Sumitomo Chemical India Ltd Management Discussions.

1. Industry Structure & Developments:

The agrochemicals industry helps farmers in minimizing farm produce losses. The Indian agrochemicals industry operates in a highly competitive and dynamic business environment. The industry is highly diverse. It has players who are small and medium dealing in generic off-patent molecules. It has players who are large multinationals with high-priced new generation and patented molecules. The industry has players who manufacture only technical grade pesticides. Some players are pure formulators. The industry also has some players who produce both – technical grade pesticides and formulations. There is an ancillary segment which manufactures intermediates for technical grade pesticides. Your Company is one of the leading players in the industry which has a balanced portfolio of technical as well as formulation products along with backward integration for some products.

India is the fourth largest manufacturer of agrochemicals owing to two major advantages - relatively low manufacturing costs and the ability and expertise in efficient handling of toxic and hazardous products and processes. Globally, India is the fifth largest exporter of agrochemicals. Availability of technically trained manpower, seasonal domestic demand and production capacities for generics built to cater to overseas markets are the other reasons for strong exports. Exports account for almost 40-50% of the industry production. India has been attracting multinationals due to good domestic growth opportunities. Domestic segment has been witnessing a steady increase in market acceptance of new generation molecules.

Your Company has presence in all the product segments - insecticides, weedicides, fungicides, fumigants and rodenticides, plant growth nutrition products, bio-rationals and plant growth regulators. Your Company is also into animal nutrition and environment health businesses – currently these are comparatively small businesses. Your Company is known for domestic marketing of proprietary products of its Japanese parent – Sumitomo Chemical Company, Limited in agrochemicals, animal nutrition and environment health business segments. The Company is also one of the few industry players having both chemical and biological products in its portfolio. The Company has strong portfolio of generics as well as specialty products and a strong marketing network and counts as a leading Indian crop protection company. R&D for developing new molecules requires high investments in terms of capital, efforts and time. Indian players, therefore, tend to build strategic partnerships with global pesticides and nutrition companies. In return, Indian companies offer foothold in the growing domestic market with their strong distribution network and marketing and sales infrastructure. Active ingredients, that are scheduled to lose global patent protection in the next few years, offer good growth and expansion opportunity for the domestic industry. Lately, the agrochemicals industry is moving towards safe and environment-friendly chemistries and products and also promoting sustainable agricultural practices. Your Company continues to identify and introduce environment friendly products which support farm eco-systems to enhance yield and improve quality of farm produce and at the same time maintain soil fertility in a sustainable manner. Your Company undertakes extensive work at the grassroots level to showcase long term benefits of these products and sustainable cultivation practices in order to encourage the farmers to adopt new concepts.

As per the Government data for cropping season of 2019, the area under cultivation in India is close to 197 million hectares. However, a large part of it is unirrigated and entirely monsoon dependent. Additionally, small land holdings and continued fragmentation of land holdings come in the way of adoption of farm mechanization and advanced cultivation techniques.

The Companys environment health business segment, catering to household insecticides players in the country, though small in size, is expected to grow at over 10% in the coming years. The growth of household insecticides market is driven by increasing awareness about health and hygiene, growing incidences of insect-borne diseases like malaria and dengue, growing demand for professional pest control and ‘Swatch Bharat initiative of the Government of India.

The animal nutrition business segment, again small in size presently, caters to the countrys animal feed market, also has good growth potential.

2. Opportunities and Threats:

Agriculture and the allied sectors continue to remain central to the Indian economy. Agriculture contributed nearly 17% to the GDP in 2019–20. More important, it is a source of livelihood for more than 50% of the countrys population. Despite the challenges of Covid-19 and the consequent lockdown and restrictions, the agrochemical industry continues to meet growing farming needs.

Forecast of a good and timely monsoon in 2021 should ensure strong domestic demand, with limited Covid-19 impact. The revenue of the Rs 47,000-crore strong agrochemical sector is expected to grow by about 12-14% in the financial year 2021-22, following a sharp recovery in offtake from domestic agriculture sector and continuing healthy exports as projected by CRISIL.

