Centenial Surgical Suture Ltd Management Discussions.

Your Companys management believes that it has been objective & prudent in making estimates and judgements relating to the financial statements & believes that these financial statements are a fair representation of your Companys operations and profits for the year. To survive and thrive, in a sector in constant transition, suture makers need to transform themselves. Analysts are of the view that "globalization" is no longer a matter of choice and suture businesses long-term success depends on it. The businesses that ride the next wave of growth will be those that understand the trends and refine their strategies, business models and portfolios according to a truly Indian mindset.

Overview

The long-term growth prospects for the Indian Economy continue to be vibrant and positive due to its young population, liberalised Government policies and strong welfare schemes for the upliftment of the poor. These initiatives have enabled India to become one of the fastest growing economies of the world. Very few large economies of the world are reporting GDP growth of more than 6.5%. It is expected that the short-term challenge of Indian Industrial growth (which is below 1%), shall be addressed since Industrial Growth is a key driver for employment generation. The year under review witnessed volatility on several fronts. The US sanctions on Iran resulted in a sudden spurt in Crude oil prices during the first three quarters, with the price touching high of US $ 84 /barrel from base of $ 65/barrel at the beginning of the financial year. Since 80% of the Indian crude oil requirement is met through imports, the economy experienced serious fiscal repercussions and apprehensions on account of ballooning trade deficit and other economic factors. The Indian Rupee devalued from levels of Rs.67 per USD to Rs.74.50 levels in a matter of a few months. Post deferral of Iran sanctions by six months, crude oil prices started coming down from Nov 2018 and stabilized in the range of $62-66/barrel, thus stabilizing the dollar exchange rate around Rs.70/USD. The recent news on the withdrawal of waivers to select countries by the US Government has led to a surge in crude oil prices touching $ 75/ barrel. If implemented, the outcome is likely to affect rupee- dollar parity as was encountered during first half of the previous financial year. The manufacturing sector in general which looked buoyant during the first half of the financial year, experienced a surprisingly recessionary situation for the second half of the year and this trend looks likely to spill over for the initial part of the next financial year. A large part of this slowdown can be attributed to the slowdown in global trade and the Chinese economy which recorded their lowest GDP growth during last 20- 25 years. Chinese outlook continues to be moderate. At the same time, growth prospects in EU economy look flattish. As a result, surplus capacities built during the economic buoyancy (particularly in China), will take some time to find commensurate demand. Global growth is expected to be moderate about 2.9% in Financial Year 2019 - 2020. Global financing conditions have tightened, industrial production has moderated, trade tensions remain elevated, and some large emerging market and developing economies have experienced significant financial market stress. Faced with these headwinds, the recovery in emerging market and developing economies has lost momentum.

The Company registered sales of Rs.5605.47 lakhs in the financial year ended March 31, 2019 and net profit after tax of Rs.201.64 Lakhs. The technical functioning of the manufacturing facility as indicated by the above-mentioned results, the capacity utilisations was quite satisfactory and production levels has selectively improved as required.

