Aarti Drugs Management Discussions

Global Economic Overview

The year 2022 saw the worldwide economy demonstrate remarkable resilience, positioning itwell for promising growth in CY 2023. Despite initial macroeconomic hindrances, such as inflation, trade conflicts, and geopolitical tensions that the growth momentum, the economys rapid rebound has paved the way for a brighter future. Governments across the globehaveplayed ted to showcase a steady growth of 2.8% in CY 2023 anticipa instrumentalroleinenhancingresilience by implementingwell-calibrated monetary policies. Their efforts have contributed to a faster resurgence of economic activities and expectationsof a prosperous & optimistic landscape in the coming year.

According to the World Economic Outlook report by the International Monetary Fund, the global economy achieved a growth rate of 3.4% in CY 2022. Gradual interest rate adoption has effectively controlled inflation since the start of CY 2023 after the inflationary pressures of CY 2022 hindered a quick recovery from the COVID-19 pandemic. While economic growth slowed in CY 2022 due to inflationary pressures, it is expected to rebound in CY 2023. The global economy is

and 3% in CY 2024 driven by robust labour markets, substantial household consumption, business investment, and growing consumer demand.

Indian Economic Overview

The Indian economy has established itself as one of the fastest-growing economies globally, with a strong growth rate of 7% expected by the end of FY 2022-23, as reported by the National Statistical Organisation (NSO). This progress has been largely driven by a rebound in economic activities, particularly in private sector consumption, Governments focus on infrastructure development. Despite short-term turbulence, Indias strong underlying economic fundamentals are anticipated to keep its long-term outlook promising. Growth-oriented policies and schemes, increased infrastructure spending, and emphasis on manufacturing and technological transformation contribute to accelerated economic growth.

While the country experienced robust economic growth during the first two quarters of FY 2022-23, with a 13.5% and 6.3% growth rate, respectively, the growth rate tapered to 4.4% in the third quarter due to inflationary pressure. In response, the Reserve Bank of India (RBI) raised the repo rate by 250 bps to 6.5% in FY 2022-23, which led to a gradual smoothening of the inflationary grip on the countrys economy. Further, to expand growth prospects, the Indian Union Budget for FY 2023-24 has allocated a substantial capex of 10 lakh Crores towards infrastructure development to boost economic growth, marking a 37.4% hike in comparison to the previous allotment. The Government has increased capital expenditure to offset the private sectors cautious stance on investment, supported by strong financials, high monthly Goods and Services Tax (GST) revenue collection increased by 13% to 1.60 lakh Crores in March 2023, marking the third consecutive month of increase in GST collections.

Increased Government spending, a rise in private consumption, and investment are expected boost economic activity and contribute to significant growthinthecomingyears.S&PGlobalRatingsanticipates moderate real GDP growth of 6% in FY 2023-24, driven by domestic demand and increased capital investment. The RBI anticipates inflation to the the first half of FY 2023-24 as domestic demand is predicted to rise.

India GDP Growth Rate (%)

Global Pharmaceutical

Industry /www.thebusinessresearchcompany. https:/

The global pharmaceuticals market is expected to witness significant growth over the next few years, with projections indicating that it will reach USD 1,587.05 billion in CY 2022 from USD 1,454.66 billion in CY 2021, reflecting CAGR of 9.1%. This growth is attributed to the of operations by companies in the industry as they are recovering from the impact of COVID-19 pandemic. Earlier these companies faced operational challenges due to COVID-19 pandemic-induced containment measures. Moreover, the market is anticipated to grow to USD 3,201.02 billion in CY 2026, representing a CAGR of 19.2%. The growth of the Global Pharmaceuticals and Medicine Manufacturing industry is primarily driven by the increasing middle-class access to industry products and the rising number of consumers requiring medications to treat chronic illnesses in emerging markets. Additionally, the increase in health expenditures by countries in the Organisation for Economic Co-operation and Development (OECD) is expected to underpin expansion over the coming years. Furthermore, global research and development (R&D) funding is anticipated to rise by an annualised 4.7% over the next five years, supporting the R&D investment in the industry. Moreover, demographic trends, such as the growing number of adults aged 65 and older, and clinical advances are also predicted to bolster revenue growth.

Regions worldwide are growing following diverging trends, with some being volume-driven, while others have a greater innovation.contributionfromtheadoption in Latin America, the Asia-Pacific region, and Africa & the Middle East are anticipated volume over the five years to CY 2027. Spending growth - willincreasebyover30%,indicating driven volume growth and a shift in the mix of higher price point products. The therapy areas with the highest forecast spending in CY 2027 are oncology, immunology, and anti-diabetics, followed by cardiovascular. Oncology is expected to expand 13-16% CAGR through to CY 2027 as novel treatments continue to be launched for cancer treatment. The demand for innovative drugs will drive oncology spending to approximately USD 370 billion by CY 2027, almost double the current level. Global medicine spending is predicted to reach USD 1.9 trillion by CY 2027, increasing at a rate of 3-6% per year.

