Meghmani Organics Ltd Management Discussions.

Meghmani Organics continued to successfully implement its aggressive strategy for growth in FY18 delivering an impressive 27% YoY growth in Revenue, 49% YoY growth in EBITDA and 95% YoY growth in PAT. The stellar results bare testimony to the success of the Companys strategy to focus on higher-value products coupled with increasing utilisations and reduction in debt. Meghmani Organics has today emerged as a well-diversified player in chemicals operating in a leading position across its three high potential businesses as: 1) Among Top 3 (capacity wise) global pigment players with a global market share of 14%, 2) A leading vertically-integrated agrochemical player and 3) The 4th largest Caustic-Chlorine player in terms of capacity in India. The Company operates 7 facilities in Gujarat, including 3 major facilities for Pigments, Agrochemicals and Basic Chemicals in Dahej, the chemicals zone of Gujarat. Over the years, the Company has built an extensive pan-India and global footprint with presence in more than 75 countries and a portfolio of over 400 clients. Last year, the Company initiated a landmark capex plan involving 6.4 bn of investments in Basic Chemicals. With the Company already operating at very high utilisation levels, this project is expected to be a major growth-driver going forward. The capex, which involves three projects, progressed as per plan during the year. The First Project of Chloromethane (CMS), with three co-products i.e. Methylene Dichloride (MDC), Chloroform and Carbon Tetra Chloride (CTC), is expected to be commissioned by December18. This is to be followed by the Second Project related to expansion of Caustic Soda by 300 TPD, and Third Project, involving setting up of Hydrogen Peroxide plant of capacity 30,000 MTPA. Both of these projects are expected to be commissioned by June19.

FY19 is anticipated to see the growth momentum across all segments. In the Pigments Segment, the Company is already among the global leaders and is looking to enter new kinds and colours of Pigments. Agrochemicals business is expected to continue its good performance on the back of increased demand following better monsoons in FY18. The Basic Chemicals business is also expected to grow on the back of the continued growth in Caustic Soda and ramping up of Caustic Potash Plant.

FY18 proved to be yet another year of profitable growth

Consolidated revenue witnessed growth of 27% from 13,963 mn in FY17 to 17,747 in FY18 on the back of 29% growth in exports and 25% growth in domestic sales. Sales of high margin products and improved raw material prices resulted in increase of 360 bps in EBITDA margin reaching 24.3% as compared to last years margin of 20.7%. EBITDA for the period jumped 49% to 4,312 mn as compared to 2,888 mn in FY17. PAT grew by 95% to 1,713 mn driven by 22% reduction in finance cost, taking the PAT margin to 9.7% in FY18 from 6.3% in FY17. Return on Capital Employed (ROCE) for the Company continued to increase, reaching 32% in FY18 from 21.2% in FY17 on the back of reduced debt and higher margins.

Business Segments I. Pigments (a) Industry Opportunity

Global Pigments market is expected to reach $27.6 bn by 2023

The global Pigments market was valued at $21.7 bn in 2017 and is expected to grow at 4.1% CAGR to reach $27.6 bn in 2023, As the future of the Pigments industry depends on the end-user industry, the constantly growing paint and coatings and plastics industry have been the main drivers of its growth. Paint and coating industry is expected to grow from $172.3 bn in 2017 at a CAGR of 4.5% between 2018 and 2023. One of the key driver for the industry is the increased demand for effect pigments/solar reflective pigments , especially from the automotive sector. The Pigments industry in 2017 faced challenges on multiple fronts with changing environmental regulations, new technologies and rising cost of raw materials. Tightened environmental regulation, particularly in Asia Pacific Region, which accounts for 40% of the total business, led to consolidations throughout the supply chain. Also, the regulations have had an adverse effect on the availability of raw material for the industry.

Organic Pigment: A major contributor to industry growth

The global Organic Pigment industry is expected to grow at a rate of 4.5 % between 2018-2022. The major segments of Organic Pigments include Azo Pigments, Phthalocyanine Pigments and Quinacridone Pigments. Out of these, Azo Pigments has the largest market of $3.9 bn and is expected to grow at a CAGR of 4.7% between 2017- 2023.

