Punjab Chemicals & Crop Protection Ltd Management Discussions

Overview

The economy world over continued to face challenges in view of geopolitical uncertainties, the aftershock of COVID-19 and the impact of global warming. Global economic growth declined from 3.5% in 2022 to an estimated 3.1% in 2023. A disproportionate share of global growth in 2023-24 came from Asia, despite a weaker-than-expected recovery in China. The economic slowdown was an account of sustained weakness in USA, higher energy costs in Europe, weak global consumer sentiment on account of the Ukraine-Russia war and the Red

Sea crisis, resulting in higher logistics costs.

The growth of advanced economies was expected to slow from 2.6% in 2022 to 1.5% in 2023 and 1.4% in 2024 following policy tightening.

Global inflation is expected to decline steadily from 8.7% in 2022 to 6.9% in 2023 and 5.8% in 2024, due to a tighter monetary policy aided by relatively low international commodity prices. Core inflation decline was expected to be gradual; inflation was not expected to return to target until 2025 in most cases. The focus of the Central Bank was on managing a decline in inflation and carrying out a calibrated fiscal consolidation to support durable medium-term growth.

Outlook

Asia is expected to continue to account for a bulk of global growth in

2024-25. Inflation is expected to ease gradually as cost pressures moderate; headline inflation in G20 countries is expected to decline. The global economy demonstrated resilience amid high inflation and monetary tightening. Growth is expected to recover to previous levels over the next two years.

I N D I A N E CO N O M Y

Overview

India continued to be a bright spot in global economy and it retained its position as the fifth largest economy with a GDP of about USD 3.7 trillion in nominal terms. The Indian economy was estimated to grow 8.2% in 2023-24 compared to 7.2% in 2022-23. Nominal GDP witnessed a growth of 9.6% in 2023-24 over the growth rate of 14.2% in 2022-23.

Real GVA grew 7.2% in 2023-24 over 6.7% in 2022-23. This GVA growth was mainly due to a significant growth of 9.9% in the manufacturing sector in 2023-24 over -2.2% in 2022-23 and a growth of 7.1% in 2023-24 over 1.9% in 2022-23 for the mining and quarrying sector.

Indias monsoon for 2023 hit a five-year low with August being the driest month in a century. From June to September, the country received only 94% of its long-term average rainfall. Erratic monsoon and was expected to put a pressure on rice and pulse production; food inflation was expected to remain a challenge. However, an exception was wheat production, expected to touch a record 114 million tons in the 2023-24 crop year on account of a higher coverage. The growth in agriculture and the allied sector declined to 0.8% compared to 4.7% in 2022-23, implying that though the countrys economy grew, there was a decline in the production of agriculture and related sectors. Due to an unfavourable monsoon, the agriculture sector was affected. Inflation is expected to moderate in

2024-25 to 4.5% compared to an estimated 5.5% in 2023-24 and 6.7% recorded in 2022-23. A global crisis, including supply chain disruptions, ongoing geopolitical issues and a potential global economic slowdown could disturb robust economic numbers, creating a challenge for policymakers. Central Bank policies continue to rein in inflation by providing investment incentives, or welfare programs with far-reaching implications on the Indian economy.

Indias Nifty 50 index grew 30% in 2023-24 and Indias stock market emerged as the worlds fourth largest with a market capitalisation of USD 4 trillion. Foreign investment in Indian government bonds jumped in the last three months of 2023. India was ranked 63 among 190 economies in the ease of doing business, according to World Bank ratings. Indias unemployment declined to a low of 3.2% in 2023 from 6.1% in 2018.

Outlook

India withstood global headwinds in 2023 and is likely to remain the worlds fastest-growing major economy on the back of a stable industry friendly policy framework, growing demand, moderate inflation, stable interest rates and robust foreign exchange reserves. It is expected to emerge as a USD 4 trillion economy in 2024-25, could surpass Japan to become the worlds fourth largest economy and emerge as the worlds third largest economy by 2027.

G LO B A L AG R I C U LT U R A L S E C TO R R E V I E W

Agriculture contributes 4.3% of the global GDP and employs 26.4% of the world workforce. Enhancing agricultural development stands as one of the most potent strategies to eradicate extreme poverty, promote widespread prosperity, and provide nourishment for an anticipated population of 10 billion by 2050. Agriculture plays a vital role in driving economic growth, constituting ~4% of the global gross domestic product (GDP) and comprising over 25% of the GDP in certain least-developed nations.

