Kanoria Chemicals & Industries Ltd Management Discussions

The Year

IN REVIEW

In the financial year ended 31^st March 2025, the global economy continued to face significant challenges, including geopolitical tensions, ongoing energy shortages, persistent inflationary pressures, and the urgent need to address climate change. These factors had a notable impact on the Indian economy and the Chemical Industry. Throughout the year, KCIL navigated through a landscape marked by fluctuating revenues and profitability. The latter half of the fiscal year witnessed a tightening of margins, primarily attributed to a decline in demand and a surplus of basic chemicals globally. Despite these obstacles, KCIL remained resilient, adapting to market dynamics and leveraging its strengths to sustain operations. The Company acknowledges the uncertainties prevailing in the economic environment and remains committed to prudent strategies for long-term growth and sustainability.

The Companys assessments and prospects outlined hereunder are to be read in the context of the evolving and ever-changing situation.

MANAGEMENT DISCUSSION & ANALYSIS

Financial Performance with respect to Operational Performance

The operations of the Chemicals business of the Company, during the year under review, remained robust and efficient resulting in higher volumes of production and sales and improved margins.

The Revenue from Operations of the Company on a standalone basis increased by 18% from 5,769 million in the year 2023-24 to Rs. 6,783 million during the year under review. The efficient operations of the plant and imposition of anti-dumping duty on imports of Pentaerythritol from a few countries resulted in improved profitability. As a result, the EBITDA increased by 69% from Rs. 317 million in the immediately preceding year to Rs. 536 million in 2024-25. The profit before exceptional items & tax multiplied over 8 times at Rs. 175 million in the year 2024-25. The Company has impaired the value of its investments in equity shares of its foreign subsidiaries by Rs. 450 million. As a result, the Company incurred a loss of Rs. 389 million from its continuing operations after tax as against a profit of Rs. 25 million in the year 2023-24. The Company, during the year, sold its Solar Power business on a Slump Sale basis and the result of this has been classified under Discontinued Operations. The company earned a profit of Rs. 9 million from its discontinued operations as against a loss of Rs. 36 million in the previous financial year. Overall the Companys loss increased from Rs. 11 million in the year 2023-24 to Rs. 380 million in the year 2024-25. The operations at APAG CoSyst Group (APAG), engaged in the manufacturing of electronics for the Automotive and Industrial segment, was negatively impacted owing to a combination of number of factors primarily global trade uncertainties, low cost Asian alternatives, higher development cost etc. APAGs Revenue from Operations decreased marginally from Rs. 7,901 million in the year 2023-24 to Rs. 7,824 million in the year 2024-25. APAG incurred an EBITDA loss of Rs. 66 million as against a profit of Rs. 277 million in the previous financial year. The Net Loss increased to Rs. 546 million as against Rs. 375 million during the immediately preceding year.

The operations at Kanoria Africa Textiles plc (KAT), another foreign subsidiary of the Company based in Ethiopia, were adversely affected by acute shortage of foreign currency for importing raw materials during the first 5 months of the financial year and then a liberalisation of foreign currency market resulting in a devaluation of local currency “Birr” by over 130%. As a result of this devaluation and a onetime impact on the costs of KAT between the pre & post liberalisation era, the results are not comparable. The, Revenue from Operations, despite better volumes, shows a decrease of 30% from Rs. 1,081 million during FY 2023-24 to Rs. 760 million during the year under review. Consequently, KAT incurred a Net Loss of Rs. 312 million as against a loss of Rs. 166 million in the immediately preceding year.

The Consolidated Revenue from Operations increased by 4% and was at Rs. 15,367 million during the year as against Rs. 14,751 million in the previous year. The Consolidated EBITDA was at Rs. 406 million as against Rs. 715 million in the previous year. The management decided to impair goodwill of Rs. 294 million which was created on acquisition of APAG. As a result, the overall Net Loss was at Rs. 1,081 million as against Rs. 553 million in the immediately preceding year.

Key Financial Ratios

*excludes exceptional items

Interest Coverage Ratio was due to improved EBIDTA. Operating Profit Margin, Net Profit Margin and Return on Net worth increased due to better Profitability. Debt Equity Ratio increased due to loan taken for the project and increase in working capital requirements.

