I G Petrochemicals Ltd Management Discussions.

Economic Overview & Outlook

The world has changed dramatically in the past 12 months, and many industries were forced to adapt. The petrochemicals industry was no exception. Petrochemical producers have played a major role in helping society with the challenges of the pandemic. The global petrochemicals market is expected to grow from $365.01 billion in 2020 to $429.11 billion in 2021 at a compound annual growth rate (CAGR) of 17.6%. The growth is mainly due to the companies rearranging their operations and recovering from the Covid-19 impact, which had earlier led to restrictive containment measures involving social distancing, remote working, and the closure of commercial activities that resulted in operational challenges. The market is expected to reach $477.85 billion in 2025 at a CAGR of 3%.

Crude oil prices averaged $41/bbl in 2020, a 34% fall from 2019. Oil demand fell 9% last year—the steepest one-year decline on record—as a result of pandemic-control measures and the associated plunge in global demand, which was partly offset by historically production cuts among OPEC and other non-OPEC oil exporters as well as Russia). But as an industry, it has transitioned into 2021 strongly, and the industry is seeing strong profitability. Most commodity prices rebounded in the second half of last year, however, the pickup in oil prices lagged the broader recovery in commodity prices due to the prolonged impact of the pandemic on global oil demand. Overall, demand growth in petrochemicals in CY 2020 was driven by increased demand for consumer staples, such as household goods and personal products such as automotive products and appliances. After the initial shocks of Covid-19, volumes bounced back in the second half of CY 2020. As the price of oil increases to more than $60 per barrel (Brent) and GDP continues to recover after the initial shocks of Covid-19, petrochemical revenues will become less volatile. On this point, regional cost advantages will resume as cost curves become steeper, and the steady recovery of indexes are expected across regions and end markets, supporting a more even recovery of volume across all types of chemicals. In many countries, governments and citizens have learned to better manage the effects of Covid-19 virus

The news on the vaccine front has been encouraging and beginning of the end of the pandemic is now in sight. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. Indias growth was expected at 11%. Although recent vaccine approvals have raised hopes of a turnaround in the pandemic later this year, however, renewed waves and new variants of the virus pose concerns for the outlook. Amid exceptional uncertainty, the global economy is projected to grow 6% in 2021 and 4.4% in 2022 as per IMF. The Covid-19 crisis has made it imperative for companies to reconfigure transform them. To the extent that they do so, greater productivity will follow. The Indian Chemical Industry is in a sweet spot of unrealised potential and tremendous opportunity. It holds a prominent position on the global stage – sixth largest in the world, and the third largest in Asia. The Indian Chemical industry should experience significant growth in the coming years, driven by rising household incomes, the existing consumption gap and a huge export opportunity.

The Indian chemical and petrochemical industry is one of the fastest-growing sectors in the world and is projected to be worth USD 300 billion by 2025. Over the last few years, Indian chemical manufacturers have been focusing on ramping up their respective niches through sustained capital deployment, building up of R&D capabilities and integration of manufacturing processes. These efforts have led to the capitalization of favourable trends at an opportune moment. Going forward, given the scale of potential opportunities, both globally (partly as a result of the shift from China) and domestically (in a bid to be self-reliant), Indian chemical manufacturers remain well-positioned to scale up their capacities to harness the structural growth trend. The year 2020 was turbulent for the whole world – the sudden onslaught of the Covid-19 pandemic grounded economies with the emergence of countless challenges and miseries. As the pandemic ravaged the country and the world, Indian chemical manufacturers too felt the heat and were impacted in various ways, depending on how global and domestic demand in their end-user industries shaped up. However, as economies opened up along with a resurgence in international trade, and more importantly, demand surging to higher-than-expected levels, the recovery witnessed in certain segments of the Indian chemical industry was nothing short of spectacular (as restrictions started to ease). Owing to the Government of Indias proactive measures such as . announcing economic stimulus packages, implementing a nationwide lockdown and launching the vaccination drive, the industry progressed towards a V-shaped recovery. With the index of industrial production (IIP) for chemical manufacturing returning to pre-Covid levels, the industry is expected to grow at a CAGR of about 9.2% by FY2025.

