Aarti Drugs Ltd Management Discussions.

The duration, intensity and spread of Covid-19 will play a major role in determining the global and domestic economic prospects. In immediate future, the pandemics negative impact on economic growth can be cushioned by higher Government spending, better crop yields and stockpiling of essential items.


CY 2020 began with a significant slowdown in demand and increasing protectionism in most of the worlds economies. The year was marked by several marquee events ranging from the after-effects of deteriorating US- China trade relationships, uncertainties around the US Presidential elections, volatile crude prices, the closure of Brexit deal and so on. But far above these disruptions, the breakout of the worldwide Covid-19 pandemic was more catastrophic, leading to severe contractions across economies. Months of uncertainty and fear paralysed economic activities in both developed and developing economies. Trade and tourism came to a halt, while job and output losses saw a steep rise. Consumption dropped further, putting pressure on global Gross Domestic Product (GDP). The world GDP fell by an estimated 3.3% in 2020 - the sharpest contraction of global output since the Great Depression (Source: World Economic Outlook, April 2021). Governments around the world, however, acted quickly and boldly to brace for the health and economic ramifications of the crisis.

As Governments around the globe imposed lockdowns to combat the increasing Covid-19 infections, the worlds economies experienced a technical recession unprecedented in history. However, the effect of the pandemic has been less pronounced than earlier, owing to a few fiscal and monetary stimulus programmes being implemented across the globe by different economies. The support from the Government has helped provide a significant boost short term but the long-term impacts of the pandemic on consumer behaviour, economic structures, growth, income distribution, trade, debt sustainability and financial stability are still uncertain.

More than a year into the pandemic, the global outlook remains bleak. New virus mutations and the rising human toll raise fears, despite rising vaccine coverage. Economic ^recoveries are diverging across countries and sectors, reflecting variation in pandemic-induced disruptions and the extent of policy support. In 2021, global growth is expected to reach 6%, moderating to 4.4% in 2022 (Source: World Economic Outlook, April 2021). The upward momentum reflects additional fiscal support in a few major economies, a vaccine-driven recovery expected in the second half of 2021 and continued economic activity adaptation to low mobility. The future will largely depend on the effectiveness of the policy support, pace of inoculations and evolution of economies based on the direction of the pandemic and its impact.


India, like the rest of the worlds major economies, experienced sluggish growth in 2020 and the pandemic made the contraction worse. The Covid-19-induced lockdown in the first half of the year resulted in 23.9% lower output, consumption and GDP in the June quarter (Source: Ministry of Statistics and Programme Implementation, August 2020). On the positive side, reopening of the economy in the second quarter, along with Governments relief package and the Reserve Bank of Indias (RBI) accommodative monetary policy, helped stabilise the economy. The Centre and the RBI provided a total fiscal stimulus of 29.87 Lakhs Crores between the period when the Covid-19 pandemic broke out in India and November 2020 (Source: Press Information Bureau, Government of India, Ministry of Finance, 12th November 2020).

The rollout of multiple vaccines, an aggressive inoculation drive and revival of several infrastructure projects by the Government is slowly churning out a positive momentum in the economy. The Indian economy thus went on to register a 0.4% GDP growth in December 2020 (Source: Ministry of Statistics and Programme Implementation, February 2021). In Q4, important indicators such as the unemployment rate showed signs of improvement. It went from 9.06% in December 2020 to 6.9% in February 2021 (Source: Centre for Monitoring Indian Economy). Manufacturing PMI expanded for seventh consecutive month to 57.7 in February 2021 , exceeding the global levels (Source: Boston Consulting Group India Economic Monitor, March 2021). India went on to record an impressive 13% growth in FDI in 2020. The Private Final Consumption Expenditure (PFCE), constituting more than 50% of the GDP, registered a decline by 2.4% in the December quarter. This decline, however, is an improvement from 26.3% in June quarter and was accompanied with a continued uptick in corporate profit (Source: Centre for Monitoring Indian Economy). GST collections continued to grow consecutively for the last six months and remained above the 1-trillion mark in February 2021 (Source: Boston Consulting Group India Economic Monitor, March 2021).

The Indian economy is undergoing a V-shaped recovery, showing strong signs of revival. The positive economic symptoms are underpinned by the rollout of vaccine, increase in mobility, privatisation and the Governments strong financial impetus. There is, however, an uncertainty about the nature of the ongoing recovery, but with strong prospects of growth in consumption and investments, the GDP is estimated to grow at 11% in FY 2021-22 (Source: Economic Survey 2020-21). Further, waves of the virus could, however, affect the economy, making the overall outlook uncertain.


