Sah Polymers Ltd Management Discussions

Economic overview

Global economy

The global economy has been surprisingly resilient, despite significant central bank interest rate hikes to restore price stability. The baseline forecast is for the world economy to continue growing at 3.2% during 2024 and 2025, at the same pace as in 2023. A slight acceleration for advanced economies - where growth is expected to rise from 1.6% in 2023 to 1.7% in 2024 and 1.8% in 2025 - will be offset by a modest slowdown in emerging markets and developing economies from 4.3% in 2023 to 4.2% in both 2024 and 2025. The forecast for global growth five years from now - at 3.1% - is at its lowest in decades. Global inflation is forecast to decline steadily, from 6.8% in 2023 to 5.9% in 2024 and 4.5% in 2025, with advanced economies returning to their inflation targets sooner than emerging markets and developing economies. Core inflation is generally projected to decline more gradually.

Source - IMF - World Economic Outlook - April 2024

Indian economy

It now appears very likely that the Indian economy will achieve a growth rate at or above 7% for FY24, and some predict it will achieve another year of 7% real growth in FY25 as well. If the prognosis for FY25 turns out to be right, that will mark the fourth year post-pandemic that the Indian economy will have grown at or over 7%. That would be an impressive achievement, testifying to the resilience and potential of the Indian economy. It augurs well for the future.

The global economy is struggling to maintain its recovery post-Covid because successive shocks have buffeted it. Some of them, such as supply chain disruptions, have returned in 2024. If they persist, they will impact trade flows, transportation costs, economic output and inflation worldwide. India will not be exempt from it, but having faced and seen off COVID and the energy and commodity price shocks of 2022, India is quietly confident of weathering the emerging disturbances.

At least three trends will be with us in the coming years. The era of hyper-globalisation in global manufacturing is over. It does not mean that de-globalisation will be upon us any time soon, as countries are only now discovering the enormous integration of global supply chains that have taken place in the last few decades.

Closely related to this challenge is the advent of Artificial Intelligence with the profound and troubling questions it poses for growth in services trade and employment since technology might remove the advantage of cost competitiveness that countries exporting digital services enjoy.

Third and arguably the most important is the energy transition challenge. Concerns over rising temperatures have led to a single-minded focus on reducing carbon emissions amidst the determination that the emission of greenhouse gases, particularly carbon, is the most significant causal factor. This has led to persistent demands from international organisations and advanced nations on developing nations to wean themselves off fossil fuels and switch to greener energy.

Source - The Indian Economy: A Review by Department of Economic Affairs

Industry overview

Global FIBC market

The global FIBC market size is expected to top a valuation of US$ 12.6 billion by the end of 2033, with a CAGR of 5.4% during the forecast period. In the year 2023, the market generated a revenue of US$ 7.5 billion. The global FIBC market has approximately 1/3rd value share of the global IBC market.

Flexible intermediate bulk containers (FIBC) that carry at least 750 kg are the most preferred type, estimated by Future Market Insights (FMI). As per the study, the FIBC industry is projected to grow steadily as manufacturers introduce lightweight containers.

The expansion of the food and pharmaceutical industries as well as the growing requirement to lower the total weight of bulk packaging is one of the key factors driving the demand for FIBC. Industries are projected to use FIBCs to transport grains, rice, and liquid chemicals used in biological products.

FIBCs are primarily consumed in the chemical industry, however, demand for these bulk bags is significantly increasing in food companies. The food grade FIBCs are becoming an ideal choice for the commercial food industries.

Attributes such as their load-carrying capacity, versatility, reusability, cost-effectiveness, and eco-friendly material are increasing the demand. FIBCs have dust-proof seams and laminated fabric sides that ensure optimum protection of the inside products from moisture.

Bulk bags with a combination of polyethylene, foil, and another type of linings are gaining immense popularity to keep food products safe from harsh environments, spillage, and damage. Easy customisation and quality printing of FIBCs are aiding end users with brand establishment and product promotions.

