Natural Capsules Ltd Management Discussions

Global Economy

The global economy entered 2026 growing at a moderate pace, below pre-pandemic averages. The International Monetary Fund projects global growth of 3.1% in 2026 and 3.2% in 2027, a downward revision that reflects the outbreak of conflict in the Middle East and its effect on commodity markets and confidence.

Global headline inflation is projected to rise modestly in 2026 before resuming its decline in 2027, allowing monetary policy to ease gradually in most economies. The slowdown in growth and the increase in inflation are expected to be more pronounced in emerging market and developing economies, which are more exposed to higher commodity prices and tighter financial conditions.

Growth remains uneven across regions. Advanced economies continue to expand slowly, weighed by the lagged effects of tighter monetary policy and softer investment, while emerging market and developing economies, though still growing faster, face the sharper edge of higher commodity prices and more volatile capital flows. Trade growth has slowed as protectionist measures and supply- chain reconfiguration reshape flows, and firms across sectors continue to pursue diversification of sourcing to manage concentration risk.

Among the major economies the pattern is one of divergence. The United States has continued to grow on the strength of consumer spending and technology investment, even as higher interest rates weigh on rate-sensitive sectors. The euro area remains subdued, constrained by weak industrial demand and the lingering effects of the energy shock. Chinas recovery has been uneven, held back by a prolonged property downturn and cautious household spending, though its manufacturing exports remain formidable. For a globally traded industry such as pharmaceuticals, this divergence matters less through any single market than through its combined effect on freight rates, currencies and the cost and availability of raw materials.

A longer or broader conflict, deeper geopolitical fragmentation, a reassessment of expectations around artificial-intelligence-driven productivity, or renewed trade tensions could each weaken growth and unsettle financial markets. Set against these are more stabilising forces: the gradual easing of inflation, the prospect of lower policy rates, and the continued reordering of global supply chains towards resilience, a shift that has tended to work in favour of manufacturers in India.

Indian Economy

India retained its position as the fastest-growing major economy in FY26. Provisional estimates place real GDP growth at 7.7% for FY26, up from 7.1% in FY25, supported by resilient domestic demand, strong manufacturing and a broad-based services sector.

Inflation was contained through the year, with headline consumer price inflation easing to around 3.4% by March 2026. The Reserve Bank of India held the policy repo rate at 5.25% at its April and June 2026 meetings, and for FY27 it lowered its GDP growth forecast to 6.6% from 6.9%, citing external and geopolitical concerns.

Policy continued to favour domestic manufacturing and self-reliance. Goods and Services Tax collections for FY26 were around ^22.27 lakh crore, and initiatives such as the Production Linked Incentive scheme, the Bulk Drug Parks programme and Make in India continued to support pharmaceutical and API manufacturing.

Beneath the headline growth, the composition of Indias expansion has been encouraging for manufacturers. Investment has been led by sustained public capital expenditure on infrastructure, which has in turn begun to draw private investment into new capacity. Consumption has been supported by moderating inflation and by measures that lifted disposable incomes, while the services sector, and digital services in particular, continued to expand at pace. For the pharmaceutical sector, the more consequential feature of the year was the continuity of policy: successive budgets and schemes have kept domestic manufacturing, import substitution and self-reliance at the centre of industrial policy, a direction that aligns closely with the Companys own strategy.

Global Pharmaceutical Industry

The global pharmaceutical industry remains one of the worlds most resilient sectors. Worldwide medicine spending was valued at around US$1.7 trillion in 2025 and is expected to reach approximately US$2.6 trillion by 2030, a compound annual growth rate in the region of 5% to 8%.

Growth is underpinned by ageing populations in advanced economies, rising chronic-disease prevalence, and the adoption of innovative therapies including GLP-1 drugs for diabetes and obesity. Geographic concentration of supply, and intensifying regulatory scrutiny of manufacturing, remain defining features of the sector.

