Sumitomo Chemical India Ltd Management Discussions

1. ECONOMY AND CROP PROTECTION INDUSTRY STRUCTURE & DEVELOPMENTS:

Global economy is struggling with inflationary pressure. US Federal Reserves policy of heightened interest rate for curbing inflation – emulated by central banks of almost all other countries – has led to slowdown of global economic growth. Indian economy has shown remarkable resilience in the face of global economic slowdown and has emerged as the fastest-growing major economy in the world.

Agriculture is of immense importance for India and is a major pillar of its economy. This sector provides employment to about 50% of its workforce and accounts for about 15% of the GDP. Food security adds to importance of the sector for the country with the largest and still growing population. Fortunes of agrochemical industry, including the crop protection industry, are closely knit and interwoven with the agriculture sector.

The Indian crop protection industry (hereinafter referred to as “the agrochemical industry / industry”) is highly diverse. It has players who are small and medium in size dealing in generic off-patent molecules. It has players who are large multinationals with high-priced new generation and patented molecules. The industry has players who manufacture only technical grade pesticides. A large number of small players is pure formulator. The industry also has some players who produce both – technical grade pesticides and formulations. There is an ancillary segment which manufactures intermediates for technical grade pesticides. India is the fourth largest producer of agrochemicals in the world -after USA, Japan and China. The Indian agrochemicals industry was valued at around USD 5.72 billion in the financial year 2020-21, almost equally accounted for by domestic consumption (approximately USD 2.72 billion) and exports (approximately USD 3.00 billion). It is expected to grow at a CAGR of 8–10% till 2025. The Indian industry has two major advantages - relatively low manufacturing costs and the ability and expertise in efficient handling of hazardous products and processes. India has emerged as a large exporter of crop protection products. Availability of technically trained manpower, seasonal domestic demand and production capacities for generics built to cater to overseas markets are the other reasons for strong exports. India has been attracting multinationals due to good domestic growth opportunities. Domestic segment has been witnessing a steady increase in acceptance of new generation molecules.

The Indian agrochemicals market is driven by the countrys rising population. The demand for food is increasing whereas the landmass available for farming is gradually decreasing due to increasing urbanization. This provides impetus for the farmers to use efficient and safe agrochemicals to increase crop productivity and to protect soil health.

Increasing demand for more nutritious food and for fruits and vegetables is giving rise to demand of better and different crop protection solutions. As per a Government of India publication, the total area under cultivation in India in 2020-21 was 188.595 million hectares out of which 147.349 million hectares was covered by chemical and bio-pesticides. However, a large part of the cultivated land area is un-irrigated and entirely monsoon dependent. Additionally, small land holdings and continued fragmentation of land holdings affect economies of scale and come in the way of adoption of farm mechanization and advanced cultivation techniques.

R&D for developing new molecules requires high investments in terms of capital, efforts and time. Active ingredients, that are scheduled to lose global patent protection in the near future, offer good growth and expansion opportunity for the domestic industry.

New product launches, mergers and acquisitions, partnerships and collaborations and manufacturing expansion are the major strategies adopted by the leading industry players. They also focus on investment in innovations to increase market share. With new product launches, the industrys growth is expected to continue in the coming years. Of late, there has been focus on ‘Natural Farming with a view to minimize the use of synthetic chemicals in farming. This, however, is unlikely to have significant impact on the agrochemicals industry in the near future.

Government has been taking several initiatives for boosting farm sector growth. Some of the ambitious steps taken by the Indian Government to revive the role of agriculture in the growth of the Indian economy, including increasing minimum support price (“MSP”), launch of eNAM portal and direct benefit transfer via PM Kisan Samman Nidhi, have created a robust foundation to enhance farmers income and encourage wider adoption of high quality agri-inputs.

The government has also taken steps in the areas of soil health and crop insurance. In the recent budgets, large fund-allocation has been made for this sector. Decent MSPs for major agriculture produces also aims at improving farmers economic conditions. All these auger well for farming sector and all agri-input businesses.

Food security concern, public policy for maintaining buffer food-grain stock to alleviate food shortage and food inflation situations also give boost to agriculture. Supply of free ration to a large section of population, which began during Covid pandemic period, has since been further extended, also calls for maintaining and increasing food-grain production. Lately, the industry is moving towards safe and environment-friendly products promoting sustainable agricultural practices. The Company is one of the leading players which has a balanced portfolio of technical as well as formulation products along with backward integration for some molecules. The Company has strong portfolio of generics as well as specialty products and a strong marketing network and counts as a leading Indian crop protection company. The Company is one of the few entities who have both chemical and biological products in its portfolio. The Company also has plant and crop growth regulators and nutrients in its product basket.