The growing preference for safe products that are sanitary and eco-friendly is supporting the growth of the market as FIBCs are 100% FDA-approved elastomers. FIBC manufacturers are introducing food-safe products adhering to the regulations to capitalise on this trend.

Source - FIBC Market Outlook (2023 to 2033)

Indian FIBC market

The Indian Flexible Intermediate Bulk Container Association states that the FIBC market in India has increased by almost 38% in the last 10 years. The food-grade FIBC is gaining immense traction, registering prominent growth rates - the production was nearly 28% of the total production of FIBC in India.

As per the association, FIBC production in India is recorded as 3,06,996 MT in 2021. In 2023, India produced around 4,00,000 tons of FIBC, and is the biggest player in the FIBC export market.

The total export sales of FIBC from India increased 3 times over the past decade and reached US$ 708.48 million in 2021. The expansion of various industries and increasing trade activities are propelling the demand for FIBC.

It is already a dominant player in exports to US and European markets. It has a 75% share in European FIBC imports and 72% in the US import market. The export has experienced a notable increase, particularly in shipments to the United Arab Emirates (UAE) and Australia. It may be noted, India recently signed trade agreements with the UAE and Australia. The Indian FIBC industry is now looking eastward too, towards the Japanese and South Korean market to drive the next leg of growth. Several industries, including food products & agriculture, pharmaceuticals products, and chemicals & fertilisers, have experienced substantial industrialisation. This is due to the increased international commerce and several favourable measures by the Indian government.

Make-in-India initiatives and industry-specific incentives are boosting the establishment of numerous manufacturing enterprises in India. Hence, the demand for FIBC for effective storage and transportation of goods is surging with the rise of such end-user industries.

According to the FMI study, India is predicted to grow at a rate of 2x during the forecast period (2023-2033)

Source - Packaging South Asia - the magazine for modern packaging : FIBC Market Outlook (2023 to 2033) : IFIBCA - Indian FIBC Association

Growth drivers of the FIBC market

The major factors contributing to the growth include:

Manpower

• Large English-speaking, intelligent and youthful workforce from 18 to 41 years

• Willingness to learn new manufacturing processes in line with industry 4.0

Knowledge and technical expertise

• Excellent product domain expertise

• Access to the best production technology and contemporary processes

• Superior technical know-how, machinery and skilled manpower

• India has become a value-added manufacturer in comparison to other competitor countries and is more cost effective and consistently making a better value proposition for FIBC end users & customers

Large integrated units

• Achieving certain economies of scale makes the total value proposition for the customer far more valuable

Higher certification and compliances

• Most integrated FIBC manufacturing units are ISO certified and ensure Environmental & Occupational Health and Safety Certification. They have world-class infrastructure and management systems to ensure the best quality FIBC product is coming out of the unit

Logistics

• Good global connectivity through dry ports, inland haulage, multiple seaports and ocean liners and short transit times to Europe, USA and the rest of the world

Government policies

• Liberal government policies to promote export of FIBCs

• Today India is exporting about 40,000 MT per month of FIBC at a very steady CAGR

• Global FIBC market size has been valued at USD 4.0 billion in 2018, expected to advance at a CAGR of 5.9% over coming years. Total Global FIBC trade is 2.5 billion USD and India alone exports FIBCs about worth 0.7 billion USD which is more than 25% of Global FIBC Trade

• Atmanirbhar Bharat campaign and vision. It is the brainchild of our Honourable Prime Minister and is based on the five pillars of the economy, infrastructure, system, demography and demand. It advocates self-reliance, not for protectionism, or isolationism, but to enable the country to identify its inherent strengths and profit from them. It is a platform in which India endeavours to make for itself and also becomes the factory for the world

Competitive pricing and excellent quality

• FIBCs have found extensive acceptance in end-use industries such as food, chemical, pharmaceutical, building & construction, agricultural, mining, manufacturing, and waste handling. Rising food and pharmaceutical industries across the world, increasing the need to reduce overall weight of bulk packaging, and growing manufacturing and construction sectors in Asia Pacific are the key factors driving the market growth.

