Epigral Ltd

OVERVIEW

The year under review was the worst of years and the best of years.

The Company seldom encountered a market that was as challenging as the one encountered during the last financial year - for the extensity and intensity of the downtrend.

This weakness tested the business models of the Company?s specialty chemicals and bulk chemical segments, eroding margins, depleting cash flows and affecting stakeholder value.

I am pleased to communicate that Epigral proved to be a striking contrarian in this challenging environment.

PERFORMANCE

Your Company reported its second-best financial performance, reflected in attractive revenues, progressive quarter-on-quarter rebound in margins and respectable cash profit. Even as the revenues reported by your Company were lower than in the previous year, it would be pertinent to note that the Company?s FY 2022- 23 performance came in the backdrop of unprecedented sectorial buoyancy that could not be sustained. What was creditable is that your Company reported an 869 bps increase in margins from the first quarter to the last, indicating that it was the last person standing during the sectoral decline and among the first to recover even before a rebound in the sector.

Besides, at a time when much of the industry held back on fresh investments, the Company invested H405 Cr in capital expenditure during the year under review. This performance validated the Company?s positioning around business sustainability across market cycles.

At a time when much of our sector was engaged in confronting demand-side challenges, your Company selected to change its name from Meghmani Finechem to Epigral Limited - a combination of the words ‘epitome? and ‘integral?.

We believe that these word components indicate a culture of excellence and our becoming integral (through products and mindset) to the success of our customers. The result is that our new identity does not merely indicate the change in a name for functional reasons; it represents a platform that deepens our commitment to business sustainability and stakeholder value-creation.

SECTORIAL OVERVIEW

The chemical sector experienced a challenging decline during the year under review. This decline was related to a sharp improvement in the sector?s performance during the pandemic when a demand and realizations rebound encouraged players to build inventory. However, when demand began to plateau out, the excess inventory depressed demand and realizations, precipitating a decline as transpired during the last financial year. Besides, a recession or slowdown in some global markets weakened the sectorial sentiment with no recovery in sight. The result was that the last financial year was unusual in that demand and realizations remained depressed through all four quarters.

OUR STRATEGIC POSITIONING

Some years ago, the management at Epigral (then Meghmani Finechem) had embarked on a strategic direction to build a business that would be sustainable across market cycles. This represented a challenge considering that the Company derived 100% of its revenues from bulk chemicals whose prospects remained volatile.

However, your management drew out a long-term direction to recalibrate its business away from these bulk chemicals towards Derivatives and Specialty chemicals; within the latter basket, your Company cherry- picked products that would substitute imports, comprise inputs for the rapidly growing downstream sector and become part of a family of products utilizing the bulk chemicals being manufactured by the Company. The essential component of the Company?s altered business model was that the increased investment in Derivatives and Specialty chemicals would not just moderate revenues derived from bulk chemicals (Chlor- alkalis in this case); it would utilize Chlor-alkalis in the manufacture of Derivatives and Specialty Chemicals, eliminating the challenge of product allocation and sale.

I am pleased to communicate that the integrated nature of the business model provided the Company with a competitive building block, resource security, an opportunity to enhance the portfolio value and strengthen the Company?s environment integrity. During the last five years, revenues from Derivatives & Specialty products increased from 0% to 45% by the close of FY 2023- 24, transforming the personality of the Company from bulk chemicals to specialized products, strengthening its capacity to recruit subject matter experts and professionals. We believe that this transformation has initiated a virtuous cycle that is redefining the way the organization thinks and plans for tomorrow.

The second differentiated initiative that the Company embarked on was portfolio diversification. We recognized that it would not be enough to merely enhance the value of the bulk chemicals we manufactured; we would need to make prudent capital allocation decisions in the selection and manufacture of products resistant to sharp swings in demand and realizations.

This extension of the Company?s business model warranted an extensive study of products, downstream relevance, demand possibilities, environment integrity, customs tariff and fitment within our overall products portfolio. This prudence in portfolio curation was extensively validated during the last financial year, when realizations on the overall were depressed. The Company commissioned capacities of Epichlorohydrin, CPVC Resin and additional capacity of Caustic Soda during FY 2022-23; volume from these products led to an overall volume growth of 15% even in this challenging environment. This resulted in an increase in revenue contribution from the Derivatives & Specialty Chemical segment to 45% of the total revenue. This proportion is only likely to increase during the current financial year.