The Company has presence in all the product segments - insecticides, weedicides, fungicides, fumigants and rodenticides, plant growth nutrition products, bio-rationals and plant growth regulators.

The Company is engaged in domestic marketing of proprietary products of its Japanese parent – Sumitomo Chemical Company, Limited - in agrochemicals, animal nutrition and environment health business segments. The Company also distributes products manufactured by Valent Bio-Sciences, an USA based affiliate, in the domestic market.

The Company continues to identify and introduce environment- friendly products which support farm eco-systems, enhance yield and improve quality of farm produce and at the same time maintain soil fertility in a sustainable manner. The Company undertakes extensive work at the grassroots level to showcase long term benefits of these products and sustainable cultivation practices in order to encourage the farmers to adopt new concepts.

The Company is also into public health and animal nutrition businesses – currently these are comparatively small businesses. The Companys business engaged in catering to household insecticides players in the country is expected to grow at over 10% in the coming years. The growth of household insecticides market is driven by increasing awareness about health and hygiene, growing incidences of insect-borne diseases like malaria and dengue, growing demand for professional pest control and ‘Swatch Bharat initiative of the Government of India. The animal nutrition business, which caters to the countrys animal feed market, also has good growth potential.

2. RISKS, THREATS AND CONCERNS:

With increasing fragmentation of farmland holdings, there is a need to improve productivity of small and marginal farmers through education, training, skill development and technology. There is need to focus on crop diversification - the existing cropping pattern is skewed towards cultivation of sugarcane, paddy and wheat, which has led to depletion of fresh groundwater resources at an alarming rate in many parts of the country. Crop diversification will promote sustainable agriculture and higher income for the farmers. Cultivation of oilseeds, pulses and horticulture needs to be given priority by addressing the core issues of irrigation, investment, credit and markets. MSP for crops like wheat, rice, soybean and cotton distort cropping pattern. Farmers tend to play safe by cultivating these products and completely ignoring market demand for other produces including vegetables and pulses. While the Central Government and few state governments are systematically encouraging crop diversification, there is also a need for coordinated simultaneous action from the state governments to facilitate the shift to high value and low water-consuming crops, especially fruits and vegetables, which are gaining market share. This will go a long way in realising the objective of doubling farmers income in a sustainable manner. Increasing cost of agri-inputs and farm labour and low awareness and adoption of technology pose crucial challenges to the Indian farmers, apart from inevitable seasonal threats like pest attack and uncertain monsoon and unstable climatic conditions.

Inadequate irrigation facilities, slow technology adoption, complexity of agri-produce marketing and low spending power are the key challenges. Farmer continues to bear the entire risk in the marketing cycle of farm produce. High volatility in produce price, rising costs of production and resource crunch affect his income. This also impacts his ability and willingness to adopt better agri-inputs, practices and technologies creating a ripple effect on the industry as a whole. The risks and the problems faced by the farming community rub on the agrochemicals industry as well. While the union and state governments have launched several initiatives aimed at improving farmers well-being, it will take time for the benefits to become visible at the ground level. Till then, the inherent problems of Indian farming seasonal production glut, non-remunerative produce prices, slow adoption of advanced technology and practices and skewed benefits of policy framework will continue to adversely

Global warming and climate change is leading to erratic rain patterns and extreme weather conditions like abrupt escalation of temperatures, unseasonal rains and weather instability. These impact yields and quality of crops in a big way and have ripple effect on the industry.

China, a major supplier of raw materials and intermediates to the industry, is also the largest producer of technical grade and formulated pesticides. It continues to pose potential threat to the industry with its opaque policies on production, pricing, exports, legislative and environmental policies and forex moves. Indian industrys dependence on China for sourcing critical raw materials and intermediates is an area of concern. The ‘Make in India and ‘Vocal for Local initiatives of the Government of India are prompting and helping indigenous manufactures to come forward and increase domestic production as also initiate process for setting up facilities for producing these raw materials and intermediates in India. The Agrochemicals industry is considered as a champion sector under ‘Make in India. However, the Government is yet to extend ‘Production Linked Incentive (PLI) Scheme to the pesticides industry though there is strong case for the same. Counterfeit, spurious, fake and illegally imported pesticides sold cheap in domestic market pose a threat for the industry.

They account for a significant market value and harm not only the domestic industry but also cause immense crop losses to farmers. Recently mandated requirement for printing ‘QR Codes on pesticides packages can be expected to mitigate this threat to a significant extent over a period of time.

