Poddar Pigments Ltd Management Discussions.

Financial and Operational Performance

Your Company registered a sale of Rs. 40197 Lakhs for the year ended 31.03.2020, as against Rs. 40404 Lakhs in the previous year. The plant operated smoothly and on schedule during the year at near-full capacity. However, as the Government of India declared total lockdown starting March 23, 2020, Your Company shut down its business operations. This was in compliance with the directives issued by MHA as a precautionary measure against the COVID - 19 pandemic. Manufacturing activities were recommenced on 7th May, 2020. In addition, your Company achieved ISO 9001: 2015 standards, reflecting its commitment towards quality and customer satisfaction.

Industry Structure and Developments

Polymers are a versatile compound that inspire innovations that help make life better, healthier and safer every day for millions of people. Their applications are innumberable - Polymers enable the manufacture of ultra- light, high strength car bodies; they are used in home furnishings like carpets and also personal use products like blankets and pillows. Strong, lightweight, and mouldable, plastics are used in thousands of products that add comfort, convenience and safety to our everyday lives.

The power of polymers lies in the versatility of their composition, which can be tweaked to adapt them perfectly to the intended application. Beyond the broad selection of available polymer types, the real power of polymers comes from the special characteristics that masterbatches add to their applications. With the benefit of highly customizable formulas, additives and colorant masterbatches help adjust a polymers properties to specifically suit a users needs, whether functional or aesthetic.

Plastics athough considered an environmental hazard, has found surprising benefits and uses during the current pandemic. It has found application in the making of PPE kits (including masks, gloves, face shields, medical gowns, aprons etc.) which protect frontline health workers and others from risk of exposure to the virus. Plastics are also being used in sample collection tubes, syringes, blood bags, thermal thermometers, sanitizer bottles, cleaning equipments, ventilator parts etc.

Your Company manufactures color & additive Masterbatches for the dope dyeing of man-made fibres (MMF), various plastic applications and engineering plastics & compounds. These are essential products required for textile and plastic products. Your Company also produces a whole host of smart products, which impart various forms of functionality to the end products, be it textiles or plastics. This is a promising product segment for the future.

The Indian polymer market registered growth of about 4% in FY 2019-20 y-o-y. PE demand growth was healthy at 7% y-o-y driven by policy boost for infrastructure, irrigation and other water management projects and growth in e-commerce sector. PP

demand growth was at 2% y-o-y subdued from auto sector and slowdown due to COVID-19. Overall, good demand growth has been observed from the health and hygiene sector (PP fibre filament), food and FMCG packaging (BOPP and LLDPE films), rigid packaging for edible oil, hair oil and sanitizers (PP and PE), milk packaging (LDPE), pipes and drip laterals for irrigation. Increased awareness and policies against single-use plastic resulted in lower demand in the first half of the year.

Due to an increase in domestic consumption, India is fast emerging as one of the focus destinations for plastics and downstream players worldwide. There is tremendous potential for growth in the sector, catalyzed by drivers such as a growing middle-class, higher disposable incomes and urbanization. Improved standards of living have led to an increase in consumption of a wide range of consumer goods from packaged food to automobiles. Investments in infrastructure and agriculture have also fuelled the demand for plastics and related products in India. Hence, it is rational to expect the demand for plastic products to further increase in the future.

The Government of India is playing its part in encouraging investments into the petrochemical sector, with a view to double the per capita consumption of Polymers to 20 kg a person by 2022. Currently, the average per capita consumption of polymers in India is 10 kg., a small number when compared to world average of 32 kg. Further, although Indias population is comparable to China, its polymer demand is only one-fifth that of China. This hints at a strong growth potential for the Indian plastics industry.

Sectors such as automobiles, consumer goods, infrastructure and irrigation are expected to drive the growth. Further, the packaging industry has witnessed a complete replacement of the old age products with the new ones.

As the Indian plastics industry grows, the consumption of masterbatches, which is linked to the consumption of polymers and synthetic dope dyed fibres, is also expected to grow at the same rate. This also suggests that the scope for innovative products in plastics and textile segments is large, which will further contribute to the growth of the masterbatch industry in years to come.

