IOL Chemicals & Pharmaceuticals Ltd Management Discussions.

Global Economic Overview

2021 has been another challenging year due to the ongoing and widespread effect of COVID-19, particularly with the introduction of new strains causing higher mortality. Financial markets and companies were impacted as a result of supply-side limitations. To guarantee that credit was accessible to firms and consumers, central banks offered a variety of solutions. Global immunization campaigns, together with accommodating governmental measures, aided economic recovery.

Even now, many low-income developing countries are still grappling with the pandemics uncertainty. Supply chain problems, semiconductor shortages, and the ongoing energy crises have exacerbated the issue. Global growth is expected to be 3.6% in 2022, down from 6.1% in 2021, according to the International Monetary Fund (IMF). However, the prognosis is contingent on improving health conditions brought about by intensive immunization campaigns, as well as the availability of innovative and effective medicines. If no new outbreaks occur, the negative effect is predicted to reduce by the second quarter of 2022.

In 2021, the value of global trade hit a new high of $28.5 trillion, a 25% rise from 2020 and a 13% increase from 2019, before the COVID-19 pandemic. While the majority of global trade expansion occurred in the first half of 2021, development continued in the 2nd half. After a rather sluggish 3rd quarter, trade growth accelerated in the 4th quarter, when trade in goods reached a new record high of $5.8 trillion, increasing by about $200 billion. Meanwhile, trade in services increased by $50 billion to reach $1.6 trillion, surpassing pre-pandemic levels by a narrow margin.

The geopolitical confrontation between Ukraine and Russia erupted into a full- edged conflict as the year 2022 approached. As a result, numerous countries saw a surge in inflation, which became their principal concern. In developed countries, inflation is forecast to grow by 5.7%, while inflation in emerging markets and developing economies is expected to rise by 8.7%. Food and fuel price increases are generating societal unrest in emerging nations. Chinas Zero COVID policy, which restricts entrance to key regions with vital industrial centers, is straining an already stretched global supply chain.

These factors have had an effect on the projected growth for the next year. The growth rate of advanced economies is projected to decline to 3.3% in 2022, from 5.2% in 2021. Emerging markets and emerging economies (EMDE) are recovering more quickly than developed economies, with a 6.8% growth rate in 2021 expected to decline to 3.8% in 2022.

With the new strain still on the loose, the need of a strong global health strategy is more important than ever. Global availability of vaccinations, diagnostics, and medications is critical for lowering the likelihood of more lethal COVID-19 variations. Higher supply production, better in-country delivery networks, and more equitable global distribution are all necessary to accomplish this. To keep inflation at bay, many nations monetary policies will need to be tightened even more, while fiscal policy would need to prioritise health and social spending while concentrating assistance on the most disadvantaged.

Global GDP Growth and Forecasts

Particulars 2020 2021 2022(Rs.) 2023 (Rs.)
World Output (3.1) 6.1 3.6 3.6
Advanced Economies (4.5) 5.2 3.3 2.4
United States (3.4) 5.7 2.7 3.3
Euro Area (6.4) 5.3 2.8 3.3
Emerging Market and Developing Economies (2.0) 6.8 3.8 4.4
China 2.2 8.1 5.4 5.1
India (7.3) 8.9 8.2 6.9
Japan (4.5) 1.62 2.39 2.32
Brazil (3.9) 4.6 0.8 1.4

(Source: IMF World Economic Outlook https://unctad.org/news/global-trade-hits-record-high-285-trillion-2021-likely-be-subdued-2022)

Indian Economic Overview

The economy is expected to have a real GDP growth of 8.9% in FY 2021-22 against the contraction of 7.3% it witnessed in the previous year. This shows us that the economic activity has grown beyond the pre-pandemic levels. Despite the health impact witnessed during Q1 FY2022 due to the Delta variant, the economic impact was much smaller than Q1 FY2021.

According to the Economic Survey 2021-22, the industrial sector grew by 11.8% this year as compared to the contraction of 7.8% it faced in FY 2020-21. This was due to larger scale of operations after vaccinations were conducted and easing of restrictions. Total consumption has grown by about 7% with government spending being the biggest contributor. The Gross Fixed Capital Formation has grown by about 15% driven by aggressive capex and infrastructure expenditure by the government. The governments focus on exports and investments supported development. Sector-specific initiatives, such as the Production Linked Incentive (PLI) scheme and increased infrastructure expenditure, have also helped in growth of domestic manufacturing.

