laxmi organic industries ltd share price Management discussions


Global Economic Outlook

The global economy saw a muted FY23 with 2022 global growth estimated at ™ 3.6%. FY24 is estimated to see a slower growth with 2023 global growth being estimated at ™ 2.9%.

Rising inflation and the Russia - Ukraine unrest were the large overhangs on the economic performance.

The Russia - Ukraine strife led to a number of economic challenges including:

Higher Energy and Food Prices

Ukraine and Russia are major exporters of wheat, corn, and sunflower oil. Russia is a major supplier of Oil and Gas, especially to continental Europe. The war disrupted the global food and energy markets, leading to higher prices for these commodities, straining business and household budgets and adding to the increasing inflation. Wheat prices have increased by about 50% since the start of the war while the oil prices rose to a high of USD 130 per barrel before starting to come down. Oil prices in May 2023 were at USD 75 per barrel with an estimate of price increases likely amidst reducing production.

Inflation

Globally, inflation has been on the rise in FY23. The Euro area saw the steepest rise with inflation reaching 10.6% in October 2022 before correcting sharply to 6.9% in March 2023. The large correction was due to the drop in energy prices. As of May 2023, the Eurozone inflation is at 6.1%, the lowest since February 2022 but the underlying price pressures remain strong. The US annual inflation rates increased to the highest in this century in June 2022 at 9.1% before starting to correct and reaching 5.0% in March 2023. As of May 2023, the US annual inflation rate was at 4.0%, lowest since April 2021 but like the Eurozone, the price pressures remain a worry for policy makers.

Financial Market Volatility

The Russia - Ukraine conflict and the rising inflation made investors exceptionally risk averse leading to significant market volatility and liguidity tightening. Stock markets have experienced sharp declines (S&P lost about 10% since April 2022), and bond yields have risen too (US 10-year Government bond yields increase over 25% since April 2022 with monthly changes in single digits for 3 consecutive months for the first time since December 2021). The interest rates across the world remain at levels which are probably the highest in recent years.

Indian Economic Outlook

In FY23 the Indian economy witnessed a 7.2% growth with the GDP touching USD 3.75 trillion mark. Currently, India is the fifth largest economy in the world after the USA, China, Japan and Germany. While manufacturing sector grew at 8.6%, the services sector grew at 8.8% in FY23.

The outlook for FY24 is muted given the global slowdown and recession worries. However, the strong domestic consumption could absorb some of the shocks. Private consumption in the country is already back to pre-pandemic levels. Estimates for FY24 Indian economic growth stand at about 6.3%.

Energy prices in India

Indias consumption of petroleum products increased 10.2% YoY in FY23. As global oil prices saw a rise, India felt the impact too. However, this impact was absorbed by the share of Russian imports increasing to almost 20% from a mere 2% YoY. Indias demand of petrol and diesel like products is expected to increase at about 7.7% in 2023. Indian coal imports increased 23% YoY led by a 28.5% increase in steam / thermal coal. With the Russia Ukraine conflict impacting commodity prices, average landed priced of imported coal was 58% higher in H1FY23 before moderating slightly in H2FY23. The coal demand in India is likely to continue to grow in FY24. The trend on electricity consumption is also upwards driven also by the climate change impact resulting in much hotter summer. The electricity prices on IEX saw a 35% increase YoY driven by demand supply mismatch. The estimates of electricity consumption indicate an increase of demand growth of 5.5% - 6.0% with the IEX prices not declining as of May 2023.

Food Prices in India

The food prices in India normalised from the start of FY23 to its end, however, are at higher-than-normal levels. While the monsoon is predicted to be normal, the timing and spread are to be watched out for. While a normal monsoon could help keep food prices in check, unseasonal rains that destroy crops could have an adverse impact. Further, according to the Food and Agriculture Organization of the United Nations (FAO) the disruption in the global wheat and other food commodities is unlikely to be alleviated, leading to some price pressures continuing.

