Epigral Ltd Management Discussions

GLOBAL ECONOMY Overview

Global economic growth declined from 3.5% in 2022 to an estimated 3.1% in 2023. A disproportionate share of global growth in FY 2023- 24 is expected to come from Asia, despite the weaker-than- expected recovery in China, sustained weakness in USA, higher energy costs in Europe, weak global consumer sentiment on account of the Ukraine-Russia war, and the Red Sea crisis resulting in higher logistics costs. A tightening monetary policy translated into increased policy rates and interest rates for new loans.

Growth in advanced economies is expected to slow from 2.6% in 2022 to 1.5% in 2023 and 1.4% in 2024 as policy tightening takes effect. Emerging market and developing economies are projected to report a modest growth decline from 4.1% in 2022 to 4.0% in 2023 and 2024. Global inflation is expected to decline steadily from 8.7% in 2022 to 6.9% in 2023 and 5.8% in 2024, due to a tighter monetary policy aided by relatively lower international commodity prices. Core inflation decline is expected to be more gradual; inflation is not expected to return to target until 2025 in most cases. The US Federal Reserve approved a much- anticipated interest rate hike that took the benchmark borrowing costs to their highest in more than 22 years.

Global trade in goods was expected to have declined nearly USD 2 Trn in 2023; trade in services was expected to have expanded USD 500 Bn. The cost of Brent crude oil averaged USD 83 per barrel in 2023, down from USD 101 per barrel in 2022, with crude oil from Russia finding destinations outside the European Union and global crude oil demand falling short of expectations.

Global equity markets ended 2023 on a high note, with major global equity benchmarks delivering double-digit returns. This outperformance was led by a decline in global inflation, slide in the dollar index, declining crude and higher expectations of rate cuts by the US Fed and other Central banks.

Regional growth (%)	2023	2022
World output	3.1	3.5
Advanced economies	1.69	2.5
Emerging and developing economies	4.1	3.8

Outlook

Asia is expected to continue to account for the bulk of global growth in FY 2024-25. Inflation is expected to ease gradually as cost pressures moderate; headline inflation in G20 countries is expected to decline. The global economy has demonstrated resilience amid high inflation and monetary tightening, growth around previous levels for the next two years (Source: World Bank).

INDIAN ECONOMY

Overview

The Indian economy was estimated to grow 7.8% in the FY 2023-24 fiscal against 7.2% in FY 2022-23. India retained its position as the fifth largest economy. The Indian rupee has demonstrated resilience compared to the preceding year, outperforming many other Asian currencies. Since April 2023, it has experienced a 0.6% depreciation against the dollar, indicating its relative stability. This resilience is underpinned by the robust growth anticipated for the Indian economy, expected to reach 7.6% during the fiscal year 2023-2024 according to government projections. The rupee?s stability is strengthened by the country?s surplus in balance of payments.

In the 11 months of FY 2023-24, the CPI inflation averaged 5.4% with rural inflation exceeding urban inflation. Lower production and erratic weather led to a spike in food inflation. In contrast, core inflation averaged at 4.5%, a sharp decline from 6.2% in FY 2022-23. The softening of global commodity prices led to a moderation in core inflation.

The nation?s foreign exchange reserves surged to a record high of USD 645.6 billion as of March 2024 surpassing the previous high of USD 642.49 billion recorded in March 2023. The credit quality of Indian companies remained strong between October 2023 and March 2024 following deleveraged Balance Sheets, sustained domestic demand and government-led capital expenditure. Rating upgrades continued to surpass rating downgrades in H2 FY 2023-24.

UPI transactions in India posted a record 56% rise in volume and 43% rise in value in FY 2023-24.

