Hitech Corporation Ltd Management Discussions.

PACKAGING SOLUTIONS FOR MULTIPLE SECTORS:

Hitech Corporation is a leading manufacturer of rigid plastic packaging solutions for a variety of customer segments across multiple geographies. These include customers from industries such as paints and coatings, personal care and healthcare, agriculture and lubricants. While it operates in a highly competitive space, its emphasis on quality and innovation remains paramount.

OVERVIEW OF INDIAN ECONOMY:

Business operations remained difficult as India had a mixed year in terms of economic growth in 2018-19. It started the fiscal year with an optimistic 8.2% in the first quarter and then eased to 7.3% in the second quarter, owing largely to increased volatility, both geopolitical and financial. External factors such as changing monetary policy in advanced economies and trade disputes and sanctions in various proportions were likely the cause of the slowdown. Domestically, higher financing costs and reduced availability of credit lowered the growth forecast for the fiscal year 2018-19 to 7.2%. Additionally, a decline in growth of private consumption, minimal increase in fixed investment and dull export forecast may have contributed to the slowdown. Significantly higher crude prices adversely affected Indias fiscal deficit and directly impacted the rupee, that started the year at a near minimum of 68.34 but ended the year at 71.19.

The short-term outlook however appears better, with forecasts at 7.3% for 2019-20. The direct cash transfer programme for farmers and the middle-class tax relief measures announced at the budget as well as government thrust on spending are expected to contribute a stimulus to the GDP growth. Structural reforms including land and labour laws will help accelerate infrastructure development, thereby easing bottlenecks. Elevated levels of regulation in public sector banks, supported by strengthening goods and services tax compliance and reducing subsidies, are likely to curtail public debt. New policies on resolving concerns over non-performing assets under a simplified insolvency and bankruptcy code may help strengthen the financial sector to provide impetus for investment and public consumption. Reforms to labour regulations will likely incentivize job creation, indirectly support the rural economy and continue to support domestic activity. Optimism around global economic growth will likely fuel Hitechs upward trajectory as well. The lesser focus on customer centricity, innovation and quality will bode well as it advances into serving newer customer segments with newer products in newer geographies.

BUSINESS SEGMENTS:

Hitech is developing business models to serve expanded sectors and customers all across India.

PAINT INDUSTRY:

Indian paints and coatings are an INR 50,000 Cr industry that is expected to grow to INR 70,000 Cr by 2022. Incentives from the government providing stimulus to both rural and urban housing as well as growing disposable income in younger Indians is likely to aid the decorative paints demand. Greater emphasis on innovation like odour free and dust & water-resistant paints will require specialized packing solutions. Hitechs newest plants in Mysore and Vizag will not only establish its firm presence in the south but also to equip it to emulate the growth of the paint industrys packaging demands.

FMCG:

The Indian FMCG industry is expected to grow at approximately 28% by 2020. Modern trade is expected to grow at 20-25% and that is likely to boost FMCG revenues. The governments approval of 100% foreign direct investment in cash & carry and single brand retail and 51% in multi brand retail will also help. It will be complemented by the

Consumer Protection Bill that lays great emphasis on simple, speedy, accessible, affordable and timely delivery of justice to consumers. While FMCGs urban segment has provided steady revenue for several years, the governments initiatives are likely to help the rural segment contribute upwards of 15% to total revenue going forward. As FMCG companies focus on increasing awareness about quality products and invest in better distribution channels, Hitech, as a trusted packaging partner to many FMCG companies will be at the forefront of this growth.

PERSONAL AND HEALTH CARE INDUSTRY:

The demand in personal and health care will likely exhibit an optimistic pace of growth and be broad based, that is, it will come from across various categories and across the diverse markets. Household and personal care accounts for approximately half of FMCG revenue owing mainly due to growing awareness, easier access and changing lifestyles of consumers. The share of the unorganized market will likely fall as brand consciousness and premiumization of certain categories among the newer consumers increases. This may lead to the introduction of different combinations of products at different prices, to cover as many market segments as possible. Lowered GST from 24% to 18% on high volume products is also expected to increase consumer spend. Hitech is therefore looking to leverage its strength in research and development to keep pace with the packaging demands.

HOME CARE:

Home care is another growing sector in India. Cost competitiveness for in-home health services has been a major driver of the demand. The introduction of Ayushman Bharat, growing hospitalisation costs and a need for personalised medical attention have fuelled a rapid increase in Indias home healthcare services sector. It is set to grow manifold in the coming years and thus translates into greater requirement of packaging solutions. Manufacturers prefer to offer their products by opting for packaging that not only specify useful information but also keep the products safe. The packaging market for this segment will continue to remain in high. Hitechs strategy is to expand its business partnerships to offer new products.

AGRO CHEMICAL:

The Indian agrochemical industry is finally exhibiting signs of recovery, riding on the success of global chemical manufacturers, rising exports and greater concerns over pest infestation due to global warming. Indian companies are steadily expanding capacities after two consecutive weak monsoons and consistent increase in raw material prices. The abundance of cheap labour and low processing cost will help bring strong product lines quickly to market. The use of agrochemicals in India is 0.65 kg per hectare compared to 4.58 kg / hectare in developed economies. The surge in demand to fulfil the dietary demands of a growing population will likely provide the impetus to increase farm productivity using agro-chemicals. The industry is expected to double to INR 50,000 Cr by 2025. Hitechs proximity to the agricultural chemical manufacturing belt will enable it to better understand the needs of these customers and expand its packaging market share.

