HLE Glascoat Ltd Management Discussions.

Forming part of the Board Report

Economic Overview

The year 2019-20 has been a difficult year for the global economy, with world output growing at its slowest pace of 2.9% since the global financial crisis in 2009. A weak environment for global manufacturing, trade, and demand has adversely impacted the Indian economy. The GDP growth rate is reported to be 4.2% in 2019-20 as compared to 6.1% in 2018-19, according the provisional estimates released by the National Statistical Office in May, 2020. GDP growth for the last quarter of FY 2019-20 slowed to 3.1%. In 2020-21, Indias GDP growth rate is expected to be in the sub-2% range. The Covid-19 pandemic has plunged the world into one of the deepest recessions in decades, with its impact on economy and life likely to be felt for a considerable amount of time. The situation is constantly evolving, as frantic efforts are being undertaken across the world to control the spread of the virus and to develop a vaccine.

India is currently the worlds sixth-largest economy by nominal GDP and the third largest by purchasing power parity (PPP). This growth has been achieved in a scenario of lower inflation, improved current account balance and reduction in the fiscal deficit to GDP ratio. The Consumer Price Index (CPI) based inflation increased from 3.7% in 2018-19 to 4.1% in 2019-20. This increase was mainly due to food inflation. The fiscal deficit for 2019-20 widened to 4.6% of GDP according to Controller General of Accounts (CGA) data released in May, 2020.

The Covid-19 Pandemic has wreaked havoc on the world. First reports of the novel coronavirus emerged in Wuhan, China in the month of December, 2019. The first reported cases outside China emerged in Thailand, Japan and South Korea in the second half of January, 2020. The virus spread quickly across the world, with the World Health Organisation declaring the outbreak a pandemic in early March, 2020. Countries enforced measures ranging from social distancing guidelines to severe lockdowns as governments attempted to curb the spread of the virus. As of early June, 2020, the WHO reported that 216 countries had confirmed cases of Covid-19, with the total confirmed cases at over 8 million people and death toll at over 0.40 million.

The Indian Government announced an unprecedented 21-day lockdown on 23rd March, 2020 in a bid to halt the spread of the virus. This has been followed by extensions in lockdowns and other measures which have continued into June, 2020, although the severity of lockdowns has been gradually eased in individual States, depending on the evolving situation in every State. Several rating agencies have downgraded growth targets for the Indian economy in light of the disruptive impact of the pandemic, with several agencies even predicting a recession for FY 2020-21. Several monetary and fiscal measures have been announced by the Government and the RBI in an attempt to relieve the stress on the economy caused by the pandemic. This includes a revision in the definition of MSMEs (allowing more companies to avail the benefits of being an MSME), announcements of collateral free loans and government guarantees for MSMEs, a partial credit guarantee scheme, extension of certain tax deadlines, amongst various other measures.

Economic Outlook

The Indian economy witnessed a slowdown in 2019-20, with the growth rate reducing to 4.2%. In a bid to revive the economy, the Government announced several measures during the year, including a reduction in corporate taxes, mega-merger of multiple PSU Banks and measures to improve credit availability. Although these measures did show encouraging initial signs, the Covid-19 pandemic brought the economy to a near standstill and has dampened hopes for substantial growth in the near term. Even so, medium to long term prospects for the Indian economy remain optimistic. Achieving the ambitious long-term targets set by the Government will require strengthening of the trust in the market. It is anticipated that the Government shall continue to introduce additional pro-business measures such as improving the ease of doing business, scaling up the banking and finance sector, scaling up manufacturing infrastructure in the country, amongst others.

A) Industry Structure and Development and Outlook

Your Company is engaged in the three main businesses (i) manufacturing of specialized Filtration and Drying equipment (ii) Glass-lined Reactors and Vessels, and (iii) manufacturing of chemical intermediates for agrochemical, specialty/ fine chemical, active pharmaceutical ingredients and dyes and pigments. The Companys products in the Engineering business (Filtration and Drying equipment and Glass-lined Reactors) are predominantly used by the manufacturers of Active Pharma Ingredients (API) and Chemical (agrochemical, specialty/ fine chemical and dyes and pigment industries) companies.