Growth of the Indian economy

	FY 21	FY 22	FY23	FY24
Real GDP growth (%)	-6.6%	8.7	7.2	8.2

Growth of the Indian economy quarter by quarter, FY 2023-24

	Q1FY24	Q2FY24	Q3FY24	Q4FY24
Real GDP growth (%)	8.2	8.1	8.4	7.8

(Source: Budget FY24; Economy Projections, RBI projections, Deccan Herald)

India?s monsoon in 2023 hit a five- year low, with August marking the driest month in a century. Despite receiving only 94% of its long-term average rainfall from June to September, wheat production estimatedly recorded 114 Mn Tons in the 2023-24 crop year due to higher coverage. Rice production was anticipated to decrease to reach 106 Mn metric Tons (MMT) in comparison to 132Mn metric Tons in the previous year. Total kharif pulses produced in 2023-24 stood at an estimated 71.18 Lakh metric Tons, which is lower than FY 2022-23 due to climatic conditions. As per the first advance estimates of national income released by the National Statistical Office (NSO), the manufacturing sector output is projected to have grown 6.5% in FY 2023-24 compared to 1.3% in FY 2022-23. The Indian mining sector experienced an estimated growth of 8.1% in FY 2023-24 compared to 4.1% in FY 2022-23. Financial services, real estate and professional services grew a projected 8.9% in FY 2023-24 compared to 7.1% in FY 2022-23.

Real GDP or GDP at constant prices increased from to Rs 160.71 Lakh Cr in 2022-23 (provisional GDP estimate released on May 31, 2023) to an estimated H173.82 Lakh Cr in 2023-24. Growth in real GDP during 2023-24 stood at 8.2% compared to 7.2% in 2022-23. Nominal GDP or GDP at current prices was estimated at H295.36 Lakh Cr in 2023-24 as compared to the provisional 2022-23 GDP estimate of H269.50 Lakh Cr. The gross non-performing asset ratio for scheduled commercial banks improved from 4.1% as of March 2023 to 2.8% as of March 2024.

India?s exports of goods and services were expected touch USD 900 billion in FY 2023-24 compared to USD 770 billion in the previous year despite global headwinds. Merchandise exports were expected to expand between USD 495 Bn and USD 500 Bn, while services exports were expected to touch USD 400 Bn during the year. India?s net direct tax collection increased 17.7% to H19.58 Lakh Cr in FY 2023-24. Gross GST collection amounted to H20.2 Lakh Cr, marking an 11.7% increase, with an average monthly collection of H1,68,000 Cr, surpassing the previous year?s average of H1,50,000 Cr.

The agriculture sector was expected to see a growth of 1.8% in FY 2023-24, lower than the 4% expansion recorded in FY 2022-23. Trade, hotel, transport, communication and services related to broadcasting segment are estimated to grow at 6.3% in FY 2023-24, a contraction from 14% in FY 2022-23. The Indian automobile segment was expected to close FY 2023-24 with a growth of 6-9%, despite global supply chain disruptions and rising ownership costs.

The construction sector was expected to grow 10.7% year- on-year from 10% in FY 2023-23. Public administration, defence and other services were estimated to grow by 7.7% in FY 2023-24 compared to 7.2% in FY 2022-23. The growth in gross value added (GVA) at basic prices was pegged at 6.9%, down from 7% in FY 2022- 23.

India reached a pivotal phase in its S-curve, characterized by acceleration in urbanization, industrialization, household incomes and energy consumption. India emerged as the fifth largest economy with a GDP of USD 3.6 Trn and nominal per capita income of H1,23,945 in FY 2023-24.

India?s Nifty 50 index grew 30% in FY 2023-24 and India?s stock market emerged as the world?s fourth largest with a market capitalization of USD 4 Trn. Foreign investment in Indian government bonds jumped in the last three months of 2023. India was ranked 63 among 190 economies in the ease of doing business, according to the latest World Bank annual ratings. India?s unemployment declined to a low of 3.2% in 2023 from 6.1% in 2018.

Outlook

India withstood global headwinds in 2023 and is likely to remain the world?s fastest-growing major economy on the back of growing demand, moderate inflation, stable interest rates and robust foreign exchange reserves. The Indian economy is anticipated to surpass USD 4 Trn in 2024-25.

Union Budget FY 2024-25

The Interim Union Budget 2024-25 retained its focus on capital expenditure spending, comprising investments in infrastructure, solar energy, tourism, medical ecosystem and technology. In 2024-25, the top 13 ministries in terms of allocations accounted for 54% of the estimated total expenditure. Of these, the Ministry of Defence reported the highest allocation at H6,21,541 Cr, accounting for 13% of the total budgeted expenditure of the central government. Other ministries with high allocation included Road transport and highways (5.8%), Railways (5.4%) and Consumer Affairs, food and public distribution (4.5%).

