Grindwell Norton Ltd Management Discussions

General Review:

Grindwell Norton Limited ("GNO") is one of the subsidiaries of Compagnie de Saint-Gobain (Saint-Gobain), a transnational group with its headquarters in Paris and with sales of Euro 47.90 billion in 2023. Saint-Gobain has organised its businesses into two broad areas: Construction or Building related businesses focused on serving regional markets and High-Performance Solutions ("HPS") catering to the global market. GNOs businesses are part of the HPS Sector. Within GNO, the businesses are divided into two major segments.

1. Abrasives

2. Ceramics & Plastics Business environment:

Indias current growth continues to be resilient despite some signs of moderation in growth. The overall growth remains robust and is estimated to be between 7% to 7.3% for the full year. The Index for Industrial Production ("IIP") grew by 6.1% over 2022-23 and the growth was seen across the sectors. The headwinds caused by the geo-political situations affected the export-oriented sectors. While the inflation was at stable level, Indian rupee witnessed lowest volatility among its emerging market peers and a few advanced economies against USD in 2023-24.

Abrasives Segment Review

GNO is the market leader in India and offers the widest range of cutting-edge Abrasive products to the Indian market. We cater to multiple market segments through our diverse and varied channels. While the vast majority of these products are made by GNO in India, some are sourced from other affiliate plants of Saint-Gobain or from third parties.

Abrasives business comprises of following sub-groups, also called as Sector of Activities (SOAs) i) Bonded Abrasives ii) Thin Wheels iii) Coated Abrasives iv) Superabrasives and v) Construction products.

Saint-Gobain has good backward integration for certain Abrasives as the Ceramic Materials Division of Saint-Gobain manufactures high-end Abrasive grains. Besides, Saint-Gobain has strong Research and Development capabilities and is uniquely positioned in the Abrasives industry.

Abrasives business in India has four manufacturing sites: Mora (near Mumbai), Bengaluru, Nagpur and Baddi (Himachal Pradesh). All the sites are certified under ISO 9001: 2015, ISO 14001:2015 and ISO 45001:2018. Besides, to augment its manufacturing capacity, GNO also has contract manufacturing and extensive sourcing arrangements both at domestic and international level.

In the last few years, we have started to offer a range of Sealants & Adhesives under the Tekbond brand based on the successful acquisition of a few businesses by Saint-Gobain in the rest of the world.

Products & Plants:

Bonded abrasives, generally available in the form of wheels and other shapes such as Segments, Sticks & Cones, etc. are used for various precision applications such as OD grinding, ID grinding, Surface grinding, Face grinding, Lapping, Honing, Super-finishing, Thread grinding, Fluting etc. They are also used in rough applications such as Snagging, Burr removal and Off-hand grinding. Bonded Abrasives are used by a variety of Industries like Steel, Bearings, Auto Ancillaries, Auto Original Equipment Manufacturers ("OEMs"), Foundries, Cutting Tools, Needle, Razor, Food Processing, Aerospace and General Engineering. The variety of products is large and consists of both Made-to-Order and Made-to-stock products. GNO makes over 15,000 different products in a year.

Thin Wheels are predominantly Cutting and Grinding Wheels used for Cutting, Deburring and Weld-removal. These are generally used in Fabrication, Construction, Foundry and General Engineering. With the increasing affordability of Power Tools, usage of TWs is growing significantly.

Coated Abrasives products are engineered composites comprising of a backing, a bond system and abrasive grains and are designed for material removal and surface preparation and finishing. Coated Abrasive products are available in various shapes like Discs, Belts, Wheels, Sheets & Rolls to suit a wide gamut of surface preparation and polishing applications. Non-Woven Abrasives, which are a part of Coated, are used for getting the desired high quality surface finish for metals, woods and other composites. Non-woven products are also used for consumer applications like utensil cleaning, floor cleaning etc as well.

Superabrasives are made of Diamond (synthetic or natural) or Cubic Boron Nitride and are used in precision applications in Auto, Bearing, Steel, Solar, Electronics and many similar industries.

