Kiri Industries Ltd Management Discussions.

Global Economy Overview

The calendar year 2019 started off with rising tensions between the worlds two largest economies - US and China. US and China together account for 40% of the global GDP and the trade disputes between them had an adverse effect on the global economy and sentiment overall. This impact was not only seen in the commodities and financial markets (equities, bonds, currencies), but also impacted the output and profitability of firms leading to deterred investment decisions of businesses. However, as the year progressed, market sentiments were boosted by tentative signs on intermittent favourable news on US-China trade negotiations.

Brexit was the other major event that finally took place on January 2020, after the public referendum in 2016 and years of negotiations. The impact of Brexit is expected to hurt the UK economy primarily in 2020 by having the weakest export growth since 2009, Business investments to contract by 0.7%, and Household spending growth predicted to be at its slowest since 2011, due to historically low unemployment.

If the pain felt across global economies was not enough in 2019, the year ended off on a worse footing with the Corona Virus being first detected in December and quickly spreading across the worlds second-largest economy from the capital of Hubei province before infecting more than 110,000 people in at least 110 countries in less than three months. According to the WHO, the death toll reached more than 4,000 by March 2020. From an economic perspective, the key issue was not just the number of cases of this virus, but the level of disruption to economies. In a March report, the Organisation for Economic Co-operation and Development, or OECD, announced it had downgraded its 2020 predictions for almost all countries, the UN Conference on Trade and Development went even further and predicted that global GDP could take a USD 2 trillion hit. The global economic activity from the Purchasing Manager Index for the manufacturing and the services sector showed that Both manufacturing and services activity plunged in February 2020. The composite index was at 46.1 indicating that the global economy was potentially in a recession for the month.

As a silver lining, Governments of all countries have taken strong and bold measures to brace their economies from the expected impact of the Corona Virus. USA started off by rate cuts and infusing more than USD 1.5 Trillion into the financial system in an effort to calm the market turmoil after Wall Street suffered its worst day since the 1987 market crash.

Indian Economy Overview

The Indian economy started this financial year on a dull note due to the ongoing liquidity crisis. In order to achieve the governments vision of making India a USD 5 trillion economy by 2025, the finance ministry slashed domestic corporate tax rates to 25.17% in the mid-year to spur the investments in the economy. As a result the domestic investments contributed intermittently to the India growth story, but this proved to be a bit too little, too late.

The Consumer Price Index (CPI) showed retail inflation rising to 7.59% in January 2020 and IIP growth stood at a mere 2% YoY in January 2020, which was mainly driven by intermediate goods output whereas, Capital goods, infrastructure and construction goods output declined.

The liquidity crunch stressed NBFC funding; interest rates hiked up, which resulted in a degrowth of household consumption. The Current Account Deficit narrowed primarily on account of lower non-oil, non-gold imports and robust services exports supported by software, travel and financial services. The balance of payments surplus stood at USD 21.6 bn which was supported by FPI and FDI flows.

Although, according to the Indian Budget 2020 the real

GDP growth was estimated at 5% in the financial year 2019-20, growing to 5.6% in financial year 2020-21, with recent development with regards to Covid-19 cases in India, these growth estimates are expected to take a major hit. The financial year 2021, regardless to say, is going to be a challenging one for the world and India.

Indian Chemical Industry

India is sixth largest producer of chemicals in the world. Indian also ranks 14th in export and 8th in import of chemicals (Excluding Pharmaceuticals products) globally. The domestic demand of chemical products is expected to grow at approximately 9% per annum over the next 5 years. Indian chemical industry employs more than 2 million people.

Between 2006 and 2019, the CAGR in TRS for Indian chemical companies was 15% a figure much higher than global chemical industry returns (CAGR of 8%) and the overall global equity market (CAGR of 6 percent). Even between 2016 and 2019, when the Indian economy faced headwinds, the chemical industry maintained returns CAGR of 17 %.