(Source: Times News Network, Economic Times, Business Standard, Times of India, The Hindu Businessline, fxstreet.com)

SECTORIAL OVERVIEW

The Indian chemical industry offers diverse products encompassing bulk chemicals, specialty chemicals, agrochemicals, petrochemicals, polymers and fertilizers, totalling over 80,000 commercial items. India ranks fourth globally in agrochemical production, following the US, Japan and China. Moreover, it commands a significant share, approximately 23%, in the global dyes market, with the colorant sector playing a pivotal role. On the international trade front, India holds the 11^th position in exports and the 6^th in imports (excluding pharmaceuticals) within the chemical industry. The sector accounted for USD 210 Bn in 2023.

Contributing about 7% to the country?s GDP, the Indian chemical sector is a vital economic player. Despite facing challenges such as inflation, geopolitical tensions and supply chain disruptions, the industry demonstrated resilience, positioning India as the sixth- largest chemical producer globally and third largest in Asia. With favorable prospects ahead, the industry is poised to seize opportunities.

Specialty chemicals manufacturers are anticipated to invest around H8 Trn (equivalent to USD 107.38 Bn) by 2025, marking a substantial 50% year-on-year increase, propelled by long-term optimism. Revenue growth is projected at approximately 15% over the last five years, compared to the previous year?s 9-10%, driven by improved realizations and domestic demand.

Geographical proximity to the Middle East, a primary source of petrochemical reserves, offers cost advantages. The sector continues to deliver significant returns to stakeholders, underscoring its ability to navigate challenges and capitalize on strategic advantages.

(Source: IBEF, economictimes, livemint, trade.gov, investindia. gov.in, india-briefing.com)

CHLORINATED POLYVINYL CHLORIDE (CPVC) RESIN INDUSTRY OVERVIEW

In FY 2023-24, the demand for CPVC resin in India surged to approximately 2,30,000 Tons and is expected to witness double- digit percentage growth on the back of a growing construction sector. The global chlorinated polyvinyl chloride (CPVC) market was valued at around USD 1.6 Bn in 2023, with projections indicating it to reach USD 2.7 Bn by 2028, with an annual growth rate of 11.1% CAGR during the forecasted period.

The rising demand for CPVC pipes is notable in commercial and residential buildings, especially in applications like hot water pipes for apartments and commercial structures.

This growth is attributed to the favourable characteristics of CPVC pipes, such as corrosion resistance, ability to withstand high temperatures and superior thermomechanical properties. CPVC pipes are utilized for conveying hot and cold potable water, as well as in chemical synthesis and transfer.

The construction sector played a pivotal role in propelling the global CPVC market revenue in 2021, with India and China spearheading the growth in the construction industry. CPVC pipes offer a robust solution for plumbing in commercial and residential setups, given their capability to handle hot water and high pressure, unlike galvanized iron (GI) pipes, which are susceptible to rust and involve labour-intensive installation processes.

EPICHLOROHYDRIN INDUSTRY OVERVIEW

In FY 2023-24, the demand for Epichlorohydrin (ECH) stood at approximately 1,25,000 Tons, with expectations of double-digit percentage growth driven by India?s infrastructure spending.

Globally, the Epichlorohydrin market was valued at USD 2.89 Bn in 2022, with a projected compound annual growth rate (CAGR) of 6% from 2022 to 2029, reaching an estimated USD 4.35 Bn. The global Epichlorohydrin market is anticipated to reach around 3,300 thousand Tons by 2030, propelled by increased usage across various sectors such as construction, automotive, aerospace and water treatment chemicals.

Epichlorohydrin, renowned for its unique chiral structure and robust epoxy bond, serves as a versatile chemical utilized in the manufacturing of epoxy resin, glue, plastic, fumigants, solvents and explosives.

The demand for Epichlorohydrin is primarily fueled by its necessity in automotive and windmill pharmaceuticals and water treatment infrastructure.