Continued emphasis on organic / natural farming in Government policies and by a section of policy influencers is a cause of concern. Organically-produced food and crops do have a niche market. It can, however, not cater to the demand of the masses that need reasonably-priced food in larger quantities. India used to produce about 51 million tons of food in 1950 on about 131 million hectare land – largely through organic farming. Presently it produces over six times as much using more or less same landmass – thanks to seed technology, improved irrigation, chemical fertilisers, pesticides and progressive farm practices and technology. One cannot feed massively increased population through organic farming. Sri Lankas recent experiment with chemical-free agriculture is a lesson for all. Regulatory risk remains high for this industry. Product registration process is complex, expensive and time-consuming. This, however, also shields against potential competition and acts as entry-barrier for new players. Regulatory overenthusiasm, at times prompted by vested interests, is capable of destabilising the industry.

The Government move on Glyphosate use is a case in point. The Central Governments notification issued in 2022, mandating use of Glyphosate only through registered pest control operators, is a looming threat for the industry. Glyphosate, a broad spectrum weedicide, is being safely used by farmers for decades. The industry associations have filed petitions against this government move before the Honble Delhi High Court and its implementation is kept in abeyance till the final disposal of the petitions.

Government move to phase out / restrict use of several old generic pesticides is likely to deprive marginal farmers of the cost-effective crop protection products. As per an industry source, these products also account for a large share in the countrys pesticides export and this move will likely hit exports significantly. Fortunately, though the Company deals in these products, their value is insignificant. Over the years, genetically modified (GM) crops have gained acceptance across the world. The Indian regulators have restricted these crops in India citing need for additional review and studies on the suitability of these varieties in the Indian context. However, on the whole, GM crops present challenge and threat to the industry in the long run. The industry is working-capital intensive in nature. The Indian industry has large imports as well as exports. Drastic movement in foreign exchange market affects the business dynamics of the industry and need to be managed efficiently.

3. OPPORTUNITIES AND INDUSTRY OUTLOOK:

Agriculture and the allied sectors continue to remain central to Indian economy owing to its share in the countrys GDP and more importantly, because it is a source of livelihood for almost 50% of the countrys workforce. In the recent years, farm production gained new highs though agriculture sectors growth rate remains sluggish. The agrochemical industry continues to meet growing farming needs.

Indias agriculture productivity is way below the global standards and needs big ramp-up. With increasing phenomena of urbanisation and industrialization, arable land availability has been reducing over the years. This is encouraging farmers to use more pesticides in order to improve crop yields.

India is uniquely placed in terms of proportion of area under agriculture to overall geographical area. Almost half of its geographical area is under cultivation unlike 10-25% in case of most other countries. If its agriculture productivity levels are lifted, it can become major food supplier to the world – against its current share of 2-2.5% in agri-exports. Indian farmer loses around 20-25% of the production to pests and diseases. The 37th Standing Committee of the Ministry of Chemicals and Fertilizers estimated that every year, Indian farmers lose nearly 900 million to pests and diseases. This is where pesticides play a vital role in a farmers life. As per the available FAO data, consumption of agrochemicals in India is very low (0.6 kg/ha) as compared to agriculturally advanced countries like China (13.1 kg/ha), Japan (11.8 kg/ha), Brazil (6kg/ha) and USA (2.5 kg/ha). This points to enormous growth opportunities available to the industry in the domestic farming. With rising income levels, Indian spends on fruits and vegetables are increasing. Consumer is willing to pay for high dietary and nutrition products. The value of horticulture production in the country now exceeds that of cereals produced.

Increasing demand for better quality and nutritious food has opened opportunity for different category of products like fungicides, plant growth promoters / regulators and nutrients. These product segments are witnessing steady rise.

These are high priced and more profitable in comparison to traditional crop protection products like insecticides.

The ‘China + one procurement model has been a key tailwind for the Indian industry as several large overseas customers are diversifying their supplier base. This is expected to lead to exports growing at about 15% in the near future. The share of exports in overall domestic industrys revenue is expected to rise further. Introduction of ‘Production-linked Incentive (PLI) Scheme, for the industry can further promote exports. In the export market, demand remains robust, given the need for food security. Given the cost advantage, the domestic agrochemicals industry has good opportunity to gain considerable share in global markets and more so as the customers are looking to diversify their supplies away from China. The industry is also trying to engage in backward integration for manufacturing technical grade products as it would like to shift its reliance away from China and become self-sufficient in the coming years.

Drone technology for application of agrochemicals for precise dosage of chemicals on crops opens up new opportunity for the crop protection industry. This can optimize consumption, reduce cost for farmers and address human health and safety challenges. The Government has approved drone pesticides application policy and has laid down standard operating practice for the same. The ‘Drone Didi project, a joint initiative by three ministries of the union government which focuses on engaging pesticide manufacturers to empower women self-help groups (“SHG”) with business opportunities, appears promising. The Company has always emphasized the integral role of SHGs in providing comprehensive support to farmers. The Company has obtained drone application registrations for some products and endeavors to add more products for drone application. Digital technology is also coming to the industrys help - it is increasingly being put to use for marketing as also for product demonstration and training and education of farmers in product use.

