pokarna ltd Management discussions

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

Global economic overview

In 2022, the major economies faced considerable macroeconomic challenges as a result of a geopolitical crisis in Europe and broadening inflationary pressures. Economic growth is being adversely affected by the persistent surge in interest rates by Central Banks to fight inflation and the ongoing food and energy crises in Europe. In CY*2022, growth was dented by the unexpected resurgence of COVID in China. However, the recent border openings have opened the door for a sooner-than-expected recovery. It is likely that global inflation would decelerate from 8.7% in 2022 to 6.8% in 2023 and 5.2% in 2024 [Source: IMF World Economic Outlook, July 2023]. In the course of2023, higher growth from pent-up demand in several economies or a quicker decline in inflation are anticipated.

Despite the headwinds, the economy is being buoyed by an upswing in household spending and an influx of foreign capital. Amid the ongoing Russia-Ukraine conflict and the synchronised rate hikes by the Central Banks, global growth is expected to slow down to 3.0% in CY*2023, from 3.5% in CY*2022.¹ The IMF predicts that India and China will contribute more than half of the global growth in FY23.

Outlook

The global economy has partially recovered following the easing of inflationary pressures. As a result, going forward, taming inflation is one of the top priorities of policymakers. Central Banks across the globe are endeavouring to strike a balance between supporting economic growth and curbing inflationary concerns. The economys health is expected to improve with proper monetary policy regulation, the resolution of geopolitical conflicts, the mitigation of supply-chain disruptions and effective management of pandemic aftereffects.

Indian economic overview

Based on the estimates of the National Statistical Office (NSO), real GDP growth is predicted to be 7.2% in FY 2022-2023.³ According to the World Bank, India is expected to be one of the top seven emerging market and developing economies (EMDEs). ⁴ The pent-up demand for contact-intensive services is a major factor in the 7.7% growth in private consumption that is anticipated for FY23. According to a sectoral analysis, the Central Government and State governments increased capex helped fuel strong building activity, which created numerous employment opportunities. In FY23, the services sector is expected to expand by 9.1%, with contact-intensive services such as trade, hotel accommodations and transportation expected to grow by 13.7%. The growth of the financial, real estate and professional services industries is anticipated to moderate to 6.4%, possibly as a result of the slowdown in credit growth caused by rising interest rates and the slowdown in the demand for software and professional services globally. ⁵

India is on track to become a USD 3 trillion economy by the conclusion of FY23. Within the next seven years, it is predicted to reach USD 7 trillion. In FY 2022, the Indian rupee continued to be one of the least volatile currencies among its Asian counterparts, and it has remained remarkably resilient so far. Seasonally adjusted capacity utilisation rose to 74.5% in Q2 of FY 2022-23, according to the RBI. On the other hand, the drag from net external demand persisted despite a decline in merchandise exports in Q3 of FY. 2022-23.⁶

Outlook

There are early signs that India is prepared for a greater investment upcycle in the industrial and services sectors, even though the post-COVID private investment recovery is still in its early stages. The number of ongoing private investment projects in the industrial sector has been consistently growing over time. The volume of e-way invoices generated, electronic toll collections and sustained rise in GST collections, all point to a positive trend.

Manufacturing activity continues to expand gradually, as shown by indicators including the PMI for manufacturing, the Index of Industrial Production and the Index of Core Industries (ICI). Services sector indicators (UPI transactions, high credit demand) also point to additional recovery. Overall, Indias demand environment continues to be favourable for sustaining economic growth. India is confident going into the upcoming fiscal year due to its underlying and overall macroeconomic stability, but it remains vigilant about geopolitical and geoeconomic concerns.⁷

Stone industry overview

Global granite stone industry

The size of the global granite market attained a valuation of USD 17,363.02 million in the year 2021. It is projected to witness growth at a Compound Annual Growth Rate (CAGR) of 3.2%, to reach an estimated value of USD 20,978.75 million by the year 2027.⁸

In the year 2022, the global granite market encountered several challenges, including inflationary pressures in major global economies and supply chain disruptions resulting from the war in Europe. However, in spite of these global headwinds, the global granite market demonstrated significant growth.

The upsurge in demand for granite is primarily driven by its expanded usage in diverse construction applications, such as kitchen countertops, bath vanity tops, backsplashes, and bathroom sinks & basins. The enduring allure of granite for residential purposes, coupled with increased investments in construction projects, has further accelerated the markets growth trajectory.

