Premier Explosives Ltd Management Discussions.

1. Macroeconomic review

The Indian economy was negatively impacted by an unprecedented health crisis in 2020-21 with the highly contagious corona virus (COVID-19) spreading across the country. In response to the pandemic, Government has taken several proactive preventive and mitigating measures. Initial measures of lockdown, social distancing, travel advisories, practicing hand wash, wearing masks reduced the spread of the disease. Worlds largest COVID-19 vaccination drive commenced on 16th January, 2021 using two indigenously manufactured vaccines.

In early May 2020, government announced "Aatma Nirbhar Bharat Abhiyan" programme, a special economic package of 20 lakh crores, equivalent to 10% of Indias GDP. This programme is aimed at ramping up policy imperatives to make India a self-reliant economy and to help parts of the economy that have been adversely affected by COVID-19. Given these stimulus measures, the long-term outlook for India remains stable as per major rating agencies, reflecting that Indias economy will recover following the containment of the COVID-19 pandemic.

Suspected role in global spread of COVID-19 virus, attempts to dominate South China Sea waters and undesirable aggression at India border have been resulting in polarisation of China on one side and India, US, Japan, Australia, European Union, etc on the other. Trade restrictions by major countries on imports from China may see profound changes in international trade and countries like India may see opportunities knocking their doors to set up manufacturing the goods that were hitherto manufactured by China.

Indias rank in the Ease of Doing Business (EoDB) Index for 2019 has moved upwards to the 63rd position in 2020 from 77th in 2018 as per the Doing Business Report (DBR), improving its position in 7 out of 10 indicators. The report acknowledges India as one of the top 10 improvers, the third time in a row, with an improvement of 67 ranks in three years

It is also the highest jump by any large country since 2011. FDI equity inflows were US$49.98 billion in FY20 as compared to US$44.37 billion during FY19. However, the bulk of FDI equity flow is in the non-manufacturing sector.

Within the manufacturing sector, industries like automobile, telecommunication, metallurgical, non-conventional energy; chemical (other than fertilizers), food processing, petroleum & natural gas got the bulk of FDI. Government has announced a Production-Linked Incentive (PLI) Scheme in the 10 key sectors under the aegis of AatmaNirbhar Bharat for enhancing Indias manufacturing capabilities and exports, with an overall expenditure estimated at 1.46 lakh crores and with sector specific financial limits. Further improvement and firming up in industrial activities are foreseen with the Government enhancing capital expenditure, the vaccination drive and the resolute push forward on long pending reform measures

2. Operating environment

Need for defending the borders, higher investments in advanced technologies and ambitious export targets in the defence sector - all lend to a positive outlook for the defence sector.

Structural reforms in the coal sector, mineral policy of 2019 and aiming for reduction in coal imports - all lend to a positive outlook for the coal and mining sector.

Together these initiatives provide hope and opportunities for your company, which primarily operates in defence explosives and mining explosives.

A. Developments in Defence sector

a) "Aatma Nirbhar" initiatives and revision of Defence Procurement Procedure

India has the second largest armed forces and the fifth largest defence budget in the world.

Aiming to achieve self-reliance in defence production, recently the government has increased the FDI limit in defence manufacturing under automatic route from 49% to 74%.

Supporting the "Make in India" initiative, in April 20, the Ministry of Defence has revised Defence Procurement Procedure mainly to facilitate greater participation of Indian Industry and develop robust defence industrial base.

Though defence expenditure has been increasing during the last 10 years, most of the increased expenditure has been in the Personnel & administration costs.

Inversely, actual expenditure on Acquisitions, stores and R&D has been decreasing.

Thus, a bigger push is required from the government in terms of allocation of defence spend in improved technologies to strengthen the countrys military position.

b) 2nd Positive Indigenization List: ban on import of 209 defence items to boost self-reliance

The Ministry of Defence has added 108 more items to its existing list of 101 defence items banned for import to give further impetus to self-reliant defence manufacturing. The tally of the negative import list for defence items has now gone up to 209. Like the first list, import substitution of ammunition which is a recurring requirement has been given special focus.

Not only does the list recognise the potential of the local defence industry, but it will also invigorate impetus to domestic Research and Development by attracting fresh investment into technology and manufacturing capabilities. the second list focuses on weapons or systems that are currently under development or trials, and are likely to translate into future orders.

