POCL Enterprises Ltd Management Discussions.

The Management discussion and analysis report sets out developments in the business environment and the Companys performance since the last report. The analysis supplements the Boards report, which forms part of this Annual Report.

GLOBAL & INDIAN ECONOMIC SCENARIO

Our world is witnessing an unprecedented pandemic that has virtually spread to every country in the world. This has resulted in loss of precious human lives and lockdown measures put in place to contain it are curtailing economic activity, driving up unemployment, and depressing international trade. IMF in its baseline scenarios is projecting the global economy to contract sharply by negative 3 percent in CY20, much worse than during the 2008-09 financial crisis.

The Indian economy continued with its slow growth trend, with quarterly growth rates trending downwards through the year. The decline was led by a slowdown in the key construction sector, a restricted real estate space and persistent downturn in the automotive sector. The fourth quarter witnessed a growth rate of 3%, the lowest in almost a decade. It aptly highlighted the concern of deceleration in the domestic economy even before the impact of COVID-19 shock.

The easy monetary policy regime implemented by the Reserve Bank of India as well as measures taken by the Central Government like sharp reduction in corporate tax rates have not helped the economy get back to its growth trajectory. On a relative basis, the Indian currency was stable for most part of the year. It faced significant downward pressure in the last quarter on bouts of increased volatility across global financial markets with the rising uncertainty around COVID-19. Similarly, crude oil prices also exhibited stability for most part of the year before seeing a sharp fall to historic lows in the last couple of months of FY 2019-20.

The outbreak of COVID-19 severely impacted the Indian economic activity towards the end of FY20 and is certain to have a major impact in FY21. The International Monetary Fund slashed its FY21 growth projection for India to 1.9% from 5.8% projected in January, holding that the ‘Great Lockdown to combat the COVID-19 outbreak will throw the world economy into the worst recession. While IMF highlights that India and China would be the only two major economies likely to register growth, with all others contracting the recovery will depend on how the pandemic is controlled in the second half of 2020 and how consumer and investor confidence is restored.

Despite short-term challenges, long-term Indian economic growth outlook continues to be positive. Growth is expected to rebound owing to lagged effect of fiscal and monetary stimulus. Government of India and the Central Bank have moved in a synchronised manner to provide large economic relief packages and flood the financial markets with abundant liquidity as a measure to support the economy. However, the outlook for FY21 remains very uncertain due to the disruption caused by COVID-19 and the progress that we would exhibit in controlling the spread of the pandemic would largely determine the rate of recovery for the economy.

INDUSTRY STRUCTURE, DEVELOPMENTS AND OUTLOOK

Zinc

Galvanizing industry is the single largest consumer of zinc accounting for about 70% of the global production as zinc is efficient in protecting steel against corrosion. Apart from this, zinc is also used for manufacturing alloys and other chemical compounds.

In FY 2019-20, the zinc market continued to remain in deficit though the gap between refined supply and demand narrowed. Refined metal supply increased by 5.1% mainly due to increase in Chinese refined metal output as smelters restarted after temporary shutdowns due to environmental regulations. In India, zinc demand until Q3 FY 2019-20 was not impacted, but the zinc demand contracted in Q4 with the outbreak of pandemic and the ensuing lockdown, which halted manufacturing activities. The zinc oxide market also remained subdued throughout the year due to slow down in automotive sector.

Zinc LME prices remained volatile during FY 2019-20, starting off the year at $3,000 per tonne plus levels and gradually cooling off on the back of continued trade tensions between the US and China. While the zinc prices could take some support in the later part of the year, the outbreak of the COVID-19 pandemic, pushed the prices below $2,000 per tonne by March 2020.

The Governments plan to spend US$1.5 trillion on infrastructure over the next decade, in the form of new and upgraded railway stations, new airports, road projects, smart cities, electrification projects, renewable energy installations and investment in transmission corridors will provide a long-term boost to Indian zinc demand.