The Asia-Pacific region leads the global Epichlorohydrin demand, commanding a significant market share of approximately 55% in 2022. This dominance is expected to persist, driven by rising demand from countries like China and India, rapid industrialization and the expansion of the consumer class.

(Source: databridgemarketresearch, thebrainyinsignts, maximizemarketresearch, chemanalyst)

GLOBAL AND INDIAN CHLOR-ALKALI INDUSTRY OVERVIEW

The global chlor-alkali market exhibited growth, rising from USD 79.98 Bn in 2023 to USD 86.26 Bn in 2024, with a CAGR of 7.9%. However, the near-term economic rebound from the COVID-19 pandemic was impeded by the Russia-Ukraine conflict, leading to economic sanctions, increased commodity prices, supply chain disruptions, inflation and global market ramifications. Despite these challenges, the chlor-alkali market is anticipated to reach USD 117.17 Bn in 2028, with an expected CAGR of 8.0%.

The expansion of the chemical industry globally is anticipated to act as a primary driver for the chlor-alkali market. This sector provides crucial industrial chemicals and foundational materials to various industries, including textiles, paint, paper, soap and detergent, pharmaceuticals and agriculture.

In 2024, China emerged as the leading region in the chlor-alkali market. In India, the chlor-alkali sector saw significant growth, with the total caustic soda capacity reaching 55.65 Lakh Tons in FY 2022-23. This capacity is projected to expand at a robust

CAGR of 6.47% by FY 2034-35, with the market volume for caustic soda estimated to reach 98 Lakh Tons by the same period.

Key highlights from the Indian chlor-alkali sector include:

- Exports exceeded imports for the third consecutive year.

- Imports declined to 1.35 Lakh MT (Y-o-Y decline of 33%), while domestic demand increased to 41.38 Lakh MT, marking a 4.2% rise over the previous year.

- Exports increased to 4.58 Lakh MT (34% Y-o-Y increase).

- Installed capacity reached 55.65 Lakh MTPA, representing about 5.5% of the global capacity. Despite an increase in production to 47.43 Lakh MT (an 8.3% rise over the previous year), capacity utilization reduced to 80%, mainly due to the addition of higher capacities during the year.

- Major consuming sectors for caustic soda include textiles (17.52%), alumina (14.69%), inorganics (12.99%), and pulp & paper (5.75%).

In India, the alkali and chlorvinyl segments are poised for growth, driven by factors such as growing middle-class, increased disposable incomes, low consumption penetration, and enhanced demand. Caustic soda, a key component, finds widespread application across various sectors, including paper and pulp, soap and detergents, alumina, pharmaceuticals, textiles, and in the synthesis of organic and inorganic chemicals.

(Source: researchandmarkets.com, chemanalyst.com, LinkedIn.com)

CHLOROMETHANES AND HYDROGEN PEROXIDE MARKETS

Chloromethane: In FY 2023-24, the demand for chloromethane (CMS) amounted to 6,15,000 TPA, consistent with the figure of 5,80,000 TPA recorded in FY 2022-23, while the capacity remained constant at 6,77,000 TPA. Anticipated growth in this sector suggests a double- digit percentage increase in demand. Globally, the demand for chloromethane is forecasted to reach USD 7.61 Bn by 2030, with a Compound Annual Growth Rate (CAGR) of 4.9% during the forecast period (2023-2030). Chloromethane plants yield various substances, including methyl chloride, methylene dichloride, chloroform and carbon tetrachloride, which are utilized in diverse applications. These products serve as solvents in pharmaceutical drug manufacturing, refrigerant gases, PTFE pipes and agrochemicals. Methylene dichloride, primarily demanded by the pharmaceutical industry at 91%, serves as a solvent and is utilized in foam blowing, aerosols, polycarbonate resins, adhesive formulations and as a key component in HFC 32, a widely used refrigerant in air conditioners.

Chloroform, contributing to 55% of its demand, is essential in the production of Tetrafluoro Ethylene, a crucial element in creating fluoropolymers such as nonstick coatings on cookware. Furthermore, chloroform is utilized in containers and pipes for storing corrosive chemicals. Approximately 25% of its total demand is attributed to the preparation of refrigerant gases like R22. Carbon tetrachloride acts as a raw material in the production of agrochemical intermediates.

