Oriental Carbon & Chemicals Ltd Management Discussions

Global economy Overview

Global economic growth declined from 3.5% in 2022 to an estimated 3.1% in 2023. A disproportionate share of global growth in FY 2023-24 is expected to come from Asia, despite the weaker-than-expected recovery in China, sustained weakness in USA, higher energy costs in Europe, weak global consumer sentiment on account of the Ukraine-Russia war, and the Red Sea crisis resulting in higher logistics costs. A tightening monetary policy translated into increased policy rates and interest rates for new loans.

Global trade in goods was expected to have declined nearly USD 2 trillion in

2023; trade in services was expected to have expanded USD 500 Billion. The cost of Brent crude oil averaged USD 83 per barrel in 2023, down from USD 101 per barrel in 2022, with crude oil from Russia finding destinations outside the European Union and global crude oil demand falling short of expectations.

Indian economy overview

The Indian economy was estimated to grow 7.8% in the FY 2023-24 fiscal against 7.2% in 2022-23 primarily driven by improved performance in the mining and quarrying, manufacturing and certain segments of the services sector. India retained its position as the fifth largest economy. The Indian rupee displayed relative resilience compared to the previous year; the rupee opened at H82.66 against the US dollar on the first trading day of 2023 and on December 27,

2023 was H83.35 versus the greenback, a depreciation of 0.8%.

In the 11 months of FY 2023-24, the CPI inflation averaged 5.4% with rural inflation exceeding urban inflation. Lower production and erratic weather led to a spike in food inflation. In contrast, core inflation averaged at 4.5%, a sharp decline from 6.2% in FY 2022-23, moderated by softening global commodity prices.

The nations foreign exchange reserves achieved a historic milestone, reaching USD 645.6 Billion. The performance of Indian companies remained robust from October 2023 to March 2024 on account of deleveraged Balance Sheets, sustained domestic demand and government-led capital expenditure. Rating upgrades continued to surpass rating downgrades in H2 FY 2023-24. UPI transactions in India posted a record 56% rise in volume and 43% rise in value in FY 2023-24.

Growth of the Indian economy

The FY 2024-25 growth in the economy was the highest since FY17, excluding the 9.7% post- COVID rebound in gross domestic product (GDP) in FY 2021-22 from the 5.8% contraction in FY 2020-21. As per the first advance estimates of national income released by the National Statistical Office (NSO), the manufacturing sector output was estimated to grow 6.5% in FY 2023-24 compared to 1.3% in FY 2022-23. The Indian mining sector growth was estimated at 8.1% in FY 2023-24 compared to 4.1% in FY 2022-23. Financial services, real estate and professional services were estimated to record a growth of 8.9% in FY 2023-24 compared to 7.1% in FY 2022-23. Real GDP or GDP at constant prices in FY 2023-24 was estimated at H171.79 Lakh Crore as against the provisional GDP estimate of FY 2022-23 of H160.06

Lakh Crore (released on May 31, 2023). Growth in real GDP during FY 2023-24 was estimated at 7.3% compared to 7.2% in FY 2022-23. Nominal GDP or GDP at current prices in FY 2023-24 was estimated at H296.58 Lakh Crore against the provisional FY 2022-23 GDP estimate of H272.41 Lakh Crore. The gross non-performing asset ratio for scheduled commercial banks dropped to 3.2% as of September 2023, following a decline from 3.9% at the end of March 2023. Indias exports of goods and services were expected touch USD 900 Billion in FY 2023-24 compared to USD 770 Billion in the previous year despite global headwinds. Merchandise exports were expected to expand between USD 495 Billion and USD 500 Billion, while services exports were expected to touch USD 400 Billion during the year. Indias net direct tax collection increased 19% to H14.71 Lakh Crore by January 2024.

The Indian automobile segment was expected to close FY 2023-24 with a growth of 6-9%, despite global supply chain disruptions and rising ownership costs. The construction sector was expected to grow 10.7% year-on-year from 10% in FY 2023-23.

India reached a pivotal phase in its S-curve, characterised by acceleration in urbanisation, industrialisation, household incomes and energy consumption. India emerged as the fifth largest economy with a GDP of USD 3.6 trillion and nominal per capita income of INR 1,23,945 in FY 2023-24.

(Source: Times News Network, Economic Times, Business Standard, Times of India)

Global specialty chemicals industry overview

The global specialty chemicals market was valued at USD 1,123.88 Billion in 2023 and is expected to reach USD 1,481.36 Billion by 2031, growing at a CAGR of 3.53% from 2024 to 2031. The market is growing on account of industrialisation and urbanisation in emerging economies, driving the demand for specialty chemicals in sectors such as construction, automotive, electronics, and healthcare.