I N D I A N AG R I C U LT U R A L S E C TO R OV E RV I E W

Agriculture serves as the primary livelihood for about 61% of Indias population and contributes 25% to the national income. It is dominated by food crops, with 75% of the cultivated land allocated to crops like wheat and rice. Food security adds to the importance of this sector.

The Indian agriculture market reached approximately USD 457.26 billion in 2023. It is projected to grow at a compound annual growth rate (CAGR) of 4.90% between 2024 and 2032, reaching around USD 703.30 billion by 2032. This growth could be driven by factors such as increasing production, investments, and purchasing power.

India ranked second globally in terms of agricultural gross value-added, after China. It contributes 11.9% to the global agriculture gross value-added and 12% to Indias exports. Indias food and grocery market were the worlds sixth largest, with retail contributing 70% of the sales. Diverse agro-climatic conditions empower India to produce a wide range of crops, making it the worlds second largest producer of cereals and the largest producer of certain vegetables and fruit. Its share in global agricultural exports was 5%.

C R O P P R OT E C T I O N C H E M I C A L I N D U S T RY OV E RV I E W

The destiny of the crop protection industry is linked to the agriculture sector. The Indian crop protection industry is diverse, with small / medium players dealing in generic off-patent molecules and large multinational players with high-priced new generation and patented molecules.

India is the fourth largest producer of agrochemicals in the world after USA, Japan and China and the second largest exporter of agrochemicals, marked by major advantages like low manufacturing costs and the ability to efficiently hazardous handle products and processes, technically trained manpower, seasonal domestic demand, and production capacities for generics to cater to overseas markets. India attracted multinationals due to domestic growth opportunities. There was a steady increase in the acceptance of new generation molecules.

The Indian agrochemicals market is driven by an increasing demand for food production amidst growing population and the necessity to mitigate crop losses due to extreme weather patterns, pests and diseases, alongside advancements in agricultural technology driving the adoption of new crop solutions. The Indian agrochemicals industry is projected to clock a robust compound annual growth rate (CAGR) of 9% from 2024-25 to 2027-28, driven largely by government support, expanding production capacities, a flourishing domestic cum export market, and a steady stream of innovative products.

S P E C I A LT Y C H E M I C A L S I N D U S T RY OV E RV I E W

The specialty chemicals market represented 22% of Indias overall chemicals and petrochemicals market and was valued at USD 32 billion. In terms of trade, specialty chemicals accounted for a significant portion more than 50% of all chemical exports.

The emergence of the Indian specialty chemicals market was driven by the countrys strong process engineering capabilities, low-cost manufacturing capabilities, and abundant manpower. Government initiatives such as the petroleum, chemicals, and petrochemicals investment region (PCPIR) policy and production-linked incentive (PLI) schemes strengthened the confidence of manufacturers to invest. Several fundamental factors drove growth within the specialty chemicals industry. A rising need for specialised products in sectors like pharmaceuticals, agrochemicals, and electronics stemmed from evolving consumer preferences and advancements in technology. Innovation in renewables, batteries, AI, and cloud are expected to drive the demand for high performance speciality chemicals. The increased requirement of construction, water treatment, food and feed additives could sustain the existing product pipeline.

As pollution control regulations become more stringent and labour costs increase in other countries, manufacturers could diversify their production. Due to this, global manufacturers are considering alternative geographies with and Indias favorable ecosystem likely to emerge as a viable option, positioning the Indian specialty chemicals market for rapid growth.

(Source: Indian chemical news, grandviewresearch.com)

S E C TO R I A L D E M A N D D R I V E R S

Availability of new land: Increased urbanisation has emphasised the need for optimising yields and inputs safeguarding crops.

Policies implemented by the government: The Indian government acknowledges agriculture as one of the 12 champion sectors with a substantial potential in the global supply chain, especially in mitigating crop losses. A higher penetration of PMFBY could incentivise farmers towards crop diversification and a larger market for new products.

Impact of climate change: Changing weather patterns can impact insects, diseases, weeds, fungi, and other pests, affecting food availability, quality, and agricultural production. New seeds and advanced crop protection chemicals could gain market share in managing pests and disease.

Integrated pest management: A new method of crop protection is an emerging trend shaping market growth. Pest control involves almost 35% of a farmers crop production cost.

Increasing use of herbicides: Investments are being made in the development of new varieties of herbicides that are effective and eco-friendlier. Most modern herbicides are formulated to decompose within a short period of time after application.

A shifting preference of consumers toward fruits and green vegetables, propelled by an increase in awareness regarding health and fitness, catalyzes the use of herbicides in agricultural applications.

