Kanoria Chemicals & Industries Ltd Management Discussions.

Financial Performance with respect to Operational Performance

The performance of the Company during the year under review remained under pressure on account of volatility in the key raw material prices, dumping of certain finished goods produced by the Company and finally outbreak of the pandemic and consequent lockdown of economic activities in the country.

The Revenue from Operations decreased by 20% from Rs. 4,475 million in the previous year to Rs. 3,597 million in the current financial year. EBITDA decreased from Rs. 409 million to Rs. 269 million in the year under review. Consequently, the Company incurred a Net Loss of Rs. 8 million during the current financial year.

APAG CoSyst Group engaged in Electronic Automotive segment under APAG Holding AG, the Switzerland based subsidiary of the Company, continued to maintain its market as a result of strategic initiatives taken in its various group companies. The Revenue from this segment remained largely in sync with the previous year at Rs. 5,160 million as against Rs. 5,220 million in the previous financial year. APAG CoSyst Group incurred a net loss of Rs. 220 million during the year as against a loss of Rs. 47 million in the previous financial year. A large part of the loss relates to higher incidence of non cash depreciation and amortisation due to expansion in its existing setup and commissioning of a new plant in Canada during the year under review.

Kanoria Africa Textiles plc (KAT), another foreign subsidiary of the Company based in Ethiopia improved its performance and efficiency. The Revenue from this segment increased by 26% from Rs. 1,023 million in the previous year to Rs. 1,290 million in the current financial year. KAT incurred a loss of Rs. 87 million during the year as against loss of Rs. 234 million in the previous financial year.

The Consolidated Revenue from Operations decreased by 6% to Rs. 10,047 million as against Rs. 10,717 million in the previous financial year. The Groups EBITDA decreased from Rs. 759 million to Rs. 500 million in the year under review. Consequently, the Group incurred a Net Loss of Rs. 315 million during the current financial year.

Key Financial Ratios

2019-20 2018-19
Debtors Turnover 5.77 7.09
Inventory Turnover 6.56 15.81
Interest Coverage Ratio 2.80 8.36
Current Ratio 1.13 1.33
Debt Equity Ratio 0.11 0.10
Operating Profit Margin (%) 1.94% 5.94%
Net Profit Margin (%) -0.21% 1.86%
Return on Net Worth -0.13% 1.39%

While almost all the ratios had an adverse impact due to outbreak of COVID-19 and consequent lockdown of economic activities, certain specific reasons for major variances are given below:

1. Inventory Turnover was adversely affected due to a significant amount of raw material and finished goods inventory remaining in transit or in the plants during lockdown.

2. Interest Coverage Ratio was lower primarily on account of new borrowings for setting up a new plant at Naidupet as well as meeting the requirement of the companys subsidiaries. Reduction in EBITDA.

3. Operating Profit and consequently Net Profit margins were adversely impacted due to volatility in the key raw material prices and dumping by way of imports of certain finished products of the Company. Net Profit Margin was further affected due to higher incidence of finance cost and depreciation.

4. The Return on Net Worth was negative due to Net Loss incurred by the Company.

Alco Chemicals Segment

Industry structure and development

The Alco Chemicals Division of the Company produces Formaldehyde, Pentaerythritol, Hexamine, Sodium Formate, Acetaldehyde and Phenolic Resins.

The Companys Formaldehyde plants use the FORMOX process, which ensures lower operational cost and higher product purity. The Pentaerythritol and Hexamine manufacturing technologies have been developed in-house by the Company and has been refined over the years to compete globally on cost and quality.

The state-of-the-art 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 resins. These collaborations enable the Company to add specialized, high-value products to its manufacturing portfolio.

Opportunities

• The Companys new Formaldehyde plant at Naidupet in the state of Andhra Pradesh has started operations from October 2019 and is under stabilisation. This has enabled the Company to cater to markets in Southern India where new manufacturing capacities of end user industries are coming up. Due to the high cost of transportation, the Company was earlier, able to service Formaldehyde customers, only in the Western region (from its Ankleshwar plant) and Eastern region (from its Vizag plant) of India.

• Phenolic resins are used in a wide variety of applications. There is great potential for developing high value resins through continuous research which the Company is focussing on. Considering the success achieved till now, the Company is considering expanding capacity.

• Technology infusion and implementation of business excellence initiatives to further increase production and reduce costs. The Company has established an "Improvement Cell" to continuously work on improvement initiatives.

• The Company has also formed a new "Product Development Cell" which has started work on developing new value-added products.

• The Companys Ankleshwar unit has received permission from the Indian Chemical Council (ICC) to use Responsible Care Logo ("RC Logo") from March 2020. We now stand one among the prestigious 64 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.

Threats

• Inordinate fluctuations in Methanol and Phenol prices could affect margins.

