Polyplex Corporation Ltd Management Discussions.

I. Corporate Overview

In this document, the terms Company, Polyplex and Group refer to the consolidated operations of Polyplex Corporation Ltd.

Polyplex offers a wide range of plastic films across various substrates (PET (thin & thick), BOPP, CPP and Blown PP/PE). They are used in flexible packaging besides several and diverse industrial applications like release liners, tapes, labels, thermal lamination, imaging and graphics, photovoltaic and optical applications. Within the substrates, for its core business of polyester (PET) films, Polyplex has the fifth largest global capacity. PET film is a high performance film with a unique combination of qualities like high tensile strength, durability, heat resistance, good gas-barrier properties, dimensional stability, chemical inertness, clarity and recyclability. PET film is a versatile product with wide and growing range of applications. These diverse applications and product versatility leads to a constant pipeline of new product variations and applications thus reducing dependence on any one application or product.

Downstream businesses like metallizing, silicone coating, extrusion coating, holography and offline chemical coating have enabled Polyplex to offer products for a variety of applications - general packaging, specialty packaging, electrical, liners, roofing and a whole gamut of other industrial applications. The Company also has non-tearable polyester film in India designed especially for digital print media segments. Recently, the Company has introduced Transfer Metallized Film/Paper which is commonly used for packaging of pharmaceutical, cosmetics, liquors, calendars, DVD inserts etc.

The plastic films business is quite different from a pure play commodity business like its precursor inputs like PTA, MEG, PP resins, due to a combination of several factors like:

a) The product is almost always "made to order" as contrasted with "made to stock".

b) Multiplicity of SKUs (based on unique combinations of length, width, thickness, surface treatment during process as well as downstream treatments and Core ID).

c) Fragmented customer base.

d) Quality and customer service also form important differentiators.

e) Geographical diversity in markets, key differentiators and buyer preferences.

f) Pricing is influenced by a host of factors as stated above besides import parity i.e. Logistics cost differentials and varying customs duties - both normal and trade defense measures like anti-dumping, countervailing and safeguard duties.

The above factors can create significant differences in regional price levels as well as between standard products and value added/specialty products.

Flexible packaging provides unmatched value as compared to rigid packaging by consuming lower raw material owing to being light weight, occupies lesser shelf space, generates relatively less waste and is the most cost-effective method for packaging. Better packaging not only improves the shelf life of products but is also essential for improving product appeal in a competitive consumer goods industry.

The Company believes that its unique model of on-shore, offshore and near-shore business locations in combination with its other strengths like customer relationship, access & intimacy and wide offering of specialty, innovative and value added products shall continue to be the key enablers for out performance and earnings stability.

There is an increasing concern by all stakeholders & environmental groups on usage of plastics in general with the focus being primarily on single-use plastics. Flexible packaging is mostly multi-layered and it results in a number of sustainability benefits. These include resource efficiency, reduced material to landfill, high product to package ratio, lower carbon footprint throughout the life cycle of packaging etc. The Company continuously strives to work on providing sustainable solutions (products, processes) as a commitment towards sustainable environment. The Company continues to invest in its recycling operation in Thailand which provides sustainable solutions for film-based process waste as well as post-consumer plastic waste.

PET film is made from Polyester resin (chips), which in turn is produced from Purified Terephthalic Acid (PTA) and MonoEthylene Glycol (MEG). The Company produces its own PET resin.

II. Global Operations

Polyplex is a global leader in the thin PET film business with manufacturing and distribution operations in six countries (India, Thailand, Turkey, USA, Indonesia and the Netherlands), along with additional warehouses in Poland, Spain, Germany, Italy and Mexico. The Indonesian plant commenced commercial operations in November, 2019.

Production Capacities

Manufacturing capacities of various locations:

Re sin

Base Film

Value Added Films

Location PET Film Resin (MT) Recycled Resin (MT) PET Thin (MT) PET Thick (MT) BOPP Film (MT) CPP (MT) Blown Film (MT) Metallizer (MT) Holography (MT) Coating (Mn Sqm) Transfer Metallized Paper
(Mn Sqm)
India 77,600 - 55,000 - 35,000 - - 33,600 4,080 257 83
Thailand 1,31,550 45,000 42,000 28,800 - 10,000 13,645 21,700 960 985 -
Turkey 75,850 - 58,000 - - - 4,392 17,700 480 320 -
USA 57,600 - 31,000 - - - - 9,250 - - -
Indonesia 73,000 - 44,000 - 60,000 - - 18,000 - - -
Polyplex Group 4,15,600 45,000 2,30,000 28,800 95,000 10,000 18,037 1,00,250 5,520 1,562 83

Notes:

1. Except Coated Films and Transfer Metallized Paper where the capacity is in Million SQM per annum, the capacity of all other product lines is in MT per annum.

2. The above table includes the projects under implementation which include Batch Resin Plant, Offline Coater & Blown Film line in Turkey, Metallizer in Indonesia and Batch Resin Plant, two Holography Lines & Blown Film Line in Thailand.

3. Recycled Resin comprises the capacity of Ecoblue, Thailand. It includes the on-going expansion into washing and recycling of post-consumer bottle flakes.

III. PET Film Industry Overview

The traditional segmentation of PET films has been thin and thick films based on distinct applications and lack of supply side substitutability. Thick films generally refer to films with a thickness range of 50-350 micron whereas films below 50 micron are characterized as thin film. In recent years, several intermediate thickness lines (with thickness ranging between 8-150 micron) have also been installed. The PET film industry has seen various structural changes over the years with Asia now dominating production and consumption. Film producers from Asia (mostly headquartered in India) have become major global players.

Polyplex has traditionally operated predominately in the area of thin PET films, which accounts for more than three-fourths of the overall global PET film demand. Higher growth in flexible packaging, relative to other applications has gradually shifted the production and usage patterns of thin PET films. The Companys relevant segments of packaging & industrial (including electrical) constitute almost 100% of the total thin film demand. The overall industry growth rate of PET Film has exceeded GDP growth in the past and is expected to continue so in the medium to long run.

Thin PET Film market

The largest application of thin PET films is flexible packaging, which accounts for 74% of the total thin film used. Flexible packaging plays a key role in source reduction based on the principle of use less packaging material in the first place. This has resulted in higher-than-GDP growth in the global flexible packaging industry. PET film, being a higher-end preferred substrate within packaging, has grown more rapidly than other substrates, averaging around 7% per annum. Packaging demand is resilient as it is driven by the consumption of food products and consumer staples, usage of which are non-discretionary in nature, as is also evident in the ongoing Covid-19 pandemic. This packaging segment characteristic along with its principles of safety, hygiene and integrity has resulted in steady demand growth, despite recurring economic turbulence.

An increase in purchasing power in developing countries has been accompanied by a rise in per capita packaging material consumption. However, when compared with mature markets, per capita packaging material consumption in developing countries is still low.

Asia is the largest market for thin PET films, accounting for around three-fourths of global consumption. Faster growing Asian demand is the main driving force in the global markets. Within Asia, India and China are the largest consumers.

A similar trend is also evident on the supply-side with most of the new capacities being installed in low-cost developing countries. A large proportion of the new capacity is focused on the packaging segment, with an emphasis on productivity and cost management. Some of these producers are now global leaders in terms of both volumes and pricing in the production of standard film. This has impacted traditional large producers of PET film operating with high cost structures, who have chosen to concentrate on niche technology oriented segments like films for Optical applications, solar panels and specific high-end applications within packaging. The high speed and productivity of the latest 10 meter+ wide lines (same as the Indonesia line of Polyplex) brings more cost competitiveness and may result in closure of some old and inefficient lines. While trade defense measures like anti-dumping and countervailing duties were invoked in the past, they were unable to address the problems of inefficient assets in developed countries producing standard films.

Global thin PET film growth is expected at about 6%-7% for the next few years, with demand in India expected to continue growing at 8%-10%. Demand growth is expected to remain largely unaffected from the ongoing Covid- 19 pandemic. Companies with consistent quality products, diversified product portfolio, access to international customers and stronger supply chains stand a better chance of participating in market growth and delivering margins above the industry average.

Over the last 2-3 years, there has been an improvement in the capacity utilization factor (CUF) due to slowdown in the pace of new capacity additions. Demand growth has been sustained, thereby resulting in improving CUF. Even though approx. 1 million ton of new capacity (more than 50% in China) is expected to be added by 2023, the industry CUF should remain within 78%-80% due to consistent growth in demand for consumer staples, deferment/delay in new capacity additions and expected closure/underutilization of older lines due to changing cost dynamics and impact of Covid-19.

Levels between 80%-90% can be considered high and close to the full producible capacity. In practice, some producers produce lower than the nameplate capacity as the assets are older and inefficient while some produce with capacity utilization even higher than 100% of the nameplate capacity using new and modern machinery and based on their expertise and experience.

