NOCIL Ltd Management Discussions.

Economic Overview

Indias GDP is expected to contract by about 7.5% in FY 2020-21 as per the economic survey released at the time of presentation of the Union Budget by the Government of India. This after combination of positive growth in agriculture by about 3.4% netted of by a contraction in the Industry and Services sector by 9.6% and 8.8% respectively. India to have a Current Account Surplus of about 1% of GDP in FY 2020-21, a historic high after 17 years. Despite being a COVID-19 situation, the net FPI Inflows into the country was about USD 36 Billion as against the peak inflows of

USD 42.36 Billion in the year 2014. Incidentally during the year 2008 (the year of global financial crisis), the net NPI flows was negative USD 9.33 Billion. approach towards the mega vaccination

During the initial months of the pandemic when uncertainty was high and lockdowns imposed economic restrictions,

India did not waste precious fiscal resources in trying to pump up discretionary consumption. Lockdown in the country to reduce the spread of COVID-19 affected all sectors including Automobile, Real Estate, Textile, Hotel, Aviation, Entertainment etc. Unemployment, pay cuts, lack of demand, liquidity concerns, debt servicing and inadequate health care systems were the key issues that were on the year.battlefield

Instead, the policy focused on ensuring that all essentials were taken care of, which included direct benefit transfers to the vulnerable sections and the worlds largest food subsidy programme targeting 80.96 crore beneficiaries.

Resultantly, the lockdown resulted in a 23.9% contraction in GDP in Q1, the recovery has been a V-shaped one as seen in the 7.5% decline in Q2 and the recovery across all key economic indicators. Starting July, a resilient V-shaped recovery is underway, as demonstrated by the recovery in GDP growth in Q2 after the sharp decline in Q1. As Indias mobility and pandemic trends aligned and improved concomitantly, indicators like E-way Bills, Rail Freight, GST Collections and Power consumption not only reached pre-pandemic levels but also surpassed previous year levels. The reignited inter and intra-State movement and record-high monthly GST collections have marked the unlocking of industrial and commercial activity. The year also saw the manufacturing sectors resilience, rural demand cushioning overall economic activity and structural consumption shifts in booming digital transactions.

Chemical Industry is intricately woven to each other and any imbalance in demand-supply for a group of chemicals can threaten the manufacturing activities of several industries. The Indian government having announced several measures including support to the borrowers in the form of moratorium, financial sectors, support to MSME, self-reliant strategy saw the economy rebounding quite sharply from the second quarter of the year.

As per International Monetary Fund (IMF), India is expected to record a growth of about 9.50% in FY 2021-22. This is of course subject to the resurgence of COVID-19 pandemic second wave which has already resulted in lockdowns across different States of India. Any improvement or driveintensified can help the Indian economy to achieve the most part of the robust recovery in the services sector and prospects for robust growth in consumption and investment. Internationally though most of countries lifted lock down in May /June, 2020, the world was left with an unpleasant choice between life and livelihood. World economy having never faced such unprecedented challenge for over a century reacted differently by trying to boost its economic activity despite the looming threat of COVID-19. The year 2020 was dominated by the COVID-19 pandemic and the ensuing global economic downturn, the most severe one since the Global Financial Crisis. The lockdowns and social distancing norms brought the already slowing global economy to a standstill. Global economic output fell by over 3% in 2020 as compared to the contraction rate of 1.70% post the global financial crisis of 2008. In view of this, Governments and

Central Banks across the world deployed a range of policy tools to support their economies such as lowering key policy rates, quantitative easing measures, loan guarantees, cash transfers and fiscal stimulus measures.

To summarise, the global economy, particularly the manufacturing sector which experienced an unprecedented health crisis for about 3-6 months started rebounding sharply from Aug 20 onwards. Given that most countries having started the vaccination drive to mitigate the COVID-19 pandemic, the global growth is expected to be positive in the next 2 years with a positive growth expectation of over 4.50%.