Rising population in India: The expected global population for 2024 is 8 billion, which is further estimated to grow to 8.6 billion by 2030, creating a shift in consumption patterns. There is a need to not just increase production to ensure that the nutritional needs of the population are met.

Off-patent molecules: The expiration of patents for over 100 agrochemical products by 2023, representing a sales value of USD 11 billion, signifies a substantial opportunity for the agrochemical industry.

China+1: India is becoming a desirable hub for agrochemical and speciality chemical production.

The manufacturing cost differential between China and India has diminished, partly attributed to Chinas stringent pollution control, leading to increased expense. This transition in the global supply chain, referred to as ‘China plus one, has encouraged multinational producers to procure larger quantities from cost-effective nations like India.

Research and development: Agrochemical and specialty chemical companies are expanding their production value chains by intensifying investments in research and development. They are capitalising on their research expertise to offer contract research and manufacturing services, potentially enhancing their profitability.

Shifts in consumer preferences: Growing consumer awareness and demand for organic and sustainably produced food are influencing agricultural practices and the development of agrochemicals that align with these preferences, driving innovation towards environment-friendly solutions.

Trade policies and tariffs:

International trade policies and tariffs impact the availability and cost of agrochemical inputs and products, influencing global market dynamics and supply chains.

Technological advancements: Rapid advancements in technology, such as precision agriculture, artificial intelligence, and biotechnology, are transforming the agrochemical industry by improving efficiency, efficacy and the sustainability of products and practices.

Regulatory Changes: Global regulatory shifts towards sustainability and stricter environmental standards are shaping the development and adoption of agrochemicals, favouring products with a lower environmental impact and promoting sustainable agricultural practices.

Economic expertise: The Indian chemicals sector provides an affordable and adaptable manufacturing infrastructure, a proficient workforce, proficiency in research and development, and a robust framework for environmental, health, and safety regulations.

(Source: Hindustan Times, Technavio, Mordor Intelligence, Data Reportal, Orfonline.org, Research report)

CO M PA N Y B U S I N E SS OV E RV I E W

With over 40 years of service, Punjab Chemicals has established itself as a leading agrochemical company in India. Our strong brand recognition and global presence are built on the pillars of trust, integrity, and respect. We secured exclusive manufacturing rights from multinational corporations, developed several products in joint development exercise to meet the evolving needs of customers. From research and development to manufacturing, marketing, and customer engagement, we provide a comprehensive range of services. We consistently delivered value-added solutions to farmers in India and worldwide, creating a niche and leaving a lasting impact on customers.

Through a strategic, differentiated, and partnership-based approach, we achieved rapid growth and aim to deliver superior returns to stakeholders.

Punjab Chemicals research and development (R&D) is directed towards solving customer problem and providing sustainable solutions. With shifting supply chains due to supply shocks in the recent past, optimism towards Indian industry and enhancement in capability to solve complex problems, respond with fast solutions, engage in safe execution and deliver quality products remained core pillar of our success. Throughout the year, the R&D team worked on several products in various phases of development; the pipeline contained products across agrochemicals, specialty chemicals and intermediate applications. The business development and R&D department continues to review the existing research pipeline based on deep partnerships with customers and intensive market research. This agility ensures that manufacturing is dynamic in an environment where sudden changes are common, making it possible to commercialise and deliver the products. We continue to build our talent pipeline and R&D resources to expand our capabilities and products addition. We continue to enrich our teams with a continuous exposure to the best minds in industry and interactions with experts.

Among various manufacturing locations, capacity utilisation for the Derabassi unit continued to be healthy. Despite challenging market conditions, we were able to sustain our market share and moving towards gaining market shares for key product portfolio. Efforts to improve Lalru unit utilisation progressed well, with customers approving products and new products being added. We expect Lalru unit utilisation to reach healthy levels over the next few quarters. The industrial chemicals division continues to deliver a strong performance. We continue to invest in asset renewal, technology upgradation, automation and other initiatives for safe, efficient and faster deliveries of products.

Business outlook

The inventory correction cycle is expected to get over in next few quarters and demand for products could return to normal levels. Competitive raw material pricing, aggressive work on cost efficiency and subdued energy prices could help us to perform well. Herbicides comprise the largest product based in Agrochemicals business and we have a strong presence in this segment.