Thick PET Film market

The demand for thick PET film is concentrated in Asia, which accounts for around 80% of the global consumption. Electronics and electrical applications are the key end-use segments in the thick film industry. The demand of thick PET film has grown at a CAGR of around 4% over the past few years. Global growth has been apparent in all end use sectors with the exception of medical/other X-ray. Over the past few years, China has emerged as the largest market for thick PET films with a market share of 46%. Applications like Flat Screen panel, photovoltaic etc. are driving growth, which should help the industry continue to grow at a CAGR of about 3%-4% in the medium-term although there may a short to medium term contraction in demand due to the impact of Covid-19 pandemic.

"Other Industrial" includes applications like labels and release liners where US & Europe are the key markets. Similar to the thin PET film business, the capacity addition for thick PET film in China has also been significant. China has become the global leader in the manufacture of PV cells and also remains a key global supplier of other electronics products, such as PCBs and capacitors. Producers in Japan, Europe and USA constitute only around 22% of world capacity in 2019.

Over the past 2-3 years, CUF levels have been stable. It is expected that CUF levels will continue to be in the 70%-75% range for the next few years. Because of the high quality standards required by optical thick film customers, manufacturers targeting this sector face higher levels of wastage due to defects, and therefore the saleable output of thick film lines is often poor relative to thin film lines. As a result, thick film lines often operate at less than 75% utilization levels.

The Thick Film line in Thailand has enabled Polyplex to straddle the entire spectrum of end-uses for PET films by accessing the traditional industrial and electrical applications for thick films with significant progress in catering to several new and promising applications in optical and photovoltaic segments. The first film line in India which was revamped in December 2011 and further upgraded in 2014 to produce intermediate thicknesses and specialty films also contributes to the Companys growth/margins.

IV. BOPP Film Industry Overview

The global demand for BOPP is around 8,900 KMT and is expected to grow @ 5%-6%. Packaging is the key segment constituting more than 80% of the total BOPP demand. China is about half of worlds demand and capacity. Given the proliferation of BOPP capacity, regional demand supply balance and local competition determine the market dynamics.

Feedstock of BOPP film is polypropylene (PP) resin which is a downstream product from crude oil and/or gas and is widely traded across the globe. BOPP is preferred over BOPET in applications like confectionaries, visiting cards, posters, gift wraps, bags etc. due to its high moisture resistance feature and other properties. Though BOPET and BOPP are sometimes considered as substitutes of each other, the two films have distinct individual features & are more often complimentary in a typical laminate structure.

Global CUF has been stable at about 70% over the past several years. This is projected to increase gradually in the next few years based on a linear demand growth.

It may be noted that a CUF factor of around 75%-80% is typically close to full producible capacity as actual production is dependent on the product mix.

In June 2019, the Company had announced a new BOPP line adjacent to the recently commissioned PET film line in Indonesia which would help diversify the product offering and help mitigate challenges posed by concerns surrounding sustainability and provides an opportunity for the Company to grow in a familiar industry. Besides growth in demand, commonality of customers with BOPET in flexible packaging, low cost of operations due to co-location and benefits of high productivity line, a global sales and distribution network provides further substance to the project. Additionally, mono material laminate structures based on Olefin (PP/PE) films are being perceived to be easier to recycle and new trials are mostly happening on olefin based structure and hence there may be a growth bias in favor of BOPP/PE based laminates.

V. CPP and Blown PP/PE Films Business

CPP films are transparent cast polypropylene films designed to offer high performance, great appearance and easy converting for flexible packaging and other applications.

CPP films are also produced from a combination of various grades of PP polymer resin. Various constructions of CPP are available (multi-layer options) which are used to cater to several applications in general packaging, as a sealant layer in conjunction with other plastic substrates for packaging of food products including snack foods like chips and biscuits, retort laminates for ready to eat food etc. Additionally, CPP find usage in medical packaging of surgical equipments etc. Given the relative modest investment required for CPP lines, regional demand supply balances are more relevant.

Another variant of PP based film is Blown PP. PTL had commissioned the first Blown PP/PE line in October 2013. This new base film (PP) enabled better use of the silicone coating facility with a broadening of the product range (including the Peel & Stick liner segment for the roofing market in North America and Europe). The second Blown PP line in Thailand was commissioned in June 2018 which helped the Company cater to new segments/new customers. The applications serviced include agriculture usage (mulch films), separator in manufacturing of air bag safety films, preferred sealing substrates for flexible laminates (Polyplex core business segment), radiation protection suit, infection protection clothing and many more. Moreover, Blown PE/PP films are being considered for monolayer packaging to improve recyclability of used plastic pouches. The Company is in the process of adding two new Blown Film lines; one each in Thailand & Turkey.

VI. Polyplex Performance vs. Industry

Even while PET industry wide CUF have ranged between 70%-82% over the past 5 years, Polyplex has displayed an industry leading capacity utilization record as depicted below due to our higher productivity/lower operational losses complimented by the expanding product portfolio, strong customer relationships backed by combination of on-shore and near shore business model.

VII. Industry Outlook

The demand supply situation in global PET thin & thick film market has improved during the past couple of years as the global capacity expansion has slowed down. This has resulted in overall improvement in the industry CUF in 2019 for PET film. However, in the next few years, several new lines (both PET & BOPP film) are expected to be added. Further, many of these new expansions are the latest 10 meters+ high productivity lines. Due to the healthy demand growth expected, especially in Flexible packaging, the new capacities are expected to be not too disproportionate, although temporary market disruptions may be felt, as and when each new line starts up in various geographies across the globe. The Company believes that its well-distributed manufacturing operations, diversified value-added product portfolio, quality consistency, international customer base, customer relationships, access & intimacy, efficient supply chain and a conservative Balance Sheet will allow it to grow profitably and withstand industry volatilities much better.

VIII. Indian Flexible Packaging Market

India is one of the worlds biggest and fastest growing flexible packaging markets. The thin PET film market size in India is currently estimated at around 525,000 tons per annum. During FY 2020-21, growth of 9%-10% is expected, with similar growth in the flexible packaging industry. The total current capacity of BOPET thin films in India is about 750,000 tons per annum with a large portion of the surplus being exported. The Indian BOPP market is currently estimated at about 500,000 tons per annum with a capacity base of 763,000 tons. Demand is expected to grow at around 9%-10% annually.

IX. Other Businesses

Silicone coating and extrusion coating businesses

The silicone coating business produces release liner, which is used for carrying adhesive labels until these are removed from the release liner and are applied to the final surface.

Other applications of siliconized films include release liner for adhesive tapes, cast polymer materials, electronic applications, roofing and other industrial uses. Company had commissioned a new coating line in Q4 of FY 2019-20 at Thailand in the existing premises to strengthen its product portfolio and to increase business in electronic release liner market segment.

The extrusion coating business involves a combination of PET/ BOPP/Nylon film with an extruded adhesive layer to produce thermal lamination film. Thermal lamination film is used for laminating offset/digital printed documents on one/both sides to improve durability and aesthetics of the printed documents. The principal uses comprise teaching aids, maps, certificates, posters, menu cards, book covers, carton board boxes, reflective insulation and food packaging. PTL is successfully running both its extrusion coating lines and has expanded sales globally. There is a shift in the global markets from offset print to Digital print lamination using special films for enhancing products appearance. Carton box packing segments are also growing due to change of food eating habits of customers. Overall, thermal films are estimated to grow at a rate of 3%-5%, mainly in BOPP and its specialty thermal films segments.

Offline coating business

Polyplex has successfully commercialized various specialty offline coated products for both packaging and industrial segments. These include specialties like transparent barrier films, lidding films, digital print media etc.

Digitization is rapidly growing in various application segments like photo book, labels, shrink sleeves, flexible packaging, graphics, promotional & customized digital printing, commercial printing etc. Polyplex has developed various digital print media film products to provide solutions for graphics, display, label and packaging segments.

In FY 2019-20, the Company has commissioned new offline coating lines in India & in Thailand to meet market demand and broaden the product portfolio. Another offline coater is under implementation in Turkey.

Transfer metallized paper business (TMP)

TMP is Metallic Paper where the metal is deposited on it by transfer from release coated metallized PET film. It is commonly used in pharmaceutical, cosmetics, liquor, calendars, DVD inserts etc. Shiny metallized packaging helps attract the consumers attention, while also raising a products image to premium status. Major segments for transfer metallized paper are:

1) Label face stock

2) Wet glue label

3) Gift Wrap

4) Flexible packaging

The annual capacity of Transfer Metallized Paper in India (excluding Polyplex) is approximately 14,000 tons (other than manufacturing by converters for their own consumption). Around 50% of the production is currently exported. Domestic market consumption is approx. 7,000-7,500 TPA. Demand is growing at a CAGR of around 8%-10%.

Polyplex has successfully commissioned a laminating machine to facilitate Transfer metallized paper business in FY 2019-20 which will further enhance its product offering.

Holography business

Holography is the process of making holograms which are usually intended for displaying three dimensional images, security text, different unique features and images. It is a physical structure embossed on plastic film that diffracts light into an image, text or patterns.

