Valiant Organics Ltd Management Discussions

Global economy

The global economy remained resilient despite central banks raising interest rates to combat inflation in 2023. The resilience was supported by steady economic activity, job creation, strong consumer spending due to higher incomes, increased government spending, and improved labour market participation.

According to the IMF, the global economy grew by 3.2% in 2023 and is expected to continue growing at the same rate in 2024 and 2025. This growth was driven by household spending in major developed countries, which utilised pandemic savings despite tighter monetary policies aimed at reducing inflation. The global commodities markets faced a challenging year, ending with a 12.6% decline across the entire commodities group. This was due to rising interest rates, geopolitical tensions, and a supply surplus of certain commodities like cobalt.

World Economic Growth (%)

Regional Growth (%)	2023	2024	2025
World output	3.2	3.2	3.2
Advanced economies	1.6	1.7	1.8
United States (US)	2.5	2.7	1.9
United Kingdom (UK)	0.1	0.5	1.5
Germany	(0.3)	0.2	1.3
Japan	1.9	0.9	1.0
Emerging Market and	4.3	4.2	4.2
Developing Economies
(EMDE)
China	5.2	4.6	4.1

Source: IMF April 2024 report

Since 2018, the shares of trade and investment flows to advanced economies and emerging market and developing economies have diverged. China experienced a GDP growth of 5.2% in 2023, and it is expected to grow by 4.6% in 2024 and 4.1% in 2025.The flows to advanced economies have declined relative to the global average while flows to emerging market and developing economies have accelerated. In 2023, the GDP growth in the US was 2.5%, and it is projected to be 2.7% in 2024 and 1.9% in 2025. In the UK, GDP growth was 0.1% in 2023, with forecasts of 0.5% in 2024 and 1.5% in 2025.

While the challenges faced by developed economies in 2023 included inadequate infrastructure, limited access to quality education and healthcare, and insufficient investment in technology, particularly impacting middle- and lower-income

countries. The Consumer Price Inflation (CPI) in US grew by 4.1% in 2023 and are expected to witness growth of 2.9% in 2024 and 2.0% in 2025. Some central banks, including the European Central Bank and the Federal Reserve, raised their nominal interest rates in response to rising inflation expectations.

Outlook

Global inflation is expected to gradually decrease from 6.8% in 2023 to 5.9% in 2024 and further to 4.5% by 2025. Managing inflation effectively is crucial for sustaining economic growth, as stable prices promote consumer confidence, encourage investment, and support overall economic stability. Advanced economies are projected to grow by 1.7% in 2024 and 1.8% in 2025 while the emerging markets and developing economies are expected to grow at 4.2% annually in both 2024 and 2025 with continued pressure from high public debt and unstable inflation rates.

According to the Short-Term Energy Outlook (STEO) April 2024 report, crude oil prices are expected to decrease, averaging US$ 90 per barrel for the rest of 2024 and US$ 85 per barrel in 2025, benefiting the global economy. World trade growth is expected to be 3.0% in 2024 and 3.3% in 2025. Over the medium term, trade growth is anticipated to maintain a steady trajectory, projecting to reach 3.2% by 2029, as compared to the historical average of 4.9% observed from 2000 to 2019. This projection, given the relatively low economic growth outlook, suggests that the ratio of total world trade to GDP will average 57% over the next five years till 2029. The world economy is actively working to accelerate the transition to net zero emissions. Technological breakthroughs, particularly in renewables and batteries, which involve the extraction, processing, and use of critical minerals, have created new opportunities for boosting economic growth and achieving the Sustainable Development Goals (SDGs), especially in mineral-rich developing economies. The countries around the world will benefit from an enabling international environment and stronger international cooperation, which are crucial for harnessing the potential of critical mineral resources and advancing sustainable development.

Source: Forbes, IMF, SP Global

Indian economy

The Indian economy surged ahead driven by strong macroeconomic indicators, improved labour market conditions, heightened urban demand, and increased government focus on capital expenditure in FY 2023-24.

According to the Ministry of Statistics and Program Implementation (MoSPI), Indias GDP grew by 7.6% in FY 2023-24, surpassing the 7.0% growth recorded in FY 2022-23.