Basic chemicals and their related products (petrochemicals, fertilisers, paints, varnishes, glass, perfumes, toiletries, pharmaceuticals, etc.) constitute a significant part of the Indian economy. Among the most diversified industrial sectors, chemicals cover an array of more than 70,000 commercial products. Total exports of dyes and dye intermediates, organic and inorganic chemicals, including agro chemicals, cosmetics and toiletries, essential oils and castor oil, stood at USD 19.09 billion during the year 2018-19 and stood at USD 15.67 billion during April 2019-January 2020 (provisional). The US, the UAE, the UK, Bangladesh and Saudi Arabia are the leading importers of cosmetics, toiletries and essential oils. During April 2019-January 2020, exports of dyes increased 9.12 per cent year-on-year to USD 2.27 billion.

The promotion of product groups such as dyes and dye intermediates, basic inorganic and organic chemicals, including agro-chemicals, cosmetics, toiletries, essential oils, incense sticks, castor oil and its derivatives, is handled by the Basic Chemicals, Cosmetics & Dyes Export Promotion Council, which is popularly known as CHEMEXCIL. The Council organises promotional events and fairs to help exporters identify potential markets abroad and providing publicity and marketing back-up.

The demand for speciality chemicals is expected to grow at 12% CAGR from FY19-22. The main reasons for the current growth of this segment are; rising disposable income, median age of population, urbanisation and growing penetration and demand from rural markets. In the terms of geographical demand shift in production and consumption towards Asian and Southeast Asian countries in all sectors leading to increasing demand for Chemicals and Petrochemicals. Moreover shift in consumer preferences towards a healthier lifestyle and environment-friendly products also boost the demand of chemicals and open the opportunity to produce USD 111 Bn worth of chemical products by 2023 for domestic requirements.

The chemical sector is expected to double to USD 300 billion by 2025, clocking an annual growth rate of 15-20 per cent. To achieve this, government is working on a draft chemical policy that will focus on meeting the rising demand for chemicals and reduce imports. In India, chemical industry is expected to follow an accelerated growth path and is expected to double up its global share in the next decade.

Indian Specialty chemical

The Specialty chemicals market in India was valued at INR 2,356.92 Bn in FY18, and its expected to reach a value of INR 4,527.36 Bn by FY 24.Chemical industry is one of the oldest industries in India. Over the last decade, the Indian Chemical industry has evolved from being a basic chemical producer to becoming an innovative industry. With investments in R&D, the industry is registering significant growth in the knowledge sector comprising of specialty chemicals, fine chemicals and pharmaceuticals.

Specialty chemicals market share is majorly driven by increasing population along with rapid industrialization resulting in decreased arable land. Significant increase in yield is possible through agrochemicals use such as fungicides. The Indian government is promoting agrochemicals use to secure food supply to meet the increasing food demand owing to drive industry growth. Robust growth in end user industries including construction and automotive will boost the Indian specialty chemicals market size by 2025. These compounds are used in adhesives and paints & coatings, which are widely used in automotive as well as construction industry. Furthermore, increasing consumer demand for lubricants to reduce frictional forces in the vehicles will enhance growth.

Indian Dye Industry

According to a report by Federation of Indian Chambers of Commerce and Industry (FICCI), the chemical industry in India has a market size of nearly USD 163 Billion and is expected to grow with a CAGR of 9% for the next five years. Chemicals industry in India is highly diversified, covering more than 80,000 commercial products. It is broadly classified into Bulk chemicals, Specialty chemicals, Agrochemicals, Petrochemicals, Polymers and Fertilizers. Indias proximity to the Middle East, the worlds source of petrochemicals feedstock, makes for economies of scale. India is a strong global dye supplier, accounting for approximately 16% of the world production of dyestuff and dye intermediates.