Higher area under cultivation and about four per cent increase in minimum support prices during kharif season for key crops such as paddy, cotton, groundnut, soybean and bajra, which account for about 66% of domestic crop production, should further boost agrochemicals sector.

The government is slated to bring a production-linked incentive scheme for promotion of domestic manufacturing of agrochemicals. The domestic agrochemicals industry has good opportunity to increase market share in the global markets as customers are looking to diversify their supply sources for reducing dependence on China - risks of heavy reliance on China have perhaps never been clearer. The domestic agrochemicals industry is also trying to engage in backward integration for the manufacturing of technical grade products in order to become self-sufficient and reduce reliance on China for supply of intermediates.

The agrochemicals industry has large unrealized potential for growth due to low level of agrochemical consumption in the country as compared to the global norms. Currently, due to Covid-19 pandemic, farming is facing challenge of manpower shortages, with many migrant workers having left for their native places. It may take a few weeks for normalcy to return. Till then, application of agrochemicals in agriculture may be hampered.

In the export market, demand remains robust given the need for food security. In fact, demand for specific agrochemical products has increased as buyers are trying to shift their sourcing away from China. Orders are coming in from key international markets like Brazil, Japan, the U.S. etc., given the cost advantages of India.

The Government of India has taken several steps towards amelioration of the agrarian problems and for sustainable agricultural development. The government has made higher fund allocation for agriculture and has taken several steps in the areas of soil health, irrigation, minimum support price, agri-produce marketing reforms and comprehensive agri-produce export policy to boost income of farmers. The state governments are also focussing on agriculture sector which should give boost to growth.

3. Segment-wise performance:

The Companys domestic sale in 2020-21 increased to Rs 21,814.53 million from Rs 19,231.05 million in 2019-20. Exports decreased from Rs 4,667.19 million in 2019-20 to Rs 4,395.64 million in 2020-21.

The Company continues to focus on promoting the branded business in order to increase the customer interface.

4. Risks and Concerns:

The complexity of rural marketing poses several challenges which are further compounded by the vast geographic spread of the country as well as the low literacy levels and low spending power of the farming community. Even today, farmer continues to bear the entire risk in the marketing cycle of farm produce. High volatility in produce price, rising costs of production and resource crunch affect his income. This also impacts his ability and willingness to adopt better agri-inputs, practices and technologies creating a ripple effect on the industry as a whole. The risks and the problems faced by the farming community rub on the agrochemicals industry as well.

While the governments have launched several initiatives aimed at improving farmers wellbeing, it will take time for the benefits to become visible at the ground level. Till then, the inherent problems of Indian farming – seasonal production glut, non-remunerative produce prices, slow adoption of latest technology and practices and skewed benefits of policy framework will continue to adversely affect the industry growth.

The Indian agrochemicals industry has large imports as well as exports. Drastic movement in foreign exchange market affects the business dynamics of the industry and need to be managed efficiently.

Indian agrochemical industrys dependence on China for sourcing critical raw material and intermediates also is an area of concern. This was evident when in 2020 Covid-19 broke out in China impacting production of key intermediates there. The logistical and transportation constraints added to the woes of the Indian industry for a part of the year. The ‘Make in India and ‘Vocal for Local initiatives of the Government of India is prompting and helping indigenous manufactures to come forward and increase domestic production as also initiate process for setting up facilities for producing these products in India. Sale of spurious products, concoction of various chemicals under the garb of bio-pesticides, adulterated and sub-standard products pose a grave threat to the industry at large and genuine players in particular. The Pesticides Management Bill ("Bill"), introduced in parliament to replace the existing regulatory framework, attempts to address some of these malaises. However, no progress is made on the Bill for quite some time.

Over the years, genetically modified (GM) crops have gained popularity across the world. The Indian regulators have restricted these crops in India citing need for additional review and studies on the suitability of these varieties in the Indian context. However, on the whole, GM crops present challenge and threat to the industry in the long run.

