I G Petrochemicals Ltd Management Discussions.
Global Economy Overview
Global economic activity accelerated in 2017 with growth increasing in more than half of the worlds economies. However, the growth momentum softened to 3.6% in 2018, as per the International Monetary Fund (IMF) Report, April 2019. First half of 2018 witnessed robust growth in the US amid a fiscal stimulus, tight labour market and firm consumption growth. With a domestic demand-led pickup, emerging Asia continued to record a strong growth. Aggregate growth in the Emerging Market and Developing Economies (EMDEs) stabilised during the same period. The global expansion moderated notably in the second half. Strong growth in US was offset by escalated US China trade wars, commodity price volatility, uncertainty related to Brexit, macroeconomic stress in Argentina and Turkey and disruptions to the auto sector in Germany. Economic activities in China moderated in the second quarter in response to regulatory tightening of the property sector and non-bank financial intermediation.
Higher oil prices in the second half of the year lifted fortunes of fuel-exporting economies in sub-Saharan Africa and the Middle East. Oil prices were impacted because of the US sanctions on purchase of oil from Iran and Venezuela. However, oil prices recovered in the beginning of 2019, thanks to production cuts by oil-exporting countries. The Euro area displayed stagnant growth as consumer and business confidence weakened with disruption of car production in Germany, drop in investment in Italy and low external demand, especially from emerging Asia. IMF has projected a shrink in the global growth to 3.3% in 2019, mainly due to easing out of the US fiscal stimulus and majority of the economies reaching their peak potential. This growth is expected to rebound from second half of 2019 on account of accommodative stance by major central banks globally.
Indian Economy Overview
The Indian economy continued being a burgeoning economy for the second time in a row in FY 2018-19.
Despite headwinds, it emerged stronger on the global landscape. The economy registered a growth rate of 6.8% during 2018-19 compared to 6.7% in the previous fiscal.
The first half of the year witnessed continued recovery of investment and private consumption. However, the second half encountered growing liquidity concerns, high crude oil prices, rupee devaluation and overall slowdown in the global growth amidst trade wars between US and China. Course correction strategies were introduced by the Government along with RBI, to improve liquidity and strengthen financial sector balance sheets. Apart from that, accelerated resolutions were initiated for the non-performing assets under the simplified bankruptcy framework. The year also witnessed continued efforts to further bring down the fiscal deficit and strengthening of Goods and Services Tax compliance.
On a year-on-year basis, the eight core industries growth remained unchanged at 4.3% in FY 2018-19 as compared to the previous year. Other factors that supported growth were steady growth in the capital goods, infrastructure and construction sectors. Construction activity picked up pace with a 9.6% growth in the third quarter of FY 2018-19 compared to 8% growth registered in the previous year. During the year, the industrial output witnessed a 3.6% growth as against 4.4% in the previous fiscal, according to data released by the Central Statistics Office (CSO). According to the 2019-20 Interim Budget, Government announced scheme such as such as Pradhan Mantri Kisan Samman Nidhi to revive the rural economy. The Government increased focus on affordable housing and key infrastructure projects through construction of roads and highways. With digitisation and urbanisation, more jobs were created in the start-up universe, ecommerce and service sectors. As a result of favourable business environment, Indias ranking in the World Banks Ease of Doing Business Index 2018 moved up by 23 places to 77th position.
The historic re-election of the Prime Minister Mr. Narendra Modi heralds another era of robust growth for the country. The promise of a stable, growth-focused Government signals continued progress of investment opportunities in India. As per IMF projections, Indias GDP growth is estimated at 7.3% in 2019 and 7.5% in 2020, amid a more expansionary stance of monetary policy and some expected impetus from fiscal policy. However, fluctuating and sluggish domestic demand may impact the growth prospects going ahead.
IGPL is one of the leading manufacturers of Phthalic Anhydride (PA) globally. PA is the downstream product of orthoxylene and is used in consumer durable and non-durables. With State-of-the-art manufacturing facility in Taloja, Maharashtra, the Company enjoys cost and operational efficiencies. Rising demand for PA with limited industry supply has led the Company to ramp-up capacities and meet end-user requirements. During the year, IGPL has undertaken Brownfield expansion, which will place the Company among the top three global producers of PA.
Industry Structure and Development
A rise in the price of crude oil affects the petrochemical industry prospects because it directly impacts the raw material prices. In addition, it also impacts the stability of the rupee and may produce an inflationary effect.
Globally, oil prices have been supported by signs of tighter supply on the back of production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia. However, with US imposing sanctions on purchase of crude oil from Iran and Venezuela, India stands to face the double whammy of rising prices as well as weaker rupee. The countrys crude oil import bill for 2018-19 rose sharply as it is dependent for 80% of its consumption needs on Imports. Currently at US$ 70.6 per barrel, Brent crude prices remained volatile during the entire year. Brent crude hit a level of $86 per barrel in October 2018, putting pressure on the rupee and on Indias current account deficit. However, the prices declined over the following months to levels of around US $52 per barrel by the end of December 2018.
