IOL Chemicals & Pharmaceuticals Ltd Management Discussions.

1. INDUSTRY STRUCTURE AND DEVELOPMENT

India has emerged as the fastest growing major economy in the world as per the Central Statistics Organisation (CSO) and International Monetary Fund (IMF) and it is expected to be one of the top three economic powers of the world over the next 10-15 years, backed by its strong democracy and partnerships. Indias GDP have increased 7.2 per cent in 2017-18 and 7 per cent in 2018-19. India has retained its position as the third largest startup base in the world with over 4,750 technology start-ups. Indias foreign exchange reserves were US$ 405.64 billion in the week up to March 15, 2019, according to data from the RBI. Indias revenue receipts are estimated to touch Rs. 28-30 trillion (US$ 385412 billion) by 2019, owing to Government of Indias measures to strengthen infrastructure and reforms like demonetisation and Goods and Services Tax (GST). (source : www.ibef.org)

Chemicals industry in India is highly diversified. It is broadly classified into Basic chemicals, Specialty chemicals, and Agrochemicals. The market size of Indian chemicals industry stood at $ 163 billion in 2017-18 which is projected to reach $ 304 bn by 2025. The specialty chemicals market has witnessed a growth of 14% in the last five years; the market size is expected to reach $ 70 bn by 2020.

The healthcare industry in India stood as the fourth largest employer in 2017. Key components of the healthcare market in India are hospitals, pharmaceuticals, diagnostics (imaging and pathology), medical equipment and supplies, medical insurance and telemedicine. Growing incidence of lifestyle diseases, rising demand for affordable healthcare delivery systems due to the increasing healthcare costs, technological advancements, the emergence of telemedicine, rapid health insurance penetration and government initiatives like e-health together with tax benefits and incentives are driving healthcare market in India. Indias healthcare market may see a threefold jump in value terms to reach $ 372 bn by 2022. (source: www.investindia.gov.in)

Moreover India enjoys an important position in the global pharmaceuticals sector. India is the largest provider of generic drugs globally and meets over 50 per cent of global demand for various vaccines, 40 per cent of generic demand in the US and 25 per cent of all medicine in UK. Indias pharmaceutical exports stood at US$ 17.27 billion in FY18 and have reached US$ 15.52 billion in FY19 (up to January 2019). Pharmaceutical exports include bulk drugs, intermediates, drug formulations, biologicals, Ayush & herbal products and surgicals.

2. Opportunities and Threats Opportunities

1 Growing domestic and international market provides potential for growth.

2 Growth of speciality chemicals specially Ethyl Acetate, a green solvent, is remained robust due to its diverse use in the various industries

3 Increased visibility of the company resulting in easy penetration in global market.

4 Rising demand for affordable healthcare facilities are driving the market for generic medicine throughout the world.

Threats:

Competition in generics in domestic and international market.

3 Business Segment Performance and outlook

Company is one of the leading APls / bulk drugs Company and is significant player in the specialty chemicals space with world class facilities. IOLCP has wide presence across major therapeutic categories like, pain management, anti-diabetes, anti- cholesterol and anti-platelets.

The Company is a manufacturer and global supplier of APIs such as Ibuprofen, Metformin, Clopidogrel and Fenofibrate and other APIs. Specialty Industrial Chemicals segment includes manufacturing of Ethyl Acetate, Iso Butyl Benzene (IBB), Mono Chloro Acetic Acid (MCA) and Acetyl Chloride.

The Company have manufacturing units in Punjab at Village Fatehgarh Chhanna, District Barnala and have an DSIR approved R&D Centre located at works which is equipped with advanced and analytical instruments. The Company have also a captive Cogeneration unit with capacity of 17 MW to meet the power requirements of the plant.

The Company have an excellent team of technical and commercial professionals with expertise in pharmaceutical and chemical manufacturing and marketing.

Specialty chemical i.e. ethyl acetate have application in diverse important industries like pharmaceuticals, ink industry flexible packaging, adhesives, surface coatings, flavours ,paints & lamination and essences etc. The demand for the product is driven by a wide range of end use industries.

Demand for APIs is showing continuous increase in its demand due to growing incidence of lifestyle diseases, rising demand for affordable healthcare delivery systems.

4. Risks and Concerns

The main risks to which the Company is exposed as well as approach taken by the management to control and mitigate those risks is given below:

Regulatory risk

The Company operates in a highly regulated pharmaceutical industry. Any lapse to comply regulations may adversely impact its operations. To overcome, regular internal and external inspections are being made to ensure compliance of regulations of Indian and all leading global regulatory authorities.

