Camlin Fine Sciences Ltd Management Discussions

GLOBAL ECONOMIC OUTLOOK

There are signs that the global outlook has started to brighten, though growth remains modest. The impact of tighter monetary conditions continues, especially in housing and credit markets, but global activity is proving relatively resilient, inflation is falling faster than initially projected and private sector confidence is improving. Supply and demand imbalances in labour markets are easing, with unemployment remaining low. Real incomes have begun to improve as inflation moderates and trade growth has turned positive. Developments continue to diverge across countries, with softer outcomes in many advanced economies, especially in Europe, offset by strong growth in the United States and many emerging market economies.

Global growth in 2023 continued at an annual rate above 3%, despite the drag exerted by tighter financial conditions and other adverse factors, including Russias war of aggression against Ukraine and the evolving conflict in the Middle East. Global GDP growth is projected at 3.1% in 2024 and 3.2% in 2025, little changed from the 3.1% in 2023. This is weaker than seen in the decade before the global financial crisis, but close to currently estimated potential growth rates in both advanced and emerging market economies.

Headline inflation fell rapidly in most economies during 2023, driven down by restrictive monetary policy settings, lower energy prices and continued easing of supply chain pressures. Food price inflation also came down sharply in most countries, as good harvests for key crops such as wheat and corn saw prices fall rapidly from highs reached after the start of the war in Ukraine. Core goods price inflation has generally fallen steadily, but services price inflation has been stickier, remaining well above pre-pandemic averages in most countries.

Artificial intelligence (AI) holds the potential for reviving the trend of productivity and growth while triggering an acceleration of innovation, even if estimates of the impact of AI on productivity are subject to considerable uncertainty. The share of firms making use of AI has risen rapidly, though most of these are large companies. The net effect of AI on aggregate productivity will depend on many factors, including the extent to which new technologies are widely diffused or concentrated in a few leading firms, and the extent to which AI is labour enhancing as opposed to labour replacing.

Cautious optimism has begun to take hold in the global economy, despite modest growth and the persistent shadow of geopolitical risks. Inflation is easing faster than expected, labour markets remain strong with unemployment at or near record lows. Private-sector confidence is improving. Yet the impacts of tighter monetary conditions are being felt, especially in housing and credit markets. This recovery is unfolding differently across regions. The United States and a number of large emerging markets continue to exhibit strong growth, in contrast to European economies. The mixed macroeconomic landscape is expected to persist, with inflation and interest rates declining at differing paces, and differing needs for fiscal consolidation. Despite a more balanced risk outlook, substantial concerns remain. High geopolitical tensions, particularly in the Middle East, could disrupt energy and financial markets, causing inflation to spike and growth to falter. Debt-service burdens are already significant and could rise further as low- yielding debt is rolled over or fixed-term borrowing rates are renegotiated. Expectations that inflation will continue to decline steadily might also prove misplaced.

In the medium and longer term, the fiscal position is worrying. Governments must address mounting debt and rising expenditure demands due to ageing populations, climate change mitigation, and defence needs. Increasing debt-service costs further worsen fiscal sustainability. There is never an attractive time to do this, but conditions enable this rebuilding to begin now. A robust medium-term approach to containing spending, building revenues, and focusing policy efforts on growth-enhancing structural reforms are all needed. Disappointing growth underscores the case for strengthening global trade and productivity. Trade and

industrial policies should aim for resilient global value chains through diversification without undermining the benefits of open trade. At the same time, accelerating decarbonisation requires bold policy measures, such as investing in green and digital infrastructure, enhancing carbon pricing, and promoting technology transfer. The developments in Artificial Intelligence (AI) provide a welcome and much needed opportunity to raise productivity. Ensuring the benefits materialise and are broadly shared requires investments in education and training and strong and internationally consistent competition policy.

Amidst these emerging scenarios, the geo economic fragmentation lead by differing the economic impulses is hampering the multilateral economic cooperation which may result into a slower than expected growth rate in the near future.