Alco Chemicals Segment

Industry structure and development

The Alco Chemicals Division of the Company serves a wide array of industries, primarily focusing on the Construction, Infrastructure, Paint, Pharma and Agrochemicals sectors. Its manufacturing portfolio includes products such as Formaldehyde, Pentaerythritol, Hexamine, Sodium Formate, Phenolic Resins, and Acetaldehyde. These products are manufactured in state-of-the-art facilities situated at Ankleshwar (Gujarat), Vizag (Andhra Pradesh), and Naidupet (Andhra Pradesh).

The Company enjoys market leadership in most of its products, and a significant presence in the rest. Its Formaldehyde plants are built using cutting-edge technologies, providing operational cost advantages and superior product quality. Moreover, the manufacturing technologies for Pentaerythritol, Hexamine, and Phenolic Resins have been developed in-house, and have been continuously refined over time to ensure global competitiveness in terms of both cost and quality.

Opportunities

• In pursuit of sustained growth and enhanced profitability, the company has formulated a comprehensive long-term strategy called "Vision- 2030." This strategic framework encompasses a diversified array of projects spanning both new product lines and expansions within the existing product portfolio, with the overarching objective of achieving substantial revenue and profitability growth by the year 2030.

• In alignment with the aforementioned strategic vision, the Company successfully commissioned its 345 TPD Formaldehyde plant at Ankleshwar in September 2024, taking the total Formaldehyde production capacity to 1400 TPD across all manufacturing locations. Further, the Hexamine plant with 18 TPD capacity was also commissioned at Ankleshwar in September 2024, increasing the total Hexamine capacity to 52 TPD. These initiatives not only strengthen

backward integration but also ensure enhanced supply security for key raw materials.

• The Companys focus on innovation through its dedicated New Product Development (NPD) Cell has started delivering encouraging outcomes. As part of its product diversification strategy, significant progress has been made in the development of Triacetin, Pentaerythritol derivatives, and other specialty chemicals. Several product and process innovations are currently underway to expand the product portfolio and address emerging application segments.

• In continuation of its commitment to excellence in environmental stewardship and safety, the Company proudly maintains its affiliation with the Responsible Care Logo ("RC Logo") initiative. This accolade places the Company among the select few chemical enterprises in India recognized for their dedication to upholding stringent safety, environmental, and operational standards. The RC Logo initiative represents a voluntary commitment by chemical industry stakeholders worldwide to mitigate public concerns regarding the manufacture, distribution, and utilization of chemicals, with the overarching objective of fostering a culture of safety and environmental responsibility.

Threats

• Inordinate fluctuations in Methanol and Phenol prices due to fluctuation in the crude prices and depreciating rupee against US dollar poses a threat of forex loss.

• Cheaper imports of Sodium Formate and Hexamine.

• The uncertainty of the geopolitical disturbances and its consequent impact on our business.

Performance

The Alco Chemicals Division experienced growth in production volumes compared to the previous year, driven by capacity expansion and sustained market demand. The Company also benefited from the rising demand for Pentaerythritol, supported by the imposition of Anti-Dumping Duty on its imports in May 2024, which provided some relief and helped stabilize market conditions. However, financial performance remained under pressure due to an intensely competitive market environment and the continued influx of low-priced imports of other products from traditional exporting countries.

Outlook

Our product demands are intricately tied to Indias GDP. Considering the countrys projected trajectory to be one of the fastest-growing economies globally, the prospects for our business look to be favourable in the upcoming fiscal year.

However, it is imperative to acknowledge that escalating geopolitical tensions may disrupt global supply chains and present a potential risk of reduced international demand. This may lead to excess global inventories and an increased likelihood of product dumping into India, which could adversely impact the Companys profitability.

Solar Power Segment

The Companys Solar Power Division located at Village Bap in Jodhpur District in the state of Rajasthan was engaged since 2012 in the generation of power from solar energy using Photo Voltaic (PV) technology. The 5.0 MW capacity plant was set up under the Renewable Energy Certificate (REC) scheme.

