Pokarna Ltd Management Discussions

Economic Overview

Global Economy¹

The reported year observed the world economy grappling with macroeconomic challenges. Despite facing major headwinds such as geopolitical turmoil, fluctuating commodity prices and elevated inflationary pressures across both advanced and emerging markets, the global economy showcased resilience and grew at a rate of 3.2%. Central banks of major economies raised interest rates to rein in inflation, leading to a rapid decline in inflation across most regions. This monetary tightening ensured gradual economic expansion and increased employment opportunities across developed economies such as the United States and Europe. Several emerging markets, including India, Vietnam, and Mexico also demonstrated robust growth, coupled with increasing capital inflows.

The unrelenting geopolitical unrest continued to disrupt global supply chains and trade dynamics. Chinas economic performance remained sluggish throughout CY 2023 and this trend is expected to persist in CY 2024. Chinas slow growth rate is likely to weigh on the global economy, given its substantial manufacturing capacity and extensive supply networks.

Outlook

The outlook for global economy holds optimism, with central banks of major economies accommodating major monetary policies and inflationary pressures reducing in most regions. Projections indicate that the Gross Domestic Product (GDP) growth rate will remain steady at 3.2% in CY 2024 and CY 2025. There is an anticipated rebound and stabilisation of the global economy despite ongoing geopolitical tensions in Europe and West Asia. Initiatives undertaken by governments of big economies across the world are expected to become instrumental in shaping a sustainable and inclusive growth trajectory in the future.

Global GDP growth rate

Indian Economy²

The Indian economy showcased notable flexibility in FY 2023-24, maintaining its position as one of the worlds fastest growing economies despite various global headwinds. A robust macroeconomic framework, increasing domestic demand and prudent monetary policies implemented by the Reserve Bank of India (RBI) enhanced the growth of Indias real GDP by 8.2%. The manufacturing sector emerged as a key driver of industrial growth, registering a steady 11.6% increase throughout FY 2023-24. This growth was supported by enhanced capacity utilisation and a seasonal upsurge in merchandise exports. The governments focus on streamlining supply chains and increased public expenditure helped cushion the country from significant economic disruptions, benefitting industries like construction and real estate.

India GDP growth rate (in %)

Outlook

India is expected to maintain its growth trajectory in the upcoming years, primarily driven by strong macroeconomic fundamentals such as political stability, increased government emphasis on public capital expenditure and rising credit demand. India is establishing itself as a viable alternative for China; this is anticipated to propel the countrys growth and make India the third largest economy in the world by FY 2027. The nations expanding export opportunities coupled with rising domestic demand are expected to facilitate India to surpass the growth of the other economies in the foreseeable future.

Increase in Capital Expenditure

Stone Industry Overview

Global Granite Stone Industry

The global granite industry is a significant segment in the natural stone market, valued approximately at USD 18.8 billion in 2023 and projected to grow to USD 23.3 billion by 2032, with a Compound Annual Growth Rate (CAGR) of 3.9%.³ Granite is an igneous rock known for its durability and aesthetic appeal. It finds its extensive use in construction, particularly for countertops, flooring and wall cladding. This industrys growth is driven by rising demand for premium building materials in both residential and commercial sectors, as well as technological advancements in quarrying and processing that enhance productivity and product quality. The Asia -Pacific region dominates the granite market, with countries like China being the major producers and exporters. Rapid urbanisation and industrialisation in these regions fuel the demand for granite in construction and infrastructure projects. North America and Europe maintain steady demand due to established construction industries. They incline towards a preference of high quality and aesthetically pleasing materials.