The Company is likely to benefit from the maturation of recent product launches, expanding market share in some products and deepening a relationship with our customers. In addition, the Company intends to introduce more new products for export markets during 2024-25. The

Company continues to maintain a robust order book in exports with regular contract renewals providing revenue visibility and expansion. The Companys increasing investments and activities in the R&D domain will continue to hone its scientific prowess and complex chemistry capabilities to not only increase the loyalty of its existing innovator customers but also attract new innovator customers. Considering these factors, Punjab Chemicals is poised to gain market share and emerge as one of the Indias leading specialty chemicals players with deep partnerships with customers.

An increase in market share and the corresponding growth can take place only when the business is being responsibly conducted. We strive to improve resource efficiency, reduce waste and pollution, and promote sustainable consumption through ethical marketing practices to ensure ‘responsible growth for a better tomorrow. Our strategic diversificationof the product portfolio, customer base and manufacturing base are important milestone. Through these strategic moves, we are poised to address vast opportunities in CRAMS, broaden our presence in the segments we serve and strengthen our position in specialty segments. We remain committed to creating sustainable growth and delivering value to stakeholders while advancing healthcare solutions for the betterment of society.

S WOT A N A LYS I S

Punjab Chemicals is among the most reliable agro and specialty chemicals manufacturing companies. With the objective to emerge among the fastest growing in its niche, enhancing value in a consistent way – A quality driven organisation.

Strengths

Low cost operator having developed a cost competitive process over the last decade, maximising its export potential.

Availability of technically trained manpower and surplus production capacity to address incremental demand

Long-term multi-product associations with multinational ould be companies and domestic clients

New technologies and integrated supply chain with a focus on R&D.

Weaknesses

Dependence on imported raw materials, presenting challenges such as price fluctuations and supply chain disruptions.

The entire agrochemical sector faced challenges such as chemical resistance, limited adoption of new technologies, compliance with quality standards, and environmental concerns.

The existence of numerous small players has added to sectorial fragmentation, which could lead to price conflicts and compromise the quality of products.

Opportunities

Global manufacturers are looking to reduce their high dependence on China. The Company is poised to benefit from a shift in the supply chain, partnering with more multinational companies and domestic players.

Favourable governments policies, which emphasise enhancing agricultural productivity and crop diversification.

Varied agro-climatic zones across India contribute to the cultivation of a broad range of crops, increasing the demand for agrochemicals.

Increased exports to global markets, prioritising quality and environment friendly products, could assist Indian companies in expanding their reach.

Rising interest in organic farming and biopesticides offers Indian agrochemical firms an opportunity to develop novel products.

New product introduction, especially with the market opening up due to a large number of products going off patent, opens up the market for intermediate and end products.

Threats

Excess capacity and technical competence in China could continue creating pricing pressures.

Multinational companies with well-known brands and a significant market presence represent a competitive threat to Indian agrochemical firms.

The changing regulatory environment concerning registration and compliance represents a challenge for Indian companies operating in the agricultural sector.

Increasing environmental concerns and heightened public awareness about the potential risks of agrochemicals could lead to stricter regulations and a reduced demand for chemical-based products.

CO M PA N Y B U S I N E SS OV E RV I E W

slos Analysisoftheprofit and statement

Revenues: Revenues from operations reported a 7.15% degrowth from H1,006 crore in 2022-23 and reached H934 crore in 2023-24.

Expenses: Total expenses decreased by 6.17% from H921 crore in 2022-23 to H864 crore in 2023-24. Raw material costs, accounting for a 59% share of the Companys revenue from operations, decreased by 15.61% from H655 crore in 2022-23 to H553 crore in 2023-24. Employee expenses, accounting for a 9.40% share of the Companys revenues from operations, increased by 5.45% from H83 crore in 2022-23 to H88 crore in 2023-24.

Analysis of the Balance Sheet Sources of funds: The capital employed by the Company increased 21.64% to H455 crore as on March 31, 2024 from H374 crore as of March 31, 2023. Return on Capital employed declined by 27.78% from 28.59% to 20.65% in 2023-24. The net worth of the Company increased by 17.44% from H281 crore as of March 31, 2023 to H330 crore as on March 31,

2024 owing plough back of profits.

The Companys equity share capital comprised 1,22,62,185 equity shares of H10 each.

Long-term debt of the Company decreased by 15% to H52.56 crore as of March 31, 2024. The long-term debt-equity ratio of the Company stood at 0.16 in 2023-24 compared to 0.22 in 2022-23 owing to new borrowings during the year.

Finance costs of the Company increased by 15.59% from H18 crore in 2022-23 to H21 crore in 2023-24 is due to increase in borrowings and rate of interest globally. The Companys gross debt (including working capital) / equity ratio was a comfortable 0.37 at the close of 2023-24, 0.32 at the close of 2022-23).