Holography is widely used in various flexible packaging applications that provide better aesthetics, protection from counterfeiting, fraud and brand protection besides hot stamping foil, security label, holography transfer paper and other packaging applications.

Holography is produced on a thin flexible plastic film (PET, BOPP, CPP or Nylon) which has been micro-embossed with patterns or even images. Patterns or an image are created by way of an embossing process which can provide a 3D effect and/or spectral (rainbow) coloring. In order to enhance holography effect & its suitability in packaging application, embossed film is metallized on the holographic side.

The annual capacity of Holographic Film in India (excluding Polyplex) is approximately 6,000-7,000 tons and annual domestic consumption is about 5,300 TPA. This demand is growing at a CAGR of around 10%-15%.

Polyplex has successfully commissioned six holography film production lines in India for flexible packaging applications and Carton lamination. New Developments are being pursued in BOPP Holography for Book Cover Lamination, WPP Bags for Rice & Grain packaging, Textile Bags etc . The Company has also commissioned one holography line in Turkey and two holography lines are under implementation in Thailand.

Recycling of plastic waste

The Company through its subsidiary in Thailand, Ecoblue Limited, which started operations in 2013, provides sustainable solutions for film-based process waste as well as post-consumer plastic waste for varied applications. Over the years, EcoBlue has been working with different post-consumer and industrial wastes (both PET and Polyolefin based) to develop and produce high quality recycled materials which can replace virgin resin in high end applications like Filament Yarn, Bottles, PET Film etc. The Company is now venturing into a new state of the art recycling facility for post-consumer waste, for these applications to meet the ultimate demand of some Consumer Product Companies. This project demonstrates Companys commitment towards sustainability. With this project, Ecoblue would be positioned amongst the leading recycling companies in the region.

X. Demand Drivers for Plastic Films

Population growth: As per UN, the worlds population is projected to grow from 7.7 billion in 2019 to 8.5 billion in 2030 (10% increase), and further to 9.7 billion in 2050 (26%) and to 10.9 billion in 2100 (42%). The population of sub-Saharan Africa is projected to double by 2050 (99%). Other regions will see varying rates of increase between 2019 and 2050 - Oceania excluding Australia/New Zealand (56%), Northern Africa and Western Asia (46%), Australia/New Zealand (28%), Central and Southern Asia (25%), Latin America and the Caribbean (18%), Eastern and South-Eastern Asia (3%), and Europe and Northern America (2%). The demand for plastic film is expected to be linear and directly proportional to population growth.

Urbanization: The urban population of the world has grown rapidly since 1950, having increased from 751 million to 4.2 billion in 2018. Asia, despite being less urbanized than most other regions today, is home to 54% of the worlds urban population, followed by Europe and Africa (13% each). Growth in the urban population is driven by overall population increase and by the upward shift in the percentage living in urban areas. Together, these two factors are projected to add 2.5 billion to the worlds urban population by 2050, with almost 90% of this growth happening in Asia and Africa.

India, China and Nigeria - together are expected to account for 35% of the growth in the worlds urban population between 2018 and 2050.

Improved quality of life: With growing life expectancy and quest for quality, consumers are expected to move towards packaged product consumption. During the current Covid 19 pandemic, there has been elevated demand for packaged foods due to its inherent properties of safety & hygiene thus mitigating the risk of contamination. Also the move from unpackaged to packaged is expected to gather further momentum especially in Asia.

Increasing environmental awareness: Owing to increasing global environmental awareness, Plastics films are gaining popularity owing to lower environmental impact (emitting lower greenhouse gases and lighter in weight). Flexible packaging offers a number of sustainability benefits throughout the entire cycle of the package when compared to other packaging options.

Increasing consumerism: Income growth has led to an increase in global consumer spends, influencing in turn the Plastic film industry. The projected growth for 2030 suggests world per capita GDP growing to around USD 14,000 from USD 11,464 in 2019.

XI. Strategy & Positioning

Polyplex seeks to maximize long-term returns following a differentiated approach that responds proactively to business and environmental changes. The key elements of this strategy are as under:

Geographical Diversification

• Manufacturing and distribution presence in key regional markets (India, Thailand, Turkey, USA and Indonesia) supplemented with warehouses in Netherlands, Poland, Spain, Germany, Mexico and Italy and liaison offices in Singapore, Korea and Japan have strengthened our global delivery capabilities.

• Recently commissioned Greenfield & ongoing brown field expansion in Indonesia for PET & BOPP film line respectively supports the Companys strategy of investment in large, productive & state of the art assets. This helps offer a better value proposition to the customers and diversifies risk without losing sight of cost and production efficiencies.

• The Company has strong and deep customer relationships, access & intimacy which are backed by a combination of onshore and near-shore business model. In the current sociopolitical environment (post Covid-19), there is an increasing risk aversion towards concentrated supply chains and trend towards de-globalization with a preference for local/regional suppliers and shorter supply chains. Our value proposition of distributed manufacturing base has an advantage as compared to the other participants with concentrated capacities and has helped achieve status as Tier-1/Strategic supplier in several large/multi-national customers/groups.

Healthy Product Mix & Specialty Focus

• Diversification into various substrates has helped the Company to establish itself as a complete packaging film provider. The Thick film line and the Blown film lines in Thailand as well as the new Blown film line in Turkey seek to strengthen our presence in the diverse industrial end use segments also besides flexible packaging.

• The Company has accelerated investments in niche downstream products to exploit synergies, broad-base the portfolio and provide a scalable platform for further growth. The setting up of Extrusion Coating lines in Thailand, Silicone Coating lines in India and Thailand, Offline Coaters in India, Turkey & Thailand comprise such downstream investments.

• The recent investments in Holography machines in India, Thailand & Turkey besides paper metallizing business in India will further provide opportunities for enhancing the range of value added products.

• The Company offers unique value through differentiated products and applications leading to a healthy growth in mix of specialty, innovative and value added products in the portfolio.

Cost efficient operations & assets

• Investment in vertical integration (both backward and forward) complemented with investments in high productivity assets would continue to protect cost competitiveness, drive innovation & value addition.

• Continuous improvements (productivity and cost optimization) were made through the use of rice husk boilers for heating instead of expensive furnace oil, packing and freight cost reductions, quality improvements and waste reduction and standardization of business processes, etc.

• In order to increase the sales of specialty film and enable economic usage of the older & less productive film lines, significant modifications have been done and more upgrades are under implementation in several lines in India, Thailand and Turkey.

R&D capability

• Focus on innovation and collaborative application development helps the Company become a preferred supplier/partner with several large multinational customers.

• Better Technical services and new products are being facilitated by leveraging in-house R&D capabilities and experience.

• Collaborative Research with government labs and educational institutions to drive innovation and new sustainability positive products.

• Systems have been created and strengthened to enhance cross-learning and sharing best practices/benchmarking across various units and businesses of the Group to enhance efficiency and synergy.

Sustainability focused

• Commitment towards sustainability while developing products & processes with minimal environmental impact.

• Developed and optimized "chemical recycling" process for manufacturing Sarafil rPET Polyester film with Post consumer Recycled content upto 90%.

• Promoted use of bio-based renewable raw materials and energy sources for the manufacture of polyester films.

• Developed various biodegradable films (PET, Blown PP/ PE, CPP) which meet the requirements of anaerobic biodegradation either in accelerated land fill or high solids anaerobic conditions complying to ASTM D5511 & D5526 standards.

• Recently added capacity to a facility in Thailand for recycling in-house and sourced plastic waste. The Company has decided to further invest in a new post-consumer bottle flake washing and recycling project which would further add impetus to its sustainability agenda.

Strong Financial profile

• A liquid and strong Balance Sheet enhances flexibility to address growth opportunities.

• Favorable taxation regime.

Note:

i. Coater capacities and capacity for Transfer Paper Metallized has been converted into MT based on current product mix.

ii. Figures include the proposed investments (which are under implementation) - Batch Resin Plant, Offline Coater & Blown Film line in Turkey, Metallizer in Indonesia and Batch Resin Plant, two Holography lines & Blown Film line in Thailand.

iii. The investment in new BOPP film line in Indonesia, co-located with the new investment in a PET film line on existing surplus land has also been considered. The project start-up is expected in H1 2021-22.

iv. Figures have been restated & revised, wherever necessary for previous years.

Despite the challenging environment, the Company continues to identify further growth avenues and is poised to enhance long-term shareholder value.

XII. Business Process Excellence

To enhance our competitive advantage and differentiation, the Company has been continuously investing in Business Process Improvement and Excellence programs. A BPE (Business Process Excellence) team is continuously working to undertake several Group-Level initiatives to improve our business processes and optimizing cost through continuous improvement in the areas of freight, packing, inventory management, electrical and thermal energy consumption, indigenization of spares, waste reduction & reuse of waste material, CRM and customer complaint handling. The benefits from these BPE programs have been continuously accruing over the last 5-6 years and significant incremental benefits are expected in the future as well.