Rubber Chemical Industry:

For the reasons mentioned in the previous para, global rubber consumption witnessed a de-growth of 6.50% for the calendar year 2020 as against a de-growth of 1% for the year 2019. Rubber chemicals demand essentially follow the trend of global rubber consumption. Rubber Chemicals are used by manufacturers to process Natural Rubber and / or Synthetic Rubber into finished products, like Tires, Hoses, Footwear, Moulded Components for vehicles, Industrial

Belts, Gloves, etc. Of these, the Tire segment is clearly the single largest consuming segment for Rubber Chemicals. During the year, the domestic tire industry being the largest consumer of the rubber chemicals managed to get a restriction on Tire imports. Coupled with the gradual resumption of economic activities both in India as well as across the globe, led to improvement of demand for recycled tires. Faced with apprehensions on Chinese sourcing (China contributes to about 75% of the global rubber chemicals demand), some customers began allocating higher share to the Company. This led to improvement of not only capacity utilisation but also approvals of the new products as well. The major domestic non-tire segment, namely the moulded & extruded goods segment, largely depends on the automobile sector. Thus, this segment is expected to move in line with the corresponding operating trend in the automobile sector. The year which began with declining demand coupled with surplus availability of Rubber chemicals saw rapid improvement in demand on account of resumption of economic activity across the globe ultimately led to the temporary surplus getting wiped out by the end of the year. Our approach to garner additional market share resulted in improved utilisation of capacities. Due to the Companys wide range of products and through an optimum mix of inventory management and buying strategy, we are in a position withstand the shock of unprecedented increase in the major input prices and could register cash profits.

Industry Structure and Developments

As stated earlier, the Rubber chemical industry essentially follows the trend of global rubber consumption.

The domestic Tire industry, largest consumer of rubber after having experienced weak demand pattern for over 2 years managed to get a restriction of tires imports into India. This led to the rapid improvement in their operating rates which became very necessary given the improvement in re-cycled tires post resumption of economic activity from June, 2020. The tire customers despite indicating pick-up rates at the beginning of each quarter were in constant need for rubber chemicals. This led to our rapid improvement in demand during second half of the year by about 73% as compared to the first half of the year. This obviously led to depletion of finished goods inventory by more than 75% of the normal levels.

Further, the continued trade war between USA and China adversely impacted domestic sales realisations. This is more severe as USA is the second largest market in the world for our business. Products were increasingly dumped into non- USA markets including India. This enabled the Chinese and other exporters to dump more rubber chemicals in the Indian markets (being the third largest market) thereby increasing their market share. In order to protect ourselves from the unfair approach of aggressive dumping adopted by our competitors from

China, Korea & USA, we filed for Anti-dumping protection with DGTR in respect of our 4 main products. The DGTR on finding prima facie evidence initiated investigation in respect of all the 4 products.

Business Outlook: Opportunities & Threats Opportunities:

Post recovery of pandemic linked recession will enable good players to come out stronger. We are one of the few non- Chinese rubber chemicals manufacturers who have gone for a substantial expansion. On approval of our facilities, we are bound to ramp up our capacity utilisation.

The normalisation of the Indian economy will enable the replacement tire market to operate at a higher rate and the Company being a supplier to tires will benefit out of the same. The import restriction on various classes of tires into India will help the domestic tires operating rates. Since tire industry constitutes 65% of the rubber chemicals consumption, any improvement at their end will benefit a player like NOCIL.

The DGTR initiation notice on anti-dumping duty on 4 of our major products, where we have expanded, will help the the Company in case the duty is levied on conclusion of findings.

China is currently contributing to 75% of global rubber chemicals supply although their domestic demand does not exceed 35% of the global demand. Given the concentration of rubber chemicals capacity in China along with the associated uncertainties, there is probably some sense of discomfort amongst international tire majors about over-dependence on a single source country. Any de- risking of this source will present an additional opportunity to the Companys outlook.