Industry:

The Abrasives industry in India currently has two major players offering a full range of Abrasives products, one of which is GNO. GNO is the market leader in several products-market segments of Abrasives and has deep presence across geographies and channels. Over the years, and due to the growth of the Indian market, we have seen many global players establishing their presence in India. We also see power tool players and local traders importing products in their brands from China.

Imports from China are predominantly in the power-tools accessory range and cater to the low and mid-tier market segments. In the last few years, we have also seen Paint, Adhesives and players from other allied industries also starting to participate in select Abrasives range.

While the overall abrasive Industry is becoming competitive due to the Chinese influx, this is also helping to grow the overall market as many manual applications are moving to power tools. Also, major players like GNO are able to differentiate due to deep customer connect, ability to customize solutions and also due to strong brand equity, built over decades.

The Key Success Factors for Abrasives in India are; range, loyal distribution, reach, high level of technical competence to work on specific solutions for different customers, good cost position, agility in offering new products & solutions, reliable service and quality and innovation.

Development & Outlook:

Saint-Gobain is a major player worldwide in Abrasives. It has a strong product portfolio with Centres of Excellence, footprint in several countries for manufacturing and R&D centres located in different parts of the world to cater to both the local and global needs in terms of products, manufacturing process etc. Besides, the Ceramic Materials Division of Saint-Gobain develops high end Abrasive Grains.

GNO benefits from being a part of such an organization, in terms of access to all developments in products and process technology.

2023-24 has been a year of moderate growth in the industry. Core Industries did reasonably well, however, exports-oriented segments had a big impact due to the ongoing slow-down in the West.

It was a good year in terms of stability in supply chains with costs coming down. However, due to moderate demand, we saw pressure on prices, especially for products originating from China.

In our core industries, we saw customer optimism and capacity addition. At the same time, there are newer markets like Railways, Defence, Solar, Electronics, where we expect the volumes to grow significantly in the next few years.

From GNO point of view, we have strengthened our position both in "core markets" as well as "new avenues". We have strengthened our teams in Sales, R&D and product development to fast track the growth in core and technical businesses. On retail side, we have worked on cost savings, through operational efficiencies and purchase savings. This will help us to compete with the Chinese imports and other new entrants in the market.

Risks & Concerns:

Overall, there are no major risks and concerns. There can be some minor fluctuations in growth for certain segments, however, with the new avenues adding, we feel the market will remain positive in near future.

With India being one of the fastest growing economies in the world, we see a lot of global players taking aggressive position in India. We will have to work on many cost-cutting initiatives to not lose any space to competition.

(i) Industry & Market:

The Abrasives business caters to a number of industries such as Steel, Automobiles, Auto Components, General Metal Fabrication, Construction and Woodworking. The dependence on any single industry segment is less than 15% even as Automotive coupled with ancillaries and Automotive after, has a significant impact. This broad-based nature of Abrasives business in a way protects it from the volatility of any particular segment.

GNO, over last few years has focused on growing the non-engineering channels and also diversifying into adjacency products. We have also increased efforts to grow exports. This in a way, should partially insulate us from the ups and downs of specific market segments in India.

(ii) Technology:

Abrasives have been used over a very long period of time and technological changes in terms of applications are gradual. GNO Abrasives is well positioned to anticipate and take advantage of these technological changes as Saint-Gobain is one of the Worlds leading manufacturers of Abrasives with a very strong R&D Centre in the USA with regional R&D centers located elsewhere (including a Centre in India). Both basic and applied research takes place at these R&D centers. GNO has full access to all the research and technology developments.

(iii) Competition:

The Abrasives Market in India has two major players and many other small, mid-size players. In the last few years, we have seen many Paint, Adhesives and similar companies entering the Abrasives market. With their deep distribution and aggressive prices, they have been able to penetrate the market in a short period of time. On the other hand, imports from China have grown over the period of time. We see organized players in power-tools segment and local traders importing from China in their own brands. High-end European and Japanese players continue to work in specific niches. They operate through their subsidiaries, distributors or agents. To meet the growing challenges in the market, the business will have to continue to invest in technology, capacities and capabilities and provide superior solutions.

