Natural Capsules Ltd Management Discussions

Global Economy

The global economy in 2025 continues to demonstrate adaptability amidst evolving geopolitical dynamics, inflationary moderation, and structural policy shifts. Growth remains steady at 2.8% (IMF, April 2025), reflecting a calibrated balance between emerging market dynamism and advanced economy stabilisation. While trade tensions and policy uncertainty persist, multilateral coordination and strategic sectoral investments highlight a narrative of cautious optimism.

The International Monetary Funds April 2025 World Economic Outlook highlights a gradual convergence toward pre-pandemic growth trends, with global output bolstered by resilient consumer demand in emerging markets and targeted its fiscal position as the fastest-growing major economy, projected to expand by 6.2% in 2025 (World Bank, March 2025), driven by digital infrastructure investments and manufacturing sector revitalisation. Conversely, advanced economies face moderated growth, with the Eurozone anticipated to grow at 0.8% amid energy transition investments and the U.S. at 1.8%, supported by technological innovation and consumer spending resilience.

Inflationary pressures have receded globally, with headline inflation expected to decline to 4.5% by year-end (OECD, March

2025), enabling central banks to adopt measured monetary easing. This stabilisation has facilitated liquidity for strategic sectors such as renewable energy and AI-driven industries, which are projected to contribute $4 trillion to global GDP by 2026 (IMF, 2025). vation, and a thriving startup ecosystem. The inno

Escalating trade restrictions, including revised U.S. tariffs and retaliatory measures, have introduced near-term volatility, slowing global trade growth to 3.2% in 2025 from 3.4% in 2024. The World Bank emphasises that de-risking strategies—including supply chain regionalisation and localised production are critical to sustaining trade flows despite protectionist trends.

Asia-Pacific dominates global growth, contributing 60% of 2025 output, with ASEAN nations benefiting from supply diversification and Indias digital economy expansion. Latin

America stabilises through commodity demand alignment, while Sub-Saharan Africa leverages critical mineral reserves for renewable energy partnerships. In advanced economies, the Eurozones focus on energy transitions and the U.S.s tech-driven consumer markets illustrate divergent yet complementary growth pathways.

The global economic landscape in 2025 is defined by resilience through transformation. Near-term risks—including geopolitical flashpoints and climate disruptions are counterbalanced by structural adaptability, technological advancement, and coordinated policy responses.

Indian Economy

Indias economy continues to demonstrate resilience in 2025, maintaining its status as the worlds fastest-growing major economy despite heightened global trade tensions and policy uncertainty. With growth projected at 6.2% in FY2025-26 (IMF, April 2025) and a steady trajectory towards 6.3% in FY27, the nations macroeconomic fundamentals underscore its capacity to navigate complex external environments while capitalising on domestic opportunities.

Indias growth narrative remains anchored in robust domestic consumption, which contributes over 60% of GDP, and strategic public investments in infrastructure and digital transformation. Rural demand, revitalised by moderating inflation (projected at 4.2% in FY26, down from 4.8% in FY25), continues to fuel private expenditure, particularly in sectors such as automotive, consumer goods, and housing. The World Bank attributes this resilience to transformative initiatives like the PM GatiShakti National Master Plan, which has enhanced logistics efficiency, and the Production-Linked Incentive

(PLI) Scheme, driving manufacturing output in electronics, pharmaceuticals, and renewable energy.

Simultaneously, Indias services sector, contributing 55% to GDP, maintains robust growth at 8.2% (FY24), led by IT exports, fintech digital economy, now valued at $1.2 trillion, is projected to expand by 15% annually, supported by initiatives like Digital India and a 850-million-strong internet user base.

The governments pro-growth fiscal measures, including tax exemptions for middle-income earners and corporate tax rationalisation, have injected 630 billion into disposable incomes, stimulating consumption and offsetting global trade headwinds. These reforms align with the Union Budget

2025s focus on infrastructure, allocating 11.1 trillion (3.3% of GDP) to transport, energy, and urban development, which is expected to catalyse private investment and generate 12 million jobs annually.

On the global stage, India is navigating trade policy shifts adeptly. Despite U.S. tariffs on exports, bilateral trade agreements with the EU and ASEAN nations have diversified export markets, limiting the tariff impact to 0.3% of GDP (Deloitte, May 2025).