Despite improved economic performance, rising inflation has been a continual cause of worry. The Consumer Price Index (CPI) in India increased to 7.8% in April 2022 from 7.0% in March 2022, far above the RBIs objective of 4 percent (+/- 2%). According to projections, ongoing food price inflation will boost the main CPI. In response, the RBI hiked the repo rate by 50 basis points to 4.9% in June 2022, the RBIs second rate hike this year following a 40 basis point off-cycle increase in May 2022.

The IMF has projected a growth of 8.2% for India during FY 2021-22, which is a revision and a reduction from their January forecast by 0.8%. This value may be further revised based on current external events such as developments in geopolitical tensions, like the Russia-Ukraine conflict, continuing supply chain constraints, and rising prices of oil and other commodities leading to further inflation.

https://www.forbes.com/advisor/in/personal-finance/2022/06/08/ indias-rbi-increases-repo-rate-by-50-bps-projects-fy23-inflation-at-6-7/#:~:text=Personal%20Finance-,Indias%20RBI%20Increases%20Repo%20 Rate%20By%2050,Projects%20FY23%20Infiation%20At%206.7%25)

As per the report by RBIs Department of Economic & Policy Research in April22, the Indian economy will take than more than a decade to overcome the losses due to COVID-19. The pandemic was followed by Russia-Ukraine war resulting in further supply chain disruptions. For the individual years 2020-21, 2021-22 and 2022-23, the report has pegged individual losses at 19.1 lakhs, 17.1 lakhs and 16.4 lakhs.

Global Industry Review

Chemicals Industry

The American Chemistry Council (ACC) predicts that worldwide chemical sector output will increase by 3.8% in 2022 before slowing to 3.2% in 2023. According to the American Chemistry Council, global chemical industry production will increase by 5.8% in 2021, with Asia Pacific growing at the fastest rate of 8.2%, North America growing at 1.8%, Latin America growing at 2.7%, Western Europe growing at 1.8%, Eastern Europe growing at 5.9%, and Africa and the Middle East growing at 2.5%. Looking ahead to 2022, production growth in the chemical industry is expected to slow down in most regions, but likely to accelerate in others. In North America, the industry is expected to reach 4.5%; in Africa and the Middle East, expected to accelerate to 3.3%; while in Latin America, Western Europe, Eastern Europe and the Asia Pacific, the industry is expected to slow to 2.4%, 1.6%, 3.6%, and 4.3% respectively.

According to the American Chemistry Council, worldwide chemical industry output growth in 2022 will be lower than in 2021, with agrochemicals decreasing from 3% in 2021 to 2.3% in 2022, and consumer chemicals slowing to 3% from 3.4% in 2022. Basic chemicals will slow to 4% from 6.1%, inorganic chemicals to 3.9% from 6.6%, bulk petrochemicals and organic chemicals to 3.8% from 5.8%, plastic resins to 4.3% from 6%, synthetic rubber to 6.3% from 7.6%, and Specialty Chemicals to 4% from 5.2%.

Specialty Chemicals

The worldwide Specialty Chemicals market was valued at USD 627.7 billion in 2020 and is expected to grow at a CAGR of 4.7 % from 2021 to 2028, reaching USD 882.6 billion. This growth is being driven by increased demand for high-performance and function-specific chemicals. Industrial and institutional cleansers segment accounted for 9.8% of market revenue in 2020 and are predicted to grow at 4.6% from 2020 to 2028 .The coatings, adhesives, sealants, and elastomers (CASE) business is also expanding as a potentially lucrative area, accounting for a 4.9% value share in 2020. Construction chemicals are expected to develop as an important product category with significant growth prospects between 2020 and 2027. Specialized water-proo ng compounds, repair and restoration compounds, joint fillers, and tile fixing adhesives are in great demand in the construction and building industry.

Despite the fact that Specialty Chemical makers are increasingly concentrating their efforts on new markets, Europe is regarded as a stable market for Specialty Chemicals. In 2018, Specialty Chemicals accounted for more than 27% of total chemical sales in the EU, according to the European Chemical Industry Council (Ce c). It is one of the most significant exporting businesses in the area, accounting for over one-third of total chemical exports in 2018. In the future, the Asia-Pacific area is predicted to account for 44% of worldwide demand, with a focus on China, India, and Japan. Companies supplying the automotive, coatings, and polymer industries are expected to see a prolonged slowdown as demand remains low, a situation that is likely to be worsened by any more COVID-19 waves.