Interest Rates

Reporates increased at the fastest pace in recent years in FY23, ending at 7.5% in March 2023 vs 4% in April 2022. The increase rate hikes have been necessitated by the higher than RBI threshold inflation and the US Feds interest rates hike. While the domestic inflation seems to have slowed, the US interest rates continue to increase having increased from 0.25% in April 2022 to 3.75% in May 2023. The RBI has also thus, in line, indicated that it controls to monitor the situation closely and take the most appropriate measures going forward.

Global Chemical Sector

2022 was a challenging year for the global chemical industry, especially in Europe where the energy prices were the most impacted. As 2023 set in, while energy prices saw softening the overall global economic situation remained depressed. In 2022 the growth of chemical industry (both bulk and speciality chemicals) was the lowest in Europe while the US and Asia fared better. Given the slower anticipated global economic growth, higher prices born of inflation and higher inventory in the chemical industry supply chain, a softer patch for the industry is the likely outcome in 2023 with estimates of a 2.9% increase in global production. Beyond 2023, as the global economy recovers there should be further expansion in demand for chemistry products. The biggest risk to the outlook is persistent inflation and continued increases in interest rates that will prolong and deepen the coming downturn.

For 2023, Fitch ratings estimates that while demand for speciality chemicals will vary by markets and industry, given the higher interest rates, the largest sector that will see demand impact will be construction. The demand on the other extreme is likely to improve for the automotive sector benefitting from the greater chip availability. 45% of the speciality sector demand that goes into Pharmaceuticals and Agrochemicals is likely to see demand flattish through the year.

On the supply side, the US production that saw a strong YoY growth of ™ 4% in 2022 is expected to see a YoY drop of 1.2% in 2023. The situation in Europe seems to be more uncertain with the larger European producers looking to control and cut costs in Europe and the industry feeling that conditions continue to be "persistently difficult". However, the American Chemistry Council, a US trade group, predicts that chemical production in Western Europe will grow by

0.8% in 2023 after declining 3.2% in 2022.

While the demand and supply side outlooks remain cautious, the global chemical industrys investment is going to be strong especially driven by the focus on innovation, sustainability, and digitalization. Innovation across the industry is on finding new product and process alternatives that are sustainable, resilient, and efficient. Sustainability being front and centre for the world now, the chemical industry is leading with investments in emissions-reducing technologies and solutions for its own production and the broader economy. In the last five years global chemical companies have invested heavily in information technology to convert most if not all of operations to digital platforms. Enterprise-wide impact is expected to be seen rather than just proof of concept implementations especially in increasing supply chain resilience and transparency and monitoring of operations and emissions.

The chemical industry has seen many changes in technology, operations, and business models over the last hundred years since it started. The pace of change that has accelerated in the 2020s, however, this is like never before. While demand, supply and R&D will continue to be important across the industry, the future of the exceptional players will be defined by innovation and digitalisation and that is where the industry transformation and consolidation are likely to head.

Indian Chemical Sector

Despite the rising interest rates, inflation, global supply chain disruptions and the other challenges of 2022, the Indian chemical sector proved to be resilient and continued to deliver great value to stakeholders. The pandemic followed by global geopolitical events, forced many major multinational companies to turn their sights to more reliable and sustainable downstream supply hubs, thus aiding Indian petrochemicals and speciality chemicals manufacturers to augment capabilities and capacities.

From 2000 to 2022, it is estimated that the Foreign Direct Investment (FDI) in the Indian chemical industry was ™ USD 21 billion and by 2025 it is estimated that the investment in Indian chemical sector will touch ™ USD 107 billion. Leaving aside FDI, investment by the chemical industry in India was the leading private sector capex announcements in FY23, accounting for 45% of the total projects by value. Low infrastructure, material, and labour costs along with very competitive corporate tax rates make India a very lucrative global supply hub. Increasing urbanisation and domestic demand along with the global demand for diversification of supply chain for value added products from strong process engineering and low-cost manufacturing locations add to the demand side interest. The government, cognisant of the same, has been active in providing the right impetus to the industry. All of this, combined with the global realignment, is indicative of a golden period for the Indian chemical industry.