(Source: Global Pharmaceuticals & Medicine Manufacturing, IBIS World, The Business Research Company, IQVIQ) -global-market-report#:~:text=The%20global%20pharmaceuticals%20 market%20size,(CAGR)%20of%209.1%25. https://www.iqvia.com/insights/the-iqvia-medicines-2023

Indian Pharmaceutical Industry

India ranks 3rd globally in terms of volume in the . Major segments include generic industry pharmaceutical drugs, OTC medicines, bulk drugs, vaccines, contract research & manufacturing, biosimilars and biologics. India is the largest supplier of generic medicines, accounting for 20% of the global supply. The industry has registered a CAGR of 7.7% from around USD 35.4 billion in FY 2017-18 to about USD 47.6 billion in FY 2021-22. Both domestic and markets have driven this growth.

The Economic Survey 2022-23 predicted Indias domestic pharmaceutical market to reach er 2030, with the pharma sector maintaining its growing pace following the COVID-19 pandemic. The ‘Ayushman Bharat Digital Mission aims to sustain the nations integrated digital health infrastructure. Moreover, digitalisation, innovation, and R&D in the pharma sector will help India maintain its leading role globally.

(Source: CareEdge Research, Economic Survey 2022-23)

Indian Pharmaceutical Market (USD billion)

Indian Domestic Pharmaceutical Market

The domestic steady growth, rising from USD 18.1 billion in FY 2017-18 to USD 23.0 billion in FY 2021-22 at a CAGR of 6.2%. The market is broadly divided into two categories: acute therapies (anti-infectives and painkillers) and chronic therapies (cardiac, gastrointestinal and anti-diabetic currently have the largest market share by revenue at 13.6%. This is followed by cardiac and gastrointestinal drugs with export shares of 12.4% and 11.5%, respectively.

The growth of thedomestic anticipated to pharma marketis be driven by various factors. These factors include increased 130 billion by CY bett to healthcare penetration ofhealthinsurance, facilities, and a rising prevalence of chronic diseases. Additionally, increased per capita income is expected to drive demand for more expensive drugs.

(Source: CareEdge Research)

Indian Export Pharmaceutical Market

The Indian pharma industry has gained global recognition due to its price competitiveness and quality of products. They supply over 60% of the worlds vaccines and 20% of generic medicines across the world. Indias pharmaceutical exports have shown impressive growth over the past few years, from USD 17.3 billion in FY 2017-18 to USD 24.6 billion in FY 2021-22, expanding at a CAGR of 9.2%. This growth can be attributed to several factors, such as the increasing generic penetration in the regulated markets, focus on the niche and complex product segments, patent expiries, medicine patent pool announcing license agreements with pharmaceutical companies, and growing demand from semi-regulated pharma markets. Despite the global trade disruptions and reduced demand for COVID-19 pandemic-related medicines, Indias pharma exports exhibited growth in FY 2021-22. As of 2021, India shipped over 1,349 billion worth of drugs to over 200 nations.These range from highly regulated markets in North America and Europe to countries with small pharmaceutical markets. As per the Ministry Reports, ‘formulations and biologicals continue to have the the countrys total pharma exports, followed by bulk drugs and drug intermediates. Indias top five destinations are the US, UK, South Africa, Russia, and


In the long-term, growth in the export market will be sustained by emerging markets, such as Russia, Brazil, and South Africa. The growth trajectory of the Indian pharma sector looks promising, and the country is poised to make significant contributions to the global pharma

(Source: Pharmaceutical Export Market in India, June 2022, Netscribes)

Indian Export Pharmaceutical Market (USD billion)

Company Overview

Aarti Drugs Limited (referred to as ‘Aarti Drugs or ‘The Company), established in 1984, is a prominent manufacturer of APIs, Pharma Intermediates, and Specialty Chemicals. The Company operates as part of the Aarti Group, a conglomerate with a net worth of USD 900 million. With over 50 compounds for antibiotics, antiprotozoal, anti-inflammatory, anti-diabetic, and emerged as a market leader in APIs. In addition, the Company owns a wholly-owned subsidiary called Pinnacle Life Science Private Limited, which specialises in manufacturing formulations.

Aarti Drugs both in-house and outsourced manufacturing, as well as significant in-house R&D. The multi-purpose plants have a capacity ranging from kilogrammes to multi-tonnes. The Companys in-house formulation supported by businessis the R&D centre located in Turbhe, Navi Mumbai, which is dedicated to creating the Tarapur R&D facility situated at MIDC, Maharashtra, is engaged in API production. These plants are strategically located near industrial hubs.