Outlook for the Indian crop protection industry continues to remain positive. Year-to-year performance may fluctuate depending upon rainfall and other weather conditions, both within the country and globally. The agrochemical sector is likely to continue with double-digit growth in revenue due to strong exports even if the domestic demand suffers owing to unfavourable monsoon and climatic conditions.

In December 2023, the Company acquired controlling stake in Barrix Agro Sciences Private Limited, a green-chemistry solution provider for pest management. This company offers environment-friendly innovative pheromone traps, chromatic sheets, bio-stimulants and plant nutrients suited for multiple crops. This portfolio along with the Companys portfolio of products fits well with the Companys philosophy of promoting more sustainable eco-friendly green products in the pest management business.

The Company has lined up plans for launch of several new products for domestic as well as export markets. It has chalked out robust capex plan for capacity expansion and new launches in the coming years. The Company has advantage of its parentage – its Japanese parent has several new and proprietary products which the Company can look forward to launch in the coming years. The parent company has strong presence in major markets like central and south Americas and Europe. The Company has been leveraging this strength to increase its exports.

4. SEGMENT-WISE PERFORMANCE:

The Companys domestic sale decreased from 26,068.92 million in 2022-23 to 22,509.79 million in 2023-24. Exports also decreased from 8,663.65 million in 2022-23 to 5,553.02 million in 2023-24.

The Company continues to focus on promoting the branded business in order to increase the customer interface.

5. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY:

The Company has proper and adequate system of internal audit and controls which ensure that all the assets are safeguarded against loss from unauthorised use or disposition and that all transactions are authorised, recorded and reported correctly.

The Company continuously strives to improve upon/evolve and implement best practices with a view to strengthen the internal control systems.

The Company has assigned internal audit function to a leading firm of Chartered Accountants. Regular internal audit and checks are carried out to ensure that the responsibilities are discharged effectively. All major findings and suggestions arising out of internal audit are reported and reviewed by the Audit Committee. The Management ensures implementation of these suggestions and reviews them periodically.

6. FINANCIAL PERFORMANCE & ANALYSIS AND MAJOR CHANGES IN RATIOS:

The sales for the year under review decreased to 28,062.81 million as compared to 34,732.57 million in the previous year. The profit before tax for the year under review is 5,033.47 million as compared to 6,554.04 million in the previous year. The profit after tax is 3,696.74 million in the current year as against 5,034.37 million in the previous year. Reasons for downturn in financial performance are explained in the Report of the Board of Directors. The Return on net worth decreased from 23.39% in 2022-23 to 15.34% in 2023-24 because profitson thereduced reduced sales turnover and the increased ‘net-worth base owing to ploughing back of profits.

7. HUMAN RESOURCE DEVELOPMENT/INDUSTRIAL RELATIONS:

TheCompanyconsidershumancapitalasakeypillarforitssustainablegrowth.TheCompanyendeavorstomakeavailable a conducive workplace environment and people-oriented policies with focus on health, safety and responsible care. Core values, high performance, collaboration and continuous improvement guide its human resource policies. It focuses on talent acquisition, retention and on improving employee skills and competencies in line with business needs. The Company has well-documented employee-friendly policies to enhance transparency and to create a sense of teamwork, oneness and mutual trust. These policies assist in providing a positive workplace environment and play a key role in the right talent onboarding and talent retention. The Company is focused on investing in the welfare, safety and well-being of its people.

The Company has generally enjoyed cordial relations with its employees and unions at its factories and offices and has received support in implementation of reforms that lead to safety, quality, cost and productivity improvements. The

Company believes that with diversity and inclusion at the workplace, it can leverage the multiplicity of skillsets in all its operations and business. Employee strength of the Company stood at 1649 as on 31 March 2024.

8. CAUTIONARY STATEMENT:

Statements in this report on Management Discussion and Analysis relating to the Companys objectives, projections, estimates, expectations or prediction may be forward looking within the meaning of applicable securities laws and regulations. These statements are based on certain assumptions and expectations of future events. Actual results might differ materially from those expressed or implied depending upon factors such as climatic conditions, global and domestic demand-supply conditions, raw materials cost, availability and prices of finished goods, foreign exchange market movements, changes in government regulations, tax structure, economic and political developments within India and the countries where the Company conducts its business and other factors such as litigation and industrial relations.

The Company assumes no responsibility in respect of forward looking statements herein which may undergo changes in future on the basis of subsequent developments, information or events.