Nectar Lifescience Ltd Management Discussions

An overview of the economy

Global Economic Overview:

In 2023, the global economy faced several challenges, including the aftermath of Pandemic, the conflict in Ukraine, Middle East (Israel & Gaza) and rising inflation. These factors are anticipated to moderate global growth from 6.1% in 2021 to a range of 3% to 3.6% in 2022 and 2023. Despite these challenges, positive indicators such as robust labour markets in certain countries and record corporate profits offer support for economic growth in the near term.

Key Global Economic Indicators (2023): Global GDP Growth: 3.6%

Inflation: 5.7% in advanced economies, 8.7% in emerging markets Unemployment: 5.5% in advanced economies, 7.5% in emerging markets Key Risks to Global Economy (2024): Ukraine Conflict: Continued disruptions to trade and potential energy price hikes are risks.

Middle East Conflict Israel and Gaza Conflict may further put pressure on the Oil Prices and this may impact the crude pricing and also it may not get other neighbouring countries involved. Inflationary Pressures: Rising inflation may impact consumer purchasing power and business operations.

Sources:

International Monetary Fund (IMF). World Economic Outlook, April 2023. World Bank. Global Economic Prospects, January 2023.

Organization for Economic Cooperation and Development (OECD). Economic Outlook, June 2022.

International Monetary Fund. (2023, April 11). World Economic Outlook: April 2023. Retrieved from https://www.imf.org/en/Publications/WEO/Issues/2023/04/11/world-economic-outlook-april-2023

Indian Economic Overview:

The Indian economy is projected to grow at 6.7% to 7% in fiscal year 2024, driven by private consumption and investment supported by government policies. Improving labour market conditions, consumer confidence, and increased capital expenditure are expected to boost demand and economic growth. Despite geopolitical tensions and potential weather-related disruptions, India s focus on balanced monetary policies and investment stimulation remains critical for sustained growth.

Sources:

Asian Development Bank (ADB). India Economy to Grow 6.4% in FY2023, Rise to 6.7% in FY2024. ADB.org.

Deloitte Insights. India Economic Outlook. Retrieved from https://www2.deloitte.com/us/en/insights/economy/asia-pacific/india-economic-outlook.html World Bank Press Release. Indian Economy Continues to Show Resilience Amid Global Uncertainties. Retrieved from https://www.worldbank.org/en/news/press-release/2023/ 04/04/indian-economy-continues-to-show-resilience-amid-global-uncertainties

Pharmaceutical Industry in India:

India s pharmaceutical industry is rapidly expanding, valued at $50 billion and expected to reach $65 billion by 2024 and $130 billion by 2030. With a significant global export market and a leading role in vaccine production, India s pharmaceutical sector benefits from a large domestic market, skilled workforce, favourable government policies, and access to global markets through free trade agreements.

Cephalosporin Space:

India s prominence in antibiotic production, particularly in Cephalosporins, positions it as a major global supplier. With growing demand driven by infectious diseases and antibiotic resistance, India s expertise, production capacity, and regulatory compliance make it a key player in the global Cephalosporin market. Challenges such as research investment and quality control improvements are being addressed to capitalize on market opportunities.

Nectar Lifesciences Limited Overview:

Nectar Lifesciences Limited ( Nectar or Company ) is a global pharmaceutical company specializing in Cephalosporins. With a strong focus on research and development, world-class manufacturing facilities, regulatory approvals, and a robust global presence, Nectar is poised for leadership in the Cephalosporin market. The Company s commitment to sustainability, positive reputation, extensive product portfolio, and skilled workforce contribute to its competitive advantage.

Active Pharmaceutical Ingredients ( APIs ):

Nectar excels in Cephalosporin APIs production with certified facilities meeting global standards. Its flexibility in production, chemistry expertise, and focus on research drive innovation and market competitiveness.

Nectar has two manufacturing units with 13 facilities. The Plant has a total oral and sterile capacity of more than 2000 MT. All its facilities can be converted to multi-purpose plants based on product basket requirement. Nectar is the world s leading producer of Cefixime Trihydrate, Cefuroxime Axetil, Cefpodoxime Proxetil and Sterile APIs. It has been certified by global regulatory authorities such as USFDA, EUGMP INFARMED, COFEPRIS, KFDA, PMDA, MCC, and ANVISA Brazil. Unit 2, at Derabassi, Punjab dedicated to catering to regulated markets is one of Asia s best sterile facilities with the least amount of human intervention. The Company s products are exported to more than 60 nations globally. The Company s competitive advantage lies in its flexibility to produce multiple products in the same manufacturing facilities and its deep knowledge and chemistry skills in diverse and challenging therapeutic domains. Nectar is also one of the few companies in India which possess both Lyophilisation and Crystallisation facilities.