INDIA ECONOMIC OUTLOOK

Indias economy is projected to grow by 6.5% in 2024, according to a report by the UN which noted that multinationals extending their manufacturing processes into the country to diversify their supply chains will have a positive impact on Indian exports. UN Trade and Development (UNCTAD) in its report released on Tuesday said that India grew by 6.7% in 2023 and is expected to expand by 6.5% in 2024, continuing to be the fastest-growing major economy in the world. Report highlights that the expansion in 2023 was driven by strong public investment outlays as well as the vitality of the services sector which benefited from robust local demand for consumer services and firm external demand for the countrys business services exports,and these factors are expected to continue to support growth in India in 2024. The report also noted the increasing focus by multinationals on India as a manufacturing base as they diversify their supply chains, a reference to China. In the outlook, an increasing trend of multinationals extending their manufacturing processes into India to diversify their supply chains will also have a positive impact on Indian exports, while moderating commodity prices will be beneficial to the countrys import bill.

Indias economy is a complex mix of agriculture, manufacturing, and a rapidly growing service sector. Agriculture employs a significant portion of the workforce, with major crops including rice, wheat, and cotton. Despite its significant role, the sector faces challenges like low productivity and inadequate infrastructure and is vulnerable to climatic conditions. Manufacturing varies from traditional village industries to modern industries like pharmaceuticals, automobiles, and textiles. The service sector, including IT and financial services, has seen rapid expansion, becoming a major GDP contributor in recent years; cities like Bangalore and Hyderabad are now known as IT hubs.

In early 2023, India overtook China as the worlds most populous nation; the demographic gap between the two will widen going forward. Indias large and young population presents both challenges and opportunities. While it offers a vast labor pool and a growing consumer market, it also poses challenges in terms of ensuring sufficient job creation and skill development.

India decisively withstood global headwinds in 2023 and is likely to remain as the worlds fastest-growing major economy on the back of growing demand, moderate inflation, stable interest rate regime and robust foreign exchange reserves.

Key highlights

Indias economy continues to show resilience, growing at a rate of approximately 8.4% in Q3 of FY24, surpassing expectations. This growth is driven by factors such as strong tax revenue collections, increased government capital spending, firm domestic demand (including rural demand), and growth in manufacturing and construction sectors.

The manufacturing sector saw significant growth of 11.6% in Q3 of FY24. Additionally, infrastructure, real estate, and construction sectors are experiencing momentum, with key segments like steel and cement witnessing double-digit growth.

Various indicators such as automobile sales, passenger traffic, robust GST collections, rising electricity demand, and growth in household credit point towards sustained domestic demand. Lower demand for MNREGA work coupled with recovering rural demand suggests improving rural sentiments.

Stable repo rates, government bond yields, exchange rates, and healthy foreign exchange reserves indicate macroeconomic stability.

Challenges and concerns

Despite the overall positive outlook, there are areas of concern. Declining non-oil merchandise exports, moderated service exports, and reduced foreign investments highlight challenges in the external sector. Sluggish private investment, as reflected in stagnant FDI, VC/PE investments, and credit growth to manufacturing, underscores the need for acceleration in the private capex cycle.

The hallmark of the Indian growth story has been political stability. The results of the national election are expected in the first week of June and there is hope that no political upheavals are seen.

GDP growth for FY24 is expected to be 7.6%, surpassing estimates by global agencies. Overall, while Indias economy is performing well amid global challenges, addressing concerns such as declining exports and sluggish private investment will be crucial for sustaining growth momentum in the future. The Consensus among analysts is for India to remain among Asias top performers in the coming years, boosted by domestic political stability, a business-friendly reform agenda, strong population growth and increased interest from foreign firms looking to diversify supply chains away from China. Upgrading shoddy infrastructure, trimming red tape, improving educational standards, and territorial disputes with China and Pakistan are key risks going forward.

GLOBAL CHEMICAL INDUSTRY OUTLOOK

The global chemicals sector faces a challenging landscape in 2024, characterized by weak demand and abundant supply, as per Fitch Ratings neutral outlook. Despite bottom-of-the-cycle conditions in 2023, the industry is expected to grapple with constrained volumes and margins, with little to no recovery anticipated. Renewed uncertainties about supply chains (especially concerns over shipping via both the Red Sea and the Panama Canal) also create long term logistics roadblocks for trade. High uncertainty further adds complexity to the sectors trajectory, setting the stage for nuanced dynamics.

