Cupid Ltd Management Discussions.

Economy Outlook

Despite strong growth momentum during the first half of the year, the growth rate in world economy softened during the second half resulting in a growth of 3.6% in 2018 as per IMF estimates against a backdrop of weakening financial market sentiment, trade policy uncertainty, and concerns about Chinas outlook. Global growth is expected to slow down further to 3.3% in 2019 owing to increasing trade tension between the US and China, financial tightening and slowdown in Europe and uncertainty surrounding

Brexit. However, global economic growth is expected to recover in the second half of this year on the back of decision by Federal Reserve to put interest-rate hikes on hold and encouraging data from Chinas manufacturing sector and the U.S. job market.

Indian economy growth in the last quarter of FY19 fell to a 20-quarter low dragging the overall growth to a five-year low of 6.8% in 2018-19. The slowdown was led by stress in nonbanking financial company (NBFC) sector which have been under liquidity pressure after the shock default by Infrastructure Leasing & Financial Services (IL&FS). Range-bound oil prices, softening interest rates, growth in exports, fiscal spending on infrastructure and the rural economy is likely to revive growth momentum going forward. However, escalating trade tensions, financial tightening, rise in crude prices, slowdown in global economy and increasing geo political tensions could act as major headwinds for growth prospects.

Industry Demand Scenario

Sexually transmitted diseases (STDs) and sexually transmitted infections (STIs) continue to be widespread. As such, condoms will continue to play its essential role in preventing STI and HIV transmissions and unintended pregnancy. Growing awareness through government initiatives and comprehensive sex education programs to reduce the prevalence of sexually transmitted diseases is driving the market growth of condoms across the globe. Rising efforts toward family planning and birth control measures are also supporting the market growth. Additionally, rising influence of internet and development and innovation in product designs is likely to fuel the market growth further in the upcoming years. Developing countries are witnessing significant growth in sales of condoms owning to rising popularity of Female Condom and growing expenditure towards contraceptive products. The advent of innovative designs, increased impact of internet on consumers purchasing behaviour, and popularity of Male and Female Condom are the latest trends that are going to shape the market positively.

Globally, government across many countries have launched various sexual health campaigns to encourage condom use by young adults to reduce the rates of sexually transmitted infections (STIs) and as a part of family planning training. Introduction of sex education in curriculum, awareness programs including advertisements and local campaigns to make the rural population understand the need for contraceptives and the risks associated with STDs and initiatives by governments such as installation of vending machines that can freely dispense condoms have helped in increased usage of condoms worldwide. According to Mordor Intelligence, the global condom market is expected to grow at an unprecedented CAGR of 9.8% during 2018-23.

Historically, the Male Condom segment has dominated the market both in terms of revenue and volume and is expected to continue its dominance. However, the Female Condom segment is witnessing significant growth in various countries. For instance, according to National South African Female Condom Program, around 80% of female prefers Female Condom over other female contraceptives which is driving the sales of Female Condoms in the country. Rising awareness in schools, colleges, mass media campaigns, workshops, etc will have significant impact on the sales of Female Condoms in both developed and developing countries. Although Female Condoms have been introduced in many countries, their penetration remains low owing to lack of awareness, limited advertisement & promotion and due to financial and regulatory barriers. However, the potential market for Female Condoms is expanding in various regions, including North America, Russia, Eastern Europe, and in Sub Saharan African countries.

Factors that are going to drive the growth in the sale of condoms going forward are:

1. Increasing prevalence of STDs/STIs including HIV

Since the first cases of HIV were reported more than 35 years ago, 78 million people have become infected with HIV and 35 million have died from AIDS-related illnesses. According to UNAIDS, in 2017, there were 36.9 million people living with HIV.

2. Preferred choice for family planning and birth control measures

Condoms have been promoted as a family planning method through social marketing. Reason for choosing condoms over other spacing family planning methods includes the fear of side effects of other modern spacing methods.

3. Initiatives by Government worldwide to create awareness

Governments across the world have formulated programs to spread awareness and encourage the use of condoms to prevent unwanted pregnancy and to prevent the spread of sexually transmitted diseases.

4. Increased availability and affordability

Both the online and offline platform are witnessing increased marketing and promotional activities resulting in easy availability of affordable condoms worldwide.