For manufacturers of products in the pharmaceutical, agro-chemical, personal care, chemicals, food additives and packaging value chains, the impact of the pandemic was mostly transient as demand was strong. These segments were largely unaffecteddue to

China trend and focus on import substitution owing to supply chain de-risking strategies. In 2021, we expect heightened momentum in other segments as well. The resurgence in automotive and consumer discretionary segments should drive demand improvements in products in these value chains, e.g. specialized polymers, polymer additives, rubber chemicals, pigments, resins etc.

In addition to the industrys historic growth trajectory, the Government has taken progressive steps, such as the economic stimulus package, Production Linked Incentive (PLI) Scheme, tax and labour reforms, setting up of the National Infrastructure Pipeline

(NIP) and various chemical industry specific policies and schemes, including its public procurement policy, mandatory BIS standards, skill development programmes and renewal of the PCPIR policy.

Key trends shaping the Indian chemical industry: Shift in customers preferences: Customers are increasingly getting interested in environmentally friendly and socially responsible products and services.

Increasing per capita consumption: The current per capita consumption of chemical products in India is about one-tenth of the global average and is expected to double by 2025.

Digitalisation and Industry 4.0: Digitalisation offers competitive advantages through improved horizontal and vertical integration, a new definitionof operations management, and innovation and new digital business models. Chemical companies are implementing digitalisation initiatives and tools in their supply chains, demand planning and pricing strategies.

Increasing M&A and investment-related activity:

Downstream value-added opportunities, the continued strength of specialty chemicals and realignment of portfolios are the key drivers of strong M&A and investment activities. Global oil and gas majors and leading chemical companies are looking for downstream opportunities in India and other high-growth economies. The trend has already begun with Saudi Aramco, Total and BASF showing their interest in the Indian chemical industry.

China shift: Consolidation in the industry, environmental reforms and tightened financing is changing the structure of Chinas chemical industry, resulting in uncertainty for companies dependent on the country for their supply of raw material. In addition, the Covid-19 outbreak has compelled companies to move their supplier base and look for alternative locations such as India that offer the advantage on low-cost labour and favourable investment policies.

Capital Availability: Investor interest has surged for the sector due to the robust operating performance of chemical companies over the last few years and the tailwinds that it enjoys. While listed players have seen a surge in their stock prices, fundraising through public offerings/private placements have also seen considerable success in CY 2020. Similar trends are expected in CY 2021, with funds raised playing a key role in capacity expansion for the sector.

The industry is expected to resume the structural growth trend, which should significantly outpace global growth, with the specialty chemicals segment clocking early mid-teens growth. As we move ahead, by addressing key areas of feedstock sufficiency and infrastructure development, and further ease of doing business, along with progressive capital deployment, India should be able to catapult itself as a hub of chemicals globally in the years to come.

Phthalic Anhydride

PAN is a versatile intermediate in organic chemistry and a downstream product of a basic petrochemical, Orthoxylene (Ox). It is used as an intermediate to produce Plasticizers, Unsaturated Polyster Resins, and Alkyd Resins & Polyols. It finds application in both consumer durables to non-consumer durables. Its end users are paints, inks, coatings, boxes, containers and packaging films industries among others. The PAN market is anticipated to register a CAGR of 5%-6% owing to the following factors :

1. The growth in the demand and consumption of plasticizers used in the production of polyvinyl chloride (PVC), specifically in the Asia-Pacific region based on rising construction spending in emerging economies including China and India owing to favorable government support to improve domestic infrastructure is expected to increase the importance of PVC.

2. Increasing use of glass fiber-reinforced polymers and capacity expansion for PAN derivatives are projected to act as an opportunity for the market.

3. Growing consumption of alkyd resins in developing economies, due to the rising paints and coatings industry, are, in turn, increasing the demand for the PAN market. Gaining importance of coatings & paints for improving corrosion and thermal resistance in automotive and construction industries are expected to promote need for alkyd resins.

4. Rising popularity of lightweight automotive parts in vehicles to improve fuel economy is expected to promote industry growth for UPR. This is expected to drive PAN demand.

Emerging applications of PAN such as flame retardants, which finds applications in foams of furniture, electronics products, and car seats among others, are expected to fuel high demand from automotive, home furnishing, and electrical and electronics industry and augment the growth of PAN market.

