Supreme Petrochem Ltd Management Discussions.

ECONOMIC OVERVIEW & OUTLOOK

Global Economy

Onset of COVID-19 pandemic in the year 2020 and subsequent lockdown imposed across the world to contain spread of virus led to unprecedented situations worldwide with domestic and global trade coming to a standstill. Lockdown and border closures across key global markets paralysed economic activities including production and business operations all over the world. This pause in the global economic activity caused significant contraction of economies in the first half of 2020. Global trade was impacted by a significant margin in the first half of the year. With the easing of lockdown starting from June 2020 the world economy rebounded but still, as per IMF estimates, global economy contracted by 3.5% in 2020. When towards the end of 2020 it looked that world economy is bouncing back the second wave of pandemic embedded with new mutated variants emerged and have slowed down the speed of economic recovery.

The global economy, as per IMF is projected to grow at 6% in 2021 reflecting additional fiscal support in a few large economies and expectations of vaccine powered recovery of economic activity.

Indian Economy

The outbreak of the COVID-19 pandemic in March 2020 along with the national lockdown in India disrupted economic activities including demand and supply chain resulting in a significant slowdown of the Indian economy. This led to a contraction of 23.9% during the first quarter of 2020-21.

With the staggered unlocking measures from May/ June 2020 onwards some normalcy started getting restored. The manufacturing sector witnessed a fast recovery from second quarter of 2020-21 coupled with a revival of consumer demands during the festive season. Widespread monsoon with healthy crops and increased rural demand also helped recovery of the Indian economy in the second half of last fiscal. The service sector was more vulnerable than manufacturing. Indian economy as per the second advance estimates is estimated to have contracted at (8%) during 2020-21 compared to a growth of 4% in 2019-20.

A sharp surge in the cases during the second wave of Covid-19 since the second week of April 2021 had lead to many state governments announcing strict lockdowns / restrictions on movement etc. and this is affecting the economic activity especially of Micro, Small and Medium Enterprises. Economic impact of the second wave could intensify in the next few weeks due to lower mobility. The overall impact of the second wave on the economy is difficult to assess presently, but it is likely to negatively affect GDP growth in the first quarter.

With emergence of strong second wave of Covid-19 pandemic, the Indian economy is now projected to grow at about 10% during fiscal 2021-2022.

COVID-19 PANDEMIC AND SUPREME PETROCHEM LTD

With the announcement of national lockdown, Company shut down its manufacturing lines at both Amdoshi plant in Maharashtra and at Manali, Tamil Nadu. After obtaining necessary approvals from the competent authorities, Company resumed operations of 1 line of Polystyrene initially and ramped up to full production by July 2020.

With disruption in domestic demand and supply chain the Company exported most of its production in the first quarter of 2020-21. Company during the period of lockdown operated its plants with limited manpower as per the stipulations laid by the authorities.

The Company took all necessary steps for safety of plant and its employees during the pandemic. Not only full wages were paid on time, the annual increases in line with the previous years were given to tide the employees through the difficult time of pandemic.

Company also reached out to the local villages surrounding our plants to provide ration, sanitization material and medical help during the lockdown period. Company created an isolation and quarantine facility at our township near the manufacturing complex at Amdoshi, Maharashtra, to isolate and treat persons with symptoms of Covid.

REVIEW OF OPERATIONS & OUTLOOK

During the year under review Company earned a net profit of Rs.477.49 crores as against Rs.102.65 crores in the previous year. Improved demand for Companys products coupled with healthy delta between raw material prices and finished products helped achieving this number.

The unfortunate incident of SM vapour leak at the PS/ EPS plant of one of Companys competitors at Visakhapatnam in May, 2020 causing deaths and destruction in the vicinity of said plant led to its closure. The plant remains closed as of now. Company rose to the occasion and has been meeting the requirements of PS/ EPS customers in India from the 2nd quarter of the year under review. It is a matter of extreme satisfaction that no customer was allowed to suffer for lack of supply of material.