Production is carried out in dedicated production units, each unit coupled to a fully dedicated isolated finishing suite. The Company maintains stringent controls through its institutionalised Quality Management System (QMS) that covers the entire production cycle - from raw materials, manufacturing to packaging and dispatch. The Company has a sophisticated R&D unit that continues to enrich the product basket with new and relevant products strengthening its opportunity promise. The team continues to develop new processes for Cephalosporin molecules to emerge as cost effective player.

Formulations:

The company s formulations division complements its APIs business, catering to diverse markets and regulatory approvals.

Nectar s facility over 5 acres in Baddi, Himachal Pradesh is operated with minimum human intervention. The Company s product basket includes Tablets (180 mn per year), Capsules (180 mn per year), Injectable Vials (240 mn per year) and Oral Suspension (10.5 mn per year). The Company has a strong compliance and quality which leads to highest quality products that conform to stringent regulatory guidelines of various authorities such as USFDA, EDQM, MHRA,

MCC, PMDA etc. Company is focusing on growth of FDF business with expansion

Empty Hard Gelatine Capsules:

Nectar s EHGC manufacturing facility adheres to international standards, offering high-quality capsules for domestic and export markets. While non-core, this business segment maintains regulatory compliance and quality standards and the Company is endeavouring to dispose off it.

Regulatory Filings:

With a robust pipeline of regulatory filings in key markets, Nectar demonstrates commitment to compliance and market expansion. Its ongoing efforts in approvals and new product filings enhance its market presence and growth prospects.

Financial Performance:

Nectar s financial performance reflects resilience and growth amidst economic challenges. Specific financial metrics and changes from previous periods are detailed in the Board s Report, highlighting stability and strategic management in uncertain times.

Continuing from the information about the financial performance from the Board s Report, the further highlights of financial performance are as under:

Particulars	FY24	FY23
EBITDA* Margin (%)	9.87	6.43
Profit (Loss) Before Tax Margin (%)	1.09	(2.67)
Profit (Loss) After Tax Margin (%)	0.30	(1.47)

* EBITDA Earning before interest, tax, depreciation and amortization.

Details of significant changes (i.e., change of 25% or more as compared to the immediately previous FY) in key financial ratios has been provided in Note no. 61 of Standalone Financial Statements, along with detailed explanations thereof. However, the ratios not provided in the said note are provided hereunder:

Key financial ratios	FY24	FY23	Change %	Numerator/ Denominator	Detailed Explanation in case change is more than 25%:
(i) Interest Coverage Ratio	1.21	0.49	146.94	(EBIT*/ Interest)	EBIT improved because of reduction in raw material and power cost.
(ii) Operating Profit (Loss) Margin (%)	5.39	(0.29)	1958.62	(Operating Margin / Net Sale)	EBIT improved because of reduction in raw material and power cost.

* EBIT Earning before interest and tax

Return on Net worth [Profit (Loss) After Tax/ Net Worth^*]

FY24	FY23	Detailed Explanation
0.47%	(2.09%)	Profitability increased because of reduction in raw material and power cost.

* Net worth is calculated on average basis. Also refer to Note 61 in financial statements i.e. return on average equity.

Internal Control System & Adequacy:

Nectar prioritizes internal controls to ensure transparency, compliance, and operational effectiveness. Rigorous evaluations, regulatory alignment, and management oversight contribute to a robust internal control framework, vital for sustained growth and risk mitigation.

The internal financial control system of the Company is aligned with the requirement of Companies Act, 2013 and also enhance operational effectiveness, efficiency, and compliance with regulations. The Company has assessed the effectiveness of the internal control over financial reporting as defined in Regulation 17 of LODR Regulations as of March 31, 2024. 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 authorization and ensuring compliance with corporate policies. These controls are integrated into automated internal business processes, a centralized global process framework, and key support functions. Nectar s internal controls are commensurate with its size and the nature of its operations.

The Company has added Standard Operating System ( SOP ) and Deloitte Compliance Management ( DCM ) Tool as Internal Control systems for operations and administration of business activities.