Fitch Ratings paints a cautious picture for the global chemicals sector in 2024. The sluggish post-lockdown demand recovery in China, a key player in the industry, with its predatory pricing contributes to the deflation of global chemical prices and margins. Surplus capacity in Asia, North America, and the Middle East, boasting lower production costs, leads to significant imports into regions with weaker cost positions, notably Europe and Latin America. While data points to an uncertain global economic outlook this year, plenty of positives, such as strong growth in services, GDP growth in several surveyed economies, and stability across multiple indicators, including unemployment paint an encouraging picture.

Inflation, Interest Rates, and Demand Constraints

Persisting high inflation and interest rates are expected to continue constraining demand in 2024, particularly in the US and Europe, where weak growth expectations prevail. The construction sector, a crucial end-market for chemicals, is set to bear the brunt of these constraints, given its sensitivity to high- interest rates and government stimulus.

Indian Chemical Companies and Global Dynamics

Against the backdrop of capacity additions amid sluggish demand, concerns arise for Indian chemical companies. While demand struggles to revive, Chinas aggressive capacity expansion poses a long-term threat. The global scenario of surplus capacity and weak demand compounds the challenges faced by Indian chemical firms.

Climate change

Conflict in the Middle East has constricted one key chokepoint for global trade. Climate change has squeezed the other. Because of drought-depleted water levels in the Panama Canal, the number of ships transiting through the canal has declined significantly over the past year. That illustrates the degree to which climate change has become a near-term risk, not just a medium-term hazard. 2023 was the hottest year on record and 2024 seem enroute to breaking that record. A series of droughts, floods, and wildfires also made the impact of climate change more visible around the world last year. Climate change is increasing the frequency and cost of natural disasters, which tend to crimp economic growth, aggravate poverty, and lower agricultural yields. Risks associated with climate change will cast a long shadow over the global economy this year and next.

Challenges and Revisions in Production Expectations

Despite initial expectations for a modest rebound in production in 2023, the chemical industry faced significant headwinds by mid-year. Global factors, including a European recession, inflation in the US, and a smaller-than-expected rebound in Chinese demand, contributed to the downturn. Over-ordering in 2021 and 2022 resulted in high inventory levels, leading to months of destocking.

US Chemical Industry?s Transition

While fears of an economic downturn in the United States have eased, economic growth is expected to slow down. Analysts project only a modest rebound in chemical production, with destocking transitioning to restocking. However, the underlying weakness in demand and overcapacity for certain products may persist. Chemical companies are focusing on cost reduction and efficiency improvement to offset the reduction in output.

Opportunities Amidst Changing Dynamics

The competitive landscape in the chemical sector is evolving, presenting both opportunities and vulnerabilities. Stakeholder pressure and government policies are driving investments in the energy transition, leading to a convergence of sectors. Some oil and gas companies are venturing into critical minerals mining, processing, agriculture, and chemicals. Similarly, chemical companies are exploring opportunities in lithium processing, battery manufacturing, and clean ammonia. These changes bring new opportunities but also introduce competition from sectors with stronger cash flows.

The last several years have been tumultuous for the global chemical sector. Supply chains were disrupted by COVID-19. Demand fluctuated unpredictably and wildly. Inflation skyrocketed as economies reopened. As we enter 2024, however, it seems as though there is a new dawn on the horizon. The Q3 2023 World Uncertainty Index shows a lower level of uncertainty compared to the indexs 10-year average. Yet, while measures of uncertainty may create a sense of security, they do not tell the whole story. The chemical sector remains highly dynamic given the acceleration of technological innovation, a global (albeit uneven) commitment to transition to sustainable energy and continued unpredictable geopolitical conflicts. These factors point to a new, higher baseline of uncertainty that the chemical sector must navigate. And importantly, while not a new theme for the chemical sector, structural shifts across regions this past year are more real than ever and make clear the complex trade-offs global executives will need to balance going forward.