Styrene Monomer (SM)

Company scaled down its operations significantly in 1st quarter due to countrywide lockdown. Imports of SM were stopped for over a month, due to the force majeure conditions. Operations were restricted so as to consume inventory and move to a safe mode. Exports were the only important outlet available for our products. With demand revival from 2nd quarter SM supplies were quickly resumed.

Significant supply constraints were seen in second half of the year due to unscheduled shutdowns in Asia, Middle East, Europe, U.S.A. etc in quick succession. Major events being the deep freeze in U.S.A., unscheduled shut down of a large SM plant in Europe etc. Company, however, was able to manage its supplies well except for some shipping delays during the year.

Styrene Monomer prices were largely stable during the first half of the year. Chinas new SM capacity additions helped in moderating the price range in Asia.

Two large world scale SM plants were commissioned in China in early 2020. A third SM plant with 6,30,000 MT capacity has been commissioned early this year in China. This augurs well for Company since the centre of gravity of SM trade flow shifts from China to India and the Company being the biggest consumer of SM in India, stands to gain from this changed trade flow. Self sufficiency for SM in China also will mean more stable pricing regime due to removal of volatility associated with Chinas SM imports.

Polystyrene (PS)

Domestic Polystyrene Market saw a de-growth of (12%) in the year under review, due to loss of business in the 1st quarter after imposition of nationwide lockdown. However, the Company had a growth of 25% due to increased demand of Companys products from the appliance sector after lifting of lockdown and demand from customers of the competitor whose plant was shut down. Ban on import of Air Conditioners with refrigerants also contributed to volume growth since existing makers of Air Conditioners in India had adequate installed capacity to take advantage of this opportunity without any loss of time.

Many segments like stationery, beads and bangles etc. still are affected adversely due to closure of educational institutions/ offices and restrictions on social gatherings.

The final findings of the investigations recommending levy of Anti-Dumping duty on imports of Polystyrene from certain countries was issued by the Directorate General of Trade Remedies, Ministry of Commerce, Government of India in June 2020. Department of Revenue, Ministry of Finance, Government of India, have not issued the required custom notification giving effect to the recommendations of DGTR. The Company has filed a writ in the Delhi High Court against Department of Revenue for same.

Outlook

All appliance OEMs have projected good growth in demand for their products which augurs well for the business of the Company.

Air Conditioner makers (both OEM and contract manufacturers) have committed investments for increasing their capacities which are all expected to fructify in the 2nd half of 2021. The benefit of increased demand from this segment will also accrue in the current financial year to the Company.

Gradual opening up of Educational institutions/ places of worship/ recreational facilities / social gatherings etc. are expected to give a fillip for the stationery/ beads & bangles segments. Company expects domestic Polystyrene demand to grow by 16 - 18% in the year 2021-22 compared to the year under review. When compared to the year 2019-20 this will translate to a growth of 7% only.

Regional tightness is expected due to closure of Denka, Singapore and Saudi Polymers, Saudi Arabia as well as conversion of GPPS capacity to HIPS by certain N. E. Asian producers.

Expandable Polystyrene (EPS)

Domestic EPS demand witnessed a fall in demand by (5.75%) due to lockdown in the 1st quarter of the year under review. Companys sales, however, grew by 20% despite loss of sales in 1st quarter due to growth in cold storage segment for vaccine handling, fish boxes, plastic crates for hygiene reasons apart from closure of competitors plant at Visakhapatnam.

Globally EPS and XPS are the material of choice for insulating both commercial and residential buildings for energy conservation to reduce Co2 emissions. International Energy Alliance (IEA) in their India Energy Outlook 2021 has predicted that more than half the increase in demand for energy in India will come from cooling load of dwellings in the period from 2019 to 2040 and have urged Government of India to give greater emphasis on building insulation to combat the same. The Company is well poised to participate in this segment as and when mandates are created by various state governments for building insulation.