PERFORMANCE PLASTICS ("PPL")

Product, Plant & Industry:

The Performance Plastics business produces and markets more than 800 standard and custom-made polymer products through three business segments: Engineered Components ("ENC"), Life Sciences ("LS") and Composites ("CMP"). Each of the segments demonstrates innovation, responsiveness to customer needs and polymer expertise. The major product lines in PPL are Bearings, Automotive Polymer Solutions, Seals, Tubing & Hoses, Single Use Bags and Assemblies, Tape Solutions and Performance Films. The major markets addressed are Life Sciences, Automotive, Construction, Energy, Oil and Gas and General Industrial. GNO has a plant for ENC and LS products situated at Bengaluru. This plant is certified under ISO 9001: 2015, ISO 14001:2015 and ISO 45001:2018.

Development & Outlook:

The major growth drivers are: (a) New product development and new customer /market conversions (b) Success in new applications development (c) Broad basing of existing applications and markets (d) Specification driven approvals at customers in Life Sciences and Automotive market segments. 2023-24 was a challenging year due to a drop in the market potential of Life Sciences business in domestic and export markets. On the other hand, Bearings segment of Engineered Components had a good year with sales increase to automotive market. Tape Solutions business gained volumes in all segments of the business, i.e., Automotive, Electric Vehicle ("EV") and Construction. Strong business conversion in battery pack manufacturers supported by demand pick up in EV automotive customers has led to a very good year for Tape Solutions business. Seals business had muted volumes on account of a sluggish Energy market environment.

Looking ahead, the outlook for most of the businesses is positive with a favorable demand scenario in most of the markets. The Life Sciences business continues to have a muted demand outlook on the domestic front and export markets. However, with local production of Bags there is a huge new business opportunity available for conversion. With Automotive demand expected to continue to do well in the current year, Bearings and Composites businesses too have a good outlook in the automotive market segments. Electric Vehicle Battery packs promises to be a significant growth driver for Tapes Solution business in 2024-25 with good volume projections coming from all local OEMs. The main aim of the PPL business in 2024-25 would be to strengthen its position in existing markets, while accelerating growth in new markets in the industrial, Life Sciences and construction segments. Presence of well-trained technical sales and application engineers with good market coverage is a key requirement to identify and develop new applications and deliver high growth. Building such teams and local expertise will continue to be a high priority for the business.

Risks & Concerns:

Demand disruption in key markets like Automotive, Life Sciences, Industrial and Oil & Gas is a major risk due to the macro environment uncertainty in the short term. EV adoption pace in the coming year with withdrawal of subsidies could lead to lower growth rates in this customer segments. Inflationary environment and concerns over availability of Key Raw materials along with logistical uncertainties will be critical challenges to overcome for the business in the current year. Depreciation of the Rupee is also a risk as the business is import-intensive.

PERFORMANCE CERAMICS AND REFRACTORIES ("PCR")

Products & Plants:

GNOs PCR Business Unit makes Ceramic and Refractory products for a wide range of industrial applications. The products manufactured mainly include Silicon Carbide based "shaped" refractory and ceramic products. The range of "unshaped (monolithic)" products primarily includes "dry ramming masses" and a few specialized "castables". PCR Business offers comprehensive solutions, based on deep expertise acquired over the years, in the design, engineering, and manufacturing of ceramic and refractory systems for addressable applications. In many cases, our offering includes installation support and training as part of the overall product- service package. PCR business unit has two manufacturing sites: one is located at Bengaluru, in Karnataka, and the other at Halol, near Vadodara, in Gujarat. The plants in Halol & Bengaluru are certified under ISO 9001: 2015, ISO 14001:2015 and ISO 45001:2018.