Lead

Lead is the only metal in the world, which can be recycled number of times without diminishing its characteristics. The main use for Lead is in Lead Acid Batteries, mainly serving the automotive and telecom sector. Additionally, lead compounds are used in PVC processing as stabilizers and in the preparation of pigments and glasses. In sync with prices of other base metals, lead prices too headed south amid intensifying trade disputes between the US and China. Weakening global economy, spread of COVID-19 and falling automotive sales were other factors exerting a downward pressure on lead prices. The average lead prices were at $1,952 per tonne during the year, down by 8% over FY 2018-19.

In terms of opportunities for lead market, the adoption of the start-stop (idle-stop) technology in conventional vehicles will boost demand for lead due to 25% more metal is being used in the technology. Further, the regulatory push to the renewable energy sector (wind, solar, etc.) will aid demand for lead-acid batteries, which are primarily used as storage devices because of their high capacity and low-cost design. On overall, the rising adoption of lead-acid batteries due to their lower cost of storage, improved charging time and energy transfer rate will boost demand for lead over the next few years.

PVC Stabiliser

India is one of the fastest growing markets for PVC products which include pipes and fittings, doors and windows, foamed sheets etc. The government of India has renewed its commitment to providing piped water supply to all residential households through the Jal Jeevan Mission. The pipe sector alone, that constitutes 70 - 75 % of the overall PVC market, is projected to grow at 6 - 8 % and the overall PVC market is expected to grow at a higher rate as demand for PVC windows and doors is increasing.

Currently, almost 80 % of PVC manufactured in India uses lead based stabilizers. While the market share of lead - free stabilizers was expected to increase at the cost of lead stabilizers, especially in pipes for drinking water applications, higher raw material cost and other factors have resulted in continued use of lead stabilizers. This (ratio of 80 - 20) is expected to continue until the government proposes regulation to phase out lead based stabilizers. Suitable steps are also being taken by POEL to meet the change over from lead stabilizers to non-lead stabilizers

OPPORTUNITIES AND THREATS

POEL believes that it has a competitive edge in the market as the Company delivers timely and quality products to its customers. The Company has long-standing relationship with many of its customers and vendors. POEL also believes that the real strength of the Company lies with its employees and they are the assets of the Company.

The Company faces foreign currency fluctuation risk. Movement in functional currency against major foreign currencies may impact the companys revenue, earnings and cash flows. Any weakening of functional currency may impact the companys cost of import and cost of borrowings. The Company uses forward exchange contracts to hedge the effects of movements in exchange rates on foreign currency. Further, the companys export revenue also acts as a natural hedge for its import operations.

The Company considers exposure to commodity price fluctuations to be an integral part of our business and its usual policy is to sell its products at prevailing market prices. Price and demand of the Companys finished products are inherently volatile and remain strongly influenced by global economic conditions. Any fluctuation in the finished product prices has direct impact on the Companys revenue and profits.

THE CoVID-19 IMPACT

All the operations of the Company were disrupted since mid-March 2020 and the Company saw partial resumption since early May 2020. Due to the outbreak of the Pandemic, the commodity markets tumbled with lead prices falling from USD 1939/MT to low of USD 1589/MT & zinc prices falling from USD 2018/MT to low of USD 1773/ MT from the end of February 2020 to March 2020. The Company had accounted for Mark to Market (MTM) loss of Rs. 213.11 Lakhs in the month of March 2020. The interest cost during the lock down period, poor debtors collection, payment of detention charges due to delay in clearing the raw material from container freight stations due to lock down restrictions and payment of full salaries & wages in spite of lower production levels will have a major bearing on the Companys profitability for Q1 of 2020-21.

The Company has now been able to open all manufacturing plants. However, the business is slow and yet to pick. Availability of labour is an area of concern. Facilities that have opened across the Company have been sanitised so that our people are safe and secure. All safety protocols of temperature sensing, wearing of safety gears, social distancing, sanitizing and washing hands are being adhered stringently. The Company has taken all the necessary steps to adhere to the guidelines for social distancing provided by the Ministry of Home Affairs, along with the various directives issued by relevant state governments and local authorities. The Company has put in place safety measures keeping in mind the safety, health and well-being of the employees and other stakeholders at all the locations where it operates.