The global pharmaceutical industry comprises the manufacturing and marketing of Active Pharmaceutical Ingredients (API), intermediaries, formulations among others. The industry, along with the healthcare sector globally, has been impacted like never before due to the Covid-19 outbreak. This has led to material impact around consumer requirements and preferences, accompanied by macroeconomic, structural and microeconomic changes in the end-to-end value chain. The industry has responded with resilience in the face of the pandemic and a changing environment. From the unfolding of the novel coronavirus in January 2020 to vaccines being delivered to the first recipient in the UK by December 2020, with efficacy levels reaching 90%, the industry has exceeded all expectations of Governments and markets around the world.

By 2023, the global pharmaceutical industry is estimated to be worth USD 1.57 trillion. Despite various obstacles, the demand in major regions is poised for expansion due to change in sentiments from curative healthcare to preventive healthcare. North America continues to be the largest pharmaceutical market, with a market share of 45.33% expected by 2023. On the other hand, Europes market share is projected to decrease in the coming years, with a share of 20.24% expected in 2023 with Asia-Pacific overtaking it as the worlds second largest pharmaceutical market, with a market share of 24.07%.

To keep up with the progress in the emerging markets, the ongoing trends suggest that the local pharma companies in Europe, Middle East and majority of Africa are turning towards a low-cost generics asset acquisition spree. These consolidations are likely to help them reduce costs further. The scenario is becoming increasingly competitive, with major pharma players considering acquisitions of small and mid-sized organisations to leverage on their innovative abilities.


The Indian pharma industry is divided into APIs, formulations and specialty chemicals. These segments are further divided into branded and generics under different therapeutic segments. The Indian pharmaceutical market is expected to witness a compounded annual growth rate (CAGR) of ~12% to reach USD 130 billion by 2030 from USD 41.7 billion in 2020. India has a huge potential both in the domestic as well as export markets due to the rising demand for quality healthcare with increase in income levels, ageing and growing population. These opportunities can be seized by accelerating research and innovation, achieving equitable and sustainable healthcare, strengthening manufacturing and supply base in domestic and global markets and improving access to medicines.

(Source: Indian Pharmaceutical Industry 2021: Future is Now February 2021)


The Indian domestic pharmaceutical market size reached USD 20.3 billion in CY 2019 with y-o-y growth of 9.8%. The anti-infective segment is the leading contributor with ~14% market share of the total domestic pharma business and continues to witness double-digit growth. Other segments that are growing in double digit include diabetes, cardiovascular disease and respiratory. The domestic market has grown at 2.2% during April-September 2020 compared to the same period last year despite a sluggish start to the year due to the pandemic.


Indian pharma exports reached USD 20.7 billion in FY 2019-20 with y-o-y growth of 8.4%. This was largely driven by exports of generics drugs to more than 200 countries, including both developed and developing markets. India is the source of 60,000 generic brands across 60 therapeutic categories. The country accounts for 40% of the generics demand in the US and ~25% of all medicines in the UK. Indian pharma manufacturers export nearly half of the pharma production, both in terms of volume and value, to the US, UK, South Africa, Russia and other countries. Further in the global vaccine market, India exports vaccines to more than 150 countries and tends to the needs of 50% of the worlds demand for vaccines as of February 2019. There remains a significant opportunity, largely untapped across Japan, China, Australia, ASEAN countries, Middle East region, Latin America and other African countries.

(Source: Indian Pharmaceutical Industry 2021: Future is Now February 2021)

With the onset of the pandemic, the industry has faced severe constraints and impediments in reaching customers in India and around the world. In response to the global crisis, the pharmaceutical industry outperformed forecasts, exporting medicines to over 150 countries in addition to meeting all domestic demands. Over the course of the year, a significant increase in vaccine ability was achieved to supplement vaccine administration in India and other countries that depend on India for supplies.

Growth in the Indian pharmaceutical sector is likely to come from the efficient utilisation of existing infrastructure and establishing new infrastructure through synergistic collaboration among Governmental research bodies. Financing support through innovative funding mechanism, right from the idea conceptualisation stage to the commercialisation stage is another growth enabler for the sector. Furthermore, Government policy support and harmonising with global regulatory standards with the Indian pharma industry is going to provide additional boost to the sector.