Industry:

PCR Refractory products find use in applications across industry segments like Primary Iron & Steel, Primary Non-Ferrous Metals (Aluminium, Copper, Zinc, etc.), Secondary Steel, Secondary Iron, Secondary Non-Ferrous (Aluminium, Copper), Petrochemicals, Waste to Energy Systems, etc. PCR Ceramic products are used in applications in industry segments like Sanitaryware, Tableware, Ballistic Armor Protection, Wear Resistance Systems, etc.

Development & Outlook:

The business continued to develop the opportunities identified during the last few years in the following segments: Foundry, Iron & Steel, and Non-Ferrous segments in the domestic market and Ceramic systems, Armor, Iron & Steel, and Foundry segments in export markets. Operating profit grew substantially, mainly due to higher sales volume, improved sales realisation and continued improvement in manufacturing efficiencies. GNO exited the joint venture with Shinagawa Refractories Co Ltd, Japan in November 2023. However, the business for Tap Hole Clay will be carried out by GNO with technical support from Shinagawa Refractories Co Ltd Japan under Royalty arrangement.

The outlook for 2024-25 is positive on account of the identified market opportunities but concerns, due to slowing Indian and global economy and supply chain disruption brought on by different economic & geopolitical circumstances.

PCR has entered into a definitive joint venture agreement with Advanced Synthetic Minerals Private Limited ("ASMPL"), a producer of White Fused Alumina ("WFA") in Gujarat with 49% equity shareholding. This investment will ensure the supply security of White Fused Alumina for the business. The fund infused by GNO will be used to augment and increase the capacities of ASMPL to cater to growing demand of WFA for PCR as well as outside market.

Significant changes in Key Financial Ratios along with detailed explanation:

The Debt-Equity Ratio of the Company has risen to 140% as a result of availing part of the sanctioned term loan during the financial year ended March 31, 2024.

Risks & Concerns:

The business has a very high level of exposure to global supply chains - both for inputs and sales. There are many geo-political factors at play that can disrupt these supply chains. Contingency plans need to be developed for such situations.

SILICON CARBIDE ("SiC")

Products & Plants:

Silicon Carbide grains are used primarily as raw material in the manufacture of Abrasives, Refractories, Iron Foundries and for stone polishing. SiC is manufactured at the plant located at Tirupati in Andhra Pradesh. SiC is also manufactured by the Companys subsidiary, Saint-Gobain Ceramic Materials Bhutan Private Limited, at its plant near Phuentsholing in Bhutan. Both the plants are certified under ISO 9001: 2015, ISO 14001:2015 and ISO 45001:2018. GNO is pioneered in providing consistent quality, reliable service with shorter lead time, which becomes the strength of the Company to compete with imports.

Industry:

In the domestic market, there are three main players (including GNO) in the SiC business. This market is also catered to by imports, mainly from China, Vietnam and Russia. The key requirements for success in the industry are quality and cost competitiveness. Entry barriers are high by way of capital investment and technology. SiC is experiencing annual growth in the domestic market, driven by the increasing steel production in India. The demand from the steel industry will continue to fuel the growth of SiC in the country.

Development & Outlook:

Price of SiC products saw a decline during the year after rising to historical levels in the previous year. The drop in sales prices was at a much faster pace than the cost drop leading to drop in Operating Margins.

On the supply side, both the sites increased their output compared to the previous year. After the shutdown of the APGPCL operation, GNO - Tirupati Plant moved to 100% grid power and continued to operate with grid energy since then. With the overall increase in output from both sites, we were able to grow volumes in this financial year thereby improving our supply in the marketplace.

Looking ahead, the focus in 2024-25 will be on maximizing supply from both manufacturing locations and to continue focus on the price and cost management.

Risks & Concerns:

With product prices continuing to be under pressure, mainly driven by product prices from China, the Input cost pressure continues to affect us. While recently we have seen some softening of input costs, this is still not sufficient given the reduction in the selling prices we continue to witness. This needs a very close management.

Digital Services

Development & Outlook and Risk & Concerns:

GNO has captive IT services unit which provides various IT services (e.g., Application development, infrastructure management, and cybersecurity) to the Saint-Gobain group globally. The IT services unit has around 650 employees. The captive center follows the cost-plus model. The growth in this segment is limited and future growth can happen only on account of cost inflation. The financial performance of this segment may be impacted due to the foreign exchange fluctuation and hedging strategy.