Apart from construction applications, granite finds extensive use in sculpture and memorials, as well as in engineering and other diverse sectors. This multifaceted materials resistance to rust and its ability to retain its colour indefinitely, especially in the context of granite countertops, play pivotal roles in driving the overall market growth.

Indian granite stone industry

The Indian granite industry has garnered widespread recognition as a major player in the global stone market. Acclaimed for its diverse array of colours, remarkable durability, and intricate patterns, Indian granite commands a prominent status in both the construction and decorative domains worldwide. India stands among the leading producers and exporters of granite, making a substantial contribution to the nations economic expansion.

The industry is predominantly concentrated in the southern states of Tamil Nadu, Karnataka, Andhra Pradesh, and Telangana, where abundant granite reserves are found. These regions have become major granite clusters with numerous quarries and processing units, fostering a competitive and thriving business environment.

During recent times, the Indian granite industry has encountered various challenges and undergone significant changes. Environmental issues, especially pertaining to sustainable quarrying methods, have spurred the government to implement more stringent regulations to mitigate the environmental impact. Granite quarrying has frequently faced criticism for its potential to induce land degradation and biodiversity loss, thereby prompting the adoption of sustainable mining practices.

The Indian granite industry has also adapted to technological advancements, with increased investment in modern machinery and processing units. This has enhanced production capabilities and improved the overall quality of finished granite products, meeting international standards and demands.

Despite its strengths, the industry has encountered obstacles like fluctuating international demand, changing global economic conditions, and competition from other granite-producing countries. To remain competitive, Indian granite exporters are continually exploring new markets and diversifying their product offerings.

Quartz

Quartz is an important material with several functions. Sand, a necessary component of glass manufacturing, is made from tiny quartz stones. There are several uses for quartz rock crystals in electronic devices. It functions as an oscillator for radios, watches, scales and intervention of optics. Sandblasting, breaking glass and cutting delicate stones all use quartz for grating. As major silicon semiconductors are made using quartz, it is mostly employed in the personal computer industry. The expanding sales of various electronic gadgets, such as tablets, phones, desktop computers and laptops, have raised the demand for semiconductors. The global quartz market was worth USD 7.2 billion in CY2022. By CY2028,the market is expected to reach USD 10.4 billion, with a compound annual growth rate (CAGR) of 5.8% between CY2023 and CY2028.⁹ The rapid development of technology and the widespread use of quartz crystals in the construction of frequency filters, controllers and timers in electronic circuits are fuelling growth in the market. Quartz is also used in the manufacturing of solar cells, which are gaining popularity as renewable energy sources. In the upcoming years, demand for quartz is anticipated to rise as solar energy usage increases. Energy-efficient lighting, such as LED bulbs, is produced using quartz and is gaining popularity as an alternative to conventional incandescent bulbs. Quartz is an important product in this industry since it is necessary for the manufacturing of concrete, tiles and other building materials. It is projected that higher infrastructure investment, particularly in emerging economies, will eventually raise the demand for quartz.

Countertop market Overview

The global demand for countertops is projected to experience a steady growth rate of 4.3% per year, reaching 711 million square meters in 2027, with an estimated value of $54.6 billion. This growth will be driven by a surge in countertop installations in both residential and non-residential settings, as they continue to be preferred over freestanding or wall-mounted fixtures in kitchens and bathrooms. Furthermore, the demand for countertops will receive a boost from the increasing trend of residential remodelling, where countertop replacement remains one of the most popular and sought-after methods to upgrade kitchens and bathrooms. As a result, the countertop market is expected to witness significant advancements, driven by the demand for improved aesthetics and functionality in various living and commercial spaces. Despite the positive growth outlook for the countertop market, there are certain factors that may restrain further gains. Weak new housing outlooks in key regions such as the US, China, Japan, South Korea, and Europe are expected to limit the expansion of the market. Furthermore, there is a possibility of a deceleration in the global market value through 2027. This is primarily attributed to the unusually high price levels experienced in 2022, which were influenced by inflationary pressures. As a result, the countertop market may face challenges in sustaining the same rate of growth as in previous years.

Outlook for Granite and Quartz Surface

The projected growth of global demand for engineered stone countertops is estimated at a robust 9.3% per year, reaching 128 million square meters by 2027. Engineered stone has experienced rapid expansion in its share of the global countertop market, rising from 7% of sales in 2012 to 14% in 2022 . Its popularity has soared, particularly in the large US market, owing to its appealing aesthetics, durability, and ease of maintenance in comparison to natural stone. This has positioned engineered stone as the most preferred countertop material in the US. The continued strong sales increases and increasing market share can be attributed to several factors:

• A growing variety of colours in line with current design trends sourced from both domestic and foreign suppliers, offering consumers a wide range of options to suit their preferences.

