Ahlcon Parenterals India Ltd Management Discussions

To the Shareholders,

This report aims to be helpful to the Shareholders of the pharmaceutical and healthcare market and provide them with anin-depth analysis of the business prospects.

FINANCIAL PERFORMANCE

The details of the financial performance of the company are appearing in the Balance sheet, Profit & Loss Statement along with other financial statement. Highlights are as under:-

(Rs. in lacs)

	CURRENT YEAR	PREVIOUS YEAR 2013
Sales (including excise) and other Income	13358.71	11910.60
Gross operating Profit	3484.19	2600.41
Profit before tax	3006.32	1868.86
Profit after tax	1950.41	1286.96
EPS (Earning Per Share)	27.02	17.79

OVERVIEW INDIAN PHARMA INDUSTERY

The Indian Pharma Industry grew a healthy 16% in FY13 to reach $ 38 Billion against a size of $ 33 Billion in FY12. This growth was largely export driven, supported by the domestic industry which grew by 12% this fiscal. The growth in the domestic market has been led by the chronic segments which grew by 14% YoY and today account for 30% of the total market.

The growth of the domestic pharma market has decelerated over the last few quarters owing to a number of systemic bottlenecks. The current policy paralysis with regards to the new drug pricing mechanism, delays in approval of clinical trials, aggressive patent activism and the evolving marketing guidelines have led to a wait and watch approach being implemented by most pharma players. In addition macro-economic pressures of high inflation and lower disposable income in the hands of payers has led to the current economic slowdown extending to the pharma space as well.

The growth in the domestic market is therefore expected to remain muted till the current bottlenecks are eased. There are some signs of recovery at the policy level with clarity emerging from the National Pharmaceutical Pricing Authority on the latest Essential Medicine List and fresh regulations being put in place to better manage clinical trials. However, it is still a long way to go before the policy measures bear fruit and the domestic growth can sustainably resume. The 2013 sectorial update by Fitch reiterates a stable outlook for the domestic Pharmamarket as the inherent growth drivers are still in place, despite the delta emerging from the current regulatory ambiguity. (Source: AIOCD MAT March 2013; Directorate General of Foreign Trade; Pharmaexcil India; CII- Yes Bank, India Life Sciences: Vision 2015)

Global Pharmaceutical Industry

The global pharmaceutical market has witnessed a 6% CAGR from 2006 to 2012 to reach a US$ 956 Billion market size in 2012. According to IMS Health, the global pharmaceutical spend is estimated to touch US$ 1.2 trillion by CY2016, growing at 4.5% annually. Growth will be primarily driven by higher generic spending (accounting for 3/4th of the total increase) and increasing medical expenditure.

Regulated Markets

USA:

The US pharmaceutical market is value at US$ 322 Billion in 2011, is expected to grow at a CAGR of 1-4% over 2012-16, likely to reach a market value of 350-380 Billion by 2016 (Source: IMS).The year 2012 witnessed around US$ 35 Billion worth of drugs to go off patent (Source: India Pharmaceuticals- HSBC, 2012). The US generics market, worth US$ 100 Billion, is also estimated to register a CAGR of 8-9% in the medium term on account of patent expiries (Source: Fitch, 2013).

EUROPE:

Europe is one of the largest global pharmaceutical market (around 17%) after the US. In Europe, pharmaceutical market is likely to witness growth in the range of 1% to 2% by 2016. Sluggish growth is expected due to healthcare cost containment measures adopted in order to curtail the debt crisis.

Emerging Markets

The emerging markets are likely to double their pharmaceutical spending from US$ 151 Billion 2011 to around US$ 285-313 Billion by 2015 (Source: CLSA, 2013).Growth will be led by gradual economic growth and government efforts to expand healthcare access. IMS expects the emerging markets to grow by 13%-plus CAGR from 2011 to 2016, reaching US$ 357 Billion by 2016.

Generic Market

The global generic spending is projected to increase to USD 400-430 Billion by 2016 from USD 242 Billion in 2011, primarily driven by emerging markets. In 2012, over 490 ANDA received approvals globally (Source: USFDA) Growing generic spending in the developed markets over the next five years will be fuelled by generic competition due to patent expiries, with some additional increased due to expanded generic use for off-patent molecules. In emerging markets generic companies will increase most of the spending.

Overview Ahlcon

Ahlcon Parenterals (India) Limited is one of the leading manufacturing Company in the Indian Pharmaceutical Industry. The Companys revenues are mainly from Contract Manufacturing, Institutional sales and ethical sale of branded-generic and unbranded-generic manufactured pharmaceutical products. A further break down of pharmaceutical sales can be done as, Domestic formulations (comprising branded pharmaceuticals formulations sold in the domestic market), Contract manufacturing (comprising sourcing, manufacturing and supplying pharmaceutical formulations to giant pharma company under their brand name) and direct export to International market comprising exports of branded and generic manufactured pharmaceutical formulations. The operating costs primarily comprise raw and packing materials, purchase of finished goods, staff cost, selling and marketing expenses, manufacturing, Research & Development expenses and general overheads.

OUTLOOK ON THREATS, RISK AND CONCERNS

The Company is exposed to certain risks such as Regulatory changes, credit and liquidity risks, New Product risks, competition , Government pricing controls, litigation relating to Intellectual Property Rights and products quality, foreign exchange fluctuation, economic and political environment etc. The Company has a Corporate Risk Management team consisting of professionally qualified persons and functional specialists who are empowered to examine/audit the adequacy, relevance and effectiveness of the control systems, compliance with policies , plans , and statutory requirements and to take the necessary steps for mitigating risks profile of the company.