(Source: https://www.grandviewresearch.com/industry-analysis/specialty-chemicals-market)

https://www.globenewswire.com/news-release/2022/07/20/2482838/0/ en/At-4-7-CAGR-Specialty-Chemicals-Market-Size-to-Surpass-USD-882-6-Billion-by-2028-Fortune-Business-Insights.html

https://www.grandviewresearch.com/industry-analysis/specialty-chemicals-market)

Pharmaceutical Industry

The global pharmaceutical industry was worth $1.4 trillion in 2021, and it is predicted to increase at a CAGR of 3-6% over the following five years, reaching $1.8 trillion by 2026. This prediction includes expenditure on COVID-19 immunizations, and total vaccine spending is anticipated to reach $251 billion by 2026.

Adoption of new treatments and specialty medicines will boost medical pharmaceutical growth in developed countries, but loss of exclusivity and competition from generics and biosimilars may restrict growth. Pharmaceutical markets in the developed world grew at a CAGR of 4.3% from 2017 to 2021, reaching $1049.2 billion, and are predicted to rise at a 2-5 percent CAGR to reach $1,230-1,260 billion by 2026.

Expanding healthcare access in most countries and increased expenditure on new medicines will help drive medicine spending growth ahead in pharmerging economies, although off-patent branded medications and cheap generic drug prices may have an influence on growth. The pharmerging markets grew at a CAGR of 7.8% between 2017 and 2021, reaching $353.2 billion in 2021, and it is predicted to grow at a 5.08% CAGR through 2026. Lower-income nations are predicted to increase expenditure at a CAGR of 2.5-5.5%, reaching $21-25 billion by 2026, up from $18.9 billion in 2021.

(Source: IQVIA Global use of medicines 2022)

API (Active Pharmaceutical Ingredients) Sector

Despite the COVID-19 problem, the global market for Active Pharmaceutical Ingredients (API) is expected to reach a revised size of $265.3 Billion by 2026, rising at a CAGR of 6.7% over the research period.

Following a detailed examination of the financial rami cations of the pandemic and the resulting economic crisis, growth in the Generic category is reduced to a 7.4% CAGR for the next seven years.

The generics segment now holds 30.2% of the international Active Pharmaceutical Ingredients (API) market. As branded API patents expire, options for generic APIs expand, resulting in increased API market demand.

APIs are physiologically active molecules that serve as the foundation for medication production. API manufacture is mostly focused in developing countries owing to their capacity to scale production based on customized and low-cost manufacturing.

The API market is expected to benefit from a greater emphasis on generic and branded medications as the incidence of non-communicable and chronic medical disorders rises as a consequence of lifestyle changes and fast urbanization. The market is expected to develop further as a result of the shift away from traditional production processes, increased investment in medication research, and strict attention to product quality.

The market is also benefiting from an increase in the number of generic pharmaceuticals developed with the consent of a pharmaceutical firm to create their own version of the medication. The COVID-19 outbreak and the related supply chain problems are causing several countries to reject sourcing APIs from China.

Despite these obstacles, the API industry is expected to accelerate owing to favourable factors such as the imminent approval of many generic and blockbuster medications that depend on APIs.

(Source: https://www.globenewswire.com/en/news-relea se/2022/01/25/2372193/28124/en/Global-Active-Pharmaceutical-Ingredients-API-Market-Report-2021-Market-to-Reach-265-3-Billion-by-2026-Preference-for-Specialized-CDMO-Contractors-on-the-Rise.html)

Indian Industry Review

Chemicals Industry

Chemicals and chemical products play an important role in the manufacturing sector because of their direct and indirect uses in a wide range of industries, including food and drinks, textiles, leather, metal extraction and processing, petroleum refining, medicines, and rubber. As its competitiveness grows, Indias chemical sector is witnessing transformative shift, driven by the availability of low-cost labor as well as a global phenomenon of China plus one strategy that attempts to focus on development of alternative supply-chain market for the sector apart from China.

The market is expected to reach $304 billion by 2025, at a CAGR of 9.3 percent, due to increased demand in the Specialty Chemicals and petrochemical categories.

Key Growth Drivers:

• Rising domestic demand

- By 2030, India is expected to have 80% of its families in the middle-income bracket.

- The expanding middle-class and increasing urbanisation are driving demand for personal care, agrochemicals, food, paints and coatings, resulting in greater chemical consumption per capita.

• The governments intent to increase manufacturings proportion of GDP to 20% by 2025

- The government sees manufacturing as a major priority and has contacted

1,450 organizations globally, to produce in India.

- The governments proposal includes 2-3 autonomous zones with no labour or land rules.