Housing Unit Sales

Indian Granite Stone Industry

The Indian granite industry is a key player in the global stone market, known for its diverse colors, durability, and intricate patterns. This industry significantly contributes to Indias economy through exports, with major markets including the USA, Europe, the UK, Russia, the Middle East, China, and Canada. Granite production is primarily concentrated in Tamil Nadu, Karnataka, Andhra Pradesh, and Telangana, where extensive reserves are found, with additional significant deposits in Rajasthan, Gujarat, and Madhya Pradesh. Technological advancements have been substantial, with increased investment in modern machinery and processing units enhancing production capabilities and the quality of finished products to align with international standards. However, the industry faces significant challenges, particularly concerning environmental sustainability. Quarrying activities have been criticized for causing land degradation and biodiversity loss, leading the Indian government to implement stringent regulations to mitigate these impacts. Compliance with these regulations is costly and time-consuming, impacting operational efficiency. Additionally, Indian granite exporters face stiff competition from countries like China and Brazil, which often offer lower-cost products, making it difficult for Indian exporters to compete on price. Supply chain issues, including the availability of raw granite blocks and efficient transportation and logistics, are also critical, with any disruptions adversely affecting the industry. The demand for granite is closely tied to the cyclical construction industry, and dependence on export markets exposes the industry to global economic conditions, including trade policies, tariffs, and international relations. Thus, while the Indian granite industry remains stable and globally significant, addressing environmental sustainability, intense global competition, supply chain efficiency, technological adaptation, and economic volatility is crucial for its continued growth and success.

Quartz⁴

Global demand for engineered stone countertops is anticipated to grow by 9.3% annually, reaching 128 million square meters by 2027 . Over the past decade, engineered stone has significantly increased its market share, from 7% of global countertop sales in 2012 to 14% in 2022. It has become the leading choice in the large US market, favoured for its aesthetics, durability, and low maintenance compared to natural stone. The continued strong sales growth and market share expansion can be attributed to several factors:

An expanding range of colors that align with current design trends, offered by both domestic and international suppliers.

Increased availability of non-Breton equipment, predominantly manufactured in China, which has enabled producers to greatly expand their capacity. Previously, the market was constrained by Bretons dominance in engineered quartz fabrication and its stringent quality standards.

A plentiful supply of affordable quartz slabs from parts of the Asia/Pacific, including India.

Enhanced distribution networks for engineered stone products.

In 2022, North America led the global demand for engineered stone countertops, holding a 35% market share. The Asia/Pacific region followed, accounting for 26% of global sales.

As a company, our products are predominantly used as countertops in residential kitchens, with sales closely tied to home renovation and remodeling projects, as well as new residential construction in the United States. However, the U.S. housing market continues to encounter significant challenges due to high inflation and rising interest rates. The resulting increase in mortgage rates has suppressed the housing market, leading to a slowdown in home renovation activity and a reduction in discretionary spending on purchases such as countertops. Consequently, these economic conditions have adversely affected the demand for our products.

As we look ahead, we anticipate subdued sales in FY 2025 for granite due to the challenges as outline in the Annual report. However, we remain optimistic about the growth in both revenues and profitability of our engineered quartz surfaces subsidiary, PESL.

Countertop market Overview⁵

The global countertop market is projected to expand at an average annual rate of 3.0%, reaching 652 million square meters by 2028 and a total market value of $49.5 billion . This growth will be driven by an increasing preference for countertops over freestanding or wall-mounted fixtures in both residential and commercial kitchens and bathrooms. The surge in residential remodeling activities, with countertop replacements being a popular choice for kitchen and bathroom updates, will further fuel demand. Although the actual demand for countertops is anticipated to grow steadily through 2028, the market value will experience a slower growth rate. This is due to the expected stabilization of countertop material prices, which had previously surged in 2021 and 2022 due to pandemic-related factors.

Outlook for Granite and Quartz Surface

As we look ahead, we anticipate subdued sales in FY 2025 for granite due to the ongoing challenges in the U.S. housing market. However, we remain optimistic about the growth in both revenues and profitability of our engineered stone subsidiary, PESL. The engineered stone market continues to show strong potential, driven by its favorable properties such as durability, aesthetic appeal, and lower maintenance compared to natural stone, which makes it a preferred choice in both residential and commercial applications. With strategic investments in technology and innovation, we expect PESL to capitalize on market opportunities and deliver robust performance in the coming years.