The Indian Government has taken significant measures to reduce costs and healthcare expenses. The highest priority continues to be on the introduction of generic drugs into the domestic market. Further, the emphasis on rural health programmes, preventive vaccinations, and life-saving medicines would provide pharma companies numerous opportunities.


Aarti Drugs Limited was established in the year 1984 and it is a part of the esteemed Aarti Group of Industries with USD 1.1 billion in revenue. The Company manufactures Active Pharmaceutical Ingredients (APIs), Pharma Intermediates and Specialty Chemicals. It also engages in the manufacturing of Formulations through our wholly owned subsidiary - Pinnacle Life Science Private Limited. The Company enjoys a leadership position in APIs with 50+ molecules for antibiotics, antiprotozoal, anti-inflammatory, anti-diabetic and anti-fungal among others.

The Company has flexible manufacturing approach with a combination of in-house manufacturing as well as an outsourcing model supported by strong in-house R&D. The capacity of our multi-purpose plants ranges from kilograms to multi-tonnes. We have a long-term experience of multi-step synthesis and fractions at high temperature levels. Some of our manufacturing capabilities include Noble Metal Hydrogenation, Ammonolysis, Halogenation among others. Our Tarapur R&D division in MIDC, Maharashtra, is at a proximity to our manufacturing locations and supports our API manufacturing segment. Our other R&D unit at Turbhe, Navi Mumbai, supports the development of complex generics for our in-house formulation business.

Our products under APIs include:

• Antibiotics like Ciprofloxacin, Hydrochloride, etc. (In total 5 Fluoroquinolones- largest in the world in this category of antibiotics)

• Antiprotozoals like Metronidazole, Tinidazole, Metronidazole benzoate and others

• Antidiabetic like Metformin HCL and Pioglitazone

• Antifungals like Ketoconazole and Tolnaftate

• Ofloxacin - part of first category of fluoroquinolone

• Anti-inflammatory like Diclofenac derivatives, Aceclofenac, Nimesulide and Celecoxib

• Other categories

Our specialty chemicals include:

• Benzene Sulphonyl Chloride

• Derivatives of Chlorosulphonation chemistry


Our R&D centres and other facilities are well recognised by the Governments Department of Science and Industrial Research (DSIR). In our R&D team, we have doctorates, master graduates (M.Sc), graduates (B.Sc) and engineer technicians. Our R&D is well supported by a team of inhouse project managers to ensure timely implementation of new products on the commercial scale. We also invite experts and professors from the Institute of Chemical Technology (ICT) and the Council of Scientific and Industrial Research (CSIR) to provide product development advice on a regular basis. In addition to developing new products for future growth, continuous process improvement and product quality improvement are major strengths of our R&D team.


The Company has three subsidiaries in India and globally. Pinnacle Life Science Private Limited (PLSPL) is a wholly owned subsidiary of Aarti Drugs Limited (ADL). PLSPL was established with the aim to achieve leadership by providing high-quality, cost-effective pharmaceutical formulations to the world. PLSPL takes advantage of its parent Companys core API strengths and engineers most of the formulations in a cost-effective manner. With a revenue contribution of around 13.21%, PLSPL has opened avenues of exports for the Company. It has commenced commercial operations in Latin America, selective African markets as well as Asia with new registrations for export and Government tenders. Together, Aarti Drugs Limited and PLSPL offer a one-stop shop for major pharmaceutical requirements. This synergy has added considerable value to the existing API products through formulation. Pinnacle Chile SpA, our subsidiary based in Santiago, Chile, assists in the marketing of drug formulations and participates in the Chilean tender and private sector.


The pandemic impacted the value chain across businesses, segments and continents. Aarti Drugs was also affected in the early days of the pandemic due to restrictions on travel and the Government-imposed lockdown. Our facilities were shut and there was unavailability of sufficient manpower. The impact on our organisation was, however, minimal as we were soon granted permission to reopen and operate our manufacturing facilities. Movement of critical workforce and materials also started as the Company qualified under the ‘essential goods and services category.

For the safety and security of our employees, we undertook initiatives such as social distancing, thermal screening and also conducted awareness campaigns. We ensured the availability of face masks and sanitisers, regular fumigation and sanitisation of our facilities, arranged Company buses for transportation of staff among others. These steps boosted employees morale and resulted in smooth functioning of the manufacturing activities. During the lockdown, the Company provided work from home facilities to our Mumbai head office employees, along with the requisite connectivity, ensuring all IT security measures were in place and all systems were monitored remotely. We got our employees vaccinated at the earliest and also took additional insurance coverage till the Covid-19 threat is eliminated.