The returns from the said solar business have not been commensurate with the investments and risks involved in it. The Company therefore, vide a resolution passed by circulation on 3^rd May, 2024, approved the sale of the solar business on a slump sale basis.

QUALITY ACCREDITATION AND OHSAS

The manufacturing units of the Company at Ankleshwar, Vishakhapatnam, and Naidupeta have maintained ISO 9001 certification for quality management systems, ISO 14001 certification for environmental management systems and practices, and OHSAS 18001 certification for organizational health and safety systems throughout the year. Additionally, our company has successfully achieved the Responsible Care certification for both the Ankleshwar and Vizag plant locations for the period from May 2024 to April 2027.

SAFETY AND ENVIRONMENT

Throughout the year, the Company maintained an exemplary safety record, achieving zero accidents across all units.

Proactive environmental management practices were implemented to effectively control waste and optimize resource recycling.

In pursuit of sustainability, the Company established a dedicated HAZOP team. This initiative aims to enhance safety protocols and maximize operational safety across our manufacturing sites, ensuring optimal utilization of man-hours during operations.

Additionally, the Company continued to uphold stringent environmental standards, fostering a culture of responsible resource management and sustainable practices.

RISKS AND CONCERNS

Currently, the Company perceives the following main business risks:

• High volatility in raw material and input prices, which may result in fluctuating profit margins.

• Changes in government regulations or policies affecting the chemical industry, particularly in areas of environmental compliance or import/export tariffs.

INTERNAL CONTROL SYSTEMS AND ADEQUACY

The Company has an Internal Financial Controls (IFC) framework, commensurate with the size, scale, and complexity of the Companys operations. The internal control framework has been designed to provide reasonable assurance with respect to recording and providing reliable financial and operational information, complying with applicable laws, safeguarding assets from unauthorised use, executing transactions with proper authorisation and ensuring compliance with corporate policies. The Companys internal financial control framework commensurate with the size and operations of the business and is in line with requirements of the Companies Act, 2013. The Company has laid down Standard Operating Procedures and policies to guide the operations of each of its functions. Business heads are responsible to ensure compliance with these policies and procedures. Continuous internal monitoring mechanisms ensure timely identification of risks and issues. The management, statutory auditors and internal auditors have also carried out adequate due diligence of the control environment of the Company.

To maintain the objectivity and independence of the Internal Financial Control, the Internal Auditor reports to the Chairman of the Audit Committee. The Internal Audit team develops an annual audit plan based on the risk profile of the business activities. The Internal Audit plan is approved by the Audit Committee, which also reviews compliance to the plan. The Internal Audit team monitors and evaluates the efficacy and adequacy of internal control systems in the Company, its compliance with operating systems, accounting procedures, and policies at all locations of the Company. Based on the report of the Internal Auditor, departmental

heads/ process owners undertake corrective action(s) in their respective area(s) and thereby strengthen the controls. Significant audit observations and corrective action(s) thereon are presented to the Audit Committee and shared with the Statutory Auditors. The Audit Committee at its meetings reviews the reports submitted by the Internal Auditor.

An adequate system of internal control is in place. The assets, buildings, plant and machinery, vehicles and stocks of the Company are adequately insured, including for loss of profits.

The key elements of the control system are:

• Clear and well-defined organisation structure and limits of financial authority.

• Corporate policies for financial reporting, accounting, information security, investment appraisal and corporate governance.

• Annual budgets and business plan, identifying key risks and opportunities.

• Internal audit for reviewing all aspects of laid down systems and procedures as well as risks and control.

• Risk Management Committee that monitors and reviews all risk and control issues.

HUMAN RESOURCE AND INDUSTRIAL RELATIONS

The Company continues to prioritize the development of its human resources, recognizing their critical role in maintaining organizational excellence amid a dynamic business landscape. Adhering to robust HR practices, the Company ensures fairness and transparency across all operations. Each employee is bound by a comprehensive Code of Conduct, which steers the organization towards ethical achievement of its objectives. In the past year, KCI has intensified its focus on employee development by conducting a variety of training programs tailored to different levels of the workforce. These initiatives encompass upskilling, leadership development, and continuous learning opportunities, thereby nurturing a culture of growth, innovation, and adaptability.