Looking ahead, India faces potential challenges from global headwinds, including slower growth in major economies and rising trade barriers. However, the economys diversified export base and ongoing reforms—such as tax rationalisation, financial sector modernisation, and infrastructure upgrades strengthen its ability to manage external risks. India enters FY26 with robust fundamentals, supported by resilient domestic demand, prudent fiscal management, and stable macroeconomic indicators. Barring major external shocks, the economy is well-positioned to maintain its status as the worlds fastest-growing large economy.

Global Pharmaceutical Industry

The global pharmaceutical industry remains one of the worlds most resilient and steadily expanding sectors, with its market value estimated at US$1.6–1.7 trillion in 2023, and industry forecasts projecting spending to reach about US$1.7 trillion by 2025, excluding vaccines (dcatvci.org). According to the IQVIA Institute, worldwide medicine spending is expected to climb to approximately US$2.3 trillion by 2028, representing a compound annual growth rate (CAGR) of 5–8% from 2023.

The industrys growth is underpinned by demographic trends, notably ageing populations in advanced economies, rising chronic disease prevalence, and the adoption of innovative therapies such as GLP-1 drugs for diabetes and obesity.

Global Capsules Market

Oral solid-dose forms remain dominant in pharmaceuticals, and the market for empty capsules – especially hard gel and plant-based shells – is growing steadily. In 2024, the global empty capsules industry was valued at roughly $3.2 billion and is forecast to expand at about 5–6% CAGR through 2030. Demand is driven by the growing nutraceutical sector and personalised medicine trends as consumers want easy-to-swallow, plant-based (HPMC) capsules for supplements and tailored combination therapies.

The gelatin capsule segment alone is expected to reach ~$3.5 billion by 2030 (5.2% CAGR), as manufacturers innovate with fast-dissolving and targeted-release formats. Regionally, North America and Asia-Pacific are the largest markets, but emerging economies are growing fastest as pharmaceutical and nutraceutical penetration rises. Industry reports also highlight changing regulatory landscapes with recent global tariff discussions that can affect capsule ingredient costs, and increased focus on sustainability is spurring a shift toward "clean-label" materials. The combination of expanding use in supplements and generics, plus continued technology investment, makes the capsule segment a resilient growth area within the broader pharma packaging ecosystem.

Global API Market

Active Pharmaceutical Ingredients form the core of drug manufacturing, and the global API market is substantial and expanding. Industry analysis estimates the API market size at roughly $255 billion in 2024, rising to ~$270.5 billion in 2025 (a CAGR around 6%). Growth is fueled by rising demand for medicines in chronic diseases and by ongoing shifts toward generic and biosimilar drugs. Biologics-based APIs are the fastest-growing segment, though synthetic chemical APIs still constitute 70–80% of volume.

This growth is underpinned by rising demand for therapies targeting chronic conditions such as cardiovascular diseases, cancer and diabetes, alongside the accelerating shift towards generic and biosimilar medicines. While synthetic chemical APIs dominate production volumes, constituting 70–80% of the market according to DCAT Value Chain Insights (2024), biologics-based APIs – particularly monoclonal antibody substances – represent the fastest-growing segment, reflecting the industrys evolving therapeutic focus.

Geopolitical concentration remains a defining characteristic, with

China controlling an estimated 80% of the global generic API supply chain, as highlighted by Drug Patent Watch (2025), while India strengthens its position as a leading producer. However, this regional dominance has prompted regulators and manufacturers to prioritise supply chain diversification, particularly given that

China and India collectively supply over 70% of APIs used in U.S. drug production, as reported by European Pharmaceutical Review

(2025). This concentration exposes the industry to significant supply chain risks, as highlighted by disruptions following Chinas environmental crackdowns and pandemic-related lockdowns. Regulatory scrutiny is intensifying, with US and EU authorities increasing inspections of API manufacturing facilities, particularly in China and India, to enforce Good Manufacturing Practices and environmental compliance.

While the pharmaceutical sector is less cyclical than many others due to the essential nature of medicines, it is still affected by global economic headwinds, inflation, and currency volatility, all of which have contributed to rising operating costs. Policy shifts, such as the US Inflation Reduction Act and EU price negotiation schemes, are aimed at curbing drug costs and may moderate future spending growth. Conversely, regulatory reforms that expedite drug approvals and incentivise research and development continue to support innovation and facilitate the launch of breakthrough therapies. The recent escalation in US–China trade tensions has highlighted the fragility of global supply chains, although pharmaceuticals have thus far been exempted from the most severe tariffs, helping to maintain the flow of generic medicines from key suppliers like India. Nevertheless, the threat of targeted tariffs remains a concern, with the potential to increase drug prices and cause shortages if implemented.

