegradable bottles are thrown away every year without any attempt at recycling. In view of this, the manufacture of recycled yarns out of PET bottles has emerged as a game changer. The demand for high quality, 100% recycled yarns made from 100% post-consumer PET waste is high and is expected to grow.

Rising incomes: In the last decade, Indian economy has progressed rapidly. Correspondingly, India’s per capita GDP has increased from Rs. 71,607 in FY12 to Rs. 117,406

in FY17 at a CAGR of 10.4% fuelling a consumption boom in the country. Correspondingly, the per capita personal disposable income surged from Rs. 73,476 in FY12 to Rs. 119,296 in FY17 at a CAGR of 10.2%. Also, the per capita private final consumption expenditure too rose from Rs. 40,250 in FY12 to Rs. 68,049 in FY17 at a CAGR of 11.1%. The growth in the country’s per capita GDP in turn has increased the disposable income of the populace ultimately driving consumption. (Source: CARE)

Recycled apparel demand: A number of international brands are increasingly using recycled PSF in the apparel manufacturing industry, thereby generating a growing demand. The use of such recycled PSF is also a trend that the fashion industry is following nowadays. Hence, recycled apparels are the need of the hour and are in high demand.

Smart Cities Mission: Under ‘Smart Cities Mission’ the Government has allocated Rs. 2.04 Lakh crore for the development of 100 smart cities. Project worth Rs. 2,350 crore has already been completed, while Rs. 20,852 crore-worth projects are in progress. Any smart city would need core infrastructure elements, including proper waste management which is expected to create opportunity for the industry. (Source: Indian real estate sector annual handbook) Man-made fibre: Over past few years, man-made fibre made from recycled PET bottles and other waste material has been gaining strength. This has created opportunity for RPSF driven by durability, versatility of end usage and lower price as compared to cotton and other substitute fibres, natural or man-made.

Virgin Recycled
Moisture regain values of virgin polyester of 150 denier is 0.040% Moisture regain values of recycled polyester of 150 denier is 0.045%
Bending length results of virgin polyester fabric of 150 denier is 2.75 Bending length results of virgin polyester fabric of 150 denier is 2.1
Abrasion resistance: 1-7.83% Abrasion resistance: 1-1.16%
Tenacity: 23.55 Tenacity: 20.24
Tearing strength of 150 denier:- Tearing strength of 150 denier:-
Wrap: 2986.6 Wrap: 2858.6
Weft: 3408.6 Weft: 2986.6

Energy needed to make the RPET is less than what was needed to make the virgin polyester.

The water used in recycled polyester production is only a fraction of what is required in cotton growing. Water is not an input in the recycling process. It is mainly used to clean the shredded pieces of plastic and to remove the dirt and debris.

Recycled polyester is soft and durable. It is wrinkle, shrink and stain resistant. Its benefits include: less soil, water and air contamination; less dependence on oil used in the production of original polyester; millions of plastic bottles saved from the landfill daily and less emissions from incinerators.

Producing recycled polyester is dramatically better for the climate, creating 75% less CO2 emissions than virgin polyester. That’s because recycled polyester doesn’t require new petroleum to create, lowering the demand for new petroleum extraction and reducing our overall carbon footprint. And by providing a use for post-consumer and post-industrial polyester, it helps keep waste out of landfills.

Also, polyester accounts for approximately 60% of the worlds production of PET, which is about twice of what is used in plastic bottles.Thus, the development of a non-virgin supply chain for polyester fiber has the potential to massively impact global energy and resource requirements.