Emerging economies in regions such as Asia-Pacific, Latin America, and the Middle East and Africa are expected to see significant growth opportunities driven by industrialisation and urban development. In contrast, mature markets in North America and Europe are emphasising innovation and sustainability to protect their competitive edge.

In 2023, Asia-Pacific was the leading market and is expected to reach a revenue of USD 497.03 Billion by 2031. The regions growth is driven by the economic expansion of countries such as India, China, and Japan, which stimulate demand across various industries that depend heavily on specialty chemicals. North America held a significant market share of 27.86% in 2023, supported by a mature industrial base and advanced technological infrastructure.

Although the specialty chemicals market is growing, it is marked by the volatility of raw material prices and rising competition. Price fluctuations for raw materials, influenced by geopolitical tensions, supply chain disruptions, and shifting market dynamics, present significant challenges for manufacturers of specialty chemicals. The market is competitive, with companies competing to expand their global share.

Increased investments in research and development are catalysing market growth. Companies are dedicating resources to R&D efforts, focusing on advanced materials, technologies, and solutions to meet evolving market needs. These investments are targeted at producing innovative formulations, specialised applications, and novel products that improve performance, efficiency, and sustainability. (Source: Kings Research)

Global insoluble sulphur industry

The global insoluble sulphur market is set for substantial growth as it is anticipated to increase from USD 917.1 Million in 2023 to USD 1,249 Million in 2032, growing at a CAGR of 3.5% between 2024 and 2032.

The United States is a major player in the sulphur industry, ranking as the second-largest sulphur producer globally with an estimated production of 8.6 Million metric tonnes in 2023. Remarkably, about 93% of this sulphur is recovered elemental sulphur. The U.S. also ranks as one of the top consumers of sulphur, with a consumption nearing ten million metric tonnes in 2023. This is largely driven by the production of sulphuric acid. Indeed, the U.S. is the leading producer of sulphuric acid globally, underscoring its widespread use across various industrial applications.

The demand for insoluble sulphur is primarily driven by its critical role in the rubber industry, especially in tyre manufacturing. Tyres account for the majority of global rubber consumption, positioning insoluble sulphur as an essential component. As the global population continues to grow, so does the demand for fertilisers and increased food production, catalysing the demand for sulphur. This trend is expected to grow the market for insoluble sulphur as well. (Source: Yahoo Finance)

Indian specialty chemicals industry overview

Within India, the chemical sector is robust, with specialty chemicals accounting for 18%, equivalent to approximately USD 36 Billion a few years ago. This segment underscores the potential for greater global market penetration. Over five years, Indias chemical industry has seen significant growth, with a CAGR of ~11.7%, signifying a rapidly expanding sector. The rise of Indias specialty chemicals market can be attributed to the nations strong process engineering capabilities, cost-effective manufacturing, and a plentiful workforce.

The segment is projected to maintain its momentum with an expected compound annual growth rate (CAGR) of 12.4%, reaching an estimated USD 64 Billion by the year 2025.

Diversifying sources beyond China: Rising geopolitical tensions and strict safety regulations imposed by the Chinese government have disrupted the global supply chain for raw materials in the chemical sector. This disruption has led to increased prices for some specialty chemicals, prompting the industry to seek alternative sources outside of China, with India emerging as one of the prospects.

Advancements in Indian R&D and engineering: Traditionally, India has faced significant gaps in the technical expertise required for complex specialty chemical production processes. However, recent years have seen substantial improvements in R&D capabilities and process engineering expertise, positioning India as a leader in innovation within the specialty chemicals sector, where technical knowledge is crucial.

Supportive government initiatives: The Indian specialty chemicals industry has benefited from government measures, including anti-dumping duties on Chinese imports, policies that favour domestic manufacturers, tax subsidies, streamlined regulations, and export promotion schemes.

Global tyre industry overview

In 2023, the global demand for tyres reached approximately USD 333.86 Billion and is anticipated to grow at a CAGR of 6.3% from 2024 to 2032, reaching USD 578.57 Billion in value. Sales in the volume of tyres across the globe stood at 2.47 Billion units in 2023 and is anticipated to reach 2.94 Billion units by 2028. This indicates a shift in technical requirements in vehicle purchasing and design within a febrile macroeconomic landscape.