INDIAN CHEMICAL INDUSTRY OUTLOOK

The Indian Chemical industry has a huge role to play to make India a US $30 trillion economy by 2047 by contributing around US $ 1 Trillion by 2040. The industry is currently pegged at US $ 220 Billion and is growing at a CAGR of 9.3%. As the sector plays a significant role in enabling the growth of the Indian economy, the country needs to build a competitive landscape for the chemical industry.

A China-plus-one strategy that seeks to develop an alternative manufacturing hub, with India pitted to be its biggest beneficiary, diversification and de-risking of supply chains, changing geopolitics, trade wars, increasingly stringent environmental norms, increasing compliance and labour costs for manufacturers in China and demand driven by growth in domestic chemical consumption in India - The chemical industry is in massive tailwind for unprecedented growth in the coming years.

Besides, the critical support the chemical industry extends to a vast number of other industries helping produce almost 1,00,000 products, strengthens sectors untapped potential and massive growth opportunity in India in the coming years. The sector will be integral to the governments aspiration of developing an "Atmanirbhar Bharat as well as growth aspirations of making India a US $ 30 Trillion economy by 2047.

The specialty chemicals market has been growing exponentially, and the industry in India is projected to grow at a CAGR of more than 12 per cent from 2020 to 2025. Opportunities are replete for both domestic and multinational manufacturers as there have been significant demand from end-user sectors such as food, automobile, real estate, clothing, cosmetics, among others. This is likely to continue to boost the industrys growth in India and subsequently outpace the rest of the world in the coming years.

The specialty chemicals market represents 22 per cent of Indias overall chemicals and petrochemicals market and is valued at USD32 billion. In terms of trade, specialty chemicals account for a significant portion-more than 50 per cent of all chemical exports. The exports of Indias top 10 specialty chemical manufacturers have also grown at a CAGR of 20+ per cent between FY15-FY20.

The emergence of the Indian specialty chemicals market has been driven by the countrys strong process engineering capabilities, low-cost manufacturing capabilities, and abundant manpower. Further, government initiatives such as the petroleum, chemicals, and petrochemicals investment region (PCPIR) policy and production-linked incentive (PLI) schemes have strengthened the confidence of manufacturers to invest within the country.

As pollution control regulations become stringent and labour costs become higher in other countries, manufacturers are looking to diversify their production capabilities. Due to this, global manufacturers are considering alternatives, and Indias favourable ecosystem is positioning itself well as a viable option, poising the Indian specialty chemicals market for substantial and rapid growth.

As the market is evolving, factors such as investor confidence, corporate spending, portfolio decisions and budget allocation will play a crucial part. Focus on aspects such as research and development, capital investments, acquisitions, economies of scale, and expanding the domestic market will be of key importance to drive sustainable growth for the industry in India.

BUSINESS OVERVIEW

Your Company is a leading manufacturer of Speciality Chemicals that can be broadly categorised into Shelf-Life Solutions, Performance Chemicals, Aroma Ingredients and Health & Wellness. These products are used in varied industries such as human food, animal feed, pet food, agrochemicals, petrochemicals, pharmaceuticals, nutraceuticals, flavours and fragrances and health care.

SHELF-LIFE SOLUTIONS

Our business in North America led the exponential growth in this segment in the previous year. The petfood business was at the heart of this growth contributing over half of the total annual revenue and is expected to deliver bigger numbers in the coming year. The natural blends business was the focus in the previous year and formed a substantial chunk of the revenue. New customer acquisitions, partnerships with new distributors, a clear focus on sustainability, and addition of key positions in the team has helped CFS North America, USA build a larger customer base which will further reap rewards in the years to come. The business in the following year is expected to grow significantly.

The Asia Pacific region has seen growth in volume but a reduction in realisations on account of stiffer competition and lower realisation on key products. In the synthetic antioxidant business, new customers and distributors were targeted to build new projects to improve the sales volumes. A renewed focus on the petfood business in key countries in the region by appointing new distributors will help to increase sales volumes as well as margins. International and domestic competition is building capacity and reducing the price, leading to a reduced margin in the business. Your Company is confident that with a keen focus on innovation and market expansion growth in volume and margins is very achievable.

