NGL Fine Chem Ltd Management Discussions

GLOBAL ECONOMY

The global economy underwent a modest recovery to grow at an estimated 3.2%, in CY 2023. This can be attributed to a robust increase in consumer demand, accumulation of savings during pandemic restrictions, and abundant job opportunities in labour markets. However, there were also challenges such as geopolitical tensions and ongoing supply chain disruptions. The decision by central banks around the world to raise interest rates to combat inflation also posed challenges to economic growth.

Advanced economies such as the United States (US) experienced a more modest growth rate of 2.5% in CY 2023. This can be attributed to strong consumer spending and a robust job market. However, the Eurozone faced a tougher climb with growth recorded at 0.4% in CY 2023. High energy prices and a less confident consumer base were significant factors influencing this slower growth. In contrast, emerging and developing economies fared better, collectively experiencing a more rapid expansion at 4.3% in CY 2023. This growth was strengthened by Chinas reopening of the economy after stringent pandemic restrictions and Indias robust domestic demand.

However, despite overall growth, inflation remained a significant global concern. While headline inflation figures began to cool towards the end of the year, they remained above central bank targets in most countries. Consequently, major central banks such as the Federal Reserve and the European Central Bank maintained a hawkish stance, repeatedly raising interest rates and tightening financial conditions in response.

OUTLOOK

In CY 2024 and 2025, the global economy is walking on a tightrope, having shown resilience by avoiding pessimistic recession projections and maintaining stable growth. Growth is projected at a modest 3.2% for both years, despite challenges from stricter monetary policies, reduced government spending, and slow productivity gains. Inflation is expected to cool to 5.9% in CY 2024 and 4.5% in CY 2025, but policymakers must carefully manage its decline to avoid hindering growth. Faster disinflation and Chinas recovery offer promising opportunities, while geopolitical tensions and persistent inflation pose downside risks. Longterm growth, especially in emerging markets, relies heavily on structural reforms aimed at boosting productivity and ensuring sustainable debt levels.

INDIAN ECONOMY

India has been witnessing robust economic growth due to resilient domestic demand and proactive policy measures implemented by the Government. The Indian economy is estimated to grow at 7.6% in FY 2023-24, surpassing the 7% growth rate recorded in FY 2022-23. Accordingly, the construction sector is estimated to post double-digit growth rate of 10.7%. This is followed closely by the manufacturing sector, which is estimated to record a solid growth rate of 8.5%. The global rating agency Moodys anticipates that the Indian economy will continue to outpace other G-20 economies, driven by policy continuity following the general election.

There is a sustained focus on infrastructure development and the Governments production linked incentive (PLI) scheme aims to bolster key manufacturing industries. This is expected to make India a global leader in manufacturing. As of September 2023, investments of nearly 95,000 Crores were made under the PLI schemes. These investments have resulted in the production of goods worth 7.80 Lakhs Crores and the creation of direct and indirect employment to over 6.4 Lakhs. Additionally, the PLI schemes have led to exports surpassing 3.20 Lakh Crores. Some of the sectors contributing to these exports include pharmaceuticals, large-scale electronics manufacturing, food processing, and telecom and networking products.

India also continues to stand out as an appealing investment destination, especially amid escalating geopolitical tensions. The countrys large market size, skilled workforce, and improving infrastructure have positioned it favourably in terms of attracting FDI and international business. Global companies are increasingly looking at diversifying their investments into secure and stable locations. Indias economic growth prospects and investor-friendly environment have enabled it to emerge as a preferred destination for international investments.

OUTLOOK

As per the International Monetary Fund (IMF), Indias growth is forecast at around 6.5% in FY 2024-25, underpinned by resilient domestic demand. This is supported by the strengthening of economic fundamentals, including a narrowing current account deficit, high foreign exchange reserves, relatively contained inflation around 5%, and a fiscal deficit target of 5.9% of GDP. The key drivers behind this growth momentum include a focus on technology, expansion of manufacturing capacity, and the promotion of higher value-added exports. Despite challenges such as geopolitical tensions and energy transition, Indias economic outlook is positive. This is further bolstered by strategic initiatives in manufacturing, clean energy, and export diversification.

