India Pesticides Ltd Management Discussions

Global economic overview

Businesses and economies worldwide are grappling with several headwinds including food and energy crises in Europe, soaring inflation, tight financial conditions in most parts of the world and a surge in commodity prices. The conflict between Russia and Ukraine has further exacerbated the problem, as has the resurgence of COVID in China.

Muted consumer demand following the pandemic coupled with rising prices continue to weigh on future growth prospects. Policy paths in the advanced economies could continue to diverge, leading to further US dollar appreciation and cross-border tensions in the days ahead. Energy and food price shocks might also add to inflationary pressures. Global tightening of financing conditions could trigger widespread distress for emerging market debt. Central

Banks around the world are closely monitoring liquidity positions and aiming to boost sentiments.

The monetary policies implemented by central banks are expected to lead to a decrease in global inflation rates from 8.7% in CY22 to 7.0% in CY23 and further down to 4.9% in CY24.1 It is projected that this reduction in inflation, combined with the release of pent-up demand in several economies, will contribute to an accelerated economic growth in the near term.

Outlook

Despite facing inflationary pressures, the global economy is expected to be buoyed by a strong labour market, augmented domestic expenditures, an influx of foreign investments, and a cautious approach to addressing the energy crisis in Europe.

Emerging markets and economies (EMDEs) have anticipated to witness a gradual recovery, resulting in higher real incomes. The global outlook will depend on the swiftness and effectiveness of fiscal and monetary policy measures employed to stimulate economic expansion. Also, the course of the war in Ukraine will play a pivotal role in determining global economic growth going forward.

Indian economic overview

The Indian economy has exhibited a robust GDP growth of 7.2% during the FY 2023.2

The recovery can be largely attributed to strong domestic demand, a resurgence in both the manufacturing and services sectors, and an upsurge in export activities due to the revival of global trade. Notably, infrastructure development has played a pivotal role in driving growth, as government initiatives have stimulated construction activities throughout the nation.

The Indian government has maintained a favourable domestic policy environment and placed significant emphasis on implementing structural reforms, thereby enabling the countrys economy to exhibit resilience even amidst global challenges. Numerous high-frequency indicators, such as GST collections, railway and air traffic, electronic toll collections, and E-Way bill volume, point towards a robust economic recovery in India.

This sustained growth momentum has positioned India as an appealing investment destination. Moreover, it is anticipated that India will retain its position as the fastest-growing G-20 nation in the foreseeable future. The upcoming presidency of the G20 Summit in 2023 has further enhanced Indias international standing. It is expected that this event will bolster Indias reputation as a hub for business and innovation, attracting increased foreign investments and facilitating new opportunities for trade and collaboration.

April 2023 GST collection hits record high: Rs. 1,87,035 crore.

(Source- https://pib.gov.in/PressReleasePage.aspx?PRID=1921186)

Outlook

India is poised to emerge as one of the fastest expanding major global economies in FY24, contributing approximately 15% to the overall worldwide growth, an achievement that places it as the second-largest contributor, surpassing the combined contributions of the United States and the European Union. A critical driver of this growth narrative lies in the anticipated upsurge of domestic consumption. As the vaccination campaign widens and pandemic-related restrictions ease, consumer confidence is expected to rebound, leading to heightened expenditure.

This favourable economic outlook is further bolstered by an increase in disposable income, facilitated access to credit, and declining interest rates, driven by a stabilising inflation trajectory. These combined dynamics augur well for Indias economic trajectory in the foreseeable future.

Global agrochemical industry

The global agrochemicals market was valued at USD 227.9 billion in 2022, and it is expected to increase at a compound annual growth rate (CAGR) of 3.0% from 2023 to 2030.3 This growth is primarily ascribed to the escalating global demand for fertilizers within the agricultural sector. The rising adoption of fertilizers by farmers to augment crop nutrients and improve yields stands out as a significant driver stimulating the demand for agrochemicals.

The market size and adoption of fertilizers are anticipated to maintain a substantial presence, primarily due to the escalating demand for food grains and the surge in global population. The growth in demand is predominantly driven by the burgeoning agricultural markets in the Asia Pacific region, particularly in countries such as India and China.