In our subsidiary, Dresen Quimica S.A.P.I. DE C.V., Mexico the revenues remained at stable despite the challenging micro economic environment prevailing during the year. Reduction in the prices by international competition and a drop in the market price of the final products has affected our margins significantly.

New product lines and product applications were introduced, customers were regained, and new projects were undertaken all of which will reap rewards going ahead.

To enable the product line expansion new positions are being added to the team and increased participation for the existing sales force is in place.

Our business in the South American continent, despite the uncertainty in the economic environment, has recorded respectable growth not only in the revenues but also in its profitability. This turnaround was possible due to a major restructuring of the business that was initiated in the last fiscal year. But for the political and economic uncertainty in countries like Argentina, the revenues as well as sales volume would have been significantly better.

Agility in price management and the introduction of product application studies allowed the team to offer customised and differentiated solutions without any impact on the margins. The antioxidant business saw a growth in volume margins despite the drop in market price of certain products. To augment further growth, the emphasis will be to enter new market segments and add new products to our existing basket.

The Biodiesel vertical performed exceptionally well in Brazil despite market price reductions. Margins grew on account of reduced input costs and shifting the production to India. The new government policy mandating the biodiesel blend in April 2024, we expect to see sustained growth in the coming years. In Argentina, the biodiesel vertical had to be shut down on account of the economic crises.

The animal nutrition business in the region also demonstrated remarkable growth on account of the increase in volume and margin. In the future, a stronger focus on more customised blends will be key in capturing a larger market share.

Optimizing internal processes, revising pricing policies, restructuring product lines, and diversifying into new markets allowed not only an improvement in operational efficiency but also an increase in profitability and financial stability. The company is confidently moving towards the next fiscal year with strategies focused on increasing the portfolio and strategic partnerships, signaling a phase of continuous expansion and innovation. Our commitment to operational excellence and customer satisfaction remains at the heart of our mission as we look to the future with well-founded optimism. With these adjustments, the company managed to establish a solid foundation for sustainable growth and ongoing development in the future.

PERFORMANCE CHEMICALS

The last financial year witnessed depressed consumer demand across geographies. This has led to drop in operating capacities across the globe and reduction in finished goods due to the low pricing strategy by the Chinese manufacturers. This strategy has led to closure of plants across Europe and USA leading to further drop in demand. Despite the lack of demand for finished goods from the market, your company has been able to maintain the volumes in the market thereby ensuring customer retention. Your company has received new approvals from USA and Europe in the last year and is expecting robust business growth in these geographies. We have successfully tested new products in the market and expect to have a positive market response in the coming years. New products grades have been supplied to Indian companies and new government projects are likely to require these new product grades. The agrochemical market is expected to revive in the coming year which will lead to increased demand for our agro intermediates. CFS Europe SpA has been severely affected by the slowdown of the global diphenols market and subsequently decided to stop the diphenols production from August 16, 2023. The Company is evaluating a plan for reconversion of the diphenols plant to produce performance chemicals by using an alternative commercially viable route. To reduce the high fixed cost burden, many efforts have been dedicated to building the shelf life solution business in the region. Requisite instrumentation has been added to the facility and multiple custom projects are being explored for the coming year.

AROMA INGREDIENTS

Your Company launched Vanillin and Ethyl Vanillin in the domestic and international markets with focus on Flavour and Fragrance (F&F) and Food and Beverage (F&B) segments. The products faced stiff challenges on account of lower global demand and the predatory pricing by Chinese manufacturers.

Your Company successfully partnered with a major F&B distributor to gain ground in the segment. We have received positive responses from companies working in the flavours and fragrances segment, improving the outlook for the future. We are committed to improve and deliver the highest quality product in the market and strengthen our position in F&F, F&B as well as industrial (agro) markets to ensure robust business growth. The team is working closely with major customers to gain market share and support customers need. We are aggressively pushing Vanillin in the domestic market to ensure that we can gain optimum market share.