Hydrogen Peroxide: The global hydrogen peroxide market, valued at USD 3.2 Bn in 2023, is anticipated to grow at a (CAGR) of 5.3% between 2023-2033, with a projected CAGR of around 10% for the upcoming year. By 2032, the global market is forecasted to reach USD 6.76 Bn, exhibiting a CAGR of 4.4% from 2024-2032.

This growth is driven by the rising demand for environmentally friendly solutions.

Hydrogen Peroxide, known for its eco-friendly properties, finds applications in deodorizing, bleaching, chemical processing, textile and pulp bleaching, cosmetics, waste treatment and catalyzing reactions. The Hydrogen Peroxide market is characterized by fragmentation across regions such as North America, Europe, Asia-Pacific, South America, the Middle East and Africa. North America is poised to witness rapid growth, fuelled by environmental concerns and technological advancements.

(Source: futuremarketinsights, imarcgroup)

INDUSTRY GROWTH DRIVERS

Increase in population: As of

2024, India?s population exceeded that of China, reaching an estimated 1.44 Bn, offering a favorable demand impact on the Indian chemical industry.

Urbanization: By 2035, India?s urban population is projected to reach 675 Mn, positioning it as the second largest globally after China?s one Bn urban residents. This surge is expected to drive demand for housing and pharmaceuticals in the country.

Demographic dividend: The median age of the Indian population stood at 28.2 years, in 2023 compared to the global median age of 30.5 years.

Growing replacement demand:

As economic conditions improve, leading to higher disposable incomes, there is a shift towards more modern lifestyles in the country, potentially increasing the demand for chemicals.

Increased consumption: India currently exhibits relatively low average chemical product consumption per capita, standing at USD 91, which lags considerably behind that of other developed nations. However, this figure is anticipated to see a significant rise over the next decade, driven by India?s strong economic growth, expanding middle class and urbanization.

Strategic partner: Over the last five years, there has been a notable shift in the emphasis of global chemical manufacturing away from China and developed nations towards more stable locations like India. This shift can be attributed to heightened global trade tensions, stricter environmental mandates, rising labor expenses in China and the repercussions of the COVID-19 pandemic.

Supplier shift: China?s chemical sector has experienced substantial transformations marked by industry consolidation, environmental initiatives and stricter financial regulations.

These changes have introduced greater uncertainty for businesses relying on Chinese suppliers for raw materials. Consequently, numerous companies have opted to transition their supplier networks to India, leveraging its affordable labour force and favourable investment regulations.

‘Plus one? strategy: Specialty chemical companies are poised to maintain their growth trajectory despite occasional fluctuations in margins. This growth is driven by strong domestic demand and heightened export activities, bolstered by the China-plus-one strategy embraced by major economies. Sales are projected to surge by over 20% until FY 2024- 25, surpassing the 17% demand surge witnessed in the sector between FY 2020-21 and FY 2021- 22. Indian manufacturers stand ready to benefit from this trend, seizing opportunities arising from plant shutdowns in Europe and expanding their market presence in a Europe-plus-one scenario.

(Source: The wire, Trading economics, PWC, IBEF, Amai India, Statista, economictimes. com, ciiblog.in, livemint)

COMPANY OVERVIEW

Established in 2007, Epigral Limited, previously known as Meghmani Finechem Limited, stands as a prominent integrated chemical manufacturer. The Company strives to meet Indian demand for essential chemicals responsibly and sustainably, the Company prioritizes significant growth while maintaining stringent standards of quality and environmental stewardship. Epigral operates an advanced automated production facility, adhering to international manufacturing norms to produce a wide array of products, including CPVC Resin, CPVC compound, Epichlorohydrin, Chlorotoluenes Value Chain, Caustic Soda, Caustic Potash, Chlorine, Hydrogen, Chloromethanes and Hydrogen Peroxide. With a focus on both domestic and international markets, Epigral actively contributes to the ‘Make in India? initiative, driving sustainable development for a brighter and safer future.

PRODUCTS

CPVC resin: Epigral commissioned its additional CPVC resin capacity by 45,000 TPA (on April 3, 2024), reaching a total capacity of 75,000 TPA (largest in India). This expansion was implemented at the Dahej complex, located near the raw material chlorine.

