Archean Chemical Industries Ltd Management Discussions

Global Economy

The world economy is currently seeing a deceleration in its growth, with global GDP growth expected to slow down from an estimated 2.7% in 2023 to 2.4% in 2024. This deceleration is due to various crises, including geopolitical conflicts and severe weather occurrences, which have heightened the risks to international trade and manufacturing. Additionally, stringent financial conditions further jeopardize global trade and production.

There are noticeable differences in growth rates across regions. The United States, as the leading economy globally, is forecasted to experience a decline in GDP growth from 2.5% in 2023 to 1.4% in 2024. This is mainly attributed to reduced consumer spending resulting from elevated interest rates and a weakening job market. China, facing both domestic and international challenges, is expected to see a modest growth slowdown, with an estimated growth of 4.7% in 2024, down from 5.3% in 2023.

Europe and Japan are also confronting significant economic challenges, with growth rates predicted at 1.2% for both regions in 2024. Meanwhile, developing countries present a mixed picture. Africas growth is projected to rise slightly from 3.3% in 2023 to 3.5% in 2024. However, the least developed countries (LDCs) are anticipated to grow by 5.0% in 2024, which falls short of the 7.0% growth target outlined in the Sustainable Development Goals (SDGs).

To sum up, the global economy is undergoing a growth slowdown marked by regional variations and labor market complexities. Factors like geopolitical conflicts, severe weather events, and stringent financial conditions are significant risks affecting international trade and production.

Indian Economy

The Indian economy has seen notable changes in recent years, driven by strong domestic demand, vigorous investment activity, and active private consumption, especially among the affluent. The nature of domestic demand has shifted, with reduced government spending due to fiscal consolidation.

Indias economic growth is supported by diverse sectors such as agriculture, telecommunications, automotive, IT, and pharmaceuticals. The agricultural sector has undergone modernization and transformation through policy initiatives and investments. Indias telecommunications industry ranks second globally, contributing 6.5% to the countrys GDP The automotive industry in India is the worlds second-fastest growing, with both domestic sales and exports witnessing significant growth in recent times. The IT sector employed 2.8 million professionals in 2011, generating revenues nearing US$100 billion and accounting for 26% of Indias merchandise exports. Furthermore, the pharmaceutical industry has established itself as a global contender, emphasizing research and development.

Indias economic prospects appear promising, with growth expected to remain robust in the short term. The governments dedication to augmenting capital expenditure, especially on infrastructure, is anticipated to bolster growth and enhance competitiveness. Additionally, Indias emphasis on manufacturing, sustainable energy sources, and exports will further fortify its economic foundation.

Indian Chemical Industry

The chemical sector plays a vital role in Indias economy, contributing significantly to its GDP and ranking among the fastest-growing industries. As of 2022, the chemical industry accounts for

7% of Indias GDP, making India the sixth-largest chemical producer globally and the third-largest in Asia.

India boasts several niche specialty chemical firms that rank among the worlds largest in their respective specialized sectors.

For a decade, Indias chemical industry has consistently surpassed global averages in demand growth and wealth creation for shareholders. With its rapid economic expansion, growing middle class, and competitive capital and operational costs, India has the potential to emerge as a key consumer and producer in the global chemical sector. Nonetheless, challenges such as limited access to domestic raw materials, regulatory delays, and a shortage of skilled R&D professionals continue to be obstacles for the Indian chemical industry.

Key Opportunities

• Specialty Chemicals: The specialty chemical sector in India offers local manufacturers a chance to enrich and diversify their product range. Incorporating specialty chemicals such as polymer additives, lubricant additives, and water treatment chemicals can enable manufacturers to meet the rising demand for value-added products.

• Export Opportunities in Growing Markets: Emerging markets in the Asia Pacific and Africa regions present significant growth prospects for both small and large-scale Indian chemical manufacturers. With these regions experiencing rapid growth, Indian chemical companies should explore these markets to broaden their customer base.

• Fine and Specialty Chemicals: Venturing into the fine and specialty chemicals sector offers substantial growth opportunities for Indias chemical firms. This sector allows companies to capitalize on their technical expertise and cost-effective innovation capabilities without

being hindered by challenges like high capital costs, limited hydrocarbon access, or elevated energy expenses.