McKinsey estimates that during 2021 - 2027 the Indian chemical industry will grow by 11% -12% and then during 2027 - 2040 in excess of 7% (between 7% -10%). This means that by 2040, India will triple its global market share. In the same period, domestic demand is expected to grow 5.5-6xto reach anywhere between USD 850 billion - USD 1000 billion. A trillion-dollar size of domestic demand along with a third of global market share is the reason that the pace of investment by the industry is as robust as it is.

Within the time frame of up to 2040, it is estimated that the speciality sub segment of the industry, which today is about 22% of the industry (valued at ™ USD 32 billion), will be the only net exporter with over USD 70 billion of exports (up from USD 15 billion in 2021). The growth of agrochemicals and those driven by the food segment are the fastest growing with CAGRs of™ 8%.

India retains advantages on most of the factors driving growth, however, as a country and industry we need to work on bridging the gap of the R&D talent, backward integration and ease of doing business.

Company Overview and Outlook

Incorporated as Laxmi Organic Industries Limited in 1989,

LOIL or the Company is one of the largest Indian players in Acetyl Intermediates and Speciality Intermediates which are the Ketene/ Diketene derivatives. The Company has commenced its journey into the Fluoro Intermediates segment as the first phase of its new plant was commissioned.

Over the years, LOIL has successfully established a very loyal customer base among diversified industries. The focus on customer needs that can be solved via R&D has enabled efficient solutioning and rising wallet share of the established client base. The Company has also been proactive in its investment in Environment, Health and Safety initiatives and thus has retained its Responsible Care certification for the third consecutive time in FY23.

Acetyl Intermediates (Al)

Commissioned with Swedish technology that has been scaled and improved on over the years, this business for the Company provides it a leading position not only in India but the world.

A top 7 producer of Ethyl Acetate (ETAC) globally, LOIL has the largest market share (>30%) in India and is the only Indian Company with on ground presence in Europe for over ten years now. In addition to Ethyl Acetate, the Company manufactures a diverse range of other products. Through strategic investment initiatives, the Company consistently seeks opportunities to expand and diversity its product portfolio.

The products in this segment are highly versatile solvents with applications across multiple high growth industries like pharmaceuticals, agrochemicals, flexible packaging, auto coatings and printing inks. The essentials solvents business under the Al category are slated to grow at " 5-6% CAGR from 2022-2028.

The feedstocks for this business are acetic acid which is largely imported and ethanol which is procured both domestically and from overseas. Laxmi has strategically located manufacturing facilities which are in close proximity to the largest port in the country, ensuring supply chain efficiencies.

The Company has its own distillery operations, which include two in-house distilleries in Satara and Kolhapur, supporting backward integration and providing some flexibility to the business. The output of these distilleries is also used to supply fuel blending ethanol to Oil Marketing companies. Having achieved best-in-class cost of production in this asset, the Company enjoys stable returns over the cycle despite fluctuations at different points in time. The business remains cash generative and a low CAPEX intensive business.

Speciality Intermediates (SI)

This business was established using German technology has grown over 10x in the last 10 years. The portfolio of over 40 products caters to various applications across sectors from pharmaceuticals to agrochemicals to coatings to paints and dyes etc. LOIL remains the largest Indian player in this segment with over 50% market share. Today, the Company is one of the very few global players that have such an extensive backward integrated portfolio from Diketene to downstream derivatives. R&D has further enabled this business to expand to other adjacent chemistries. Global market for this segment is around USD 1.7 billion and is expected to grow at " 5-6% CAGR in the next 5 years.

There are multiple tailwinds driving demand for Diketene derivatives with consumer segments showing strong growth globally. Global crop protection chemicals market clocked "USD 79 billion in 2022 having grown at a 9.9% over 2021. The market is expected to witness a similar growth in the next 5 years. Whereas the other important Diketene derivatives application in the pharma sector is also expected to witness a high growth of" 9% CAGR from USD 1.5 trillion in 2021 on a year-on-year basis.

