Dharmaj Crop Guard Ltd Management Discussions

Economy Review Global economy

The global economy is gradually recovering from the downturn experienced in CY 2022, which was influenced by a range of challenges and heightened market volatility. Factors such as the Russia- Ukraine war, supply chain disruptions, and high inflation resulted in central banks worldwide raising interest rates, thus significantly impacting major economies. Inflation rates soared to multi-year highs in countries like the US and the UK, with the global average reaching 8.8% in CY 2022. However, inflation has since subsided to a considerable extent due to tightening monetary policies.

These events exerted downward pressure on market sentiment and economic activities, particularly in developed markets. Emerging markets and developing economies also experienced slower growth, partly due to Chinas stringent zero-COVID policy and the slowdown in the real estate sector. As a consequence, global economic growth declined to 3.4% in CY 2022 compared to the 6% growth observed in CY 2021. European economies, heavily reliant on Russia and Ukraine for their food and energy needs, suffered greatly from supply chain disruptions and an energy price crisis triggered by the war. This had a direct impact on the manufacturing sector, leading to production cuts. Growth in the Euro area stood at 3.5% in CY 2022. The US economy also felt the effects of high inflation and supply chain issues, resulting in a growth rate of 2%.

Outlook

Despite initial predictions of a global economic recession in CY 2023, the markets performed better than anticipated in the latter part of CY 2022 and Q1 CY 2023. During this period, inflation reached its peak in most countries, while consumer sentiments and spending improved. The relaxation of Chinas fiscal stance, coupled with the countrys efforts to stimulate its economy, bodes well not only for China but also for the global economy as a whole. As a result of these developments, global inflation is projected to decline to an expected 6.6% in CY 2023 and further to 4.3% in CY 2024. The global economic growth is estimated to be 2.9% and 3.1% respectively during these years. However, it is anticipated that the growth rate of the US economy will decelerate to 1.4% in CY 2023, while the Euro area is expected to experience a growth rate of 0.7%.

Indian economy

The Indian economy exhibited remarkable performance in FY23, surpassing global trends. Robust domestic demand, coupled with the outstanding performance of the manufacturing sector driven by the shift in global supply chains

and Indias pursuit of self-reliance, contributed to an estimated GDP growth of 6.8% in FY23. Notably, the countrys exports reached $750 billion, while GST collections rose by approximately 21% to ?18.1 trillion. In terms of inflation, India experienced a peak of 7.8% in April 2022. However, the Reserve Bank of India (RBI) implemented multiple rate hikes, resulting in an increase in repo rates from 4% to 6.5% by February 2023.

Outlook

As we enter FY 2023-24, the Indian economy continues to stand on a solid foundation, with the International Monetary Fund (IMF) projecting a growth rate of 6.1%. This growth is expected to contribute significantly, accounting for 15% of the global GDP growth. The governments strong policy decisions will serve as a catalyst for this growth, particularly its efforts to position India as a global manufacturing hub to attract investments. Furthermore, the increased allocation of ?10 lakh crores for infrastructure development will play a vital role in supporting economic expansion. These initiatives reflect the governments commitment to creating a favourable environment for sustainable growth in the Indian economy.

Industry Review Indian agriculture sector

The agriculture sector holds immense significance in India, as it supports the livelihoods of over 50% of the population and contributes nearly 16% to the countrys GDP. India has established itself as a leading global producer of various agricultural commodities, including rice, wheat, sugar, cotton, and horticulture, among others.

Despite facing challenges such as erratic and delayed rainfall, FY23 proved to be a favourable year for the Indian agriculture sector. According to the second advance estimates, the country achieved a record foodgrain production of 3,235.54 lakh tonnes, which is an increase of 79.38 lakh tonnes compared to the previous year. Additionally, all major crops witnessed record production levels, with rice reaching 1,308.37 lakh tonnes and wheat reaching 1,121.82 lakh tonnes. (Source: Ministry of Agriculture & Farmers Welfare Second Advanced Estimates) [AM1]

In FY23, India witnessed a notable increase in exports of principal agricultural commodities and processed food products (excluding tobacco, spices, cashew, and marine products). The exports rose by approximately 13% from $ 23.98 billion in FY22 to $ 27.88 billion. This growth can be attributed to the increased exports of rice, oil meals, and fruits and vegetables, which played a significant role in driving the overall export performance. (Source: Ministry of Commerce) [AM2]

Agrochemicals Industry Global pesticide industry

Segments of global pesticides industry and its outlook

(in $ billion)

Segments	2019	2020E	2024E	Outlook CAGR
Crop market
Herbicides	25	25	26	1.0%-1.2%
Fungicides	16	17	18	1.5%-1.7%
Insecticides	15	15	16	1.6%-1.8%
Others	2	2	2	1.9%-2.1%
Total crop market	58	59	62	1.3%-1.5%
Non-crop market	8	8	10	4.5%-5.0%
Total global pesticides market	66	67	71	1.6%-1.8%

The global pesticide industry has experienced consistent growth over the years and can be broadly categorised into herbicides, fungicides, and insecticides. According to the Royal Society of Chemicals, there are over 800 chemically active ingredients registered globally for use as crop protection solutions.