• Decentralized Manufacturing Systems: Transitioning from a single-country manufacturing approach to a multi-country operational model is gaining traction among manufacturers. Adopting this strategy can offer a more resilient and diversified supply chain, presenting an advantage for Indian specialty chemical companies aiming for global expansion.

Key Challenges

• Raw Materials: Securing the necessary raw materials for chemical processes can be challenging in India, often resulting in higher feedstock costs compared to countries like the Middle East, China, and other Southeast Asian nations.

• Infrastructure Challenges: Limited access to railway depots, ports, and inadequate pipeline connectivity pose obstacles to the seamless delivery of raw materials. Additionally, small and medium-sized industries face power supply issues as they may not have access to captive power plants.

• Logistics: While most chemical industries are located on the west coast, primarily in Gujarat, to be close to raw material sources and ports, the main demand from end- users often comes from the south and east regions. This geographical disparity leads to increased transportation costs and raises overall production expenses.

• Global Competition: Cheaper chemical imports from low-cost manufacturing centers like China have intensified competition in India. Since joining the World Trade Organization, India has reduced import tariffs on various products, further increasing competitive pressures.

• Plant Underutilization: Due to oversupply in the global petrochemical market, the cost of petrochemicals has decreased, causing domestic manufacturers to underutilize their production facilities.

• R&D Limitations: The high cost associated with research and development discourages domestic manufacturers from introducing new products to the market, hindering their ability to innovate and adapt.

• Skilled Labor Shortage: The chemical industry in India grapples with a significant shortage of skilled workers, impacting productivity. A study by FICCI-NASSCOM & EY highlighted that out of Indias 600 million- strong workforce, 9% will be in jobs that currently dont exist, and 37% will require entirely new skill sets. Over the next decade, the manufacturing sector alone is projected to face a shortfall of 7.9 million workers.

Outlook:

The Indian specialty chemical industry is poised for growth driven by increasing demand from various sectors, technological advancements, and favourable government policies. Despite challenges like raw material availability, infrastructure limitations, and skill shortages, the industrys focus on innovation, collaboration, and product diversification presents a promising outlook for becoming a major player in the global market. By addressing these challenges and leveraging opportunities, the Indian specialty chemical industry can continue its growth trajectory and contribute significantly to the countrys economic development.

Bromine

The global Bromine market is on a growth trajectory and is anticipated to continue expanding in the coming years. Valued at approximately USD 2.8 billion in 2022, the market is forecasted to reach around USD 4.7 billion by 2033, with a compound annual growth rate (CAGR) of about 2.7%. The market is segmented by derivatives such as organ bromine, clear brine fluids, and hydrogen bromide, and by applications including flame retardants, oil & gas drilling, water treatment, among others.

The Asia-Pacific region is expected to dominate the market share, driven by increasing demand from sectors like electronics, automotive, and pharmaceuticals. Countries like China and India are key players in bromine production.

Industrial Salt

The industrial salt market is propelled by its growing applications across various sectors and the cost- effective, availability of salt reserves. Industrial salt finds use in diverse industries including chemical processing, de-icing, water treatment, oil & gas, and agriculture.

A significant portion of the global industrial salt is dedicated to de-icing roads to enhance driving safety. Moreover, the chemical industry relies on salt as a filler to expedite the dissolution of chemicals in water, and energy-producing facilities like solar ponds that require substantial amounts of salt to maintain optimal salinity levels.

The global industrial salt market was valued at US$ 14.7 billion in 2023 and is projected to grow at a CAGR of 4.0% from 2023 to 2033. The markets growth is fuelled by rising demand from the chemical processing, oil & gas, and de-icing sectors. Additionally, the increasing demand for chlorine alkali in the production of vinyl and other downstream chemicals contributes to market expansion.

SOP

The Sulphate of Potash (SOP) market is poised for a promising future. The global Potassium Sulphate market is projected to reach US$5.4 billion by 2027, with a CAGR of 4.8% from 2022 to 2027. In the Asia-Pacific region, the SOP market is expected to grow from USD million in 2022 to USD million by 2028, at a CAGR of 5%.