US decision to end waivers for countries importing crude from Iran beginning 2nd May, 2019 may lead to a supply crunch and likely increase in overall crude oil prices. Further, a global slowdown, rising geo-political uncertainties and increasing US-China trade war may impact the crude prices as well.
Phthalic Anhydride (PA)
Phthalic anhydride is a white crystalline compound used in the manufacturing of Plasticizers, Unsaturated Polyester Resins, Alkyd Resins, Polyols and CPC Pigments.
This colorless solid is an important industrial chemical, especially for the largescale production of plasticizers for plastics. It is obtained by catalytic oxidation of orthoxylene, a basic petrochemical. PA is widely used in the production of paints, inks, coatings, boxes, containers and packaging films industries among others.
The market size of domestic PA industry stands at 3,75,000 MTPA in 2018 and is expected to grow at 7-8% annually. The demand for PA is driven by growing use of PVC in construction and the automotive industry. Rising disposable income, growing number of nuclear families are expected to drive high demand for home furnishings and decorative paints in the country. Growth in the end-user industries will lead to a rise in innovative usage of PA. Moreover, Indias per capita consumption of plastic is 11 kg every year in comparison to 109 kg annually in the US. The plastic consumption in India is estimated to rise in the coming years, which presents a huge scope for the PA industry. Further, the demand for PA is projected to grow at a CAGR of 7.75% during 2019-2030 backed by Governments initiative to develop infrastructure and affordable housing for all.
In line with the strategic approach to tap industry opportunities, IGPL is wisely expanding the PA manufacturing capacity. The Company targets to complete the PA4 expansion by the end of 2019, which will increase its PA capacity significantly.
With the lowest cost production, strong clientele and higher capacities, IGPL is amongst the leading PA manufacturers globally.
Maleic Anhydride (MA)
Maleic anhydride is used in the production of unsaturated polyester resin. The raw material for MA is N-Butane. It is used in manufacturing coatings, pharmaceutics and surfactants, additive of plastics, lubricating oil additives and agricultural chemicals, spandex. MA is a precursor to compounds used for water treatment detergents, insecticides and fungicides.
Despite rising demand, domestic MA production is hit because of unavailability of the raw material N-butane.
Thus, bulk of domestic MA requirement is met through imports. The ongoing PA4 expansion will result in additional wash water, which will be used to generate more MA capacity for the Company. With higher MA capacity, IGPL is all set to grow its foothold in the MA business.
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The Company is exposed to risks arising out of the macroeconomic environment as well as from the internal business environment. IGPL continually focuses on addressing the same as well as ensuring value creation for the stakeholders. The Company realises the need and takes appropriate action to understand, anticipate, evaluate and mitigate risks in order to minimise their impact on business.
Exchange Rate Risk
The raw material used for manufacturing PA is Orthoxylene and is sourced largely from domestic market. IGPL has a major presence in the domestic PA market. Thus, the Company always keeps checks on the exchange rate fluctuationsand takes necessary safeguard and forward covers.
Interest Rate Risk
The Company, apart from utilising the internal accruals, occasionally borrows funds to meet its short-term and long-term business goals. Thus, it is exposed to the risks arising from interest rate fluctuations. The Company regularly services its debt payments to prevent itself from any adverse situation. It also reviews its working capital loans, commercial borrowings and rupee term loan on regular intervals.
Various concerns such as fluctuations in crude oil prices, global slowdown, geo-political tensions and trade uncertainties can impact the Companys performance.
However, with positive outlook in the end-users industries, the demand for petrochemical products will consistently rise in the future.
There are many global players that dump their products in India. Thus, anti-dumping duty has been imposed by the Government on Russia and Japan. These anti-dumping measures ensure fair trade and protect the interest of the domestic industry. Also, there is an import duty of 7.5% levied on phthalic anhydride, to protect the domestic industry.
PA is toxic in nature in and thus is exposed to numerous environmental risks. It continues to face various rigid norms from the Government. The key challenges, faced by the Company, are of handling of various processes like storage of raw material, transportation of finished products etc. Over the years, IGPL follows the worlds best environmental protection standards to ensure that plants and products meet all the applicable regulations laid down by the Government.
Internal Control System & their Adequacy
The Company has adequate internal control systems that commensurate with its size and the industry standards.
The process and the systems are well-defined and well-documented in the form of Standard Operating Processes. The Company strictly complies with all rules, laws and statutes of the land. The business transactions are properly recorded and are in total compliance and conformity with accounting principle and processes. The Company also regularly monitors all its expenses and ensures these are strictly within the allocated budgetary limits. The strict Code of Conduct lays down clear guidelines to be followed by the Company employees and business associates in their day-to-day activities.
There are regular internal audits conducted through an internal audit program that check and correct any discrepancy or non-adherence or non-compliance with set and defined norms. The senior management executives of the Company supervise the internal audit program.
Material Development in HR
IGPL fosters a culture that is performance oriented, promotes rewards for results and provides equal importance to all employees. Strong set of values and the cohesive work culture ensure that the employees achieve their potential professionally and personally. IGPL ensures safe, secure and healthy environment for its workers. Also, the Company conducts various skill development programs and workshops for enhancement and upgrading the skills of their employees.
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.