Among these segments, herbicides hold the dominant position due to the shortage of labour for mechanical weeding in developed countries and their ability to provide higher efficiency. In terms of regional markets, Asia Pacific is the largest market for agrochemicals, followed by Latin America, accounting for 30% and 29% of the market share, respectively. The growth in Asia Pacific can be attributed to the increasing awareness of crop protection products among small and marginal producers. The region is expected to continue its strong growth trajectory, driven by the expansion of land under cultivation for high-value, export- oriented crops, as well as the rising demand for crops to support a growing population.

Region-wise share of global pesticides market for 2020

($ billion, %)

The global pesticides market is projected to expand at a compound annual growth rate (CAGR) of 1.6-1.8% from $ 67 billion in FY20 to approximately $ 71 billion by FY24. All major segments, including herbicides, fungicides, and insecticides, are expected to follow a similar growth trend during this period. The herbicides segment is forecasted to grow at a CAGR of 1-1.2% to reach $ 26 billion by FY24, fungicides at 1.5-1.7% to reach $ 18 billion, and insecticides at 1.6-1.8% to reach $ 16 billion.

Indian pesticide industry

India holds a significant position as a major producer and exporter of agrochemicals globally. India is the 2^nd largest producer, led by the USA, Japan and China. Further, India is a net exporter of agrochemicals and has emerged as the 13^th largest exporter of pesticides globally. However, the per capita consumption of agrochemicals within the country remains relatively low at around 0.65 kg compared to 4.8 kg in the USA. This disparity can be attributed to the highly fragmented nature of agriculture in India, with numerous small and marginal farmers who have limited access to and utilisation of agrochemicals, resulting in lower productivity. Furthermore, approximately 20-25% of the total food produced in India is lost due to pests and diseases.

Considering the increasing population and the focus on improving the nutrition of the majority of citizens, there is a growing need to enhance agricultural yields through the usage of agrochemicals. The Government of India has actively promoted their use through various schemes and awareness initiatives.

As a result, the usage of pesticides in India has been steadily increasing. The market for pesticides and other agrochemicals in the country is expected to grow from $ 6.7 billion in FY21 to $ 7.9 billion in FY24, with a compound annual growth rate (CAGR) of 7 to 8%. Insecticides currently hold the largest market share at 55%, followed by herbicides at 23%, and this trend is expected to persist. The total output of pesticides is also projected to increase from 255 thousand tonnes in FY21 to 282 thousand tonnes in FY24.

(Source: CARE EDGE report)

As per CRISIL, the Indian agrochemical industrys revenues were estimated to grow by 15-17% [AM3] in FY23 and by 10-12% in FY24, as the country benefits from the China+1 strategy. Exports are expected to be one of the key contributors to this growth, accounting for over 50% of the total revenues. This was evident in FY22, with India remaining a net exporter of agrochemicals with an export of ?36,521 Crores [AM4] as against an import of ?13,363 Crores.

In terms of regional distribution, Maharashtra and Uttar Pradesh are the major contributors to the total chemical pesticides consumption in India, accounting for a significant share of 21.3% and 18.6%, respectively. Punjab and Telangana each held around 8% of the overall consumption. Haryana, West Bengal, and Jammu & Kashmir contributed in the range of approximately 5% to 6.5%. Rajasthan, Karnataka, Tamil Nadu, and Chhattisgarh held a share of around 2.5% to 4%. The remaining states and Union Territories (UTs) collectively accounted for 13.6% of the total chemical pesticides consumption during the year 2020-21.

State-wise share of pesticides consumption in India

(%)

Factors driving growth of Indian agrochemicals industry:

Rising food grains demand against declining arable land:

India, being one of the most populated nations, continues to experience rapid population growth. However, the availability of arable land for agriculture is declining. This situation necessitates the need to enhance productivity and yields in order to meet the rising demand for food grains.