The Indian Dye and Dyestuffs Industry is an important aspect of the Indian Chemical Industry that significantly contributes to the latters growth. According to a recent survey, the Indian dyes market is poised to generate revenue of INR 48,000 crores by 2022. There is no reason why one should not be hopeful for a bright future for this sector, which will lead to more jobs, more exports, and overall growth of the Indian Chemical Industry.

While nearly 1000 units in the unorganized sector contributing to nearly 35% of the total dyestuffs manufactured in India, the rest comes from 50 large production facilities belonging to the organized sector. These chemical products find several applications in industries such as textiles, paper, plastics, printing ink, and foodstuff industries, the textile industry accounts for nearly 80% of the dyes and dyestuffs consumption. The growth of the textile and leathers industry directly impacts the growth of the dyes industry. Due to the availability of the necessary raw materials and the regional hegemony of Gujarat and Maharashtra over the textile industry, nearly 90% of dyestuff production occurs there.

Despite the fact that India started out as an importer for dyes, due to persistent growth, India now exports dyes and dyestuffs to mostly all the countries it once imported them from. India exports dyes to various major economies such as USA, Turkey, Bangladesh, China as well as Germany.

Today, India exports dyes and dye intermediates to those countries on which it was once dependent for imports and India offer other countries a wide variety of dyes that include reactive, acid, inkjet, disperse, and leather dyes. With advancement in technology, cheaper production techniques, and government support, India will not only be one of the leading suppliers of dyes but will, in fact, be the leader.

Global Dye Industry

The global dyes and pigments market size was valued at USD 33.2 billion in 2019 and is anticipated to progress at a revenue-based CAGR of 5.0% from 2020 to 2027. Increasing demand from various applications such as textiles, paints and coatings, construction, and plastics are expected to drive the market growth. Manufacturers of dyes and pigments are actively venturing into enhancing their products by utilizing advanced technologies for efficient removal of environmental and hazardous pollutants during the manufacturing process.

Manufacturers of the products are likely to experience varied production costs due to volatility in the price of raw material such as benzene. Wide distribution channel in the market is achieved through both physical retail stores and online retailing. Availability of the product online has increased the consumer base for the companies and also witnesses higher reach which is anticipated to drive product demand.

The growth in construction industry, globally, has been a significant factor contributing to the demand for dyes and pigments. Countries such as U.S, U.K, China, Indonesia, India, Saudi Arabia, and UAE are the major countries exhibiting significant global growth potential in the construction sector. Growing population coupled with increasing industrialization has encouraged governments to increase their construction spending to expand infrastructural development. As a result, increasing construction expenditure across the world is expected to create massive demand for dyes and pigments in coming years.

Global Textile Industry

The global textile market size was valued at USD 961.5 billion in 2019 and is estimated to exhibit a CAGR of 4.3% from 2020 to 2027 owing to the increased demand for apparels, especially in developing countries such as China, India, Mexico, and Bangladesh, according to Grand View Research.

The U.S. is expected to be the largest market for textiles in the North American region. Textile companies in the region focus on restructuring their businesses, developing effective work processes, and investing in niche products. Natural fibers are anticipated to be the largest product segment in the region on account of the rising demand from the fashion and apparel industry.

Chemicals play an important role in the textile industry. Acetic acid, oxalic acid, sulfuric acid, and soda ash are some of the basic chemicals during textile manufacturing. Chemicals are used as finishing and dyeing agents in order to improve the appearance of textiles. The rising importance of the physical appearance of textiles is expected to drive the segment growth over the forecast period.

Asia Pacific is the largest regional market and is anticipated to register a substantial CAGR of 5.6% in terms of value over the forecast period. This is attributed to the rapidly increasing demand for apparels, particularly through e-commerce portals. Moreover, manufacturers prefer setting up manufacturing units in countries such as China, India, Bangladesh, and Pakistan owing to high cotton production and low labour costs.

Indian Textile Industry

Indias textiles sector is one of the oldest industries in Indian economy dating back several centuries. Indias overall textile exports during FY 2017-18 stood at USD 39.2 billion and is expected to increase to USD 82.00 billion by 2021. Indias textile and apparel exports stood at USD 38.70 billion in FY19 and is expected to increase to USD 82.00 billion by 2021 from USD 11.92 billion in FY20 (up to July 2019).

