Supreme Petrochem Ltd Management Discussions.

ECONOMIC OPERATION & OUTLOOK

India emerged as the fastest growing major economy in the world during 2018-19 with a GDP growth of 7.2% as compared to 6.6% recorded in 2017-18, backed by its strong domestic consumption. This growth in GDP in 2018-19 is commendable as the economy overcame the initial slowdown owing to the implementation of the Goods and Services Tax in the previous year and signs of stress in major economies of the world. The strong macroeconomic fundamentals and policy reforms including Insolvency and Bankruptcy Code, liberalization of FDI norms, and steps taken to improve Ease of Doing Business in India helped improve the investment and business climate and supported the overall pace of economic growth. Low inflation rates with CPI at 2.86% and WPI at 3.18% enabled the interest rates to remain soft thus helping the domestic consumption. Rise in income tax collection, GST collection, increase in Indias Foreign Direct Investment (FDI), maintaining current account deficit and fiscal deficit within the set targets speak well for the future of Indias economy. India retained its position as the third largest startup base in the world with technology startups according to a report by Nasscom.

Proposals listed in the Interim Budget of 2019-20 including direct Cash Transfer Program for farmers and tax relief measures for the middle class shall put more cash in the hands of individuals thus providing a fiscal stimulus to the economy. Thrust on rural spending, infrastructure creation, and hike in MSP shall result in significant jump in rural income in the coming years thus giving further push to domestic consumption.

Indias economic growth is estimated to grow at 7.5% in 2019-20 according to the IMF retaining its tag as the fastest growing large economy. Based on the economic reforms adopted in last few years, India is poised to remain the fastest growing large economy in the world and its GDP is expected to reach US$ 5 Trillion by 2025.

The global economy, faced with Trade policy tensions, imposition of Import tariffs between U.S.A. and China, weaker performance by Eurozone Countries, Japan and Britain, and rising interest rates resulting in capital outflows from some emerging markets, grew at 3.6% in 2018. Emerging markets and developing economies witnessed a challenging environment in the later part of 2018-19 owing to trade policy tensions, rising interest rates, dollar appreciation and volatile oil prices. Some of these challenges are likely to continue in the current year. The silver lining for global trade is likely trade pact between U.S.A. and China for which both countries are making positive efforts. However, the slowdown in Chinese economy may have chain effect on many major economies with fluctuation in prices of key raw materials and input costs of manufacturing. Further with OPEC deciding to limit production, the oil importing economies shall have to bear the increased cost of crude oil. As per IMF the global economy is likely to grow at 3.3% in 2019 and 3.6% in 2020.

REVIEW OF OPERATIONS & OUTLOOK

During the year under review, your Company earned a net profit of Rs.49.21 crores against Rs.116.12 crores in the previous year. The operations were adversely affected due to heavy inventory losses suffered during the third quarter of the year under review consequent to sharp fall in the price of Styrene Monomer between September, 2018 to November, 2018 and subdued demand in the first half of the year on account of uncertainty caused by the order on ban of certain one time use plastic products.

Styrene Monomer (SM)

SM the main raw material for your Companys products witnessed a sharp fall in its prices from US$ 1450 to US$ 950 in a short span of less than three months between September, 2018 and November, 2018. These sharp movements in SM prices resulting in unstable prices of end products made the customers tread with caution in terms of their purchases and stocking of material thus resulting in subdued demand. Customers procured material for immediate consumption only and with this slow offtake the demand pipeline became empty. This not only led to falling margins for the Company but also caused heavy inventory losses in the third quarter of the year under review. Towards the end of the financial year SM prices seemed to have stabilised. However, with global supply and demand of SM in a tight balance any disruption in the major supply sources causes disturbance in trade flows resulting in volatility in the prices of SM in the international market.

The imposition of antidumping duty on SM imported from certain countries into China affected traditional trade flows. It took a while for new trade flows to be established resulting in shipping delays across the globe resulting in too much inventories in one region and creating artificial scarcities in certain other regions. In these difficult circumstances your Company was able to manage the supplies remarkably well, except for some minor disruptions during the year which affected our export deliveries to some extent.

Outlook

The trade flows of SM have now stabilized and your Company is well supported by the traditional suppliers from Singapore and Middle East as well as the new suppliers from USA. All major SM suppliers of the world recognize the pre-eminent position of India as a major destination and your Company as a major customer.

Polystyrene (PS)

PS demand shrunk by about 1% during the year under review for the industry as a whole including imports mainly due to ban on one time use disposable foodware and cutlery in Maharashtra and Uttar Pradesh and static growth in other applications except appliances. Notification banning certain applications of Polystyrene caused uncertainty in the minds of processors in the initial months resulting in low offtake for the trade in the first half of the year under review. Falling prices of Polystyrene as a result of fall in SM price starting September, 2018 impacted consumption of PS in applications other than Appliances, Pens and Stationary.

Ban on one time use disposable foodware and cutlery not only impacted demand in the concerned State but to an extent also in the neighbouring States where product was supplied from manufacturing units in the State banning the product.