Risks & Concerns:

1. Financial:

GNOs financial management has always been governed by prudent policies, based on conservative principles. Currently, GNO has minimal borrowing. All the commercial transactions entered into by GNO in foreign currencies are managed by hedging them appropriately to minimize the exchange risk. GNO has a well-defined and structured treasury operation, with the emphasis being on security.

2. Legal & Statutory

• Contingent Liabilities: Details of Contingent Liabilities are in the Notes forming part of the financial statements.

• Statutory Compliance: GNO ensures statutory compliance of all applicable laws and is committed to the timely payment of statutory dues. The Company monitors compliance under various statutes periodically.

Human Resources:

The Companys primary focus is to provide a fair and inclusive work environment that fosters innovation for building a more sustainable world, inspires high performance, and empowers employees to develop and grow. The Company strives to sustain its leadership position in the market and places a strong emphasis on developing careers through shared trust. The well-founded hiring and onboarding practices enables the Company to attract, grow and retain talent and enable them to unlock their infinite potential through exposure to diverse assignments and opportunities. An objective and transparent performance management process serves to encourage superior performance. To improve organizational efficiency, employee engagement, and skill development, the Company encourages participation in various training programs, e-learning courses, external events participation, benchmarking and best practices visits. At the end of the financial year, there were 2524 permanent employees on the rolls of the Company.

The Company will continue to invest in training people in Environment, Health and Safety and World Class Manufacturing and to provide an opportunity for employees to give their best and realize their full potential.

The Company firmly believes in enhancing the culture of creating values by taking initiatives in proactively designing and presenting innovative solutions that generate value for customers and end-users. The top priority is to maintain a smooth execution process, while emphasizing on high standards of quality and efficiency, as well as prioritizing environment, health and safety. This approach is rooted in the companys ethos of promoting togetherness, leveraging diversity, and nurturing personal and professional development.

Overall Performance:

The financial year witnessed increased economic activity. The industrial economy witnessed a steady and sustained improvement despite increase in input costs and high commodity prices. Your Companys standalone revenue from operations and operating profit have increased by 5.1% and 3.3% respectively and consolidated revenue from operations and operating profit increased by 5.7% and 4.6% respectively. The consolidated operating profit margin (19.2% vs 19.4%) and net profit margin (14.3% vs 14.2%) were in line with previous year. Return on Net Worth (standalone) for the financial year ended March 31, 2024 at 18.9% is lower than that of the previous financial year (20.3%) and Return on Net Worth (consolidated) for the financial year ended March 31,2024 at 18.6% is lower than that of the previous financial year (19.9%).

Internal Control Systems:

The Company has established an effective system of internal controls, with documented policies and procedures that encompass all financial and operational aspects. These controls are designed to reasonably ensure the reliability of financial reporting, monitor operations, and protect assets from unauthorized use or losses while ensuring compliance with regulations. The efficacy of the internal control systems is validated by Internal as well as the Statutory Auditors.

A well-established, independent and multi-disciplinary Internal Audit team operates in accordance with governance best practices. It reviews the compliances, internal controls, the efficiency and effectiveness of operations, and key process risks. Every quarter the significant audit finding, the corrective steps recommended, and their implementation status are presented to the Audit Committee.

The Risk Management Committee reviews business risk areas, encompassing operational, financial, strategic, regulatory, and other risks.

Segment Financials:

For the current year, in line with the Accounting Standards on Segment reporting, GNO has identified three segments. These segments are Abrasives, Ceramics & Plastics and Digital Services.

Cautionary Statement:

The Management Discussion and Analysis Report contains a few forward looking statements based on the information and data available with the Company and assumptions with regard to the economic environment, the government policies etc. The Company cannot guarantee the validity of assumptions and performance of the Company in the future. Hence, it is cautioned that the actual results may differ from those indicated, expressed, or implied in this report.