In summary, the outlook for the global pharmaceutical industry in 2025 and beyond is cautiously optimistic, with projected growth at a modest mid-single-digit pace of around 3–5% annually, driven by novel therapies and ongoing demand for established drugs. The capsules and API markets are integral to this ecosystem, each facing unique challenges related to supply chain security, regulatory compliance, and technological advancement, but also benefitting from significant opportunities linked to demographic shifts, rising healthcare standards, and the expanding scope of personalised and preventive medicine.

Indian Pharmaceutical Industry

Indias pharmaceutical industry has firmly established itself as a global leader, earning the title of the "pharmacy of the world" due to its scale, cost competitiveness, and export reach. As of 2025, the sector is valued at approximately US$58 billion (including both domestic sales and exports), with industry estimates projecting expansion to US$120–130 billion by 2030 and potentially US$400 450 billion by 2047 (India Briefing).

India ranks third globally in pharmaceutical production by volume, supplying about 20% of global generic drugs and meeting around 40% of US generics demand and 25% of UK medicine needs (India Briefing).

According to the Ministry of Statistics and Programme Implementation, Indias pharmaceutical market for FY24 was valued at US$50 billion, with domestic consumption at

US$23.5 billion and exports at US$26.5 billion. The domestic market has grown at around 7–8% annually, with April 2025 alone seeing a 7.8% year-on-year increase (Business Standard). Exports remain a cornerstone, with pharmaceutical exports crossing US$30 billion in FY25, a more than 9% increase from the previous year. The United States remains the largest export market, accounting for over 36% of export value, followed by the UK, Brazil, France, and South Africa.

Government initiatives such as the Production Linked Incentive

(PLI) scheme with a financial outlay of 15,000 crore for pharmaceuticals and 6,940 crore for APIs have mobilised investment in high-value formulations and API manufacturing, aimed at reducing import dependence and boosting self-reliance. The Bulk Drug Parks scheme ( 3,000 crore) further supports world-class API clusters, while relaxed FDI norms

(100% automatic route in greenfield projects) have attracted significant foreign investments.

However, challenges persist. The industry remains reliant on imported key starting materials and intermediates, especially from China, exposing it to supply chain risks.

Environmental compliance, including effluent treatment and waste management, has raised production costs. Additionally, new regulatory requirements such as barcoding and quality controls have increased operational overheads, particularly for API manufacturers.

Indian Capsule Market

The capsules market in India forms a crucial part of the countrys pharmaceutical and nutraceutical landscape, reflecting both the industrys scale and its ongoing evolution.

Demand for capsules, particularly hard gelatin and vegetarian (hydroxypropyl methylcellulose, or HPMC) variants has continued to rise, fuelled by the increasing prevalence of chronic diseases and a growing focus on consumer wellness products. The growth of Indias nutraceuticals sector and the rise in health-conscious consumers are expected to further drive capsule demand, with chronic therapy segments—such as cardiac, gastrointestinal, and anti-diabetic therapies—growing at a robust pace of 9–10% per year (Business Standard, April 2025).

The opportunities in the Indian capsules market are significant.

Rising health awareness is fuelling demand for dietary supplements and wellness products in capsule form, with the nutraceuticals segment witnessing strong double-digit growth. Innovation is also a key driver, as manufacturers invest in plant-based and "smart" capsules to cater to vegetarian preferences and advanced drug delivery needs.

Policy support from the government, through initiatives such as Pharma Vision 2030 and the "Make in India" programme, continues to encourage domestic manufacturing of capsules and packaging materials, further strengthening the sectors foundation.

However, the capsules market also faces notable challenges. One of the primary concerns is the supply and cost of raw materials. Fluctuations in the prices of gelatin and HPMC—often imported—can impact production costs and margins. Despite these challenges, the overall outlook for the capsules segment remains positive, supported by strong demand fundamentals and proactive industry responses to regulatory and supply chain issues.

Indian API Market

Indian Active Pharmaceutical Ingredient (API) market is strategically significant for both self-reliance and export growth. India is now the worlds third-largest API producer, accounting for approximately 8% of global API volume and manufacturing over 500 different APIs (CFO Economic Times, March 2025).

The domestic API market was valued at around US$18 billion in 2024 and is projected to expand to US$22 billion by 2030, representing a compound annual growth rate of 8.3%. APIs contribute about 35% of the value of Indias pharmaceutical sector, and API exports are currently estimated at US$5 billion annually (Business Standard, April 2025).