The Central Government notification, proposing ban on twenty seven pesticide products, poses serious threat to the industry. These are generic products, which are manufactured and widely used by the countrys farmers for decades and form a large part of the domestic agrochemicals business. These products are also supplied by India in large scale in the export market. These products, if banned, will adversely impact the industry immensely. This action will also hit hard the farming community – especially the small and marginal farmers - because they will be deprived of inexpensive pest control products. Based on the Company managements understanding and expectations, the matter is not likely to have material adverse impact on the Companys performance as the proposed restrictions, if any, are not expected to be applicable to exports. The proposal is subject matter of court litigation and appeals by the industry and farmers before the administrative authorities. Similarly, the Central Government has issued a notification expressing its intention that Glyphosate, a weedicide and an important product for the Company, will be allowed to be used only through ‘pest control operators. The Company, other industry players and the industry associations have filed appeals before the appellate authority against the proposal as the proposal is not feasible and not implementable owing to ground realities. Hearing in the matter is pending. The proposal, if implemented, will have impact only on domestic use of Glyphosate. It will not impact exports.

5. Internal control systems and their adequacy:

The Company has proper and adequate system of internal audit and controls which ensure that all the assets are safeguarded against loss from unauthorised use or disposition and that all transactions are authorised, recorded and reported correctly.

The Company continuously strives to improve upon/evolve and implement best practices with a view to strengthen the internal control systems.

The Company has assigned internal audit function to a leading firm of Chartered Accountants. Regular internal audit and checks are carried out to ensure that the responsibilities are discharged effectively. All major findings and suggestions arising out of internal audit are reported and reviewed by the Audit Committee. The Management ensures implementation of these suggestions and reviews them periodically.

6. Financial Performance & Analysis and major changes in ratios:

The sales for the year under review are Rs 26,210.17 million as compared to Rs 23,898.24 million in the previous year. The profit before tax and exceptional item for the year under review is Rs 4,531.24 million as compared to Rs 2,981.70 million in the previous year. The exceptional item last year related to expenditure of Rs 308.89 million for amalgamation. The profit after tax is Rs 3,452.97 million in the current year as against Rs 2,056.26 million in the previous year. In the financial year 2020-21, the operating profit margin increased by 37.69% from 12.71% in 2019-20 to 17.50% in 2020-21. Similarly, the net profit margin increased by 53.14% from 8.60% in 2019-20 to 13.17% in 2020-21.

As a result, the Return on net worth increased to 22.60% in 2020-21 as compared to 17.01% in 2019-20 - an increase of 32.86%. The major reasons for improvement in profit margin are change in product mix; share of better - margin products in sales increased in 2020-21, better product - prices due to market conditions and accrual of synergies of merger on fixed-cost front.

7. Human Resource Development/Industrial Relations:

Your Company has introduced HR digital interventions through SAP payroll module across organisation for better control and information system.

Your Company is making continuous efforts to build performance-based work culture in the organisation through effective implementation of Performance Management System. The Company has effective goal setting process for ensuring alignment of the corporate, functional and individual goals for all the management category employees. Your Company continuously grooms its employees through learning initiatives to improve skill, knowledge and competencies for taking up higher responsibilities. The Company has effective mechanism for identifying key talent i.e. employees having high performance and high potential and for grooming them for taking up higher/future responsibilities. Your Company attaches high importance to attract, retain and engage a talented pool of individuals at its plants, offices and field staff level. Your Company has an excellent track record on industrial relations. It has maintained a record of ‘zero loss of man-days due to industrial unrest. Your Companys grievance redressal mechanisms ensure that employees can raise issues and concerns and have them addressed in time. The employee strength of the Company stands at 1722 as on 31st March, 2021.

8. Cautionary Statement:

Statements in this report on Management Discussion and Analysis relating to the Companys objectives, projections, estimates, expectations or prediction may be forward looking within the meaning of applicable securities laws and regulations. These statements are based on certain assumptions and expectations of future events. Actual results might differ materially from those expressed or implied depending upon factors such as climatic conditions, global and domestic demand-supply conditions, raw materials cost, availability and prices of finished goods, foreign exchange market movements, changes in government regulations, tax structure, economic and political developments within India and the countries where the Company conducts its business and other factors such as litigation and industrial relations.

The Company assumes no responsibility in respect of forward looking statements herein which may undergo changes in future on the basis of subsequent developments, information or events.