This growth is fuelled by the rising demand for potassium sulphate across industries such as agriculture, pharmaceuticals, cosmetics, and food & beverages. Key drivers for the SOP market include the increasing adoption of high-efficiency fertilizers, growing urbanization, and the emphasis on food security, particularly in regions like Asia and Latin America. The market is characterized by its segmentation based on grade, form, end-use industry, and geography, highlighting the diverse applications and growth opportunities within the SOP sector.

Company Overview

Archean Chemical Industries Limited (ACIL) is an India-based specialty chemicals manufacturing company that produces and supplies marine chemicals. The company is engaged in the production and supply of industrial salt, liquid bromine, sulphate of potash (SOP). ACIL serves a range of industries, including agriculture, pharmaceutical, water treatment, aluminium, glass, and textiles.

Product wise performance

Revenue (in Cr)	FY 2023-24	FY 2022-23	FY 2021-22
Bromine	427.43	708.39	605.28
Industrial Salt	840.06	728.12	512.89
Sulphate of	35.96	3.05	11.39
Potash

Bromine is a naturally occurring element. The most recoverable form of bromine is from soluble salts in seawater, salt lakes, inland sea and brine wells. Bromine in much higher concentration is found in inland sea and brine wells. Much of the bromine and brominated compounds are manufactured at the Dead Sea in Israel, Jordan, and the US. It is widely used as a reactant and catalyst for manufacturing various products, such as agrochemicals, biocides, water disinfectants, pharmaceutical intermediates, dyes, completion fluids, flame retardants, and photographic chemicals. Bromine finds applications in chemicals, rubbers, plastics, agrochemicals, oil and gas, pharmaceuticals, electronics, textiles and other industries. The global bromine market can be segmented into applications such as flame retardants, clear brine fluids, biocides, brominated organic intermediates, fungicides, etc. The company increased bromines capacity to 42,500 MTPA in January 2023 from 28,500 MTPA earlier. The increased bromine capacities will be used for captive consumption in the bromine derivatives plant, leading to expansion in its product portfolio.

Bromine Derivatives a class of bromine second- derivative products with multiple use cases. The company is gearing up to introduce a range of bromine second-derivative products known as Bromine Derivatives. These products include BFR (bromine flame retardants), CBF (clear brine fluids), and PTA. The company plans to launch them to the market in the second half of the fiscal year 2024. To facilitate this, ACIL is establishing a new production facility with a capacity of 28,000 metric tons per annum (MTPA) through its subsidiary, Acume Chemicals Private Ltd (ACPL). ACPL has commissioned its phase 1 of the facility on March 14, 2024 and has started its commercial production from this date onwards.

During the year, ACIL through one of its subsidiary company, acquired Oren Hydrocarbons Private Ltd. The Company will thus be able to offer other specialized products for oil drilling beyond those CBR bromine derivatives. It will be able to expand its portfolio of products.

Industrial salt is another main product. ACIL is Indias largest producer of industrial salt, with a capacity of 4 million MT in FY24. Industrial salt has 14,000 commercial uses of salt, a source of sodium and chlorine, which are essential components of an array of materials, glass, synthetic rubber, cleansers, pesticides, paints, adhesives, fertilizers, explosives and metal coatings. The company exported 100% of its industrial salt production and benefits from its nearness to the captive Jakhau Jetty and Mundra Port, where it transports industrial salt to its customers globally.

With respect to Sulphate of potash (SOP), ACIL is Indias only large-scale producer of fertilizer grade water soluble SOP It is produced through sea brine, which has a low cost of production and is green (no chemical process involved). Globally, only 15% of SOP is produced through this brine route, and the majority are by the Mannheim process, which consists of converting MOP (muriate of potash) into SOP by using sulphuric acid. The cost of production of SOP is lowest for brine-based production.

RISKS AND CONCERNS

The Company recognises, assesses, and manages risks by placing suitable mitigation measures against each identified risk. The Company is engaged in formulating and recommending an appropriate Risk Management Policy to the Board on a continuous basis. The Risk Management Committee ensures (a) that appropriate methodology, processes and systems are in place to monitor and evaluate risks associated with the business of the Company (b) monitoring and oversee implementation of the risk management policy, including evaluating the adequacy of risk management systems. (c) periodically review the risk management policy (d) to keep the board of directors informed about the nature and content of its discussions, recommendations and actions to be taken.