Growth of the Indian economy

	FY 2019-20	FY 2020-21	FY 2021-22	FY 2022-23	FY 2023-24	FY 2024-25
Real GDP growth (%)	3.9	(5.8)	9.7	7.0	8.2	7.2
Growth of the Indian economy quarter by quarter, FY 2024-25
		Q4FY 2023-24	Q1FY 2024-25	Q2FY 2024-25	Q3FY 2024-25	Q4FY 2024-25
Real GDP growth (%)		7.8	7.3	7.2	7.3	7.2

Source: MoSPI report dated 31^st May 2024

RBI (Reserve Bank of India) MPC (Monetary Policy Committee) report dated 7^th June 2024

In FY 2023-24, net direct tax collections amounted to 19.6 lakh crore, up from 16.6 lakh crore in FY 2022-23, marking a significant increase by 17.7%. India has also made substantial advancements in leveraging technology to enhance knowledge sharing, strengthen manufacturing capabilities, and improve export competitiveness. These efforts have contributed to robust economic growth and reinforced overall economic stability. Indias economic resilience in FY 2023-24 was strengthened by strong Goods and Services Tax (GST) collections, steady growth in bank credit, and a positive Purchasing Managers Index (PMI). Gross GST revenue for FY 2023-24 totalled 20.2 trillion, marking an 11.7% increase over the previous year. As of June 7, 2024, Indias foreign exchange reserves have increased to US$ 656 billion from US$ 595 billion recorded on June 9, 2023. In March 2024, Indias composite purchasing managers index (PMI) stood at 61.2, well above the global average of 52.1, indicating robust economic expansion.

During FY 2023-24, the Non-banking financial companies (NBFCs) have demonstrated robust financial performance comparable to the banking sector. As of March 2024, both scheduled commercial banks and NBFCs reported gross non-performing assets (GNPAs) below 3% of total advances, indicating sound asset quality management across the financial sector. Throughout FY 2023-24, the Reserve Bank of Indias Monetary Policy Committee (MPC) held the policy repo

rate steady at 6.5% and maintained a stance of withdrawal of accommodation. The RBI has estimated an inflation rate of 5.4% for FY 2023-24 while aiming to keep headline inflation at 4%.

In FY 2023-24, Gross Fixed Capital Formation, a key indicator of investment, accounted for approximately 33.5% of Indias GDP, up from 33.3% in FY 2022-23, signalling a growing emphasis on investment in the economy. Meanwhile, private investment is showing signs of recovery, supported by improved financial health among banks and corporations. Despite global foreign direct investment (FDI) remained weak in 2023, with only a modest 3% increase over 2022, India performed better than its Asian peers. In FY 2023-24, Indias Gross Value Addition (GVA) grew by 7.2%, up from 6.7% in FY 2022-23. The construction sector led this growth with a 9.9% increase as compared to 9.4% recorded in FY 2022-23, while manufacturing rebounded strongly with an 9.9% growth following a contraction in the previous year. The mining & quarrying activity also grew by 7.1% in FY 2023-24 as compared to 1.9% growth registered in FY 2022-23.

According to the second advance estimate by the Ministry of Agriculture and Farmers Welfare, in FY 2023-24, kharif rice production was anticipated to reach 111.5 million tonnes (MT), as compared to 110.5 MT, while the rabi season was expected to yield 12.36 MT of rice. Additionally, wheat production is estimated to be robust at 112.0 MT as compared to 110.6 MT recorded in FY 2022-23. The estimated production of millet grain (Shree Anna) is 12.89 MT during the kharif season and 2.49 MT during the rabi period in FY 2023-24. These estimates indicate a promising outlook for agricultural production in India, reflecting efforts to enhance food security and meet domestic demand amidst varying seasonal conditions.

Despite global challenges, overall exports (including merchandise and services) in FY 2023-24 surpassed the previous years record, reaching US$ 776.68 billion compared to US$ 776.40 billion in FY 2022-23. Imports in FY 2023-24 were estimated at US$ 854.80 billion, showing a decline of 4.81% from the previous year. The trade deficit improved significantly by 35.77%, decreasing from US$ 121.62 billion in FY 2022-23 to US$ 78.12 billion in FY 2023-24.