Risk management

01 Industry risk
Drop in demand from the end- user segments could adversely impact the Company’s offtake. Mitigation: Growing demand for consumer goods and various governmental initiatives such as ‘Make in India’ among others are expected to boost synthetic fibre demand in the domestic market. The textile and apparel industry in India was pegged at US$ 150 billion in 2017-18 and is expected to reach US$ 250 billion by 2019.
02 Raw material risk
Inability to procure adequate raw material could impact the seamlessness of the Company’s operations. Mitigation: GESL has an extensive network of collection centres and scrap dealers across the country. The Company is focusing on the collection of PET waste from various hotels, malls, airports. Owing to the growing outreach in 2017-18, the Company processed more than 4.92 billion PET bottles, which helped the Company achieve a capacity utilisation of 89%. Regulatory support like Plastic Waste Management Rules, 2016 will also boost collection rate of plastic waste including PET bottle scrap.
03 Capacity expansion risk
The Company may not be able to sell the production from additional capacity. Mitigation: With expanded capacity, the Company now has one more production line to service its customers quickly and as per their needs. Even with the expanded capacity, the Company could maintain an average utilisation of 89%, reflecting strong demand of its products.
04 Competition risk
Growing competition could have an adverse bearing on the Company’s profitability. Mitigation: GESL possesses one of the largest capacities for PET recycling in India, which helps it to reap the benefits stemming from economies-of-scale. The Company has a huge outreach across the country and has differentiated itself by capitalising on the advantage of its pan-Indian presence and the proximity to industrial hubs, which in turn acted as an entry barrier to the new players of the sector.
05 Currency fluctuation risk
Adverse currency fluctuation could impact profitability of the Company. Mitigation: Besides having natural hedge in case of imports and exports, the Company is having continuous watch on foreign currency borrowings through cautious hedging policies.
06 Funding risk
The Company may not be able to fund its growing business and expansion needs in a cost- effective manner. Mitigation: The Company’s moderate debt-equity ratio of 0.38 in 2017-18 gives the Company liberty to take on additional borrowings. The Company’s interest cover stood at a robust 4.71x as on 31st March 2018, reflecting the Company’s ability to efficiently service debt. Timely repayments of debts and a moderate gearing helped raising additional debt in a cost-effective manner. The Company is also having adequate cash generation and is having access to capital market to fund its growth plan.
07 Quality risk
Main input being PET bottle scrap, contamination levels may affect the quality of final products. Mitigation: The Company is driven towards enhancing its operational efficiency with cutting-edge technology across its manufacturing facilities. The Company also strives to produce quality ensured products and is in compliance with ISO 9001:2015 which assures quality management system. Furthermore, its competent workforce ensures high capacity utilisation levels with optimal production and reduced wastage. This enables the Company to produce products of high quality, fostering strong customer relationships.

Finance review

Basis of preparation

The financial statements of the Company have been prepared in accordance with the Indian Accounting Standards (‘Ind AS’) notified under the Companies (Indian Accounting Standards) Rules, 2015 as amended. These financial statements for financial year 2017-18 are the

first financial statements with comparatives prepared by the Company in accordance with Accounting Standards notified under Section 133 of the Companies Act, 2013, read with Paragraph 7 of Companies (Accounts) Rules, 2014.

Key performance metrics
Parameters 2016-17 2017-18 Growth (%)
Revenue from operations (H crore) 685.95 757.55 10.44
EBIDTA (H crore) 81.52 89.14 9.35
PAT (H crore) 29.94 35.23 17.67
Earnings per share (Rs.) 15.59 18.37 17.83

Analysis of the profit and loss statement Revenues:

Total revenues of the Company reported a 10.44% growth from Rs. 685.95 crore in 2016-17 to Rs. 757.55 crore in 2017-18. The growth was primarily driven by growth in volumes owing to higher capacity. The other income of the Company reported 32.90% growth, largely driven by growth in government grants. Other income accounted for only 0.40% of the Company’s revenue reflecting the Company’s dependence on core business operations. Other income as a proportion of net profit stood at 8.52% in 2017-18 against 7.54% in 2016-17, reflecting Company’s profitability is skewed towards its core business.

Expenses: Total expenses of the Company increased 9.98% from Rs. 642.35 crore in 2016-17 to Rs. 706.47 crore largely on account of increase in cost of raw material consumed, growth in employee cost and increase in other expenses. Raw material cost, comprising 65.08% of the Company’s sales in 2017-18 (63.3% in 2016-17), increased 13.61% from

Rs. 430.41 crore in 2016-17 to Rs. 488.98 crore in 2017-18 owing to increase in the operations of the Company as well as higher input prices. Employees’ expenses, comprising 5.85% of the total revenues, increased 4.38% from Rs. 42.64 crore in 2016-17 to Rs. 44.51 crore in 2017-18 owing to increased employee base as well as yearly revision in remuneration of the employees.

Other expenses have been increased owing to increase in freight and forwarding charges on higher volumes, allowances for doubtful trade receivables and advances as well as loss on sale/discard of property, plant and equipment.