During FY23, two large CAPEX in the SI segment were completed and the plants are now operating at optimum capacity. Higher contractual business gives this business a less volatile performance, and the higher margins contribute significantly to the Companys bottom line.

Fluoro speciality Intermediates (FI)

The Miteni SpA assets acguired by LOILs subsidiary have all been successfully dismantled and relocated to India.

The site being set up at Lote Parshuram, Maharashtra will be commissioned in phases over FY24. The first phase was commissioned in May 2023.

Global fluorochemicals market is growing at an attractive CAGR of 5-6% and is expected to touch USD 30 billion by 2025. Indian market itself for fluorochemicals is growing at a strong pace of 12% CAGR and given the increasing demand from pharmaceuticals, agrochemicals and now EV and renewables applications, this growth rate could accelerate to higher levels of 12-14% over next few years. Indian market size is currently around USD 450 million and expected to reach USD 1 billion by FY26. There has been a tremendous surge in demand for fluorine based chemical products in the field of agrochemicals in tandem with the rise of use in pharmaceuticals. Fluorine has a special place in the toolkit of the agrochemical and pharmaceutical chemist. It has a significant impact on the biological activity of agrochemicals like fungicides, insecticides, herbicides, acaricides, and nematicides. Fluorine containing pesticides account for " 67% of the overall pesticides and over 53% of the pesticides introduced in the previous 2 decades. On the other hand, fluorine containing drugs account for " 2% of the drugs approved by FDA in the last 5 years.

FI segment is a complementary to Laxmis existing business and allows the Company to leverage existing customer relationships. The products under Mitenis portfolio are currently not manufactured in India by any other player differentiating LOIL groups foray. At the start, the Group aims to establish the technology with a first set of 8-10 products and then continue to increase the pipeline. R&D and kilo lab efforts precede the commercialization well in time to ensure that the ramp up efforts are not unduly delayed. As the commissioning and the ensuing revenues progress the diversification of the Companys business will also grow.

Supply Chain Operations

With years of relationships with local and foreign vendors, efficient planning and in-house experience, the Company has robust supply chain operations, to cater to its domestic and international customers. Most of its suppliers are organizations of repute and have healthy financial standing and where feasible backward integrated. The Company due to its financial strength and long-standing credible relationships with its suppliers, enjoys industry-leading credit terms and supply preference from most of its major suppliers of raw materials at competitive prices. Proactive management and investment in storage facilities (in India and Europe) enables the Company to manage supplies timely, ensuring operational continuity with fiscal prudence and managing customer demand. LOILs supply chain operations are supported by its offices in China and Netherlands.

Risk Management

The Company has a well-appointed Risk Management & ESG Governance Committee, whose function is to identify, assess and prioritize potential risks and threats. It also establishes effective mitigation measures to be adopted, in case the risk becomes a threat, which essentially softens any potential blow to the Company. The Company has identified and prioritized the following risks during FY23.

RISK CATEGORY

RISK DESCRIPTION

Sustainability (ESG)

Risk of not meeting with fast changing EHS regulations, more rigorous societal demand and increasing investor expectations.

Sustainability (ESG)

Risk of having single site dependency, which may cause vulnerability and

potential disruptions, posing a significant threat to the business continuity and resilience.

Operational

Risk relating to potential vulnerabilities and uncertainties associated with individuals in top managerial positions within the Company. This risk may arise from factors such as their competence, decisionmaking abilities, integrity and potential conflict of interest, which could impact the overall performance and reputation of the Company.

Information

Risk of technology/data leakage, which can result in significant reputational damage and financial loss for the Company.

Strategic

Increased competitive pressure due to emergence of another domestic player in Speciality chemicals business.

ESG

Acknowledging the role businesses play in shaping communities and impacting society, the Company is committed to the highest Environmental, Social, and Governance (ESG) standards,. In line with this commitment, the Company has invested in employee safety, reducing effluent load and working with the local communities to enable inclusive growth. The BRSR report published, details the Companys endeavors across ethical governance, environmental presentation and social impact. The Company believes that this is an area of constant growth and improvement and remains steadfast in its resolve to further its efforts so that it grows the business while underpinning its mission to drive long-term value for shareholders, communities,and the environment alike.