Per capita Net National Income (NNI) at constant (2011-12) prices in India increased by 35.12%, rising from 72,805 in FY 2014-15 to 98,374 in FY 2022-23. This reflects improved economic conditions and a growing middle class with higher disposable incomes. Increased government capital expenditure is expected to drive economic growth by boosting consumer spending and enhancing infrastructure nationwide.

Outlook

The Interim Budget for FY 2024-25 emphasises Indias shift towards self-reliance, aiming to reduce import dependency and promote domestic industry while ensuring stability in direct and indirect taxes. The increase in government spending is anticipated to have a ripple effect on the economy, stimulating demand, enhancing supply chains, and broadening market opportunities. In FY 2024-25, the government aims to spend capital expenditure to 11.1 lakh crore, compared to 10 lakh crore allocated in FY 2023-24. Indias gradual and ongoing reduction in fiscal deficit has strengthened the governments financial stability significantly. Highway construction in the FY 2023-24 reached 12,349 km, marking the second-best performance on record. This represents a 20% increase compared to the previous year, 2022-23.

The fiscal deficit target for FY 2024-25 has been revised down to 5.1%, a decrease from the previous target of 5.8% set for FY 2023-24. This reduction underscores a commitment to enhanced fiscal discipline, signalling effective management of budgetary resources. These positive developments are promoting optimism about Indias sustained economic advancement. According to RBI, Indias GDP will grow by 7.2% in FY 2024-25, alongside an estimated inflation rate of 4.5% for the same period. This projected growth path, combined with declining inflation, reflects Indias potential to ascend to the rank of the worlds third largest economy by 2030.

Source: Economic Times, RBI, PIB

Specialty chemicals industry of India

The Indian specialty chemicals account for 20% of the global chemical industrys US$ 4 trillion market as of March 2024. Indias specialty chemicals market is expected to grow at a Compound Annual Growth Rate (CAGR) of 12%, from US$ 32 billion in 2019 to US$ 64 billion in 2025. The growth will be fuelled by strong demand from export and end-user industries, which are projected to grow at an annual rate of 10-20%. Indian specialty chemicals companies are expanding their capacities to meet the growing demand both domestically and internationally. With global companies looking to diversify their supply chains away from China, Indias chemical sector has a significant growth opportunity.

Globally, India is the fourth-largest producer of agrochemicals, following the United States, Japan, and China. As of March 2024, the agrochemicals market in India is valued at US$ 5.5 billion, growing at a CAGR of 8.3%. Approximately 50% of Indias agrochemical production is exported to various countries around the world. From April to December 2023, India exported agrochemicals worth US$ 3.12 billion and imported agrochemicals valued at US$ 1.11 billion. India

ranks as the fourth-largest net exporter of agrochemicals and the thirteenth-largest exporter of pesticides and disinfectants globally. By 2040, the agrochemicals market is projected to constitute nearly 40% of Indias total chemicals exports.

India accounts for 16-18% of the worlds production of dyestuffs and dye intermediates. From April to December 2023, India exported dyes valued at US$ 1.56 billion and other dye intermediates worth US$ 125.53 million. In the same period, India imported dyes amounting to US$ 226.33 million and other dye intermediates totalling US$ 969.07 million.

Fertilisers play a crucial role in global agriculture by significantly increasing crop yields and enhancing food security. The Indian fertiliser market is projected to reach approximately US$ 39.54 billion by 2030 from US$ 27.7 billion in 2023, growing at a CAGR of 5.2%.

India is projected to remain one of the fastest-growing markets in the global construction chemicals industry, accounting for 6-8% of the global market share, with a significant increase in suppliers within the country. According to Persistence Market Research, the Indian construction chemicals market reached around US$ 2.2 billion at the end of 2023, registering a year-on-year growth of approximately 11.2%. The market is projected to witness a CAGR of 13.9% from 2024 to 2033 in terms of value, with the consumption of construction chemicals in India expected to reach US$ 7.8 billion by 2033. North India and South India are anticipated to be key markets due to the growing use of construction chemicals in mega projects and Make in India initiatives.