CAPITAL EXPENDITURE & EXPANSION PLANS:

Hitech has grown organically and through acquisition in the last several years. Driven by its promise of customer centricity, its plants are located close to customers locations to understand their needs. The Mysore unit started production in September 2018 and Vizag plant came online in August 2019. Southern India shows great opportunity in the majority of Hitechs core customer segments and the new plants, along with the expanded Sriperumbudur facility, will help solidify Hitechs position in this geography.

OPPORTUNITIES, RISKS AND THREATS:

Hitechs simple three-fold strategy to expand current products in new customer segments, develop new products for existing customer segments and create new products for new customer segments has served it well. Having 14 manufacturing facilities across the country has allowed it to take direct advantage of opportunities in varied customer segments and geographies.

General economic deceleration, that impacts Hitechs customer segments, and fluctuating polymer prices pose the most direct risks to Hitech. In order to mitigate risks from economic slowdown, Hitech continuously works to minimize its costs. It has consolidated its facilities within two major regions to increase synergies and combine efficiencies. It also works with its customers to contractually pass on the effects of polymer prices in order to minimize adverse effects on operating profits.

Structural changes in monetary policy and industrial regulation have an indirect impact on Hitech as customers pursue short- and long-term changes to their strategies to cope with the same. Increased crude oil prices have direct effects on profitability. Hitech works closely with its customers to stay ahead of the effects of such changes. It also restricts imports and covers foreign exchange rates to minimize any adverse financial implications it may have.

HUMAN RESOURCES & INDUSTRIAL RELATIONS:

Hitech continues to attract and retain necessary talent at all its facilities. Its commitment to the holistic development of its employees extends not only to engaging and developing them on a professional level but also encouraging personal development. These are through meditation, interactive workshops, multi faith prayers every morning and great emphasis on preventive healthcare through yoga.

ENVIRONMENT, HEALTH AND SAFETY ("EHS"):

Hitechs EHS policy requires compliance to statutory EHS requirements as the minimum performance standard. It is committed to adopt stricter standards, wherever possible. Health and safety of employees is always given priority. Hitech arranges employee training programs that enable workers to perform as per prescribed procedures designed to meet all EHS requirements.

INFORMATION TECHNOLOGY:

The Company is increasing its focus on digitisation and automation. During the year, Hitech has worked on creating a dashboard for simplifying the operational controls and management at all its plants. This facilitates transparency of data and results in higher operating efficiencies.

RESEARCH & DEVELOPMENT:

Hitechs Research and Development Centre, accredited by the Department of Scientific and Industrial Research (DSIR) of the Government of India, was moved to Sanaswadi in the last quarter. The new facility is large enough to support the firms ambitions to invest in better machining technology as well as proximate enough to facilitate faster trial and testing time. Mould design and development remains at the forefront of Hitechs technological enterprise, but other innovations, ranging from low cost automation to process improvement complement its holistic approach towards providing customer delight.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY:

Hitech has an adequate internal control mechanism based on an integrated cloud-based ERP system and has aligned its current system of internal financial control with the requirement of The Companies Act, 2013. This system is commensurate with the nature of Hitechs business in addition to the size and complexity of its operations. The management assessed the effectiveness of the Companys internal control over financial reporting and the Statutory Auditors of the

Company have issued an attestation report on the internal control over financial reporting as required under section 143 of the Companies Act, 2013. The Audit Committee appoints internal auditors to audit and submit a summary of the internal audit report periodically. The Committee then discusses and reviews the findings with the internal auditors, statutory auditors as well as with senior management, including functional heads. Significant findings, along with management response and status of action plans, are also periodically shared with and reviewed by the Audit Committee. Evaluation of risk management system and process reviews are being further improved to increase profitability, efficiency and operational excellence.

FINANCIAL PERFORMANCE:

Our financial results and performance for the year are elaborated in the Directors Report.

In accordance with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 as amended, key changes in financial indicators alongwith Key Financial Ratios are given below:

During the financial year 2018-19 :

• Operating revenue increased to Rs 46,190.11 lakhs as against Rs 39,768.79 lakhs in the previous year resulting to a growth of 16.15%.

• EBIDT increased to Rs 5,205.87 lakhs as against Rs 3,779.91 lakhs in the previous year resulting to increase of 37.72%.

• Profit after tax increased to Rs 1,640.30 lakhs from Rs 776.39 lakhs in the previous year resulting to a growth of 111.27%.

Ratios

FY 2018-19

FY 2017-18

Debtors Turnover Ratio*

7.04

4.90

Inventory Turnover Ratio(on Cost of Goods Sold)

7.38

6.76

Interest Coverage Ratio

2.61

1.86

Current Ratio

0.90

1.04

Debt Equity ratio$

0.86

0.77

Operating Margin Ratio**

9.85%

6.53%

Net Profit Margin**

3.53%

1.96%

Return on Net Worth (RONW)**

9.91%

5.19%

 

$ Equity includes Reserves and Preference Shares

* Debtors Turnover Ratio increased due to improvement in debtors collection.

"Operating Performance Ratios have improved due to increase in operating profit and Insurance claim recovery

FORWARD LOOKING STATEMENTS:

This report contains forward looking statements, which may be identified by their use of words like ‘plans, ‘expects, ‘will, ‘anticipates, ‘believes, ‘intends, ‘projects, ‘estimates, or other words of similar meaning. All statements that address expectations or projections about the future, including but not limited to statements about Hitechs strategy for growth, product development, market position, expenditures and financial results are forward looking statements. Forward looking statements are based on certain assumptions and expectations of future events. Hitech cannot guarantee that these assumptions and expectations are accurate or will be realised. The Companys actual results, performance or achievements could thus differ materially from those projected in any such forward looking statements. It assumes no responsibility to publicly amend, modify or revise any forward-looking statements based on any subsequent developments, information or events.