Rising export demand:

There has been a notable shift in the global supply chain following the pandemic and the Russia-Ukraine war, with countries adopting the China+1 model. In this context, India ha: emerged as a favoured destination. The agrochemicals industry in the country has made significant progress in terms of quality and volume. Additionally, the restrictions on agrochemical manufacturing in China have created favourable conditions for the Indian agrochemicals industry.

Off-patent demand:

The expiration of patents for various molecules in the next two years, estimated to be worth $ 4 billion, presents significant export opportunities for domestic companies, as stated by CRISIL.

Government support:

The government has been supportive of the agrochemicals sector through various schemes that provide subsidies and credit facilities. Additionally, there has been an active effort to raise awareness about the benefits of agrochemicals. In the Union Budget 2023-24, the allocation for agriculture has been increased by 5% to 1.25 lakh Crores, which will further contribute to the growth of the sector.

Climate change and pest attack:

Climate change and pest attacks pose significant challenges to Indian agriculture. Around 20-25% of crops in India are damaged due to diseases and pest attacks, making the efficient use of agrochemicals crucial in preventing such losses. Furthermore, the increasing instances of floods, erratic rainfall, and delayed rainfall further add to the challenges faced by farmers. To overcome these challenges, it is necessary to provide farmers with better tools and support, including the use of agrochemicals.

Company Overview

Dharmaj Crop Guard Limited (referred to as Dharmaj, DCGL, or the Company) is a rapidly growing agrochemicals Company headquartered in Ahmedabad. The Company is involved in the manufacturing, distribution, and marketing of a wide range of agrochemical formulations including insecticides, fungicides, herbicides, plant growth regulators, and micro fertilisers. These products are supplied to both B2B customers (institutional customers in India and internationally) and B2C customers (farmers through dealers and distributors).

Sales to B2B customers are conducted in bulk through customer orders, while B2C sales are made under the Companys own brands. Dharmaj has recently diversified into the manufacturing and sale of general insect and pest control chemicals for public health and animal health protection.

With a total of 490 registrations for agrochemical products, including 200 exclusive registrations for export markets, Dharmaj has established a strong presence in the industry. The Company has also obtained 10 Technical registrations, with 14 more currently under registration. Dharmaj has built robust formulations manufacturing capabilities and operates a manufacturing plant located in Kerala GIDC, Ahmedabad. The plant has a total capacity of 25,500 MT for formulations manufacturing.

Additionally, the Company has a NABL accredited quality control lab and a dedicated R&D centre on site at Kerala GIDC.

Dharmajs products have gained significant market acceptance. The Company serves over 730 institutional customers and its branded products are sold across 20 states in India through a network of more than 4,500 dealers and distributors, reaching over 13,500 retail touchpoints. Internationally, Dharmaj has a presence in 26 countries across Latin America, East Africa, the Middle East, and Far East, catering to over 70 export customers.

In order to further expand its operations and strengthen its position in the industry, the Company is in the process of setting up a new plant in Sayakha, Gujarat. This plant will focus on manufacturing agrochemical active ingredients and their key intermediates. With a production capacity of 8,000 TPA, this venture into the active ingredients segment will enable Dharmaj to become a fully integrated player across the agrochemical chain. This backward integration strategy is expected to enhance profitability and reinforce the existing formulations business while serving as a new growth driver for the Company. Furthermore, it will provide opportunities for Dharmaj to enter the public health and animal health segments on a larger scale.

Financial Review Performance Discussion

The Company delivered resilient financial performance in FY23 despite external and macro challenges in the agrochemical industry. Revenue from Operations for the year reached an all time high of ?5,336 million, as compared to ?3,942 million in FY22, registering an increase of 35% year on year. Profitability margins compressed to an extent, with slight reduction in Gross Margins from 20% in FY22 to 18% in FY23. Subsequently, EBITDA margins also registered a decrease from 11% in FY22 to 9% in FY23. Couple of factors led to suppressed profitability margins, in H2FY23, the Company witnessed an average 25% reduction in sales realisation in line with the industry trend, this coupled with higher operating costs on account of a growing sales team and higher thrust on sales promotion and marketing expenditure led to the impact on profitability. With the business kicking in from newer markets in the coming financial year, coupled with business growth in general, we rationalize of these expenses and thus better profitability. Our Net Profits for the year stood at ?331 million, as compared to ?287 million in the previous year, thus registering a growth of 15% over the previous year.