During FY 2019-20, Indias polyester filaments market grew by 12% on a y-o-y basis, staple demand weakened marginally by 1% y-o-y, while the PET market grew by 10%. The polyester fibre and filament market witnessed weakness at the start of the year due to weak demand and financial crunch with end users, which later improved, ahead of Diwali and Christmas celebrations.

While the global per capita consumption of man-made fibres is around 12 kg per annum, it is merely 3.5 kg in India, hence providing significant scope for the increase in domestic consumption.

Applications in Textiles

Your companys major product range comprises of masterbatches for the polyester textile segment.

While cotton is typically more comfortable in hot and humid weather, recent technological-developments in fabrics made with manmade fibres have bridged this gap, with added other advantages like strength, elasticity, color, absorption etc. Cotton will continue to be a crucial raw material for the textile industry, However, supply side pressures and price volatility will make it a challenge to satisfy growing demand in future, which in turn will increase the bias towards synthetic fibres, especially polyester.

The consumption of polyester fibres is gaining momentum due to factors such as the fluctuation in cotton prices, increased presence & sourcing by global brands where polyester fibre dominates, growth of womens wear segment, growth of value retail etc. The major raw material used in the global textile industry is polyester and cotton, while fibres like nylon, viscose are growing fast. Polyester is expected to dominate global textiles in the foreseeable future in almost all end use categories. Within manmade fibres, polyester has a huge share of 76%. Fibres like nylon, acrylic and polyolefin are more expensive and used mainly for specialized applications like technical textiles.In recent years, polyester has shown an impressive growth at around 7.6% CAGR and has gradually eaten into the share of cotton.

The following key trends have been identified in the fashion industry :

Increased emphasis on fitness and health as more and more people are opting for sports and physical exercises due to which they look for comfort along with performance.

Fashion cycles are very short; brands frequently introduce new products and styles in the market.

Consumer has become demanding and is seeking good quality at affordable prices.

With increasing awareness about environmental issues, the concern of sustainability is growing.

Owing to the above trends in the global market, polyester has proved to be a cost-effective and adaptable fibre type, and has increasingly picked up the bulk of new business growth. It is recyclable and can be blended with other fibres like cotton and spandex for performance requirements. Polyester provides a combination of comfort and performance as it can be easily processed to improve the fibre properties. That is why, it has wide acceptance in various end use categories like sportswear, leisurewear, women dresses, home textiles, automotive, carpet, other industrial segments etc.

Indias economy has been one of the best performing economies in the last decade and is expected to maintain a high growth rate over the next 10-15 years. In addition, Indian consumers affinity towards brands and organized retailing is increasing, which is helping the consumption growth of all products including textile and apparel. The increased per capita income level has also helped to make these products affordable to a wider section of the population.

A large number of technical textile products are consumed by industries like automotive, healthcare, infrastructure, oil & petroleum, etc. With increase in investments in these industry sectors and increased awareness level of the workers of those sectors regarding personal safety, consumption of technical textiles is increasing rapidly.

Increased awareness about hygiene & safety: The increased consumer awareness about hygiene & safety is supporting the growth of technical textile materials like baby diaper, sanitary napkins, wipes, high visibility clothing etc. in domestic markets.

Impact of Covid-19

The COVID-19 pandemic has bought us fact to face with unimaginable circumstances. The pandemic has shaken up the human race and nearly all global economies.

Almost all major economies, including China, the United States, India and many European nations, have been under complete or partial lockdown since beginning of CY 2020. Although opening up after lockdown has started since May 7, 2020, normalcy hasnt been restored yet in most part of the world as of end August 20.

Owing to the outbreak of COVID-19, Q4 of FY 2019-20 saw a slowdown in the industry all across the globe. Further, the global demand growth of polymers and textiles is expected to remain subdued in near term.

The domestic as well as global demand for textile and plastics products have come to a grinding halt due to the panic created by the COVID-19 outbreak. Due to the lockdown, all sorts of textile and plastics-related factories were closed and are now gradually start to reopen. The business community is on tenterhooks on account of cash crunch, supply chain disturbance and manpower-related issues.