Apparel

The Board of Directors ("Board"), in their meeting held on March 23, 2024, approved the potential transfer, sale, lease, exchange, hive-off, or other disposal of the Apparel Business on a going concern basis. The Board believes that all assets of the Apparel Business are realizable in the ordinary course of business at the values stated in the Financial Statements. This decision is contingent upon finding a suitable buyer or investor and receiving an acceptable offer, as well as obtaining the necessary approvals, consents, and clearances from the Companys

Bankers, Shareholders, and other relevant institutions or statutory authorities. This strategic move is part of the companys broader effort to streamline operations and focus on core business areas expected to drive future growth and profitability. The Company has already initiated the necessary steps and expects to complete the process within the next twelve months. Consequently, the financials of the Apparel Division are classified as Assets held for sale and discontinued operations as per Ind AS 105. Correspondingly, the previous years figures in the Statement of Profit and Loss account have been restated to reflect this change. Details of the discontinued operations are provided in the Financial Statements, which are part of the Annual Report.

Company overview and business

The Company supplies both raw and processed granite, with raw granite blocks being exported to China and the majority of its finished granite products directed to the United States. The Company operates two granite processing units in the Hyderabad region, along with quarrying operations in Telangana, Andhra Pradesh, and Tamil Nadu. Additionally, the Company has discontinued the operations of its Apparel Division, as detailed in other sections of this annual report, including the financial statements.

PESL, a wholly-owned subsidiary of the company, is a prominent global producer of premium quartz surfaces. It operates in a diverse market characterized by various companies ranging from small privately-owned enterprises to large multinational conglomerates. To maintain competitiveness in this industry, PESL focuses on key strategies such as product innovation, design excellence, superior quality, competitive pricing, advanced performance technology, and exemplary customer service. The Company aims to distinguish its quartz surfaces in the market by creating distinctive products with premium features and a superior value proposition. PESLs competitive edge lies in its ability to compete based on performance, quality, style, and service rather than relying solely on pricing. This advantage is reinforced by PESLs investments in state-of-the-art production technology and strategic marketing resource allocation. During FY25, PESL will commercialise two cutting-edge technologies from BRETON S.p.A of Italy: the KREOS and CHROMIA lines. Both in the short and long term, the Company anticipates strengthening its market position, diversifying its operations, and enhancing profitability.

Financial performance

This sections details concern the financial outcomes for the fiscal year that ended on March 31, 2024. The financial statements of the Company and its subsidiaries have been prepared in accordance with the Companies (Indian Accounting Standards) Rules and the Indian Accounting Standards (Ind AS) as prescribed under Section 133 of the Companies Act, 2013, as amended from time to time. Key financial indicators are summarised in the table below.

INR in Crores (Consolidated)

Particulars	2023-24	2022-23	YoY Change (In %)
Continuing operations
Consolidated Revenue	687.61	725.32	-5%
Consolidated EBITDA	221.18	181.23	22%
Profit /(Loss) after tax from discontinuing operations	(4.00)	(2.27)	76%
Consolidated PAT	87.36	65.81	33%
Net Worth	591.43	506.08	17%

5https://www.freedoniagroup.com/industry-study/global-countertops

Key Financial Ratios of Pokarna Limited (Standalone)

Particulars	2023-24	2022-23	YoY Change (In %)
Debtors Turnover (Days)	76	51	49%
Inventory Turnover (Days)	376	388	-3%
Interest Coverage Ratio	-0.44	1.53	-128%
Current Ratio	1.27	1.22	4%
Debt Equity Ratio	0.07	0.16	-56%
Operating Profit Margin %	-5%	10%	-145%
EBITDA margin %	13%	22%	-41%
Net Profit Margin %	-8.41%	3.53%	-338%
Return of Net Worth %	-5.64%	0.58%	-1067%

Risk management

The quarrying sector faces a variety of internal and external headwinds. In order to reduce losses, the Companys complete risk management strategy focuses on quickly recognizing potential risks, evaluating their impact and attempting to mitigate their effects.