XIII. Projects

The following projects are under implementation. The Capex cost for BOPP Line in Indonesia is around Rs 400 crores and other projects aggregate to around Rs 275 crores. A substantial amount of the Capex is expected to be spent in FY 2020-21.

Project Details Location Capex Type Annual Capacity Expected Start up
(TPA)
BOPP Film Line 12 Indonesia Brownfield Expansion 60,000 Q2 FY 2021-22
Metallizer-II Indonesia Forward Integration 12,000 Q2 FY 2021-22
Blown Film Line III Thailand Brownfield Expansion 4,800 Q3 FY 2020-21
Batch Plant-III Thailand Backward Integration 25,500 Q1 FY 2021-22
Holography-I Thailand Forward Integration 480 Q2 FY 2020-21
Holography-II Thailand Forward Integration 480 Q3 FY 2020-21
Post-Consumer Plastic Waste Recycling Ecoblue, Thailand Greenfield Expansion 25,000 Q2 FY 2021-22
Batch Plant Turkey Backward Integration 18,250 Q2 FY 2020-21
Blown Film Line Turkey Greenfield Expansion 4,392 Q2 FY 2021-22
Offline Coater Turkey Forward Integration 2,400 Q3 FY 2021-22

XIV. Performance during the year

AH discussion here is in the context of the consolidated performance of the Company.

Sales and Operations

The Company has a large international presence with active sales in all major regional markets/countries with an extensive base of about 1,900 customers and low customer concentration. Its top-10 customers contributed 28% of revenues in FY 2019-20. Almost 67% of the Companys revenues were from PET films (Thin and Thick) in FY 2019-20. Of the total sales of the Group, 65% was accounted by ultimate end-users.

The breakup of the Companys revenues from various regions, operating companies, business segments and applications is given below:

Note:

1. Other sales in the graph above comprise scrap sales and trading sales of third party non-manufactured products.

2. Other sales and Chips sales have not been considered in the application-wise breakup of sales.

New Start Up in Indonesia

The Company commissioned its new PET film line with an annual capacity of 44,000 MT and a Metallizer with annual capacity of 6,000 MT in Indonesia in November 2019. The Resin plant with an annual capacity of 73,000 MT has been commissioned in March 2020. Within a few months of startup, operations in the film line have ramped up rapidly with current CUF exceeding 90% levels.

With the backward integration into resin in place now, we expect significant improvement in the operations both from the cost/ profitability perspective as well as reliability/consistency of raw material input.

The Brownfield expansion for a new BOPP line is on schedule.

Financial performance

A snapshot of the Income Statement for the last two years is given below:

Particulars

2019-20

2018-19

Change
(Rs in Lacs) % of Total Expenses (Rs in Lacs) % of Total Expenses (YoY)
Sales & Other Income 4,54,850 100% 4,73,343 100% -4%
Manufacturing Expenses 2,92,116 64% 72% 3,17,149 67% 80%
Operating and other Expenses 78,522 17% 19% 66,704 14% 17%
EBITDA 84,212 19% 89,490 19% -6%
Foreign exchange fluctuation loss/(gain) # 10,175 2% 2% (9,407) -2% -2%
Normalized EBITDA * 94,387 21% 80,083 17% 18%
Interest & Finance Charges 1,802 0% 0% 2,908 1% 1%
Depreciation and Amortization 25,333 6% 6% 20,910 4% 5%
Income Before Income Tax 57,077 13% 65,672 14% -13%
Exceptional Gain/(Loss) 6,941 2% - 0%
Provision for Income Tax 14,636 3% 7,307 2%
Net Income (Before Minority Interest) 49,382 11% 58,365 12% -15%
Minority Interest 21,178 5% 25,362 5%
Net Income (After Minority Interest) 28,204 6% 33,003 7% -15%

# Unrealized portion of foreign exchange loss/(gain) on foreign currency long term loan

* Normalized EBITDA excludes impact of unrealized FX (gain)/ loss on long term loans

During the year under review, the sales and other income have declined by 4% due to decrease in unit sales realization both in PET film as well as BOPP film businesses resulting from significant fall in raw material prices on the back of oil price declines. This is despite the overall sales volume in FY 2019-20 having increased by 8%, largely due to the new Indonesia plant startup during Q3 FY 2019-20.

Normalized EBITDA is higher by 18%. This was mainly on account of higher sales volume and improved value addition as compared to previous year. Reported EBITDA was lower by 6% owing to unrealized foreign exchange fluctuation loss of Rs 10,175 lacs during the current year, in comparison to unrealized foreign exchange fluctuation gain worth Rs 9,407 lacs during the previous year. This was on account of unrealized foreign exchange differences arising as a result of rein statement of long-term foreign currency loans charged to the Profit and Loss account as per applicable accounting norms.

Exceptional item during the year represents a gain of Rs 7,106 lacs due to reversal of the impairment loss on manufacturing assets of Polyplex USA LLC (PU) partially offset by a loss of Rs 165 lacs on account of provision for impairment on investment in subsidiary Company (PTSL, China). There is an additional depreciation charge of Rs 1,544 lacs resulting from the reversal of impairment loss.

The Income Tax cost is higher during the current year due to deferred tax liability creation as well as deferred tax asset reversal aggregating to Rs 5,220 lacs.

Sales and other income

2019-20 2018-19 Change
(Rs in Lacs) (Rs in Lacs) (YoY)
Sales 4,46,488 4,54,548 -2%
Other Income 8,363 18,795 -56%
Total 4,54,850 : 4,73,343 -4%

A marginal decrease in topline during the year under review was mainly d ue to decrease in selling prices of PET and OPP Films which is substantially set-off by increase in sales volume.

Other income during the previous year was higher due to net foreign exchange gains of Rs 10,828 lacs (unrealized foreign exchange fluctuation gain on long term loans of Rs 9,407 lacs and other operational forex gains of Rs 1,421 lacs). For the current year, there are net foreign exchange losses which are clubbed in "Other Expenses". Other income also included interest income generated through deployment of surplus cash in low-risk market instruments and fixed deposits.

The break-up of sales reveal that 67% of the overall turnover is derived from thin/thick PET films (67% in FY 2018-19), 3% from PET chips (5% in FY 2018-19), 12% from Coating business (13% in FY 2018-19), 9% from BOPP films (9% in FY 2018-19), 7% from CPP films/Blown films/other sales (6% in FY 2018-19) and 2% from Other Specialty business (nil in FY 2018-19).

Manufacturing expenses

2019-20 2018-19 Change
(Rs in Lacs) (Rs in Lacs) (YoY)
Raw Materials Consumed (Incl. Stock Accretion/ Decretion) 2,34,827 2,64,655 -11%
Power & Fuel 26,505 24,464 8%
Packing Material Consumed 16,173 14,893 9%
Stores & Spares Consumed 10,112 8,814 15%
Repairs and Maintenance 4,499 4,322 4%
Total Manufacturing Expenses 2,92,116 3,17,149 -8%
as a % of Sales and Other Income 64% 67%

Manufacturing expenses decreased by 8% in absolute terms due to decrease in raw material consumption on account of decline in raw material prices which is partly offset by higher sales volume. Further, power and fuel costs and packing cost increased due to higher sales volume and startup of Indonesia operations.

Operating and other expenses

2019-20 2018-19 Change
(Rs in Lacs) (Rs in Lacs) (YoY)
Personnel Expenses 38,722 34,460 12%
Administrative Expenses 12,305 11,525 7%
Selling Expenses 20,473 20,600 -1%
Other Expenses 7,023 118 5827%
Total Operating and other Expenses 78,522 66,704 18%
as a % of Sales and Other Income 17% 14%

Operating and other expenses in absolute terms have increased by 18%. Other expenses have increased during the current year primarily due to net foreign exchange loss of Rs 6,826 lacs (unrealized foreign exchange fluctuation loss on long term loans of Rs 10,175 lacs partially set off by other operational forex gains of Rs 3,349 lacs). Other operating expenses like personal expenses and administrative expenses are higher reflecting the impact of inflation, startup of new operation at Indonesia and increase in sales volume.

Interest and finance charges

2019-20 2018-19 Change
(Rs in Lacs) (Rs in Lacs) (YoY)
Interest Expense 1,723 2,726 -37%
Bank & Other Financial Charges 79 182 -57%
Total Interest and Finance Charges 1,802 2,908 -38%
as a % of Sales and Other Income 0.4% 0.6%

Financial expenses are lower than the previous year due to repayment/prepayment of term loans during the year under review partly offset by increased borrowings for new operations in Indonesia. Further lower working capital borrowing and decline in interest rates during the year also resulted in a lower interest cost.

Liquidity and capital resources

The Company ensures access to sufficient funding at acceptable costs to meet its business needs and financial obligations through business cycles. The Company relies on cash from operations and short-term/long-term debt for meeting its operational/capex requirements. It continues to maintain adequate liquidity for its operations with a close watch on the debt service and leveraging ratios. Cash and equivalents together with undrawn credit lines (excluding project financing) and liquid investments aggregated to around Rs 2,05,620 lacs (including unutilized working capital limits of Rs 79,968 lacs) as at the end of the reporting period.