The growth in the Organic Pigment industry can be attributed to the growth of its end-user industries mainly printing inks, paints and coatings and textile industries. Developing countries like India and China are fast becoming the centre of the global Organic Pigments market from both the supply and demand side. The regulatory environment, labour laws and wages in the Asia Pacific region are the major factors driving this global shift.

Moreover, Organic Pigments provide a wide variety of colour spectrum as compared to their inorganic counterparts and, hence,are expected to substitute them for some specific applications in the coming years.

Indian Pigments industry: Great potential in the future

Indian Pigments sales have been growing at a rate of 13-14 % over the past five years. This growth is mainly due to rise in exports. But, it has been observed that the capacity utilisation in the Pigments industry has been low at 67% which shows that there is a great potential of increasing the production and business in this industry. The per capita consumption of Pigments in India is still very low as compared to that of other high consuming countries which shows that, in the coming years, domestic consumption should rise at a very high rate.

It is expected that India will be the Second largest market for Organic Pigments which has been growing fastest, in terms of demand, during the past few years. The Indian Pigments industry is highly fragmented with many unorganised players, but, it is the large scale organised companies which dominate the market and have major market share.

(b) Business Overview

Meghmani Organics is amongst the largest manufacturers of Phthalocyanine-based Pigments with a global market share of 14% in volume terms. The Company has vertically integrated facilities manufacturing CPC Blue (an upstream product which too is sold to other Pigments manufacturers) and end products Pigment Green and Pigment Blue. These Pigments products are used in multiple applications, including paints, plastics and printing inks.

The Companys Pigments business enjoys strong global presence with exports accounting for 79% of net sales. Customers comprise mainly MNCs, such as Sun-DIC, Flint Group, Akzo Nobel, DuPont and PPG Industries. The Companys relationship with its clients is sticky, with 90% business arising from repeat customers. The Company has a global distribution network. Its direct presence (with subsidiaries in the US, Indonesia, Dubai and a representative office in China) helps maintain a front-end presence and the ability to work closely with end-user customers. The Company also has warehouses in Turkey, Russia, USA, and Uruguay.

Meghmani Organics has three dedicated manufacturing facilities to manufacture Pigments Products. These are located at:

GIDC Vatva, Ahmedabad, (2,940 MTPA) where Pigment Green 7 products are manufactured

GIDC Panoli, near Ankleshwar, (17,400 MTPA), where CPC Blue, Alfa and Beta Blue, Pigment Blue 15 products are manufactured

Dahej SEZ Ltd, (12,600 MTPA) where CPC Blue, Alfa and Beta Blue are manufactured

(c) FY18 Performance of Pigments Segment:

Pigments business delivered net sales growth of 12% in FY18 and reached 5,747 mn from 5,143 mn. Although the net sales in the domestic market were down, growth was driven by increase of 29% in exports. Sales volumes were up by 11% at 16,090 MT from 14,462MT though realizations remained flat. EBITDA margin was slightly down at 15% as compared to last years 17%, resulting in a marginal decrease of 3% in EBITDA from last years 871 mn to 847 mn. The reason for the reduced profitability for the year was the increased prices of raw materials that could not be passed on to the customers fully. Utilization levels increased to 81% in FY18 from 65% in FY17.

Outlook and Strategy:

Meghmani Organics currently is the largest producer for the Copper Phthalocyanines Pigment and going forward, the Company is looking to diversify by adding new product of Pigments. The Company continues to focus on increasing its domestic presence, given the significant market opportunities. The drastic increase in the prices of raw materials has affected the profitability this year which is expected to normalize in FY19 with gradual transfer of increased costs to customers.

(d) Risks, Concerns and Threats

Drastic changes and continuous fluctuations in the prices of key raw materials are critical challenges to the growth of this industry. As the Companys revenue comprises a significant portion of business from exports, volatility of the rupees vis-a-vis the Dollar and the Euro may affect realisations. The Company is engaged in a business involving different areas such as procurement, backward and forward integration, quality, technical competence, logistics facilities, after-sales service and customer relationship. Changing competitive landscape and emergence of new technologies may impact the Companys business and future prospects.

II. Agrochemicals

(a) Industry Structure

Global Agrochemicals market is expected to grow at a CAGR of more than 4.1% from 2017-2025, crossing $309 bn from $215 bn in 2016.