Suture Industry

The global surgical suture market is projected to reach USD 5.02 billion by 2023 form USD 3.86 billion by 2018, at a CAGR of 5.4% from 2018 to 2023. The global market for surgical sutures is witnessing steady growth primarily due to the increasing number of surgical procedures conducted, globally. The favourable reimbursement scenario for a number of surgical procedures and the launch of advanced sutures are further contributing to the market growth. The report segments the surgical sutures market by product, type, application, end user, and region. Based on product, the surgical suture market is segmented sutures thread and automated suturing device. The suture threads segment is expected to command the largest share of this market majorly due to the greater preference for suture threads for wound closure and their lower cost as compared to automated suturing devices. Based on type, the surgical suture market is segmented into monofilament and multifilament sutures. The multifilament/braided segment is expected to account for the largest share of the surgical sutures market. The growth of this segment is driven by the increasing number of complex surgeries, rising geriatric population, and favourable reimbursement policies for hospital treatments. Based on application, the surgical sutures market is segmented into cardiovascular surgery, gynecological surgery, orthopedic surgery, ophthalmic surgery, general surgery, cosmetic surgery, and other applications. In 2018, the cardiovascular surgery segment is expected to dominate the surgical sutures market. The largest share of this application segment can be primarily attributed to the large number of cardiovascular surgeries performed across the world as a result of the high prevalence of cardiovascular diseases (CVDs). Based on the end user, the surgical suture market is segmented into hospitals, ambulatory surgical centers, and clinics & physician offices. Among these, the hospitals segment is expected to account for the largest market share in 2019 - 2020. The large share of this segment is attributed to the increasing number of complex surgeries performed in hospitals, rising geriatric population, favorable reimbursement policies for hospital treatments, and increasing number of new hospitals established, especially in emerging countries. Asia is expected to register the highest CAGR during the forecast period owing to the regions growing medical tourism industry, rising prevalence of chronic diseases, and favorable reimbursement scenario. Moreover, the key surgical sutures manufacturers are also focusing on gaining a competitive edge in these high-growth markets, which is aiding the growth in Asia. However, the presence of alternative Wound Care management products and growing preference for minimally invasive surgeries are some of the factors expected to limit the growth of the market to a certain extent. The global surgical sutures market size is increasing in the number of surgeries due to unhealthy lifestyle and aging population are anticipated drive the market. Improved safety and efficacy of various surgeries due to technological advancements is also expected to boost the market demand. Initiatives, such as acquisitions and partnerships, undertaken by key companies for product development and distribution activities are expected propel the market further during the forecast years. Flexible government regulations for surgical procedures, aging baby boomers, and the introduction of technologically advanced products are likely to increase number of surgeries and thereby the market in the coming years and surgeons will perform surgeries ranging from tooth extraction to open-heart procedure. Increase in awareness about surgeries in the developing region, investment by market players in emerging markets, and developing imaging and diagnosis techniques are the other key factors to boost the growth in coming years.

Based on type, the market has been segmented into absorbable and non-absorbable sutures. In 2017, absorbable suture accounted for the largest share of the market and is expected to maintain its position during the forecast period. This can be attributed to the ability of the suture to provide temporary support to wound until it heals significantly. Furthermore, it is cost effective as it dissolves in the body after a certain period. Non-absorbable sutures are majorly used on skin wound closure where stitches can be removed after few weeks or in a stressful internal environment where absorbable sutures are unable to fulfill the requirement. Special silk, stainless steel wires, synthetics polypropylene, polyester, and nylon are the major material used for non-absorbable sutures. Based on the type of filament, the sutures market has been segmented into monofilament and multifilament sutures. Multifilament accounted for the maximum market share due to its greater strength, more flexibility, and pliability. Increased number of complicated surgeries, availability of more products, and high cost over monovalent sutures are likely to drive the segment in the coming years. Based on application, the surgical sutures market is divided into ophthalmic surgery, cardiovascular surgery, orthopedic surgery, neurological surgery, and others. Cardiovascular surgery accounted for the largest market share and is expected to expand at the fastest CAGR during the forecast period. This can be attributed to the increasing incidence rate of cardiovascular diseases and technological advancements in diagnostics, imaging, and surgical tools. The others segment includes gynecology and obstetrics surgery, urology, gastrointestinal surgery, general surgery, and oral surgery. The increasing number of obese population and rise in the number of womens health issues are likely to drive this segment significantly over the forecast period. Asia Pacific is expected to grow at a rapid pace over the forecast period owing to the introduction of technologically advanced products due to investment by market players in this region, high volume of surgeries, and growing consumer disposable income levels. China, Japan, and India are the major markets in the Asia Pacific region. Increasing medical tourism is another key factor for the rise in the number of surgical procedures and thereby sutures market in the region.

Finished goods prices witnessed a sudden drop. Thankfully, due to your companys wide range of products and through an optimum mix of inventory management and buying strategy, we could withstand this shock, and this partially impacted the profit margins during the year.