There has been no significant impact on the Companys capital and financial resources, performance, or liquidity position due to the pandemic. To tackle any impact arising from the pandemic, the Company has adopted strict control measures across the organisation. With the supply chain restored, and the pharmaceutical products being designated ‘essentials goods, the Company returned to normalcy during the middle of the FY 2020-21.

During the pandemic, Aarti group took active steps to support communities. When Covid-19 initially struck India, the Company contributed around 250 million to fight the impact of the virus on our society. It also donated large oxygen plant to the Government hospitals in the second wave.

The Company is in a healthy position to fulfil its future obligations and current arrangements. At present, the Company does not anticipate any contracts or arrangements that would have an adverse impact on the business in case of non-fulfilment of obligations by any party.


The Companys strong distribution network is significant to its operations. It is a strategic enabler allowing the Company to expand to more than 100 countries. In most of the cases, the Company ships goods directly to its customers by air or sea. This helps it in lowering its expenses. In some cases when the quantity isnt particularly large, the Company ships goods to its distributors. We also consciously assess our customers creditworthiness, and if any credit risk is discovered, the transaction is completed through European traders. The Company has sufficient trade credit insurance in place to cover our receivables risks.


During the year, the Company exhibited a consistent performance on account of its long-term growth strategy coupled with cost-optimisation measures. Our value centric business model, along with our global presence, has translated into a positive performance.

The Company registered a consolidated top line growth 19.5% to 21,593.05 million with an EBIDTA of 4,416.30 million, growth of 67.7% compared to previous year and EBITDA margin of 20.5%. Profit after Tax (PAT) for the year grew by 98.3% to 2,804 million, compared to the corresponding period last year. This growth was due to implementation of effective cost strategies. As a Company, we are attempting to reduce our reliance on imports through further backward integration of our API segment, in-house production of materials, along with the development of alternative processes, to minimise the risk of shortages. The Company managed to optimise its overall costs as a result of improved working capital and inventory management. All these measures led to an increased PAT and improved operating cash flow. In addition, the Company adopted a new tax regime in FY 2019-20 lowering the Companys total tax rate and resulting in higher PAT.

Particulars FY 202021 (%) FY 201920 (%) change (%)
Interest Coverage Ratio 17.06 6.36 168.24
Current Ratio 1.78 1.44 22.99
Debt Equity Ratio (Times) 0.38 0.58 -35.15
Operating Profit Margin 18.14 11.93 52.06
Net Profit Margin 13.01 7.83 66.21
Return on Equity 35.81 23.65 51.45

Overall working capital utilisation reduced due to timely realisation of debtors leading to improvement in interest coverage ratio.

In lieu of lower working capital utilisation, the working capital debt of the Company reduced whereas the net worth of the Company improved due to increase in PAT. This overall effect led to improvement in its Debt Equity ratio.

The Company actively focused on changing the processes for its products. The efficiency of these processes led to reduction in overall cost and improvement in its Net Profit Margin by 520 bps to 13.01% in FY 2020-21.

The improvement in PAT also resulted from the new tax regime. The Companys Consolidated Profit after Tax grew 520 bps in FY 2020-21 to 2,804 million. This led to an improvement in Return on Net worth from 23.65% in FY 2019-20 to 35.81% in FY 2020-21.


Our internal control systems are sound and adequate in proportion to the Companys size and nature of operation. We assess and upgrade our systems regularly for incremental improvements. Our systems are reviewed by the Boards Audit Committee on a regular basis. These systems ensure asset security, accurate transaction recording, and timely reporting.

At Aarti Drugs, internal audit is carried out by an independent firm of Chartered Accountants on a quarterly basis. Further, the Audit Committee regularly reviews the Internal Auditors periodic reports and resolves any issues raised by the Internal Auditors and Statutory Auditors. Our Audit Committee constantly tries to add value by evaluating existing systems.


At Aarti Drugs, we consider our human capital an essential component of our business. As on March 31, 2021 on a consolidated basis, the Company had 1,620 permanent employees at its manufacturing plants and administrative office. To nurture and enhance the capabilities of our people, our Human Resource Development (HRD) Centre has conducted several training programmes during the year. In addition to in-house training programmes, we have also organised various training sessions and seminars for our team at some of the most prestigious training institutes.