Several factors are driving a shift towards higher-performance tyres. Rising petroleum prices, stringent new fuel efficiency standards (Euro 7/NHTSA), and the shift towards electric vehicles are increasing the demand for tyres with lower rolling resistance. This is enhancing the offtake of specialty and premium tyres, especially for heavier

SUVs and electric powertrains, focusing on enhancing handling and durability. Across the passenger, light truck (PLT), two-wheeler, and truck and bus radial segments, sales of premium tyres are expected to grow at a rate of 9.3% annually from 2023 to 2028, significantly outpacing the growth of standard tyre models, which have a projected CAGR of 2.3%.

Increasing Asian demand is expected to grow the tyre industry in 2024. The growth of the Asian tyre industry is catalysed not only by the expansion of the automobile sector but also by decreased production costs. These lower costs result from reduced labour expenses and a shift towards using more synthetic rubber instead of natural rubber in tyres. Additionally, with the rising automotive production in Latin

America and the Middle East, robust growth is anticipated in these regions.

(Source: Expert Market Research, Smithers)

Tyre production (Billion units)

Indian tyre industry overview

The India tyre market size reached 196.3 Million units in 2023, and projected to expand to 253.9 Million units by 2032, growing at a CAGR of 2.9% during the period from 2023 to 2032. This growth is primarily driven by increasing automobile production, rising income levels, and escalating vehicle demand. The countrys domestic tyre sale volumes are anticipated to report moderate growth of 6-8% in FY 2023-24.

Tyre export volumes, which account for approximately 25% of the industrys sales by value, are estimated to have seen a low single-digit growth in FY 2023-24, following a contraction of around 7% in FY 2022-23. This change is attributed to reduced demand in key markets, exacerbated by inflationary pressures and higher interest rates.

Following a robust growth over the past two years, revenue growth in the tyre industry (consolidated for ICRAs sample set of seven leading tyre manufacturers) is estimated to have moderated to mid-single digits in FY 2023-24. This slowdown is due to an estimated domestic volume growth of 6-8%, flat realisations, and subdued exports.

(Source: Business Wire, Business Standard, ICRA)

Radialisation of commercial vehicle tyres: An increasing number of consumers are opting for radial tyres over other types due to their fuel efficiency and enhanced durability.

Safety awareness: Rising safety consciousness in India is necessitating the production of quality tyres. As a result, tyre customers have become increasingly demanding, urging the manufacturers to engage with reputable suppliers of insoluble sulphur.

Competition: Intense competition within the tyre industry is driving companies to launch superior products into the market.

Increase in tyre exports: The global trend of shifting production away from China, coupled with a competitive and conducive environment, is positioning India as a favoured global supplier of tyres.

Expanding roads and highways: India possesses the second-largest road network in the world, covering 6.67 Million km. Over 64.5% of goods transportation and 90% of passenger traffic in the country rely on this road network. With road freight movement expected to rise, there is likely to be an increased demand for commercial vehicles. (Source: pib.org, IBEF.org)

Development Scheme (CPDS): This scheme is designed to foster the growth and development of the chemical industry, focusing on specialty chemicals such as dyes and dye intermediates.

Public Procurement Policy: Under the Make in India initiative, procuring entities are required to meet local content criteria for a specific group of chemicals. The minimum local content requirement for these chemicals is set to gradually increase through to FY 2024-25.

2034 Vision for the Chemicals Sector: The government has outlined a vision for 2034 that focuses on enhancing domestic production, reducing imports, and attracting more investment into the sector. (Source: assets.kpmg)

Production-Linked Incentive scheme: The PLI allocated a budget of H25,938 Crore over five years from FY 2022-23 to FY 2026-27, designed to boost the manufacturing of advanced automotive technology products. This initiative is expected to drive the localisation of AAT products and promote the development of domestic and international supply chains. The scheme emphasises zero emission vehicles such as battery electric vehicles and hydrogen fuel cell vehicles. (Source: investindia.gov.in, economictimes.com)

There is a shift towards the production of eco-friendly and lighter tyres, which may lead to a higher use of insoluble sulphur per tyre.

There is an increasing trend towards the radialisation of commercial vehicle tyres.

India is rapidly emerging as a key centre for tyre exports, particularly as global manufacturers seek to diversify their sourcing away from China.

The Free Trade Agreement (FTA) between India and other countries could affect domestic industries, particularly with greater concessions on customs duties for finished tyres, despite Indias implementation of anti-dumping duties on tyre imports from China.

