THE YEAR IN REVIEW
The global ecomomy has encountered multiple events in 2022-23 like Russia-Ukraine war, energy crisis in Europe, surging inflation, debt tightening, fear of recession as well as the climate emergency. The Indian economy and Chemcial Industry in particular, has felt the pressure of shrinking Revenue and profitability in the 2nd half of the 2022-23. Most of the basic chemicals saw a sharp correction in prices on account of global over supply situation due to weaker demand in Europe and China. There has also been significant dumping of selected chemicals in India from regular exporting countries. Depreciation of Indian currency against the US Dollar has also hampered the profitability of the Indian Chemical Industry who are reliant on imports of some basic chemcials. We at KCIL, felt the pressure on our profitability during the year.
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
During the year under review, the operations across various segments of the Company has shown improved efficiencies and productivity. As a result, the Electronic Automotive and Textile segments of the company performed much better than the immediately preceding year. However the performance of the Alco Chemicals segment, especially in the second half of the financial year under review, was marred by a sudden dumping of a key product manufactured by the company at a significantly lower prices.
The Revenue from Operations of the Company on a standalone basis increased by 4% from Rs. 6,491 million in the year 2021-22 to Rs. 6,752 million in the year 2022-23. The EBITDA, however, reduced from Rs. 704 million in the year 2021-22 to Rs. 396 million in the year 2022-23 due to dumping of the product and volatility in the prices. As a result, the Net Profit of the Company also reduced to Rs. 59 million during the year as against a Net Profit of Rs. 250 million in the immediately preceding financial year.
The operations at APAG CoSyst Group (APAG), engaged in the manufacturing of electronics for the Automotive segment, improved with the relatively better supply of semiconductors. APAGs Revenue from Operations increased by 23% from Rs. 5,918 million in the year 2021-22 to Rs. 7,250 million in the year 2022-23. The EBIDTA more than doubled from Rs. 66 million in the year 2021-22 to Rs. 172 million in the year 2022-23. The Net Loss during the year reduced from Rs. 230 million in the year 2021- 22 to Rs. 206 million in the year under review.
Kanoria Africa Textiles plc (KAT), another foreign subsidiary of the Company based in Ethiopia also delivered improved performance with Revenue from Operations increasing by 39% from Rs. 1,282 million during FY 2021-22 to Rs. 1,782 million in the year 2022-23. The EBIDTA increased by 24% from Rs. 253 million in the year 2021-22 to Rs. 314 million in the year 2022- 23. The Net Profit for the year was Rs. 18 million as against a profit of Rs. 2 million in the immediately preceding financial year.
The Consolidated Revenue from Operations increased by 15% from Rs. 13,691 million in the previous year to Rs. 15,784 million in the year under review. The Consolidated EBITDA decreased from Rs. 970 million in the year 2021-22 to Rs. 827 million in the year 2022-23. As a result, the Company incurred a Net Loss of Rs. 129 million on Consolidated basis during the year under review as against a Net Profit of Rs. 22 million in the previous year.
Key Financial Ratios
2022-23 | 2021-22 | |
Debtors Turnover | 6.68 | 6.51 |
Inventory Turnover | 12.78 | 13.39 |
Interest Coverage Ratio | 4.78 | 9.90 |
Current Ratio | 1.44 | 1.44 |
Debt Equity Ratio | 0.19 | 0.15 |
Operating Profit Margin (%) | 2.79 | 9.15 |
Net Profit Margin (%) | 0.85 | 3.79 |
Return on Net Worth (%) | 0.93 | 3.99 |
1. Operating Profit Margin was primarily lower due to dumping of a key product manufactured by the company at a significantly lower prices and volatility in input prices. This had a cascading adverse impact on Interest Coverage Ratio, Net Profit Margin and Return on Net Worth.