The SOP streamlines administrative work of the Company and make proper workflow in system by strengthening audit and compliance of the Company which initiated automated trackers for validation and evaluation of the workflow. The SOP benefited the Company with better management, analysis, decision making with more reliable and authenticated data provided with this system. The SOP enhanced better planning and reporting of work and moved towards more process-oriented system with coping global standards in market. The DCM Tool provides a consolidated platform for monitoring different compliance requirements at various departments of the Company which will keep the Company updated over fast changing regulatory environment and new laws and regulations. The Compliance dashboard shows all the compliances of respective department at one place with deadlines automated with alerts and reminder emails which will be reviewed and confirmed by two designated persons with one being Owner and Reviewer of the compliance which enhanced the accountability of compliance owner and compliance culture in the Company. The database of Compliance Tool will act as audit trail for Compliance loopholes of the Company. M/s Deepak Jindal & Co., Chartered Accountants, the statutory auditors of Nectar have audited the financial statements and have issued an attestation report on the company s internal control over financial reporting as defined in section 143 of the Act. Nectar has appointed Mr. Aman Singla, Chartered Accountant to oversee and carry out internal audit of its activities. The audit is based on an internal audit plan, which is reviewed and approved by the Audit Committee. Nectar also undergoes periodic audit by specialized third party consultants and professionals for business specific compliances such as quality management, service management, information security, etc. The Audit Committee reviews audit reports submitted by internal auditors and statutory auditors. Suggestions for improvement are considered and the audit committee follows up on corrective action.

Outlook & Strategy:

The analytical Grid for Growth of Company with five year prospective is as under:

1. Cephalosporin Market Trends and Growth Drivers: a. Rising Demand: The global market for cephalosporin APIs is projected to grow significantly due to increased demand for antibiotics driven by rising infections and the need for effective treatments. The market is expected to expand at a CAGR of around 4.1% from 2023 to 2029. b. Technological Advancements: Innovations in cephalosporin formulations and production technologies will enhance Nectar s product offerings, making them more competitive and appealing to a broader market. c. Regulatory Approvals: Continuous regulatory approvals from authorities such as USFDA, EUGMP, PMDA, ANVISA and others will solidify Nectar s position in regulated markets.

2. Strategic Initiatives: a. Capacity Augmentation: Nectar plans to augment its production capacity for APIs and formulations by realigning and marginal augmentation of equipment which will lead to capacity increase, catering to the rising global demand and ensuring a steady supply to various markets. b. Product Portfolio expansion: Expanding the product portfolio to include advanced generation cephalosporins will help in capturing more market share and meeting diverse therapeutic needs. c. Geographical Expansion: Targeting emerging markets in Asia, Africa, and Latin America, where the demand for antibiotics is growing, will enhance Nectar s global footprint.

3. Competitive Landscape: a. Competing with major global manufacturers from India, Europe and China, Nectar s emphasis on high-quality production and regulatory compliance along with competitive prices provides a competitive edge. b. Market Share: Nectar s robust production and extensive regulatory approvals will help in maintaining and potentially increasing its market share in the global cephalosporin API market.

4. Financial Projections: a. Revenue Growth: With strategic investments in R&D and production facilities, Nectar is expected to see significant revenue growth, leveraging the expanding cephalosporin market. b. Cost Efficiency: Improving production processes and achieving economies of scale will help in reducing costs, thereby increasing profitability.

5. Market Size and Growth Prospects: The global cephalosporin market size reached approximately $19.3 billion in 2023 and is projected to grow to $24.4 billion by 2032, during the forecast period. This growth is driven by increasing antibiotic-resistant infections, the demand for effective and safer treatment options, ongoing research and development efforts, and rising awareness among healthcare professionals regarding their broad-spectrum antibiotics. As global conditions normalize, Nectar anticipates stabilization and growth in its business segments. The company s strategic focus on customer expansion, product diversification, and market alignment positions it for continued success and leadership in the pharmaceutical industry. Ongoing investments in R&D, regulatory compliance, and talent development underpin its growth trajectory.

Opportunities and Threats - SWOT Analysis:

Nectar s strengths in market presence, facilities, capacity, location advantages, technology, and regulatory approvals form a solid foundation for growth. Opportunities in global demand, emerging markets, product innovation, and industry expansion are key growth drivers. Managing threats such as regulatory challenges, supply chain disruptions, and price pressures remains crucial for sustained performance.

The SWOT matrix of the Company is as under:

Strengths	Weaknesses
Strong market presence and reputation	Potential regulatory hurdles
Advanced manufacturing facilities	Vulnerability to supply chain disruptions
Extensive regulatory approvals	-
Skilled workforce	-
Opportunities	Threats
Expanding global demand for cephalosporins	Increasing competition in the pharmaceutical industry
Emerging markets in Asia, Africa, and Latin America	Regulatory challenges
Product innovation and diversification	Economic volatility
Strategic partnerships and acquisitions	-

Human Resource & Employee Welfare:

Nectar values its employees as assets, emphasizing talent acquisition, development, and retention. HR policies promote a performance-oriented culture, leadership development, collaboration, and continuous learning. Employee welfare initiatives, safety services, and EHS commitments ensure a conducive work environment aligned with industry standards.

