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.
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