(Rs in Lacs)
FY (2016-17) FY (2017-18) FY (2018-19) FY (2019-20)
Net Cash flow from Operating activities 44,120 30,705 55,119 73,110
Net Cash flow from Investing activities (14,390) (12,635) (29,626) (40,496)
Net Cash flow from Financing activities (43,578) (4,176) (31,153) (29,767)
Exchange Difference on translation of Foreign Operation (10,163) 2,023 3,096 8,172
Cash & Cash Equivalents 20,017 35,935 33,370 44,389
Total Cash & Bank Balance Including Investment 1,08,403 1,25,185 1,18,529 1,25,652

Cash & Cash Equivalents exclude fixed deposits with maturity more than 3 months and other fixed income investments.

Detail of Cash & Bank Balance Including Investments at the end of year:

(Rs in Lacs)
Particulars As on March 31, 2020
Cash & Bank Balances 27,373
Fixed Deposit with Banks (less than 3 Months) 17,016
Cash & Cash Equivalent (A) 44,389
Fixed Deposit with Banks (less than 12 Months) 51,397
Other Balances with Bank 329
Bank Balances other then Cash & Cash Equivalent (B) 51,725
Fixed Deposit with Banks (More than 12 Months) 6,254
Investment in Bonds 16,065
Liquid Investment 7,218
Other Cash & Bank Balances (C) 29,538
Total Cash & Bank Balance Including investment (A + B + C) 1,25,652

Cash flow from operating activities

For the year under review, cash-flow from operating activities (before change in working capital) has increased to Rs 91,668 lacs as compared to Rs 77,135 lacs in previous year mainly due to expanded scale of operations and higher margins. This was partially offset by significant increase in net working capital invested in business (Inventories, trade receivable and other net current assets), thus resulting in net cash-flow from operating activities (after change in working capital) at Rs 73,110 lacs.

Cash flow from investing activities

The cash generated was used in investment in fixed assets to the tune of Rs 47,228 lacs in FY 2019-20 (H 37,247 lacs in FY 2018-19), mainly towards capital advances/ payments for new PET Film line & BOPP project at Indonesia as well as multiple smaller investments in various locations. Around Rs 2,196 lacs of fixed income securities and bank term deposits were redeemed (net of investment) during the FY 2019-20 (net redemption of Rs 4,132 lacs in FY 2018-19). In FY 2019-20, cash was used for further investment in Bonds of Rs 6,680 lacs, as compared to FY 2018-19 where cash generated due to net redemption of investment in Bonds was Rs 2,027 lacs. Interest received during the year is higher at Rs 3,816 lacs (H 3,242 lacs in FY 2018-19) on account of increased level of bank term deposit maturing during the year and higher coupon rate on fixed income securities.

Cash flow from financing activities

During the year there was a net decline in total debt (short term + long term) by Rs 3,726 lacs, though term debt has increased by Rs 12,602 lacs (net of repaid/prepaid borrowings) on account of fresh borrowings at Indonesia. Interest paid during the year was Rs 2,380 lacs (H 2,912 lacs in FY 2018-19). The Company paid dividend of Rs 23,597 lacs in FY 2019-20 (H 20,866 lacs in FY 2018-19).

Exchange Difference on translation of foreign operations

This is the exchange rate difference arising out of translation of assets & liabilities of overseas subsidiaries which are denominated in different currencies into INR.

Debt profile

Total debt as on March 31, 2020 is Rs 75,800 lacs (H 78,574 lacs on March 31, 2019), a decline of Rs 2,774 lacs as compared to the previous year. This is mainly due to the decrease in working capital borrowing and net payment/pre-payment of long term debt substantially offset by fresh borrowings in Indonesia.

XV. Sustainability

There is concern from all stakeholders and environmental groups on usage of plastics with emphasis on single-use plastic items and sustainable solutions are being sought. Governments are becoming an active participant in setting out the expectations and defining rules. Governments and Industry is focusing on developing economical models for collection, sorting and reuse/ recycling of post-consumer plastic waste. The urgency and sensitivity on the sustainability agenda varies significantly across regions with Europe taking the lead and limited traction in USA and South East Asia.

The Ellen MacArthur Foundation (EMF) in collaboration with the UN Environment has come up with a New Plastics Economy Global Commitment vision document wherein one of six key pillars is that all plastic packaging is 100% reusable, recyclable, or compostable.

In light of the above, each industry participant is challenged with both threats as well as opportunities. The Company strives to partner with all stakeholders in the value chain on sustainability developments. It represents the polyester industry at various national and International Industry Associations, the details of which are as below:

1 Industry Associations 1 Objective
PETCORE-Europe PET Sustainability & Recycling
CEFLEX-Europe Flexible packaging circular economy
EUPP-Europe Recyclability & Sustainability
BOFE-Europe PET film
SPC-USA Recyclability & Sustainability
IFCA-India Flexible packaging and folding carton

Polyplex is committed towards sustainability and aims to be a total packaging substrate solution provider for its customers while developing products with minimal environmental impact and providing the highest standards of health and safety to the workforce. As an organisation, the Company continually strives to:

• Improve production and operational efficiencies to ensure optimal consumption of resources like electricity, water and raw materials.

• Limiting the impact on the environment by reducing emission levels of industrial waste and effluents.

• Improve safety and health standards by continuously improving working conditions, minimizing workplace hazards and raising awareness through involvement, participation and continuous training of the shop floor workforce.

• Engage with stakeholders to promote sustainable business practices.

Polyplex has undertaken the following decisive initiatives in the realm of environmental conservation:

• Developed and optimized "chemical recycling" process for manufacturing Sarafil rPET Polyester film with postconsumer recyclate content of upto 90% for packaging applications. The film has been made available commercially using post-consumer PET bottle flakes as input material. The rPET resin has properties same as that of virgin PET resin and the resultant PET film is compliant with all regulatory requirements including EC and US FDA compliances.

• Developed PET film based monomeric structure for use as single layer for applications including cold seal release film and applications.

• Introduction of transfer metallization films & paper for plastic free cartons which is 100% recyclable.

• Operationalized latest technologies to save power across plant locations which resulted in substantial improvements in terms of energy efficiency.

• Through its R&D initiatives, Polyplex has promoted the use of bio-based renewable raw materials and energy sources for the manufacture of polyester films.

• Dedicated recycling unit in Thailand which provides sustainable solutions for plain and coated film waste and post-consumer waste.

• Reduced greenhouse gas generation by using husk-fired heaters at its Indian facilities.

• Switched to LED lighting across plants.

The Company has been following best practices relating to the environment, health and safety and has been diligently following the guidelines that have been set out as per the following certifications:

Management System International Standards PCL - Khatima PCL - Bazpur PTL-Thailand PE - Turkey PU - USA PFI - Indonesia
Quality Management System (ISO 9001:2015) Certified since 1996 Certified since 2010 Certified since 2004 Certified since 2006 Certified since 2018 Under Implementation (Certification expected by Q2 FY 2020-21)
Environment Management system (ISO 14001:2015) Certified since 2002 Certified since 2010 Certified since 2004 Certified since 2009 Certified since 2018
Occupational health & safety management system (OHSAS 18001:2007/IS0 45001:2018) Certified since 2004 Certified since 2012 Certified since 2008 Certified since 2009
Food Safety Management System (ISO 22000:2005/ BRC-IOP/FSSC-V5) Certified since 2008 (ISO 22000) Certified since 2012 (ISO 22000) Certified since 2009 (ISO 22000) Certified since 2006 (BRC-IOP) Under Implementation (Certification expected by Q2 FY 2020-21) Under Implementation (Certification expected by Q4 FY 2020-21)
Energy Management System (ISO 50001:2011) Certified since 2013 Under Implementation, (Certification expected by Q3 FY 2020-21) Certified since 2014

The Company has also published its second Sustainability report (for the FY 2017-18) as per the Global Reporting Initiative (GRI) standards. The objective of the Sustainability Report is to disclose its Environmental, Social and Governance performance to the stakeholders and to set benchmarks for each sustainability indicator with improvement and intervention areas.

XVI. Corporate Social Responsibility

Corporate social responsibility has been an important part of the mission of the Company. The Company has been undertaking various initiatives to help communities in areas adjoining to its plants and improve the quality of life of its employees.

In the ongoing Covid-19 pandemic, the Company, across all its locations, has made monetary contributions to NGOs, Hospitals and Government relief funds. The Company has also donated sanitizers, necessary medical equipments and protective gear for healthcare workers. Various NGOs have been supported by providing necessary food supplies to the communities around our locations. At our plant locations in Khatima & Bazpur, hospital beds & other necessary medical devices have been provided to civil hospitals.