OPTIMISM

At Epigral, we are optimistic of our prospects for various reasons.

One, the Derivatives and Specialty chemical products that we invested in - ECH and CPVC Resin - represent the building blocks of a modern India. The ECH manufactured by your Company is used in the manufacture of Epoxy resin, which in turn, used in manufacturing of wind energy blades, automotive industry, construction and other industries. Given the growing investments

in renewable energy and the manufacture of wind energy blades within the country as a part of the Make in India initiative, the prospects of this product - and Company - appear assured across the foreseeable future.

The Company invested in the largest CPVC resin manufacturing facility in India; installed capacity was increased from 30,000 TPA to 75,000 TPA. This investment makes our CPVC facility the largest in the world at a single location; the scale and investment are justified by the fact that the downstream CPVC pipes sector is growing in the high percentage double-digits on the back of a construction boom in India.

Two, the Company embarked on the manufacture of CPVC compounds (not to be confused with CPVC resin). This product is used in the manufacture of CPVC pipes and represents an intermediate product between resin and pipes. A number of our CPVC customers buy resin to manufacture compounds used to manufacture pipes; our decision to manufacture the compound will help provide end customers with an intermediate solution and empower them to focus on their core business, while providing our Company with the opportunity to enhance value to the resin that we manufacture within and strengthen customer relationships.

Three, our long-term confidence is derived from the fact that through a combination of prudent engineering, project execution speed and commercial negotiation, we have been able to commission our brownfield capacities at a cost considerably lower than the prevailing average. By the virtue of commissioning these projects at a modest capital cost per Tons, we have created a competitive buffer likely to keep us liquid and profitable across market cycles.

Four, in a world being increasingly marked by environment sensitivity, we possess the right business model. Chlorine as a product can have an unfavourable influence on the business; chlorine is generated as a by-product by your Company from the manufacture of chlor- alkalis and in the past needed to be transported from the manufacturing premises to customers through secure logistics. By graduating chlorine from a by-product into a co- product, your Company has made the most decisive environment- friendly investment. A product that could not be completely sold to customers in the past is now being turned into a building block and increasingly consumed within to manufacture value- added downstream products.

The result is that what could have been a logistical risk is now being progressively neutralized, moderating the Company?s carbon footprint.

Besides, your Company commissioned an 18.34 MW hybrid renewable power plant, accounting for around 8% of our power appetite, a direction that is likely to grow.

Five, your Company recognizes that in a knowledge-extensive business-like specialty chemicals, the prospective driver of the Company will be research.

During the year under review, your Company embarked on a decisive initiative to commission an R&D centre in Ahmedabad.

This research facility focuses on the identification of suitable specialty chemical products, building entire product families and establishing processes. This initiative will strengthen the Company's pipeline of prospective products, making it possible to generate an attractive proportion of revenues from their launch year-on-year, rejuvenating the Company?s income profile. Besides, this research centre will embrace challenging products and processes, making it possible to enter relatively under-crowded spaces. The centre could also emerge as a platform for joint product development with companies (global or Indian) possessing synergic interests.

Six, at Epigral we believe that prudent strategy comes from Board guidance and composition. During the year under review, your Company moderated the number of Executive Directors on the Board. We believe that this rebalancing will enhance the interplay of diverse and independent perspectives within the Board, leading to a prudent strategic direction.

CONCLUSION

At Epigral, we are competitively placed to see positive results at the brink of the ongoing slowdown. Across the foreseeable future, the decline is expected to consume itself, demand is likely to exceed supply, prices are expected to stabilize and this could provide confidence to the trade to rebuild inventories. When this transpires, volumes would grow and realizations could improve, strengthening cash flows.

Epigral will be attractively placed to capitalize. Your Company has expanded its manufacturing capacities through the downtrend, its gearing is reasonable, cash flows are adequate to meet debt and interest payment obligations cum margins are likely to improve,

We believe that a combination of these realities could translate into superior capital efficiency - as measured by Return on Employed Capital - that enhances value for all our stakeholders.

Maulik Patel

Chairman and Managing Director