Heranba Industries Ltd Management Discussions

Economic Overview

Global Economy

The global economy displayed unexpected resilience during the disinflation period of 2022-23, defying predictions of stagflation and recession. Economic activity remained steady, supported by factors like government spending, household consumption, and increased labour force participation. This resilience allowed households, particularly in advanced economies, to draw upon savings accumulated during the pandemic.

While global growth is estimated at 3.2% in 2023, it is projected to continue at the same modest pace in 2024 and 2025. This relatively low growth rate is attributed to factors such as high borrowing costs, withdrawal of fiscal support, weak productivity growth, and increasing geoeconomic fragmentation. Global headline inflation is expected to gradually decline, with advanced economies returning to inflation targets sooner than emerging markets.

Global growth is estimated at 3.2% in 2023 and projected to continue at the same pace in 2024 and 2025, which is low by historical standards. This is due to factors like high borrowing costs, withdrawal of fiscal support, productivity weakness, and geoeconomic fragmentation.

Global headline inflation is expected to fall from 6.8% in 2023 to 5.9% in 2024 and 4.5% in 2025, with advanced economies returning to inflation targets sooner than emerging markets.

The medium-term growth outlook appears relatively weak, reflecting lower growth in GDP per capita stemming from persistent structural frictions that prevent capital and labour from moving to productive firms. The dimmer growth prospects in China and other large emerging economies, given their increasing share of the global economy, will also weigh on the prospects of their trading partners.

Risks to the global outlook are now broadly balanced. Downside risks include geopolitical tensions, persistent core inflation, divergence in disinflation speeds, financial stress from high interest rates, and geoeconomic fragmentation. Upside risks include looser fiscal policy and faster-than-expected disinflation.

Policy priorities include ensuring a smooth landing for inflation, implementing medium-term fiscal consolidation, intensifying supply-enhancing reforms, and multilateral cooperation to limit geoeconomic fragmentation and climate change risks.

Source: IMF World Economic Outlook, April 2024

Indian Economy

The Indian economy is projected to sustain a robust growth rate of 7% or higher for the financial year 2023-24, with some forecasts indicating a continuation of this impressive performance into FY25. If this prediction materialises, it would mark the fourth consecutive year of post-pandemic growth at or above 7%, a remarkable achievement that underscores the Indian economys resilience and potential, auguring well for its future prospects.

In contrast, the global economy continues to grapple with sustaining its post-Covid recovery, as successive shocks, including the recent resurgence of supply chain disruptions in 2024, threaten to disrupt trade flows, transportation costs, economic output, and inflation globally. While India is not immune to these challenges, having already navigated the Covid pandemic and the energy and commodity price shocks of 2022, it exudes a quiet confidence in its ability to weather emerging disturbances.

Several trends are expected to reshape the future economic landscape:

1. Waning Hyper-Globalisation: The era of hyperglobalisation in global manufacturing appears to be coming to an end, but this does not necessarily herald de-globalization, as countries are only now beginning to appreciate the extensive integration of global supply chains developed over recent decades.

2. Rise of Al: The advancement of Artificial Intelligence

(Al) raises complex questions about growth in services trade and employment, posing a threat to the cost competitiveness advantage enjoyed by countries exporting digital services.

3. Energy Transition:

The challenge of energy transition looms large, driven by mounting concerns over rising temperatures and the need to reduce carbon emissions. This has led to sustained pressure from international organisations and advanced nations on developing countries to transition away from fossil fuels and adopt greener energy alternatives.

The governments fiscal policy stance for FY 2024-25 aims to fortify the domestic economys resilience against external shocks and mitigate the risks of a global economic downturn, without compromising macroeconomic stability. The overarching strategy focuses on fostering a more inclusive, sustainable, and shock-resistant domestic economy. Increased resources will be channelled towards capital spending to sustain the momentum of infrastructure development, embracing the principles of PM Gati Shakti for integrated and coordinated project planning and implementation. Fiscal federalism will be strengthened by supporting states efforts in enhancing public infrastructure. Prioritisation of expenditure will be directed towards key developmental sectors such as drinking water, housing, sanitation, green energy, health, education, agriculture, and rural development, ensuring long-term sustainable and inclusive betterment of citizens. Furthermore, the effectiveness of cash management will be enhanced through just-in-time resource allocation, leveraging systems likeSNA/TSA.