The growing demand for crop protection chemicals, such as fungicides, herbicides, and insecticides, is expected to be the biggest driver of the agrochemicals industry over the forecast period. Growing population, declining arable land and increasing pest concerns are some of the other drivers of Agrochemicals market.

The demand for Agrochemicals is the highest in the Asia Pacific (APAC) region (53%), from countries like India, Sri Lanka and China, due to their major dependence on agriculture and related industries for economic growth. This market is expected to witness the highest growth over the forecast period due to the growing agro-based industries including sugar, textiles, vegetable oil manufacturing, and animal husbandry.

Indian Agrochemicals market to reach $6.3 bn by 2020

The Indian Agriculture sector remains the backbone of the nations economy accounting for about 15% of the countrys Gross Domestic Product. But, given that Indian Agriculture is highly monsoon dependent, and only a limited area has irrigation facilities, it becomes all the more imperative to make efficient utilisation of this available arable land. Further, potential loss of crop production due to pests, weeds and diseases necessitates the need to use Agrochemicals to enhance productivity. Currently, India is the fourth largest global producer of Pesticides with an estimated market size of around $4.9 bn in FY17 after United States, Japan and China. The Indian Pesticide industry is predominated with generic version products and has a substantial opportunity to explore the drugs going off-patent during 2017-2020 and through acquisitions and strategic partnerships of global giants with domestic players. The demand for Agrochemicals is split in equal proportions between domestic consumers and exports. Exports are expected to increase 10-14% on the back of increased demand from key export markets like Latin America coupled with a fall in exports from China.

Opportunities and key growth drivers for the Indian Agrochemicals Market

1. The pro-farmer budget of 2018-19 gives a positive outlook to Indian Agriculture and, in turn, the Agrochemicals Sector.

= For 2018-19, the minimum support price of agricultural commodities has been fixed at at-least 150% of input price per farm and the farm credit has been raised by 10% to 11 Lakh Crore for this fiscal.

• Tax incentives in terms of 100% deduction to the companies registered as Farmer Producer Companies and having annual turnover up to 1 bn in respect of the profit derived from post-agricultural activities for a period of 5 years from FY 2018-19.

All these measures shall improve the welfare of the farmers and the agricultural sector, thus boosting the sales of our Agrochemicals business.

2. After two years of consecutive drought, FY18 witnessed healthy monsoons and the same outlook is expected for the FY19.

3. The positive outlook for monsoons has also changed the crop protection market which was previously challenged due to deficient monsoons. The market is expected to grow at approximate 12% p.a. The growth would be largely driven by export demand which is expected to grow at 10-14% p.a, while domestic demand is expected to grow at 8-9% p.a.

4. Consumption of herbicides and insecticides in India is bound to increase in the future owing to the increasing farm labour wages and tropical climatic conditions and high production of cereals, respectively.

5. Consumption of pesticides is the lowest in India, at 0.6kg/ha compared to 13kg/ha in China. This is bound to increase in order to help boost yields.

6. Other drivers, such as rising population, decreasing per capita availability of arable land and focus on increasing agricultural yield will fuel the demand for Agrochemicals.

(b) Business Overview

Meghmani Organics is a leading vertically-integrated Agrochemicals player with product offerings encompassing the entire value chain Intermediate, Technical Grade and Formulations (Bulk and Branded). The Companys vertical integration of business allows Meghmani Organics to effectively manage raw material costs and assure a constant supply of consistent quality.

The Agrochemicals industry is highly regulated and the Company enjoys competitive advantage via 260 export registrations, 333 registrations in pipeline, 307 CIB registrations, and 35 registered trademarks. The Company has a strong global client base with exports accounting for 67% of its Agrochemical Sales. The Company exports technical as well as branded products to Africa, Brazil, LatAm, the US and European Countries. Meghmani Organics produces commonly-used pesticides for crop and non-crop applications, such as for public health, insect control in wood preservation and food grain storage. Major products include 2, 4-D, Cypermethrin, Permethrin,Metaphenoxy, Benzaldehyde, Chlorpyrifos and Profenophos. In branded formulations, the Company has established a strong pan-India presence with about 2800 stockists, agents, distributors, and dealers spread across 17 states. Key brands include Megastar, Megacyper, Megaban, Synergy, and Courage.