The Indian textiles industry is extremely varied, with the hand-spun and hand-woven textiles sectors at one end of the spectrum, while the capital-intensive sophisticated mills sector at the other end of the spectrum. The decentralised power looms/ hosiery and knitting sector form the largest component of the textiles sector. The close linkage of the textile industry to agriculture (for raw materials such as cotton) and the ancient culture and traditions of the country in terms of textiles make the Indian textiles sector unique in comparison to the industries of other countries. The Indian textile industry has the capacity to produce a wide variety of products suitable to different market segments, both within India and across the world.

The Indian textiles industry, currently estimated at around USD 150 billion, is expected to reach USD 250 billion by 2019. Indias textiles industry contributed seven per cent of the industry output (in value terms) of India in 2018-19. It contributed two per cent to the GDP of India and employs more than 45 million people in 2018-19. The sector contributed 15 per cent to the export earnings of India in 2018-19. The future for the Indian textile industry looks promising, buoyed by both strong domestic consumption as well as export demand. With consumerism and disposable income on the rise, the retail sector has experienced a rapid growth in the past decade with the entry of several international players like Marks & Spencer, Guess and Next into the Indian market. High economic growth has resulted in higher disposable income. This has led to rise in demand for products creating a huge domestic market.

COVID-19 Situation

The outbreak of Covid 19 pandemic and consequent lockdown across the country has caused the shutdown of chemical manufacturing units immediately after the lockdown. However, selective chemical companies either continued manufacturing or resumed due their essential nature. Hence, the situation will create a limited impact of Covid 19 on Indian specialty chemical companies in the medium term.

Financial Performance of the Company

A. Standalone Financial Performance :

i) Total Revenue:

During the Financial Year 2019-20, total revenue of the Company is reduced by 8.59% from INR 1064.69 Crore to INR 973.18 Crore as compared to the previous Financial Year 2018-19 on account of closure of plants and decrease in average price realization by 11% of the products as compared to FY 2018-19 due to outbreak of Global Pandemic COIVD 19 in the later part of March 2020.

ii) Expenditure:

During the year, total expenditure of your company has been marginally reduced by 2.59% from INR 938.34 Crore in FY 2018-19 to INR 914.03 Crore in current FY 2019-20. Operational expenses of INR 872.89 Crore include a significant amount of Legal & Professional fees related to the Singapore court cases.

iii) Employee benefits expenses:

During the Year under review, the Employee benefits expenses increased by 20.27% from INR 34.28 Crore to INR 41.23 Crore as compared to the previous Financial Year. The employee benefit expenses have been increased on account of recruitment of new employees in the company.

iv) Finance Cost:

The finance cost is slightly increased from INR 4.39 Crore to INR 4.52 Crore as compared to the previous Financial Year 2018-19, which mainly consist finance charges for letter of credit.

v) Operational & other Expenses:

The Operational & other expenses reduced by 3.60% from INR 905.45 Crore to 872.89 Crore as compared to the previous Financial Year 2018-19.

vi) Net Profit:

Due to COVID-19 pandemic effect and decrease in process of products, the Net Profit is decreased from INR 119.83 Crore to INR 49.83 Crore as compared to the previous Financial Year 2018-19.

vii) Non-Current Liabilities:

The non-current liabilities have decreased by 32.38% from INR 166.18 Crore to INR 112.37 Crore as compared to the previous Financial Year 2018-19.

viii) Current Liabilities:

The current liabilities have increased from INR 267.34 Crore to INR 302.14 Crore as compared to the previous Financial Year 2018-19.

ix) Non Current Assets:

The non-current assets have increased by 10.74% from INR 692.19 Crore to INR 766.54 Crore as compared to the previous Financial Year 2018-19.

x) Current Assets:

The current assets have been reduced by 13.73% from INR 372.07 Crore to INR 320.99 Crore as compared to the previous Financial Year 2018-19.