Source: Ministry of Finance, Government of India

Industry Overview

Global Chemical Industry Overview

Global Crop Protection Industry Overview

Pesticides, also known as agrochemicals, play a crucial role in agriculture by supporting plant growth, protecting crops from pests, and increasing crop yields. They safeguard crops from insects, diseases, and weeds, which can adversely affect the volume and quality of food crops. These benefits have supported the growth of the pesticide industry globally over the years. Additionally, the need for sufficient global food production to meet the demands of the increasing world population has also contributed to the markets growth.

The global pesticide industry is dominated by the herbicide segment, followed by fungicides and insecticides. In 2022, the industrys global market size was around USD 81 billion, with herbicides accounting for the highest share of approximately USD 29 billion (around 35%). The fungicide and insecticide segments contributed roughly USD 18 billion (-22%) and USD 17 billion (-17%), respectively, to the global pesticide industry during the same year.

Segments (USD billion)	2022	2028P	Outlook CAGR
	Crop protection market
Herbicides	29	-40	4.5%-5.5%
Fungicides	18	-25	4.5%-5.5%
Insecticides	17	23	4.5%-5.5%
Others	6	7	1.5%-2.0%
Total crop market	70	~95	5.0%-6.0%
Non-crop market	11	-14	4.1%-5.0%
Total global pesticides market	81	-109	5.0%-6.0%

Source: CareEdge Research estimates based on industry sources Note: 2022 data is estimate

Apart from the crop market, the non-crop segment has also contributed significantly to the global pesticide market. In 2023, this segment had a market size of about USD 11 billion. These pesticides are used in homes, gardens, turfs, ornamentals, pest control operations, industrial vegetation management, forestry, public health, and aquatic environments, among others. They serve various purposes, including weed control, disease management, insect control, and plant growth regulation.

With the anticipated increase in pesticide application due to their benefits, the crop market is expected to grow at a faster compound annual growth rate (CAGR) compared to the global non-crop market. Accordingly, the global non-crop market is projected to rise at a CAGR of about 4.1%-5% by 2028, reaching approximately USD 14 billion.

During the period of 2017-2022, the global pesticide market is estimated to have grown at a CAGR of 5.1%, increasing from USD 62 billion in 2017 to USD 81 billion in 2022. However, post-2021, demand has been soft due to various factors, including geopolitical tensions, supply chain issues, and high raw material prices. In 2023, after export restrictions were eased in China, the supply increased, leading to declining prices and subdued demand.

The aforementioned factors are expected to continue supporting the global pesticide industry. As a result, wthis market is projected to register a growth rate of 5.0-6.0% during the period of 2023-2028, likely reaching approximately USD 109 billion by 2028.

? Asia Pacific is expected to remain the largest market for the global pesticide industry and is projected to grow at the fastest CAGR of 6.0-6.5% by 2028 among all regions. This is likely to increase the Asia Pacific regions share in the international market to around 34% by 2028, up from an estimated 32% in 2022.

? The pesticide markets in Latin America, North America, and the Middle East & Africa are likely to increase at a CAGR of 4.5%-5.5% by 2028.

? The pesticide market in Europe, on the other hand, is estimated to increase at a CAGR of 2.0%-2.4% during the forecasted period.

Source: Care Ratings

Indian Agrochemicals Market Overview

The Indian pesticides market has shown significant growth over the past decade. From 2013-14 to 2022-23, the market grew at a Compound Annual Growth Rate (CAGR) of 6.6%, increasing from ? 368 billion to ? 655 billion. In terms of USD, the market grew at a CAGR of 3.0%, from USD 6.1 billion to USD 7.9 billion during the same period.

Os

Source: Department of Chemicals and Petrochemicals.

Note: The market size of industry for years 2020-21,2021-22 and 2022-23 are CareEdge Research estimates

The Indian pesticide industry is primarily divided into three types:

• Insecticides: Account for approximately 40% of the market share

• Fungicides: Hold around 34% of the market share

• Herbicides: Make up about 23% of the market share

The overall Indian pesticide industry is expected to continue its growth trajectory, with an estimated CAGR of 6.0%-6.5% by 2027-28. This growth is driven by an anticipated increase in both international market demand and domestic usage of pesticides.