FINANCIAL AND OPERATIONAL REVIEW

Financial Year 2019-20 has been a disappointing year for the Company. Until Q3 of 2019-20, the Company registered a Profit after tax of Rs. 241.02 Lakhs, after which the company profitability was badly hit due to drastic fall in the commodities market. Due to the outbreak of the CoVID 19 pandemic, the commodity markets tumbled with both lead and zinc prices falling approximately by USD 300/MT between February and March 2020. The Company had accounted for Mark to Market (MTM) loss of Rs. 213.11 Lakhs in the month of March 2020 and with this, the company reported a loss of Rs. 60.50 Lakhs for the full year 2019-20. Brief highlights on the financials and operational performance for the year 2019-20 is summarized below:

• Revenue from Operations for the financial year 2019-20 was Rs. 346.86 Crore as against Rs. 453.73 Crore in the previous year. The de-growth of 23% over the previous year in the top line coming majorly from zinc oxides segment. The reduction in zinc oxide sales was due to slow down in automobile sector, coupled with companys strategy to do away with less profitable orders.

• Our export sales (including SEZ sales) for the year 2019-20 was Rs. 114.42 Crore as against Rs. 152.00 Crore in the previous year.

• Major expenditure of the Company is accounted towards material cost. Material cost for the year 2019- 20 was about 89% of the total revenue as against 90.50% for the previous year. The company had accounted for Mark to Market (MTM) loss of Rs. 234.04 Lakhs for the year as a part of its hedging operations.

• Though the employee cost has remained almost at the same levels in absolute terms, but when compared to its revenue from operations, the employee cost has increased by 0.68% predominately reflecting the full year impact of increments.

• Finance cost of the company for the year was Rs. 688.89 Lakhs as against Rs. 964.58 Lakhs in the previous year.

• Depreciation and Amortization cost has remained almost at the same levels as compared to the previous year. The company had accounted for Rs. 10.61 Lakhs on account of depreciation from Right of Use Asset.

• Other expenses for the year was Rs. 23.07 Crore as against Rs. 29.11 Crore in the previous year.

• The company reported a net loss of Rs. 61.52 Lakhs. The reason for the loss was due to drastic fall in the commodities market where both lead and zinc prices tumbled approximately by USD 300/MT between February and March 2020.

• The Company had positive cash flow from operations of Rs. 16.65 Crore for the year.

• The total shareholders funds as on March 31,2020 stood at Rs. 33.56 Crore.

KEY FINANCIAL RATIOS

Sl.No Key Financial Ratio 2019-20 2018-19 Remarks
1. Debtors Turnover Ratio 8.07 times 7.60 times -
2. Inventory Turnover Ratio 12.69 times 28.16 times A change of almost 55% is only because of year-end accumulation of inventory for the current year. The ratio at year- end is unrepresentative of the position during the year.
3. Interest Coverage Ratio 0.78 times 0.33 times The increase in coverage of interest cost was mainly due to reduction in finance cost and losses for the year as compared to previous year.
4. Current Ratio 1.01 times 1.02 times -
5. Debt Equity Ratio 2.97 times 2.92 times -
6. Operating Profit Margin 1.54% 0.71% The increase in operating profit margin is not comparable to previous year due to significant losses and higher finance cost in the previous year.
7. Net Profit Margin (0.44%) (1.42%) The increase in net profit margin is not comparable to previous year due to significant losses (due to higher material cost because of LME Fluctuations and higher finance cost) in the previous year.
8. Return on Net worth (4.57%) (18.81%) The increase in return on net worth is not comparable to previous year due to significant losses in the previous year.

GEOGRAPHICAL REVENUE ANALYSIS

Particulars 2019-20 2018-19
Domestic 70.50% 71%
International 29.50% 29%

SEGMENT-WISE PERFORMANCE

The business of your Company is structured into three segments i.e, (i) Metal (ii) Metallic Oxides and (iii) Plastic Additives. The segment wise performance is as follows:

Segments Turnover Profit/Loss before Interest & Tax
Metal 16,470.59 538.08
Metallic Oxides 15,100.40 141.65
Plastic Additives 5,520.37 441.66

Metal segment contributed for about 44% of the total turnover of the Company. The segment generated

a profit of 3.26% on its turnover for the year as against the loss in the previous year. The turnover in metallic oxides segment dropped from Rs. 224.25 Crore in the previous year to Rs. 151.00 Crore in the current year. The reason for reduction in turnover of metallic oxides is coming from zinc oxide business where the sales was down due to slow down in automobile sector. The Plastic Additives business contributes about 8.00% of profit on its turnover and remains to be the most profitable segment of the Company.

