Hindcon Chemicals Ltd Management Discussions

Overview: Global economic growth declined from 3.5% in 2022 to an estimated 3.1% in 2023. A disproportionate share of global growth in 2023-24 is expected to come from Asia, despite the weaker-than-expected recovery in China, sustained weakness in USA, higher energy costs in Europe, 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 percent in 2022 to 1.5 percent in 2023 and 1.4 percent in 2024 as policy tightening takes effect. Emerging market and developing economies are projected to report a modest growth decline from 4.1 percent in 2022 to 4.0 percent in 2023 and 2024. Global inflation is expected to decline steadily from 8.7 percent in 2022 to 6.9 percent in 2023 and 5.8 percent in 2024, due to a tighter monetary policy aided by relatively lower international commodity prices. Core inflation decline is expected to be more 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 US$ 2 trillion in 2023; trade in services was expected to have expanded US$ 500 billion. The cost of Brent crude oil averaged US$ 83 per barrel in 2023, down from US$101per barrel in 2022, with crude oil from Russia finding destinations outside the European Union and global crude oil demand falling short of expectations.

Global equity markets ended 2023 on a high note, with major global equity benchmarks delivering double-digit returns. This outperformance was led by a decline in global inflation, slide in the dollar index, declining crude and higher expectations of rate cuts by the US Fed and other Central banks.

United States: Reported GDP growth of 2.5% in 2023 compared to 1.9% in 2022

China: GDP growth was 5.2% in 2023 compared to 3% in 2022

United Kingdom: GDP grew by 0.4% in 2023 compared to 4.3% in 2022

Japan: GDP grew 1.9% in 2023 unchanged from a preliminary 1.9% in 2022

Germany: GDP contracted by 0.3% in 2023 compared to 1.8% in 2022

(Source: PWC report, EY report, IMF data, OECD data, Livemint)

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

Overview: The Indian economy was estimated to grow 7.8 per cent in the 2023-24 fiscal against 7.2 per cent in 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 27 December was H83.35 versus the greenback, a depreciation of 0.8%.

In FY 2023-24, the CPI inflation averaged 5.4 percent 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 percent, a sharp decline from 6.2 percent in FY 23. The softening of global commodity prices led to a moderation in core inflation.

The nations foreign exchange reserves achieved a historic milestone, reaching $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. UPI transactions in India posted a record 56 per cent rise in volume and 43 per cent rise in value in FY24.

E: Estimated

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

The FY 24 growth in the economy was the highest since FY17, excluding the 9.7% post- Covid rebound in gross domestic product (GDP) in FY22 from the 5.8% contraction in FY21.

Indias monsoon for 2023 hit a five-year low. August was the driest month in a century. From June to September, the country received only 94 per cent of its long-term average rainfall. Despite this reality, wheat production was expected to touch a record 114 million tonnes in the 2023-24 crop year on account of higher coverage. Rice production was expected to decline to reach 106 million metric tons (MMT) compared with 132 million metric tonnes in the previous year. Total kharif pulses production for 2023-24 was estimated at 71.18 lakh metric tonnes, lower than the previous year due to climatic conditions.

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 per cent in 2023-24 compared to 1.3 per cent in 2022-23. The Indian mining sector growth was estimated at 8.1 per cent in 2023-24 compared to 4.1 per cent in 2022-23. Financial services, real estate and professional services were estimated to record a growth of 8.9 per cent in 2023-24 compared to 7.1 per cent in FY 2022-23.

Real GDP or GDP at constant prices in 2023-24 was estimated at H171.79 lakh crore as against the provisional GDP estimate of 2022-23 of H160.06 lakh crore (released on 31^st May 2023). Growth in real GDP during 2023-24 was estimated at 7.3 per cent compared to 7.2 per cent in 2022-23. Nominal GDP or GDP at current prices in 2023-24 was estimated at H296.58 lakh crore against the provisional 2022-23 GDP estimate of H272.41 lakh crore. The gross non-performing asset ratio for scheduled commercial banks dropped to 3.2 per cent as of September 2023, following a decline from 3.9 per cent at the end of March 2023.

Indias exports of goods and services were expected touch $900 billion in 2023-24 compared to $770 billion in the previous year despite global headwinds. Merchandise exports were expected to expand between $495 billion and $500 billion, while services exports were expected to touch $400 billion during the year. Indias net direct tax collection increased 19 per cent to _14.71 lakh crore by January 2024. The gross collection was 24.58 per cent higher than the gross collection for the corresponding period of the previous year. Gross GST collection of H20.2 lakh crore represented an 11.7% increase; average monthly collection was H1,68,000 crore, surpassing the previous years average of H1,50,000 crore.