Supply Chain and Backward Integration

Indias pesticide industry is currently dependent on China for some technical insecticides. Disruptions in Chinas supply chain, such as chemical plant shutdowns to reduce pollution, can impact Indias supply chain. To mitigate this risk, the Indian government is considering expanding the Production Linked Incentive (PLI) scheme to include domestic manufacturing of agrochemicals. This initiative aims to:

• Increase the competitiveness of domestic producers.

• Enhance Indias market share in the global agrochemicals market.

• Achieve self-sufficiency by producing technical-grade ingredients domestically.

Exports & Imports

India is a net exporter of pesticides, with exports accounting for a significant share of the total market size. From 2018-19 to 2022-23, pesticide exports grew at a CAGR of 8.1%, from 461 thousand tonnes to 630 thousand tonnes. The export value also increased at a higher CAGR of 22%, from USD 3.2 billion (? 225 billion) to USD 5.2 billion (? 431 billion).

Top export destinations include Brazil, the USA, Bangladesh, Vietnam, and Australia. The export volumes are expected to grow at a CAGR of 6%-7% by 2027-28, with insecticides projected to grow the fastest at 10%-11%, followed by herbicides at 7.5%-8.5%, and fungicides at 4%-5%.

While India is a net exporter, it also imports pesticides, albeit in smaller quantities. Imports grew at a CAGR of 3.5%, from 117 thousand tonnes in 2018-19 to 134 thousand tonnes in 2022-23. The value of imports increased at a CAGR of 6.0%, from USD 1.3 billion (? 89 billion) to USD 1.7 billion (? 140 billion). China is the major source of imports, accounting for 51.97% of the total, followed by the USA, Israel, and Taiwan.

Indias pesticide production capacity has increased at a CAGR of 4.0%, from 325 thousand tonnes in 2017-18 to 380 thousand tonnes in 2021-22. However, production declined by 13.3% year-on-year to 258 thousand tonnes in 2022-23 due to subdued demand from agriculture both globally and domestically. The industrys capacity utilisation has averaged around 65% over the past five years.

India has a competitive edge in the agrochemical industry due to low labour costs and support for chemical clusters. The industry remained resilient during the pandemic year (2021-22), with exports increasing by 22% to 648 thousand tonnes and growing by 37.7% to ? 365 billion year-on-year.

MD&A

Opportunities and Challenges

The Indian pesticide industry has several growth opportunities, including:

• Increasing food consumption due to population growth.

• Government support for agriculture.

• Demand from export markets, horticulture, and floriculture.

However, challenges such as dependency on China for technical insecticides and the need for backward integration to ensure supply chain stability remain. The adoption of the ‘China plus one strategy by many countries could benefit India by reducing global dependence on China and increasing Indias export potential.

In conclusion, the Indian crop protection industry is poised for continued growth, driven by both domestic and international demand, government initiatives, and strategic shifts in global supply chains.

Global Pyrethroid Market Overview

In 2020, the global pyrethroids market was valued at approximately $3.3 billion. From 2015 to 2020, the market experienced steady growth with a CAGR of 4.7%. Looking ahead, it is projected to continue growing at a CAGR of 6.4% until 2025, reaching a value of $4.5 billion. Despite recent industry-related challenges, the pyrethroids market is expected to recover and exhibit growth due to the ongoing demand for these chemicals in various applications. Pyrethroids are extensively used in both agricultural and urban settings for public and animal health functions. As the global population expands and farmland diminishes, farmers worldwide are adopting novel farming techniques to enhance crop productivity. In terms of human safety,

pyrethroids offer an advantage over organophosphates, being more eco-friendly and safer for humans and mammals.

In 2020, the Asia Pacific region, including India, held the dominant position as the largest market for pyrethroids, comprising approximately 40% of the global market share. Latin America followed closely with 22%, North America with 18%, Europe with 15%, and the Middle East and Africa with around 5%. While India played a significant role in the export market, its own consumption accounted for approximately 4% of the global total. Within the Asia Pacific region, India constituted around 10% of the demand, with China being the largest player in the region. Among the emerging economies, including China, India, Vietnam, and Thailand, there is substantial consumption of pyrethroid insecticides for various cereal and grain crops.