Source - IFIBCA - Indian FIBC Association

FY24 performance discussion

FY24 continued to be a challenging financial year for our company and the overall bulk packaging & FIBC industry. We faced several headwinds, including volatility in raw material pricing, geopolitical tensions, and lower industrial output from key markets. Despite these challenges, we managed to achieve growth in total income, although profitability metrics were adversely affected.

The primary challenge we encountered was the volatility in raw material pricing. The prices of various polymers derived from crude oil fluctuated significantly throughout the year, impacting our cost structure and margins. In addition to raw material price volatility, geopolitical tensions, particularly the Red Sea crisis in the latter half of the year, posed significant challenges. The crisis, driven by ongoing geopolitical tensions, delayed shipments and escalated transit times and ocean freights. These disruptions directly impacted our export operations, leading to increased costs and delays in fulfilling customer orders.

Furthermore, lower industrial output in Europe, a significant market for our products, reduced the off-take of our products. The economic slowdown in the region affected demand, further compounding the challenges we faced in maintaining our sales volumes and profitability.

Despite these headwinds, we reported a growth in Total Income, which stood at 111.52 Cr., registering a year-on-year (YoY) growth of 14.71%. However, our profitability metrics were impacted. EBITDA stood at 4.98 Cr., reflecting a YoY decline of 53.78%. The decrease in EBITDA margin was primarily due to the volatility in raw material prices. Profit Before Tax (PBT) was 1.35 Cr., with a YoY decline of 73.57%. The lower EBITDA margins and higher depreciation expenses contributed to this significant drop. Consequently, our net profit stood at 0.93 Cr., showing a YoY decline of 75.40%.

Financial Ratios

RATIOS	FY24	FY23
(a) Current ratio	2.16	2.90
(b) Debt equity ratio	0.26	0.17
(c) Debt Service Coverage Ratio	1.43	3.01
(d) Return on Equity Ratio	0.01	0.06
(e) Inventory turnover ratio	5.14	5.61
(f) Trade Receivables turnover ratio	6.45	7.24
(g) Trade payables turnover ratio	8.84	7.48
(h) Net capital turnover ratio	2.75	1.91
(i) Net profit ratio	0.01	0.04
(j) Return on Capital employed	0.03	0.06
(k) Return on investment	-	-

(a) Due to increase in current liabilities. (b) Low margin.

(c) Low margin and increase in debts.

(d) Low margin and increase in shareholders equity. (i) Increase in current assets.

(j) Decrease in margin due to higher input cost (k) Decrease in margin due to higher input cost.

(l) Not calculated as no investment was made for the purpose of earning returns. Investment was made for acquisition of business in the subsidiary company.

Outlook

To navigate the current challenges, we have implemented several strategic measures. We focused on optimizing our cost structure to mitigate the impact of raw material price volatility. Additionally, we adjusted our supply chain strategies to manage the delays and increased costs associated with the Red Sea crisis. We are also exploring new markets to reduce our dependence, focus is on expanding in America & newer markets in Europe. Looking ahead, we remain cautiously optimistic. We will continue to focus on enhancing operational efficiency to improve margins and profitability. Strengthening our market presence by expanding in new and existing markets will be a priority to drive growth. Furthermore, we will invest in innovation and product development to meet evolving customer needs and stay competitive.

In conclusion, FY24 was a year of significant challenges, but our resilience and strategic initiatives enabled us to achieve growth in Total Income. While profitability was impacted, we are committed to navigating these challenges and driving sustainable growth in the future.

Cautionary statement

We want to highlight that this document includes forward-looking statements concerning the expected future events, as well as the financial and operational outcomes of Sah Polymers Limited. These statements inherently involve assumptions and are subject to various risks and uncertainties. Theres a significant risk that these assumptions, predictions, and other forward-looking statements may not accurately reflect future outcomes. We urge readers to exercise caution and avoid placing undue reliance on forward-looking statements, as several factors could lead to differences between assumptions and actual future results and events. Therefore, this document is subject to the disclaimer and is qualified in its entirety by the assumptions, qualifications, and risk factors outlined in Sah Polymers Limiteds Annual Report for FY24, as discussed in the Management Discussion and Analysis.