The Company has been running a school at its Khatima plant for the past almost three decades. The school provides over 1,750 students with best-in-class educational facilities. Under a PPP model at Bazpur and Khatima, Polyplex has adopted two local schools and provides them with the necessary infrastructure. Polyplex also offers a slew of sports and educational sponsorships as well as full scholarships to the school-going children of deceased employees. Polyplex promotes religious harmony through its even-handed support to local religious activities and celebrations. Polyplex has also contributed to the Rekhta Foundation, which is a non-profit organisation established to promote and disseminate Urdu literature and culture. In line with the requirements of Companies Act, 2013, the Company has also constituted a CSR Committee with a keen emphasis on delivering a positive impact across social, economic and environmental parameters. A detailed report on CSR expenditure is provided in the Directors Report section.

XVII. Innovation

Polyplex has adopted a lean innovation model in order to create enduring value for customers. It aims to provide more than a new product or a substrate. Polyplexs innovation center has introduced value-added products in several areas through a well-defined customer engagement process to align with customer requirements. The Company also focuses on developing applications and replacing existing products with alternative solutions. Innovation in this area is mainly based on developing new functional surfaces and properties besides films addressing the sustainability agenda for PET and PP based products based on future needs of customers.

Polyplex leverages the concept of co-creation while working on various innovation programs with its stakeholders-customers, brand owners, packaging designers, suppliers and adhesive manufacturers. Such engagement initiatives with customers are classified as V+ (value plus), W2 (win-win) and P1 (power of one).

The Company owns 18 Patents spread across various products, processes and countries and more than 5 are currently under the application stage. Additionally, five trademarks have been registered and a few more have been applied for.

Innovation - Sustainability related products

Polyplex has successfully adopted the 3R (reduce, reuse and recycle) concept while coming up with new-age packaging substrate solutions. It has taken various initiatives to recycle waste, save energy and use clean technology to reassert its environmental commitment and continually strives to manufacture sustainable products which can gain global acceptance, for example green candy wraps, direct digital printable films, transparent chlorine-free high-barrier films, UV printable carton lamination films, shrink sleeve wraps and label films, etc.

The Company has come up with several projects focused on CO2 footprint reduction. Digital printing offers high-quality graphics without the usage of solvents unlike conventional printing techniques such as Flexo and Rotogravure. With a lot of technologies available for digital printing itself, Polyplex has been able to develop products for most segments suitable for different digital technologies such as inkjet, dry toner, liquid electro-photography, etc.

Another project focused on sustainability was an attempt to convert general packaging laminate structures from 3 layers to 2 layers, which basically contributes to both source reduction as well as CO2 footprint reduction. With this idea in mind, Company now has a high barrier PE which is successfully being used in shampoo and detergent packaging where it essentially converted a 3 layers structure to 2 layers.

With the current developments around sustainability, Company has commercialized environment friendly alternatives Sarafil PCR PET with more than 90% recyclable content from used PET bottle flakes and other PCR flakes.

Polyplex has also come up with monolayer structures for some packaging applications. With polymeric modifications we were able to develop Heat Sealable PET films with high seal strength of upto 2kg/25mm. Such films are instrumental in designing mono polymeric PET laminates for applications like cold seal as well as replacing few multi-layer laminate structures where PET films can be used as sealant layer.

Product Innovation

The Company has been consistently introducing specialty products with various innovative applications and uses. Recent examples include films for back sheets of solar panels, thick films for electrical and electronic appliances, easy-to-tear packaging films for food and cosmetics, foldable films for medical and industrial uses, anti-fog films, thermo-formable films, antibacterial coated film, high-barrier high-adhesion films for metallic surfaces, transparent barrier films for food packaging, specialty-coated PET films and films for print media suitable for digital printable and UV inks, among others.

Consumers have become highly demanding and are looking for more and more convenience features in packaging formats. "Reclosability", "Easy to tear" and "Save for later" have become regular concepts in the packaging market. The Company has delivered various innovative products and solutions for convenience, aesthetic, shelf life & high performance as under:

• Easy and Straight tear PET film has facilitated customer convenience through easy opening of pouches.

• Twist N Wrap is one such development which is seen on the market shelves for leading chocolate brands in India. This has also made possible conversion from a 3 layers laminate to a 2 layers laminate structure.

• Cold and Hot thermo-formable films have been developed for replacement of Nylon and PVC in certain flexible and pharmaceutical segments. AlOx based transparent barrier lidding films and pasteurization/retort grade films have been commercialized.

• The Company has also come up with specialty coated products for aesthetically pleasing packaging structures. They are targeted to impart a more natural and paper-like look for a soft and subtle appearance.

• Inkjet, dry toner digital printing films are environmental friendly and meets the need for variable printing applications.

• Specialty papers like Transfer Metallized Paper and Direct Metallized Paper for label segments have been developed.

• Holographic films for specialized applications like security & Tamper evident applications have been commercialized.

XVIII. Human Resources

Polyplex Group employs approximately 2300 people across the globe including the new greenfield site in Indonesia.

The Company closely monitors employee performance and accordingly creates career progression paths. Greater emphasis has been given to the following initiatives:

• Internal Growth and Development: Company believes in developing leaders from within the organization. New greenfield expansion has provided growth opportunities to many who were ready to take expanded leadership roles.

• Retention of Key Employees: The leadership retention scheme has been broad based to include many future leaders. Over the last few years, there is zero attrition at the leadership level. Company strongly believes in managing operations through stable management team.

• Localization: In order to provide greater opportunities of learning and growth, there is greater emphasis on developing and promoting local leaders having potential to deliver. This has positively impacted the morale and participation of local employees in improvement initiatives and programs. There is almost zero attrition at the local leadership level at all the units.

• Performance Management System: Special emphasis has been given to improve the robustness of performance feedback across the hierarchy.

• Employee Welfare and engagement: Company believes in having strong institutionalized employee engagement schemes/programs specially designed to meet the aspiration of local environment, culture and social practices. The attempt is to promote health of all employees holistically. Physical, mental, emotional and spiritual health of employees is monitored to ensure higher engagement. Employee engagement and employee welfare schemes continue to play its pivotal role in improving employee bonding. Polyplex has more than 50 structured and institutionalized employee engagement/welfare schemes covering employees at all plants and head office.

• Opportunity of Learning and Growth to employees of all nationalities while setting up greenfield operations:

During the year, the new Indonesia operations started-up. We attempted to make best use of human resources from all the units globally. This has helped us experience best possible vertical start-up of our operation in Indonesia.

• Healthy IR situation: Overall IR situation in all the plants are healthy. Employees participate in decision making process through employee welfare committees.

• Employee Rationalization: Employee rationalization related initiatives continued to operate at all the units. The emphasis was to use each opportunity of employee rationalization with minimal emotional distress to employees. The leadership team in our new operation in Indonesia consists of employees from all the units without any additional hiring. Business growth opportunities provided additional space for manpower rationalization. Rationalization also involves lowering the salary grade at which a specific job is performed, integration of functions to reduce managers/supervisors, delayering of structuring.

• Reward and Recognition: In order to recognize and promote good performance, the Company has an institutionalized process of rewarding outstanding individual and team performance globally.

• Systems and Process Institutionalizations: Polyplex believes in institutionalized mechanism of managing all the benefits related to human resources. Employees have full access to these documents in HR portal (HRIS) for their ready reference.

• HRIS: Human Resource Information System (HRIS) has been implemented at Indonesia operation from beginning. This has helped manage all the HR processes digitally. With this India, Thailand, Turkey and Indonesia operations are integrated through HRIS.

• Management of Human Resources during Pandemic:

During the current crisis, a robust health control mechanism has been put in place including handling of emergency situations. Proactive communication and prevention have been the hallmark of these initiatives. AH our operations continued without any disruption till date during these difficult times.

• Hiring of Future Leaders: The Company continues to employ students from various premier institutions of the country. This initiative, over the last five years, has helped young engineers and management professionals take up middle level leadership positions. Under this program, key executives are given direct exposure through structured role change for faster and all-round growth. This has helped in improving the available talent pipeline and employee retention.

• Caring Culture: Care is one of the four core values of Polyplexs value system. Polyplex believes in holistic development of our employees.

• Long serving employees: In order to appreciate the contribution of long serving employees, following initiatives have been taken during last financial year:

- Direct family members of employees are given opportunity of employment

- Employees at operating level are given growth to play larger role at the plants

XIX. Information Technology

During the year under review, the Company continued to implement IT enablement initiatives for improving and optimizing processes. The new application platform "Integrate" has been successfully running in two locations and the roll out is under progress for next location.

In view of lockdown due to Covid-19 pandemic, the Company undertook additional measures and steps to facilitate work from home policies while extending security measures to protect information processing and collaboration outside corporate networks.

The Company has also undertaken review of IT Disaster Recovery and Backup infrastructure and is in the process of evaluating and implementing measures to improve the IT applications and infrastructure supporting the business operations.

The focus is on effecting improvements in tools deployed to empower marketing and technical service teams and expanding coverage of web-based training and development portal for employees to improve their knowledge and skills in the areas relevant for their operations. The Company continues to invest in upgradation of older networks and infrastructure components to contemporary standards with secured infrastructure.