Applications of funds: Fixed assets (net block) of the Company increased by 6.33% from H217 crore as of March 31, 2023 to H230 crore as on March 31, 2024.

Depreciation on assets increased by 16.57% from H19 crore in 2022-23 to H22 crore in 2023-24 due to increase in assets due to acquisition of assets. Non-current investments of the Company increased from H1.37 crore as on March 31, 2023 to H1.44 crore as on March 31, 2024 owing to reinstatement of investments.

Working capital management: Current assets of the Company increased by

4.14% from H362 crore as on March 31, 2023 to H377 crore as on March 31, 2024 owing to increase in the debtors due to change in the business model. The current ratios of the Company stood at 1.59 at the close of 2023-24 compared to 1.48 at the close of 2022-23.

Inventories including raw materials, work-in-progress and finished goods among others decreased by 21% from H168 crore as on March 31, 2023 to H133 crore as on March 31, 2024. The inventory turnover ratio reduced from 6.25 in 2022-23 to 6.21 in 2023-24. Despite marginal growth in revenues, trade receivables increased by 37.79% from H143 crore as on March 31, 2023 to H197 crore as on March 31, 2024. Trade receivable turnover ratio stood at 5.48 as on March 31, 2024 as compared to 7.89 as on March 31, 2023.

Margins: Lower cost absorption due to flat revenues impacted the margins during the year under review. The EBITDA margin of the Company reduced by 9 bps from 12.51% in 2022-23 to 12.42% while the net profit margin of the Company reduced by 33 bps.

Key ratios

Ratio analysis (Consolidated)	2023-24	2022-23	Reason for variance above 25% year on year
Current ratio	1.59	1.48	No major variation
Debt equity ratio	0.37	0.32	No major variation
Debt service coverage ratio	3.06	3.77	No major variation
Return on equity/Return on investment	17.55	24.14	The ratio has mainly decreased due to decrease in profit
Inventory turnover	6.21	6.25	No major variation
Trade receivables turnover ratio	5.48	7.89	No major variation
Trade payables turnover ratio	5.39	5.97	No major variation
Net capital turnover ratio	6.64	8.58	No major variation
Net profit ratio (%)	5.74	6.07	No major variation
Return on capital employed	20.65	28.59	Due to decrease increase in profit and trade receivable
Interest coverage ratio	4.51	5.93	No major variation
Operating profit margin	10.02	10.59	No major variation
Return on net worth	16.23	21.77	No major variation

H U M A N R E S O U R C E S

PCCPL remains steadfast in acknowledging the pivotal role played by its human resources in driving growth. It is committed to empowering employees in their continual pursuit of knowledge and skill enhancement. The Company continues to build its technical and managerial capabilities with the addition of the professionals across various functions during the year. Internal training and development mechanisms were further strengthened and employees are being trained to cater to growing future needs and market challenges.

Trainings was conducted for technical and soft skills.

PCCPL seeks to be a leader in innovation and new products introduction. Extensive training on safety, process safety management and external audits are being conducted to ensure peoples awareness and alignment with best practices. The Company is dedicated to nurturing employee capabilities, fostering innovation, and advancing organisational objectives by leveraging talent acquisition, learning and development, performance management, and effective succession planning.

Emphasis is placed on strengthening HR policies and processes, cultivating a robust value system, and nurturing behavioral skills aligned with the Companys present and future goals. PCCPLs primary focus is to ensure a workplace characterised by fairness, transparent compensation, flexible work arrangements, and an environment that prioritises the health, safety, and overall well-being of its employees.

I N T E R N A L CO N T R O L S A N D A D E Q U AC Y

The Company upholds strong internal control systems governing its business processes, ensuring operational efficiency, precise financial reporting, and rigorous compliance with applicable laws and regulations. The Audit Committee oversees these systems, examining internal audit reports.

This committee not only evaluates suggestions for improvement but also actively oversees the implementation of corrective actions. Furthermore, it collaborates with the Companys statutory auditors to assess the efficiency of the internal control framework. Regular reports on its discoveries are presented to the board of directors, promoting transparency and informed decision-making.

C A U T I O N A RY S TAT E M E N T

The Management Discussion & Analysis (MD&A) section contains statements regarding the Companys objectives, expectations, and forecasts that might be forward-looking as per relevant securities laws and regulations. Its important to note that actual results could vary from these statements due to economic conditions, climatic influences, government policies, and other unforeseen factors. While the MDA includes all mandatory information, any missing details in this section are provided elsewhere in the Annual Report.