The utilisation of pyrethroids has been on the rise in Europe and North America, particularly in Canada, as they are increasingly being substituted for organophosphates. Vegetables and fruits in North America are treated with domestically registered pyrethroids. The demand for insecticides is expected to continue growing due to robust government support for environmentally friendly and responsible agricultural practices. However, the European market is projected to exhibit sluggish growth in the forecast period due to stringent regulations on chemical production and usage.

In terms of global consumption, the Asia Pacific and Latin America regions together accounted for nearly 60% of the total demand in 2020, with the Asia Pacific region also functioning as the largest manufacturer and supplier of pyrethroids.

Source: Care Ratings

Company Overview

Heranba Industries Limited (HIL) is a prominent agrochemical Company in India, specialising in the manufacturing of intermediates, technicals, and formulations for farmers and other institutional customers. The Company provides innovative crop care solutions to farmers and public health products like pesticides to pest control companies, government authorities, and others.

HIL operates 4 state-of-the-art manufacturing units strategically located in the industrial belt of Vapi,

Saykha, and Sarigram in Gujarat. The Company boasts a dedicated in-house research and development team focused on product development and improvement, operating out of 3 cutting-edge R&D centres. This team is complemented by a strong product registration team working to expand the Companys business globally

With a diverse product portfolio, robust R&D capabilities, and prudent growth strategies, Heranba Industries Limited is well-positioned to expand its operations globally and become a leading player in the agrochemical industry.

The Company develops, manufactures, and sells crop protection solutions such as herbicides, insecticides, and fungicides, aiding farmers in safeguarding their crops against weeds, pests, and diseases.

Heranba primarily operates in the off-patent market, offering customers long-standing foundational products and unique formulations. It holds a prominent position

as one of the leading domestic producers of synthetic pyrethroids, including cypermethrin, alphacypermethrin, deltamethrin, permethrin, lambda cyhalothrin, and others. The Companys pesticide range encompasses insecticides, herbicides, fungicides, and public health products for pest control.

Heranba Industries Limited has a strong global presence, with its footprint in the Middle East, Commonwealth of Independent States (CIS), Asia, Southeast Asia, and Africa regions. Furthermore, the Company is actively working towards expanding its operations in developed markets such as the United States and Europe, leveraging its expertise and innovative solutions to cater to the global agricultural community.

Risks and Concerns

In FY24, Heranba Industries Limited continued to face a challenging macroeconomic environment and industry headwinds that originated in FY23. These challenges included a decrease in demand due to supply-chain destocking in various regions, lower overall demand, and a decline in price realisations for agrochemicals in 2023. Additionally the industry faced intense competition from Chinese manufacturers and higher stock levels with supply chain players in export markets.

Despite these obstacles, the Company exhibited resilience in its performance and continued to advance its strategic initiatives, such as product development and commercialization, project execution, and brandbuilding efforts. Heranba Industries remains confident in its performance and believes it will continue to deliver value to its customers and shareholders in the future.

As agrochemicals rely on the agricultural sector for their demand, they are susceptible to weather conditions, including extreme events like droughts and natura disasters. Prolonged periods of excessive rainfall or drought in India or foreign markets where the Company operates can impact the demand for its products. Unfavourable weather patterns can have adverse effects on the Companys operations and financials.

Given the nature of the products manufactured by Heranba Industries, challenges such as contamination, adulteration, and product tampering arise throughout the manufacturing, transportation, and storage processes. Product liability or recall claims are inherent risks for the Company if goods fail to meet quality standards or are alleged to cause harm to consumers. While the Company follows standard manufacturing practices and conducts final product testing to mitigate these risks, it cannot completely eliminate them.

For more detailed information on the Risks and Risk Management Framework of the Company, please refer to page number 36.

FY24 Performance Review & Outlook

Revenue from Operations stood at ? 1,274.75 crore in FY24 as compared to ? 1,324.38 crore in FY23. EBITDA stood at ? 126.99 crore during the year as compared to ? 174.64 crore in FY23. Subsequently EBITDA margin stood at 9.96% in FY23 as compared to 13.05% in FY23. Profit After Tax stood at ? 66.35 crore in FY24 as compared to ? 110.11 crore in FY23.

The Companys FY24 revenues stood at ? 1,274.75 crore restricted by unfavourable global economic scenario, inventory build-up in the system and sluggish demand from key export regions. However, we have witnessed decent traction for our formulation products in both domestic and export markets. The EBITDA margins remained muted during FY24 due to lower price realisation in export markets and falling prices in finished goods. Despite a challenging year, Heranbas Balance Sheet continues to remain robust.