Outlook

We expect a growth of 10% in the current year due to appliance demand growth as well as growth in cold chain development happening across the country. 3D EPS Core panel boards are being used in several warehouses in an industrial smart city in Maharashtra. Company expects this method of construction to pick up pace both for residential as well as industrial buildings in due course of time for its cost effectiveness and speed of construction in addition to insulation properties.

EIFS (External Insulation Finishing System) promoted by the Company has also been adopted by a few prestigious projects including a mall, hospital and AIIMS amongst others. With these developments, we expect EPS business to grow faster in the coming years.

Speciality Polymers & Compound Business (SPC)

SPC business achieved several milestones this year with a volume growth of 30% at 11,800 MT despite nationwide lockdown in the first quarter. Main growth drivers were customized UV stabilized pre-colour HIPS and FR PS compounds for appliance/ electrical and electronics segments. Pre-coloured ABS compounds are well received in many applications. Growth in Masterbatch business is driven by Black MB in pipes for agriculture and portable water distribution, drip irrigation, mulch films, pond liners, packaging and industrial foam. White and additive masterbatches have shown steady growth in packaging and appliances. Companys additive MB business is now firmly established with several prestigious customers added to the Companys customer base.

Outlook

Increased demand in black masterbatches due to sustained growth in infrastructure and agriculture and supply of colour masterbatches has established the Company as a strong player in this space. SPC business is expected to grow by 25% in the year 2021 - 22 due to increased range of products now being offered by the Company.

Extruded Polystyrene Boards (XPS)

The year under review saw sales volumes lower by (8%) compared to 2019-20 due to very poor 1st half sale on account of lockdown and restriction on construction activities. Implementation picked up pace after lifting of the lockdown. Refrigerated truck business picked up strongly with all major players in this segment operating at full capacity to enable transport of COVID vaccines across the nation.

Some of the important infrastructure projects of national importance are using Insuboard. Total number of distributors increased to sixty four during the year. XPS business is expected to grow by 25% - 30% during the year provided there are no restrictions imposed on the construction activities in the country.

Styrene Methyl Methacrylate (SMMA)

Company was producing SMMA on campaign basis in order to utilize the spare capacity of the Polystyrene plant. However, due to increased demand of PS from domestic customers, the Company had to regretfully forego SMMA business in the year under review.

However, in order to protect the SMMA compounds business which was developed with great efforts, the Company has tied up with a Japanese maker of SMMA for regular supply of SMMA. With this arrangement in place, Company hopes to revive the SMMA compounds business in the current year.

Acrylonitrile Butadiene Styrene (ABS)

In the year under review the Company firmly established itself as a supplier of imported ABS on regular basis as well as develop various compounds of ABS and SAN. India imports about 50% of its ABS requirements. Demand is further growing due to growth in appliance segment, Automobiles as well as Electrical & Electronic segments.

The Company is in discussions with foreign technical know how supplier for technology for its proposed Mass ABS project.

EXPORTS

Companys export activities have been put in hibernation mode in view of additional requirements from domestic customers in 2020-21. However, considering that the PS/ EPS expansion project underway will be operational in Q4 of 2021-22. Company has kept its overseas customers fully informed of the developments in the Company from time to time so that business can be re-started as soon as products are available.

SUSTAINIBILITY

Companys concern for environment made it take initiatives in the field of recycling of post consumer plastic waste of PS and EPS. As a 1st step Company is encouraging organized collection and recycling of post consumer EPS waste in several cities and is actively supporting EPS processors who have joined hands to create a circular economy in the state of Maharashtra.

FINANCE

Company continues to remain debt free. Available surplus funds are judiciously deployed for optimum returns and minimum risk to the principal investments of the Company. Capital expenditure incurred during the year was met from internal accruals only.

CRISIL Ratings Ltd. has assigned long term rating at CRISIL AA- Stable and short term rating at CRISIL A1+ for Companys Working Capital facilities from banks.