In the constantly changing environment in which the Company operates, risk analysis and mitigation are crucial.

Risk	Impact	Mitigation
Competition	The Company might fail to act on the underlying opportunities in a timely manner- - Increased and intensified competition might hurt the Companys market share, margin profile, and return on capital employed	The Company is always aware of new prospects in the chemical industry and responds proactively by introducing new products to its portfolio. - Our long-standing client connections help us manage this risk as a chosen supplier and dependable partner. Constantly review peers and focus on quality of the product and timely servicing the customer.
Raw material price risk	Increase in crude oil prices and the pricing of other raw materials might have an impact on the bottom line.	Our backward integration enables us to receive a consistent supply of Inputs at a low cost. Further, the Company is constantly working towards Multi supplier approach so as to lessen our reliance on single supplier, reducing the risk
Disaster risks	The Company might be hit by force majeure events such as cyclone etc.,	We ensure our preparedness to face such events. Our manufacturing plant(s) are insured against natural risks.
Foreign currency exchange rate risk	Foreign exchange rate changes might have a substantial influence on our financial performance with our exports accounting for more than 70% of our revenue, and significant portion of our raw material being imported	Our strong foreign exchange hedging mechanism and processes, such as forward contracts, help us to manage this risk

INTERNAL CONTROL SYSTEMS & THEIR ADEQUACY

The Management is responsible for establishing & maintaining internal controls for financial reporting. The Statutory Auditors have evaluated the system of internal controls of the Company and also reviewed their effectiveness and have reported that the same are adequate & commensurate with the size of the Company and the nature of its business.

They have also reviewed the internal controls pertaining to financial reporting of the Company to ensure that financial statements of the Company present a true and fair view of the state of affairs of the Company. In addition, Auditors in their report have also opined that the Company has in all material respects adequate internal financial control systems over financial reporting and the same were operating effectively as on 31^st March 2023.

DISCUSSION ON FINANCIAL PERFORMANCE / OPERATION PERFORMANCE

Archean Chemical Industries Limiteds total revenue on a standalone basis is Rs 1329.58 crores. In FY 24, the EBITDA stands at Rs 511.03 crores, compared to Rs 678.55 crores in FY 23. In FY 24, the PAT is Rs 322.35 croes, compared to Rs 383.65 million in FY 23. EPS in FY 24 is Rs 26.17.

On a consolidated basis, the total revenue is Rs 1330.09 crores. EBITDA stands at Rs 505.98 crores in FY 24, compared to Rs 677.27 crores in FY 23. PAT stands at Rs 318.97 crores in FY 24, compared to Rs 382.56 crores in FY 23. EPS stands at Rs 25.90 in FY 24.

MATERIAL DEVELOPMENT IN HUMAN RESOURCE & INDUSTRIAL RELATIONS

The Company is a people centric organisation. It treats its employees as most integral asset. The Company has an excellent HR system and well- structured policies for the healthy development of this asset. The Company strives to achieve inclusive growth for its employees, thereby ensuring its goals are aligned with its employees. Further, the Company has a strong people policy aimed at recruiting the best talent, training the people, engaging with them continuously, and ensuring strong retention, thereby, laying foundation to a robust human capital. The Company periodically conducts programs and initiatives to strengthen talent management, capability development, and performance of its employees. As on 31 March 2024, the Company had 288 employees working at both plant and Registered Office.

Key Ratios

Metric	FY 23-24	FY 22-23	% Change	Explanation
Current ratio	5.7	3.4	68%	Increase in current assets due to increase in investment in Mutual funds.
Debt-Equity Ratio	0.00	0.02	-97%	Due to reduction in short term borrowings.
Return on Net Worth	20.5%	45.3%	-55%	Due to increase in Average Shareholders Equity.
Inventory turnover	9.0	10.0	-10%	-
Debtors turnover	9.7	10.7	-9%	-
Operating Profit Margin	37.2%	45.7%	-19%	-
Net profit Margin	24.2%	26.6%	-9%
Interest Coverage Ratio	45.6	6.3	625%	Due to reduction in interest on account of redemption of NCDs in FY 22-23.