innovasynth technologies india ltd share price Management discussions

INNOVASSYNTH TECHNOLOGIES (INDIA) LIMITED ANNUAL REPORT 2009-2010 MANAGEMENT DISCUSSION AND ANALYSIS 1. INDUSTRY STRUCTURE AND DEVELOPMENTS: The Company is engaged in the business of customs synthesis, contract research & development, contract chemicals, specialty chemicals, toll and contract manufacture of various chemicals and similar businesses. Thus the Company is engaged in several diverse activities which cannot be benchmarked to any industry. The Company is currently engaged in both contract research & development for product groups like protected nucleosides, phosphoramidites & amino acids, intermediates for active Pharma intermediates, specialty carbohydrate derivatives, metalocene compound, etc. The Companys focus on nucleosides and amidites has placed it in one among the top few companies engaged in this activity in the world. The Company manufactures specifically against orders received from its customers. The Company is also manufacturing under long term contract since 2001 with Ciba Specialty Chemicals (Now BASF after global take over of business), Switzerland for manufacture of a single product. This has been one of the major contract manufacturing activities of the Company since its inception. The Company has developed hundreds of molecules for several internationally well known customers. Last five years of hard work and promotion of companys technical capabilities have resulted in well known chemical and pharma MNCs accepting Companys status as a quality Research & Development company especially in several new areas. The entire production of the Company is exported. Hence the Company has applied for the status as Export Oriented Unit (EOU) with appropriate authorities and expecting to receive the approval in due course of time. 2. OPPORTUNITIES AND THREATS The Company has been recognized internationally as one of the few companies in development and manufacture of nucleosides and amidites. This breakthrough opens up vast opportunities for the Company in this area. There are several Pharma MNCs worldwide which are actively engaged in developing new drugs based on DNA analysis, Stem cell research etc. The requirement for nucleosides and amidites of different types, for research, manufacture and diagnosis offer unlimited opportunities. The Company has already in the supply chain of some of the large R&D and Pharma companies who are using the Companys products for their research. Some of the drugs are in advanced stage of Clinical trials and once these are successful, the Company can hope to get multi ton orders from these companies. Similarly, in customs synthesis and contract manufacture, the Company has established its name and has been working successfully for CIBA (& now with BASF) since 2001. Last year, the Company produced 196 metrics ton of a single product for this customer and has received order for around 312 MT for the year 2010. The Company hopes this contract would continue further as the markets in US & Europe has opened up post recession and demand is picking up. The Company has to depend on supplies through imports and therefore, logistics assumes considerable importance. However, the industry scenario appears bright and the Company hopes to emerge as one of the major players in the world. 3. PERFORMANCE The Companys turnover for 2009-10 was Rs. 31.79 crores as compared with Rs. 41.82 crores during the previous year. The year has resulted in a net loss after tax of Rs. 7.73 crores compared with Rs.13.71 crores during the last year. The reduction in losses is due to reduction in financial expenses & other fixed overheads. The net worth of the Company as on 31st March 2010 amounts to Rs.95.24 crores. The Company is yet to reach a break even level to earn profits. This is due to the fact that the Company has to invest in infrastructure and servicing of fixed expenses in advance to establish its credentials with prospective customers who come to audit the companys facilities before placing orders. Secondly the global market is hit by the recession and as a result business of Contract manufacturing and Custom Synthesis are affected. The Company hopes to achieve progress in the current year. In view of the investments made earlier, the Companys financial costs, depreciation and other fixed costs cannot be fully absorbed at the current turnover level. Further the losses incurred by the Compa have affected the current cash flow situation. However, the Company is in due process of receiving adequa orders for the current year to meet its budgetary projection. 4. OUTLOOK The Company expects to substantially increase its turnover in the current year considering the orders likely be received for a range of products developed for its customers. New customers have been added for Deo amidites, RNA amidites, Fluro amidites, Sugar Monomers, Sodium-p- Glycerophosphate and many specialty product There is positive response from various Pharma companies, oligo houses and drug discovery companies in US Europe and Japan for supply of Deoxy and RNA amidites. In view of increase in potential demand for vario nucleoside products and considering their pH sensitive nature, your company has converted one of the special chemical plant into nucleosides and amidite manufacturing plant. There is a good demand post global recessio for the new business segments entered into by the company, namely, Protected Amino acids and other chemica In other chemicals segment, discussions are at an advanced stage with one of the leading US based compani for large contract manufacture collaboration. On finalization of the contract, there will be a quantum jump the turnover. In contract chemicals segment, the existing contract with BASF is expected to continue as t Company has received a bulk order of around 312 MT for the current year. Overall the future prospects appe to be bright in view of recovery of global recession. Company has also started local initiative to sign contra manufacturing agreement with Indian Pharma Companies which will give steady cash flow over and above goo profit margin. Cost reduction measures being implemented especially in utilities. Steam generation through low cost input (i. Bio-mass) has already resulted in saving in utility cost. This will also enable us to benefit from Carbon cred Cost cutting measures in other fixed overheads are also in vogue. 5. RISKS & CONCERNS As the Company is involved in research and development of new molecules and products there are possibiliti of delay in the client commercializing their development. This is also partly affected by global meltdown. Wor economy is now at a stage of gradual recovery. Many of the clients who are carrying out clinical trials for dru for which the Company has supplied the raw materials, are in advanced stage of trials. Once these trails a completed successfully and they commercialize the same, the Company will benefit by way of substantial order Further, development of new molecules and products involve considerable development costs which are to amortized over a period of few years. There are possibilities that the client may not succeed in their development of their final products. In view of several new products being developed simultaneously, it would be difficult assess the capacity utilization which depends on the product mix. The Company, however, attach priority to high contribution products to improve its profitability. The Company also depends for its growth on its vast skilled scientists and chemists whose continuance in service is a critical factor inspite of high recurring and retentio cost. 6. INTERNAL CONTROL SYSTEMS AND ADEQUACY The Audit Committee set up by the Board reviews periodically the internal audit reports submitted by the intern auditors. The Management periodically interacts with the internal auditors and statutory auditors. The Company has adequate internal control systems commensurate with its size and operations. 7. HUMAN RESOURCES AND INDUSTRIAL RELATIONS Industrial relations remained cordial throughout the year. The number of permanent employees on roll of th Company is 228. Of this, there are 3 doctorates (Ph.Ds) in Chemistry and 58 Chemists are engaged in R& work. The unionized workers are 70 in number.