XX. Internal Control Systems

The Company has a strong internal control system comprising various levels of authorization, supervision, checks and balances and procedures through documented policy guidelines and manuals. The internal audit team conducts detailed audits to regularly monitor the efficacy of internal controls and compliances with Standard Operating Procedures and Manuals with an objective of providing to the Audit Committee and the Board of Directors, an independent, objective and reasonable assurance that all transactions are authorized, recorded and reported correctly.

The Company remains committed in ensuring an effective internal control environment that provides assurance to the Board of Directors, Audit Committee and the management that there is a structured system for:

• Ensuring statutory compliance framework and its effectiveness.

• Evaluating and managing risks on the basis of pre-defined risk control matrix as per Internal Financial Control (IFC) guidelines.

• Review of business plans and goals.

• Safeguarding the Companys assets against unauthorized usage.

• Prevention and detection of fraud and error.

• Compliance of policies and delegation of authority.

• Validation of IT security controls.

XXI. Risk Management

Polyplexs integrated risk management approach comprises compliance with prudential norms, structured reporting and effective controls. A combination of centrally-issued policies and locally-sensitized procedures has helped enhance process robustness, ensuring that business risks are effectively addressed.

Competition and business cycle risk

The industry margins in standard PET films hinge on Value Addition "VA" i.e. the difference between PET film prices and raw material (PTA and MEG) prices. Whenever the demand-supply balance favours the suppliers, VA usually widens and thereby encourages manufacturers to increase production by expanding capacities. On the contrary, if PET film supply exceeds market demand, prices drop, thereby narrowing the gap. This inevitably affects every producers revenues and profits, though the impact varies considerably depending upon the product mix, market positioning and other factors. The demand supply balance has been improving over the last 2-3 years with the slowdown in capacity additions and continued demand growth. The year 2019 witnessed start-up of some new lines, mostly by incumbent players in different parts of the world and was absorbed quickly without affecting the demand supply balance significantly. There are several more lines which are slated to start in the next 2-3 years. These lines are spread across geographies but mostly by incumbent players. The ongoing Covid-19 pandemic might cause some delays in the start-up of these capacities and even some cancellations. In a hyper competitive market scenario, the industry may also see likely closure of some old and inefficient lines which may not be economically viable when compared to the high capacity contemporary lines.

The industry volatility for the standard products has also become somewhat damped over the last 4-5 years due to a host of factors including more rational behavior by industry participants, lenders, sponsors besides institutional changes, especially in Asia on new lending norms, bankruptcy laws, etc.

Risk mitigation

The Companys business model is designed to moderate volatility in earnings and build long-term competitiveness. Its multi-locational manufacturing assets lend it the ability to service key regional markets while minimizing logistics costs.

A well-distributed manufacturing presence, diversified product portfolio and long term customer relationships provide better access to global markets and allow it to maintain a more balanced sales profile across regions, products, customers and currencies. This year the Company has further revisited and redefined the methodology for determining the proportion of High Value Added (HVA) film in the sales portfolio. HVA film sales usually are higher margin sales arising from differentiated product characteristics or application and/or a differentiated customer. HVA film helps the Company de-risk earnings. Over the past four years, the share of HVA in the total films sales turnover has increased from 24% in FY 2016-17 to 33% in FY 2019-20. If the impact of Indonesian start-up (product basket is mostly 100% essentials) is excluded, the share of HVA film for the FY 2019-20 would be 34%.

Price volatility risk

The basic raw material for production of PET film is PET resin, which in turn is produced from PTA and MEG. Being byproducts of the petro-chemical chain, the prices of PTA & MEG are impacted by Global crude oil prices, apart from demand-supply within its own industry.

The cost of resin is the single-largest component of the total production costs. Hence, any adverse fluctuations in the cost of PET resin can impact the Companys operating margins depending upon the Companys ability to pass on cost increases to its customers. As selling prices are usually negotiated on a monthly/quarterly basis, in a balanced demand supply situation, the Company is able to adjust the selling prices following any changes in PET resin costs and other operating costs, although this happens usually with a time lag varying between 1-3 months depending on the region and prevailing market conditions. The margins on the HVA products tend to be more stable and even counter-cyclical.

Risk mitigation

The graph below analyzes the correlation between crude oil prices and VA of PET films. Though any movement in the raw material prices is generally passed on to the end customers, albeit with some time lag, more importantly, with the diverse product mix and increasing proportion of HVA film sales, Polyplex has much better ability to maintain relatively stable overall VA across business cycles which is reflected in the consistently higher VA levels as compared to standard film VA prevailing in China.

Also depicted in the above chart is the comparison of crude oil price with standard film VA in China and overall VA for the Company which clearly shows the lack of any significant correlation between them over an extended period.

The Company monitors global and local input price trends carefully and determines its procurement plans accordingly. Moreover, unpredictable price movements of raw materials affect all industry participants and thus does not put Polyplex in a materially advantageous or disadvantageous position vis-a-vis its competitors. The Companys geographical and product diversification helps in sustaining pricing/margins much better than other participants. The prices of downstream products like silicone-coating, extrusioncoating, holography and other specialty/HVA films are less susceptible to changes in raw material prices and thus reduce the Companys vulnerability in the face of volatile resin costs.

Trade defense risk

Trade defense measures (Anti-dumping duties, countervailing duties, safeguard measures etc) are imposed to protect local producers against unfairly traded or subsidized imports. Antidumping duties are imposed on imports if the ex-factory prices of such imported products are proved to be lower than the local selling prices of similar products in the respective exporting country. Countervailing duties are tariffs levied on imported products to offset the impact of subsidies applicable for exporters in those nations. Such tariff measures increase prices of imported products, usually rendering exporters uncompetitive.

PET Film: International trade in PET film has been subject to trade defense measures for more than three decades through the imposition of anti-dumping duties and countervailing duties. The important markets adopting this measure are the EU, the US, Korea, Indonesia and Brazil. In order to protect the domestic economy from Covid impact, Turkey has recently imposed additional custom duties of 40% till Sept 30, 2020 and 10% thereafter on all countries excluding those with FTAs and Custom Union.

Risk mitigation

A summary of the AD/CVD duties applicable in the major export markets for PET Films are as under:

Country of Import Polyplex Duty (AD+CVD) Other Indian Producer Duty Rates Other Countries on whom AD/ Other Countries Duty Rates (AD+CVD) except Polyplex Group
(AD+CVD) (Min-Max) CVD applicable (Min-Max)
China 31.24% - 76.72%
USA 13.75% (PCL) 7.22% - 65.59% Taiwan 0% - 4.48%
UAE 4.05% - 70.75%
Turkey 646.12($/Mt)
UAE 436.78($/Mt) - 576.32($/Mt)
Brazil 259.79($/Mt) (PCL) 67.44($/Mt) (PE) 222.15($/Mt) - 938.25 ($/Mt) Mexico Egypt China 1013.98($/Mt) 419.45($/Mt) - 483.83($/Mt) 946.36($/Mt)
Bahrain 480.15($/Mt)
Peru 123.20($/Mt)
Thailand 3.68% - 3.71%
Korea 34.90% (PCL)

34.90%

Taiwan 8.68%
3.67% (PTL) UAE 7.98% - 60.95%
China 13.51% - 36.98%
Indonesia 8.5% (PCL)

4.00% - 8.50%

China 2.60% - 10.60%
2.20% (PTL) Thailand 5.40% - 7.10%
Turkey 21.61% (PCL) 4.25% - 21.61%

Note: Sunset review by USA, Indonesia & Brazil on the following countries is ongoing USA - India, Taiwan, China & UAE Indonesia - India, China & Thailand Brazil - India, Egypt & China

The Company undertakes required steps to insulate itself against risks arising out of any such anti-dumping actions and other trade barriers imposed by importing countries. A well-diversified manufacturing presence and an end-to-end product portfolio also helps mitigate fallouts emanating from such actions. As a local producer in many countries, it is also evaluating actions for protection against unfairly traded or subsidized imports from other countries.

BOPP Film: The key markets imposing trade defense measures on imports of BOPP films are Indonesia, Vietnam, Korea, Pakistan etc. Our existing operations in India for BOPP film are not subject to these trade defense measures. The brownfield expansion in Indonesia which is expected to start in H1 of FY 2021-22 may have some impact on exports to Korea. On the other hand, the Indonesian market is protected against imports from other key exporting countries like Thailand & Vietnam.

PET Film Resin: In case of PET Film Resin, there are not many trade defense measures across the globe except the safeguard duties imposed by Turkey on imports from Korea.

PTA: There have been AD duties on imports of PTA in India from countries like Thailand, Korea, China, Indonesia, Malaysia, Taiwan & Iran but effective Feb20, these duties have been revoked as PTA has been designated as a critical input for textile fibers & yarn.

MEG: Currently, there are no trade defense measures on MEG but recently (in Dec19) an AD investigation has been initiated by the Government of India on imports of MEG from Kuwait, Oman, Saudi Arabia (subsequently withdrawn), UAE & Singapore.