• The increased availability of non-Breton equipment, mainly manufactured in China, which has allowed producers to significantly enhance their production capacity.

• The abundance of low-cost quartz slabs from the Asia/Pacific region, Africa/Mideast region and other locations has made engineered stone production more cost-effective, further driving its popularity.

• The establishment of broader distribution networks for engineered stone has made these countertops more accessible and widely available, contributing to their growing demand.

In 2022, North America accounted for the largest share, representing 35% of global engineered stone countertop demand. The demand for engineered stone is anticipated to experience robust growth through 2027, surpassing both laminate and granite to become the second most popular countertop product globally.

As a company, our products are widely used as countertops in residential kitchens, and our sales are closely linked to home renovation and remodelling projects, as well as new residential construction in the United States. However, during the middle of FY 23, the U.S. housing market faced challenges due to rising interest rates and high inflation, which affected household budgets. Consequently, there was an oversupply of new and resale homes, an increase in foreclosures, and reduced consumer demand for new homes, resulting in lower construction levels and decreased demand for our products. Moreover, U.S. importers reacted swiftly to shipping congestion and increased consumer demand last year, leading to the importation of excessive product quantities. As a result, our U.S. importers now face the issue of surplus inventory, necessitating effective inventory management strategies.

Currently, the countertop industry is going through a cyclical downturn, mainly due to factors like higher interest rates, persistent inflation, and decreased consumer confidence. Given the complexity of economic cycles and the varying conditions worldwide, accurately predicting their depth and duration poses challenges. As we look ahead, we anticipate subdued sales in FY 2024, with the impact on new home construction and remodelling expected to persist until macroeconomic conditions improve. In our view, demand for our industrys products does not disappear during these cycles; it is deferred.

Indias textile industry

Indias textile and apparel market is expected to reach USD 250 billion by 2025-26.¹⁰ The domestic apparel and textile industry in India accounts for approximately 2% of the countrys GDP and 7% of the industry output in value terms.¹¹ Indias technical textiles segment is estimated to be valued at USD 16 billion, or approximately 6% of the global market. The second-largest employer in India is the textile and apparel industry, directly employing about 45 million people and indirectly offering employment to 100 million people across all consolidated industries. ¹² The industry contributes 5% to international trade and 13% of the countrys total export earnings, with a target of USD 100 billion in exports by FY2025. ¹³ India is one of the top producers and exporters of textiles and apparel globally, mainly to the United States, the United Kingdom and the United Arab Emirates.

India is the worlds top producer of cotton, jute and silk, as well as the second-largest producer of silk, but it needs to produce more performance-based man-made fibres and fabrics (MMFs), which are in higher demand due to changing lifestyles and rising disposable incomes. These MMFs have advantages in terms of cost savings, versatility, durability and consistency. Although it is the worlds second-largest producer of viscose and polyester, the country still trails China in the export of MMF fabrics and is yet to capture a sizable portion of the high-end markets. Moreover, the broadening inflationary pressures have resulted in a demand slowdown and have affected exports from the domestic textile market. Along with a favourable operating environment, a lower cost of production and consistent investments in textiles and readymade garments have opened up employment opportunities in this space. The country is, therefore, making significant progress in providing a source of livelihood to a large number of people, especially in rural areas. Moreover, government initiatives such as investment in the National Technical Textiles Mission (NTTM), revamping of the technical textile industry in India and impetus for the PLI (Production Linked Incentive) scheme are helping states adopt affordable infrastructure for textile manufacturing.

Outlook

In the upcoming years, there will be a plethora of investment opportunities in Indias textile industry. The industry may gain considerable momentum, especially with the highly anticipated announcement of PM-MITRA parks in the years ahead. These parks will offer fantastic investment opportunities, including those for master developers and anchor investors, in addition to a wide range of ancillary activities in and around the parks as well. Additionally, the Central and State governments might work together to make India a leading textile investment destination. The growing demand for technical textiles, such as medical textiles, protective clothing and geotextiles, is driving growth in Indias textile industry. Indias textile businesses can now capitalise on new possibilities to diversify their product offerings and widen their customer bases. In 2023 and beyond, new prospects for Indias textile companies are anticipated to arise as a result of the governments focus on enhancing domestic manufacturing and exports.