- 300 organizations are actively pursuing manufacturing plans in mobile phones, electronics, medical products, and textiles.

Specialty Chemicals

The Specialty Chemicals sector in India has been critical in fueling the expansion of the chemical industry. By value, it accounts for around 22% of Indias overall chemicals market. India is growing as a favored production base for Specialty Chemicals, including contract and custom synthesis for both local and foreign markets. The Indian Specialty Chemicals sector is projected to increase 11-12% to $64 billion by 2025. Furthermore, it is estimated to create an additional $60 billion in potential across Specialty Chemicals industries over the next 8-10 years.

In an effort to expand their businesses, Specialty Chemical firms are pursuing import substitutes and exploring other export options. 20% of the $4 trillion worldwide chemicals business is comprised of Specialty Chemicals.

(Source: IBEF Chemicals February 2022 https://www.indianchemicalnews.com/opinion/indian-specialty-chemical-industry-poised-for-a-quantum-leap-13553)

Pharmaceutical Industry

India is third in the world by volume and 14th by value in terms of pharmaceutical production. The domestic pharmaceutical sector consists of a network of 3,000 pharmaceutical companies and 10,500 production facilities. The Indian Economic Survey 2021 forecasts that the domestic market would triple in size over the next decade. Domestic pharmaceutical sales in India were $42 billion in 2021, and is projected to reach $65 billion by 2024 and $120 billion by 2030. In January 2022, the Indian pharmaceutical market grew by 13.9%. India is a prominent and expanding participant in the global pharmaceutical industry. India is the worlds largest supplier of generic pharmaceuticals, accounting for 20% of the global supply by volume and fulfilling over 60% of the global demand for vaccinations.

(Source: IBEF Pharmaceuticals March 2022)

API Sector

During the 2020-2026, the market for APIs in India is expected to grow at a rapid rate. The expansion of the Indian APIs market is primarily driven by the rising prevalence of chronic illnesses and the significance of generics. Innovations in active pharmaceutical ingredient (API) manufacture and the expansion of the biopharmaceutical industry is also driving pharmaceutical market expansion.

The growth of the sector is fueled by the adoption of global standards and the establishment of large-scale operations in the country. India has the biggest number of US FDA-approved plants, ~665, and accounts for 44 percent of the worlds abbreviated new drug applications (ANDA).

To encourage API (bulk drug) production, the Government of India has introduced Production-Linked Incentive (PLI) scheme that also supports the "Atmanirbhar" effort for Indian manufacturers.

Business Review

IOL is a leading and recognized company in the Active Pharmaceutical Ingredient (API) and specialty chemicals sectors. The company is a producer and global supplier of APIs including Ibuprofen, Metformin, Clopidogrel, Lamotrigine, Pantoprazole, and Feno brate, as well as additional APIs, and has a strong presence in all key therapeutic categories. The need for APIs continues to rise because to the prevalence of lifestyle disorders and the necessity for more inexpensive healthcare delivery methods. In the Specialty Industrial Chemicals division of the IOL, Ethyl Acetate, Iso Butyl Benzene (IBB), Mono Chloro Acetic Acid (MCA), and Acetyl Chloride are manufactured. Ethyl acetate is used in industries like pharmaceuticals, printing, flexible packaging, adhesives, surface coatings, avors, paints & lamination, and essences. A diverse array of end-use industries fuel the products demand. The companys production facilities are in Fatehgarh Chhanna, Barnala District, Punjab. The Department of Scientific and Industrial Research (DSIR) approved R&D centre of the company is equipped with modern and analytical equipment. As part of our sustainability efforts, we have initiated the usage of biofuels in our captive co-generation plant (17 MW capacity) to reduce our carbon footprint. The company has an exceptional team of technical and commercial experts in pharmaceutical and chemical production and marketing.

SCOT Analysis

Strengths

• Strong backward integration capabilities.

• Maximizing export potential by filling DMFs and getting regulatory approvals

• Good long-term relationship with domestic clients

• High-quality front-end team with strong regulatory and manufacturing capabilities

• A strong balance sheet with no debt.

• Strong product pipeline in both the pharmaceutical and chemical sector

• Ability to manage high scale complex operations

Challenges

• Long durational period for developing compounds and getting registrations for commercialization

• Strained supply chain network across the world

• Volatility in the pricing of raw materials

Opportunities

• Indian pharmaceuticals and chemical companies getting increased outsourcing opportunities, fueled by the China+1 strategy

• Increasing domestic needs that are unmet due to the supply chain disruption owing to the disturbed geographical scenario can be met by the domestic producers

Threats

• Increasing energy and raw material prices because of the volatile nature of the changing global scenario, worsened by the Russia-Ukraine conflict

Risk Management

Please refer page 16 in the non-statutory section for details.

