Hindusthan National Glass & Industries Ltd Management Discussions.

Container Glass Industry - Present & Future

The glass bottles and containers market was valued at USD 60.9 billion in 2019, and it is expected to reach a value of USD 77.2 billion by 2025, at a CAGR of 4.03% over the forecast period 2020-2025. Alcoholic Beverages, Food and Pharmaceutical will continue to drive the global glass market. Glass packaging is also witnessing rise for Cosmetics and Fragrance industries, owing to being best packaging alternative for this segment. Asia-Pacific excluding the Japan (APEJ) has the largest demand market, followed by Europe and the Americas. In terms of production too, APEJ is the major producer and exporter of glass containers followed by Europe .

The Asia-Pacific region is expected to register a significant growth rate compared to other nations owing to an increase in demand for pharmaceutical and chemical industries, which prefers glass packaging because of the inert nature of glass bottles. China, India and Australia among others are the prominent nations majorly contributing to the growth of the Asia Pacific glass packaging market.

COVID-19 Pandemic outbreak has left the world economy in a precarious situation, badly impacting Productivity. Straining US - China relationship, which was already going through a rough patch due to trade war tussle and also contributed to war some situation. The longer-term impact on container glass industry, with China being a major player, will have implications once the situation becomes clearer.

Premium Food & Beverage brands mostly prefer container glass over other packaging options such as plastics, as glass is sustainable, chemically inert, non-porous and impermeable. Various consumer surveys have also indicated container glass to be the most preferred option as it has a long shelf life and doesnt affect the taste of a product.

Some of the factors of Container Glass Industry, which limits the growth perspective due to volatile prices of Energy and Raw materials, Higher Logistics costs, Issues of Breakage and Growing use of Alternate Packaging like Plastics, Paper and Flexible packaging etc.

Indian Container Glass Industry

Total size of India container Glass Market is 6000 Cr and same is expected to grow at 7% CAGR to 9456 Cr by F.Y. 27. Current running capacities are in tune of 29 Lacs MT and it is likely to grow at 3.5% CAGR up to F.Y. 27 in spite of the small aberration caused due to COVID-19 pandemic. All the players are likely to take cautious approach towards capacity expansion due to bitter experience in last business cycle in 2012-13.

Demand, Consumption, Capacity Utilization and Profitability of the Container glass players are likely to be impacted in F.Y. 20-21 due to COVID-19 pandemic. Beer and IMFL segment likely to remain flat or grow at a very lower rate due to COVID-19 pandemic after-effect. However, there will be surge in Food and Pharma segment.

New Opportunity- Restrictions on Plastic Bottle/Alternate Packaging

Besides increasing awareness about the hazards of using alternate packing like PET/Plastic bottles among the public as well as among the government institutions, this Pandemic of COVID-19 has also brought opportunities in positioning glass as the best suited packaging alternative to various segments producing health and wellness products.

This shall boost the demand of processed food industry. Pull demand of Organic food, wellness and nutraceuticals would provide for additional growth in food segment and is thereby a preferential platform for promotion of glass packaging. Life-saving drugs and promotion of Pharmaceutical products would provide for good growth in Pharma segment. It is expected that Government of India will maintain focused approach in boosting this segment. Kerala Government has already moved, to shift 750 ml IMFL to glass packaging from PET (750 ml constitutes 35% of IMFL in Kerala). The above move of Kerala government is expected to have positive influence on other state liquor policies. Such steps will bolster Indian glass bottle market in coming days. Many companies in India have started indicating the willingness to shift from alternate packaging to glass. Parle is in advance stages of launching its regular PET packaged Appy Fizz in glass packaging.

Challenges

1. COVID-19 Impact on Business Profitability:

a. COVID-19 pandemic and subsequent measures including lockdown has badly hit end user consumption as well as container glass production. Raw material prices may witness sudden shoot-up in near future in this changed business economics, which might enforce container glass industry to increase bottle price.

b. Higher tax imposition by several states on Liquor / Beer products will pose serious challenge to maintain profitability in changing macro-economic environment.

c. Overall F.Y. 20-21 sales volume may decrease.

2. Soda Ash Prices are likely to remain flat owing to demand supply mismatches. As per the information available, most of the manufacturers are sitting on high inventory levels and operating plants at reduced capacities. Demand from Flat glass industry is at all-time low whereas Container glass plants are slowly starting the operation.