B. Consolidated Financial Performance:

i) Total Revenue:

The total revenue has been reduced by 6.15% from INR 1396.50 Crore to INR 1310.68 Crore as compared to the previous Financial Year 2018-19.

ii) Total Expense:

The total expenses have been reduced by 3.06% from INR 1205.45 Crore to INR 1168.57 Crore as compared to the previous Financial Year 2018-19.

iii) Net profit:

In the Current Financial Year, your Company has recorded net profit (before OCI) of INR 375.50 Crore as compared to INR 164.12 Crore of the preceding financial year 2018-19 which is significantly increased by 128.80%.

iv) Non Current Liabilities:

The non-current liabilities have decreased by 32.53% from INR 172.51 Crore to INR 116.40 Crore as compared to the preceding Financial Year 2018-19.

v) Current Liabilities:

The current liabilities have increased by 11.12% from INR 318.51 Crore to INR 353.94 Crore as compared to the preceding Financial Year 2018-19.

vi) Non Current Assets:

The non-current assets have increased by 20.71% from INR 1567.32 Crore to INR 1891.90 Crore as compared to the preceding Financial Year 2018-19.

vii) Current Assets:

During the year, your Companys total current assets have been increased by 4.24% on Y-O-Y basis, from INR 491.03 Crore to INR 511.87 Crore as compared to the preceding Financial Year 2018-19.

Material Development in Human Resources

Our Employees are fundamental and most valuable assets of the Company. The Company has encouraging working environments that motivate our employee at all level. The company has undertaken various initiatives and implemented policies which are drawn up to engage our employees, especially the younger generation and ensure a healthy balance between business needs and individual aspirations. To motivate, incentivize and reward employees, your Company has instituted employee stock options plan.

Details of Key Financial ratios

In compliance with the requirement of listing regulations, the key financial ratios were examined and the ratios with significant changes of 25% or more as compared to the immediately previous financial year have been provided hereunder along with the explanation for the changes, if any.

Key Financial Ratios FY 2019-20 FY 2018-19 Reason for Significant Change, if any
Interest Coverage Ratio 14.00 29.74 The finance cost is in line with previous financial year. In FY 2020, reduction in profitability on account of decrease in prices of products has resulted into lower Interest coverage ratio. However, reporting year interest coverage ratio is 14 times, which is well above the standard coverage ratio.
Operating Profit Margin 6.11% 12.58% Operating Profit Margin for FY2020 is reduced mainly on account of 1) Reduction in per unit sales prices of various products, though sales volume has increased.
2) Increase in cost specially legal and professional cost as well as pollution treatment cost.
3) Impact of covid-19 in Q4 of 2020.
Net Profit Margin 5.14% 11.30% Net Profit Margin for FY 2020 is reduced mainly on account of 1) Reduction in per unit sales prices of various products, though sales volume has increased.
2) Increase in cost specially legal and professional cost as well as pollution treatment cost.
3) Impact of covid-19 in Q4 of 2020
Details of change in 7.40% 19.03% 1) Reduction in per unit sales prices of various products, though sales volume has increased.
Return on Net Worth 2) Increase in cost specially legal and profession cost as well as pollution treatment cost.
3) Impact of covid-19 in Q4 of 2020

Cautionary statement:

Certain statements made in this Report relating to the Companys outlook, estimates, predictions etc. may constitute "forward looking statements" within the meaning of applicable laws and regulations. Actual results may differ from such estimates, whether express or implied. Several factors that could make a difference to Companys operations include climatic conditions and economic conditions affecting demand and supply, changes in Government regulation tax regimes, natural calamities, etc. over which the Company does not have any direct control.

For and on behalf of Board of Directors
Date: August 10, 2020 Pravin Kiri
Place: Ahmedabad Chairman