Performance of the Engineering Sector

Indias engineering sector is divided into two major segments – heavy engineering and light engineering. The turnover of the capital goods industry in India is expected to grow to Rs. 8.05 lakh crores (US$ 115.17 billion) by 2025. Comparative advantage vis-a-vis peers in terms of manufacturing cost, market knowledge, technology and creativity has been the driving force behind engineering exports from India. Engineering exports grew 6.32 per cent year-on-year to US$ 81.02 billion in FY19 and reached US$ 64.03 billion in FY20 (till January, 2020). The Index of Industrial Production (IIP) for electrical equipment industry stood at 105.5 in FY20. As quoted by the Honble Minister for Commerce and Industry and Railways, the Government will make all efforts to ensure that the exports of engineering goods reach US$ 200 billion by 2030. The Government has also announced plans to invest Rs. 10,000,000 crores (US$ 1.5 trillion) in infrastructure over the next five years. Companies engaged in the engineering sector have enjoyed a healthy improvement in their business. Capacity creation in sectors like infrastructure, power, mining, oil and gas, refinery, steel, automotive, and consumer durables have been driving the demand in the engineering sector. Separately, the approval of a significant number of Special Economic Zones (SEZs) across the country and the development of the Delhi-Mumbai Industrial Corridor (DMIC) across seven states is expected to further bolster the engineering sector. With 100 per cent Foreign Direct Investment (FDI) allowed through the automatic route and new initiatives like Make in India and Aatmanirbhar Bharat, the sector will receive a further impetus in the coming years. .

Performance of the Pharmaceutical Sector

The Indian Pharmaceutical sector is in robust health and is growing its presence in the world. India is the largest provider of generic drugs globally, with a 20% market share by volume. The Indian pharmaceutical sector industry supplies over 50 per cent of global demand for various vaccines, 40 per cent of generic demand in the US and 25 per cent of all medicines in UK. The Indian market is expected to grow to US$ 100 billion by 2025, thereby emerging as the sixth largest pharmaceutical market globally by absolute size. The Indian bulk drug industry is the third largest in the world and has advantages in terms of availability of manpower and low-cost operations.

Increase in the size of middle-class households coupled with the improvement in medical infrastructure and increase in the penetration of health insurance (through Ayushman Bharat Scheme of the Government) in the country will also positively influence the growth of the Pharmaceutical Sector. The Indian government has taken various steps to reduce costs and bring down healthcare expenses. Speedy introduction of generic drugs into the market has been the focus area and is expected to benefit the Indian pharmaceutical companies. In addition, the thrust on rural health programmes, lifesaving drugs and preventive vaccines also augurs well for the pharmaceutical companies and will further give a boost to the Sector.

In light of the Covid-19 pandemic, the role of the Indian Pharmaceutical sector has become critical. The Covid-19 pandemic has brought to light shortcomings in Indias healthcare infrastructure and presents an opportunity for further investment in the sector. It has also presented opportunities for Indian pharmaceutical companies to become a hub for the manufacture of APIs. Several measures (liked Production Linked Incentive scheme – popularly known as PLI Scheme) have been initiated by the Government to aid this and reduce Indias dependence on imported APIs. An increase in research and development expenditure, growing healthcare investments, healthy growth in domestic and international demand and favorable Government policies all signal a bright future for Indian pharmaceutical companies.

Performance of the Chemical Industry

The chemical industry is a knowledge intensive as well as capital intensive industry. It is an integral constituent of the growing Indian Industry. It includes basic chemicals and its products, petrochemicals, fertilizers, paints, varnishes, gases, soaps, perfumes and toiletry and pharmaceuticals. The diversification within the chemical industry is large and covers more than eighty thousand commercial products. This Industry occupies a pivotal position in meeting basic needs and improving quality of life. The industry is the main stay of industrial and agricultural development of the country and provides building blocks for several downstream industries, such as textiles, papers, paints, varnishes, soaps, detergents, pharmaceuticals, etc. India ranks 6th in the world and 4th in Asia in the chemicals and petrochemicals sector. The market size of the chemical sector in India for the year 2018-19 is estimated to be US$ 178 billion, which is expected to reach US$ 304 billion by 2024-25 at annual growth rate of 9.3%. (Source: FICCI and CEFIC Report).