Your Companys local sales were lower by 0.6% during the year under review over the previous year. Your Company, however, had a healthy growth in the appliances sector during the year. Imports of General Purpose Polystyrene continued during the year at low prices from Iran/UAE with 81% of total GPPS imports into India arriving from these two countries. PS industry is working on making an application for levy of anti-dumping duty on imports of Polystyrene from Iran/UAE.

Export volumes remained flat due to loss of Turkey market where Iranian PS producers were selling at very low prices. Anti-dumping duty of 11.3% was imposed by the Turkish Government in January, 2019. However, business didnt pick up for us, since overall PS market in Turkey shrunk due to over 3% drop in GDP of the economy. Export business in other markets like SAARC countries & Hong Kong/China market did well. Your Companys exports of PS during the year was lower by 10% compared to the previous year due not only to loss of Turkey business but also on account of disruption in Styrene supplies on some occasions during the year.

Outlook

With the anticipated growth in the appliance segment Polystyrene demand is likely to grow in the coming years despite ban on one time disposable foodware and cutlery. With new capacities being put up by the existing players like Haier and Whirlpool and entry of new players like Voltas Beko, Havells and Media in the next 1-2 years demand for PS in the appliances segment is likely to grow by about 15% in the coming years. During 2019-20, the overall growth in domestic demand for PS is estimated at 5%.

Focused efforts in developing customers in appliance industry across the various countries where your Company is exporting by offering improved property products is expected to give new impetus to export volumes in 2019-20 period. Your Company hopes to recover the export business during the year with expected increase in volumes by 20% over the previous year.

Expandable Polystyrene (EPS)

EPS demand in the country grew by 6% during the year under review despite ban on use of certain EPS products in the States of Maharashtra and Uttar Pradesh. Your Companys sale increased by 8.65% during the year. The demand growth came from white goods, agri packaging, and cold storages. Due to various promotional programmes undertaken by your Company through seminars and exhibitions displaying a fully functional house built from 3D panels, the awareness level for use of 3D panel in construction is growing. Demand base for 3D panel is quite low at present. During the year it witnessed 100% growth over the previous year. With a new plant for 3D panel commissioning soon your Company expects to see the demand growing in this application in the second half of 2019-20.

Outlook

The expected growth in EPS market during 2019-20 is about 6%. The growth in demand is expected from white goods packagings, fisheries, construction and insulation. Your Company is consistently engaged in business development activities involving three major application segments viz. Construction, Insulation and packaging to give a fillip to its EPS business. Your Company expects to grow at about 8% during the current year.

Speciality Polymers & Compound Business (SPC)

The business volume was flat during 2018-19. However, the strategy to shift focus from low value compounds to higher value compounds was completed successfully. This shift has resulted in about 25% growth in high value compounds. New distributors are continuously being added to increase the reach. Your Company appointed 10 new distributors for SPC business during the year taking total number of distributors to 31. Company plans to add another 10 distributors for its SPC business during the year.

Outlook

Emphasis is continuously being made in developing new value added compounds of SMMA for different applications including light diffuser grades. The Company plans to introduce in the current year compounds of ABS, Nylon etc. for which necessary facilities are being suitably retrofitted and renewed. This would give a boost to the compound business of your Company.

Extruded Polystyrene Board (XPS)

XPS grew by 33% despite slowdown of several key projects like IITs, AIIMS, IIMs etc. This could be possible by addition of new distributors in Tier II & Tier III cities. The Company added 28 new distributors during the year. Total number of distributors at the end of the year under review increased to 49. Adding new distributors in new territories is an ongoing exercise and your Company plans to increase total number of distributors for XPS business to 70 by the end of the current year.

Some imports take place only to the extent of low priced low quality boards as well as non-standard wide width boards. Your Company has taken steps to develop BIS specification in line with Global standards. Once the BIS standards are notified, imports of low quality boards may largely reduce.

Outlook

In addition to the building insulation, REEFER container and fresh container segment is developing as new application area for XPS due to their excellent cost to performance ratio vis-a-vis other competing materials. Your Company expects this segment to grow into significant volume in the years ahead.

Your Company is targeting to grow XPS business by 25% in 2019-20.

Styrene Methyl Methacrylate (SMMA)

The commercial sales of SMMA has steadily grown in the fiscal 2018-19. The new high impact grade of SMMA introduced in the third quarter is showing encouraging acceptance in household, kitchenware, small appliances, RO Water cabinets and stationary segments where transparent ABS, PMMA and Polycarbonate is normally used. Several new compounded grades of SMMA were introduced in the market for use in applications where BPA-free material suitable for food contact use is a pre-requisite. This is showing good acceptance in the market place.

Outlook

Commissioning of large MMA plant in Saudi Arabia is expected to give impetus to our SMMA business, making it possible to price our SMMA & Compounds in a competitive manner, which will help to develop new application in sheet segment. Rigid Sheets produced from your SMMA have well been accepted during the trial runs.

Companys product has been well accepted in certain export markets. New markets are being explored, based on successful applications in different segment in domestic market.

The long term strategy of the Company is to create R&D capability to develop unique products in all the verticals in which your Company is operating.

FINANCE

Your 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.