The Indian Pharmaceutical market is highly fragmented and as more players enter in the industry, the landscape is becoming increasingly competitive. Certain brands and therapy segments are facing stiff competition. Rising cost and falling margins are areas of concern. The adherence to regulatory compliance and standards is becoming tougher. Companies who upgrade their manufacturing facilities, develop new innovative products shall be in an advantageous position.

Drug Pricing Policy

Recently, the Government of India cleared the way for the much awaited National Pharmaceutical Pricing Policy 2012. Unlike the current cost based pricing policy, this new policy is market based, and seeks to control prices of all strengths and dosages of 358 drugs and their combinations falling into the National List of Essential Medicines (NLEM). The price control will also be applicable to imported medicines, if these drugs also fall in the list of essential medicines.

Pharmaceuticals Pricing:

One of the very serious concerns for the Pharmaceuticals division is Government regulation of prices of medicines and mounting pressure to reduce drug prices. The control extends two ways with the first being on the cost of inputs i.e raw materials , packing materials where the Government determines the fixation of prices and the second being the conversion cost and packing cost which is yet again decided by the Government on the basis of studies carried out by them. The domestic market is subject to price control under DPCO, 1995. More and more products are being added to the list of controlled products and thereby, the profit margins could be significantly affected. The Company manages its product portfolio, product mix and value added products, so as to move away, reduce and minimize the product weightage of drugs under price control.

Competitive pressures:

Both the Pharmaceuticals and Chemicals segments operate in a highly competitive market scenario, making it necessary that they differentiate themselves from competition by offering better quality products at lower prices thus adding value to the customers.

Financial Risks:

With the high amount of imports of raw materials like granules and exports of finished goods transacted in foreign currencies the foreign exchange fluctuations have may an impact on the working of the Company. By way of hedging of foreign exchange transactions wherever found prudent, the Company minimizes the impact of foreign exchange loss. Due to the broad customer base in Pharmaceuticals segment, the Company is exposed to a low credit risk in its sales markets.

Weakness in domestic markets:

Fierce price competition has become the order of the day for the domestic pharma industry, which has restricted the ability of the domestic pharma market to grow in value terms. Due to its highly fragmented structure, the pricing power of the players has been pruned. The Indian markets have traditionally been and continue to remain price sensitive and premium pricing of products is extremely difficult to maintain .The new players in the industry are resorting to the cutthroat price competition. However, the company has been able to increase its product ranges and able to maintain a balance for its existing profit percentage.

Challenges

Over the past decade, pharmaceutical companies have entered a difficult period where shareholders, the market and regulators have created significant pressures for change within the industry. The core issues for most of drug companies are declining productivity of in-house R & D, patent expiration of number of block buster drugs, increasing legal and regulatory concern, and pricing issue. As a result larger pharmaceutical companies are shifting to new business model with greater outsourcing of discovery services, clinical research and manufacturing.

At the same time, the Indian Pharma Industry would have to contend with several challenges particularly the effects of new product patent,drug price control,regulatory reforms,infrastructure development,quality management and conformance to global standards. (Sources:http://www.cci.in/ pdf/surveys_reports/indias_pharmaceutica l_industry.pdf)

INTERNAL CONTROL SYSTEMS AND ADEQUACY

The internal control system of the Company are adequate and transparent commensurate with the size of the company. It is based on laid down policies, guidelines, authentications and approved procedures. The reputed firms of Chartered Accountants carries out audit throughout the year . The Internal Audit Report, the progress in implementation contained in the audit report and adequacy of internal controls are reviewed by Audit Committee of the Board on regular basis.

HUMAN RESOURCES & INDUSTRIAL RELATIONS

At AHLCON, we have been sharing expertise continuously, developing the internal potential of the employees from the present level to the desired level, to sustain the growth of our company. Regular and detailed performance appraisal system is in place to evaluate the performance of all employees and the necessary steps are taken to strengthen the areas which need improvements. Regular Training programmes, were organized for the employees. The Company regards its Human Resources amongst its most valuable assets and proactively reviews and evolves policies and processes to attract and retain its substantial pool of scientific, technical and managerial resources through a work environment that encourages initiative, provides challenges and opportunities.

AHLCON believes that its human assets give it the competitive edge. The definition and institutionalization of work ethics has resulted in creating a transparent, empowered and ownership driven culture in the organization. All efforts are being taken to ensure that people processes are aligned to business processes through key processes such as Talent Acquisition, Performance Management, KRA and Talent Development. Internal Communication continues to be the key engine to motivate and engage employees at the work place.

Adequate facilities and opportunities are also being provided to the technical and professional staff to update themselves in the fast changing era of technologies. More experienced technical manpowers are being taken at the senior and middle level to streamline the whole business process.

CORPORATE SOCIAL RESPONSIBILITY:

At Ahlcon, a large part of its commitment to caring for life comprises its commitment to think and make a difference beyond the world of business into the world of the under privileged and needy. It is in keeping with this core ideology of making a difference to communities and being at the forefront of corporate social responsibility that the AHLCON has always offered financial aid. Ahlcon recognizes the important responsibility towards society and has constantly endeavored and embarked on spreading awareness about social responsibility. After the amendment of company Act, 2013 the company has constituted a CSR Committee for the implementation of CSR Policy during the year 2014-15.

CAUTIONARY STATEMENT

The statements in this Report, particularly which relate to Management Discussion and Analysis describing the Companys objectives, plans, projections, estimates and expectations, may constitute "forward looking statements" within the meaning of applicable laws and regulations. Actual results may differ materially from those expressed or implied in the statement depending on the circumstances, which are beyond the control of the Company. The company assumes no responsibility in respect of forward looking statements which may be amended or modified in the future on the basis of subsequent developments, information or events.

For and on behalf of the Board of Directors

Anand Chandra shekhar Apte

Chairman

DIN: 01677401

Place: New Delhi

Dated: 12.08.2014