The apparel industry has been severely hit all over the world. Retail stores have been closed and almost all buyers have been cancelling or postponing orders, owing to existing inventory. As it appears, they may not place orders in the next few months as well. The labour situation, in this scenario, is extremely dire. The daily wage worker, who forms about 80 per cent of the workforce in garment factories, is out of work and probably back in her hometown. Indias major export destinations, the United States and Europe, are the worst affected. It is tough to say when these countries will return to normal life, and even if they do, how soon will consumers start spending is uncertain.

According to a recent survey by the International Textile Manufacturers Federation (ITMF), on an average 8 per cent orders have dropped worldwide and the expected turnover this calendar year will be down by nearly 10 per cent over 2019 figures. The fall in orders ranges from 4 per cent in South America to 13.3 per cent in Africa.

The results show that, on an average, companies in all regions are expecting their turnovers in 2020 to be significantly lower than in 2019.

On world average, the turnover in 2020 is expected to be lower by 10.5 per cent against 2019. While North America is expected to witness an average decline of 7.5 per cent, companies in Europe are expecting a drop of 17.5 per cent, according to an ITMF press release.

The industry may take a much longer time to recover after the lockdown. It may take a minimum of four to six months to see businesses back to normal. Estimates of direct losses are difficult to make just yet and it is also tough to foresee the issues that will crop up later. Financially strong companies are expected to recover faster.

Even ahead of the pandemic, the global polyester sector was impacted by the USA - China trade war and bore further damage by the COVID-19 outbreak in the later part of the year. As the outbreak spread across China and many nations across the globe, governmental restrictions to contain the outbreak were imposed. Consequently, the demand for polyester weakened.

According to the Wazir Advisor report:

Apparel retail will reduce anywhere between 20 48% depending on the lock down periods and anticipated recovery period from Rs.5,33,000 Cr (FY 20).

Recovery pace will vary across segments (apparels-automotive), seasons and categories (casual wear to party wear).

The value of production will reduce proportionately.

40% and 45% market reduction expected in US and EU respectively. 122 billion USD export market will vanish from these market.

Buyers will increasingly look to replace China.

Indian apparel market will reduce by 25% - 45%.

As we are still reeling under the impact of the pandemic, it is difficult to predict the full extent of the impact the industry will have to endure.

Managing the Black Swan event at your Company:

Since the announcement of the lock down, Your Companys operations were shut down on 22nd March 20. We have resumed operations on 07th May and since then, the plant has been operating smoothly. All guidelines, as issued by the government, are being strictly followed w.r.t. health, hygiene and safety of the employees.

Industrial relations with the employees and management are excellent, hence the impact of non-availability of manpower as seen with most of the industries is not being faced by Your Company. As a result, the production operations are running at around 60 % of normal capacity. Once all the customers return to their full production capacity, your companys operations will resume full capacity too.

Since Your Company has a very broad product mix for various applications of masterbatches in the textile and plastics segments, we have been able to achieve sales of around 60% of pre Covid-19 sales and hope to increase it in the coming months.

Digital communication by way of video conferencing, email, telephone have been strengthened and communication with all partners, customers and supplier have been established successfully by this mode.

Continuous interaction and monitoring of the suppliers are being done so that the supply chain is not disturbed.

Opportunities post Covid-19

India is not only the second biggest manufacturer of textiles, apparel and technical textiles, but also offers diversified product baskets across the value chain at a competitive price. India has a robust end-to-end textile and apparel value chain covering fibre to retail. The sector accounts for around 2 percent of Indias GDP and around 13 percent of Indias export earnings. The design capabilities and flexibility of textile production lines have made India a sought after sourcing base for value added products and textile products of smaller lot sizes.

The Indian polyester industry will find itself at an advantageous position with the growth of consumer demand and a strong manufacturing base, enabling India to serve as a regional polyester manufacturing hub. India enjoys a comparative advantage in terms of skilled manpower and cost of production, relative to other major textile producing regions.

The health-care and hygiene sectors have witnessed a spike in demand due to the COVID-19 crisis with increased usage of medical textiles and non-woven products.