Changes in Key Financial Ratios:

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

Sr. No. Ratio

Year Ended

Deviation
31/03/2019 31/03/2018 %
1 Debtors Turnover Ratio Times 11.01 10.30 6.92
2 Inventory Turnover Times 10.11 8.49 19.14
3 Interest Coverage Ratio Times 26.47 44.37 (40.34)
4 Current Ratio Times 1.64 1.57 4.46
5 Debt Equity Ratio * Times - - -
6 Operating Profit Margin % 3.24 6.75 (52.00)
7 Net Profit Margin % 1.54 3.84 (59.90)
8 Change in Return on Net Worth % 7.64 18.92 (59.62)

* The Company is Debt free

Operations during the year under review were adversely affected due to heavy inventory losses suffered by your Company during the third quarter of the year consequent to sharp fall in prices of Styrene Monomer, its main raw material, by around 35% during a short span of less than three months between September, 2018 to November, 2018 and subdued demand in the first half of the year on account of uncertainty caused by ban of certain one time use plastic products. Some of the Companys operating ratios have therefore been negatively impacted by more than 25% for these reasons. Reduction in inventory during the year helped improve inventory turnover ratio.

CAPITAL EXPENDITURE

Your Company incurred a total expenditure of Rs.34.00 crores during the year under review on various items comprised of HIPS product improvement, retrofitting/replacement of compounding line for SMMA/ABS/SAN Compounds, replacement of old Hardware in Manali, Tamil Nadu and Nagothane, Maharashtra Plants of the Company.

The capital expenditure proposed to be incurred in the current year towards various process/product improvement projects, SMMA/GPPS debottlenecking, EPS debottlenecking, replacement/retrofitting XPS line, additional Compounding/MB Lines, replacement of old hardware etc. is estimated at Rs.61 crores.

MASS ABS PROJECT

Supreme Petrochem Ltd proposes to start a new vertical of Mass ABS with initial capacity of 60,000 TPA for which technical feasibility studies have been carried out. We have applied for necessary statutory clearances. The Company will execute the project on a fast track basis after getting necessary clearances.

RISK MANAGEMENT

International pricing and demand/supply risk are inherent in the import of Styrene Monomer, the main raw material. Your 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. However, a part of the requirement is sourced on spot basis so as to float with fluctuations in the market and to guard against price volatility. Your Company has linked part of its sales to raw material prices so that any increase/decrease in raw material cost has a cushion to protect the margin. Companys speciality products like SPC, XPS and SMMA will provide additional cushion from Styrene Monomer price movement risks as these businesses mature.

The global and Indian economic events impacting dollar-rupee parity has a direct effect on cost of imports and also pricing of your Companys products. To overcome these risk of cost and pricing due to foreign exchange volatility, your 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. Your 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, your Company constantly monitors them to decide on proper response measure.

Your Company has adequately insured its plant and machinery on a reinstatement basis. The Policies also cover stocks of finished goods, raw materials (at plant 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 your Company. Your Company also has Credit Risk Insurance in respect of its receivables for one of its products. 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, your Company has instituted the best practices adopted across the industry. Your Company has all its servers co-located at Tier III+ Data Centres, with DR/backup DC at different Seismic zone, Antivirus setup maintenance and monitoring for filtering incoming data, endpoint security controls, Firewall setup for control/restrictions on Networking Access, Access control to Business Application and File System and E-mailing and Internet Policies to control outgoing data/information. Your 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, Network architecture review and firewall rule base 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. Your 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 unauthorised use or disposition are in place.

Regular internal audits, review by management and documented policies, guidelines and procedures supplements 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

Amdoshi, Nagothane, Maharashtra Plant:

(i) Health Safety and Environment: Environmental Management System and Occupational Health and Safety Management System continued to be maintained by your Company as per the ISO 14001:2015 and OHSAS 18001:2007 standard respectively.

HSE Performance Index for the period under review stood to be in "Excellent" Range. The Company has completed 6740 accident free days as on March 31, 2019 which amounts to 17.44 million man-hours of accident free operations.

(ii) Awards and Recognitions

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

• National Safety Council of India (NSCI) Safety Awards-2018-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 -2015 to 2017.

• Greentech Safety Award 2018 (Platinum Award)-From Greentech Foundation, New Delhi. For outstanding achievements in Safety Management.

• Greentech Environment Award 2018 (Gold Award)-From Greentech Foundation, New Delhi. For outstanding achievement in Environment Management.

• National Safety Awards, Ministry of Labour & Employment, Government of India for outstanding performance in Industrial safety as Runner-Up during the Performance Year 2016 in achieving Lowest Average Frequency Rate.

• National Safety Awards, Ministry of Labour & Employment, Government of India, for outstanding performance in Industrial safety as Runner-Up during the Performance Year 2016 in achieving Accident Free Year.

• Certificate of Merit from National Safety Council-Maharashtra Chapter for achieving Zero Accident Frequency Rate in the contest year 2017.

Manali Plant, Tamil Nadu

• Certificate of Appreciation from the renowned National Safety Council (NSCI)-2018

CAUTIONARY STATEMENT

Statements in the Management Discussion and Analysis describing your 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.