3. Indian Rupee has drastically depreciated in last 2-3 months due to slowdown in economic activities due to present COVID-19. It has direct bearing on the import of all chemicals and commodities. However, in last few weeks Government has focused on giving boost to economic activities by announcing Stimulus Packages. Stimulus Packages in conjunction with announcement of opening up the economy has resulted into appreciation of the Rupee against Dollar. It is too difficult to predict the Rs. Movement when covid-19 numbers are increasing at Rapid rate.

4. Uncertainly in Brent Crude prices and its direct impact of Power and Fuel cost in Glass industry. In the last two-three months, it has been in favour of Glass industry. All fuel prices were at their rock bottom level. Once again, Brent crude has started inching towards $50-60 / bbl make in last few days it has come down to $40/ bbl.

Threat

1. Domestic Soda Ash players - RSPL, GHCL & DCW have filed for Anti-Dumping Duty (ADD) imposition against soda ash Imports from Turkey and USA and Anti-Subsidy Duty imposition on Soda Ash against Turkey. Soda is one of the key ingredients for glass bottle production and any imposition of ADD & Anti-subsidy will have direct impact on Companys bottom line.

2. There is a likelihood of Covid cess imposition @ 15% on import of all chemicals in India. This has both positive & negative impact for chemical industry. Government will certainly take cognizance of both aspects before levying such taxation on imports. In case, it happens, it will directly affect bottom-line.

3. Threat from alternate packaging like PET, Multilayer Brick, Metal Cans, etc.

Sectoral Analysis

Liquor

Liquor segment has witnessed a growth of 3% in F.Y. 20 and about 3.5% growth trend is expected to continue in coming years. F.Y. 21 will remain challenging due to COVID-19 pandemic after effects. Whiskey, Brandy and Rum, the top three segments, grew at 2.6%, 2.5% & 2.4% respectively. Dec-Feb provided some impetus to the sales as people consumed more due to the winter.

India remains a whiskey drinking country and consumers prefer drinks made here because of relatively low price tags. Companies, however, are selling more premium drinks aided by a new class of drinkers with more disposable income.

Since Diageo acquired USL more than five years ago, the contribution of the premium segment to its overall sales has gone up to two-thirds from 45-50% in 2014. Diageos overall net sales in India grew 2% in F.Y. 20 but premium segment went up 5.1% during the quarter to December 2019. Pernod Ricard, reported net sales growth of 5% for the six months ended December 2019, compared to 24% a year ago.

Alcohol consumption in India has doubled in the last 25 years. Focus is going to be more on premium segment apart from increased penetration of routine category to increase per capita consumption in India.

F.Y. 20 sales has been impacted by weaker macro-economic environment, national election, weather condition (flooding) etc. leading to some temporary down trading in India. The brakes on growth come on the heels of a relatively good F.Y. 19.

Share of glass packaging in IMFL is expected to increase due to following factors.

1) Premium segments which constitute more than 40% of IMFL volume uses 100% glass packaging. The share of this segment is expected to grow to 67% of volume by 2 0 27 and hence the overall share of glass packaging in IMFL will also increase.

2) In the Mass / Popular segment, the share of glass bottles has reduced due to emergence of cheap alternate PET bottles. However, revenue leakages and ill effects on health are forcing state governments to turn back to glass packaging in liquor in phased manner.

Beer

The beer market grew 6.9% in F.Y. 20 compared with 5.7% in F.Y. 19. However, the year had remained challenging and the pace was significantly slower than the pre-demonetisation period in 2016, when sales increased 10% annually on an average. Also, last year saw disruptions such as Lok Sabha elections in April- May that also coincided with the Indian Premier League cricket tournament and crucial summer months, which have both historically boosted demand for beer. South India accounted for the largest market share of the India beer market due to hot weather condition. North India and Western India are expected to be the fastest growing markets.

United Breweries and AB InBev that together control three-fourth of Indias beer market expect it to grow in single digit for F.Y. 21, dragged by increasing taxation and regulations. Despite a weak volume growth forecast, companies expect higher value growth due to price hikes. Beer consumers now needs to adapt to the new reality, especially in pricing (due to taxes and regulation) and further in F.Y. 20 beer companies expect to continue on the growth trajectory.