RISKS AND CONCERNS

Risk is an integral factor, virtually in all businesses. At POEL, risks are adequately measured, estimated and controlled. Irrespective of the type of risk or the activity that creates it, the Companys fundamental approach to the risk management remains the same by identifying and measuring risks, leverage an in depth-knowledge of the business and competitors and respond flexibly in our risk understanding and management.

Your Company operates both in the domestic and international market. Having our global presence with import and export operations, we are subject to currency rate fluctuation which may result in gains or losses. In order to safeguard the business, your company adopts hedging techniques to protect itself against currency fluctuation.

Raw material availability and commodity price fluctuation also remains an area of challenge. Your Company is in the business of non-ferrous metals, which are subjected to market volatility. This volatility can create deep pockets either ways. Competition from unorganized players can also act as impediment to the business.

Pandemic risk: The latter part of the year saw the risk of the pandemic affecting operations across the globe. The Company was not immune to the same. The outbreak of pandemic COVID-19 has disturbed the economic activity and financial structures of the whole world. It is also observed that the economic recovery from this fatal disease is only possible by FY21 because it has left severe impacts on the global economy and the countries face multiple difficulties to bring it back in a stable condition.

Amidst the crisis, the safety of our employees has been our top-most priority and the Company has taken several measures to ensure their well-being. Employee safety was ensured by following social distancing and usage of necessary sanitizers. The Company quickly enabled work from home for most of its employees.

While risk is an inherent aspect of any business, the Company is conscious of the need to have an effective monitoring mechanism and has put in place appropriate measures for its mitigation.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has a proper, adequate internal control system to ensure that all assets are safeguarded and protected against loss from unauthorized use or disposition, and that the transactions are authorised, recorded and reported correctly. Investment decisions involving capital expenditure are taken up only after due appraisal and review. Adequate policies have been laid down for approval and control of expenditure. The internal control is designed to ensure that the financial and other records are reliable for preparing the financial statements and other data, and for maintaining accountability of persons.

The CEO and CFO Certification provided in this Annual Report discusses the adequacy of our internal control systems and procedures. M/s. Raju & Daftary, the Statutory Auditors of the Company have reported that the Company has adequate internal financial control system over financial reporting and such internal financial control systems over financial reporting were operating effectively. Further, the Company has an Internal Auditing system in place handled by a reputed Chartered Accounting firm. The findings are discussed with the process owners and corrective actions are taken wherever necessary. The Audit Committee reviews the reports submitted by the Internal Auditors and Statutory Auditors. The Audit Committee considers suggestions for improvement. The audit committee, to ensure effectiveness of the internal control system, reviews the audit observations and corrective action taken thereon.

MATERIAL DEVELOPMENT IN HUMAN RESOURCES/INDUSTRIAL RELATIONS

Your Company believes that its employees are the main force in driving performance and developing competitive advantage. pOel maintains good employer-employee relationship. In a competitive economy, proper utilization

of human resource plays a crucial role. It begins with best practices in recruiting people and moves through learning and development, engagement, employee feedback and recognition.

To keep the Company and its human resource competitive, the Company organizes training programs to train employees at various levels. Technical and safety training programs are conducted to enhance workers knowledge and application skills.

The Company has a strength of 314 employees as on March 31,2020 (398 employees as on March 31,2019). Industrial relations continued to remain cordial and harmonious during the year.

CAUTIONARY STATEMENT

Statements made herein describing the Companys expectations or predictions are "forward-looking statements". The actual results may differ materially from those expected or predicted depending on market conditions, input costs, economic development, Government policies and other incidental factors.

For POCL Enterprises Limited
Devakar Bansal Sunil Kumar Bansal
Place: Chennai Managing Director Managing Director
Date : July 29, 2020 DIN:00232565 DIN:00232617