Quality

Your Company has been consistently meeting the Quality Objectives of ISO 9001:2015, ISO 13485:2016, WHO-GMP, ISO 45001:2018 and medical devices are in conformity to medical device directives 93/42/EEC, Medical Device Rules, 2017.

Economic Environment

Analysts expect the Financial Year 2018 - 2019, Gross Domestic Product (GDP) growth to improve mainly on the back of a recovery in the industrial sector. The GDP growth forecast for Financial Year 2018 - 2019 is however lower.

Research and Development

The Company has achieved the following through Research and Development:

• Development of new value-added products.

• Process improvements resulting in better yields and further improvement in Quality of Products.

Energy Conservation

Regular studies are carried out to ascertain the quantitative energy consumption patterns, variances are analysed and corrective actions taken. The Company is continuously working towards further improvements in energy consumption levels.

Health, Safety and Environment

During the period under review, medical check-up of all regular employees has been carried out. All requirements pertaining to pollution control, environmental protection and safety have been complied with. Employees have been trained to observe the guidelines relating to safety, health and environment.

Companys Philosophy on Code of Governance

Philosophy of your Company on Corporate Governance envisages the attainment of the highest levels of transparency, accountability and equity, in all facets of its operations. Your Company believes that all its operations and actions must serve the underlying goal of enhancing overall shareholder value, over a sustained period of time.

Opportunities and Threats

The surgical industry depends largely on new surgical applications and surgeries. In the last few years, the increase in the allocation of funds for such purposes has been on the increase and as such the opportunity of growth in surgical items is unlimited. However, there exists untapped potential in the nursing home sector. The Company has arrangement / understanding with various distribution markets and sell various items which are required in the nursing home market. The Rupee traded in the range of Rs.67.00 Rs.74.50 per USD. The Company continued to mitigate the risk of this volatility by effecting payments towards our imports out of our Export Earnings as much as possible and by taking adequate cover. To negate the impact of competition, our competitors have for long been dumping their medical devices / products in the Indian market at low prices. The possibility of competitors pursuing an irrational pricing approach cannot be ruled out. This may create pressure on our margins. Sentiment-driven currency changes can also impact domestic prices and profitability. The country is expecting a normal monsoon this year, any shortfall may lead to fall in the rural demand thereby unfavourably impacting some patients / user segments.

Product Performance

The overall growth of business in the country has not been upto the desired levels because of restricted funding. However, in view of unrestricted imports, competition, sales and profitability of the Company has been affected.

Outlook

During the current financial year there has been a slight improvement in the market conditions resulting in an increase in despatches and satisfactory sales price realisations. It is expected that this trend will continue. Further, slow growth rate of the Indian economy has been projected and the Company expects its growth to be slow.

Risks and Concerns

Your Company has from its inception been conscious and has regularly evaluated the risks and threats that control it and converted these threats into opportunities to its best advantage. The management believes that your Companys business is subject to a number of risks. Many of the components of the regulatory regime are established or articulated by the relevant regulatory authorities, including Food and Drug Administration. The Risk Management in your Company has been functioning effectively and has been contributing to the mitigation of the risks that would have otherwise impacted our Company.

Operating and Financial Performance for the Year

The Financial Statements comply in all material aspects with Indian Accounting Standards (Ind AS) notified under Section 133 of the Companies Act, 2013 (the ‘Act) [Companies (Indian Accounting Standards) Rules, 2015] and other relevant provisions of the Act. The Company remains a zero-debt company. The Company had also approached CRISIL Limited for review of its existing ratings, which had assigned CRISIL A1+ (stable) for its Non-Fund based Bank Facilities. The Companys performance about the domestic sales volumes, remained reasonable for the year on account of slight slowdown and competition experienced at domestic surgeries in medical industry. On the export business front, despite stiff competition, your company successfully exported to strategic accounts with wide range of products and thus achieved a healthy growth. By a combination of a better product mix helped by speciality products and continual improvement in the efficiency of operations the Company has managed to keep its operating margins at reasonable levels for all the four quarters, although during second half the EBIDTA levels, dropped due to slowdown, falling prices and some legacy input costs on account of our inevitable coverage of 2- 3 months.