Maleic Anhydride

The Maleic Anhydride market size is projected to reach USD 3.5 billion by 2024 from USD 2.8 billion, at a CAGR of 4.5%. Increasing demand for Unsaturated Polyester Resins (UPR) and 1,4-Butanediol (BDO) is expected to augment market growth for Maleic Anhydride over the period. These chemicals are widely used in engineering plastics, fibers, medicines, artificial leather, cosmetics, pesticides, hardener, plasticizers, solvent, and rust remover. Some key factors contributing to the growth are –

1. Increasing applicability of the resin in various industry verticals, owing to its high-strength fiber-based properties and easy availability.

The market growth in developing economies, such as Brazil, South Africa, and Saudi Arabia, is driven by an increase in demand for residential construction and new non-residential buildings.

2. The increasing demand for heat-resistant tanks and pipes for chemical storage is a crucial factor contributing to the rise in demand for UPR, thus fuelling the maleic anhydride market in this segment.

3. Hectic lifestyle and rise in living standards have driven global packaged food & beverage market. Maleic Anhydride is converted into fumaric and maleic acid and acts as a flavour enhancer in beverages. It prevents microbial and fungal growth and commonly used preservative in food industry.

4. Growing penetration of spandex in medical textiles, compression stockings, and sportswear coupled with the increasing disposable income are factors that are projected to surge the demand for 1, 4-butanediol which in turn will result in the rise in the demand of maleic anhydride. Increasing popularity of using the maleic anhydride with the feedstock polymers that are bio-based is positively impacting the market.

IGPL advantage

IGPL is one of the largest producers of PAN in domestic market and has more than 50% market share. IGPL, capacity expansion, entry into downstream segment and other opportunities open a new window to enter into other downstream specialty chemicals. IGPL continues to diversify its product mix and will be producing ~ 92% of PAN as a part of its overall capacity, compared to 100% PAN in 2014. With the lowest cost production, strong clientele and higher capacities, IGPL is amongst the leading PAN manufacturers globally. We are one of the lowest cost producer of PAN, due to our strategic location which is near to raw material supplier & port, catering to most of customers in the region of Gujarat and Maharashtra and lower operating conversion cost due to state of art technology which provides better yield and efficiency in usage of energy. Operating efficiency and expertise coupled with rich cash flows from operations places

IGPL in a comfortable position to venture into new chemistry as compared to its peers.

IGPL has completed its expansion project in December, 2020 which has increased it PAN capacity to 2,22,110 MTPA and MAN capacity to 7,660 MTPA and BA capacity to 1,500 MTPA. Downstream Plasticizer Project is under implementation and expected to be completed by mid of CY 2021, which will further diversify its portfolios. In view of surge in PAN demand across all the sectors mainly paints and plasticizer, specialty chemicals PVC, pigments etc., IGPL has planned for another green field expansion of 80,000 MTPA of PAN and its downstream derivatives. As a part of its vision to diversify its product portfolios, IGPL continues to explore the opportunity in downstream derivatives and other specialty chemicals project.

Operating performance review

During FY 2020-21, revenue from operations on standalone basis increased to Rs. 1,12,361.88 lakhs as against Rs. 1,05,858.02 lakhs in the previous year – a growth of 6.10%. Despite the economic slowdown, the business has done extremely well. The Company has enjoyed good operating profitability supported by the softening of raw material prices and rising demand of PAN. The Company also registered a strong growth in volume terms at 5% in Phthalic Anhydride and 20% in Maleic Anhydride. The Company achieved EBITDA of Rs. 30,333.11 lakhs as compared to Rs. 7,822.53 lakhs in the previous year and Profit After Tax for the year stood at Rs. 18,951.67 lakhs against Rs. 2,104.40 lakhs in the previous year – a whopping growth of 801%.

The details of significant ratios are:

Ratios 2020-21 2019-20 Changes (%) Reason
Debtors Turnover 65 days 49 days 32.65% Further credit extended to few high rated clients on account of prevailing Covid situation
Inventory Turnover 16 days 6 days 166.67% Orders were booked but delivery delayed due to the impact of 2nd wave of Covid and lockdown
Interest Coverage 20.84 4.90 325.31% High revenue, overall improvement in margin and prepayment and repayment of loans, supported by lower interest cost
Current Ratio 1.39 times 1.20 times 15.83% -
Debt Equity Ratio 0.14 0.28 50% Repayment of debt including pre-payment of term loan
Operating Profit Margin 23.96% 4.56% 425.44% Strong recovery in demand led to improved price realisation and margin
Net Profit Margin 16.87% 1.99% 747.74% Strong recovery in demand led to improved margin
Return on net worth 23.20% 3.30% 603.03% High operating margins resulted in higher RONW