Chlorotoluene and value chain:

Epigral?s Chlorotoluene project and associated value chain will be implemented within the Dahej complex and will be the first in India to manufacture intermediates crucial for producing active ingredients utilized in the pharmaceutical and agrochemical sectors.

Epichlorohydrin: This transparent and colourless liquid is derived from a renewable source, glycerin, which is entirely bio-based. The product boasts exceptional purity levels exceeding 99.9%, minimizing the waste generated by end-users. A distinctive technology enables brine recycling and substantially diminishes liquid process waste. The product is used in the following applications:

Epoxy resin, water treatment chemicals, automotive, pharmaceuticals, paper reinforcement and infrastructure chemicals.

Chlor-alkali: The Company is a leading producer of Chlor-alkalis in India with a diversified related portfolio of Caustic soda, Liquid chlorine, Hydrochloric acid, Hydrogen gas, Sodium hypochlorite, Diluted sulphuric acid and Caustic potash.

Chloromethanes (CMS): The

Company manufactures Methyl chloride, Methylene dichloride, Chloroform and Carbon tetrachloride. CMS is used majorly in pharmaceutical, refrigerant, Tetrafluoroethylene (TFE), etc

Hydrogen peroxide: The

Company is the third largest producer of hydrogen peroxide (H₂O₂) with a diverse industrial application across sectors such as paper and pulp, textiles, effluent treatment and chemicals.

OPERATIONAL REVIEW

- Despite challenges, Epigral sales volume surged 15% in FY 2023-24.

- Derivatives & Specialty business witnessed an impressive growth of approximately 30% by volume, while the Chlor-alkali business grew 7%.

- Capacity utilization remained robust at 78%, consistent with FY 2022-23 levels.

- While facing market fluctuations, in FY 2023-24 Epigral managed to maintain a strong performance, with realizations for all products, albeit lower by 12% to 45%, showcasing resilience.

The more we produced, the less we consumed from external sources, strengthening margins

Product	Current capacity (TPA)	New/additional capacity (TPA)
Caustic Soda	4,00,000	-
Caustic Potash	21,000	-
Chloromethanes	50,000	-
Hydrogen Peroxide	60,000	-
Epichlorohydrin	50,000	-
CPVC Resin	30,000	45,000
CPVC Compound		35,000
Captive Power Plant (CPP)	132 MW	-
Chlorotoluene & value Chain		15,000
Wind-solar hybrid power plant	18.34 MW	-

FINANCIAL REVIEW

- During FY 2023-24, the revenue of the Company decreased to H1,936 Cr, a de-growth of 12% compared to FY 2022-23 on account of a drastic drop in realizations for all products

- EBITDA in FY 2023-24 stood at H481 Cr, a de-growth of 30% compared to H689 Cr in FY 2022- 23.

- The Company recorded a profit after tax (PAT) of H196 Cr in FY 2023-24 as against H353 Cr in FY 2022-23

HUMAN RESOURCE MANAGEMENT

Epigral upheld its leadership standing by implementing successful human resource strategies. The Company allocated resources to training, encompassing formal, informal and on-the-job learning, fostering an enriched work environment with challenging roles and consistent communication with the management. These initiatives resulted in one of the industry?s highest employee retention rates, enabling the development of leaders from within and enhancing future opportunities. As of March 31, 2024, Epigral Limited had a workforce comprising 996 employees. The Company recruited senior management professionals across various functions to support expansion plans.

INTERNAL CONTROL SYSTEMS

The Company has strong internal control procedures commensurate with its size and operations. The Board of Directors, responsible for the internal control system, sets the guidelines and verifies its adequacy, effectiveness and application. The Company?s internal control system is designed to ensure management efficiency, measurability and verifiability, reliability of accounting and management information, compliance with all applicable laws and regulations and the protection of the Company?s assets. This will help identify and manage the Company?s risks (operational, compliance-related, economic and financial)

CAUTIONARY STATEMENT

This statement made in this section describes the Company?s objectives, projections, expectation and estimations which may be ‘forward looking statements? within the meaning of applicable securities laws and regulations.