Within this expanding market, several structural shifts stand out. The steady loss of exclusivity on major branded medicines continues to enlarge the generics and biosimilars opportunity, much of it served from India. Oral solid-dose forms, tablets and capsules, remain the dominant means of delivering medicine, valued for their stability, convenience and cost, which keeps demand for capsules closely tied to the growth of the industry as a whole. At the same time, the sectors experience of supply disruption in recent years has pushed manufacturers and governments alike to reduce dependence on any single source of active ingredients, a theme that recurs through the rest of this discussion.

Global Capsules Market

Oral solid-dose forms remain dominant in pharmaceuticals, and the market for empty capsules continues to grow steadily. The global empty-capsules market was valued at around US$3.19 billion in 2025 and is forecast to reach about US$4.19 billion by 2030, a compound annual growth rate of roughly 5.6%.

Gelatin shells still account for the majority of market revenue, at around 66% in 2025, while HPMC and pullulan-based capsules are the faster-growing segment, expanding at a compound annual rate of around 10%. Demand is driven by the expanding nutraceutical sector and by personalised-medicine trends, as consumers seek easy-to-swallow, plant-based capsules for supplements and tailored therapies.

The capsule itself is quietly evolving. Beyond the traditional divide between gelatin and vegetarian shells, demand is broadening into specialised applications: liquid-fill and semi-solid formulations, delayed and targeted-release designs, and capsules tailored for sensitive or combination therapies. The nutraceutical sector has been a particular engine of growth, as health-conscious consumers turn to supplements delivered in convenient capsule form. For manufacturers able to offer both gelatin and HPMC across a range of specifications, this widening of demand is an opportunity to move beyond commodity supply towards higher-value, differentiated products.

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 market at around US$270.5 billion in 2025, growing at a compound annual rate of roughly 5.5%.

Synthetic chemical APIs still constitute the majority of production volume, at around 70% to 80%, while biologics-based APIs are the fastest-growing segment. The market is marked by geographic concentration and intensifying regulatory oversight, with a large share of global generic API supply concentrated in a small number of countries.

Two forces are reshaping the API landscape. The first is the drive to diversify supply away from its historic concentration, as governments and large pharmaceutical companies seek greater resilience following recent disruptions, a shift that has directed fresh attention and investment towards Indian producers. The second is the steady tightening of regulatory oversight, as authorities intensify inspection of manufacturing sites and enforce environmental and quality standards. Together these forces reward producers that combine reliable, compliant manufacturing with the ability to make complex, higher-value molecules, precisely the space in which the Companys API business is positioned.

Indian Pharmaceutical Industry

Indias pharmaceutical industry is a global leader, known as the pharmacy of the world for its scale, cost competitiveness and export reach. The market was valued at around US$60 billion in 2026 and is projected to expand to US$120 to US$130 billion by 2030. India ranks third globally in pharmaceutical production by volume and supplies about 20% of the worlds generic medicines.

Exports remain a cornerstone of the industry, with pharmaceutical exports crossing US$30 billion in FY25, an increase of more than 9%. Government policy continues to support self-reliance: the Production Linked Incentive scheme, with outlays of around ^15,000 crore for pharmaceuticals and ^6,940 crore for APIs, and the Bulk Drug Parks programme, are aimed at reducing import dependence and building domestic capacity.

The strength of Indias pharmaceutical industry rests on a combination few countries can match: large-scale, low-cost manufacturing, a deep base of skilled chemists and formulators, and a regulatory record that has earned access to the worlds most demanding markets. Domestically, rising incomes, wider insurance coverage and an ageing population continue to expand demand, while chronic and lifestyle diseases shift the therapeutic mix towards long-term medication. The industrys one persistent vulnerability is its reliance on imported starting materials and intermediates, the very dependence that current policy, and the Companys own backward integration, are designed to reduce.

Indian Capsule Market

The Indian capsules market is a crucial part of the countrys pharmaceutical and nutraceutical landscape. Demand for capsules, particularly hard gelatin and HPMC variants, continues to rise, driven by the increasing prevalence of chronic disease and a growing focus on consumer wellness.

Rising health awareness is driving demand for dietary supplements and wellness products in capsule form, with the nutraceuticals segment growing at double-digit rates and chronic-therapy segments such as cardiac, gastrointestinal and anti- diabetic therapies growing at around 9% to 10% a year. The market faces challenges, notably the supply and cost of raw materials such as gelatin and HPMC, which are often imported and can affect production costs and margins.