It may be noted, that NOCIL is not only seen as a dependable and quality supplier, but also as a player which offers almost a complete range of rubber chemicals. Moreover, NOCILs strong R&D capabilities are considered a very important strength by these tire majors.

By virtue of its long association with most international tire majors, the Company also enjoys a preferred-supplier status with their Indian operations. With increasing presence of these players in the Indian market, NOCIL stands to gain Plantssignificant as well. There are opportunities for expanding business in certain specialty chemicals and high value chemicals, where some customers are conducting advanced pre-commercial studies. This development augurs well for us. The Company is taking all the necessary steps for meeting these increased requirements. In line with the future trend of rubber growth over in the coming years, Auto Sector Growth and Tire industry growth, the Company has invested 470 Crores to augment its capacities. In case the demand pattern is sustained, further expansion in the field of rubber chemicals by the Company is an additional opportunity wherein we can consolidate in the global rubber chemical space.

At the same time, we also continue to be selective in the choice of target customers and markets.

Threats:

The Rupee traded in the wide range of 72.50 –76 per USD. The Company largely continued to mitigate the risk of this volatility by effecting payments towards our imports out of our Export Earnings in Foreign Currency and by taking adequate cover through forward/ option contracts.

Our competitors have for long been dumping their products in the Indian market at low prices. The possibility of competitors pursuing an irrational pricing approach cannot be ruled out. This may create pressure on our margins. Sentiment-driven currency changes can also impact domestic prices and profitability.

The country is expecting a normal monsoon this year, any shortfall may lead to fall in the rural demand thereby unfavorably impacting some user segments.

Risks & Concerns:

Exchange rate fluctuations coupled with movement in prices of Crude Oil and down-stream Petrochemicals, trade war between USA and China, any government sanctions on supply chains etc. are all concern areas. Any disruption in the economic activities on account of resurgence of COVID-19 pandemic can impact the markets either at raw material manufacturers, customers or operational sites partially can impact the business prospects for that particular period.

Operating & Financial Performance for the Year

The Financial Statements comply in all material aspects with the Indian Accounting Standards (Ind AS) notified under Section 133 of the Companies Act, 2013 (the ‘Act) [Companies (Indian Accounting Standards) Rules, 2015] and other relevant provisions of the Act.

The Company remains a zero-debt Company. In view of the comfortable cash flows, the entire funding of the capital expenditure has been done be through internal accruals. During the year CARE has reaffirmed ratings as CARE AA (Double A) (Stable) for long term Bank Facilities (Term loan as well as Fund Based facilities) and CARE A1+ (A One plus) rating for short term Non-Fund Based Bank facilities.

The Company had also approached CRISIL Limited for review of its existing ratings, which had assigned CRISIL AA for its Fund-based Bank Facilities and CRISIL A1+ (stable) for its Non - Fund-based Bank Facilities in the previous

Financial Year.

Despite the challenges faced by the Industry due to lockdown in the first quarter, the Companys performance on the domestic sales volumes, registered a growth of over 14% for the year as against the rubber consumption de- growth of 5%. On the export business front, despite stiff competition, especially from China, the Company successfully exported to strategic accounts with wide range of products and thus achieved a growth of 12% as against the global rubber consumption de-growth of 7%. During the features of the internal control systems first quarter of the year, the Company was forced to operate at sub-optimal volumes in view of the lock-down which meant incurring costs quite disproportionate to the level of activity. Post gradual resumption of economic activity, the

Company consciously sacrificed some drop in operating margins in the quest for additional volumes. Further the unprecedented price increases in respect of its major inputs during the second half of the year also contributed to the drop in margins. As a result, the EBIDTA margins dropped on account of the above factors.