Source: IBEF, Persistence Market Research, Research and Markets. com, PIB

Prospects in the specialty chemical industry

• I ndia has historically been a global leader in generics, biosimilars, and major vaccine manufacturing, supplying more than 50% of the worlds vaccines.

• Increasing demand from end-user sectors like food processing, personal care, and home care is fuelling growth across various segments within Indias specialty chemicals market.

• Demand for chemicals and petrochemicals in India is projected to almost triple, reaching US$ 1 trillion by 2040.

• On February 15, 2023, the Indian Specialty Chemical Manufacturers Association (ISCMA) signed an MoU with the US-India Importers Council (USIIC) to promote trade in specialty chemicals.

Growth drivers

The following growth drivers would collectively contribute to the robust expansion and increasing global competitiveness of the Indian chemical industry.

• Development of chemical hubs and dedicated zones, along with improved transportation and logistics infrastructure, supports efficient production and distribution.

• The countrys export growth is supported by factors such as low-cost manufacturing, access to skilled technical workforce, seasonal domestic demand, overcapacity, competitive pricing, and a strong foothold in generic pesticide manufacturing. The increase in demand from the agricultural sector is a key driver of growth for the agrochemicals industry in India.

• Indias transformation from a food-deficient nation to a leading agricultural producer is largely attributed to the increasing usage of chemical fertilisers, particularly after the Green Revolution in 1960s.

• Availability of a large pool of skilled professionals and engineers supports the industry in maintaining high standards of production and innovation. Increased focus on R&D for developing new products, improving existing products, and finding sustainable and eco-friendly solutions would further drive innovation and growth.

Government initiatives

The government has introduced various government initiatives and policies to support and enhance the growth and development of the Indian specialty chemicals industry. They are being highlighted as follows:

• Under the PLI scheme, India will manufacture 1,800 pharmaceutical products and formulations, as well as 22 bulk drugs. The PLI scheme plans to manufacture 41 bulk drugs with a total budget of 6,940 crores from 2020-21 to 2029-30. By December 2023, participants in the scheme have already invested 3,651 crores.

• The government has planned to open 25,000 Jan Aushadhi Kendras to provide affordable medicines.

• I n the Interim Union Budget 2024-25, the government allocated 1,68,380 crores to the Department of Chemicals and Petrochemicals. The government plans to implement a PLI system with 10-20% output incentives for the agrochemical sector, aiming to create an end-to-end manufacturing ecosystem through the development of clusters. A 2034 vision for the chemicals

and petrochemicals sector has been established to explore opportunities for improving domestic production, reducing imports, and attract more investments.

• Foreign Direct Investment (FDI) in the chemicals sector (excluding fertilisers) reached US$ 22.07 billion between April 2000 and December 2023.

• Government initiatives and funding drive the Indian fertilisers market, supported by schemes like Pradhan Mantri Krishi Sinchai Yojana (PMKSY) and Pradhan Mantri Kisan Urja Suraksha evam Utthaan Mahabhiyan (PM-KUSUM) to boost agricultural productivity.

• As a government initiative to promote fertiliser manufacturing in India, Make in India has aimed to reduce import dependency, boost local production, and develop advanced fertilisers tailored to local conditions. This initiative supports industry growth, encourages investment, and fosters technological innovation to enhance agricultural outcomes sustainably. The estimated government expenditure on fertiliser subsidies for 2024-25 is 1,64,000 crores, which declined by 13.2% from the previous year.

• In addition, the Department of Chemicals and Petrochemicals (DCPC) introduced new HS codes for high-value chemical imports, especially pesticides, to improve trade analysis. Quality Control Orders (QCOs) now mandate BIS standards for specific chemicals to ensure regulatory compliance. DCPC hosted the B20 International Conference in New Delhi on sustainable transitions in the chemicals sector and a summit to establish India as a global manufacturing hub. Effective October 1, 2023, the Department of Revenue requires additional qualifiers (IUPAC and CAS numbers) for chemical imports and exports to enhance oversight. The chemicals sector allows 100% FDI under the automatic route, except for certain hazardous chemicals.

Source: PRS India, PIB

Opportunities and threats

Opportunities

• Growing Domestic Demand: Increasing chemical consumption across sectors such as pharmaceuticals, agriculture, textiles, and consumer goods presents substantial growth opportunities. By 2030, approximately 80% of Indian households are expected to be in the middle-income group. The growing middle class and increasing urbanisation would drive demand for personal care products, agrochemicals, food, and paints & coatings, leading to higher per capita consumption of chemicals.