The domestic capsule market reflects these wider currents. Growth is driven at one end by the pharmaceutical sectors steady demand for reliable, high-quality shells, and at the other by the rapid expansion of nutraceuticals and wellness products, where vegetarian formats are especially favoured. Manufacturers face two enduring challenges: the cost and availability of raw materials such as gelatin and HPMC, which are partly imported and subject to price movement, and the need to keep investing in capacity and technology to serve increasingly demanding customers. The Companys dual gelatin and HPMC capability, together with its continued investment in manufacturing, is aimed squarely at both the opportunity and the challenge.

Indian API Market

India is the worlds third-largest API producer, accounting for around 8% of global API volume.

The domestic API market was valued at around US$14.18 billion in 2025 and is projected to rise to about US$15.28 billion in 2026, a compound annual growth rate of roughly 7.7%.

Import dependence remains a significant vulnerability, with an estimated 65% to 70% of key intermediates still sourced from China, exposing the sector to supply-chain and price risk. Global firms are increasingly sourcing APIs from India to reduce single-country dependence, a trend reinforced by the Production Linked Incentive scheme and the Bulk Drug Parks programme, and by a clear shift from low-cost APIs towards complex, high-value molecules.

Policy has moved decisively to address this dependence. The Production Linked Incentive U scheme for bulk drugs, together with the Bulk Drug Parks programme, is intended to rebuild H domestic capacity in key starting materials, intermediates and active ingredients, and to move the industry up the value chain from simple, low-margin products towards complex, M higher-value molecules. Progress will take time, and success will depend on execution rather than announcement. For a producer U of complex steroidal APIs that has chosen to integrate backwards and manufacture in-house, the direction of policy and the direction of the business are firmly aligned.

Company Overview

Established in 1993 and headquartered in Bengaluru, Natural Capsules Limited is a manufacturer of hard capsule shells, recognised for its pioneering role in introducing vegetarian capsules to the domestic market. Over three decades it has become the second-largest manufacturer of gelatin capsules in India, and in recent years has diversified into active pharmaceutical ingredients, marking a shift from a single-product focus to a multi-vertical pharmaceutical enterprise. FY26 saw the API facility move into commercial production.

The Company operates through two connected verticals. The capsules business, run from facilities at Bangalore and Puducherry, manufactures hard gelatin and HPMC capsules along with a range of specialty and regulatory variants, serving pharmaceutical and nutraceutical customers in India and abroad. The API business, operated through the subsidiary Natural Biogenex at Tumkur, manufactures complex steroidal active ingredients. What connects the two is a single value chain: the Company now makes both the active molecule and the capsule that can carry it, an integration that is unusual in the Indian industry and central to how the Company intends to compete.

Performance Review

FY26 was a transitional year for Natural Capsules Limited. Revenue from operations grew 11% to ^187.20 crore, from ^169.21 crore in FY25, supported by the capsule business and early contributions from APIs. Earnings, however, declined: EBITDA was approximately ^(1.56) crore and profit after tax approximately ^(24.66) crore, against a profit in the prior year.

Two factors explain the outcome. The first was the temporary shutdown at the Puducherry capsule facility, linked to a licensing matter, which disrupted production and dispatches for part of the year.

The second was the full-year cost of depreciation of around ^17.14 crore and finance cost of around ^10.95 crore on newly commissioned capacity, at a stage when revenue from the newer platforms was still building.

The fourth quarter was the strongest operating quarter of the year for the capsule business, with revenue of around ^58.45 crore, up materially both sequentially and year on year, as the Puducherry disruption was resolved. Around ^6 crore of dispatches were deferred within the quarter. On the balance sheet, net worth stood at ^234.72 crore and the Company generated positive operating cash flow of ^10.92 crore for the year.