The governments embargo on imports is aimed at strengthening domestic manufacturing as the new defence policy eyes 35,000 crore defence exports in the next five years. Expected to boost up domestic defence industry, the ban-lists include missiles, ammunition and other items for which your company has built up competence and capacities.

c) Separate budget for procuring only Indian made defence items

In May 2020, Finance Minister announced that emphasis will be on procuring locally made products and said separate budgetary provisions for procuring only Indian made defence items.

d) Unstable developments along the border and the need for Defence preparedness

In a significant deterioration of border relations, India and China were locked in a face-off in early Jun20, with China claiming sovereignty over parts of Indian territory. Though the process of disengagement at several places is underway after diplomatic talks, this is the first major confrontation between the two countries since 1967 and marks an environment of increased tension that will require vital defence preparedness to meet any untoward incident at the border in future.

e) Growing ranks of India as defence exporter globally It is estimated that an export target of $5 billion in the next five years is not only achievable but can even match the national current capital outlay for defence of $15 billion in a decade.

Anecdotally, US is one of the largest importers of Propellant Powders with imports of USD 280 million in 2019. While US imports from China formed close to 7% of the total imports in 2018, the growing trade tensions between the two countries has resulted in this share declined to less than 1% in 2019. Such continued realignment of global procurement supply chains presents an export opportunity for India.

India has begun exploring export of missiles like BrahMos and Akash to Philippines, Indonesia & Vietnam and an MoU has been signed with Phillippines. The country is already exporting personal protective gear and armour plating for military vehicles to Phillippines, and now, missiles are expected to widen the export product mix.

In a major boost to the Honble Prime Ministers "Atmanirbhar Bharat Abhiyaan", your company has reached a unique milestone for being the first private company in India to export rocket motors. The first consignment dispatched to Israel marks the beginning of new pillar of growth. Your company already has more orders in hand which are currently in execution phase. The products are completely designed and developed through in-house R&D, and successfully tested to meet all customer requirements and specifications, qualifying international export standards. This remarkable achievement is believed to put Premier on the radar of international defence manufacturers and OEMs as a go to destination when it comes to rocket motors, warheads and other munitions.

f) Update on your companys contribution to Indias missile programmes

Your company has been working with various defence entities towards indigenisation of national missile programs. Following table gives details of missiles for which PEL has been supplying solid propellants.

Missile Type Stage End user Remarks
Akash Tactical, Surface to Air Production Indian Air Force and Indian Army Supplied 2200+ booster grains and 600+ Sustainer grains
LRSAM Tactical, Surface to Air Development and Production Indian Navy Sole supplier of solid propellants
MRSAM Tactical, Surface to Air Development and Production Indian Air Force and Indian Army Sole supplier of solid propellants
QRSAM Tactical, Surface to Air Development and Production Indian Army Sole supplier of Solid Propellant
NGARM Tactical, Air to Surface Anti Radiation Development of Propellant and Assembly of rocket motors Indian Air Force Sole supplier of Solid Propellant
Astra Tactical, Air to Air Development and Production Indian Air Force Sole supplier of solid propellants
Astra - II Tactical, Air to Air Development and Production Indian Air Force Sole supplier of solid propellants
BrahMos Cruise Anti-ship, Land attack Production Indian Air Force, Indian Navy and Indian Army Transfer of technology is under induction at Katepally plant
Pralay Tactical, Surface to Surface Production Indian Army Transfer of technology in progress

g) Update on PELs other defence and space products

In addition to missile area, PEL has been working towards the national indigenisation efforts in association with defence and space entities on the following products:

Product Type Remarks
Strap on motor for satellite launcher (PSLV) Solid propellant Production of HS, MS and NS on-going at Katepally plant
Air Target Imitator Dummy Rockets with IR Flares for Practice Firing First such product to be designed, developed and manufactured in India
Pyrogen Igniters Large Igniters for Initiation of Strategic Missiles propellant stages Sole supplier of Pyrogen Igniters
Supplied Igniters for various Strategic missiles like Agni and Submarine launched missiles
First indigenous supplier of the product
Chaff Counter measure Entered into Memorandum of Agreement with Indian Air Force for development and manufacture under Make in India
IR flare Counter measure First indigenous supplier of the product under Make in India
Smoke flare Signalling device
Pyro cartridges Initiators for rockets, missiles and other projectiles Sole supplier
Water cannon disruptor Neutralising IEDs
Mob control device Tear gas grenades and shells
>Fuze (filling and assembling) Device that detonates a munitions explosive material Under user trials

B. Industrial Explosives - Key Drivers

The global industrial explosives market was valued at $7.1 billion in 2019, and is projected to reach $10.9 billion by 2027, growing at a CAGR of 5.5% from 2020 to 2027.