The Company has three state-of-the-art manufacturing facilities where capacities have been increased via debottlenecking. These are located at:

• GIDC Ankleshwar, (6,420 MTPA)

= GIDC Panoli, (7,200 MTPA)

= GIDC Dahej, (14,640 MTPA)

(c) FY18 Performance of Agrochemicals Segment:

FY18 witnessed 33% growth in Net Sales from the Agrochemicals segment to reach 6,273 mn from 4,730 mn in FY17. This was driven by robust growth of 43% in exports and growth of 15% in domestic market. Volumes witnessed growth of 11% from last years 15,624 MT reaching 17,342 MT with strong growth of 19% in branded realization. EBITDA was up by a significant 114%, from 458 in FY17 mn to 981 mn in FY18, on the back of positive market conditions and better price realizations. EBITDA margin for the period also increased to 16% from 10% in FY17. Utilization level ncreased to 68% in FY18 from last years 60%. FY18 was a strong year on account of good monsoons, higher margins on products and expanded distribution network.

(d) Outlook and Strategy

FY18 was a strong year for the Agrochemicals Segment on the back of a fruitful monsoon season after two consecutive seasons of poor monsoons. FY19 shall also sustain the same growth levels as the monsoons are expected to be healthy. Raw material prices from China are drastically increasing, affecting the margins, but, as the company has a strong backward integration, the impact on Meghmani Organics is limited and thus, we are Constantly improving the margins. Going forward, the Company plans to expand in existing products with high global demand and also look to add some new branded products in the portfolio.

Budget 2018 has also been encouraging as it focuses on addressing post-harvest relief and improving farm incomes which will provide a boost to demand for Agrochemicals Segment.

(e) Risks, Concerns and Threats

Despite strong growth drivers, the Indian Agrochemicals industry faces challenges in terms of low awareness levels among farmers about Agrochemical products and their usage. Also, rising sale of spurious pesticides and spiked bio pesticides pose major threats to industry growth.

The Company exports its products to various countries. Thus, any adverse changes in the political, climatic, economic, regulatory or social conditions of these countries might impact the Companys business prospects in these Countries. Any change in the policies implemented by the Governments of these Countries, which result in currency and interest rate fluctuations, capital restrictions, changes in duties & taxes and a registration regime detrimental to the Companys business could adversely affect its operations and future growth. Increase in Crude prices will also impact the costs and prices of various products.

The Company operates in a competitive environment and faces competition from international as well as domestic players on various fronts, such as quality, technical competence, distribution channels, logistics facilities, after-sales service and customer relationships. The performance of the Indian Agrochemical industry is dependent on the monsoon. Erratic rainfall affects crop acreages, pest application and overall productivity, directly impacting the Companys sales performance.

III. Basic Chemicals

(a) Industry Structure

Global Chlor-Alkali Industry to grow at 5.3-5.9% CAGR (2017-2023), to reach $125 bn by 2023

Globally, the Chlor-Alkali market represents one of the largest chemical industries by value as well as volume. Chlor-Alkali is an industrial process for producing Chlorine, Caustic Soda, and other Caustic & Chlorine-based derivatives. Research suggests that the global market for Chlor-Alkali will continue to grow owing to the increased exposure of different end-user areas, such as glass, alumina, vinyl, and water treatment, etc., in the global economy. Additionally, the increased usage of Chlor-Alkali derivatives like Polyvinyl Chloride Plastics in advance infrastructure solutions is expanding its market in the global economy. Among the Geographies, Asia Pacific (ACPC) dominated the world market while North America and Europe are anticipated to grow at the highest CAGR over the forecast period. APAC will continue to dominate the market due to the growing economy, increasing infrastructure and manufacturing base and large population base.

Indian Chlor-Alkali Industry poised to grow a CAGR of 6.5% during 2017-2022

The Indian Caustic industry is a well-established mature industry with a capacity of 3.4 mn MTPA (Caustic Soda) and a total turnover of about 70 bn annually. The Indian industry is regarded by global peers as being among the most efficient, eco-friendly and progressive industries. Regionally, Rajasthan and Gujarat region is growing at the fastest rate owing to increasing number of chemical industries.