The considerable slowdown of chemical manufacturing in China is a significant opportunity for Indian chemical companies. Indian companies have to increment their existing capacity to fill the gap left by the disruption in China and have been investing in order to build additional manufacturing capacity. The Government has also undertaken initiatives such as Make in India and Aatmanirbhar Bharat, which should help boost the chemical industry. However, it is important to temper expectations keeping in mind the impact of the Covid-19 pandemic. Agriculture, and in turn, Agrochemicals, remain a focus area for the Government. The Government has set a target to double farmer income by 2022, which should see a significant increase in public spending. States have been asked to plan for higher food grain production for FY 2020-21 by the Agriculture Ministry. Efforts to boost farm yields will help drive demand for the use of agrochemicals. The Government is also keen to reduce the countrys dependence on agrochemical imports. The slowdown in China and increased domestic demand bodes well for the agrochemical industry. The agrochemicals market in India is expected to grow to $4.7 billion by FY 2024-25.

Company Overview

HLE Glascoat Limited (formerly Swiss Glascoat Equipments Limited) ("HGL") was formed 29 years ago with an objective to serve Indian customers who were exploited by the multinational companies for Glass-lined Equipment. Post its acquisition by HLE Engineers Private Limited in FY2016-17 and its successful integration (consequent to the Scheme of Arrangement) with the operating business of HLE Engineers Private Limited during FY20, today, the Company is the largest manufacturer of customized and sophisticated filtration and drying equipment and one of the leading manufacturers of standard and customized glass lined equipment in the country. The Company caters to the Indian and international markets. Your Company embarked upon the technological drive to synthesize the best of engineering practices and technological advancements to come up with superior quality solutions in both filtration and drying equipment and glass-lined products and services and has emerged as a front-runner in the domestic market by catering to diverse industries and applications ranging from dyes to pigments; from pharmaceutical to food processing (requiring high GMP compliance and minimal human intervention); from chemicals to pesticides; from intermediates to resins and other conceivable corrosion-prone areas in the chemical processing industry. Today, HGL has demonstrated its capabilities to meet the stringent process requirements of its customers and is known in the market for its high-quality Agitated Nutsche Filters, Agitated Nutsche Filters and Dryers, Rotary Vacuum Paddle Dryers and Glass Lined Reactors, Vessels and other Specialized Equipment and commands a good brand recall amongst its customers, which includes most of the large and medium sized players in the pharma, chemical and agrochemical industry.

HGL has a strong presence in the domestic market through its network of selling agents. HGL has had an excellent track record of growth and profitability and has emerged as one of the leaders in the Indian marketplace for its sophisticated equipment. HGLs penetration into the export markets is also gradually improving, being constrained primarily by the large domestic order backlog. With the increase in its manufacturing capacity, your Company is hopeful of increasing the contribution of exports in its total turnover in the coming years. By consolidating quality, performance, engineering design, service and much more, HGL has established itself as comprehensive provider for sophisticated chemical engineering equipment of any type, size, output including a complete range of accessories. Today, with the support of its customers, your Company is progressing faster than most competing companies in terms of technology, processes, customer orientation and people.

The Company has planned to discontinue its chemical unit operations at Maroli since it is not considered feasible to continue the manufacturing operations at the Maroli Chemical Plant in the medium term.

B) Opportunities and Threats

Your Companys philosophy to provide the best quality at a competitive price, continuously innovating its existing processes and introducing new technologies (automation and process improvement) will give lot of thrust and impetus to your Companys operations and order book. Further your Company has invested in innovating and improvising the glass lining technologies, improving material sourcing, and handling capability, strengthening distribution channel and reach and entering new market segments and geographies (both in domestic and export markets).