RISK	Description	Mitigation
Production and sales risk	The Company runs the risk of incurring losses unless and until the quarries reach a level of development that enables the production of commercially significant volumes of material, generating adequate revenues to sustain ongoing operations.	The Company implements risk mitigation measures by adhering to an approved business plan and predefined targets. Furthermore, it exercises stringent control over working capital, employing robust budgeting and cost control processes.
Operational risk	The quarrying operations of the Company are susceptible to inherent hazards and subsoil risks, encompassing both anticipated and unforeseen impacts and challenges arising from the underground geological conditions.	The Company actively mitigates these risks by implementing rigorous health and safety training protocols. A zero-tolerance approach towards safety incidents is ingrained throughout all levels of operations. Moreover, any noteworthy incidents on-site necessitate reporting to the Board of Directors. Trained personnel are utilised to address and minimise other operational risks.
Quarry development risk	A number of the Companys quarries and pits are currently in the initial stages of development. Consequently, there is no guarantee that the colour, texture, quality, and other attributes of the granite slabs processed and blocks mined from these quarries will align consistently with the material extracted thus far. In the event that the granite blocks extracted exhibit lower quality than anticipated, it may lead to reduced demand and a lower realisable price than expected.	The Company employs effective risk mitigation measures by employing extensively trained quarry personnel and geologists. Additionally, it conducts comprehensive evaluations of the resource, which may involve drilling, technical surveys, and third-party reviews when deemed necessary.
Breaches in information/ IT security	Similar to numerous other organisations, the Companys dependency on computers and network technology is on the rise. Consequently, any cybersecurity breach possesses the potential to significantly impact business operations.	The Company has established standard operating procedures for information and IT security. Well- defined IT security policies and procedures are implemented, and an IT system is deployed to monitor logical access controls.
Environmental risks and hazards	The Companys quarrying activities are subject to compliance with environmental regulations. Environmental legislation is continuously evolving, potentially leading to the imposition of more rigorous standards, enhanced enforcement measures, escalated fines, and penalties for non- compliance. Moreover, there may be a heightened demand for stringent environmental assessments of proposed projects, placing greater responsibility on companies and their officers, directors, and employees.	The company has developed policies and procedures to ensure that environmental standards are met in excess of current local legislation. It continues to monitor evolving standards within each of its operating environments and takes appropriate action accordingly.

 

RISK	Description	Mitigation
Currency exchange rate fluctuations	The Company derives a significant portion of its income from exports. It maintains foreign currency loans and procures some of its raw materials and a substantial portion of consumables and capital equipment through imports. Consequently, any fluctuations in currency exchange rates would potentially have an impact on the Companys performance.	The Company mitigates these risks by refraining from engaging in forex speculation. The audit committee periodically reviews forex-related matters and offers appropriate recommendations as required by the business, adhering to the overall framework of the Companys forex policy.
Community relations	The ongoing prosperity of the Companys current operations and upcoming projects relies, in part, on garnering broad support and fostering positive relationships with the respective local communities. Failure to identify and effectively address local concerns and expectations could have adverse consequences on the Companys reputation and its social license to operate and expand.	The Company employs risk mitigation strategies by conducting regular engagements with all local communities, with the aim of establishing relationships founded on trust and mutual benefit. A key priority is obtaining local consent before accessing resources or commencing work. The Company endeavours to identify and mitigate potential adverse operational impacts and risks through responsible conduct, characterised by transparency and ethical behaviour, encouraging dialogue, and fulfilling commitments to stakeholders. The corporate social responsibility (CSR) committee, under the purview of the Board, determines the focus areas, budget, and programs for all CSR activities to be undertaken.
People	The Company recognises that its ongoing pursuit of growth and operational efficiency will impose substantial demands on its management resources. The presence of a highly skilled workforce and an experienced management team is crucial for sustaining current operations, executing development projects, and attaining long-term growth objectives.	The Company intends to make strategic investments in initiatives aimed at expanding its talent pool. Its performance management system has been meticulously crafted to offer attractive reward and remuneration structures, along with personal development opportunities, with the objective of attracting and retaining key employees.
Financial risk	PESLs capital expenditure (capex) plans encompass various strategic initiatives, such as expansion, productivity enhancement, technology upgrades, optimisation of operating efficiency, and maintenance or replacement of existing facilities and equipment. However, an excessive ratio of capital expenditures to revenues could potentially create financial strain for the Company.	The Company holds the belief that its capital resources will prove sufficient to address the current projected operating requirements, capital expenditures, and other cash obligations. Furthermore, the Company has a commendable track record of maintaining positive relations with banks and successfully raising borrowings in recent years. Necessary measures have been taken to ensure that the construction and operation timelines for the capital expenditure projects adhere to the prescribed time limits.
Trade restrictions	A significant portion of the Companys products are exported to the US. The Companys financial performance relies on uninterrupted access to the US markets. However, the presence of tariffs and other trade barriers that limit or impede access pose an ongoing risk to the Company.	The Company intends to implement risk mitigation strategies by diversifying its presence into alternative markets and reinforcing its position in non-US markets where it already operates.
Trade credit	The Companys trade agreements with specific customers involve offering short-term credit. As a result, the Company is exposed to credit risk for a portion of its sales.	The Company employs risk mitigation strategies by conducting individual assessments of customer credit limits and implementing rigorous credit monitoring procedures, closely tracking the aging of outstanding balances.