There are considerable opportunities in the API sector. Global pharmaceutical firms are increasingly sourcing APIs from India to reduce dependence on China, a trend accelerated by recent global supply chain disruptions and evolving trade policies. The Indian governments Production o the Active Pharmaceutical IngredientsLinked Incentive (PLI) scheme for APIs and the Bulk Drug Parks initiative are specifically designed to strengthen domestic production of critical ingredients, offering financial incentives and infrastructure upgrades to reduce import dependence and enhance competitiveness (PIB India, 2025). There is also a clear shift from low-cost APIs to more complex, high-value APIs, such as those used in oncology and specialty drugs, supported by increased R&D investments and a focus on regulatory compliance (Invest India, 2025). The government has allocated over 20,000 crore to these initiatives, with the 2024 Budget providing further impetus for companies investing in domestic manufacturing of key starting materials and intermediates (Pharmabiz, March 2025).

Despite these opportunities, the API sector continues to face several challenges. Import dependence remains a significant vulnerability, with 65–70% of key intermediates still sourced from China, exposing the sector to supply chain interruptions, price swings, and geopolitical risks. The sector is also subject to stringent regulatory requirements, with oversight from the Central Drug Standard Control Organisation (CDSCO) and the Drug Controller General of India (DCGI), which ensure the safety, efficacy, and quality of drugs but also increase compliance costs (CUTS-CCIER, 2019).

In summary, Indias pharmaceutical industry in 2025 stands on a strong footing, combining robust domestic growth with expanding exports and a strategic policy push towards self-reliance and innovation. The capsules segment is poised for steady expansion, fuelled by rising demand in chronic therapies and wellness products, while innovation and policy support create new opportunities. The API sector is undergoing a transformation, with government incentives and global supply chain shifts offering significant growth potential, though challenges around import dependence, compliance, and logistics remain. With continued investment in R&D, infrastructure, and regulatory compliance, India is well-positioned to capture a larger share of the global pharmaceutical market and reinforce its role as a reliable supplier of affordable, high-quality medicines.

Company Overview

Established in 1993 and headquartered in Bengaluru, Natural Capsules Limited (NCL) is a leading Indian manufacturer of hard capsule shells, recognised for its pioneering role in introducing vegetarian capsules to the domestic market. Over the past three decades, NCL has emerged as the second-largest manufacturer of gelatin capsules in India, supported by robust manufacturing infrastructure, including a key facility in Puducherry. In recent years, the company has strategically diversified segment, marking a pivotal shift from a single-product focus to a multi-vertical pharmaceutical enterprise. The successful commercialisation of its API facility in FY25 signals a new phase of growth, innovation, and value creation.

Business Verticals and Core Offerings

Capsules Vertical

NCLs capsules business is anchored in a culture of process innovation, operational excellence, and consistent capital investment. The companys facilities operate with dedicated manufacturing lines that adhere to globally recognised quality standards, including WHO-GMP, ISO 9001:2015, HACCP, and

Halal certifications. Over the years, strategic infrastructure upgrades have resulted in a near threefold expansion in production capacity. This enables the company to meet growing demand with shorter turnaround times, reduced rejection rates, and improved energy efficiency, positioning NCL as a trusted supplier to both domestic and international clients.

Product Portfolio:

Hard Gelatin Capsules

Hypromellose (HPMC) Vegetarian Capsules

Other Customised Hard Capsule Variants

APIs Vertical

In line with its strategic diversification and value-accretive initiatives, NCL entered the Active Pharmaceutical Ingredients (API) segment with the aim of reducing Indias dependence on imports and becoming a key player in niche therapeutic areas. FY25 marked a pivotal milestone with the commercialisation of NCLs API manufacturing facility, operated through its subsidiary. This facility leverages fermentation-based synthesis from Key Starting Materials (KSMs) and is among the few in India to focus on the production of steroidal APIs.

The API vertical is poised to become a major growth and profitability driver for the company, with the first three molecules falling under the Government of Indias Production Linked Incentive (PLI) scheme. The facility commenced production and supply of key products during FY25, establishing NCLs credentials as a future-ready pharmaceutical manufacturer.

Product Portfolio:

Prednisolone and its Derivative Salts

Betamethasone and its Derivative Salts

Dexamethasone and its Derivative Salts

Hydrocortisone and its Derivative Salts

Performance Review

FY25 was a year of transition for Natural Capsules Limited, marked by operational advancements and a build-out of future-ready capabilities. Revenue from operations grew by 8.9% to

169.21 crore, supported by improved realisations in the capsules segment and early contributions from the API business.