Chinese manufacturers of insoluble sulphur are increasingly targeting exports to utilise their excess capacities.

A surge in commodity prices and freight costs could impact profit margins.

Outlook

Domestic demand is anticipated from original equipment manufacturers (OEMs) in consumer segments like passenger vehicle and two-wheeler as well as robust replacement demand. While revenues are likely to expand by 5-7% this fiscal, high natural rubber prices and increasing crude prices are likely to moderate the tyre industrys margins by 200-300 basis points (bps) in FY25. On the capex front, the tyre industry is expected to continue to invest 6-9% of its revenues in FY25. (Source: Business Standard, ICRA)

India sulphuric acid and oleum

Sulphuric acid, also known as ‘oil of vitriol, is a corrosive mineral acid widely utilised in the chemical industry for producing fertilisers, detergents, and batteries. It plays a critical role in catalysing and dehydrating processes in petrochemical and organic chemical manufacturing. India stands as one of the largest consumers and a significant net importer of sulphuric acid globally.

In 2022, India became the fourth largest importer of sulphuric acid and oleum, with imports totaling USD 199 Million. The demand for this acid in India is expected to rise primarily due to increases in fertiliser production. However, significant capacity additions due to a copper smelter plant coming into production in Gujarat, for which sulphuric acid is a byproduct and capacity expansion in other copper smelter plant during the year is expected to have significant impact on pricing and margins. This pressure on margins, if it continues for some time is likely to put a question mark on the viability of standalone sulphuric acid plants.

Sustainability

In todays evolving world, sustainability has become a focus area for manufacturing companies. There is an increasing trend in the demand of sustainable products globally, which is pushing sustainable ways of manufacturing and has become crucial for business.

Your Company is one of the early movers in taking sustainable initiatives and working towards sustainable development. The Company has taken several actions and set ambitious targets for attaining sustainability goals, in line with SDG 2030 principles. The organisation is continuously working on various sustainability projects with a focus on energy and water conservation through initiatives which include rooftop solar plants at both plant locations, substitution by cleaner fuels such as Propane / PNG in place of Diesel/ LD, improvement in manufacturing processes, water rejuvenation through ponds among others. The sustainability focus extends to our procurement and sales cycle in order-to-order to make them more sustainable wherever feasible. Initiatives are continuously being taken in order to meet our sustainability goals. The Company has entered into an arrangement for supply of additional solar power through the captive solar power scheme of the Haryana government for its Dharuhera plant. Some of the major recognitions of our efforts include Ecovadis Gold award three years in a row, Responsible care logo awarded by Indian Chemical Council, supply chain sustainability through ISO 20400 accreditation, under Carbon disclosure program (CDP) rated under "B" category in Climate Change 2022 report. The Company strengthened its decarbonisation goals by committing to Science Based Target in 2023 and have committed to reduce carbon emissions by 42% (Scope 1 and Scope 2) while setting a target for Scope 3) in 2030 and become carbon-neutral by 2050.

The initiative and outcomes are outlined in detail in the Business Responsibility and Sustainability report, a part of this annual report.

Revenues: Revenues from operations during the year were H39,697.01 Lakh against H46,485.72 Lakh in FY 2022-23. This includes investment income of H1,122.72 Lakh in FY 2023-24 against H777.98 Lakh in FY 2022-23.

Margins: EBITDA for the year was H9,727.83 Lakh as against H9,825.94 Lakh in FY 2022-23. EBITDA margin of the Company increased to 24.5% from 21% in FY 2022-23. The net profit of the Company was H4,295.17 Lakh in FY 2023-24 compared to H4,370.76 Lakh in FY 2022-23. The revenue was lower due to a reduction in sales price on account of a correction in input costs and freight. However, the Company was able to largely maintain margins.

Sources of funds: The capital employed by the Company increased to H72,168 Lakh as on March 31, 2024 from

H71,122 Lakh as on March 31, 2023 owing to internal accruals.

The net worth of the Company increased by 5% to H62,566 Lakh as on March 31, 2024 from H59,368 Lakh as on

March 31, 2023. Long-term debt of the Company Including current maturities was H6,814.78 Lakh as on March 31, 2024, compared to H10,409.74 Lakh as on March 31, 2023. The long-term debt-equity ratio of the Company stood at 0.11 in FY 2023-24 compared to 0.18 in FY 2022-23 and the total debt-equity ratio (including working capital borrowings) of the Company was 0.21 in FY 2023-24 compared to 0.27 in FY 2022-23. The change was due to the repayment of a term loan during the year under review.