KCI maintains robust open communication channels between management and employees, fostering a collaborative and supportive workplace environment & the industrial relations climate of the Company continues to

be harmonious and cordial, with an unwavering focus on enhancing productivity, quality, and safety.

At the end of the year, the Company had 389 permanent employees, reflecting its commitment to maintaining a stable and experienced workforce. Additionally, KCI places a high emphasis on employee well-being, offering various health and wellness programs, competitive benefits, and work-life balance initiatives to ensure a motivated and engaged workforce.

SUBSIDIARIES PERFORMANCE AND OUTLOOK

Textiles Segment

The Companys integrated denim manufacturing unit in Ethiopia, Africa operates through its wholly owned subsidiary, Kanoria Africa Textiles plc (“KAT") incorporated in Ethiopia.

A major policy change, Ethiopia decided to liberalize the exchange rate regime which was tightly controlled by the central bank of the country since more than half a century. This has come as a condition from International monatory fund for financing the country that is strugging against unmanageable debts and dwindling foreign reserves. The country witnessed a sharp fall in local currency from Birr 57 per USD to Birr 130 per USD by the time we close the books for the year. There was hardly any demand of our products after the devaluation as Market took some time to absorb this shock and adjust the prices accordingly. There is sales growth in current FY over 20% but when we convert the local currency into USD the growth is eaten up by the sharp devaluation of local currency.

The fact is the devaluation has created some challenges in current FY 2024-25 and some challenges will remain for some time but the long term outlook remains positive mainly because of two reasons. There was acute shortage of foreign currency in the past and with liberalization of exchange rate foreign currency is available for import of raw materials and essential spares and this will help in maximum capacity utilization. Secondly, export has became viable due to cheap cost of production in terms of USD. The company will definitely do very well once come out of debt burden which was committed when the interest rates were really low.

Electronics Automotive Segment

The combination of global trade uncertainty, the threat of low cost Asian alternatives, and the need to straddle the ICE and electric propulsion technologies (causing higher development costs allocated over similar volumes) continued to challenge the western automotive OEMs. Cost competitiveness, and consequently, demand was hampered.

With free capacity as a result of lower demand, many of APAGs large customers insourced programmes. The remainder passed on OEM pressure for price reductions. This had a negative effect on margins for the company in the current year and will affect top line in the years ahead as insourcing initiatives consumnate. Moreover, OEMs pulled back on new development endeavours and APAGs ECU R&D division was faced with inadequate programme work.

This situation, however, was common across peers and resulted in the closure or consolidation of several similarly-sized competitors. This activity opens up future opportunities for the company even if with higher price pressure as competitors are now larger and enjoy more purchasing power in component negotiations.

To capitalise on this opportunity and to rebuild trust among customers and suppliers, APAG has found a strategic investor. The investment in the company will infuse cash to pay off debts and strengthen the balance sheet. This should restore customer confidence especially in a sector where many competitors are no longer reliably stable and help win business to avoid shrinkage and slowly return to growth. It should also help improve credit insurance availability for APAG debts at the companys suppliers and allow improved payment terms and liquidity. The investor brings access to the Indian market as well where APAGs expertise is becoming relevant with luxury and ADAS features emerging in Indian OEM offerings.

Operationally APAG took steps to continue to be competitive in the changing landscape. Back office functions were shifted to India at lower employee compensation. The ECU R&D team was rationalised in Europe and North America and grown in India - both to reduce costs in the face of lower demand and to adapt to opportunities in India. Strategic Procurement is also being shifted to India over the next 8-10 months to tap potentially reduced prices in the local market where the distribution network for electronic components supports foreign country sourcing.

With these big strategic moves for operational efficiency, the strengthening if the balance sheet, and the access to the Indian market; the company is making every endeavour to successfully traverse the difficult market and return to growth.

Statement in this Management Discussion and Analysis describing the Companys objectives, projections, estimates, expectations or predictions may be forward looking statements within the meaning of applicable securities 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 global and Indian demand supply conditions, finished goods prices, feed stock availability and prices, cyclical demand and pricing in the Companys principal markets, changes in Government regulations, tax regimes, economic developments within India and the countries within which the Company conducts business and other factors such as litigation and labour negotiations.