India Ratings and Research (Ind-Ra) upgraded Companys long term issue rating to IND AA- from IND A+ with Stable outlook and confirmed short term rating at IND A1+ for Companys fund and non-fund based working capital facilities from banks.

Buyback of shares

The Company bought back 2481287 equity shares during the scheme period which ended on September 18, 2020. A total sum of Rs.48.85 crores was spent on the shares bought back (including Rs.9.26 crores towards transaction expenses and buyback distribution tax etc.). Consequently the total number of shares of the paid up capital of the Company (Rs. 10/- nominal value per share) reduced from 96501958 shares to 94020671 shares.

Reduction of Share Capital

The Board of Directors of the Company in their meeting held on March 12, 2021 recommended reduction in paid up share capital in terms of section 66 of Companies Act 2013 and regulation 37 of SEBI (LODR) Regulations 2015 from Rs.10/- per share to Rs.4/- per share, without reducing the number of shares. Accordingly, every shareholder will receive Rs.6/- per share for every share held on the record date. This is subject to approval of shareholders, NSE/BSE/ SEBI/NCLT etc. This will reduce the existing paid up share capital from Rs.9402.07 lacs to Rs.3760.83 lacs. The total amount involved is Rs.56.41 crores.

Changes in Key Financial Ratios:

Pursuant to the provisions of Regulation 34(3) of SEBI (LODR) Regulation 2015 read with Schedule V part B(1) details of changes in Key Financial Ratios is given hereunder :

Sr. No. Ratio

Year Ended

Deviation
31/3/2021 31/3/2020 %
1 Debtors Turnover Ratio Times 10.09 10.23 -1.37
2 Inventory Turnover Times 7.94 9.31 -14.72
3 Interest Coverage Ratio Times 143.73 32.70 339.54
4 Current Ratio Times 2.20 1.66 32.53
5 Debt Equity Ratio * Times - - -
6 Operating Profit Margin % 21.53 5.86 267.41
7 Net Profit Margin % 14.99 3.77 297.61
8 Change in Return on Net Worth % 54.94 15.60 252.18

* The Company is Debt free

All around improvements in the business of the Company led to the above improved ratios.

CAPITAL EXPENDITURE

Company incurred a total expenditure of Rs.26.24 crores during the year under review on ongoing projects related to PS and EPS at Amdoshi and Manali plants and hardware replacement at both locations.

Capital expenditure proposed to be incurred in the current year towards PS 4th line at Amdoshi plant, EPS expansion/ debottlenecking at both plant locations, GPPS line revamp, additional lines for SPC and hardware replacement at both plant locations is estimated at about Rs.260 crores. These projects will add 90,000 MTA of PS and 30,000 MTA of EPS capacity.

RISK MANAGEMENT

International pricing and demand / supply risk are inherent in the import of Styrene Monomer, the main raw material. Company enters into procurement contracts for imports of Styrene Monomer on annual basis. The contracts specify the quantity and attributes for arriving at monthly pricing. A part of the requirement is also sourced on spot basis so as to float with fluctuations in the market and guard against price volatility. Some part of supply to large OEMs are on annual contracts basis tied into monthly SM pricing which allows for equitable sharing of the volatility in SM pricing. Company has also diversified the product portfolio into compounds, masterbatches, foam products etc. as a hedge against Styrene Monomer volatility.

The global and Indian economic events impacting dollar-rupee parity has a direct effect on cost of imports and also pricing of Companys products. To overcome these risks of cost and pricing due to foreign exchange volatility, Company hedges part of open foreign exchange exposure relating to imports so as to lessen the impact of foreign exchange rate fluctuations in respect of import of raw material. Company also has a natural hedge to the extent of its exports and pricing its products locally on import parity basis. Foreign currency exchange rates being dynamic, Company constantly monitors them to decide on proper response measure.

Company has adequately insured its plant and machinery on a reinstatement basis. The Policies also cover stocks of finished goods, raw materials (at plant, at ports and while in transit), projects under erection and third party liabilities.