Moreover, there is a projected increase in the market penetration of herbicides and fungicides. This growth is attributed to the escalating occurrences of rodent and pest infestations on crops, necessitating enhanced protection measures. Moreover, the expanding domains of animal husbandry and animal feed industries are anticipated to exert a favourable influence on the prospects of the global agrochemicals market.

Indian agrochemical industry

In 2022, the Indian pesticides market achieved a size of 229.4 billion. Going forward, it is anticipated that the market to expand significantly, reaching 342.3 billion by 2028. This growth trajectory reflects a compound annual growth rate (CAGR) of 6.6% during the period from 2023 to 2028.4

The reduction in arable land and crop losses caused by pest infestations result in wastage, presenting a significant obstacle in ensuring food and nutritional security. Pesticides encompass substances or mixtures thereof designed to prevent, eradicate, deter, or mitigate any form of pest. They constitute the final input in agricultural operations, applied to safeguard crops from pests such as insects, fungi, weeds, and others, thereby augmenting agricultural output. The significance of pesticides has witnessed a steady increase in recent decades, driven by the necessity to optimise agricultural production and ensure sufficient food supply to meet the demands of a continuously expanding population in the country. In India, pests and diseases, on average, consume approximately 20-25% of the total food production. The agrochemical market plays a pivotal role as a vital support industry for agriculture, elevating agricultural output. These prevailing factors substantiate the growth trajectory of the market.

In India, approximately 15-25% of potential crop production is compromised annually due to the detrimental impact of pests, weeds, and diseases. Enhancing crop productivity through the strategic implementation of pest control measures and the adoption of efficient weed management practices has been acknowledged as a crucial factor in augmenting agricultural output. Consequently, these aspects are facilitating the widespread utilisation of agrochemicals in agriculture to achieve heightened crop yields.

Agrochemical application remains substantial among various chemical inputs in the market. However, the industry is witnessing the emergence of price premiums and innovative eco-friendly production techniques. Consequently, there is a growing imperative to strike a balance between the prudent utilisation of effective chemicals and mitigating their potential impact. In alignment with the Central Governments efforts to promote sustainable agricultural practices, the adoption of biopesticides has been on the rise, now representing 15% of the market share.

Growth drivers

• In recent years, the per capita availability of arable land has been declining due to escalating levels of urbanisation, and this trend is anticipated to persist in the future. Simultaneously, driven by population growth, the demand for food is projected to continue rising in the forthcoming years. In light of these developments, it is anticipated that the pesticides to play a pivotal role in enhancing average crop yields per hectare.

• Government initiatives aimed at facilitating credit facilities for farmers in rural areas are poised to significantly bolster the pesticides industry. The enhanced accessibility and favourable interest rates of agricultural loans are anticipated to incentivise farmers to employ increased quantities of pesticides, thereby aiming to improve crop yields.

• Both government and private initiatives are actively raising awareness about pesticides among farmers. Ongoing efforts encompass educational programmes to enlighten farmers on the correct utilisation of pesticides, encompassing aspects such as optimal quantities, appropriate application methods, and the selection of suitable chemicals to address specific pest-related challenges. These initiatives are being conducted in different regions across the country.

• The level of pesticide penetration in India is notably lower compared to other major countries like the US and China. This indicates that the pesticides market in India remains largely untapped, presenting substantial potential for future growth.

Indian API market

According to ICRA, the Indian Active Pharmaceutical Ingredients (API) market is estimated to be worth Rs. 1,000-1,100 billion by 2022. This industry is expected to grow at a compound annual growth rate (CAGR) of 7-8% during the next three to four years. The driving factors behind this growth include the steady expansion of the formulations industry, facilitated by factors such as a rising geriatric population, an increasing prevalence of chronic diseases and growing demand for contract manufacturing. Significantly, global customers seeking to diversify their supply chain dependency from China to alternative locations contribute to this demand.