2. Debt Equity Ratio decreased due to lower profitability and increase in total debt.
Alco Chemicals Segment
Industry structure and development
The Alco Chemicals Division of the Company caters to a diverse range of industries including primarily Pharma, Construction, Agrochemicals, infrastructure and Paints. It produces products such as Formaldehyde, Pentaerythritol, Hexamine, Sodium Formate, Phenolic Resins, and Acetaldehyde in its state of art facilities located at Ankleshwer (Gujarat), Vizag (Andhra Pradesh) and Naidupet (Andhra Pradesh).
The Company is a leading producer of Formaldehyde, Pentaerythritol, Phenolic Resins and Hexamine in India. The Formaldehyde plants are equipped with latest technologies, which have advantage of operational cost and better product quality. The Pentaerythritol, Hexamine and Phenolic Resins manufacturing technologies have been developed in-house by the Company and have been refined over the years to compete globally on cost and quality. The state-of-the-art Phenolic Resin production plant of the Company has collaborative agreements with Hexion Inc.- the global leader in thermoset resins, and ASK Chemicals - a global player in foundry solutions and other resins. These collaborations enable the Company to add specialized, high-value products to its manufacturing portfolio.
Opportunities
The company has made a long term growth plan "Vision-2030" comprising of mix of projects in both new and existing product portfolios. We aim to grow multifold in revenue and profitability by the year 2030.
• As part of the 1st phase of Vision-2030, KCIL has commissioned its 2nd Phenolic Resins plant at its Ankleshwar unit. It makes KCIL, the only Phenolics Resins manufacturer in India to have plants in both West and East coast of India.
• KCILs effort towards "New Product Development Cell (NPD Cell)" has started giving fruitful efforts. The company has decided to add Triacetin in its product portfolio. The Company has put up a pilot plant at Ankleshwar with in-house technology making on-spec product. Working on putting up the commercial plant at Ankleshwar is in progress.
• KCIL has also announced its new 300 TPD Formaldehyde Plant at its Ankleshwar unit. This plant will be based on the latest Metal Oxide technology.
• The company continues to retain the Responsible Care Logo ("RC Logo") in the year 2022-23. We now stand one among the prestigious 100 Chemical companies across India which has been awarded with this recognition. RC Logo is an initiative voluntarily undertaken by chemical companies worldwide to address public concerns about manufacturing, distribution and use of chemicals, all having common theme of making progress towards vision of no accidents, injuries or harm to environment.
• The Companys Formaldehyde plant at Naidupeta in the state of Andhra Pradesh is in operation. Work on the new Formaldehyde consuming plants by reputed manufacturers in nearby areas are under progress and are expected to be in operations during FY-24. Looking at the upcoming demand of Formaldehyde around our plant at Naidupeta, the company is considering the proposal to expand its Formaldehyde manufacturing capacity at Naidupeta.
• The companys R&D center at Ankleshwar has been granted recognition from Department of Scientific and Industrial Research (DSIR), Ministry of Science & Technology, Government of India.
• Companys "Business Excellence Cell" is fully functional, and is working towards better management of plants for cost reductions and better efficiencies.
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 Pentaerythritol, Sodium Formate or Hexamine.
• The uncertainty of the geopolitical disturbances and its consequent impact on our business.
Performance
The operations of the Alco Chemicals Division were on a smooth run. Production and sales volumes were higher than the previous year. A very sharp decline in the prices of pentaerythritol from Q2 onwards due to dumping of the product by the regular exporters to India has very significantly impacted the revenues and margin in the financial year. The company has approached concerned ministry of Government of India for Anti Dumping Duty investigations.
Outlook
• As the Union budget focuses on increased spending on infrastructure, affordable housing and railways, the overall demand of our products would increase.
• India is expected to be one of the fastest growing ecomony in the world. Demands of our products are linked with the GDP of India and hence our business is estimated to be good in the coming year.
• There is threat of global recession which might lead to declining demand in the global markets. In such a scenario, there will be threat of dumping of products at cheaper prices in India from other exporting countries which may hamper our profitability.