Summary of the financial performance of the Company is presented below:

Particulars F.Y. 2019-20 F.Y. 2018-19
Revenue from Operations 924.66 846.29
Other Income 14.21 9.70
Total Income 938.87 855.99
Operating EBIDTA 126.93 176.45

During the year under review, the Company achieved a profit before tax of 104.18 Crores as compared to

152.41 Crores in the Financial Year 2019-20.

Pursuant to the SEBI (Listing Obligations and Disclosure

Requirements), (Amendment), Regulations, 2018, the key financial ratios viz., Debtors turnover, Inventory Turnover,

Current Ratio and Debt Equity ratios do not exceed the threshold of 25% or more as compared to the immediately preceding financial year. However, Operating Profit Margin (%), Net Profit (%), Return on Net Worth and Interest

Coverage exceeded the threshold limits due to the reasons stated above.

Internal control systems

TheCompanyhasinplace,adequateinternalcontrolsystems and procedures covering all the financial and operating functions. These have been designed to provide adequate assurance to the management regarding compliance with the accounting standards by maintenance of appropriate accounting records, monitoring the economy and efficiency of operations, protecting the assets of the Company from losses, and ensuring the reliability of financial and operational information through proper compliance with the statutory enactments and its rules and regulations. Some of the significant procedures are as follows:

Appropriate delegation of authority limits with responsibility for incurring capital and revenue expenditures

Approval and monitoring of annual revenue budget for all operating and service functions

Procedure for approval of capital budget proposals and monitoring the expenditure on such acquisitions

Formulating and reviewing the annual and long-term business plans

A comprehensive code of conduct for ensuring the integrity of financial reporting, ethical conduct, regulatory compliances, and conflict of interest, if any

Review of the operations and financial plans in key business areas through monthly management meetings

Appointment of Internal Auditors to conduct periodical internal audits on operations, systems, internal control on financial reporting etc and issue reports to the management and the Audit Committee of the Board, regarding the adequacy and compliance with the internal controls and the efficiencyand effectiveness of operations

An ERP system (SAP) connecting Plant, Regional Sales Offices and Head Office enables the management to evaluate and take decisions based on real time information systems The Audit Committee of the Board of Directors regularly review the findings of the internal auditors, adequacy of internal controls, financial controls, compliance with the accounting standards, as well as recommends to the Board, the adoption of the quarterly and annual results of the Company and the appointment of auditors. The Audit Committee also reviews the related party transactions, entered by the Company during each quarter.

Further, the Secretarial Auditors review on a periodical basis through their own systems and check lists the compliances part with respect to the Companies Act, 2013 and SEBI (Listing Obligations & Disclosure Requirements)

Regulations, 2015, as amended and other SEBI regulations as may be applicable to the Company.

Material developments in human resources

Talented and skilled manpower is an important enabler for a Company to grow and maintain competitiveness. Human resources are considered as most important and valuable assets of the Company. Focus was kept on acquisition, retention and development of necessary skilled manpower keeping in view our current operations requirement as well as the future business expansion and growth plans, particularly the Dahej plant expansion project. Innovative incentive schemes are designed and implemented as a motivational and retention in forex rates, changes in strategy. The Company continues to conduct employee trainings across several functions pertaining to technical, behavioral / general, health safety and environment and ISO standards.

‘Managerial Skill Development training programs are conducted to enhance the soft skills of potential managers. A regular employee performance evaluation system is in place to evaluate the individual performances as well as determining their development needs and future potential. The Company has complied with all the regulations pertaining to Factory, Labour and other applicable laws and very cordial Industrial Relations are maintained with the recognised labour Union.

Cautionary statement

Certain statements in the Management Discussion

& Analysis describing the Companys objectives, projections, estimates, expectations, or predictions may be ‘forward looking statements within the meaning of applicable securities laws and regulations. Actual results may differ from those expressed or implied. Important factors that could make a difference to the Companys operations include raw material availability and prices, cyclical demand and pricing in the Companys principal markets, fluctuation regulations, tax regimes, economic developments within

India and the countries in which business is conducted, and other incidental factors.