The agriculture sector was expected to see a growth of 1.8 per cent in 2023-24, lower than the 4 per cent expansion recorded in 2022-23. Trade, hotel, transport, communication and services related to broadcasting segment are estimated to grow at 6.3 per cent in 2023-24, a contraction from 14 per cent in 2022-23. The Indian automobile segment was expected to close FY 2023-24 with a growth of 6-9 per cent, despite global supply chain disruptions and rising ownership costs.

The construction sector was expected to grow 10.7 per cent year-on-year from 10 per cent in 2023-23. Public administration, defence and other services were estimated to grow by 7.7 per cent in 2023-24 compared to 7.2 per cent in FY2022-23. The growth in gross value added (GVA) at basic prices was pegged at 6.9 per cent, down from 7 per cent in 2022-23.

India reached a pivotal phase in its S-curve, characterized by acceleration in urbanization, industrialization, household incomes and energy consumption. India emerged as the fifth largest economy with a GDP of US$3.6 trillion and nominal per capita income of INR 123,945 in 2023-24.

Indias Nifty 50 index grew 30 percent in FY2023-24 and Indias stock market emerged as the worlds fourth largest with a market capitalization of US$4 trillion. Foreign investment in Indian government bonds jumped in the last three months of 2023. India was ranked 63 among 190 economies in the ease of doing business, according to the latest World Bank annual ratings. Indias unemployment declined to a low of 3.2% in 2023 from 6.1% in 2018.

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 2024-25.

Union Budget FY 2024-25: The Interim Union Budget 2024-25 retained its focus on capital expenditure spending, comprising investments in infrastructure, solar energy, tourism, medical ecosystem and technology. In 2024-25, the top 13 ministries in terms of allocations accounted for 54% of the estimated total expenditure. Of these, the Ministry of Defence reported the highest allocation at H6,21,541 crore, accounting for 13% of the total budgeted expenditure of the central government. Other ministries with high allocation included Road transport and highways (5.8%), Railways (5.4%) and Consumer Affairs, food and public distribution (4.5%).

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

The global construction chemicals market is poised for substantial growth, estimated at USD 90.51 billion in 2024 and projected to reach USD 130.52 billion by 2030, with a CAGR of 6.29% during the forecast period. These chemicals are vital additives used alongside cement and concrete. In 2022, the market witnessed a 4.37% increase, expected to continue at an annual rate of 5.57% in 2023, driven by rising demand from both industrial, institutional and residential construction sectors.

The industrial, institutional segment led consumption in 2022, comprising 34.8% of the global market. Investments in healthcare, education, and industrial infrastructure are set to strengthen growth, fuelled by global urbanization and industrialization trends. By 2030, the sectors new floor area is expected to expand from 9 billion sq. ft to 11 billion sq. ft, driving a projected USD 14 billion increase in demand for construction chemicals.

The residential sector is anticipated to be the fastest-growing segment with a CAGR of 6.90% during the forecast period, supported by sustained housing demand, increased investments, and favourable government policies. For instance, Indonesia aims to build 1 million housing units by 2025 to meet projected demand of 30 million units. Globally, the residential floor area is expected to grow by 3.81% annually, further boosting demand for construction chemicals.

Concrete admixtures, waterproo_ng solutions, flooring resins, anchors and grouts, are crucial components enhancing building functionalities. In 2022, the global market saw significant growth, with Asia-Pacific and Europe leading at 42.8% and 25.3%, respectively. Asia-Pacific dominated the market in 2023 with a 43.0% share, driven by escalating construction activities in both residential and industrial sectors. By 2030, the regions construction chemicals market is expected to grow by 62.2%, primarily fuelled by residential sector expansion, particularly in urban areas like India, where demand for affordable housing units is projected to create substantial growth opportunities.

(Source: Mordor Intelligence)

The Indian construction chemicals market is projected to grow significantly from an estimated USD 3.30 billion in 2024 to USD 5.02 billion by 2030, with a CAGR of 7.24% during this period. This promising outlook is driven by several key factors.

Rapid urbanization and extensive infrastructure projects, such as smart cities, highways, railways and affordable housing initiatives, are major demand drivers. The _ourishing construction industry across residential, commercial, industrial, and other sectors further boosts the market. A noticeable shift towards green and sustainable construction practices fuels demand for eco-friendly construction chemicals.

In the commercial sector, Indias Grade A office market is expected to expand to 1.2 billion sq. ft by 2030, spurred by significant growth in new floor area driven by foreign direct investment. The residential sector saw a 9.4% increase in floor area in 2022, with continued growth expected as urbanization drives demand for housing units. Both sectors are forecasted to grow at CAGRs of approximately 7.4% and 2.95%, respectively, through 2030, supported by government initiatives and increased real estate investments.