HEALTH AND WELLNESS

Your Company took systematic measures to improve production processes that resulted in superior yield of Algal DHA Oil. The improved manufacturing processes also aided the launch of higher grades of the product to provide a differentiated offering to the existing ones available in the market. We have partnered with multiple distributors working in the APAC region. The on-going crisis of availability of crude fish oil has increased demand for algal DHA biomass in the feed industry. Our proactive identification of the looming industry crisis helped us consolidate biomass production which now caters to established players in pet food and Aqua feed segments. Though the year posed several challenges from the supply chain ecosystem we are strategically well positioned for both geographic expansion and market penetration and anticipate significant growth in the market share in the coming year.

RESEARCH AND DEVELOPMENT

Your Company believes strongly in innovation and optimisation. New products, better yields, cleaner and greener processes are an integral part of our research and development endeavours throughout the year. Our new products are launched with not only an emphasis on boosting sustainability and protecting the environment, but also with a focus on cost reduction. The R&D activity in CFS Europe has been focused on new diphenols derivatives and on new feed additives. In 2024, an article based on a project conducted in collaboration with University of Florence has been published in "Italian Journal of Animal Science."

CUSTOMER SERVICE AND APPLICATIONS LABORATORY

Your Company strongly believes in involving the customer in our innovation and product development activities. Our team at the customer service and applications laboratory works tirelessly to ensure that we can build and maintain customer service standards par excellence. Working across our shelf-life solutions, animal nutrition, aroma and health and wellness verticals, the application lab creates innovative solutions catering to the specific needs of our customers. Product and prototype development, Product applications, Performance testing and sensory evaluation are ancillary services we provide at our lab. To facilitate the sale of our products, we provide technical support to the customers in the form of application protocols, dosage and usage guidelines, customer visits and demonstrations, product seminar, webinars and trainings to ensure that the customer is well-versed with the product and can optimise the usage as per their requirement.

It is our constant endeavour to achieve resource and cost optimization for ourselves as well as for our customers and the customer service and applications laboratory is a vital cog to do so.

HUMAN RESOURCES AND INDUSTRIAL RELATIONS

This year was all about our employees. Extensive efforts have been routed for development of Human Resources with focus on prioritising their physical and mental health to keeping them at the centre of multiple events conducted in the year. To encourage team building and bonding in the head office, we organised multiple sports tournaments. We organised leadership drives at our plants to promote the growth of hardworking employees and ensure recognition of the efforts. Taking pride in our Indian roots and culture, we organised multiple festive celebrations ranging from Republic Day to Diwali. Impetus was given to the employee feedbacks by organising surveys and considered their views on various matters related to investments, physical health and mental health. This ensured the provision of certain tailor made solutions for employee well being. Company will continue its endevour to value and develop the Human Resource as it remains the pivotal force for the business growth.

The total employee count as on March 31, 2024 was 624.

ESG INITIATIVES

With the effects of climate change proving catastrophic in many parts of the globe, the resource conservation, sustainability and reversal of the damage done to the environment are taking a front seat for the world. Working in tandem to achieve the above goals along with those of the company is vital for sustainable growth and development.

Our shelf-life solutions products address food and feed shortages by making adequate a scarce resource by preserving it for longer duration. The localised set up of our business, especially our local application laboratories, support local communities and resolve shelf-life challenges unique to the area they operate in. Reduced food loss and eased pressure on distribution and logistics, contributes to a healthy society. CFS business of manufacturing tailor made traditional/natural blends and additives for food safety and protection is in itself a huge initiative in promoting solutions for sustainability.

We also provide solutions for nutrition, health and hygiene of livestock to improve Food Conversion Ratio (FCR) and overall animal performance through the expansion of its Animal Nutrition Portfolio. The Companys comprehensive range of products, sanitization services and holistic health care approaches with antibiotic-alternatives would strive to create a thriving farm environment, which will have a positive impact on food chain, food security and human health.