Outlook

Profit & Loss Statement

(in ? million, unless specified)

Particulars	FY22	FY23	YoY Change
Revenue from Operations	3,942	5,336	35%
Total Income	3,963	5,381	36%
Gross Profit	799	956	20%
Gross Profit Margin (%)	20%	18%	(236 BPS)
Operating Expenses	356	482	35%
EBITDA (Excluding OI & EI)	443	474	7%
EBITDA Margin (%)	11%	9%	(21%)
Finance Cost	26	23	(11%)
Depreciation & Amortisation	53	51	(4%)
Profit Before Taxes (and EI)	385	445	15%
Profit After Taxes	287	331	15%
Profit After Taxes Margin (%)	7.24%	6.15%	(15%)
Earnings Per Share (?)*	11.62	12.03

EPS not annualised

Financial Ratios

	FY22	FY23	Deviation	Remarks
Debtors turnover	5.20	5.77	10.91%	-
Inventory turnover in days	31.80	34.55	8.65%	-
Current ratio	1.44	3.62	151.28%	Due to unutilized IPO proceeds held as fixed deposit having maturity of less then 12 months as at 31.03.2023.
Debt:equity	0.43	0.16	(62.50%)	Due to repayments of Short term and long term borrowings and also increase in equity & securities premium amount on account of IPO.
Return on equity %	34.64	10.31	(70.25)	Increase in share capital and securities premium on account of IPO.
Net profit ratio %	7.28	6.21	(14.73%)	-
Return on capital employed %	32.87	12.34	(62.47%)	Increase in share capital and securities premium on account of IPO

While the immediate outlook for the Indian agrochemicals industry remains challenging driven by a number of short-term factors such as higher inventories, destocking throughout the trade channel, declining prices of agrochemicals and raw materials, coupled with subdued demand from various international markets; the long term drivers for the industry remain intact. Being driven by the increasing need to enhance agricultural output, combat crop damages caused by diseases and pest attacks, and support a growing population. Dharmaj will benefit from these factors, with its branded formulations and institutional formulations gaining traction in both domestic and international markets.

In the branded formulations business, the Company is focused on constantly expanding and refreshing its portfolio and strengthening its brand equity through dedicated engagement initiatives with farmers and dealers and aggressive demand generation activities. It aims to deepen its presence in existing markets and explore opportunities in new markets, like the 6 new states added in FY23.

For the international formulations business, Dharmaj is committed to improving cost- efficiencies to reinforce its market positioning. This includes backward integration by establishing a dedicated plant for manufacturing Agrochemical Active Ingredients and Intermediates. This strategic move will enhance the availability of raw materials and generate cost savings, strengthening the formulations business. The Company has also increased engagements with domestic and international customers to secure new business opportunities. Additionally, the products manufactured through this integration will create possibilities for product development in the public health and animal health sectors. Dharmaj is actively working on expanding its product registrations in international markets, including preparing for expansion in Brazil and other Latin American Markets.

Overall, Dharmaj Crop Guard Limited is well-positioned to capitalise on the growth opportunities in the agrochemicals industry, leveraging its strong presence in both domestic and international markets while focusing on portfolio expansion, cost-efficiency, and customer engagement initiatives.

Risk Management

Dharmaj Crop Guard Limited acknowledges the presence of risks in its business and proactively assesses, monitors, analyses, and mitigates them. Here are the key risks identified by the Company and their corresponding mitigation strategies:

Demand risk

A weak macro-economic environment and erratic or delayed monsoons can lead to low demand for agrochemicals.

Mitigation: Mitigation measures include constant monitoring of the industry situation, pro-active client engagements, and closely following climate forecasts. The Companys diversified operations across products, customer segments, and geographies help mitigate dependence on any single revenue area.

Quality risks

Inability to maintain stringent quality standards can result in loss of customers, damage to brand reputation, and regulatory fines.

Mitigation: The Company mitigates this risk by placing paramount importance on quality. Its plants are equipped with a NABL accredited quality control laboratory with advanced instrumentation & testing equipment. The Company monitors every step of the manufacturing process from procurement to final dispatch, ensuring high standards of quality. Dharmajs operations are also ISO 9001:2015 certified.

Competition risk

Competition from domestic and international players can impact the Companys business and market share if it fails to provide high-quality, high- performing products, maintain supply reliability, and launch innovative solutions.

Mitigation: Mitigation strategies include consistently launching quality products, meeting evolving customer needs, focusing on cost reduction to ensure competitive pricing, expanding the customer base through promotional activities, and strengthening relations with farmers and dealers. The Company has established a portfolio with 121+ brands and 350+ SKUs. The Company also focuses on innovative launches each year, which drive demand generation and profitability at the portfolio level for the Company.

Inventory management risks

The Company always needs to maintain optimised inventory levels to ensure it can meet demand rapidly while also preventing a situation of holding high inventory levels which involves costs and the risk of inventory write-offs. The Company further needs to effectively forecast demand of the right products, to plan production accordingly.