Solar Power Segment
Industry structure and development
The Companys Solar Power Division located at Village Bap in Jodhpur District in the state of Rajasthan is 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 plant is equipped with dual axis tracking system in 2.5 MW capacity, which ensures capture of maximum solar radiation by orienting the modules to face the sun at all times.
The renewable energy sector, however, continues to face policy implementation and procedural difficulties. The Government also reduced the prices of RECs without commensurate adjustment in the number of RECs held. This is being collectively contested by the renewable energy industry through the concerned trade bodies, the Green Energy Association and the Indian Wind Power Association before the Honble Supreme Court. Presently trading of RECs is stayed by Appellate Tribunal For Electricity (APTEL) order.
The state Government has not extended the Power Purchase Agreement beyond 31st March 2019 and the same is being contested by us in the Honble High Court of Rajasthan.
Due to unfavorable developments we were not able to install a Solar Power Plant on our Agricultural Land admeasuring 183.16 Acres bearing Khasra No 194, 194/3 & 196/6 at Village Bawdi Barsinga, Tehsil Bap, Jodhpur. Due to the non-renewal of the Power Purchase Agreement (PPA) with DISCOM & drastic fall in the price of Renewable Energy Certificates(REC) the company found it commercially and financially unviable to install a Solar Power Plant and hence management decided to sell the said Agricultural land in the interest of the company.
Hence the company has sold its above said Agricultural Land admeasuring 183.16 Acres to buyers who are interested in setting up Solar Power plant.
Opportunities
• With the Governments ambitious targets for renewable energy generation, we have about 46.84 acres of unused land owned by the Company near to operational solar energy generation plant, which is a valuable asset for future expansion of the Solar Plant capacity.
Threats
• Power Purchase Agreement with Discom was not renewed by Discom during the year under consideration.
Performance
The operation of the Solar Power Division was marginally affected due to failure of Incinometer Sensor. Thus generation was marginally lower side during the year. The generation has since improved after failure Inclinomters were replaced with the new Inclinometers.
Outlook
• We have replaced the failed Inclinometer sensors with new Inclinometers, thus operation of the Division is expected to further improve w.r.t. Generation.
QUALITY ACCREDITATION AND OHSAS
The manufacturing units of the Company at Ankleshwar, Vishakhapatnam and Naidupeta maintain the ISO 9001 certification for quality management systems, the ISO 14001 certification for environment management systems and practices, and OHSAS 18001 certification for organizational health and safety systems during the year. The company maintains the permission for the use of Responsible Care Logo (RC) at the Ankleshwar Unit till 2024.
SAFETY AND ENVIRONMENT
The Company maintained its safety record and it remained an accident free year at all units.
Proactive practices in managing and protecting the environment ensured control on wastage and recycling resources.
On the sustainability front the Company has formed a HAZOP team to ensure maximum safe man-hours at our manufacturing sites during operations.
RISKS AND CONCERNS
Currently, the Company perceives the following main business risks:
• Dumping of Pentaerythritol, Sodium Formate and Hexamine at cheaper prices by other countries would adversely impact our profit margings.
• Extreme volatility in prices of raw materials and other inputs could lead to fluctuating margins.
• Non extension of Power Purchase Agreement and reduction of REC price by the Central Electricity Regulatory Commission (CERC) are areas of concern for the Companys solar power business.
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 commensurates 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. A Certificate provided by the CEO and CFO is placed before the Board of Directors which discusses the adequacy of the internal control systems and procedures.
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 has consistently laid focus on people development and the role played by its human resources in inculcating organisational excellence in fast changing business environment. The Company adopts appropriate HR practices to impart fairness and transparency in all its operations. Each employee is guided by a detailed Code of Conduct that helps the organisation to achieve its goals in an ethical manner. KCI regularly conducts training programmes for different levels of employees to ensure mapping of job requirement and skills base.