At AlgalR Nutrapharms Private Limited, our subsidiary specialising in nutraceuticals, we have developed a range of sustainable products under the brand BioSus, using a proprietary fermentation technology. DHA, one of the Omega 3 fatty acids derived from microalgae is clean, vegan and with no harm to marine life. CFS aims to provide better feed and food by integrating natural and fermentation technologies. Marine biodiversity is under major threat and our sustainable and vegan solution promises to unburden the stress on marine life while providing similar benefits to the consumers.

By adopting the use of brickettes instead of coal as an energy source at our facility at Tarapur, we have reduced our carbon footprint significantly. We are constantly exploring multiple technologies to further improve out carbon footprint. While our products significantly contribute towards enhancing sustainability, we are now moving to transform our production and manufacturing processes towards being fully sustainable and environment friendly. CFS endeavour has always been to adopt a circular economy model, and this is being implemented across board.

We are on the cusp of a shift from brown power to green power in our Tarapur and Dahej plants. This not only also has a huge implication on the cost reduction, but also allows us to reduce our carbon emissions significantly. Deals are in place, and we will be signing them in the coming year to ensure we do our bit in conversing the planet.

Our strategic partnership with Lockheed Martin, a US based firm that delivers comprehensive solutions across the energy industry to include energy storage, demand management solutions, microgrids, military energy solutions, nuclear systems and bioenergy generation, is a project which promises to revolutionise the energy storage space. Current dominant technologies for storage and distribution of power such as pumped hydro ion and lithium ion cannot sufficiently provide a durable solution.

Their unique flow battery technology has the unique ability to address high-energy needs by cycling for ten or eleven hours on a sustained basis and is well suited for use even in emergency and unpredictable situations. It allows for maximising the utilisation of renewable energy due to its capability to store energy for a long duration.

Along with switching to more environmentally sound practices, we are now demanding the same from our vendors, alliance partners and employees as well. We are ensuring that the initiatives taken by the Company not only help us to not disturb the balance of nature, but also restore what has been lost so far. As a reward for their good work, CFS Europe SpA was awarded by Confindustria Romagna with the "Excelsa Award" In May 2023 for their activity on sustainability.

INFORMATION TECHNOLOGY

Our commitment towards digital excellence is outlined by continuous investment in information technology and digitisation. Your companys focus is on using its information power and consequently empowering its personnel for data driven excellence.

Continuous expansion of new infrastructure helps to automate complex workflows to build faster and leaner process which not only ensure adequate control, but also fulfil regulatory challenges. The strengthening of systems which is an on-going process. Aids in enhancing effectiveness and boosting productivity.

In the current year, your company has successfully deployed cybersecurity tolls for data monitoring, security, availability and infrastructure. These measures include firewalls, monitoring, compliance, encryption, testing and training.

The issue of business continuity and data protection is addressed with periodic disaster recovery drills. During our annual IT audit, periodic vulnerability testing is carried out by a third party agency to ensure that the company is protected from external threats.

Our Enterprise Resource Planning System also supports accounting and auditing procedures. It is capable of maintaining robust audit trails which support effective control procedures. The Scale up of IT in manufacturing processes is being planned to enhance and digitise the sales and operations planning which is expected to contribute to productivity optime costs. Human Resource Processes are being automated and digitised to increase productivity, responsibility, and well-being.

Your company endeavours to deploy technology for an optimised workflow platform, digitising systems and building agility.

RISKS AND CONCERNS

The Company is prone to various risks such as technological risks, strategic risks, operational risks, foreign exchange currency risks, health, safety and environmental risks, financial risks as well as compliance & control risks. These risks can have a material adverse impact on the implementation of strategy, business, performance, results, cash flows & liquidity, stakeholders value and of course reputation.

The company has a robust and effective governance structure consisting of risk owners, senior leadership, risk management committee, stakeholders relationship committee, Audit committee and Board of Directors thereby ensuring both bottom-up and top-down approaches. Risk management committee oversees and periodically reviews the risk and efforts in the operations of the company. Their review includes identification of key risks, their gradation and assessing the status of mitigation measures. Our approach to risk management is devised to provide reasonable assurance that its assets are safeguarded, and the risks faced by the business are being assessed and mitigated.