Rise in demand for earth minerals, such as bauxite, iron ore, coal, and rare earth metals, including gold and silver, which are present inside the earth crust, is a key driver of the global industrial explosives market growth. Moreover, increase in use of industrial explosives in the construction industry for tunneling and other applications along with inclination of construction professionals toward the use of industrial explosives to save time & labor costs is fueling the growth of the market. Furthermore, initiatives by governments of various economies to tap rich underground mineral resources to achieve higher GDP aids in boosting the market growth. Currently, the global industrial explosives market has witnessed vivid opportunities due to upsurge in mining activities, especially in developing economies across the globe.

However, fluctuation in prices of ammonia and implementation of stringent regulations on the storage & transportation of industrial explosives are expected to act as major restraints of the global market. Moreover, high initial costs required for the manufacture of industrial explosives are some of the key factors hampering the market growth.

a) Production of coal in India

All India Production of coal during 2020-21 were 716.01 MT, in comparison to 729.10 MT in 2019-20, with a negative growth of -2.03%.

Coal India Limited (CIL) and its subsidiaries production accounted for 596.25 MT of coal in 2020-21 compared to 602.13 MT in 2019-20, with a negative growth of -0.98%.

India imported 214.97 MT of coal in 2020-21, about 13.5% per cent lower than 248.54 MT in 2019-20.

Several initiatives are being taken by Ministry of Coal for supply of domestic coal to reduce import dependency.

In May 2020, the central government decided to bring the import of coal for blending purpose by domestic coal-based power plants to zero in FY 2020-21.

This is expected to ramp up production by Indian coal miner and to generate demand for explosives.

b) Auction of coal mines for commercial extraction by the private sector

On June 18, 2020, the Government launched auction of 41 coal mines for commercial mining with the theme "Unleashing Coal: New Hopes for Atmanirbhar Bharat", for Indias self-reliance in coal mining through structural reforms in the coal sector.

Salient features of the auction include:

• In all 41 mines total geological coal reserves amounts to 17 billion tonne of coal

• Peak rated capacities (PRC) of all mines is 225 mtpa

• The mines on offer are largely fully explored ones - could be brought to production immediately.

• 100 per cent FDI through automatic route allowed

• Floor price of coal mines has been set competitively at 4 per cent of revenue share

• Complete freedom to use coal production for sale, captive consumption, sale to affiliates, coal gassification and exports

The coal mines auctions are expected to lay strong foundation for energy security, large scale employment generation and huge opportunities for investment in coal sector.

These initiatives provide increased opportunities for supply of explosives.

c) Volume restrictions on electric detonators

With a view to enhance safety in mining operations, restrictions have been imposed on volumes of electric detonators to phase them out over a period of time. Nonelectric detonators would replace the electric detonators and your company is taking steps to increase production of shock tube and other parts for non-electric detonators.

3. Outlook

Your company has been focusing on defence explosives business and continues to accept mining explosives opportunities wherever the margins are profitable. Your company is also focusing on the overseas market for industrial explosives with better realizations and is expecting to increase the exports of industrial explosives by 4-5 folds.

The company is working towards the maximum capacity utilization of our production facilities and the same is expected to reflect in the top line in FY 2021-22 .

The Greenfield project at Katepally has come into commercial production in early 2021. Order inflow for this plant is good. By 2021-22, it is expected to give good contribution to the top and bottom lines.

4. Segment-wise performance

The companys primary business is manufacture of high energy materials as a single business segment.

5. Financial analysis

Generally accepted accounting principles:

The financial statements are prepared under the historical cost convention on an accrual basis.


Current years net operating revenue has been 15,194.05 lakhs compared to 15,650.80 lakhs during 2019-20. During the year the company has incurred a loss before tax of 1,489.06 lakhs compared to a Loss of 1,450.94 lakhs last year. Loss after tax stood at 1,074.47 lakhs against loss after tax at 958.24 lakhs. The loss was occurred primarily due to the onetime charge of VRS to employees. The company spent 908.01 for the Voluntary retirement scheme to employees. The company has come to the profit in last quarter of FY 202021 and we expect the positive trend to continue in near future. The operational EBIDTA has turned positive during the year to 4% s against the negative EBIDTA of 3% in FY 2019-20.

