NACL Industries Ltd Management Discussions.

The Discussion report is on the Crop Protection Business covering the Indian and global markets. This outlook is based on assessment of the business environment as foreseen currently. It can change due to economic and other developments, both in India and abroad.

ECONOMIC SCENARIO:

The Global Economy Growth was projected at 3.9 percent in 2018 and 2019. However, with the escalation of US-China trade tensions, macroeconomic stress in countries such as Argentina and Turkey, disruptions to the auto sector in Germany, tighter credit policies in China, and financial tightening alongside the normalization of monetary policy in the larger advanced economies have all contributed to a significantly weakened global expansion.

The Growth in advanced economies is projected to slow from 2.2 percent in 2018 to 1.8 percent in 2019 and 1.7 percent in 2020. The decline in growth relative to 2018 are due to lower growth in China and as well as a deepening contraction in Iran. The global economic growth for the year 2020 is projected to return to 3.6 percent. The growth in emerging and developing Asia will dip from 6.4 percent in 2018 to 6.3 percent in 2019 and 2020. Global growth in 2019 is also weighed down by the emerging market and developing economy group, where growth is expected to tick down to 4.4 percent in 2019 (from 4.5 percent in 2018). (Source: IMF World Economic Outlook - April 2019). Trade tensions, weak emerging market currencies and exceptionally strong US grain yields constituted the primary drags on global food prices in the first three quarters of 2018. Since then, prices have been less volatile. Food prices are projected to decrease by 2.9 percent a year in 2019 and then increase by 2.1 percent in 2020. Weather disruptions are an upside risk to the forecast. (Source: IMF World Economic Outlook - April 2019). According to the UNs World Economic Situation and Prospects (WESP) 2019, Indias GDP growth is expected to accelerate to 7.6 per cent in 2019-20 from an estimated 7.4 per cent in the current fiscal ending March 2019. India will continue to remain the worlds fastest-growing large economy in 2019 as well as in 2020, much ahead of China. As per the provisional estimate of national income, the growth of real Gross Domestic Product (GDP) of India for 2018-19 is estimated at 7.0 percent, as against the growth rates of GDP at constant prices for the years 2015-16, 2016-17 and 2017-18 were 8.0 percent, 8.2 percent and 7.2 percent respectively. (Source: DEA- Ministry of Finance-Monthly Economic Report-January 2019)

INDUSTRY OVERVIEW:

The global agrochemical market in 2018 shows a year-on-year increase of 2.0% to $64,179 million, representing the second consecutive year of growth following downturns in the industry in 2015 and 2016.

Agriculture remains the pre-dominant occupation in India for vast sections of the population. Over the years, several new challenges have emerged before the sector. Agriculture sector in India typically goes through cyclical movement in terms of its growth. The Gross Value Added (GVA) in agriculture improved from a negative 0.2 per cent in 2014-15 to 6.3 per cent in 2016-17 only to decelerate to 2.9 per cent in 2018-19. Average annual growth rate in real terms in agricultural & allied sectors has remained at around 2.88 per cent during 2014-15 to 2018-19. However, the volatility of output growth as measured by the coefficient of variation has declined from 2.7 in the period of 1961-1988 to 1.6 during 1989-2004 and further to 0.8 during 2005 to 2018.

The share of agriculture, forestry & fishing sector in GVA has seen a steady decrease over the years from 15.4 per cent in 2015-16 to 14.4 per cent in 2018-19. The decline was mainly due to decline in the share of crops in GVA from 9.2 per cent in 2015-16 to 8.7 per cent in 2017-18. As per Phase-I results of the Agriculture Census, 2015-16, the number of operational holdings, i.e. land put to agricultural use, has increased to 14.6 crore in 2015-16 from 13.8 crore in 2010-11, thereby registering an increase of 5.3 per cent. The share of marginal holdings (less than 1 ha) in total operational holdings increased from 62.9 per cent in 2000-01 to 68.5 per cent in 2015-16, while the share of small holdings (1 ha to 2 ha) decreased from 18.9 per cent to 17.7 per cent during this period. Large holdings (above 4 ha) decreased from 6.5 per cent to 4.3 percent. The area operated by the marginal and small holdings increased from 38.9 per cent in 2000-01 to 47.4 per cent in 2015-16, while that of the large holdings decreased from 37.2 per cent to 20 per cent during this period. Procurement of rice as on 30th April 2019 during Kharif Marketing Season 2018-19 was 39.3 million tonnes. Procurement of wheat during Rabi Marketing Season 2019-20 was 19.6 million tonnes.(Source: Economic Survey Report: 2018-19). As per the 3rd Advance Estimates (AE) for 2018-19, the total production of food grains during 2018-19 is estimated at 283.4 million tonnes compared to 279.6 million tonnes in 2017-18 (3rd AE).