Analysis of the Balance Sheet Sources of funds

Capital employed: The capital employed of the Company increased 25.76% from Rs. 366.32 crore as on 31st March 2017 to Rs. 460.67 crore as on 31st March 2018 owing to increase in net worth as well as borrowings taken for the expansion project. Return on capital employed, a measurement of returns derived from every rupee invested in the business decreased 194 basis points from 17.39% in 2016-17 to 15.45% in 2017-18 due to deployment of funds for expansion project, the operation for which started in February 2018 only. The net worth of the Company increased 14.22% from Rs. 230.09 crore as on 31st March 2017 to Rs. 262.83 crore as on 31st March 2018 owing to increase in profits. The Company’s equity share capital comprising 19,176,877 Equity Shares of Rs. 10/- each, remained unchanged during the year under review.

Long-term debt: Long-term debt of the Company increased 126.76% from Rs. 36.65 crore as on 31st March 2017 owing to capital investments in expanded capacity. Long-term debt-equity ratio of the Company stood at 0.38 in 2017-18 compared to 0.32 in 2016-17, reflecting use of leverage to meet the operational demand. Finance cost: Finance cost of the Company decreased 2% from Rs. 14.87 crore in 2016-17 to Rs. 14.57 crore in 2017-18 due to scheduled repayment of loans and capitalisation of finance cost on new loans taken for expansion project. The Company’s interest cover stood at a comfortable 4.71x in 2017-18 (4.11x in 2016-17), reflecting the comfort in servicing interest by the Company.

Applications of funds

Property, plant and equipment (gross) of the Company increased 26.09% from Rs. 356.28 crore as on 31st March 2017 to Rs. 449.24 crore as on 31st March 2018 largely owing to capacity expansion. Depreciation on tangible assets declined 0.24% from Rs. 20.53 crore in 2016-17 to Rs. 20.48 crore in 2017-18.

Working capital management

Current assets of the Company increased 38.53% from Rs. 168.75 crore as on 31st March 2017 to Rs. 233.78 crore as on 31st March 2018 owing to growing business scale of the Company and impact of GST. Inventories including raw materials, work in progress and finished goods among others increased 44.37% from Rs. 92.25 crore as on 31st March 2017 to Rs. 133.18 crore as on 31st March 2018. Inventory turnover days stood at 62 days of turnover equivalent in 2017-18 from 50 days of turnover equivalent in 2016-17.

Growing business volumes resulted in an increase of 40.25% in trade receivables from Rs. 56.05 crore as on 31st March 2017 to Rs. 78.61 crore as on 31st March 2018. The Company contained average debtor turnover cycle within 24 days of turnover equivalent in 2017-18 against 28 days in 2016-17.

Cash and bank balances (including cash equivalent) of the Company declined 55.46% from Rs. 10.62 crore as on 31st March 2017 to Rs. 4.73 crore as on 31st March 2018.

Loans and advances made by the Company declined 27.57% from Rs. 3.99 crore as on 31st March 2017 to Rs. 2.89 crore on account of repayment of loans and advances.

Margins

A strong cost control helped the Company in reporting better margins during the year under review. The EBIDTA margin of the Company declined 25 basis points from 12.12% in 2016-17 to 11.87% while the net profit margin of the Company improved 24 basis points.

Key performance ratios
Parameters 2016-17 2017-18
Debt-equity ratio (x) 0.32 0.38
ROCE (%) on average capital employed 17.39 15.45
ROE (%) on average net worth 13.90 14.29
Net working capital cycle (days) 47 51
Debtor turnover cycle (days) 28 24
Inventory turnover cycle (days) 50 62
Interest cover (x) 4.11 4.71

Human resources

The Company provides competitive compensation, amiable work environment and acknowledges employee performance through a planned reward and recognition programme. The Company believes in evolving its organisational structure consistently while continuing with its efforts to follow good HR practices. Adequate efforts of the staff and management personnel are directed towards imparting continuous training to improve the work practices. The Company encourages individuals to extend beyond their scope of work and undertake voluntary projects that enable them to learn and contribute innovative ideas.

Internal control

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 involves a range of personnel who act in a coordinated manner while executing their respective responsibilities. The Board of Directors offers its guidance and strategic supervision to the Executive Directors and management, monitoring and support committees.