Corporate Social Responsibility & Community service

At IGPL, we believe in a business model where we grow together with the surrounding community. Thus, we have adopted the latest environment friendly technologies in our manufacturing process. We concentrate on uplifting the weaker section of our society through diverse initiatives in the areas of education, healthcare, livelihood and community services. The CSR Committee is responsible for discharging the Companys obligation of giving back to the society. We give immense importance to local sourcing through use of local transporters, packaging materials, waste disposal bodies and local Labour. This is embedded in IGPL philosophy and helps sustain community. Community Service – We have made contributions to the Old Age Homes situated in and around the factory and Orphanage which provides the financial support and looks after the maintenance of the homeless senior / aged people / orphan / disabled persons, etc. by way of a financial support for their general upliftment. Education - The Companys contribution in the field of education includes contribution to the Akshay Patra Foundation, which provides mid-day meal to the students of various schools, distribution of LED TVs with Tata Sky channel to a Primary School and by donation through a registered public trust to the schools for purchase of school bus and other educational material. Healthcare - Donation to the Child Health Foundation, Neurology Foundation and Blind Organization of India to cater to the need for medical and healthcare services for the needy section of the public.

Internal Control Systems and Their Adequacy

The Companys internal control systems are commensurate with the nature of its business and the size and complexity of its operations. Appropriate internal control policies and procedures have been set up to provide reasonable assurance on the following objectives:

Effectiveness and efficiency of its oper ations

Reliability of financial reporting

• Compliance with applicable laws and regulations

• Prevention and detection of frauds and errors

• Safeguarding its assets

Compliance to these policies and procedures is an integral part of the management review process.

Adequacy and effectiveness of these internal controls are routinely tested by internal auditors based on their risk-based audit plan. The audit plan covers the key process across the functions, including plants, depots and other establishments. Suggestions to further strengthen the processes or make them more effective are shared with the process owners and changes are made suitably. The Company uses robust ERP and allied IT tools as an integral part of internal control system. It also uses data analytics tools to identify data exception and trends to minimising errors and lapses, and to track crucial compliances. Wherever possible, emphasis is placed on incorporation of automated controls within the process to minimise deviations and exceptions. The risk-based internal audit plan is approved by the Audit Committee. Significant observations and follow-up actions thereon are reported to the Audit Committee. The Audit Committee periodically reviews the adequacy and effectiveness of the Companys internal financial controls and the implementation of audit recommendations. The Company believes in conducting business in a fair, ethical and compliant manner. Towards this, periodically courses are rolled out to make the employees aware of the code of conduct and related policies of the Company, including the whistle-blowing policy and mechanism. The Company stays committed to maintain the highest standards of governance.

Information Technology & Human Resources

Before the Covid-19 crisis, the idea of remote working was in the air but not proceeding very far or fast. But the pandemic changed that, with tens of millions of people transitioning to working from home, essentially overnight, in a wide range of industries. Our focus on IT infrastructure development and its continuous improvement and seamless integration with other aspects of business allowed our employees to work remotely without any hassle. Evidence shows that the benefits of reskilling current staff, rather than letting them go and then finding new people, typically costs less and brings benefits that outweigh the costs. Investing in employees can also foster loyalty, customer satisfaction, and positive brand perception. IGPL ensures that their employees experience learning and growth as the company moves ahead in the journey of growth.

Cautionary Statement

This report contains statements that are "forward looking statements" including, but without limitation, statements relating to the implementation of strategic initiatives and other statements relating to Companys future business developments and economic performance. While these forward-looking statements indicate our assessment and future expectations concerning the development of our business, several risks, uncertainties and other unknown factors could cause actual developments and results to differ materially from our expectations. These factors include, but are not limited to, general market, macroeconomic, governmental and regulatory trends, movements in currency exchange and interest rates, competitive pressures, technological developments, changes in the financial conditions of third parties dealing with us, legislative developments, and other key factors that could affect our business and financial performance. Company undertakes no obligation to publicly revise any forward-looking statements to reflect future/likely events or circumstances.