• Robust Export Potential: Indias competitive

manufacturing costs and compliance with global standards position the specialty chemical industry well for expanding its presence in international markets. India has become a significant exporter of chemicals due to its cost-competitive manufacturing, quality products, and compliance with international standards. The global shift towards sourcing from alternative markets also boosts Indian chemical exports. Indias strategic location provides access to key global markets, facilitating trade and export opportunities.

• Sustainability Initiatives: Growing awareness and demand for sustainable and green chemicals drive the industry towards adopting environmentally friendly practices, opening new market opportunities. Increasing global demand for eco-friendly and sustainable chemicals presents opportunities for Indian companies to innovate and capture new markets.

• Technological Advancements: Adoption of advanced technologies are expected to enhance productivity, efficiency, and product innovation. Focus on research and development for developing new products, improving existing ones, and adopting sustainable practices would further drive innovation and competitiveness.

Threats

• Fluctuations in global economic conditions can impact demand and export opportunities for Indian chemical products. Instability or geopolitical tensions can disrupt supply chains and international trade, affecting exports and operations.

• Stringent environmental regulations in India and abroad could increase compliance costs and might affect competitiveness. Adherence to stringent health and safety standards is crucial but can also increase operational costs.

• Dependency on imported raw materials with fluctuating prices can impact production costs and profitability. Exchange rate fluctuations can affect profitability, especially for export-oriented businesses.

Company overview

Valiant Organics Limited (hereafter referred to as the Company) is a leading producer of specialty chemicals in India with over thirty years of experience. The Company was founded in 1984 by first-generation technocrats and is headquartered in Mumbai, India. The Companys chemicals are used in various industries, including agrochemicals, pharmaceuticals, and dyes and pigments.

Valiant Organics Limiteds commitment to product quality allows it to export to Asia, Europe, and the United States, in addition to its domestic sales in India. The Company uses its extensive industry expertise and deep domain knowledge to manufacture and supply specialty chemicals to both local and international markets. Over the years, the Company has focused on manufacturing specialty chemicals that are in high demand but have low domestic supply, often relying on imports.

Manufacturing capacity

Valiant Organics Limited excels in manufacturing high-quality specialty chemicals across six integrated manufacturing facilities spread across five locations in Gujarat and Maharashtra. The Company has a total production capacity of 70,000 tonnes per annum (TPA) as of June 2024. These facilities are strategically designed to cater to a diverse range of processes, as outlined below:

Manufacturing facilities	Process
Sarigam	Chlorination
Tarapur	Ammonolysis
Vapi	Ammonolysis
Jhagadia (Units 1 & 2)	Hydrogenation, Methoxylation
Ahmedabad	Sulphonation and Acetylation

Revenue break-up

Regional growth (%)	FY 2023-24	FY 2022-23
Domestic	94%	94%
Exports	6%	6%

Operational diversity

Valiant Organics Limited forms a part of the esteemed Aarti Group, which includes renowned companies such as Aarti Surfactants, Aarti Industries, and Aarti Drugs. The Company specialises in various chemical processes, including acetylation, hydrogenation, ammonolysis, chlorination, methoxylation, and others. This broad expertise enables Valiant Organics to deliver exceptional quality and meet diverse chemical requirements.

The Companys core product portfolio comprises essential chemicals such as Para Chlorophenol, Ortho Chlorophenol, 2,4 Di Chlorophenol, Para Nitro Aniline, Ortho Anisidine, Para Anisidine, and Para Amino Phenol. These products are the cornerstone of the Companys offerings and cater to various industry needs. The Company is one of the largest manufacturers of chlorophenol derivatives globally and one of the largest domestic producers of Para Nitro Aniline (PNA). The Company is also a leading manufacturer of benzene derivative products and one of the few commercial players

in the production of Ortho Anisidine and Para Anisidine. In addition, the Company is among the first domestic manufacturers of Para Amino Phenol (PAP). The Companys success is attributed to a highly skilled and experienced workforce.

