Chemcon Speciality Chemicals Ltd Management Discussions

ECONOMY OVERVIEW AND OUTLOOK

Global economic review

The global economy witnessed erratic trends during the past one year. Economic activity bounced back sharply in the year 2021, post the first COVID-19 wave, supported by pent-up demand and unprecedented policy support. However, two successive waves of COVID-19, persistent labour market challenges and continuing bottlenecks in global supply chains that have led to inflationary pressures, have subdued the prospects of a broad-based economic recovery. The latter part of the financial year also witnessed significant rise in geopolitical tensions followed by sweeping sanctions and logistical challenges.

The outlook is mixed with reopening of economies supporting greater demand coupled with challenges of Eastern Europe conflict having direct and global spill overs through commodity markets. In addition, there is the continued impact of lockdowns with new bottlenecks in global supply chains. Recent International Monetary Fund (IMF) Report projects global growth at 3.6% in the year 2022 and 2023, 0.8% and 0.2% lower than the January forecast, respectively.

Among the Emerging Market and Developing

Economies (‘EMDE’), China is expected to grow by

4.4% in calendar year 2022. India is expected to grow at the rate of 8.2% for calendar year 2022 and 6.9% in calendar year 2023.

 

Source: IMF World Economic Outlook April 2022

Indian economic review

Advance estimates suggest that the Indian economy is expected to witness real GDP expansion of 9.2 per cent in 2021-22 after contracting in 2020-21. This implies that overall economic activity has recovered past the pre-pandemic levels. Almost all indicators show that the economic impact of the "second wave" in Q1 was much smaller than that experienced during the full lockdown phase in 2020-21 even though the health impact was more severe.

The industrial sector expanded by 22.9 percent in the first half of 2021- 22 compared to the same period in the previous fiscal year, and it is expected to grow by 11.8 percent this fiscal year. The Reserve Bank of Indias Monetary Policy Committee (MPC) maintained an accommodative stance in order to achieve economic growth while keeping inflation under control.

INDUSTRY OVERVIEW AND OUTLOOK

Pharmaceutical intermediates Chemicals:

Pharmaceutical production needs a large number of specific chemicals that were originally produced by the pharmaceutical industry. However, with the expansion of social labour division and the evolution of production technology, the pharmaceutical industry could transfer the production of required pharmaceutical intermediates to chemical industries. Pharmaceutical intermediates are exquisite chemical products. The production of pharmaceutical intermediates has grown vastly in the international chemical industry. The growing pharmaceuticals industry is driving demand for pharmaceutical intermediates across the world. The pharmaceutical intermediates are produced on demand for bulk and custom productions. The global market of chemicals used as pharmaceutical intermediates was valued at about USD 27 Billion in 2019 and is expected to grow at a CAGR of 4% between 2020 and 2023.

Domestic consumption for chemicals used as pharmaceutical intermediates is dependent upon bulk drugs manufacturing (domestic consumption as well as captive consumption by integrated players). India is expected to witness a HMDS/CMIC demand growth of around 11% CAGR during 2019-2023 fuelled by increase of end use customers and growing population base who desire quality healthcare.

Oil well completion Chemicals:

The global market of Completion Chemicals is growing rapidly due to increased oil & gas exploration activities across the world. The segment is expected to register a CAGR of 5.5% from 2019 to 2023. based on factors such as continuous development of offshore reserves and rising deep water production.

With capital expenditure in oil production across the world expected to recover to 2014 levels by 2023, Chemcon, the leading manufacturer of Bromides in India, will have ample opportunity to cater to the global demand of Bromides by focussing on developing export markets and robust distribution channels.

COMPANY OVERVIEW

Chemcon Speciality Chemicals Limited ("the Company") is a Public limited company incorporated and domiciled in India. Its shares are listed on BSE Limited (BSE) and National Stock Exchange in India Limited (NSE). The Company is ISO 9001:2015 and ISO 14001:2015 Certified.

The Company is in production of pharmaceutical intermediates and Oil well completion Chemicals (Completion Fluids). The company is leading manufacturer of specialised chemicals, such as HMDS and CMIC which are predominantly used in the pharmaceuticals industry and inorganic bromides, predominantly used as completion fluids in the oilfield industry.

The Company is only manufacturer of HMDS in India and are the third largest manufacturer of HMDS worldwide in terms of production. The Company is the largest manufacturer of CMIC in India and worldwide, in terms of production and capacity. Further, The Company is only manufacturer of Zinc Bromide and the largest manufacturer of Calcium Bromide in India, in terms of production.

OPERATIONAL AND FINANCIAL OVERVIEW

The Company’s manufacturing Plant are located at

Manjusar, Vadodara in Gujarat. The Company has eight individual operational plants, along with six warehouses for storage of our products and raw materials. The Company has in-house laboratory to test raw materials procured and the products at various stages of the manufacturing process and for research and development of new product.

The Company has successfully initiated production of CMIC and TMCS at P8 facility at Manjusar. As a result, the Company has added the production capacity of 2,400 MTPA of TMCS and 1,200 MTPA of CMIC. The Company is now the largest manufacturer of CMIC in the world with a total capacity of 3,000 MTPA. The Company has started mechanical construction of two more plants at the same location for other pharmaceutical intermediate products which are expected to commence in next financial year.

We have a track record of operations of over two decades and have a strong balance sheet with stable cash flows. We have experienced sustained growth in various financial indicators, including our revenue and PAT. We have also seen consistent improvement in our balance sheet position in the last three fiscals, wherein we have witnessed an increase in our net worth.