However, higher disposable income, rising preference of consumer for low alcohol beverage and increasing youth population is well equipped to adapt to this changed scenario. Drinking in bars is fast becoming a social phenomenon in Metro and Tier 2 cities and same is leading to increased beer consumption. Besides, the rising number of pubs and bars are another factor which increased beer consumption. Some state governments, for instance Maharashtra, Uttar Pradesh and Kerala, offered separate licenses for beer sale, further boosting growth prospects for the industry.

The beer industry has seen various mergers and acquisitions in India, which has consolidated the Market place and lead to increased Market competition during the last five years, which has led to deep market penetration. For instance, US-based Molson Coors Brewing Company acquiring Mount Shivalik Breweries (Thunderbolt beer manufacturer), Ab InBev acquisition of SAB Miller in 2016. All Leading companies are increasing their manufacturing footprints to ensure product availability to its customer and increases in their market share. Carlsberg and Som distillers have put up capacities in East to increase their penetration in this zone.

With emergence of Craft Beers, the growth in beer consumption has increased rapidly. B9 Beverages & Simba is leading player in this segment. B9 Beverages with launch of Bira Craft Beer about five years ago, has managed about 5% share in key markets despite the dominance of MNC players and had growth of 15.4% in F.Y. 19. B9 Beverages has raised $20 million in a bridge round from existing backers Sequoia Capital and Sofina. The fresh funding indeed will boost Bira 91s confidence and growth plan. As per the latest development, the company was looking to launch 40-50 different limited release beers in the next one year.

Due to continuous nationwide lockdown on account of COVID-19 Pandemic, all business houses have been effected, while business of beverage companies have been effected worstly. Due to the shutdown of bars, pubs and alcohol shops, the revenue for such businesses has almost come down to zero for the past two months.

Share of glass packaging in Beer is quite high i.e. 85% and is likely to continue in the future also. Reuse of Old bottles is likely to reduce going forward as the market is mainly led by MNC players. Increase in Manufacturing footprints leads to Increases creation of Glass pool, which ultimately increased Glass bottle demand.

Food

Spending on food in India is expected to grow at 9-10% CAGR matching the expansion rate in 2019, evolving consumer preferences, rising income & growing rural opportunity. The rural slowdown has bottomed out, demand is expected to stabilise.

F.Y. 21, growth in rural FMCG revenue will recover to 11-12% from lows of about 9% in F.Y. 20, largely driven by better agriculture GDP growth. Besides, higher spending by the government on rural infrastructure could benefit rural incomes and thereby demand for FMCG product.

Indian organic food market to grow at a CAGR of 20% reaching a value of US$ 2,091 Million by 2024.

Along with offering profitable business opportunities, the dairy industry in India serves as a tool of socio-economic development. The private participation in the Indian dairy sector has also increased over the past few years. Both national and international players are entering the dairy industry, attracted by the size and potential of the Indian market. The focus is being given to value-added products such as cheese, yogurt, probiotic drinks, etc. These players are also improving their milk procurement network which is further facilitating the development of the dairy industry in India. Looking forward, the market is expected to reach a value of INR 25,491 Billion by 2025, exhibiting a CAGR of around 16% during 2020-2025.

Share of glass packaging in food segment is 10% and in dairy is 15% and is not expected to change significantly in future, though it is the most preferred choice for premium milk shakes, yogurts and flavoured milk. Glass offtake in this segment has grown @10% in last fiscal and same is likely to continue in future. Government is pushing the food processing segment aggressively and taking all needful measures to provide impetus to this segment. This will ultimately lead to increase in Glass bottle demand. COVID-19 pandemic impact has further grew awareness for usage of glass packaging for health products.

Pharmaceuticals

India is the third-largest pharmaceuticals in terms of volume and thirteenth most significant in terms of value as it has a large raw material base and availability of a skilled workforce. Indian pharmaceutical sector is estimated to account for 3.5% of the global pharmaceutical industry in value terms and 10% in volume terms. It is expected to grow to US$100 billion by 2025. Indias domestic pharmaceutical market turnover reached ? 1.4 lakh crore (US$ 20.03 billion) in 2019, growing 9.8 per cent year-on-year (in Rs) from Rs 129,015 crore (US$ 18.12 billion) in 2018.