The Company is constantly working on innovative technologies to create efficient Waste Management Systems. The Companys primary focus has been around reducing emission and promoting cleaner environmental solutions. We have significantly reduced water consumption through our innovative production processes. Additionally, with the use of multiple effect evaporators and incinerators we have achieved zero organic effluent discharge from our plants for many of our locations by the end of FY 2020-21.

The Company has acquired 250 acres of forest land from the Forest Department near Dhuktan, Palghar, where the plantation work has been completed and it is being maintained on a regular basis. To reduce the entire effluent stream, the Company has continuously innovated several techniques to reduce effluent generation in the process, utility, and domestic areas across facilities. At Aarti Drugs, we integrate environmental considerations into the plant design in the preliminary stages of the project. Our facilities are fitted and operational with air scrubbers, dust filters, fire protection systems, and effluent treatment plants to facilitate a green environment. The Company is continuously innovating processes to reduce waste by maintaining higher yields and extracting byproducts from effluent streams, hence minimising environmental waste. Also by segregating waste we are able to further utilise it as a source of fuel for energy generation, reducing the carbon footprint.

During the year, the Company conducted various training programmes in all units regarding the use and value of personal protective equipment (PPE), safety awareness, and safety actions. A training session on "Kaizen" and "Behavior Based Safety in Organizations (Industrial Safety Awareness)" was conducted by the faculty of Bombay Productivity Council. Faculty from the Civil Defense, a Central Government Agency, conducted training for our people on first-aid, fire-fighting, and rescue operations to deal with emergencies.

To monitor the fire threat, all our units have fire hydrant systems, fire extinguishers, and smoke and heat detectors. We also have hydrogen gas leak detectors and ammonia gas leak detectors installed in our units wherever required. Besides, all electrical fittings in our units are flameproof. We have also installed rupture discs and safety valves in reaction vessels and distillation systems. Audio Visual Alert Alarm system has also been installed for the reactors to check likely rise in temperature, failure of cooling or chilling system and tripping of agitators. All our units were subjected to an external safety audit in accordance with IS:14489:1998, which was conducted by a Government of Maharashtra-approved safety auditor. Various onsite work training and safety-related observations were performed by safety consultant and former Deputy Director of the Department of Industrial Safety and Health. The Company is continually working to develop safer working conditions for its people.


The global economy is expected to grow by 6% in the CY2021 on account of increased fiscal support in major economies, large-scale inoculation drives, rising public investments and a general rise in sentiments (Source: IMFs World Economic Outlook, April 2021). Even emerging economies are expected to pick up in the CY2021 and grow by 6.7% (Source: IMFs World Economic Outlook, April 2021). According to the Economic Survey 2020-21, India is set to expand by 11% in the FY 2021-22. This will mostly be driven by resumption of business activities, vaccination programmes across the country among other such measures. However, with India being hit by the second wave and a third wave is in the offing, most Indian cities had gone into lockdown at the time of writing this report, restricting trade, travel and interrupting supply chain. An optimistic outlook is still uncertain.

On the other side, consumer preferences have changed, and the world is moving towards preventive medicines over curative medicines. The inoculation drive is going to support the pharma sector, which already has been earmarked under the ‘essential space. At Aarti Drugs, we are prepared for all the challenges and opportunities that are going to arise from here. We are focused towards expanding our capacities, debottlenecking our facilities, reducing overall cost and expanding the geographical reach. Our measures are expected to translate into significant increase in revenue and margins in the coming years. API and speciality chemicals remain important segments for future green field projects. In the API segment, anti-diabetic therapy and other chronic lifestyle related therapies would be the primary focus areas. We are also focusing to tap more regulated geographies and setting up enhanced IT infrastructure support. The Company is also setting up more intermediate plants as a part of the drive to reduce further import dependency thereby improving profit margins. As a part of our forward integration strategy, manufacturing more derivatives and expanding in formulation business globally remain the key.

Cautionary Statement

Statement in the Management Discussion and Analysis describing the Company’s objectives, projections, expectations and estimates regarding future performance may be "forward-looking statements" and are based on the currently available information. The management believes these to be true to the best of its knowledge at the time of preparation of this report. However, these statements are subject to certain future events and uncertainties, which could cause actual results to differ materially from those, which may be indicated in such statements.