Moreover, the API industrys growth is expected to be significantly boosted by the legislative support and the production-linked incentive (PLI) scheme introduced by the Central Government as part of its broader Atmanirbhar Bharat mission. These measures will aid in reducing the industrys reliance on Chinese imports.5

Government initiatives

India is strategically building a comprehensive and conducive ecosystem to harness its Active Pharmaceutical Ingredients (API) potential. In 2020, the government approved an investment of 6,940 crore for a production-linked incentive

(PLI) scheme, aimed at promoting domestic manufacturing of Key Starting Materials (KSMs), Drug Intermediaries (DIs), and APIs. Notably, manufacturing for 35 active pharmaceutical ingredients, constituting approximately 67% of APIs, for which India is dependent on imports, has already commenced in the country under the PLI scheme.

Moreover, the Department of Pharmaceuticals has granted ‘in-principle approval to proposals from the states of Himachal Pradesh, Gujarat, and Andhra Pradesh under the ‘Promotion of Bulk Drug Parks scheme. This vital initiative seeks to bolster bulk drug manufacturing in India. With a budget of 3,000 crores, the scheme provides financial assistance to these states to establish bulk drug parks, with the objective of reducing manufacturing costs through the creation of world-class common infrastructure facilities. This endeavour aims to enhance the competitiveness of the domestic bulk drug industry. Moreover, the Government of Assam has presented a proposal for a Pharmaceutical Park in Chaygaon, Kamrup Rural, spread over an area of 100 acres, with an estimated project cost of 153.64 crores.

In order to foster innovation within the pharmaceutical industry, several measures have been suggested. These include the proposal to increase the limit for foreign direct investment (FDI) up to 100% through the automatic route for Greenfield pharmaceutical projects. Additionally, a new strategy is being pursued to strengthen the protection of intellectual property rights.6

Company overview

Established in 1984, India Pesticides Limited (IPL) is a prominent chemical manufacturer in India, specialising in the production of Technicals & Formulations in agrochemicals and active pharmaceutical ingredients (APIs). Its strong emphasis on research and development (R&D) continues to lend the Company a competitive edge and has enabled it to consistently introduce new and innovative products that have led to sustainable business growth over the past three decades.

IPL is a leading manufacturer of Captan, Folpet, and Thiocarbamate Herbicide, positioning it as a market leader in the domestic as well as export market. The Company has expanded its installed capacity of Technicals to 24,000 MT, as of March 31, 2023, increasing from 21,500 MT on March 31, 2022.

Benefitting from its strategically located manufacturing facilities in Lucknow and Hardoi districts of Uttar Pradesh, IPL has established a strong regional presence and streamlined its production and distribution processes.

Status of subsidiary

Shalvis Specialities Limited has successfully obtained necessary Environmental Clearance (EC), and construction for the project is currently underway. Additionally, a budget of Rs. 60 crores have been earmarked for the Companys project at Hamirpur.

SSL is authorized to engage in the business of Manufacturing Agrochemicals, Intermediates, API and Fine Chemicals for Export & Indigenous use among other things, manufacture, production, formulation, sale and trade of all types of agricultural chemicals and pesticides under the objects clause of its memorandum of association.

Total Plot Area of SSL at Hamirpur project is approx. 25 acres and such project Plan to start commencement of Commercial Production Q4 of FY24.

During the year SSL has received Environment Clearance from The Ministry of Environment & Forest Climate Change on 24th December, 2022 and other allied approvals like provisional Fire NOC, TSDF Membership, Ground water abstraction, Consent To Establish, Export Registration & Membership, Registration for Export, Shop & Commercial for office.

Credit Rating

The companys credit rating has been reaffirmed A plus (A+) by CARE rating on October 06, 2022. The reaffirmation in the ratings of India Pesticides Limited (IPL) factors in the improvement in the overall financial risk profile of the Company characterized by the sustained growth in total operating income and improvement in profitability supported by growth across all major segments.

Operational overview

The Company reported revenue of 8,982 million in FY23.