Indias cost of production is significantly lower than that of the US and almost haIf of that of Europe. It gives a competitive edge to India over others. Increase in the size of middle class households coupled with the improvement in medical infrastructure and increase in the penetration of health insurance in the country will also influence in the growth of pharmaceuticals sector.

Indian pharma companies are capitalising on export opportunities in regulated and semi-regulated markets. In F.Y. 19, India exported pharmaceutical products worth US$ 19.2 billion.

Pharma Packaging market is growing at 6-7% driven by growth in pharma industry and its need for bulk drugs, formulations and trial drug packaging.

Share of glass packaging in liquid formulations is still high given potential risks of storing medicines in plastic bottles.

However, overall share of glass packaging has come down from 34% in 2009 to 21% in 2018 and is further expected to fall in future until government brings some regulation to curtail plastic usage in Oral formulations and Suspensions due to plastic ill effect. Some glass players in India are optimistic about phasing out of plastic usage by this year end and have recently added additional capacity

Soft Drinks

The market size of carbonated drinks in India is approx Rs 18,500 crore.

Carbonate Soft Drink (CSD) market is experiencing slowdown driven by availability of healthier alternatives and unfavourable policy decisions.

With growing cost pressure and ease of use, Coca Cola and Pepsi are shifting their containers from glass bottles to PET bottles. Share of glass packaging has fallen from 34% in F.Y. 09 to 22% at present and is further expected to decrease.

Glass usage in CSD Business has witnessed a negative growth of 13%. This is in continuation of its trend from 3-4 years and same is likely to continue.

Cosmetics

Indian Cosmetics market is expected to register 25% growth & likely to touch $20 billion by 2025 from present $ 8.5 billion. In comparison, the global cosmetics market is growing at 5.3% CAGR and will reach USD 450 billion 2025. This means that by 2025, India will constitute 5% of the total global cosmetics market and become one of the top 5 global markets by revenue. The Indian retail cosmetics market was valued over $ 10,441 million in 2018 and is projected to grow at a CAGR of over 16%, to reach around $ 25,987 million by 2024.

The rising awareness of beauty products, increasing premium on personal grooming, changes in consumption patterns , lifestyles and improved purchasing power among women are expected to boost the industry.

The market will maintain healthy growth due to rising preference for specialised cosmetic products such as organic, herbal and ayurvedic products. Principal areas that are expected to grow include colour cosmetics, fragrances, specialised skin care and make-up cosmetics.

The Indian industry is growing rapidly at a rate of 13-18%, more than that of US or European markets. Body care is the largest category and growing at about 4% CAGR while colour cosmetics is expected to grow at 13%. The premium segment is expected to grow at 6.3% per annum.

Details of significant changes (i.e. change of 25% or more as compared to the immediately previous Financial Year) in key financial ratios, along with detailed explanations therefor, including:

There has been significant changes in the Financial Ratios of the Company. The key Financial Ratio are as below:-

Particulars F.Y 2019-20 F.Y 2018-19 Reason for Difference
(i) Debtors Turnover 14.86% 15.83% Lower due to lower Dispatch
(ii) Inventory Turnover 18.06% 17.99% Due to increased inventory
(iii) Interest Coverage Ratio 55.77% -6.06% Increased realization of Goods Sold & reduction in Power & Fuel Cost.
(iv) Current Ratio 54.96% 62.64% Due to increase in current maturity of borrowing.
(v) Debt Equity Ratio* and** - - Due to reduction in Networth
(vi) Operating Profit Margin (%) 5.60% -0.63% Increased realization of Goods sold & reduction in Power & Fuel Cost.
(vii) Net Profit Margin (%) or sector-specific equivalent ratios, as applicable. -4.44% -11.12% Increased realization of Goods sold & reduction in Power & Fuel Cost.
(viii) details of any change in Return on Net Worth as compared to the immediately previous financial year along with a detailed explanation thereof.

The Companys Net Worth as per the financials has fallen and is at negative Rs 12,472 lacs as compared to the previous financial year being Rs 2155 lacs.

Due to Accrued Losses.

*Including Current Maturities -5.10% for F.Y. 2019-20 and -0.90% for F.Y. 2018-19.

‘‘Excluding Current Maturities -7.89% for F.Y. 2019-20 and -1.15% for F.Y. 2018-19.