The acceptability of condoms depends on the awareness levels, knowledge, easy availability and affordability. Various strategies have been adopted to create awareness and spread correct use of condoms. Going forward, increase in demand for condoms is expected due to increase in international donor funding, higher consumption in lower- and middle-income countries and more funding from National Governments for the prevention of spread of HIV and unintended pregnancies.

Company Review

We started our journey in 1993 and currently we are a leading condom manufacturing company in India engaged in designing and manufacturing of Male Condoms, Female Condoms and Lubricant Jelly. In 2012, Cupid was the first company in India and only second in the world to have pre-qualified for Female Condoms accredited by WHO (World Health Organization)/UNFPA (United Nations Population Fund) for worldwide public distribution. From a manufacturing standpoint, our facility at Nashik is mapped to global standards with best quality practices and accredited with various quality standards. As a testimony to our systems, we are WHO-GMP approved along with certifications from ISO standards such as 9001:2008, 13485:2003, 14001:2004, CE-0434, pre-qualification from UNFPA, SABS Mark, USFDAti510k for Male Condoms and Indian FDA amongst others. We have a strong focus on research and development initiatives which have enabled us to develop and improve our product portfolio. We have an active research and development centre in addition to our production facility at Nashik enabling us to innovate and enhance our product portfolio and remain ahead of the curve in meeting the emerging requirements of our customers. Historically, we have operated predominantly in the B2B space, but we are now focusing also in the B2C category. In the B2B segment, we primarily cater to governments and institutional buyers worldwide for prevention of AIDS, STIs, STDs and prevention of unintended pregnancies. We are also engaged in contract manufacturing business, whereby we undertake contracts and manufacture products under other customers brands. During the year, we launched Cupid range of Male and Female Condoms, Hand Sanitizers and Water Based Lubricant Jelly and started to export the products. The Company started work on expanding production capacity by about 40% during the year which would permit Cupid to participate in large sized tenders from Brazil, South Africa, Zambia and India.

The Company witnessed muted performance in Fiscal Year 2019 owing to slowdown in Female Condom orders from South Africa and higher share of low margin Male Condom in overall sales. The revenue of the Company was impacted due to continuing slowdown in Female Condom orders and declined from Rs 806.0 mn in FY18 to Rs 854.7 mn in FY19. Out of the total operating revenues, the Male Condoms contributed about 59% in value terms as against 40% for the Female Condoms, and Water Based Lubricant Jelly added around 1%. From a margin standpoint, our EBITDA margins stood at 27% in FY19. At the net profit level, we closed this financial year with a net profit of Rs 152.1 mn (FY19) as against Rs 170.9 mn in the previous year. During the year, Cupid celebrated its 25th Anniversary (1993 to 2018) and announced Bonus Share offer, 1 share for 5 shares to all its shareholders at the AGM. Your Company successfully completed its three years contract of Female Condom supply to the South African Government. Cupid shall continue to explore possibility of enhancing business prospects in South Africa and other sub-continents. Based on Female Condom brand registration in Brazil, the Company expects to garner sizable order for Female Condom. UNFPA renewed Cupids Pre-Qualification status for its Female Condom Version 1 & 2 and Male Condom. Cupid continued to dispatch Male Condoms to Govt. of India and for the first time started to export to Central American countries like Guatemala, Honduras besides Dominican Republic and Haiti through United Nation Population Fund (UNFPA).

Outlook

We are currently seeing robust demand for Male and Female Condoms from UNFPA, NGO as well as from tender businesses. In order to prepare the company to be ready for these opportunities, Cupid has decided to go for around 40% increase in production capacity. The Company has decided to market condoms in India through wholesalers in a cost-efficient manner. "Cupid Angel" Trademark has been finally registered with the United States Patent and Trademark Office which would help us to promote and market our Cupid Female Condoms in USA.

Some of the key initiatives planned for coming years are:

A. Launch the newly developed products including different types of wipes, second generation Female Condoms and Vaginal Wash through online sales.

B. Capitalizing on the digital marketing medium to sell Cupids products through already established ecommerce portals.

C. Strengthen our distribution network and foray into newer geographies both for the institutional as well the retail business.