India depends significantly on raw material imports for high-value-added synthetic products. With supply chain disruption in China, the global textile industry is expected to experience a vacuum for these raw materials in the post COVID-19 era. Indian textile players stand to gain owing to the abundance of natural raw materials, a young workforce and end-to-end value chain capabilities.

Long before COVID-19, U.S. fashion brands and retailers have begun to reduce their exposure to sourcing from China, especially since October 2019 due to concerns about the US-China tariff war. Notably, Chinas market shares in the U.S. apparel import market dropped to only 11% in March 2020 (and 18.3% year to date in 2020), a record new low in history (it was 30% in 2019). Chinas lost market shares have been picked up mostly by other Asian suppliers. Also the current situation also presents an opportunity for India as it helps brands reduce their dependence on China.

Other advantages of India such as an English-speaking industry representation, unbiased legal systems and a wide scale proven democracy have all provided India with a chance to score more than its nearest competitor China.

As food and clothing will continue to remain key purchases, there is always hope for this industry.

With your Company being the pioneer in India for development and manufacturing of masterbatches for the textile segment and having a strong customer base in domestic as well as export market, it is expected that we can gain from these developments.

Under the new normal, our focus is as follows:

Continuous research & development, to stay tuned to the changing needs of consumers.

Promote sales of various functional products that have been developed e.g. antimicrobial properties, flame retardant, soft to touch, hydrophilic, UV resistance, etc. which will be in greater demand

Operational excellence, Innovation and cost management.

Working capital and inventory management.

To manage near-term risks

Build upon new opportunities in the new normal world.

Ensure customers demand is being met at all times.

Successfully implementation of the ongoing capacity expansion at the new site.

Your Companys thrust on the continuous development of new and innovative products and market-focused application development will enable it to stay ahead of the competition.

Your Company has also made in-roads into some of the worlds largest masterbatch markets. The growth from export sales is expected to be around 10% per annum for the next few years.

Your Company also manufactures color and antimicrobial masterbatches for the PPE kits and other industries and expect good sales in the coming months.

In order to serve this growing market, your Company had planned in the last financial year for an expansion with a new site and has continued the construction of the factory post COVID-19, which will add an enhanced capacity of approx. 20-25%.

Demand in Asia is likely to be healthy, led by India and China, as the economies emerge from the COVID-19 crisis.

FY 2020-21 will show lower sales due to COVID-19 but it can be anticipated that due to strong R&D and varied product mix, Your Company is confident in achieving sales to pre COVID-19 level in the FY 2021-22 and optimistic to enhance in the subsequent years.

Hence, it can optimistically be stated that in the coming years, with the growing demand for masterbatches and the strategies being adopted, Your Company is headed towards excellent growth and better all-round performance.

Opportunities and Threats

 

Key Opportunity:

Due to the low per capita polymer and polyester consumption in India, this segment is likely to experience an increase in demand. Your Company is a pioneer in the manufacture of masterbatches for the synthetic fibre industry, based on polyesters, nylons and polypropylenes, for specialty and general purpose applications such as automotives, carpets, home-furnishings, apparels, non-woven fabrics, technical fibres, etc. It is expected that the demand for Your Companys products will grow manifold with the increased requirements of the polyester fibre industry.

 

Key Threats & Risks:

Demand Risk: Recession in the user industries may affect demand for the products. Product changes, high fluctuation in the prices of raw materials, competition from domestic and global players and changes in the demand-supply environment may increase the pressure on margins. With continuous improvements in technology, new product developments and cost effective measures, Your Company is confident that it will successfully meet these challenges.

Foreign Exchange Risk: Fluctuations in foreign currencies also play a major role in the profitability of Your Company. It suitably hedges the differential short-term exposure between export and import to appropriately manage the currency risk.

Competitor Risk: The market is highly competitive with no fiscal barriers and no barrier to entry for new players. To address this risk, Your Company deploys multi-pronged plans for continuous improvements in the area of cost, quality, customer service and brand equity.