The threats to your Company are mostly associated with the cyclical industry trend, rising inflation, non-availability of adequate skilled manpower, continuous increase in electricity/ fuel costs, cost of wages and salaries and finance cost. Before the outbreak of the Covid-19 in India, the economy was witnessing an upswing in the capex cycle and user industries had either undertaken or planning to undertake major capex program, especially companies engaged in Specialty Chemicals, Dyes and Dyestuffs and Agrochemical segments. The continued impact of the Covid-19 pandemic in India as well as other major countries in the world may lead to delay in the implementation of these capex programs. The investments in these industries have a direct positive impact on the Companys order book.

Your Companys equipment have a high brand recall amongst its existing customers as well as generally in the Industry. Now, your Company has intensified its marketing efforts and service network to strengthen its domestic and global presence and is receiving positive, encouraging response. Your management is quite confident that they will overcome the internal threats and ensure that your Company achieves improved performance in the current year.

C) Risks and Concerns

COVID-19 has triggered the deepest global recession in decades. While the ultimate outcome is still uncertain, the pandemic will result in contractions across the vast majority of emerging markets and developing economies. It will also do lasting damage to labour productivity and potential output. The immediate government policy priorities should be targeted to alleviate the human costs and attenuate the near-term economic losses. Once the crisis abates substantially, it will be necessary for the government to reaffirm a credible commitment to sustainable policies and undertake the reforms necessary to buttress long-term prospects. Global coordination and cooperation will be critical. Per capita incomes in most emerging and developing economies will shrink this year. The pandemic highlights the urgent need for policy action to cushion its consequences, protect vulnerable populations, and improve countries capacity to cope with similar future events.

D) Internal Control Systems and their adequacy

Your Company is committed to ensuring an effective internal control environment that provides reasonable assurance regarding the effectiveness and efficiency of operations, adequacy of safeguards for assets, reliability of financial controls and compliance with applicable laws and regulations. Towards this end, your Company has laid down standard operating procedures and policies to guide the various business operations. To further strengthen the internal control systems, an independent external professional agencies have been appointed to conduct internal audit of the systems and processes of both its manufacturing locations (Maroli as well as Anand). The internal auditors ensure that internal controls are reviewed through the periodical internal audit process in consultation with the Audit Committee. Internal auditors covers every operational unit and all major corporate functions under the direction of the Audit Committee of the Board. The Boards Audit Committee oversees the adequacy of the internal control environment through periodic reviews of audit findings and monitoring implementations of internal audit recommendations through compliance reports. The Statutory Auditors have opined in their report that there are adequate internal controls over financial reporting at your Company. The Certification by the Managing Director and the Chief Financial Officer of the Company has been provided elsewhere in this Annual Report and discusses the adequacy of our internal control systems and procedures.

E) Financial performance vis--vis Operational performance

Financial Highlights Rs. in lakhs
Particulars 2019-20 2018-19
Total Income 39,522.58 34,255.06
Profit Before Finance costs, Tax, Depreciation and Amortization
(after adjusting Other Comprehensive Income) 7,153.23 4,530.38
Profit Before Tax (after adjusting Other Comprehensive Income) 5,247.43 2,507.21
Profit After Tax 3,785.68 1,791.38
Total Assets 32,217.58 28,281.73
Equity Share Capital 1,293.11 650.00
Other Equity 6,325.49 3,494.70
Total Equity 7,618.60 4,144.70
Bank Borrowings 6,705.36 6,982.76
Debt: Equity Ratio (including long term and short term borrowings) 1.29 2.72
Book Value per Share of Rs. 10 each – In Rs. 57.47 63.76
Earnings Per Share - Basic and Diluted – In Rs. 29.53 14.01
Dividend Per Share – In Rs. 4.50 -
(including proposed
dividend of 2.50)

Note: Previous years figures are restated, regrouped, rearranged and recast, wherever considered necessary. Previous years figures have been consolidated and restated for better understanding considering the appointed date in the Scheme of Arrangement was 1st April, 2018. Your Company continues to remain the undisputed market leader in the filtration and drying segment. In the glass lined equipment segment, your Company continues to consolidate its position with increasing market share and is a reputed name amongst the user industries. The Board of Directors has decided to gradually wind down the chemical business which was operated from the Maroli location by around July, 2020 since continuing the chemical unit at that location could pose challenges in future.