Technical & API

In FY23, Technicals and Active Pharmaceutical Ingredients (APIs) together contributed 80% of the total revenue, amounting to 7,066 million. Notably, the Company introduced three new technical products and an important intermediate during the review period. We manufacture generic technicals for fungicides, herbicides, and APIs used in dermatological products. Technicals are the commercially available versions of the comparatively pure active components utilised to create formulated agrochemical products. We also manufacture a significant amount of thiocarbamate herbicides, which are utilised on field crops like wheat and rice.

Key fungicide Technicals produced by IPL include the following:

Key Technicals	Category	Application
Prosulfocarb	Herbicide	Used in field crops, such as, wheat and potatoes
Pretilachlor	Herbicide	Widely used for protecting rice crop
Cymoxanil	Fungicide	Controls downy mildews of grapes, potatoes, vegetables and several other crops
Captan	Fungicide	Used for fruits, vegetables and ornamental plants
Folpet	Fungicide	Controls fungal growth at vineyards, cereals, crops and biocide in paints
Diafenthiuron	Insecticides	Used on Cotton plants
Thiamethoxam	Insecticides	A broad-spectrum systemic insecticide with several applications
Pyriproxyfen	Insecticide	Used in field crops
Etridiazole	Fungicide	Green House
PEDA	Intermediate	Used For Pretilachlor

APIs are elements of pharmaceutical drugs that are employed to provide the intended effects in a finished pharmaceutical product. Our APIs products are used for manufacturing final drugs to treat dermatological problems such as anti-fungal and anti-scabies medications.

Formulation Business

The Formulation business of the Company generated a revenue of 1,783 million in FY23. During the fiscal year, the Company successfully launched a total of 10 new formulation products.

We manufacture and offer a wide range of various formulations for insecticides, fungicides and herbicides, growth regulators, and acaricides. Through our distribution partners, our ready-to-use product segment provides branded products to customers.

Few Branded Formulations	Category
Grip, Pendizet, Trisol, Clogold, Midash, Safer, Elimminator, Penda, Aatish	Herbicide
Dollar, Vardhan, Vecto, Trim, Sodhit, Captax-50, Natraj, Sanjeevani, Talwar	Fungicides
Carbo, Amida, Frem, Byprten, Immidiator, Tridev, Difen, Frame, Soldier, Crotax	Insecticides
Star, Talvar, Contanol, Guru, Shakti, Sparkle, Chakra, Namaskar	Intermediate

International Business

The Company achieved a significant milestone with the newly launched herbicide technical product receiving TEQ certification in the European Union. Additionally, one of its thiocarbamates were registered in the USA, thereby enhancing its export revenue potential.

In FY23, the Companys export revenue reached 480 crores, demonstrating notable growth from 330 crores in FY22. The

International business reported remarkable growth, witRs. 45% increase in export sales during the year.

Financial Overview

Standalone performance for the year ended March 31, 2022

Analysis of the Standalone Profit and Loss Statement

Particulars	FY 2022-23 (Rs in Crore)	FY2021-22 (Rs in Crore)	Change (%)
Revenue from operations (Net)	885	716	23
Other income	13	13	0
Cost of materials consumed	553	374	47
Power and fuel	40	33	21
Freight, handling and packing	18	22	(18)
Employee benefits expenses	35	30	17
Depreciation and amortization expenses	11	8	38
Finance costs	6	7	-14
EBITDA	211	227	-7
Profit after tax	145	158	-9

Income

During FY 2022-23, total income of the Company increased 23% from Rs. 729 crore in FY 2021-22 to Rs. 898 crore in FY 2022-23. This comprises revenue from operations and other income.

Revenue from operations increased by 23% during the year, from Rs. 716 crore in FY 2021-22 to Rs. 885 crore in FY 2022-23, driven by growth in formulation business & technical business.

Expenses

The Companys total expenses increased by 36% from Rs. 517 crore in FY 2021-22 to Rs. 705 crore in FY 2022-23. Major expense items comprise the cost of material consumed, change in inventories, power & fuel, employee benefits, finance costs, depreciation, and amortization expenses.

The cost of material consumed (including stock adjustments and purchases) increased by 47% from Rs. 330 in FY 2021-22 to Rs. 485 in FY 2022-23, due to higher sales of the technical & formulation business.