Nectar is supported by an effective HR strategy that includes all aspects of Learning and Development, Recruitment, Benefits Administration, Compensation Management, Performance Appraisal and Management, Employee and Labour Relations and Compliance Management. There is no material developments in Human Resources / Industrial Relations front during financial year 2023-24. The number of people employed with the Company are 1686 as on March 31, 2024.

Whistle Blower Policy/ Vigil Mechanism

The company has made the Whistle Blower Policy for the employees of the company where employees are given the freedom to disclose to the management- any instances of unethical behaviour, actual or suspected, fraud or violation of the company s code of conduct or ethics policy. As per policy:

1. No unfair treatment will be meted out to a Whistle Blower by virtue of his/her having reported a Protected Disclosure under this Policy.

2. The Company condemns any discrimination, harassment, victimization, or other unfair employment practice being adopted against Whistle Blowers.

3. Complete protection will be given to Whistle Blowers against any unfair practice like retaliation, threat or intimidation of termination/suspension of service, disciplinary action, transfer, demotion, refusal of promotion, or the like including any direct or indirect use of authority to obstruct the Whistle Blower s right to continue to perform his duties/functions including making further Protected Disclosure.

Risk Management:

Nectar employs a proactive risk management approach, identifying and mitigating critical risks such as competition, regulations, economic volatility, and supply chain disruptions. A dedicated Risk Management Committee (detailed provided in the Corporate Governance Report) oversees risk mitigation strategies, ensuring operational resilience and long-term stability.

Overall, Nectar Lifesciences Limited s strategic focus, market position, regulatory compliance, financial performance, and human capital strategies collectively contribute to its competitive advantage and growth prospects in the pharmaceutical industry. The major risks and mitigation strategies are discussed as under:

1. Competition Risk

Impact: Cephalosporin manufacturers pose a threat to the company s sales.

Mitigation: The Company is one of the leading APIs manufactures and that provides economies of scale and maintain long & healthy customer relations.

The Company has a proficient R&D team and efficient human capital, which continues to work on developing robust processes and helps it to stand out from the clutter and focus on cost optimization.

2. Regulatory Risk

Impact: Many countries have included, additional and upgraded regulations in their processes to deliver better quality and better-priced products.

Mitigation: The Company has a dedicated team that ensure the Compliance of regulatory ecosystem with strong quality assurance mechanism and continuous training.

3. Patent Protection Risks

Impact: Some companies prefer having the comfort of knowing that they are less likely to be undercut by poor quality knock-offs and therefore have their own patents.

Mitigation: A dedicated team of scientists ensure that no product or processes are infringed. The team undertakes a detailed study of the patents in vogue and ensures non-infringement at the initial stage of a new product or new process development.

4. Commodity Risks

Impact: Most companies are dependent upon others for the raw materials of their production. Nectar is highly dependent on China for its raw materials.

Mitigation: The Company is making a conscious effort to broaden its vendor base and develop substitute inputs to decrease over dependence. Nectar deliberately purchases materials only against order to tackle this challenge. Additionally, a strong export base acts as a safety net for raw material procurement.

5. Financial Risks including Foreign Exchange Risk

Impact: Financial Risk includes risks relating to Financial Reporting, Corporate Accounting Frauds, Liquidity, Credit, Interest Rate Management, foreign exchange fluctuation and Revenue Concentration.

Mitigation: Nectar is maintaining high standards of corporate governance, public disclosure and compliance with evolving laws, regulations and standards. It helps the Company to address risks of Financial Reporting, Corporate Accounting Frauds.

For Liquidity Risk, Cash management services are availed from Bank to avoid any loss of interest on collections. Exposures to Foreign Exchange transactions are supported by LCs and Bank guarantees etc.

For Credit Risk, systems put in place for assessment of credit worthiness of dealers/customers. Provision for bad and doubtful debts made to arrive at correct financial position of the Company. Nectar is not only an export-oriented company, but it also has considerable imports and working capital that backs export-oriented projects. The Company has natural forex hedge in case of imports and exports.

Concentration of revenue from any particular section of industry is sought to be minimized over the long term by careful extension into other activities, particularly in areas the company has some basic advantage such as availability of infrastructure, technical knowhow or manpower resources.