Financial performance

In FY 2023-24, Valiant Organics Limited reported revenue from operations of 67,719.21 lakhs, down from 91,161.80 lakhs in FY 2022-23, representing a decline of 25.7% year- over-year (y-o-y). The Companys EBITDA stood at 4,246.36 lakhs in FY 2023-24, compared to 13,291.22 lakhs in FY

Key financial ratios

2022-23, reflecting a y-o-y decrease of 68%. Loss after tax for FY 2023-24 was 304.34 lakhs, as compared to the profit of 7,557.99 lakhs in FY 2022-23. The debt-equity ratio stood at 0.32x in FY 2023-24 compared to 0.32x in FY 2022-23.

Indicative revenue break-up as per end-user industry

Particulars	FY 2023-24	FY 2022-23
Dyes and pigments	43%	41%
Pharmaceuticals	19%	31%
Agrochemicals	33%	25%
Speciality chemicals	5%	3%

 

Particulars	FY 2023-24	FY 2022-23 Y-o-Y change Explanations
Current ratio	0.97	1.05 -756 (bps) Current assets decreased while current liabilities increased during the year. This decrease in current assets was primarily due to reductions in trade receivables and cash equivalents, while the increase in current liabilities was driven by higher trade payables.
Net debt-to-equity	0.32	0.32 - Borrowings decreased on account of repayments and dependency on short term funding.
Return on equity	(0.46%)	11.91% (1,237 bps) Profit decreased due to subdued demand in overall chemical industry, price corrections across products.
Net profit ratio	(0.45%)	8.29% (874 bps) Profits declined more sharply than revenue, primarily due to increases in finance costs, depreciation, other expenses, and raw material prices.

Environmental, Social and Governance

The Company is dedicated to integrating health, safety, environmental, social, and governance principles into its business operations. Valiant Organics Limited recognises the potential for sustainable growth and value creation through ethical practices and strong governance. The Company emphasises people-centricity by aligning its environmental, health, and safety standards with international norms. Proactive measures are implemented for employee and contractual worker well-being, ensuring a positive work environment through initiatives focused on employee satisfaction, human rights, talent management, skills development, and engagement.

The Company is actively engaged in CSR projects to support communities where it operates, demonstrating its commitment to employee welfare and community development. In addition to prioritising health and safety, the Company strives to create a positive environment for its workforce and aligns its practices with international standards. Environmental sustainability remains a key focus, with efforts directed at reducing hazardous waste, conserving water, improving energy efficiency, and optimising natural resource use to minimise the carbon footprint. The Company

has implemented Zero Liquid Discharge units across most manufacturing facilities to manage waste effectively. Moreover, through a captive renewable energy plant, the Company aims not only to moderate costs but also to reduce its environmental impact.

The Company values strong governance and transparency as essential for sustainable growth. The Company values strong governance and transparency as essential for sustainable growth and success.

The Companys governance structure emphasises accountability and responsibility, supported by policies that protect all stakeholders interests.

Risk Management

Given its reliance on knowledge-intensive operations, the Company faces the risk of adverse impacts stemming from a lack of innovation. Additionally, annual risks include volatility in crude prices and foreign currency exchange rates. The dominant role of China in the chemical manufacturing sector poses a continuous threat, potentially increasing the influx of cheaper imports.

Internal Control Systems

The Company has established a robust internal control framework including governance, compliance, audit, control, and reporting aspects. These internal controls play a crucial role in ensuring regulatory compliance, fraud prevention, financial safeguarding, and the reliability of financial reporting. The internal audit team regularly evaluates the effectiveness of these controls and reports their findings to management. Based on these audits, prompt corrective actions are taken to improve the accuracy and efficiency of the internal controls.

Cautionary statement

The Management Discussion and Analysis includes statements outlining the Companys objectives, projections, estimates, and expectations, which may involve forwardlooking information. These statements are made in accordance with applicable laws and regulations, based on informed judgements and estimates. Past performance continuity cannot be guaranteed as future performance is subject to risks and uncertainties. These factors may include, but are not limited to, general market conditions, macroeconomic factors, interest rate fluctuations, competitive pressures, technological advancements, legislative changes, and other key factors impacting the Companys business and financial performance.