• Cheaper imports of Pentaerythritol or Hexamine could reduce margins.

• The uncertainty of the evolution of the pandemic and its consequent impact on our operations and on the demand for our products.

Performance

• The operations of the Alco Chemicals Division remained stable during the year. Production and sales volume of products of the Division were similar to the previous year despite significant economic slowdown in the year and countrywide lockdown due to COVID-19 towards the end of the year.

Outlook

• This countrywide lockdown for prolonged period due to outbreak of COVID-19 has impacted the economy very severely. Operations at our plants were under suspension from 24th March 2020 to mid-May 2020 due to lockdown. Considering the outlook for demand and availability of workforce, we are operating the plants at lower capacities. With the frequent changing scenario of COVID-19, it is difficult to assess the future impact of the pandemic on business operations. We are reasonably confident of our ability to tide over crisis.

• The Governments focus on infrastructure and affordable housing should result in increasing overall demand for Formaldehyde, Pentaerythritol, Hexamine and Phenolic resins.

• The estimates for production and revenues for the current year are lower over the previous year primarily due to impact of COVID -19.

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. Although trading has resumed since 2018, further growth in the sector will depend on government policy and judicious regulation.

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.

Opportunities

• With the Governments ambitious targets for renewable energy generation, about 230 acres of unused land owned by the Company near an operational solar energy generation plant is a valuable asset.

Threats

• Power Purchase Agreement with Discom was not renewed by Discom during the year under consideration.

• Downward revision of prices of Renewable Energy Certificates will lower revenues.

Performance

• The operation of the Solar Power Division was partly affected due to breakdown of Invertor and tracking system. Thus generation was lower during the year. The generation has since improved after rectification of tracking system.

Outlook

• Operation of the Division is expected to improve.

QUALITY ACCREDITATION AND OHSAS

The manufacturing units of the Company at Ankleshwar and Vishakhapatnam renewed 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. These units also received RC 14001:2015 certification for responsible care management systems. The Companys Ankleshwar unit has also received permission from Indian Chemical Council (ICC) to use Responsible Care Logo (RC Logo).

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.

RISKS AND CONCERNS

Currently, the Company perceives the following main business risks:

• Prolonged limited economic activities due to COVID-19 would severely hamper demand of our product in domestic and International markets.

• Cheap imports and dumping by other countries threaten to adversely impact domestic prices leading to lower margins.

• Extreme volatility in prices of raw materials and other inputs could lead to fluctuating margins, and possibly have an overall negative impact on profitability as a result of higher inventory carrying risk.

• 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

An adequate system of internal control is in place. The assets, buildings, plant and machinery, vehicles and stocks of the Company are 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 good 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 400.

CAUSIONARY 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.

SUBSIDIARIES PERFORMANCE AND OUTLOOK

Textiles Segment

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

KAT has shown improved performance during the year. Its garment division, started recently, has had a positive impact on its top line and bottom line. Efficient production of garments is contingent upon training the workforce and is expected to reach the desired efficiency level by the end of the current year. The bottle necks in fabric production has been removed with addition of required balancing equipment.

KAT has been able to overcome most of its initial challenges. It has recruited a large number of local graduate engineer trainees who are being trained to be future managers. This has made possible the reduction of almost 40% expats thus saving costs. Workers skill development has shown positive signs in improving efficiency, reducing labour turnover and in reducing absenteeism.

Ethiopia is seen as the next textile hub for supply of textiles and apparel to the US and EU markets. Ethiopia enjoys duty free access to the US under African Growth & Opportunity Act (AGOA), to EU under Everything But Arms (EBA) and to many other countries as it has Least Developed Country (LDC) status. The dedicated government is proactively working to promote textile as priority sector and many foreign investors from Asia and Europe are investing in Ethiopia. Many multinational fashion and apparel brands have opened their offices for sourcing in Ethiopia.

Electronics Automotive Segment

The performance of the Switzerland based subsidiary of the Company, APAG Holding AG, doing business as APAGCoSyst Electronic Control Systems had started reflecting the upswing in the global automotive sector in the last quarter of the financial year 2019-20. It was then, however, once again negatively impacted by the COVID-19 crisis which stifled demand in the last couple of months.

APAGCoSyst is engaged in the development and production of non-core lighting and electronic control units primarily for the automotive industry, with some contract manufacturing presence also in the precision industrial equipment sector. With growing forecast uncertainty in the automotive industry given the slow shift in propulsion technology to electricity, APAGCoSyst is diversifying the final automotive OEMs and models served (ensuring that both fossil fuel and electric vehicles are covered in its portfolio) to balance risk. Moreover, building on its high-quality profile and development prowess, APAGCoSyst has taken steps to be certified as a technology and component supplier for the medical industry within the next fiscal year. This will further diversify its portfolio and open a new, trending industry for long-term growth.