Company overview and business

PL supplies both raw and processed granite, with raw granite blocks being exported to China and a majority of its finished granite products being 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, PL has a retail division for the STANZA brand and engages in clothing production under the same name.

PESL, being a prominent global producer of premium quartz surfaces, operates in a diverse market characterised by various companies ranging from small privately-owned enterprises to vast multinational conglomerates. The key strategies for maintaining competitiveness in this industry encompass product innovation, design excellence, superior quality, competitive pricing, advanced performance technology, and exemplary customer service.

The Company endeavours to establish its quartz surface as unique in the market by crafting distinctive products with premium features and a superior value proposition. The Companys competitive edge lies in its capacity to vie based on performance, quality, style, and service, rather than merely relying on pricing. This advantage is bolstered by PESLs investments in cutting-edge production technology and the strategic allocation of marketing resources.

PESL will proceed with the expansion of production at its newly established facility, enabling increased volumes and improved efficiency. Harnessing the full potential of this unit, both presently and in the long term, the Company anticipates bolstering its strength, diversifying its operations, and enhancing profitability.

Financial performance

This sections details concern the financial outcomes for the fiscal year that ended on March 31, 2023. 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	2022-23	2021-22	YoY change (in %)
Consolidated Revenue	727.99	650.19	12%
Consolidated EBITDA	180.99	181.62	-0.34%
Consolidated PAT	65.81	78.30	-16%
Net Worth	506.08	442.45	14%

Key Financial Ratios of Pokarna limited (standalone):

Particulars	2022-23	2021-22	YoY change (in %)
Debtors Turnover (Days)	51	49	4%
Inventory Turnover (Days)	388	338	15%
Interest Coverage Ratio	1.05	1.09	-4%
Current Ratio	1.22	1.15	6%
Debt equity ratio	0.16	0.17	-6%
Operating profit Margin (%)	8%	7%	14%
EBITDA margin (%)	21%	20%	5%
Net Profit Margin (%)	1.22%	0.12%	917%
Return on Net Worth (%)	0.58%	0.07%	729%

Risk management

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

RISK	Description	Mitigation
M 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.
0 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.
"3) 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.
	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	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.
Environmental risks and hazards	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.
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.
Operational turnaround of apparel business	The apparel divisions losses have an impact on the overall profitability of the Company.	The Company is making dedicated efforts to enhance the performance of this business and achieve operational profitability.
m 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 ofworkers 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 maintain the Audit Committees independence and objectivity in its activities, the Internal Audit Department reports directly to the Committee. Based on the internal audit functions reports, process owners make corrections in their own areas. Important audit findings and suggested corrective measures are communicated to the Boards Audit Committee. In accordance with Section 134(5)(e) of the Act, the Company has developed and implemented a process-driven framework for internal financial controls (hereafter, IFC). There are no significant flaws, and the businesss IFC is robust in comparison to the scale and complexity of its commercial operations. Strong policies and procedures are in place at the Company that, among other things, ensure that business is conducted with integrity, assets are protected, reliable financial information is prepared on time, accounting records are accurate and complete, and fraud as well as other errors are prevented and detected promptly.

Human resource

The Company acknowledges its people as its most valuable assets. Pokarna, one of the most recognisable businesses in the granite industry emphasises on the need to assemble a team of skilled workers that are capable of handling a wide range of competencies. The Firm also embraced best practices and established Standard Operating Procedures (SOPs) for the majority of functions to increase operational efficiency and consistency across processes. The Company encourages skill-building activities so they can become knowledgeable in a range of job-specific duties. This encourages a learning atmosphere and promotes the growth of the Company as well as its people. Also, fostering people-engagement at the workplace helps the Company sustain its long-term growth.

Cautionary statement

Certain statements in this report about potential future developments could be forward-looking statements. These involve known and unknown risks and uncertainties that could materially affect actual results. Along with the aforementioned macroenvironmental changes, a global pandemic such as COVID may present unanticipated, unprecedented, unascertainable and ongoing risk(s) to the Company and the environment in which it operates, among other things. Certain facts and figures in the report were determined using the outcomes of these assumptions, which were based on available internal and external information. The estimates on which they are based are also subject to change because the variables supporting these assumptions are dynamic. Any forward-looking statement made here only reflects the Companys intentions, beliefs, or current expectations, and only as of the date on which it was made. The Company disclaims any obligation to alter or update any forward-looking statements, whether as a result of new data, unexpected developments, or other factors.