Product Portfolio


The Company has various APIs in its portfolio which includes the following..

Antibiotics like Ciprofloxacin Hydrochloride, Ofloxacin, Levofloxacin, Norfloxacin, and others a flexible Antiprotozoals like Metronidazole, Tinidazole, and Metronidazole Benzoate, among others Anti-diabetics like Metformin HCL, Pioglitazone, Vildagliptin, and Teneligliptin Anti-inflammatory like Diclofenac derivatives, Aceclofenac Nimesulide and Celecoxib generics. Meanwhile, Antifungals like Ketoconazole and Tolnaftate Cardioprotectant - Clopidogrel>

Other categories

Speciality Chemicals:

Aarti Drugs is also actively engaged in range of speciality chemical development which includes Benzene Sulphonyl Chloride Derivatives of Chlorosulphonation Chemistry


Capex of 600 Crores underway [starting from FY

2021-22 for the next 4-5 years]

Full ramp-up of existing capacity post 600 Crores capex


rugs R&D team comprises doctorates, post graduates D Aarti (MSc), graduates (BSc), and engineering technicians. The Companys R&D centres and other institutionshave received accreditation from the Department of Science and Industrial Research (DSIR). The teams key competencies include continual process improvement, product quality enhancement, and inventing new products for future growth. To ensure timely commercialisation of innovative products, Aarti Drugs R&D is fully-supported by an in-house team of project managers. Additionally, it frequently seeks product development guidance from professionals and academics associated with the Institute of Chemical Technology (ICT), and the Council of Scientific and


Aarti Drugs has three subsidiaries: Pinnacle Life Science Private Limited, Aarti Speciality Chemicals Limited, and Pinnacle Chile SpA (a foreign subsidiary). Pinnacle Life Science Private Limited (PLSPL) is a wholly-owned subsidiary that was founded to become the worlds leading provider of high-quality and cost-effective pharmaceutical formulations. Aarti Drugs and PLSPL shop for key pharmaceutical needs. parent companys core API competencies and engineers the majority of the formulations in a cost-resulting in significantly increased value for existing API products formulations. PLSPL has 10% of the Companys revenue by opening up new export opportunities in Latin America, certain African countries, and Asia, through new export and Government tender registrations. Another subsidiary, Pinnacle Chile SpA, supports the marketingof medication formulations and Chilean tenders and the private sector in Santiago, Chile.

Distribution Network

Research (CSIR).

Aarti Drugs distribution channel is a crucial enabler that has facilitated its expansion into more than 100 countries. In the vast majority of cases, the Company delivers products directly to consumers via air or water transportation, reducing costs. It also has distributors in instances where the volume is not substantial. Aarti Drugs carefully evaluates its clients creditworthiness, and if any risk is identified, employs European traders to handle those transactions. Company adequately covers its risks, such as receivables risks, through its trade credit insurance. Therefore, Aarti to provide a one-stop Drugs outstanding distribution network is essential to its leverages its operations and cannot be overstated.

Financial Highlights

Financial Parameters

FY 2021-22 FY 2022-23 Change (%)
Debt Equity Ratio (Times) 0.52 0.51 -1.92%
Operating Profit Margin (%) 11.41 9.61 -15.78%
Net Profit Margin (%) 8.24 6.12 -25.73%
Return on Equity (%) 21.03 14.93 -29.01%
Return on Capital Employed (in %) 19.43 14.61 -24.81%

Growth in API business remained below expectation primarily due to inventory recalibration at the customers level owing to high API prices. Margins and profitabilitycontinuedtoremainaffectedasinflationary pressure weighed on raw materials, power and fuel costs, coupled with sharp depreciation in the currency.

Debt Equity ratio for FY 2022-23 stood 0.51x largely owing to ongoing capex.

Aarti Drugs saw an increase in its consolidated topline by 9% to 2,718 Crores and EBIDTA came in at 307.8 Crores, while EBITDA margin stood at 11.3%. Profit after Tax for the year stood at 166.4 Crores, with the PAT margin at 6.1%. To lessen the risk of shortages, the Company is seeking to reduce its dependency on imports through more backward integration of its API segment, in-house material production, and the development of alternative procedures. The capex for FY 2022-23 stood at 164 Crores, which was funded through a mix of internal accruals and debt. The net debt-to-equity ratio for FY 2022-23 stood at 0.51x compared to 0.52x year-on-year. The Return on Equity (ROE) for FY 2022-23 stood at 14.93%, while the return on capital employed stood at 14.61%

Internal Controls

Internal controls are a crucial aspect of any companys operations, andAarti Robust internal controls are in place to prevent any wrongdoing or misconduct, and they are regularly reviewed by the Audit security, precise transaction recording, andtimely reporting through these systems, which are frequently upgraded and analysed to keep up with changing circumstances. Additionally, Aarti Drugs conducts regular internal auditing through an independent firm of Chartered Accountants, and its Audit reports to address any concerns raised.