Adequate loss of profit insurance policy to cover loss of gross profit, if any, due to interruption has also been purchased by Company. Company has also insured itself against crimes against the Company and has purchased Directors & Officers (D&O) Liability insurance policy also to shield itself from the associated risks. Company is also insured against Cyber Crime The management periodically reviews the adequacy of the insurance cover.

Protection of data and system is essential part of managing the business. To secure its data, Company has instituted the best practices adopted across the industry. Company has all its servers co-located at Tier III+ Data Centres, with DR on cloud with necessary cloud security tool. Antivirus setup, maintenance and monitoring for filtering incoming data, endpoint security controls, Firewall setup for control/ restrictions on Networking Access, Device whitelisting to restrict and ensure access to authorized persons and their authorized devices, Access control to Business Application and File System and E-mailing and Internet Policies to control outgoing data / information.

Using licensed software and products only and not allowing to download and install any unlicensed/pirated softwares on Company provided devices. Company gets IT infrastructure audits by the 3rd party service providers on periodical basis. These audits include Application Security Assessment, Internal / External penetration testing by using ethical hacking tools, Server / Network devices configuration Audit, Software / License Audit, Network architecture review and firewall rule based review. Issues found in the audit are reviewed and mitigated as per the recommendation followed by re-audit for effective mitigation.

HUMAN RESOURCES / INDUSTRIAL RELATIONS

Human Resources are one of the most important ingredients for growth. The Company therefore strives to align human resource policy and initiatives to meet business plans. Training of employees to maintain high level of motivation is an ongoing process. Industrial relations at all the units remained cordial during the year.

INTERNAL CONTROL SYSTEMS & THEIR ADEQUACY

The internal control systems for safeguarding and protecting assets against loss from unauthorized use or disposition are in place.

Regular internal audits, review by management and documented policies, guidelines and procedures supplement the internal controls which are designed to ensure that financial and other records are reliable for preparing financial information and other data and for maintaining accountability of assets.

HSE MANAGEMENT, AWARDS & RECOGNITION

Health Safety and Environment:

Both the Environmental Management System and Occupational Health and Safety Management System continued to be maintained by Company as per the ISO 14001:2015 Standard and ISO 45001:2018 Standard respectively.

Company has continued implementation of HSE management Systems under the Guiding Principles of declared Integrated Management System policy (Occupational Health and Safety Policy and Environmental Policy).

HSE Performance Index for the period under review stood to be in "Excellent" Range.

The Company has completed 7470 accident free days as on March 31, 2021 which amounts to 19.64 million man-hours of accident free operations.

Awards and Recognition

Company has achieved the following recognitions and awards during the period under review:

• NSCI Safety Awards - 2020 - Sarvashreshtha Suraksha Puraskar (Gold Award), in recognition for developing and implementing most effective Management System & Procedures and achieving the most outstanding performance in OSH for the Assessment Period of three years - 2017 to 2019.

• Winner - Maharashtra Safety Award Competition 2019 organized by National Safety Council Maharashtra Chapter for Lowest Accident Frequency Rate (for the Factories working more than Six Lakh up to Ten Lakh man-hours in a year).

• Winner - Maharashtra Safety Award Competition 2019 organized by National Safety Council Maharashtra Chapter for Longest Accident Free Period. (for the Factories working more than Six Lakh up to Ten Lakh man-hours in a year).

• Winner - Annual Greentech Safety Award 2020 for Outstanding Safety Management.

• Winner - Annual Greentech Environment Award 2020 for Outstanding Environment Management.

CAUTIONARY STATEMENT

Statements in the Management Discussion and Analysis describing Companys objectives, estimates, expectations or projections may constitute "forward looking statements", within the meaning of applicable laws and regulations. Actual results may differ materially from those either expressed or implied in the statements.

Important factors that could make a difference to Companys operations include economic conditions affecting demand/ supply and price conditions in the domestic and international markets, changes in the Government regulations, tax laws / other statutes and other incidental factors.