The Company continues to maintain a strategic approach to risk management and approaches it cautiously to reap its rewards and accelerate growth. The Companys expansion strategy includes expansion into various countries around the world. It is the risk handling ability of the Company which makes the difference.

Exposure to international markets exposes the business to currency risks. This risk has been mitigated by effective foreign exchange management policy along with judicial use of natural hedge provided by exports against its imports in view of the Company being the net exporter on the currency front.

As regards inflationary pressures and its impacts on the cost of manufacturing, it gets monitored regularly to ensure that they do not affect the operating margins of the Company. The Company continues with its efforts to improve its processes, yields and technological upgradation and also stresses on bringing about cost optimization.

INTERNAL FINANCIAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has an adequate system of internal controls in place. The system consists of documented policies, guidelines and procedures which cover all important financial and operating functions. These controls have been designed to provide a reasonable assurance with regard to maintaining of proper accounting controls for ensuring reliability of financial reporting, monitoring of operations, protecting of assets from unauthorised use or loss, and complying with regulations.

The Company consistently strives to improve its processes and align them with the highest standards. An established framework is in place to monitor the controls through the Risk Management Committee as well as the Audit Committee. The Audit Committee comprises Independent Directors who regularly review audit plans, significant audit findings, adequacy of internal controls, compliances with accounting standards and changes thereto. The Risk Management Committee reviews business risk areas covering operational, financial, strategic and regulatory risks.

The scope and authority of the Internal Audit function is approved by the Audit Committee. The company has engaged a reputable external-internal audit firm to support the internal audit function for carrying out the internal audit reviews. These reviews are conducted on a regular basis on a risk-based audit plan which is approved by the audit committee at the beginning of each financial year. The internal auditors review and report to the management and the audit committee about compliance with internal controls and the efficiency and effectiveness of operations as well as the key process risks.

The Audit committee meets every quarter to review and discuss the internal audit reports and follow up on the action plans of past significant audit issues and compliance with the audit plan. Our internal control system is further fortified by the steps taken to address risks and concerns referred under the section, "Risks and Concerns."

There have been no significant changes in our internal control over financial reporting that occurred during the period of the annual report that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. During the financial year, we have assessed the effectiveness of the internal control over financial reporting and have determined that the system was effective as on March 31, 2024.

FINANCIAL PERFORMANCE REVIEW

Members may refer to the section Financial Results in the Boards Report for the summary of financial performance of your Company.

Members may refer to Note 48 to the financial statement which sets out financial ratios of the Company.

The details of significant changes (i.e., change of 25% or more as compared to the immediately previous financial year) in financial ratios is as follows:

Particulars	Standalone		Percentage change	Reason for change
	2023-24	2022-23
Interest Service Coverage Ratio (Times)	0.82	3.16	-74.17%	Loss incurred during the year
Debt Equity Ratio (%)	0.69	0.94	-27.01%	Conversion of FCCBs during the year, leading to reduction in outstanding debt.
Operating Profit Margin (%)	6.77	17.39	-61.10%	Loss incurred during the year
Net Profit Margin (%)	-6.65	6.02	-210.32%	Loss incurred during the year

The details of return on net worth at standalone levels are as follows:

Particulars	Standalone		Percentage change
	2023-24	2022-23
Return on net worth (%)	7.31	21.38	-65.81%

Operating profit has reduced from Rs 13,731.76 Lakhs to Rs 5,232.68 Lakhs and the net worth has increased from Rs 64,214.16 Lakhs to Rs 71,571.40 Lakhs. Operating profit has reduced on account of losses incurred during the year. Share capital has increased from Rs 1,570.93 Lakhs to Rs 1,674.65 Lakhs on account of allotment of shares on conversion of FCCBs and allotment of ESOPs to the employees. Further, Other equity has increased from Rs 62,643.22 Lakhs to Rs 69,896.75 Lakhs mainly on account of securities premium due to allotment of shares on conversion of FCCBs and gain on conversion of FCCBs credited to other equity. Further, other equity is reduced on account of loss incurred during the year.

REFERENCES

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