The industrial relations climate of the Company continues to remain harmonious and cordial with focus on improving productivity, quality and safety.
The number of persons permanently employed by the Company as at the end of the year was 442.
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.
The country is still going through the political crises which to certain extent has been resolved with peace agreement. The government is committed towards the peace agreement and maintaining law and order across the country. This initiative will have positive impact in long term with respect to the business in Ethiopia. The forex crises have worsened due to the civil war and will take sometime to be back on track.
Last year despite challenges company could sustain and perform better. With above positive changes in the political scenario of country KAT result is expected to be improved in current financial year. The only concern is the forex crises country is facing at present.
In last financial year due to political challenges, higher manpower turnover KAT could at least retain the operational efficiencies but could not improve as expected. There have been certain areas which have been identified for the improvement in current financial years which will result in better financial results. The team is committed and dedicated towards the goal of the organisation. It is expected to have increase in cash reserves during current financial years making KAT in better position. The export market has again picked up for KAT and will improve further. Domestic market though uncertain but seems to be better after the peace agreement.
Electronics Automotive Segment
APAGCoSyst Electronic Control Systems designs, develops, and produces ECUs and lighting for the automotive, and industrial sectors.
After a turbulent time with the severe and unprecedented global shortage of semiconductors, the supply chain is easing somewhat and the short-term future looks brighter than it did. The long-term prospects remain bright with a strong sales pipeline in both markets - Europe and North America.
In Europe, despite ongoing challenges in one product family or another, the breadth of over 250 finished products facilitates consistently healthy sales. This has helped reduce inventory and free up some liquidity. Demand is staying strong and the company is on track for a healthy short to medium- term forecast.
In Canada, the shortage has resulted in more difficult consequences with the cancellation of some car model variants, and a delay in others; resulting in a further delay in achieving month to month breakeven sales. Exacerbating this situation is the growing stock because of either the inability to convert to sales (because of a missing portion of the bill of material), or a delay in customer demand. In fact, because of a now foreseen period of 2-3 months of low demand, the company is exploring a temporary work-time reduction supported by the government. Following this period, sales are forecasted to grow to break-even levels.
In the long-term, APAG is poised to grow. Future contracted sales (based on single-source awarded projects) are high. This fiscal year 2023-24 should see the company come very close to the CHF 100 mn. turnover barrier despite the strong Swiss Franc and then remain above for the following two years even with no additional contract awards. There are, however, new, further opportunities in the sales pipeline as well which can be won with the appropriate preparation and investment. After a few years of severe cost- control, this year will be capital expenditure-heavy for the company. Existing sold contracts and close to being won future opportunities require space expansion in the Czech plant and investments in standard and customised machinery. Moreover, the entry into ADAS (Automated Driving Assistance Systems) sub-components also requires some investments in the research and development team.
In addition to the supply chain challenges in the electronics market, the automotive industry is in a period of change - propulsion technology is changing from fossil fuels to electricity. Whilst electric cars still have small volumes, straddling both is important to cement the companys position in the future. This means higher working capital needs because forecasting sales of car models has become harder (as it is difficult to accurately predict whether a particular buyer profile will choose the electric or internal combustion car). The recent capital infusion will also help ride this period as the company is selling components with a healthy ratio between electric and internal combustion cars.
The next years will hopefully see APAGCoSyst develop into a strong player in the industry.
CAUTIONARTY STATEMENT
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.
Invest wise with Expert advice
IIFL Customer Care Number
(Gold/NCD/NBFC/Insurance/NPS)
1860-267-3000 / 7039-050-000
IIFL Capital Services Support WhatsApp Number
+91 9892691696
IIFL Securities Limited - Stock Broker SEBI Regn. No: INZ000164132, PMS SEBI Regn. No: INP000002213,IA SEBI Regn. No: INA000000623, SEBI RA Regn. No: INH000000248
This Certificate Demonstrates That IIFL As An Organization Has Defined And Put In Place Best-Practice Information Security Processes.