Insecticides dominate the Indian crop protection market and form almost 53% of the domestic agrochemicals market. Herbicides are, however, emerging as the fastest growing segment amongst the agrochemicals. Paddy accounts for the maximum share of agrochemicals consumption around (26%-28%) followed by cotton (18% -20%). The eight states viz. Andhra Pradesh, Maharashtra, Punjab, Madhya Pradesh, Chhattisgarh, Gujarat, Tamil Nadu and Haryana account for usage of >70% of the agrochemicals used in India. Andhra Pradesh is a leading consumer of crop protection chemicals with a market share of 24%. (Source: CARE-Indian Agrochemicals Industry: Insights and Outlook) The agrochemicals market is estimated to register a CAGR of 3.7% during the forecast period of 2019 - 2024 and is projected to reach a market size of USD 269.7 billion, by the year 2022.(Source: Mordorintelligence: Agrochemicals Market Report)

OUTLOOK AND OPPORTUNITIES:

The IMFs positive sentiment towards the Indian economy is echoed by other major agencies such as the World Bank and United Nations Development Programme (UNDP), and is a testament to their confidence in the country and the expectation that it will drive global economic growth. Various measures of the Government under Make in India and other similar initiative have begun to showing positive results. Population statistics in the country have been responsible for maintaining adequacy in agricultural practices, ensuring greater utilization of agrochemical products in areas that were ignored in the past. By embracing modern practices in the fields, use of agrochemicals has seen tremendous growth particularly for pesticides and fertilizer consumption. India is the second biggest consumer of agrochemical products in the world after China.

Globalization of agrochemical industry has a huge impact on the Indian market. With the high rate of population growth, increasing the need for food production and economic growth, the market for agrochemicals gets pushed ahead. The ambitious project of food security can only be achieved through improved product performance and productivity with the scarce resources available. Land scarcity due to urbanization, soil degradation, water scarcity etc. makes it more essential for the farmers to use agrochemicals to sustain. Export potential and Integrated Farming Practices would provide future growth opportunities. Pesticides market is currently lead by insecticides products followed by fungicides and herbicides; reportedly insecticide demand accounts for 65% of the total pesticide market share. The opportunities for growth of your Company are good in domestic, export and contract manufacturing given the following factors:

a) In the direction of the doubling farmers income by FY 2022, the Ministry of Agriculture and Farmers Welfare has been allocated Rs. 57,600 crore in 2018-19 to agricultural sector, which is 14.6% more than the revised estimate in 2017-18.

b) Agriculture credit being provided to farmers under the Interest Subsidy Scheme with interest subvention of 2% on short term crop loans up to Rs. 3 lakhs will augur well for the Industry.

c) Increase in demand for food grains: India has 17% of the worlds population. An increasing population, need for food security and high emphasis on achieving food grain self-sufficiency is expected to drive the demand for crop protection chemicals.

d) Growth of horticulture: Fruits and vegetables account for nearly 90% of total horticulture production in the country. India is now the 2nd largest producer of fruits and vegetables in the World and is the leader in several horticultural crops namely mango, banana, papaya, cashew-nuts, areca nut, potato and okra. Growth in horticulture and industries is to result in increase in demand for agrochemicals, especially fungicides. As Indias diverse climate ensures production of all varieties of fresh fruits & vegetables, the trend has slowly shifted from production of food grains to horticulture, with production of horticulture consistently exceeding the production of food grains.

e) Incidence of pest attacks: One of the major challenges to ensure food security and good crop yields is incidence of pests. On an average agro-pests are estimated to cause 15%-20% yield losses in principal major food and cash crops. Pest attacks across various stages of crop life-cycles are affecting farmers. Due to the hot humid climatic conditions prevalent in India, the number of pest attacks has been increasing. Use of agrochemicals can help mitigate the pest problem and increase crop output by 25%-50%. So far, the presence of more than 40,000 different types of insects have been recorded in India and of these about 1,000 have been listed as potential pests of economic plants, 500 pests have caused serious damage at some time and 70 have been causing damage more often.

f) Increasing awareness: Educating the farmers about advantages of agrochemicals and its safe usage, will lead to increase in demand. Companies are increasingly training farmers regarding the right use of agrochemicals in terms of quantity to be used, the right application methodology and appropriate chemicals to be used for identified pest problems.

g) Off-patent: Pesticides valuing US$ 2.9 billion are expected to go off-patent between 2017-20, according to a FICCI Report. This patent cliff will result in a decline in market share of patented products from 20%-22% to around 13%-15% by 2020. This will provide significant opportunities for the Indian players with high proportion of exports as part of their total turnover.

h) Contract Manufacturing: As China looks to shut down capacities to curb pollution, the shift in manufacturing base from China and Japan is opening opportunities for Indian players. The Make in India program of the Central Government coupled with conducive financial systems for lending further strengthens the capex plans for the Indian Agrochemical players.

i) Changing climatic conditions: Erratic climatic conditions are impacting crop output. Farms need an array of inputs to protect crops from adverse climatic realities. Irregular monsoons coupled with lack of irrigation (60% of cultivable land is non-irrigated) results in low agricultural yield in India. Damp and warm weather conditions aid in breeding of weeds.

j) Limited farmland availability: Rapid urbanization has had a detrimental impact on land availability. The pressure is therefore to increase yield per hectare which can be achieved through increased usage of farm productivity-enhancing inputs like agrochemicals.