Financial position:

During the year the company incurred the capital expenditure of 1,184.47 lakhs on fixed assets, 270.76 lakhs on intangible assets. Most of the capital expenditure has been towards Katepally Greenfield project which was completed and capitalized during the year. The Katepally project commenced commercial operations during the last Quarter of 2020-21.

Key financial ratios:

2020-21 2019-20
Debtors turnover 3.62 3.33
Inventory turnover 4.14 3.72
Current ratio 1.13 1.27
Long term Debt equity ratio 0.06 0.02
Operating Profit Ratio 0.44% (6.48%)
Net Profit Ratio (7.07%) (6.12%)
Interest coverage ratio 0.90 # NA

# As Profit before Interest, Depreciation and Tax was negative, it is shown as NA

6. Risk management

Your company recognizes Risk Management as a very important part of business and has kept in place necessary policies, procedures and mechanisms. The company proactively identifies, monitors and takes precautionary and mitigation measures in respect of various risks that threaten the operations and resources of the company, which include the following:

Risk Description Mitigation
COVID-19 risk First identified in December 2019 in Wuhan, China, it is an infectious disease and has resulted in an ongoing pandemic affecting almost all the countries. The company has been following the lock-down / relaxation guidelines prescribed by the government. Plants and offices have been taking precautions such as sanitisation, social distancing, no entry without mask, etc.
In financial terms, market demand and supply chains have been affected causing global economic recession.
Delivery schedules and payment terms are being renegotiated with customers and suppliers to mitigate contract obligation risks.
Project risk The company has been executing various projects for enhancement of capacity as well as establishment of manufacturing facilities for new products. These capital projects may be exposed to time and cost overruns. To mitigate these risks, the technocrat management developed in-house design of equipment to the extent possible. The management also closely follows up the execution of projects to meet the deadlines.
Market and Competition risk Industrial explosives business is linked to mining and infrastructure activity which have not been faring well in recent times. Further, there has been intensive competition in the industry with entry of new units. To mitigate this risk, the company is exploring new markets including export markets. The company is also focusing on defence products which are expected to grow into a reasonably large stream of revenues to add diversity to the product portfolio.
Safety measures Both raw materials and finished goods are high risk items during production and handling. Apart from strict adherence to mandatory safety measures, the company has developed an alternative chemical compound as primary explosive in production of detonators. This alternative chemical is less sensitive shock & friction and hence is safer than its traditional counterpart. The company which is already an ISO 9000 compliant for industrial products is now AS 9100D certified. The company gives utmost priority for the safety of its employees as well as the manufacturing assets. These measures are expected to make the systems function in accordance with safety standards.
Raw material price risks Ammonium nitrate and fuel oil form major part of raw materials in manufacture of explosives and those raw material prices are influenced by international dynamics. This risk is mitigated by price escalation clauses in supply contracts whereby selling prices are periodically adjusted for the changes in prices of main raw materials. The company also uses a mix of domestic and imported ammonium nitrate taking into account the landed cost of the materials in both the options. As such risk absorption clauses are not available in supply of other products, the company takes all efforts to control the overall cost of manufacture, including backward integration.

7. Internal financial controls and their adequacy

Your company has established necessary internal financial controls and have got them assessed by professionals in the field during the year.

Your company has been utilising an ERP system for recording all financial transactions with built in checks and balances. This has been helping in preparation of financial statements and other reports accurately, reliably and timely.

Management reviews the operations on a regular basis.

Independent auditors, internal auditors, cost auditors and secretarial auditors verify financial and other information from their respective angles on intervals as are required.

Board and its committees review the quarterly and annual financial statements in conjunction with the financial policies, assurances through auditors observations and management responses and certifications.

Based on the above measures your company is confident that internal controls are in place, they are adequate and are reasonably working.

8. Material developments in human resources / industrial relations including number of employees

Your company has 975 employees as on March 31, 2021 (1,103 a year ago). Relations between the management and employees have been cordial. Employees have been imparted training in their respective areas for better performance. The management acknowledges the contributions made by each and every employee and records its appreciation for the cooperation extended by them at all levels.