The Company is hopeful of a better operating environment in the coming years, with some relief on product price trends, better demand outlook and incremental capacities coming on stream.

Financial Ratios & Remarks

Particulars	FY24	FY23	Change	Remarks
Current Ratio	158	2.53	-37.40%	Overall decrease in current assets
Debt-Equity ratio	0.16	0.11	45.76%	Fresh borrowings taken during the year
Debt Service Coverage Ratio	8.09	15.43	-47.54%	Due to overall decrease in profit as compared to previous year
Return on Equity Ratio (ROE)	7.84%	14.39%	-45.54%	Due to overall decrease in profit as compared to previous year
Inventory Turnover Ratio	3.29	3.21	2.52%
Trade Receivables Turnover Ratio	2.88	3.17	-9.34%
Trade Payables Turnover Ratio	4.65	5.06	-8.07%
Net Capital Turnover Ratio	3.19	2.65	20.39%
Net Profit Ratio	5.21%	8.31%	-37.39%	Due to overall decrease in profit as compared to previous year
Return on Capital Employed (ROCE)	10.04%	16.80%	-40.21%	Due to overall decrease in profit as compared to previous year
Return on Investment (ROI)	0.83%	3.71%	-77.53%	Fresh investment made during the year

Human Resource and Industrial Relationship

Heranba Industries recognises its people as the driving force behind its business growth and considers them its most valuable asset. The Company is committed not only to fostering the professional development of its employees but also nurturing their personal growth. It strives to unlock the full potential of its human resources, thereby enhancing employee performance and achieving organisational objectives. Heranba places great emphasis on upskilling and training initiatives that align with the evolving needs of the business. The Company is dedicated to providing opportunities for its workforce to grow and learn within the organisation, enabling them to stay relevant and contribute effectively.

Heranba motivates its employees through various performance-based compensation schemes, which serve as a strong incentive for their dedication and hard work. These schemes recognize and reward exceptional contributions, fostering a culture of excellence and continuous improvement. The management team at Heranba comprises a blend of young talent and seasoned professionals. This combination ensures a continuous flow of fresh ideas while benefiting from the wealth of experience accumulated over the years,

creating a dynamic and innovative environment. The Company strives to strike a harmonious balance between employee satisfaction and the Companys profitability and capabilities, recognizing that a motivated and engaged workforce is crucial for successfully achieving its goals. Heranba Industries expresses sincere appreciation and gratitude to its employees for their significant contributions and unwavering support, which have played a vital role in the Companys success and development. The Company acknowledges the invaluable role of its human capital in driving its growth and achieving its objectives.

Internal Controls Systems and Their Adequacy

The Company has implemented a robust system of internal controls to safeguard its assets against loss, unauthorised use, or misappropriation. All transactions undergo a rigorous approval process, are meticulously documented, and reported to the Management within stipulated timelines. The Company adheres to all relevant accounting standards, ensuring proper maintenance of accounting records and accurate presentation of financial statements.

The Boards Audit Committee defines the scope, frequency, and methodology for internal audits. The internal auditors conduct comprehensive audits, encompassing the evaluation of the effectiveness and adequacy of the Companys internal control systems. They ensure compliance with operating procedures, accounting practices, and policies across all Company locations. Based on their findings and observations, periodic internal audit reports are submitted to the Audit Committee for review.

Process owners take necessary actions and implement measures in their respective areas based on the internal audit report and the Audit Committees evaluation. According to the internal auditors, the Companys internal control system is robust, efficient, and effective, ensuring a high level of operational excellence.

Furthermore, the Board has established a comprehensive legal compliance framework to ensure adherence to all relevant laws and regulations. This framework ensures that

the Companys compliance procedures are sufficient and effective, fostering a culture of ethical and responsible business practices.

Cautionary Statement

Some of the statements in this “Management Discussion and Analysis”, describing the Companys objectives, projections, estimates, expectations, and predictions may be “forward looking statements” within the meaning of applicable securities laws and regulations. Although the expectations are based on reasonable assumptions, the actual results could materially differ from those expressed or implied, since the Companys operations are influenced by many external and internal factors beyond the control of the Company.

The Company assumes no responsibility to publicly amend, modify or revise any forward looking statements, based on any subsequent developments, information or events.