 

RISK	Description	Mitigation
Silicosis	During recent times, the quartz surfaces and natural stone countertop industry has seen an increased acknowledgment of the health hazards associated with respirable crystalline silica exposure for workers. Individuals engaged in various processes such as manufacturing, cutting, fabricating, finishing, and installing quartz and stone countertops are deemed at risk. In response to this concern, several local regulatory bodies have taken proactive steps by issuing safety alerts and implementing new regulations to safeguard the well-being of workers in this sector. These measures aim to ensure the proper handling of materials and reduce the risks associated with respirable crystalline silica exposure in the workplace. Given these developments, the possibility of changes in laws and regulations pertaining to the hazards associated with quartz surfaces or the content of respirable crystalline silica in quartz surfaces has become a matter of concern. If such changes occur, they could have substantial implications for our operations and products, necessitating adjustments to ensure compliance and mitigate any potential adverse effects.	As a responsible company, we place a high priority on staying up-to-date with regulatory developments, particularly concerning the health and safety of our workforce and those involved in processing our products. We are fully committed to ensuring compliance with all relevant laws and regulations. In response to the concerns related to respirable crystalline silica exposure, we have taken proactive measures to develop low respirable crystalline silica products. Our readiness with these low respirable crystalline silica products demonstrates our commitment to mitigating any potential adverse effects and ensuring the well-being of everyone involved in the production and use of our materials. We will continue to invest in research and innovation to uphold our dedication to safety and compliance.

Internal Control and Adequacy

The scope of the internal audit function is established each year to ensure it aligns with the companys objectives and risk management strategies. To maintain the Audit Committees independence and objectivity, the Internal Audit Department reports directly to the Committee. Based on the internal audit functions reports, process owners implement corrections in their respective areas. Significant audit findings and recommended corrective measures are communicated to the Boards Audit Committee. In compliance with Section 134(5)(e) of the Companies Act, the Company has developed and implemented a process-driven framework for internal financial controls (IFC). This framework is designed to be robust, taking into account the scale and complexity of the Companys operations. There are no significant flaws identified, indicating the strength of the IFC in place. The Company has established strong policies and procedures to ensure business integrity, asset protection, timely preparation of reliable financial information, accurate and complete accounting records, and prompt prevention and detection of fraud and other errors. These measures collectively ensure that the business operates efficiently and with high standards of integrity and accountability.

Human Resources

The Company recognizes its people as its most valuable assets. As one of the most recognizable businesses in the granite industry, Pokarna places a strong emphasis on assembling a team of skilled workers capable of handling a wide range of competencies. The Firm has embraced best practices and established Standard Operating

Procedures (SOPs) for most functions to increase operational efficiency and ensure consistency across processes. To promote a learning environment and foster the growth of both the Company and its employees, the Company encourages skill-building activities, enabling employees to become proficient in various job-specific duties. This approach not only enhances the skill set of the workforce but also supports long-term growth and sustainability. Additionally, fostering employee engagement within the workplace helps maintain high levels of motivation and productivity, contributing to the Companys ongoing success.

Cautionary Statement

Certain statements in this report regarding potential future developments could be forward-looking statements. These statements involve known and unknown risks and uncertainties that could materially affect actual results. Factors such as macroeconomic changes and unexpected events, including global pandemics like COVID-19, may present unprecedented and ongoing risks to the Company and the environment in which it operates. The facts and figures presented in the report are based on assumptions derived from available internal and external information, which are subject to change due to dynamic variables. Any forward-looking statements reflect the Companys intentions, beliefs, or current expectations as of the date they were made. The Company disclaims any obligation to update or alter any forward-looking statements, whether due to new data, unexpected developments, or other factors.