The residential and commercial sectors are poised to remain the largest applications by value and volume in Indias construction chemicals market, driven by population growth, rising middle-class incomes, and urbanization trends. The Indian government has significantly increased its capital expenditure, allocating US$ 133.9 billion (H11.11 trillion) for FY25 to boost infrastructure development, equivalent to 3.4% of GDP.

National highway construction has been robust, growing at a CAGR of 5.3% between FY14 and FY23 despite pandemic challenges. In FY22 alone, India constructed 10,457 km of highways, with FY23 seeing an additional 10,331 km by the Ministry of Road Transport and Highways. The governments March 2024 inauguration of 112 national highway projects valued at approximately US$ 12.04 billion (H1 lakh crore) underscores its commitment to infrastructure expansion.

Within the construction chemicals market, the concrete admixture segment is expected to experience accelerated growth in volume by 2030. This growth is further strengthened by Indias housing deficit, with estimates suggesting a shortage of 10 million units in urban areas and a need for 25 million affordable housing units by 2030. Initiatives like PMAY-Gramin aim to construct 1.95 crore homes, significantly contributing to residential construction demand.

(Source: Mordor Intelligence, Persistence market research)

Rise in GDP: Real GDP, or GDP at constant prices, is projected to reach H173.82 lakh crore in 2023-24, up from H160.71 lakh crore in the first revised estimates (FRE) for 2022-23. This represents a growth rate of 8.2% in 2023-24, compared to 7.0% in 2022-23.

Surge in real estate: Indias real estate sector is projected to reach USD 1 trillion by 2030, up from USD 200 billion in 2021, and contribute 13% to GDP by 2025. Retail, hospitality, and commercial real estate are growing significantly, supporting Indias infrastructure needs. By 2047, the sector is expected to expand to USD 5.8 trillion, increasing its GDP contribution to 15.5% from the current 7.3%

Reduction of GST for building materials in the 28% category in budget 2024: Cost is a critical factor that influences both the construction industry and end consumers. To address this concern, we propose the reduction of the GST on certain building materials, particularly those still in the 28% category, such as cement. This measure will not only make construction more affordable but will also contribute to the growth of the building sector.

Demographic dividend: India, with a median age of 28.2 years in 2023, holds the distinction of having the largest population cluster in the world. This youthful demographic underscores the nations potential for dynamic economic growth and cultural vibrancy. Technological advancements: Technological advancements in construction chemical formulations, including the development of high-performance admixtures, waterproo_ng compounds and advanced coatings, are driving market growth by offering improved properties and performance characteristics.

Environmental regulations and sustainability: The adoption of green rating systems like Leadership in energy and environmental design (LEED) and Indian green building council (IGBC) in India promotes the use of eco-friendly construction materials. Buildings certified under these systems earn points for sustainable practices, making them more appealing to tenants and investors.

(Source: pib.org, Ibef.org, Economic Times, Worldometer, Market Wide Research, USGBC-Leed, IGBC)

The commercial real estate market is set for significant growth, projected to reach USD 4.85 trillion in 2023 and expand to USD 8.36 trillion by 2028 at a CAGR of 11.50%.

Coworking spaces, reaching 47 million square feet in India by mid-2022 and expected to exceed 80 million square feet by 2025, offer flexible solutions for businesses.

Tier 2 cities like Nagpur, Vizag, Lucknow, Surat, Jaipur, Indore, and Mangalore are becoming attractive investment destinations due to a_ordability, infrastructure development, a growing middle-class population, and government support.

PropTech is reshaping the commercial real estate sector with innovations like online platforms, drones, 3D printing, data analytics and cloud-based software. It enhances property transactions and management. In coworking spaces, PropTech fosters collaboration, improves efficiency, and promotes sustainability through smart buildings and IoT, addressing broader urban challenges.

(Source: gototheaddress.com)

In FY23, Indias residential property market reached new heights, with home sales valued at an all-time high of H3.47 lakh crore (US$ 42 billion), marking a robust 48% year-on-year increase. Sales volume also grew significantly, rising 36% to 379,095 units sold. In 2023, Indian real estate developers in major urban centers are set to complete approximately 558,000 homes. Demand for residential properties surged across the top eight Indian cities, driven by strong interest in mid-income, premium, and luxury segments, despite challenges like high mortgage rates and property prices.

(Source: ibef.org)

Urban rejuvenation and smart cities mission: As for urban rejuvenation and smart cities mission, there is a 21% dip in allocation. As much as H13,200 crore was allocated in 2023-2024 and H10,400 crore has been allocated for 2024-2025.

The Pradhan Mantri Awas Yojana (PMAY)has been increased by 49% to H80,671 crore. As much as H54,103 cr. was allocated (as per revised estimates) in 2023-2024.