However, profitability was subdued due to elevated input costs and the cost structure associated with new capacity additions.

EBITDA stood at 17.52 crore, while Profit After Tax declined to 0.62 crore, reflecting increased depreciation, interest costs, and provisions related to employee stock options.

The capsules business remained the core revenue driver. Demand conditions were stable, particularly in export markets, and realisations improved sequentially through the year. While cost headwinds such as higher freight charges and elevated power tariffs impacted profitability, the commissioning of the HPMC production line marked a strategic milestone. Despite initial delays in customer qualification, the product has begun gaining traction. Toward the close of FY25, regulatory action in the United States created a favourable pricing environment for Indian HPMC exporters, offering significant headroom for growth in FY26.

In the API segment, commercial batches commenced at the fully capitalised facility under subsidiary Natural Biogenex. Regulatory delays impacted the scale-up timeline, and global pricing pressure persisted due to oversupply from Chinese manufacturers. Despite this, trial batches were supplied to key pharmaceutical customers, and process improvements were undertaken to strengthen production stability. A patent filing in bioconversion further enhanced the companys innovation pipeline.

FY25 outcomes reflect both the challenges of capacity scale-up and the groundwork laid for FY26. With a clear focus on expanding the HPMC footprint, accelerating API commercialisation and achieving operational leverage, the company remains well placed to deliver sustainable improvement in financial and operating performance in the year ahead.

Key Financial Ratios

Ratio	FY25	FY24	Change	Reason
Current Ratio	1.30	1.62	(19.91%)	-
Debt-equity Ratio	63.07%	64.56%	(2.31%)	-
Debt Service	99.52%	117.77%	(15.49%)	-
Coverage Ratio
Return on Equity	0.00	0.03	(96.97%)	Due to increase in net profit
Inventory Turnover	7.46	10.95	(31.89%)	Due to increase in inventory and
Ratio				decrease in sales
Trade Receivables	2.90	2.92	(0.56%)	-
Turnover Ratio
Trade Payables	2.82	3.23	(12.88%)	-
Turnover Ratio
Net Capital Turnover	5.72	3.29	73.93%	Due to increase in working capital and
Ratio				decrease in sales
Net Profit Ratio	0.36%	3.57%	(89.79%)	Due to lower sales realisation
Return on Capital	2.49%	3.86%	(35.49%)	Due to lower earnings
Employed
Return on Investment	NA	NA	NA	-

Human Resources

At Natural Capsules Limited, our people are central to our success and growth. Operating in a sector that demands efficiency, innovation, and strict adherence to quality standards, we recognise the vital role of our skilled and motivated workforce. Our employees drive operational excellence and contribute to the organisations ongoing development.

In FY25, we continued to prioritise the nurturing and development of our human resources, with a focus on attracting, retaining, and engaging top industry talent. We are committed to providing a supportive work environment that encourages personal growth, skill development, and employee well-being. Regular training programmes and workshops are conducted to enhance capabilities across all functions.

Our Employee Stock Option Scheme remains an important tool for retaining talent and aligning employee interests with the companys long-term growth. As at 31 March 2025, Natural Capsules Limited employed over 619 individuals, all dedicated to advancing the companys objectives.

Internal Control Systems and Their Adequacy

Natural Capsules Limited maintains a robust internal control framework to safeguard assets, ensure the integrity of financial records, and promote operationalefficiency. The management team is responsible for the implementation and continuous monitoring of internal controls, upholding high standards of corporate governance.

To strengthen this framework, we engage an independent

Chartered Accountancy firm to conduct internal audits and verify the accuracy and reliability of our financial processes. Our controls ensure that all transactions are properly authorised, recorded, and reported in line with established procedures. Regular asset protection measures and strict safeguards are in place to prevent unauthorised access or misuse.

The Audit Committee provides oversight by reviewing financial statements and assessing the y applicable adequacy laws and regulations.and effectiveness of internal controls, ensuring transparency and accuracy in financial reporting. In addition, a comprehensive CCTV surveillance system covers our factory premises, further supporting asset protection and workplace safety.

Management remains vigilant, continuously evaluating and enhancing internal controls to address emerging risks and maintain operational excellence. We are committed to a culture of accountability, ethical conduct, and effective risk management throughout the organisation.