Summary of the financial performance of the Company is presented below:

Rs. in Lakhs

For the year ended March 31 2019 2018
Net Profit before Depreciation & Taxation 353.61 301.40
Less : Depreciation 69.43 60.08
Provision for Deferred Taxation 0.00 0.00
Provision for Taxation / Written Off 82.54 87.10
Net Profit/(Loss) 201.64 154.21
Add : Balance from Last Year 2061.56 1907.35
Prior Period Profit adjustments 0.00 0.00
Less : Appropriation 0.00 0.00
Transfer to Reserves Profit / (Loss) carried to Balance Sheet 2263.20 2061.56

During the year under review, the Company achieved a profit before tax of Rs.276.69 Crores as compared to Rs.253.07 Crores in 2017 - 2018. Pursuant to the SEBI (Listing Obligations and Disclosure Requirements), (Amendment), Regulations, 2018, the key financial ratios viz., Debtors Turnover, Inventory Turnover, Operating Profit Margin (%), Net Profit (%) and Return on Net Worth do not exceed the threshold of 25 % or more as compared to the immediately preceding financial year.

Adequacy of Internal Controls

Your Company has a proper and adequate system of internal controls to ensure that all assets are safeguarded and protected against loss from unauthorised use or disposition and that transaction are authorised, recorded and reported correctly. The Audit Committee of the Board of Directors regularly reviews the findings of the internal auditors, adequacy of internal controls, financial controls, compliance with the accounting standards, as well as recommends to the Board, the adoption of the quarterly and annual results of the Company and appointment of auditors. The Audit Committee also reviews the related party transactions, entered by the Company during each quarter. Further, the Secretarial Auditors review on periodical basis through their own systems and check list the compliances part with respect to the Companies Act, 2013 and SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015, as amended and other SEBI regulations as may be applicable to the Company.

Material Development in Human Resources & Industrial Relation

Significant efforts have also been made to further strengthen the Companys Performance by the Management. The employee strength of the Company as on March 31, 2019 was 275. Talented and skilled manpower is an important enabler for a Company to grow and maintain competitiveness. Human resources are considered as most important and valuable assets of your Company. Focus was kept on acquisition, retention and development of necessary skilled manpower keeping in view our current operations requirement as well as the future business expansion and growth plans, particularly the Murbad, Thane plant. Innovative incentive schemes are designed and implemented as a motivational and retention strategy. Company continues to conduct employee trainings across several functions pertaining to technical, behavioural / general, health safety and environment and ISO standards. ‘Managerial Skill Development training programs are conducted to enhance the soft skills of potential managers. A regular employee performance evaluation system is in place to evaluate the individual performances as well as determining their development needs and future potential. Your company has complied with all the regulations pertaining to Factory, Labour and other applicable laws and very cordial Industrial Relations are maintained with the employees. The Management strives to maintain a climate of openness, fairness, equality and respect for individuals leading to industrial harmony, mutual trust and teamwork. Industrial relations at the plant of the Company remained cordial during the year 2018 - 2019 under review.

Cautionary Note

The Statements made in this report are forward-looking and are made on the basis of certain assumptions and expectations of future events. The Company cannot guarantee that these forward-looking statements will be realized, though they are set out based on anticipated results and management plans. The Companys actual results, performance or achievements are subject to risk, uncertainties and even inaccurate assumptions, which could thus differ materially from those projected in any such forward looking statements. The Board of Directors of the Company assumes no responsibility in respect of the forward-looking statements mentioned herein, which may differ in future on account of subsequent developments, events or otherwise and the Company is under no obligation to publicly update any forward-looking statements on the basis of subsequent developments, information, future events or otherwise.

By Order of the Board of Directors

For CENTENIAL SURGICAL SUTURE LTD

Vijay MAJREKAR
Place of Signature : Mumbai, Maharashtra Managing Director
Date: August 9, 2019 DIN: 00804808