The table below sets forth some of the key financial indicators for the FY 2021-22 and FY 2020-21 YoY basis:

Particulars	FY 2021-22	FY 2020-21	Growth Y-o-Y
Revenue from Operations	257.1	243.5	5.6%
Cost of Goods Sold	124.4	122.9
Employee Cost	19.1	15.9
Other Expenses	32.0	23.6
EBITDA	81.6	81.1	0.6%
EBITDA Margin %	31.7%	33.3%
Other Income	9.2	4.6
Depreciation	6.3	6.1
EBIT	84.6	79.7	6.1%
EBIT Margin %	32.91%	32.73%
Finance Cost	0.6	3.6
Profit Before Tax	84.0	76.1
Tax	21.2	19.7
PAT	62.8	56.4	11.3%
PAT Margin %	24.4%	23.2%
Basic EPS (In INR)	17.13	16.48

The Company’s revenue grew by 5.6% to INR 257.1 crore aided by improvement in volume & realisation.

Despite challenges due to raw material price volatility and the global supply chain, the Company’s EBIDTA grew from INR 81.1 crore to INR 81.6 crore, an increase of 0.6% on YoY basis. Profit after Tax (PAT) increased by 11.3% to INR 62.8 crore against INR 56.4, an increase of 11.3% on YoY basis.

KEY FINANCIAL RATIOS:

Sr. No. Particulars	FY 2021-22	FY 2020-21	% of Variance	Reason for Variance if above 25%
1 Debtors Turnover Ratio (times)	2.60	2.65	-1.69%	No Significant Changes
2 Inventory Turnover Ratio (times)	5.33	4.25	25.44%	Increase is primarily on account of reduction in Inventory and due to provision for Non- moving items as at March 31, 2022
3 Debt service coverage Ratio (times)	17.62	4.45	296.17%	Increase is primarily on account of lower outstanding borrowing due to prepayment of term loans in financial year 2020-21
4 Current Ratio (times)	4.84	7.08	-31.55%	Decrease is primarily on account of higher outstanding advances taken from Customers for supply of Goods and utilisation of Overdraft facility in financial year 2021-22
5 Debt Equity Ratio (times)	0.09	0.01	520.58%	Increase is primarily on account of utilisation of Overdraft facility in financial year 2021-22
6 Operating Profit Margin (%) (EBIT)	32.91%	32.73%	0.18%	No Significant Changes
7 Net Profit Margin (%) (PAT)	24.44%	23.19%	1.26%	No Significant Changes
8 Return on Net Worth (%	15.04%	15.95%	0.90%	No Significant Changes

HUMAN RESOURCES

FY 2021-22 saw a continued impact of COVID-19 on the work, family and social life of the employees. Safety, health & well-being of employees, their families and the community around us remained an immediate concern of the Company. Employee connects & communication attained high importance.

The Company believes that employees are the foundation for the superstructure of any corporate organisation. The Company considers its employees as its most significant asset and provides them with a healthy and competitive work environment to excel and set new standards of quality, productivity, efficiency and customer satisfaction.

The details of number of employees as on March 31, 2022, are provided in Business Responsibility Report which is annexed with the Directors’ Report.

INTERNAL CONTROL SYSTEM

The Company has in place adequate internal financial controls over financial reporting. It has adopted necessary policies and procedures for ensuring the orderly and efficient conduct of its business, including adherence to Companys policies, safeguarding of its assets, prevention and detection of frauds and errors, accuracy and completeness of the accounting records, and timely preparation of reliable financial information

The internal control system is supported by qualified personnel and a continuous programme of internal audit. The prime objective of such audits is to test the adequacy and effectiveness of all internal control systems laid down by the management and to suggest improvements.

KEY RISK AND CONCERNS

Risk management is a holistic, integrated, structured and disciplined approach to managing risks with the objective of maximizing shareholder’s value. It aligns strategy, processes, people & culture, technology and governance with the purpose of evaluating and managing the uncertainties faced by the organization while creating value. Risk Management is an essential element in achieving business goals and deriving benefits from market opportunities.

Chemcon has formulated an appropriate policy and established a risk management framework, the objectives of which are:

Embedding the management of risk as an integral part of the business processes

Establishing an effective system of risk identification, analysis, evaluation and treatment within all areas and levels of the Company

Avoiding exposure to significant financial loss Contributing to the achievement of the Company’s objectives; and

Accessing the benefits and cost of implementation of available options and controls to manage risk

The Company is exposed primarily to fluctuations in foreign currency exchange rates, interest rates, equity prices, liquidity and credit risk, which may adversely impact the fair value of its financial instruments.

Market Risk

Market risk is the risk that changes in market prices (such as foreign exchange rates, interest rates and equity prices) will affect the Company’s income or the value of its holdings of financial instrument. The objective of market risk management is to manage and control market risk exposures within acceptable parameters while optimising the return. The major components of market risk are foreign currency risk, interest rate risk and price risk.

Interest Rate Risk

Interest rate risk is measured by using the cash flow sensitivity for changes in variable interest rates. Any movement in the reference rates could have an impact on the Company’s cash flows as well as costs.

Credit Risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company has adopted a policy of dealing only with creditworthy counterparties as a means of mitigating the risk of financial loss from defaults. The Companys exposure and wherever appropriate, the credit ratings of its counterparties are continuously monitored and spread amongst various counterparties. Credit exposure is controlled by counterparty limits that are reviewed and approved by the management of the Company. Financial instruments that are subject to concentrations of credit risk, principally consist of balance with banks, trade receivables and loans and advances.

Liquidity Risk

The Company manages liquidity risk by maintaining sufficient cash and cash equivalents and availability of funding through an adequate amount of committed credit facilities to meet the obligations when due. Management monitors rolling forecasts of liquidity position and cash and cash equivalents on the basis of expected cash flows. In addition, liquidity management also involves projecting cash flows considering level of liquid assets necessary to meet obligations by matching the maturity profiles of financial assets & liabilities and monitoring balance sheet liquidity ratios.