Operational risks

Increase in raw material prices could impact the performance of the Company. The Company manages it by entering into regular agreements to ensure the continuous supply of raw material and lifting of its finished products to achieve the desired production level and proper utilization of resources. Moreover the Company has backward integrated manufacturing facilities to ensure continuous supply of major raw material in house to bulk drugs.

Debt risk

This refers to the possibility of default of a Company to meet its obligations because of unavailability of funds to meet its debt and operational requirements. In order to ensure adequacy of its funding, cash flow forecasts are prepared regularly and appropriate actions are taken. The Company had prepaid term loans of Rs. 20.05 crore during financial year 2018-19 and further prepaid Rs. 27.57 crore till date of report in addition to regular repayments to the banks.

Credit risk

Credit risk is associated with losses that occur when debtors are unable to meet their obligations on time. Company has established internal policies and controls to determine credit worthiness and reliability of existing and potential customers, which are reviewed on periodical basis.

Geographic risk

A significant concentration in a particular market could be a risk in the event of downturn in that region. So the Company has network of customers in most of states of India. The Company has also expanded its customer base in about 80 countries to mitigate geographical risk. Moreover Company caters different industrial users of the same product.

Technological risk

Technological advancement could result in asset obsolescence warranting a high cost of replacement. Company is using the latest and state of the art technology in the manufacturing, processing and quality control measures and keeps itself in touch with the latest updation in technology and adopting the same to remain efficient in productivity and cost minimization. Moreover the Company has DSIR recognized Research and Development cell which is very active in developing and validating new processes for existing products and development of new products .

Environmental Health and Safety Risk

Today Governments of all the countries around the world are cautious about the environment safety. Non compliance with environmental regulatory issue might affect operations. Company conducts periodic checks to compare effluents and stack emissions and comply with all applicable rules and regulations to protect the environment. Moreover, Company has also obtained ISO 14001:2004 Certification.

Health and Safety of the Workforce is priority of the Company. IOLCP committed itself to manage it through occupational health and safety management tools, dedicated dispensary at factory and qualified Doctor. Moreover the Company has obtained OHSAS 18001:2007.

Competition risk

The Company is exposed to competition from indigenous as well as foreign players. We are controlling the competition risk by continuously improving the quality and capacity of products and maintaining long term relationship with our customers by providing better services to them. The Company is a global leader with about 30% market share in Ibuprofen. The quality control department implemented a range of quality assurance procedures to providing high quality products to our customers.

Foreign exchange risk

Company is exposed to foreign exchange risk with respect to foreign currencies, denominated mainly in US dollars, on revenue and supplies. Although the foreign currency risk is naturally hedged as the Company is importing and exporting the goods. However, the Company does regular monitoring of exposures and takes hedging whenever required,

Human Capital Risk

Acquisition and retention of right talent is critical to maintain desired operational standards. The Company has a dedicated team of professionals who is not only looks after the recruitment and training of human capital but also takes care to provide better working environment and development opportunities to them for their self progress.

Insurance

All the insurable immovable as well as movable assets of the Company including stocks are adequately insured and all insurance policies are in force as on the date of the report.

5. Internal Control System and its adequacy

The Company has aligned its current systems of internal controls including financial controls with the requirement of Companies Act 2013. The Companys internal controls are commensurate with its size and the nature of its operations. These have been designed to provide reasonable assurance with regard to recording and providing reliable financial and operational information, complying with applicable statutes, safeguarding assets from unauthorized use, executing transactions with proper authorisation and ensuring compliance of corporate policies.

The Company uses best IT system to record data for accounting, consolidation and management information purposes and connects to different locations for efficient exchange of information.

The Audit and Risk Management Committee reviews reports submitted by internal auditors regularly and suggest the improvements from time to time which are being implemented by the Company.

6. Financial Performance

A. Profit and Loss Account Revenue

Total income has increased to Rs. 1695.70 crore during the year of review as compared to Rs. 1007.29 crore during the previous year. FOB value of Export sales of the Company has also increased from Rs. 309.72 crore to Rs. 588.40 crore.

Segmental Revenue

Bulk drugs segment contributed about 66% of total revenue for the financial year 2019 against 63% contribution in financial year 2018. The Chemicals Segment contributed about 34% to total revenue in financial year 2019 against 36% in financial year 2018.

EBIDTA

EBITDA of the Company has increased to Rs. 420.02 crore during year under review from Rs. 125.86 crore during the previous year due to increase in the operation efficiencies.

Net Profit after tax

The Company has earned profits after tax of Rs. 236.70 crore in the year under review against profits after tax of Rs. 27.70 crore during the previous year.