Human Resource

Aarti Drugs understands resources, but rather, they are individuals with unique skills, talents, and aspirations. meeting its business work environment that allows its employees to reach their (HRD) fullpotential. ensures that all its employees are provided with equal opportunities to grow, learn, and excel in their careers.

The Companys HRD works closely with the line managers to identify the areas where training and development can make a significant difference in the performance of By organising regular training sessions and seminars, the takesthemveryseriously. Company strives to enhance the skills and knowledge of its employees. In-house training programmes are organised as and when required to address specific training needs. .TheCompanyensuresasset Aarti Drugs is committed to providing its employees with the necessary resources and support to excel in their roles. The Company believes in fostering a culture of continuous learning and development, where employees are encouraged to take ownership of their career growth. Therefore, Aarti evaluates the Internal Auditors periodic Drugs provides its employees with opportunities for functional learning, leadership development programmes, and exposure to diverse business functions The Company recognises that its employees are the driving employeesarenotjust force behind its success. Aarti Drugs is committed to creating an inclusive, supportive, and empowering Companys focusisnotonlyon where its employees can thrive and realise their full potential.

The Company believes that investing in its employees butalsooncreatingaconducive growth and development can create a culture of excellence that translates into long-term success for it.

Environment, Health and Safety

Aarti Drugs takes pride in the fact that it has made significant progress in its efforts to promote sustainability and reduce environmental impact. Through the Companys focus on developing new technologies and innovative manufacturing processes, it has been able to provide more effective management systems and achieve a considerable reduction in water use.

The Company has implemented procedures to decrease waste by maintaining greater yields and removing by-productsfromeffluent streams, resulting in reduced environmental waste. It has also completed plantation work and planted trees on 250 acres of forest property at Dhuktan, Palghar, and is committed to their regular maintenance.

Aarti Drugs takes environmental concerns seriously and incorporates them into all stages of its plant design. The Company has installed air scrubbers, dust suppression systems, and wastewater treatment plants in all of its facilities to help maintain a green environment. Additionally, it has implemented waste isolation measures to use garbage as a source of fuel for energy generation, reducing its carbon impact.

Dedicated to upholding employee well-being, the Company actively arranges routine training sessions. These programs center around the proper utilization and Personal Protective Equipment (PPE), along with cultivating a strong sense of safety awareness and corresponding actions. It has also organised training sessions with the faculties of the Bombay Productivity Council on Kaizen and behaviour-based safety in organisations (Industrial Safety Awareness). The employeesofAartiDrugs have undergone training in first aid, firefighting, and emergency rescue operations, offered by Civil Defence, a Central Government agency. The Company believes that the safety of its employees is a top priority and is important for maintaining a conducive business environment. To bring in a sense of security, Aarti Drugs Limited has equipped its facilities with a system, fire extinguishers, and smoke & heat detectors. Alongside, the Company has installed hydrogen and ammonia gas leak detectors, and all the electric components at its plants are flameproof. The audio-visual alert alarm system monitors temperature fluctuation - rising, cooling or chilling system failures, and agitator tripping. For Aarti Drugs reaction vessels and distillation systems, it has put rupture discs and safety valves in place. The Companys facilities underwent external safety audit by a safety auditor recognised by the Maharashtra Government, and all itssafety controls are aligned with IS:14489:1998. Additionally, a safety consultant and former Deputy Director of the Department of Industrial Safety and Health conducted various onsite job training for employee well-being.


Despite a challenging economic and geopolitical environment, Aarti Drugs maintains an positive outlook, highlighted by pivotal developments. Notably, two expansive greenfield projects are expected to the second half of FY 2023-24, promising to propel the Companys growth trajectory to new heights. The strategic pursuit of additional regulatory approvals underscores its dedication to amplifying sales within the regulatory markets. As inflationary pressures recede, a robust domestic demand emerge. However, the challenge of USD shortages in specific emerging markets persists, constraining the expansion of the growth of exports. The Company is also actively pursuing USFDA for a follow-up inspection. transformative potential in shaping our forthcoming ventures positively.

Cautionary Statement

Estimates and expectations stated in this Management Discussion and Analysis may be ‘forward-looking within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed of or implied. Important factors that could make a difference to the Companys operationsincludeeconomic conditions in the Governments regulations, tax other incidental factors.