Power and fuel expenses increased 21% from Rs. 33 crore in FY 2021-22 to Rs. 40 crore in FY 2022-23, mainly due to the higher production.

Employee benefit expenses increased 17% from Rs. 30 crore in FY 2021-22. to Rs. 35 crore in FY 2022-23. This increase was on account of regular increments and increase in number of employees to support future growth.

Depreciation and amortization expenses increased by 38% from Rs. 8 crore in FY 2021-22 to Rs. 11 crore in FY 2022-23. This is on account of the commercialization of projects in line with the capacity expansion strategy.

Profitability

EBITDA margins decreased by 786 basis points (bps) from 31.7% in FY 2021-22 to 23.84% in current year under review. Decrease in EBITDA margin was due to higher raw material cost & fuel expenses.

Profit After Tax (PAT) Decreased from Rs. 158 crore in FY 2021-22 to Rs. 145 crore in FY 2022-23. PAT was reflective of the EBITDA trend.

Analysis of the Standalone Balance Sheet

Non-Current Assets

Particulars	FY 2022-23 (Rs in Crore)	FY2021-22 (Rs in Crore)	Change (%)
Property, plant and equipment	231	158	46.20
Right-of-use assets	6	5	20.00
Capital work-in-progress	27	44	-38.64
Other intangible assets	0*	0*	0.00
Financial assets
I. Investments	17	20	-15.00
II. Loans	5	1	400.00
III. Other Financial Assets	41	4	925.00
Other non-current assets	7	2	250.00
Total non-current assets	333	234	42.31

Note: Figures are rounded off to the nearest crore

* value is less than Rs. 1 crore

Working Capital

Particulars	FY 2022-23 (Rs in Crore)	FY2021-22 (Rs in Crore)	Change (%)
Current assets
Inventories	225	140	60.71
Financial assets
I. Trade receivables	262	248	5.65
II. Cash and cash equivalent	11	16	-31.25
III. Other balances with banks	48	91	-47.25
IV. Other financial assets	4	4	0.00
Other current assets	32	52	-38.46
Current tax assets (Net)	1	0*	338.60
Total current assets	583	551	5.81
Current liabilities
Financial liabilities
I. Borrowings	2	11	-81.82
II. Lease liabilities	0*	0*	0.00
III. Trade payables	103	95	8.42
IV. Other financial liabilities	8	14	-38.46
Other current liabilities	6	9	-33.33
Provisions	5	4	25.00
Current tax liabilities	-	-	-
Total current liabilities	125	132	-5.30
Working capital (Net Current Assets)	458	419	9.31

Note: Figures are rounded off to the nearest crore

* value is less than Rs. 1 crore

Inventory

Inventory increased by 60.71% from Rs. 140 crore as on March 31, 2022 to Rs. 225 crore as on March 31, 2023. The Inventory Turnover ratio was at 3.11 vis-?-vis 5.71 in the previous year. Higher inventory levels were on account of the build-up of some raw materials & finished goods to meet the next seasons demands as a part of the strategic procurement and shortage of containers for imported material.

Trade receivables

Trade receivables increased by 5.7% compared to the previous year. An increase in debtors was mainly on account of an increased turnover.

Trade payables

Creditors increased by 8.4% during the year owing to higher level of purchase to support increased turnover.

Net cash flows

Net cash flows from operating activities were Rs. 46 crore against Rs. 76 crore for the mentioned period, respectively.

Capital Employed

Particulars	FY 2022-23 (Rs in Crore)	FY2021-22 (Rs in Crore)	Change (%)
Equity
Equity share capital	11.52	11.52	0.00
Other equity	763.48	626.86	21.79
Total equity (A)	775.00	638.38	21.40
Financial liabilities
I. Non-Current Borrowings	1.70	3.55	-52.11
II. Non-Current Lease Liabilities	1.44	0.63	128.57
III. Current Borrowings	1.87	10.80	-82.69
Total Debt (B)	5.01	14.98	-66.56
Deferred Tax Liabilities (Net) (C)	10.34	8.02	28.93
Total Capital Employed (A+B+C)	790.35	661.38	19.50

Key Ratios

In accordance with the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations 2018, the Company is required to provide 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.