Financial Performance

Revenue: Total income has grown to 2,216 crores during the year in review as compared to 1,991 crores in the previous year. Segmental Revenue: The pharmaceutical segment contributed to ~46% of the revenue during the year as compared to ~60% in the previous year. Within the pharmaceuticals segment, Ibuprofen had a ~65% share of the sales during FY 2021-22 when compared to the ~82% share it had in the previous year.

The chemicals segment had a ~54% share of the total revenue during the year as compared to the 41% share it held last year. EBITDA: The EBITDA during the year in review was 288 crores, as compared to the 616 crores in the previous year. This decline was caused majorly due to rising raw material and fuel costs. Net Profit After Tax: The Company earned 166 crores as profit after tax during the year as compared to 445 crores earned last year.

Balance Sheet

Share Capital: The paid-up equity share capital of the Company has been 58,70,55,020/- (Rupees fty-eight crore seventy lakh fty-five thousand and twenty) consisting of 5,87,05,502 (Five crore eighty-seven lakh five thousand five hundred two) equity shares of 10/- each as on 31st March 2022. There is no change in the Capital of the Company during the FY 2021-22.

Reserves and Surplus: Reserves and Surplus for FY 2021-22 was 1,332 crores as compared to 1,202 crores for the previous year. Net Worth: The net worth of the Company has grown to 1,390 crores in FY 2021-22 from 1,260 crores at the end of FY 2020-21 Borrowings: Long-term secured borrowing was NIL at the end of FY 2021-22. Unsecured long-term borrowings were NIL at the end of FY 2021-22. As of now, the Company has no outstanding balance on any Term Loan.

Short term secured borrowing at the end of FY 2021-22 were 43 crores against NIL at the end of FY 2020-21.

Assets

Non-Current Assets: Total non-current assets including Capital work in process increase to 882 crores as on 31st March 2022 from 600 crores as on 31st March 2021, net of depreciation and additions.

Current Assets and Current Liabilities: The Company had inventories of 410 crores as on 31st March 2022 against 295 crores as on 31st March 2021. Trade Receivable amounted to 470 crores as on 31st March 2022 as compared with 300 crores as on 31st March 2021. The trade payables increased to 409 crores as on 31st March 2022 as compared with 239 crores as on 31st March 2021. The changes are in line with increase in overall operations.

Cash Flows: The Companys net cash flow from operating activities for the year ended 31st March 2022 amounted to 91 crores against net cash flow used in operating activities 380 crores during the previous year.

The Companys net cash used in investing activities amounted to 120 crores during the year ended 31st March 2022 against 317 crores during the previous year.

During the year ended 31st March 2022, net cash used in financing activities amounted to 2 crores as against 58 crores during the previous year.

Ratio Analysis
Ratio FY 2020-21 FY 2021-22
Operating Profit Margin 30.94% 13.01%
Net Profit Margin 22.60% 7.58%
Return on Net Worth 43.50% 16.44%
Trade Receivable Turnover 56 79
Inventory Turnover Ratio 5.20 5.05
Current Ratio 3.48 2.10

People and Culture

As of March 31, 2022, the Company has a workforce of 2,300+ people. The company ensures the utmost importance of its Human capital and focuses on ensuring a quality workplace with best-in-class people policies, overall rewards, and capability development.

The company believes in providing equal opportunities irrespective of gender, background, and age. We imbibe the companys values which are delivering high-quality products and services, exceeding our clients expectations, passionate about our work, having strong ethics, and taking pride in what we do.

We focus on the career progression of our people internally and provide them with growth opportunities through our various development programs including succession planning and job rotations. We continuously hire fresh talent from colleges and nurture them in a focused manner to take up challenging and higher roles in the organization.

Recently, we have reviewed our peoples policies and refined them further to be one of the most employee-friendly companies in the Chemicals and Pharma space. We have introduced policies like menstrual leave, and flexible working hours for new mothers for female employees as a step to build a diversified culture in the company.

Employee engagement is another critical focus area for us wherein we continuously have events like town hall, meeting with new joiners, Funday activities, wellness sessions, and sports events to drive teamwork and foster vibrant organizational culture.

Internal Control System and Their 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 Committee reviews reports submitted by internal auditors regularly and suggest the improvements from time to time which are being implemented by the Company.

Cautionary Statement

Statements 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.