Liquidity and solvency risk

Liquidity implies the ability to meet debt obligations and finance future investments. A less than optimal debt-equity ratio could limit the investment capacity of a corporate. Generally, if the cost of debt is lower than the return on investments, by increasing the financial leverage, a corporate can enhance return on equity. However, since there is an obligation to make fixed interest and principal repayments, volatile cash flows could strain the liquidity of a corporate. Also, higher debts could limit the ability to finance further investments.

Risk mitigation

Even after considering various ongoing expansions and prepayments/repayments of long terms loans, the Company has sufficient cash reserves significantly exceeding the level of debt. Cash and equivalents together with undrawn credit lines (excluding project financing) and liquid investments (current and non-current) aggregated to more than Rs 205,620 lacs. Free cash flows along with large unutilized credit lines available at Polyplexs disposal are expected be quite adequate to manage various ongoing expansions and to deal with any unforeseen contingences.

Exchange rate and interest rate risk

These risks arise on account of unanticipated changes in exchange rates. As the Company deals in multiple currencies due to its operations across different locations, the Company is exposed to risks on account of currency mismatches. Interest rate risk is the risk borne by interest bearing debt and investments due to variability in interest rates. In case of financing done at floating rates, as the interest rates change, cost of borrowing also changes, thus impacting cash flows.

Risk mitigation

Since the currency markets are highly volatile, the Company minimizes such risks by adopting a consistent hedging strategy. A natural hedge is created by choosing the right currencies for taking loans. Thus, the Company fixes the currency of the liability in order to match with the currency of operational surplus. The remaining mismatched exposures are optimized by the Company by carefully identifying, measuring, monitoring and hedging the net exposures by using simple instruments like forwards with a 3 month rolling time horizon. This ensures that the maximum potential loss remains within defined limits. As there is a natural hedge available for all long-term borrowings, the Company does not cover the exchange rate risk on these liabilities. Therefore, the foreign exchange translation gain/loss on these liabilities, as reported in the Financial Statements, may not have a corresponding impact on the cash flows of the Company as the payments for these loans are met via future receivables in the same currency. The forex risk is managed on a Standalone basis as cash flows are not freely transferable between Group entities.

The currencies used for external borrowing by the Company are US Dollar, Euro, INR & THB. Depending on the net FX surplus on Standalone basis, the currency for external borrowings is chosen. As of March 31, 2020, majority of the long term external borrowings were in Polyplex Indonesia which is in Euro & USD. Any spike in EUR & USD value against the local currency (IDR) has a negative impact on loan liabilities but with majority of the Companys exports to Europe & US markets, the impact on the Companys cash flow is minimized. Apart from this, there are related party borrowings too which are in Euros. Hence, there is a significant impact of Euro movement in terms of foreign exchange rein statement gain/loss as reported in the Financial Statements, which is partially hedged through Euro-denominated exports.

There are various reasons for interest rate changes like economic growth, inflation expectations and unemployment, among others. All these factors are external and uncontrollable. In order to have a more balanced loan portfolio and taking into account the cost benefit analysis, the Company continuously evaluates shifting some of its floating rate debt to fixed rate.

Credit risk

Credit risk refers to the risk of non-payment by debtors. This risk increases in case of unsecured or open payment terms.

Risk mitigation

The Company has a well-defined and robust internal credit management system to monitor unsecured sales. The Company also has a global credit insurance cover to secure non-payment risks of customers. During FY 2019-20, the Company had 1,900 customers and 28% of the total revenues were contributed by the top-10 customers. A strong internal credit risk management framework and credit insurance policy has enabled Polyplex to manage credit risks prudently. The average credit period during FY 2019-20 stood at 56 days as compared to 48 days in FY 201819. In the current pandemic situation, the risk of default is high and delays in payments are expected but with strong credit risk management system and strong relationship with customers, Company believes that it should be able to mitigate the risk.

Project implementation risk

Any delay in implementation, cost overrun, inability to stabilize production from the new investment and failure to meet the target investment objectives may significantly affect future profitability. Although the Company takes into consideration various regulatory aspects at the project feasibility stage, subsequent changes during the implementation phase may lead to project delays.

Risk mitigation

The risks are mitigated by forming a dedicated project management team, corporate management oversight, management commitment and suitable protection clauses in contractual arrangements and appropriate insurance products. The Company remains confident of successful implementation of new projects on time and within Budgeted costs except for un-foreseen circumstances. The BOPP Project at Indonesia is on schedule and expected to start commercial operations within Rs 1 of FY 2021-22

Geographic risk

An over dependence on a particular geography may not bode well for the Company.

Risk mitigation

The installed capacity of base films as well as downstream units is quite evenly spread out among the five manufacturing country locations of India, Thailand, Turkey, Indonesia and the US. Though some political and economic problems have been faced in Thailand and Turkey from time to time, there has not any significant effect on business activities. The Turkey operations are well placed to sustain any impact in the short term arising from its location in a Free Trade Zone, high export orientation, domestic sales being invoiced in Euro and other mitigating steps undertaken. However, no adverse long-term impact is envisaged.

Regulatory risk

Regulatory compliance is a key consideration for the PET industry. In order to ensure the safety of food that is packaged and consumed, extensive regulations have been put in place by various regulatory bodies like the USFDA, the EC, among others.

Risk mitigation

The Company stringently conforms to the relevant USFDA and EC directives for food packaging applications.

Environmental and sustainability risk

The Indian packaging industry is prone to certain environmental and sustainability risks. The Plastic Waste Management Rules, 2016 and Solid Waste Management Rules, 2016 defined responsibilities and actions required by municipal authorities, manufacturers, dealers and brand owners. Amendments to these Rules made in March, 2018 have relaxed the regulations on usage of multilayer plastics, factoring in lack of alternatives. Further, while several Indian states have also come up with directives on limiting the usage of plastics in packaging, these are broadly not applicable to multilayer plastics for flexible packaging.

The current legislative framework has clarified that every producer or brand owner shall be responsible for safe disposal of plastic waste generated either in their premises or through post-consumer packaging material. They will have to register themselves with concerned authorities like SPCB/ CPCB and their agencies who will be disposing of above material.

At Global level also, there are increasing concerns on the usage of plastics in general due to low rates of recycling of postconsumer waste and lack of efficient collection and sorting systems. The ongoing Covid-19 crises has resulted in a re-think on the benefits of plastics in general and may re-orient thinking on recycling strategies and solutions.

Risk mitigation (please see section on Sustainability also)

Flexible packaging is environment friendly compared to traditional rigid forms of packaging owing to its lower carbon footprint, light weight and lower requirement of landfill. The amendment to the Plastic Waste Management Rules in India has significantly diluted the threat to multilayer flexible packaging as it defines recyclability by inclusion of other alternative usages like waste to energy as well as road construction, etc. There is increasing recognition among policy makers and other stakeholders that the functional properties of flexible packaging are unmatched and alternative options are not suitable. Governments and Industry are focusing on developing economic models for collection, sorting and reuse/recycling of post-consumer plastic waste. There is an increasing trend towards identifying EPR (Extended Producer Responsibility) measures to fund such initiatives.

The Industry is also working on multiple fronts to provide sustainable solutions such as:

- Higher rPET content in packaging.

- Single substrate packaging solutions.

- Higher Bio content or Bio sourced solutions.

- Several alternative usages of plastic waste are being pursued like conversion to fuel oil, incineration, road construction, etc.

Covid 19 related risk

The immediate impact of the pandemic on the PET industry would stem from expected fall in disposable income worldwide due to reduction in economic activities/higher unemployment levels. This impact, is expected to be felt for a period of 12 -18 months and may result in a reduction in the demand for discretionary items in both the packaging and industrial segments. These would include expensive snacks/boutique products, white goods, mobile devices, LED/LCD devices and the automotive segment, thereby leading to a reduction in demand for the films used in these segments.

Risk mitigation

Given Polyplexs exposure to Industrial applications is only 29% of total sales, the impact of reduced demand for some industrial applications is limited. Additionally, the increased demand of health and personal protection/hygiene related products will help alleviate the stress on CUF and margins. Plastic has proved to be much safer, affordable, long lasting and helps in disease containment during these tough times.

Consumer staples, which make up bulk of Polyplexs business, are expected to see stable to elevated demand. In developed economies such as Japan, Korea, Europe and US - there is an increase in demand for films going into flexible packaging, as consumers gravitate towards more packaged goods to avoid inherent risk of contamination in the fresh food segment. Even in developing economies like India people have become more health conscious and prefer to buy packed products rather than those which are sold loose.

Cautionary statement

This report contains forward-looking statements which may be identified by their use of words like plans, expects, will, anticipates, intends, projects, estimates or other words of similar meaning. All statements that address expectations or projections about the future, including statements about the Companys strategy for growth, market position, expenditures and financial results are forward-looking statements. Forward-looking statements are based on certain assumptions and expectations of future events. The Company cannot guarantee that these assumptions and expectations are accurate or will be realized.