B. Balance Sheet Share Capital

Authorized share capital of the Company is Rs. 80 crore divided into 8,00,00,000 equity shares of Rs. 10/- each as on 31 March 2019. Paid-up share capital of the Company is Rs. 56,88,75,020/- consisting of 5,68,87,502 equity shares of Rs. 10/- each.

Reserves and Surplus

Reserves and surplus at the end of the year under review stood at Rs. 417.45 crore against Rs. 159.53 crore at the end of previous year.

Net Worth

Net worth of the Company has improved to Rs. 474.34 crore at the end of the year as against Rs. 215.74 crore at the end of previous year.

Borrowings

Long term secured borrowing at the end of financial year 2019 were Rs. 189.88 crore against Rs. 236.16 crore at the end of financial year 2018. Unsecured long term borrowings at the end of financial year 2019 stood at Nil against Rs. 21.96 crore at the end of financial year 2018. The Company has prepaid the term loans amounting to Rs. 20.05 crore during the year in addition to regular repayments. Short term secured borrowing at the end of financial year 2019 were Rs. 67.72 crore against Rs. 135.27 crore at the end of financial year 2018.

Assets

Non- Current Assets

Total Fixed assets including Capital work-in-process increased to Rs. 438.74 crore as on 31 March 2019 from Rs. 412.59 crore as on 31 March 2018, net of depreciation and additions.

Current Assets and Current Liabilities

The Company had inventories of Rs. 188.86 crore as on 31 March 2019 against Rs. 207.45 crore as on 31 March 2018. Trade Receivable amounted to Rs. 199.16 crore as on 31 March 2019 as compared with Rs. 146.14 crore as on 31 March 2018. The trade payables decreased to Rs. 120.27 crore as on 31 March 2019 as compared with Rs. 157.61 crore as on 31 March 2018. The changes are in line with increase in overall operations.

Cash flows

The Companys net cash flow from operating activities for the year ended 31 March 2019 amounted to Rs. 273.17 crore against net cash flow used in operating activities Rs. 119.72 crore during the previous year.

The Companys net cash used in investing activities amounted to Rs. 63.04 crore during the year ended 31 March 2019 against Rs. 50.38 crore during the previous year.

During the year, net cash used in financing activities amounted to Rs. 197.46 crore as against net cash flow from financing activities Rs. 70.36 crore during the previous year.

Analysis of Ratios :

Ratio Year ended 31 March 2019 Year ended 31 March 2018 Remarks
Operating Profit Margin (%) 24.77 12.49 Better utilisation of resources and improvement in operational efficiencies
Net Profit Margin (%) 13.96 2.75 Increased due to better realisation of prices of products
Return on Net Worth (%) 49.90 12.84 Better utilisation of resources
Debtors Turnover (Days) 43 53 Efficient and quick realisation

 

Ratio Year ended 31 March 2019 Year ended 31 March 2018 Remarks
Inventory Turnover 8.51 4.18 Efficiency in operations
Interest Coverage Ratio 8.17 1.96 Better utilisation of resources
Current Ratio 1.90 1.23 Better profitability
Debt Equity Ratio 0.46 1.33 Better profitability and pre-payment of loans
Fixed Assets Coverage Ratio 2.03 1.56 Efficient use of resources

7 Human Assets

The Company has a team of 1618 strong members as on 31 March 2019 consisting of 6.18% Professionals, 25.53% Post Graduates/ Graduates, 14.52 % Diploma/ITI and 53.77 % others.

The Company emphasizes on all around development of the human resources. The Companys HR policies entail injecting company with a high degree of expertise, professional depth, dynamism and power of the youth. The Company belief in respect of human resources and dignity of labour and consider human resources very valuable and vital assets for the development of the organization. We provide managerial and leadership development programmes across all levels to improve our business practices. The Company gives due importance to talent acquisition and thus have a blend of both campus and latent hiring. We believe in nurturing of talent and companys practices root for the same by providing them strategic training and development programs.

8 Cautionary Statement

Statement in Management Discussion and Analysis describing Companys objectives, projections, estimates and expectations may be "Forward Looking Statements" within the meaning of applicable laws & regulations. Actual results may differ materially from those expressed or implied. Important factors that could make a difference to companys operations include but are not restricted to the economic conditions affecting demand/supply and price conditions in the domestic and overseas markets in which Company operates, changes in the Government regulations, tax laws, and other statues, as also other incidental factors.

For and on behalf of the Board

Sd/- Sd/-
Varinder Gupta Rajender Mohan Malla
Place : Barnala Managing Director Chairman
Dated : 29 May 2019 DIN -00044068 DIN-00002973