Kanoria Chemicals & Industries Ltd Management Discussions.

Financial Performance with respect to Operational Performance

During the year under review, Revenue from Operations decreased marginally from Rs. 3,298 million to Rs. 3,274 million. The Profit before tax and exceptional items, however, grew by 23% from Rs. 223 million in the previous year to Rs. 275 million in the current financial year. The Company following conservative principles of accounting booked a loss of Rs. 184 million towards write down in the values of Solar Power RECs on the basis of notification issued by the Central Electricity Regulatory Commission reducing the floor price of RECs and the same has been shown as Exceptional Item in the Statement of Profit & Loss. After accounting for MAT Credit entitlement pertaining to earlier years, the Profit for the year grew by 10% from Rs. 170 million in the previous year to Rs. 187 million in the current year. The Total Comprehensive Income grew by 26% to Rs. 189 million as against Rs. 149 million in the previous year. The Earnings per Share for the year was Rs. 4.28.

At Consolidated level, Revenue of APAG Holding AG (APAG), the Switzerland based subsidiary of the Company engaged in Electronic Automotive increased by 35% from Rs. 2,682 million to Rs. 3,615 million. Kanoria Africa Textiles plc (KAT), the other major subsidiary of the Company also started commercial production during the year and had Revenue from Operations of Rs. 449 million. The total Consolidated Revenue from Operations grew by 23% to Rs. 7,337 million as against Rs. 5,979 million in the previous year. The Segment Result of APAG improved significantly from a loss of Rs. 213 million in the previous year to a Profit of Rs. 19 million in the current year. KAT incurred a loss of Rs. 276 million in its first year of operation and as a result the Company incurred a Consolidated Total Comprehensive Loss of Rs. 233 million (of this Rs. 144 million attributable to the Shareholders of the Company) as against Rs. 91 million (attributable to the Shareholders of the Company) in the previous year.

Alco Chemicals Segment

Industry structure and development

The Division of the Company produces Formaldehyde and other value added products, including Pentaerythritol, Hexamine, Sodium Formate, Acetaldehyde and Phenolic Resins.

The Companys Formaldehyde plants use the FORMOX process, a world class Formaldehyde manufacturing technology with lower operational cost and higher product purity compared to competitors. The Company is the only Indian manufacturer operating on this technology.

The Pentaerythritol and Hexamine manufacturing technologies have been developed in-house by the Company. Over many years, these have been (and continue to be) refined to compete globally on cost and quality.

For Phenolic Resins, the Company has entered into manufacturing and technology collaborations with Hexion Inc. - the global leader in thermoset resins, and ASK Chemicals - a global player in foundry solutions and resins. These collaborations have happened as a result of the Companys state-of-the-art resin production plant, and are enabling it to add specialized, high-value products to the manufacturing portfolio.

Opportunities

• Currently, the Company is only able to service Formaldehyde consumers in the West (from the Ankleshwar plant) and East (from the Vizag plant) of India. This is due to the high cost of transporting Formaldehyde, making it unviable beyond a radius of about 800km. The Company has an opportunity to supply to consumers in the South and North, by setting up new plants. Large new manufacturing capacities for wood products (big consumers of Formaldehyde), are scheduled to be operational in the next three years, in the South and North. This will substantially increase demand.

• Phenolic resins are used in a wide variety of applications, such as foundries, refractories, abrasives, adhesives, grinding tools, composites and more. There is great potential for developing high value resins through continuous research.

• Technology upgradation to increase production and reduce costs.

Threats

• Cheaper imports of Pentaerythritol or Hexamine could reduce margins.

• Rapid and drastic fluctuations in Methanol and Phenol prices could lead to fluctuating margins, and possibly have a negative overall impact on profitability due to inventory carrying risk.

Performance

The operations of the Alco Chemicals Division remained stable during the year. Production and sale of Formaldehyde improved over the previous year.

Outlook

• Higher growth in the manufacturing sector expected to improve demand for Alco Chemicals in the country.

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

• An ongoing shift in the wood products industry towards the organized sector, may result in greater demand for higher quality, higher concentration Formaldehyde that is cheaper to transport.

• No significant improvement in margins.

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 in the generation of power from solar energy using Photo Voltaic (PV) technology. The project was set up under the Renewable Energy Certificate (REC) scheme.

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.

• Easier revenue flow by enforcement of Renewable Purchase Obligation (RPO) scheme.

Threats

• Lack of enforcement of the Renewable Purchase Obligation scheme.

• Lack of visibility in the future of the Renewable Energy Certificate (REC) mechanism.

Performance

The operations of the Solar Power Division improved over the previous year. Choice of technology for the project resulted in the Division to be amongst projects with the highest performance ratio in the country.

Outlook

• The Division expects stable operations to continue.

• Expectation that the government will improve enforcement of the Renewable Purchase Obligation leading to better REC sales.

Quality Accreditation and OHSAS

During the year, both 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.

Safety and Environment

During 2016-17, 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:

• Threat from cheap imports and dumping by other countries negatively impacts domestic prices and could reduce margins.

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

• Governments weak enforcement of the Renewable Purchase Obligation and the uncertainty on the future of the Renewable Energy Certificate (REC) mechanism.

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

KCI has consistently stressed on people development and the role played by its human resources in inculcating organisational excellence in the competitive and fast changing business environment. The Company adopts good HR practices to impart excellence, 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 31st March 2017 was 319.