The major risks prevalent in this industry are the high fluctuation in the prices of raw materials, technology obsolescence, competition from global players and further aberration in the custom duties in the coming years under WTO obligations. These can create pressures on the margins and thereby affect the performance of Your Company. Furthermore, low economic growth can affect sales and margins. Your company is taking due care against the prevailing risks in the industry by adopting new technologies, introducing innovative Masterbatches through its regular R&D, reduction in material costs, re-engineering business and manufacturing processes and much more. Foreseeable risks to the Companys assets are adequately covered by comprehensive insurance policies.

Your Company has well designed strategies to identify and mitigate operational, financial, reporting and legal compliances.

Internal Control Systems and Their Adequacy

Your Company has internal control procedures commensurate with the Companys size and nature of business. Your Company has an in house team that carries out internal audits and ensures that all transactions are appropriately authorized, recorded and reported. Exercises for safeguarding assets and protection against unauthorized use are undertaken from time to time. There are well-established policies and procedures in place across Your Company. The objective of these procedures is to ensure the efficient use and protection of your Companys resources, accuracy in financial reporting and due compliance of statutes and Company procedures. The Internal Audit reports, the progress in implementation of recommendations and actions taken contained in such reports and the adequacy of internal control systems are reviewed by the Audit Committee of the Board in its periodical meetings. The same are also examined by the Statutory Auditors in course of their Audit procedures.

Human Resources

The talent base of Your Company during the year 2019-20 was 298 (excluding casual). The Board of Directors expresses its appreciation for the sincere efforts made by the employees of your Company at all levels during the year.

Your directors believe and affirm the importance of developing human resources, which is the most valuable asset of your Company and the key element in bringing all round improvements and achieving growth. The human resource philosophy and strategy of your Company has been designed to attract and retain the best talent. In practice, it creates and nurtures a work environment that keeps employees engaged & motivated. Employee relations during the year under review were peaceful. The contribution and co-operation received from employees across all levels was excellent and the same has been appreciated & supported by the management through its continuous & systematic training programmes.

Corporate Social Responsibility

The management of Your Company is of the opinion that the companys contribution to the society should be of its own volition and not out of compulsion. Hence, even before it was mandated by law, the company had initiated measures over the past several years, to help the underprivileged sections of the society. The disclosures as per Rule 9 of Companies (Corporate Social Responsibility Policy) Rules, 2014 has been made and further details on CSR activities is annexed and marked as Annexure VIII to the Directors Report.

Key Performance Indicators

Details of significant changes (i.e. change of 25% or more as compared to the immediately previous Financial Year) in key financial ratios, along with detailed explanations therefore, including:

There has been significant changes in the Financial Ratios of the Company. The key Financial Ratio are as below:-

Particulars 31.03.2020 31.03.2019 Explanation for change
1 Debtors turnover 8.78 7.59 Change not significant
2 Inventory turnover 7.02 7.26 Change not significant
3 Interest coverage ratio 96.72 51.72 Decrease in interest and increase in Profit.
4 Current ratio 4.99 6.15 Increase in sundry creditors and advance from customers
5 Debt to equity ratio 0.00 0.00 No change
6 Operating profit margin (%)on turn over 7.75 6.39 Reduced Raw Material cost.
7 Net profit margin (%) on turn over 5.96 4.63 Reduced Raw Material cost.
8 Return on Net Worth 11.48 9.83 Increase in profit

Forward- looking Statements

The report contains forward-looking statements, identified by words like plans, expects, will, anticipates, believes, intends, projects, estimates and so on. All statements that address expectations or projections about the future, but not limited to the Companys strategy for growth, products development, market position, expenditures and financial results, are forward looking statements. Since these are based on certain assumptions and expectations of future events, the Company cannot guarantee that these are accurate or will be realized. Your Companys actual results, performance or achievements could thus differ from those projected in any forward-looking statement. Your Company assumes no responsibility to publicly modify or revise any such statements on the basis of subsequent developments, information or events.

For and on behalf of Management Team
M. K. Sonthalia S. S. Poddar
DATE : 31st August, 2020 DIRECTOR MANAGING DIRECTOR
PLACE : CHENNAI (DIN: 00021297) (DIN: 00058025)