Your Companys increased efforts in implementing various growth strategies and improving productivity across resources and assets, shall augur well in the time to come.

CHALLENGES, THREAT, RISKS AND CONCERNS:

Over past three years, the global agrochemical market has come under some rough weather with sales declining by around around 8% to 9%. There have been many reasons: unfavourable weather conditions, delaying planting patterns in key markets such as Latin America, severe drought situations in Mexico and Australia, dry weather in Southern Europe, piling up of Inventory, stagnancy in prices and pressure in margins etc. (Source: www.outlookbusiness.com)

Although the long term benefits for the Company expected to be good given the growth opportunities unfolding, there are few challenges, threat, risks and concerns that may affect the agrochemical business. Few of them are highlighted hererin below:

a) Increase in raw material prices due to rising crude oil prices and supply constraints emanating from the shut-down of industries in China on pollution concerns added pressure on the profitability of agrochemical manufacturers.

b) An increase in crude oil prices by 33.2%, and the ongoing farm distress has led to the fall in the margins of the agrochemical companies.

c) Lower acreages during the existing rabi season and ban on use of organophosphorus compounds in several states, erratic rainfall in key agrarian states and poor price realization in the key crops has impacted the margins of the industry.

d) The margins of agrochemical companies have been stagnant mainly due to the varying weather conditions (including El Nino phenomenon and weak monsoons), drought like conditions which affected the acreages and crop prices and weakening herbicide prices. Keeping in view the above, your Company is gearing itself to seize the emerging opportunities amidst the challenging macro-economic environment, by focusing in better portfolio management, productivity and expansion plans, and leveraging strengths in domestic as well as international markets.

Internal Control System:

The Company has proper and adequate systems of internal controls which ensure that all the assets are safeguarded and are structured to provide adequate support and controls for the business of the Company. The Companys internal audit systems are geared towards ensuring adequate Internal controls to meet the size and needs of business, for safeguarding the assets of the Company, evaluating reliability of financial and operational information, identifying weaknesses and areas of improvement and to meet with all compliances.

Financial Performance: (Consolidated)

During the year 2018-19, the Revenue from operations Rs 86,549 Lakhs reflects an increase of 3% over the previous year. The EBIT and Cash Profit stood at Rs 2,049 Lakhs and Rs. 688 Lakhs (before exceptional items) respectively compared to Rs. 4,885 and Rs. 3,591 Lakhs.

The financial performance of your Company during 2018-19 was as under: (Rs. in Lakhs)

Particulars 2018-19 2017-18
Revenue from Operations (excluding Excise Duty) 86,549 84,670
EBIDTA (as % of Revenue from Operations) 4.72% 8.10%
Profit before depreciation, tax (as % of revenue from operations) 0.79% 4.16%
Return on Capital Employed 6.59% 17.36%
Return on Net Worth (2.45%) 4.84%
Earnings per share (FV Rs.1 each) (0.44) 0.74
Book value per share 16.97 15.30

The loss is mainly attributable to poor domestic Rabi season, steep raw material price increase due to temporary closure of some of the chemical manufacturing facilities in China and rupee depreciation etc. On adoption of Indian Accounting Standards (Ind AS) by the Company with effect from April 1, 2017, the financial were prepared in accordance with said Accounting Standards.

Previous year comparative figures were recast/regrouped as required by Ind AS.

Industrial Relations and Human Resources Development:

The number of employees in the Company as on the 31st March, 2019 was 1177. The Company enjoys cordial and harmonious industrial relations. Training programs and various initiatives are being taken to create an environment to enhance individual and team performance.

Cautionary Statement:

The Statement in the Report of the Board of Directors and Management Discussion & Analysis Report describing the Companys projections, estimates, exceptions or prediction may be forward looking statement within meaning of applicable of Securities Laws and Regulations. Actual results could differ materially from those expressed implied since the Companys operations are influenced by many external and internal factors beyond the control of Company.

Disclaimer:

Readers are cautioned that this Management Discussion and Analysis contains forward-looking statements that involve risksand uncertainties. When used in thisdiscussion, the words anticipate, believe, estimate, intend, will, and expected and other similar expressions as they relate to the Company or its business are intended to identify such forward looking statements, whether as a result of new information, future events, or otherwise. Actual results, performances or achievements and risks and opportunities could differ materially from those expressed or implied in such forward-looking statements. The important factors that would make a difference to the Companys operations include economic conditions affecting demand supply and price conditions in the domestic and overseas markets, raw material prices, changes in the Governmental regulations, labour negotiations, tax laws and other statutes, economic development within India and the countries within which the Company conducts business and incidental factors. The Company undertakes no obligation to publicly amend, modify or revise any forward-looking statements on the basis, of any subsequent developments, information or events. The following discussion and analysis should be read in conjunction with the Companys financial statements included herein and the notes thereto.

For and on behalf of the Board

K.Lakshmi Raju
Place: Hyderabad Chairperson
Date: 03rd July, 2019 (DIN:00545776)