The key financial ratios are given below:

Particulars	FY 2022-23	FY 2021-22
Current Ratio	4.65	4.16
Debt Equity Ratio	0.005	0.02
Debt Service Coverage Ratio	38.50	58.20
Return on Equity (ROE)	20.44%	30.82%
Inventory Turnover Ratio	4.85	6.83
Trade receivables turnover ratio	3.47	3.10
Trade payables turnover ratio	5.75	4.64
Net profit ratio	16.33%	22.12%
Net capital turnover ratio (in times)	1.96	1.74
Return on capital employed (%)	25%	33%
Return on investment (ROI)	19%	25%

Human Resources

The Company places significant importance on its human resources, recognising the importance of its employees as the driving force behind the Companys success and growth. As a rapidly expanding chemical manufacturer, IPL understands the critical role that its workforce plays in achieving the Companys goals and maintaining its position as a pioneer in agrochemicals and pharmaceutical ingredients.

The Company encourages professional growth and fosters a culture of continuous learning, innovation, and teamwork. IPL strives to attract and retain top talent by offering competitive compensation packages, opportunities for career advancement, and a conducive work environment that promotes work-life balance and employee well-being.

The human resources department of IPL is committed to creating a diverse and inclusive workplace that fosters employee engagement and helps the workforce to remain aligned with the Companys vision. With a strong emphasis on nurturing talent, the Company aspires to build a strong foundation for sustained growth and excellence in the chemical manufacturing industry.

Risk management

IPL recognises the significance of robust risk management practices to ensure the continued success and sustainability of its operations. As a rapidly expanding chemical manufacturer with a diverse portfolio of agrochemicals and active pharmaceutical ingredients (APIs), it may be exposed to potential risks.

To effectively manage internal as well as external risks, IPL adopts a comprehensive risk management framework that aims to identify, assess, mitigate and monitor threats. The risk management framework is overseen by a Committee led by an Independent Director and comprises the Chairman, CEO, CFO, and other Independent Directors as members. The Company diligently identifies risk factors and conducts thorough Probability & Impact Analysis to ensure timely review and mitigation.

In addition to the main Risk Management Committee, IPL has a Sub-Committee of Executives (known as the Risk Management Committee of Executives). This Sub-Committee bears the responsibility of implementing effective practices and timely identification of potential risks. It reviews mitigation plans and implements strategies to reduce risks while ensuring seamless integration of planning and management activities throughout the year. Its aim is to ensure the overall efficiency and functionality of the risk management framework.

Internal financial controls and their adequacy

The Company maintains Internal Financial Control Systems that are well-suited to the nature of its business, the scale, and intricacy of its operations. These internal controls are deemed sufficient in relation to the preparation and presentation of the financial statements.

To ensure thoroughness and objectivity, the Internal Audit is conducted by an external independent firm. This firm periodically submits its findings and reports to the Audit Committee. The Internal Audit offers assurance to the Board concerning the efficacy of the internal financial control mechanisms and their overall quality. This is achieved through ongoing monitoring and operational testing performed by the internal audit function.

Way forward

The primary focus of the Company lies in research and development (R&D) and the introduction of new products to the market. The Company remains committed to enhancing its product mix while concurrently augmenting and refining its production capabilities to offer improved solutions to farmers and improve their livelihood. It also aims to capitalise on emerging opportunities in the field of agriculture to ensure profitable and sustainable growth.

Disclaimer

The Management Discussion and Analysis (MD&A) section may contain statements regarding the Companys objectives, projections, estimates, and expectations, which could be considered forward-looking statements in accordance with applicable securities laws and regulations. It should be noted that actual results may significantly differ from those expressed or implied in these statements. Several important factors can influence the outcomes, including economic conditions impacting demand and supply, price fluctuations in both domestic and international markets where the Company operates, competitive pressures within these markets, alterations in government regulations, tax laws, and other statutory changes, along with other incidental factors.