Viewed by segment, the capsule business remained the Companys core through the year. Demand in export markets held up, particularly for HPMC capsules, where the shift towards vegetarian and plant-based formats continued to support order flow. The temporary shutdown at Puducherry was the principal drag on volumes; with it resolved and a new HPMC line commissioned, the segment closed the year on a firmer footing. The API business, in its first year of commercial production, operated against global pricing pressure while establishing customer connections and supplying key molecules, with the FermBox Bio arrangement intended to support utilisation at Tumkur.

FY26 is best understood as a year in which the Company absorbed the cost of a transition it had chosen to make. The decline in earnings was driven by an identifiable, largely non-recurring disruption and by the front-loaded costs of new capacity, rather than by any erosion of the underlying capsule business, which continued to generate demand and cash through the year. The balance sheet remained sound, and operations continued to fund themselves.

Operationally, the capsule business enters the new year with the Puducherry disruption resolved and a new HPMC line commissioned. The API business reached commercial production at Tumkur and signed a framework and contract manufacturing agreement with FermBox Bio, while continuing to work towards regulatory certification. The task in the periods ahead is operational: to restore and lift utilisation across the capsule sites and to build volumes in the API business.

Key Financial Ratios

Ratio	FY26	FY25	Variance / Reason
Current Ratio	1.03	1.30	(20.47%)
Debt-equity Ratio	80.71%	63.07%	27.96%
Debt Service Coverage Ratio	13.15%	99.52%	(86.78%)
Return On Equity	(0.10)	0.00	(10821.53%)
Inventory Turnover Ratio	7.17	7.46	(3.91%)
Trade Receivables Turnover Ratio	2.80	2.90	(3.35%)
Trade Payables Turnover Ratio	2.32	2.82	(17.71%)
Net Capital Turnover Ratio	45.99	5.72	704.44%
Net Profit Ratio	(13.17%)	0.36%	(3710.50%)
Return On Capital Employed	(4.86%)	2.49%	(295.04%)
Return On Investment	-	-	NA

Internal Control Systems and Their Adequacy

The Company maintains an internal control framework designed to safeguard assets, ensure the integrity of financial records and promote operational efficiency. Management is responsible for the implementation and continuous monitoring of these controls, and an independent chartered accountancy firm conducts internal audits to verify the accuracy and reliability of financial processes. Controls ensure that transactions are properly authorised, recorded and reported, and asset- protection measures, including a comprehensive surveillance system across factory premises, support security and workplace safety.

The Audit Committee provides oversight, reviewing financial statements and assessing the adequacy and effectiveness of internal controls to ensure transparency and accuracy in financial reporting. Management continuously evaluates and strengthens these controls to address emerging risks and maintain operational excellence.

The commissioning of the API facility during the year extended the Companys control environment to a second, more complex manufacturing operation, with its own requirements for process safety, quality documentation and environmental compliance. Bringing this facility within the established framework of authorisation, review and audit has been a focus during the year, and it will remain so as the facility scales and moves towards regulatory certification. The Company regards a sound control environment not as a compliance obligation alone but as a prerequisite for operating credibly in regulated pharmaceutical markets.

Human Resources

The Companys people are central to its performance in a sector that demands efficiency, innovation and strict adherence to quality. During FY26 the Company continued to prioritise the attraction, retention and engagement of talent, providing a supportive environment with regular training and development across functions.

The 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 2026 the Company employed over 615 people.

The move into API manufacturing has changed the shape of the Companys talent requirement. Scaling complex steroidal chemistry calls for specialist skills in fermentation, process development and regulatory affairs, alongside the manufacturing and quality expertise the capsule business has long relied upon. The Company has extended its employee stock option scheme to senior research and technical staff to align their interests with its long-term objectives, and it continues to invest in training and development so that its people can carry both businesses to the standards their markets demand.

Cautionary Statement

Statements in this Management Discussion and Analysis relating to objectives, projections, estimates and expectations of the Company, its subsidiaries and associates may constitute forward-looking statements within the meaning of applicable laws and regulations. Actual results may differ materially from those expressed or implied due to factors such as economic conditions affecting demand and supply, price fluctuations in domestic and international markets, changes in government regulations, tax laws and other incidental factors. The Company undertakes no obligation to publicly update or revise any forward- looking statements.