There is a trend towards a strong growth pursuant to your Companys commitment to quality and sustainability. Your Company believes in a philosophy of continuous efforts to perform better operationally, which is expected to translate into better financial performance. Your Companys Balance Sheet continues to remain robust and relatively insulated from financial risks. By actively managing utilities and other operational costs, payment terms and working capital requirements, your management has influenced the financial performance and achieved significant cost savings. Your Companys revenue from operations for the year 2019-20 was Rs. 39,522.58 lakhs compared to Rs. 34,255.06 lakhs during the previous year. Your Company earned profit after tax during the year of Rs. 3,818.63 lakhs compared to Rs. 1,811.40 lakhs during the previous year. Operating Profit/ Earnings before Finance costs, Depreciation and Tax (and adjusting the comprehensive income) for the year stood at Rs. 7,153.23 lakhs compared to Rs. 4,530.80 lakhs.

F) Material Developments on Human Resources/ industrial relations, including number of people employed

Your Company considers people as the most important asset and backbone of the business for its success. Over the years, your Company has strengthened its HR processes to ensure continual development and growth of its employees. HR processes are fine-tuned and upgraded to attract, recruit and retain talent in your Company. We have been receiving active co-operation and support from the entire hierarchy of personnel, resulting in improvement in productivity and overall growth of your Company. The staff and workers are our most important assets. The personnel of your Company are efficient and committed to the growth of your Companys business.

Your Company has well documented and updated policies in place to prevent any kind of discrimination and harassment, including sexual harassment. The Whistle Blower Policy plays an important role as a watchdog. The total permanent employee strength of your Company as on 31st March, 2020 stands at 533. Your Company believes in focusing on development of its existing staff and workers and provides constant training to them so as to make them ready for growth and better positions in your Company. The training is provided internally, and training programmes are also organized by inviting external faculty. Our continuous training programmes have emphasis not only on increasing production of your Company but also on imbibing qualities of commitment and integrity in the attitude of the personnel.

G) 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

Key Financial Ratios FY 2019-20 FY 2018-19 Detailed explanation for change of 25% or more, if any
Debtors Turnover (times) 9.01 10.65 -
Inventory Turnover (times) 1.34 1.50 -
Interest Coverage Ratio (times) 5.47 2.82 Higher turnover in FY20, reduction in debt and consequent finance costs during the year has improved interest coverage
Current Ratio 1.13 1.06 -
Debt Equity Ratio (considering long term and short term debt) 1.29 2.72 Improved profitability resulting in increase in equity in FY20 and a reduction in total debt has led to favourable change
in the ratio
Operating Profit Margin (%) 16.63 11.60 The Company has improved performance for the year
Net Profit Margin (%) 9.77 5.32 The Company has improved performance for the year

H) Details of any change in Return on Net Worth as compared to the immediately previous financial year along with a detailed explanation thereof

Return on Net Worth FY 2019-20 FY 2018-19 Detailed explanation for change of 25% or more, if any
Return on Net Worth (PAT/ Net Worth) 49.69% 43.22% -

Cautionary Statement

Statements in the Management Discussion and Analysis describing the Companys objectives, projections, estimates and expectations, if any, may be "forward looking statements" within the meaning of applicable laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operations include among others, raw material pricing, climatic conditions, economic conditions affecting demand/ supply and price conditions in the domestic and overseas markets in which the Company operates, changes in the Government regulations, tax laws and other statutes and other incidental factors.

By the Order of the Board of

HLE Glascoat Limited

(formerly Swiss Glascoat Equipments Limited)


Mr. Himanshu Patel

Chairperson and Managing Director

(DIN: 00202312)

Date : 20th June, 2020