Mitigation: To mitigate the risk associated with inventory management, Dharmaj Crop Guard Limited implements a strategic approach to maintain minimal levels of finished goods inventory. The Company adopts lean principles in its formulation operations, ensuring efficient resource utilisation. Furthermore, Dharmaj carefully manages inventory for volatile and high-value raw materials, preferring to maintain limited quantities. Conversely, for less volatile and lower-value raw materials, the Company may opt for longer-duration stock. Production planning is conducted periodically, allowing the Company to adjust schedules and volumes based on actual orders received and industry outlook. By implementing these proactive measures, Dharmaj optimises inventory levels, minimises holding costs, and effectively meets customer demands.

Employee risks

The agrochemical business requires skilled talent, and employees play a crucial role in maintaining relationships with the dealer network. Inability to attract or retain the right talent can impact operations and lead to business losses.

Mitigation: Mitigation measures include programs for health, safety, learning, and development, ensuring fair remuneration, providing periodic training, and maintaining a stable key managerial team. DCGL is proactively working on skill enhancement programmes for employees. These initiatives have increased employee satisfaction, motivation, and reduced attrition levels.

Safety, Health and Environment

Ensuring the safety of individuals, communities, and the environment is of utmost importance to Dharmaj Crop Guard Limited. The Company upholds world-class safety standards within its manufacturing facility, maintaining a track record of zero accidents at the manufacturing facility in FY23. Stringent measures are in place, including the establishment of comprehensive health and safety guidelines that mandate the use of safety equipment. Dharmaj also emphasises workplace cleanliness and orderliness to prevent accidents, coupled with robust accident reporting protocols.

To further enhance safety preparedness, the Company provides training on fire safety and conducts regular safety drills. A dedicated health centre is available at the manufacturing facility, with our own ambulance and regular health check up for all employees to address daily health concerns, minor injuries, and periodic checkups. Dharmaj also prioritises the security of its workers at the factory and its employees at different locations by providing them with insurance coverage.

In terms of environmental safety, the Company strictly adheres to all relevant environmental regulations. It has implemented a soil bioreactor wastewater treatment plant at its facility, ensuring the removal of pollutants and effective treatment of wastewater and sewage before discharge. Additionally, Dharmaj has made significant investments in solar panels, boasting a capacity of 85,320 KW per annum. This commitment to renewable energy sources contributes to a reduction in conventional energy consumption, promoting environmental sustainability.

Human Resources

Employees are a key resource, and the Company places great importance on their growth, development and well-being. Learning and development is an important focus area for the Company. Technical training was conducted for the workers. Further, the Company also undertook soft skills training sessions for the engineers and workers. During the year, the Company undertook various training programmes towards this, including fire and safety drills, workshops on Microsoft Office, free health checkups, offsite programs, among others

As on March 31, 2023, the Company had a total of 409 employees, including 326 permanent & 83 contractual workers. It maintained cordial relations and there were no issues with the labour unions.

Information Technology

Dharmaj has been effectively using digitisation initiatives and technology to enable it to bring more efficiency in its operations and empower its dealer network. The Company has invested in robust ERP systems to power critical processes like sales, finance, human resources, manufacturing, supply chain and order management among others.

It is enabling the Company to achieve improved visibility of operations, make informed decisions with analytics, and also bring more efficiency across various functions. The system provides the Company with real-time information across departments, empowering it to make data-driven decisions, manage performance and take corrective actions. It is also helping the Company bring more transparency and accountability in operations.

To support the dealers, the Company has developed a mobile application. It has features like order, payment and billing management, accounting reports and sales analysis that enable dealers to operate with better efficiency.

Internal Control Systems and Adequacy

The Companys internal financial control framework is aligned with the regulatory requirements of its industry and is commensurate with the size and nature of its business. Dharmaj has in place well-defined processes, systems and policies to safeguard its assets and ensure business continuity. The Company has also implemented ERP systems towards automating control transactions. The Internal Audit function undertakes the responsibility of determining the efficacy of controls on a regular basis. All reports are submitted to the Audit Committee for further actions.

409

Total Employees as on March 31, 2023

Cautionary Statement

Statements in the Management Discussion & Analysis describing the Companys objectives, projections, estimates and expectations may be forward-looking statements within the meaning of applicable laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operations include among others, climatic conditions, economic conditions affecting demand- supply and price conditions in the domestic and overseas markets in which the Company operates, changes in the Government regulations, tax laws and other statutes and other incidental factors.

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