Human Resources

Recognizing the invaluable role its workforce plays in the Companys growth, the Company places great emphasis on fostering the personal and professional development of its employees. The Company regularly conducts diverse training and development initiatives aimed at upskilling its staff and enhancing their knowledge base. Throughout the year, the Company has maintained a harmonious relationship with its employees and expresses gratitude for their significant contributions for the operational growth and commends the employees for their proactive initiatives. As of March 31, 2023, the Company boasts a workforce of 874 permanent employees.

Quality Assurance

The Company is committed to providing the highest quality products and services to its customers, and it has enabled customer stickiness and repeat business for Laxmi over the years. The team comprises dedicated and qualified professionals for its various business functions. Its infrastructure has been equipped with the latest technology and effective processes have been put in place to maximize quality output. The Company also has a robust supplier quality evaluation process, which ensures that the materials received comply with its high internal standards and specifications, designed to satisfy the requirements of its customers.

Performance Overview

Details of significant changes in key financial ratios

PARTICULARS

FY22* FY23 % DIFFERENCE

COMMENT

Debtors turnover

(Average debtors as no. of times of sales) (average debtors is the average of opening and closing debtors)

5.71 4.64 (19%)

Average debtors went up by 15% while sales was lower by 7% contributing to the movement in debtors turnover ratio

Inventory turnover

(Average inventory as no. of times of sales) (average inventory is the average of opening and closing inventories)

8.01 6.3 (21%)

The volumes have increased and hence the average inventory has increased while a combination of domestic procurement and lower prices have reduced cost of goods sold

Interest Coverage Ratio

(Finance cost / Earnings before interest and tax)

21.64 10.93 (49%)

Higher borrowings as compared to FY22 as detailed in debt equity ratio along with lower margins led to lower Interest Coverage Ratio

Current Ratio

(Current assets / Current liabilities)

1.62 1.52 (6%)

NA

Debt Equity Ratio (Net debt / Net worth)

0.08 0.26 238%

The Company only had a longterm ECB at the end of FY22. In September 2022 and in December 2022 the Company has borrowed 7 500 million and 7 900 million, respectively. Both these were partially reimbursement and partially for new CAPEX.

Operating Profit Margin %

(Operating profit before tax / Revenue)

10.11 6.74 (33%)

The lower commodity prices have impacted top and bottom line while the fixed cost as a % of revenue is almost flat

Net Profit Margin %

(Profit after tax / Revenue)

8.33 5.01 (40%)

The lower commodity prices have impacted top and bottom line while the fixed cost as a % of revenue is almost flat

‘Financial Statements are restated for March 31, 2022 to give effect of the acquisition by merger of AHPL and YCPL.

Internal Controls Systems and Adequacy

Governance rests on a reliable foundation of systems and controls, with the Companys ERP system serving as its cornerstone. Teams are equipped with the necessary training to proficiently utilize this system. To ensure seamless operations, the Companys Information Technology function diligently maintains process uptime, connectivity, and the integrity of hardware and software, thereby enhancing engagements and collaborations. The Companys controls, including financial controls, are well- aligned with its operations. Internal audits, entrusted to a reputable firm of Chartered Accountants, are conducted periodically, with reports being submitted to the Audit Committee of the Board. As with the entire industry, LOIL IT team is also working on constant improvement and enhancing digitalization.

Cautionary Statement

Statements in the Management Discussion and Analysis describing the objectives, projections, estimates and expectations of the Company, its direct and indirect subsidiaries and its associates, may be ‘forward-looking statements within the meaning of applicable laws and regulations. Actual results might differ substantially or materially from those expressed or implied. Important factors that could make a difference to the Companys operations include, among others, economic conditions affecting demand/supply, price conditions in the domestic and overseas markets in which the Company operates, changes in the Government regulations, tax laws and other statutes and incidental factors.