With steady economic growth, industrial demand for Chlor-Alkali is set to grow at a considerable pace in the coming years. The products of Chlor-Alkali industry are also used by major consumer products industries such as soaps and detergents, pulp and paper, textile processing. The fact that products of Chlor-Alkali industry find increasing use in products used daily shows the potential for growth of this industry. Moreover, with growing aspirations of a rising middle class, higher disposable incomes and the current low level of penetration, demand for these products is bound to grow.

(b) Business Overview

Meghmani Organics entered the Basic Chemicals Segment in 2009 with current capacity of 166,600 MTPA. The Company is the fourth-largest Caustic Soda producer in India. The Company also has Manufacturing Capacity of 60 TPD of Caustic Potash at Dahej and has Capacity Utilization of 86% in FY18. The current product portfolio includes Caustic Soda, Chlorine and Hydrogen.

The Company is one of the most efficient manufacturers of Caustic Soda with an integrated Captive Power Plant of 60MW. It uses the latest fourth-generation ‘Membrane Cell Technology sourced from Asahi Kasei Chemical Corp, Japan, (one of the most established technology providers of Chlor-Alkali products). The Dahej facility is strategically located due to its proximity to the port, providing ease of importing coal. The Company is supplying Caustic Soda and

Chlorine via pipeline to select buyers, thus substantially reducing its logistics costs.

The Companys new Caustic Potash facility at Dahej of 60 TPD capacity has achieved 86% utilization level by the end of FY 2018.Caustic Potash is one of the very few chemicals that find universal application in Soaps, Detergents, Fertilizers and Chemicals Industries. The Companys planned capex of 6.4 bn involving 3 projects are in-line with its strategic intent of expanding the chemicals business. The First is the CMS project of 40,000 MTPA which will produce MDC, Chloroform and Carbon Tetra Chloride. This is expected to be commissioned by December18 and add 1.2 bn of revenue post full year of operations. The Second Project involves 50% capacity expansion of the Companys Caustic Soda plant to 2,71,600 MTPA and increase the Captive Power Plant capacity to 96MW from 60 MW now. The Third Project is to set up a Hydrogen Peroxide (50%) project of 30,000 MTPA capacity. Expansion of the Caustic Soda and Hydrogen Peroxide projects will involve 5 bn investments and are expected to be commissioned by June19.

(c) Performance of Basic Chemicals

FY18 proved to be a remarkable year than FY17 with net sales of Basic Chemicals growing at 52% to 5,971 mn from 3,919 mn driven by increased demand. Sales volumes increased 14% from last years 1,38,219 MT reaching 1,57,313 MT for the year. EBITDA increased 78% YoY from 1,432 mn in FY17 to 2,554 mn in FY18. EBITDA margin also increased to 43% in FY18 from 37% in FY17 and utilization was up at 86% in FY18 from 77% in FY17.

(d) Outlook and Strategy

The Companys CMS project is progressing as per plan and is expected to be commissioned by December 2018. In the coming years Capacity Utilization of both Caustic Soda and Caustic Potash at Optimum level coupled with strong market demand will be the key drivers for profitable growth of the Basic Chemicals segment.

(e) Risks, Concerns and Threats

The Company operate in a competitive environment and compete with international as well as domestic players on various fronts, such as quality, technical competence, distribution channels, logistics facilities, after-sales service and customer relationships. Dumping of Caustic Soda from neighbouring countries might impact realisations of the Electrochemical Unit (ECU). Internal Control System

The Company has a proper and adequate system of Internal Control commensurate with the size and nature of its operations to ensure that all assets are safeguarded against unauthorised use or disposal, ensuring true and fair reporting and compliance with all applicable regulatory laws and company policies. Internal Audit Reports are reviewed by the Audit Committee of the Board.

The following ratios reflect the consolidated financial performance for the year in relation to the previous year.

Particulars ( mn) FY17 FY18
Net Sales 13,963 17,747
EBITDA 2,888 4,312
PBT 1,558 3,257
PAT before Minority Interest 1,162 2,379
PAT after Minority Interest 877 1,713
Key Ratios
Net Sales Growth 6.8% 27%
EBITDA Margin 20.7% 24.3%
ROCE 21.2% 32%
D/E Ratio 0.6 0.4