For metro projects: too there is a 9% increase in allocation and H19508 cr. was set aside in 2023-2024 (as per revised estimates) and H21336 cr. has been allocated for 2024-2025.

Capital investment: In the interim budget for 2024-25, the capital investment outlay for infrastructure has been raised by 11.1% to H11.11 lakh crore (US$ 133.86 billion), which accounts for 3.4% of GDP. Specifically, the government has allocated H2.76 lakh crore (US$ 33.4 billion) for the Ministry of Roads for the fiscal year 2024-25.

Strengths: The Indian chemical industry boasts a diverse manufacturing base, a robust domestic market, and strong growth potential. Its ability to innovate and produce high-quality chemicals at competitive costs, supported by favourable government policies and R&D investments, positions it as a global key player. Indias strategic location and established trade networks enhance its export capabilities, ensuring resilience and dynamism.

Weakness: The Indian chemical industry faces several challenges, including weak export demand, high channel inventories, and the risk of Chinese dumping, which are expected to continue pressuring margins and causing inventory losses.

Opportunity: The demand for chemicals in India is expected to grow by 9% annually by 2025, with the industry projected to contribute US$ 383 billion to the GDP by 2030. This robust growth trajectory underscores the dynamic expansion of the chemical industry, which is poised to make a substantial impact on the national economy. Threats: Organized players in the Indian construction chemicals market encounter challenges stemming from rising imports from China and the general lack of industry organization.

(Source: IBEF, Economic Times)

Economy risk: Domestic challenges such as inflation, liquidity crunch, slower industrial growth, depreciating rupee, political instability, and rising commodity prices could impact performance.

Mitigation: Recognizing the critical importance of timely and affordable resource availability, Hindcon implemented backward integration strategies. These initiatives involve producing resources internally for both internal use and sales, effectively reducing marketing and inventory costs and boosting overall profitability. By leveraging its captive supply, Hindcon has also managed to offer more competitive prices, enhancing its market position. This reliance on internal sources for a significant portion of its resources, raw materials, and power needs underscores Hindcons competitive edge in the industry.

Demand risk: As the infrastructure industry develops, it drives demand in the construction chemicals sector; any weaknesses within the sector could impact the demand for construction chemicals.

Mitigation: The company is innovating and introducing unique products with potential applications across multiple sectors.

Competition risk: With rising competition, businesses may experience a decrease in profits.

Mitigation: The company aims to broaden its geographical market reach and attract new B2B clients while nurturing long-term partnerships that currently account for over 65% of its revenue. Additionally, it actively seeks to cultivate new business relationships. To meet changing customer needs, the company offers a diverse array of products. In the fiscal year 2023-24, B2B customers comprised 78% of the companys total revenues.

Quality risk: A decrease in product quality can impact the companys long-term revenue prospects.

Mitigation: The company maintains a vigilant approach to monitoring regulatory changes to ensure adherence to relevant regulations. Emphasizing compliance, it takes proactive measures to stay updated with applicable standards. The company has achieved accreditation for ISO 9001:2015 and ISO 22716:2007, focusing on quality control and management processes.

Environment risk: The risk of not meeting environmental standards includes the production of environmentally friendly products.

Mitigation: As a member of the Indian Green Building Council, the company focuses on prioritizing the production of eco-friendly products.

Portfolio risk: A decrease in sodium silicate sales could adversely affect the companys operations and profitability.

Mitigation: The company provides a diverse range of products including sodium silicate, concrete and mortar admixtures, floorings, protective waterproo_ng coatings, and adhesives. Additionally, it offers services such as waterproo_ng and repair and retrofitting of distressed structures.

Revenues: Revenues during the year under review were H63.42 cr. as compared to H82.72 cr. during FY2022-23.

Profit after tax: The Company registered a profit after tax of H6.38 cr. during FY 2023-24 compared to H4.31 cr. during FY2022-23, which was 48.03% higher than the previous financial year.

The internal control and risk management system at our organization adheres to the principles and criteria outlined in our corporate governance code. It is integrated into the overall organizational structure of both the Company and the Group, involving coordinated efforts from various personnel in their respective roles. The Board of Directors provides strategic guidance and oversight to the Executive Directors and management, overseeing and supporting committees. The Control and Risk Committee, along with the head of the audit department, operate under the supervision of the Board-appointed Statutory Auditors.

Hindcon attributes its success to a motivated workforce. The company offers competitive salaries, cultivates a supportive work environment, and acknowledges employee achievements through a structured rewards and recognition system. Hindcon fosters a culture of personal growth by encouraging participation in voluntary projects that enrich individual learning experiences. As of March 31^st, 2024, Hindcon employed a total of 126 employees.

This statement 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 realized. 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.