Applications of funds: Fixed assets (gross) of the Company increased to H69,890 Lakh as on March 31, 2024 from H68,692 Lakh as on March 31, 2023, including capital work in progress for expansion.

Working capital management

Total Current Assets of the Company remained stable at H24,375 Lakh as on March 31, 2024 as compared to H25,468 Lakh as on March 31, 2023. Current Assets included current investment and cash and bank balance of H10,060 Lakh in FY 2023-24 compared to H10,851 Lakh in FY 2022-23.

Inventories, including raw materials, work-in-progress and finished goods, among others, remained stable at H5,801 Lakh on March 31, 2024 from H5,991 Lakh as on March 31, 2023. Trade receivables as at March 31, 2024 were H7,351 Lakh compared to H7,558 Lakh as at March 31, 2023.

Key ratios and numbers

Risks management framework

The Company has a Risk Management Committee to monitor likely risks and mitigation strategies. The Company follows a defined and exhaustive risk management process that is integrated with its operations. Risk, that is the manifestation of business uncertainty affecting corporate performance and prospects, is an integral part of business. This enables the Company to identify, categorise and prioritise operational, financial and strategic business risks. To address the identified risks, the Company continues to spend significant time, effort and human resources to manage and mitigate such risks.

Economy risk: A sustained economic slowdown could have an impact on the demand for insoluble sulphur.

Mitigation: The Indian economy grew by an estimated 7.8% in FY 2023-24 compared to a growth of 7.2% in FY 2022-23. The global sulphur market is anticipated to grow in the coming years, largely driven by the expected strong demand in Asia, especially in India.

Measure: The Company has established stable relationships with major tyre manufacturers worldwide, enhancing the predictability of its revenue streams.

Debt service risk: The inability to service debt on schedule could have a negative effect on the Companys credit rating.

Mitigation: The Company follows a conservative policy related to leverage.

Measure: The Companys gearing stood at 0.21 as on March 31, 2024, better than 0.27 on March 31, 2023.

Employee risk: Disruptions in industrial harmony could impact employee retention. The Company faces a risk of underperformance due to potentially insufficient employee training and development.

Mitigation: The Company implemented policies to foster internal harmony, covering recruitment, training, empowerment, job satisfaction, and remuneration. It ensures that employee skills are continuously updated to align with evolving needs. Training programs were introduced to equip employees with new skills, preparing them for advanced responsibilities and enabling them to adapt to the changing requirements of the Company. The Company was awarded a Great Place to Work certificate.

Measure: As of March 31, 2024, the Companys workforce stood at 419 employees, with a retention rate of 90.8%.

Product acceptance risk: The intense competition in the market is leading to a need for improved product quality.

Mitigation: The Company achieved approvals from leading tyre manufacturers globally. The Company has a state-of-art R&D facility for the continuous improvement of its products as per customer needs.

Internal control systems and their adequacy

The Company has adequate internal control systems, which includes internal financial controls, the efficacy of which is continuously monitored and updated when required internally. The Companys internal control system ensures that assets are safeguarded, established regulations are complied with and pending issues are addressed promptly. The internal Auditors monitor the effectiveness of internal control procedures & compliance on quarterly basis and report to the Audit Committee of the Board of directors of the Company. The Audit Committee reviews reports presented by the internal auditors on a routine basis. The committee makes note of the audit observations and takes corrective actions, if necessary. It maintains constant dialogue with statutory and internal auditors to ensure that internal control systems are operating effectively.

Human resources

The Company employed 419 officers and workmen as on March 31, 2024. Increase in the value of human capital through the development of individual and collective competencies helped the Company stay in step with market developments and requirements. The Company has a policy to regularly run programs and projects on skill development and upgradation of employee competence. Programmes of knowledge sharing were conducted; employees are encouraged to attend external programs as required to enhance their perspective of emerging standards. A number of new ideas received from employees on process/cost improvements were implemented, resulting in productivity, cost optimisation and enhanced quality.

Cautionary statement

This statement made in this section describes the Companys objectives, projections, expectation and estimations which may be ‘forward looking statements within the meaning of applicable Securities Laws and Regulations. Forward looking statements are based on certain assumptions and expectations of future events. The Company cannot guarantee that these assumptions and expectations are accurate or will be realised by the Company. Actual results could differ materially from those expressed in the statements or implied due to the influence of external factors which are beyond the control of the Company. The Company assumes no responsibility to publicly amend, modify or revise any forward-looking statements on the basis of any subsequent development, information or events.