GLOBAL PHARMACEUTICAL MANUFACTURING INDUSTRY

The global pharmaceutical industry has witnessed remarkable growth in recent years. Some factors driving this growth include rising demand, technological advancements, an ageing population, increasing healthcareexpenditure, and the growing burden of chronic diseases worldwide. According to industry estimates, the total global pharmaceutical market for FY 2023-24 stood at around US$ 1.6 Trillion. The industry is expected to continue on a growth trajectory in the coming years.

Globally, the US is by far the leading market for pharmaceuticals, followed by other developed countries and emerging markets. Emerging markets, which include middle and low-income countries such as Brazil, India, Russia, Colombia, and Egypt, among others, present substantial growth opportunities for the pharmaceutical industry.

Global Animal Healthcare Market

Animal healthcare has an important role in addressing a spectrum of diseases impacting animals-an upward trend witnessed in recent years that continues today. The increasing demand for animal healthcare has driven intensified research initiatives and ramped up pharmaceutical production tailored to this market. This is expected to further boost the animal healthcare market. The global animal healthcare market was valued at US$ 60.72 Billion in CY 2023. It is anticipated to grow from US$ 66.97 Billion in 2024 to US$ 149.02 Billion by CY 2032, clocking in a CAGR of 10.5% during the forecast period.

This growth is fuelled by the increasing ownership of pets worldwide which is further driving the demand for pet healthcare products and veterinary services. Additionally, there is a growing awareness among both livestock and pet owners regarding the importance of preventive healthcare measures for animals. This is leading to a rise in the demand for animal vaccines, diagnostics, and healthcare products. Governments around the world are increasingly promoting initiatives for animal healthcare. These efforts are expected to further strengthen the potential of the animal healthcare market in the long run, as they contribute to raising awareness, improving access to veterinary services, and ensuring the overall health and well-being of animals. Source: [https://www.polarismarketresearch.com/industry- analvsis/animal-health-market

https://www.factmr.com/report/animal-healthcare-market1 Global Veterinary API Manufacturing Market

In CY 2023, the global veterinary active pharmaceutical ingredients (API) manufacturing market was valued at US$ 8.54 Billion. Projections suggest that the market will continue to grow steadily, with estimates indicating it could reach a value of US$ 13.47 Billion by 2030 at a CAGR of 6.8% throughout the forecast period.

APIs for veterinary use are essential components of animal medicines and have a crucial role in achieving desired therapeutic effects. Before receiving commercial approval, these APIs undergo rigorous testing and research. With the escalating demand for animal healthcare solutions, the market for premium veterinary APIs is experiencing significant growth. This can be attributed to robust research and development of veterinary products, increased investments in outsourcing, facility expansions, and higher expenditure on animal health.

The veterinary APIs manufacturing market is expanding primarily due to the rising prevalence of transboundary and zoonotic diseases. These diseases pose substantial threats to both animal and human well-being, endangering public health, global trade, and animal welfare. Utilising veterinary APIs has become imperative in controlling and preventing the spread of such diseases. These APIs are essential in treating sick animals, developing effective remedies, and alleviating symptom severity, thereby helping in the recovery of affected animals.

Moreover, veterinary APIs play a crucial role in addressing animal population epidemics. They also help in reducing the risk of disease transmission from animals to humans. Consequently, there has been a significant increase in the global adoption of veterinary APIs for pre-empting and managing zoonotic and transboundary diseases. Governments, veterinary professionals, and international organisations are collaborating to develop and implement comprehensive disease control initiatives.

Indian Pharmaceutical Industry

The Indian pharmaceutical industry is poised for phenomenal growth, with projections indicating a substantial surge in market valuation. In FY 2023-24, the market size reached US$ 54.6 Billion, and according to the IMARC Group, it is expected to reach US$ 163.1 Billion by CY 2032, at a CAGR of 12.3% during 2024-2032. This growth is likely to be fuelled by several key factors driving demand from both domestic and international markets.

On the export front, the industry has demonstrated remarkable performance. According to data from the Ministry of Commerce, pharmaceutical exports surged by 12.73% in March, reaching US$ 2.8 Billion. In FY 2023-24, exports totalled an impressive US$ 27.9 Billion. This robust export performance is a testament to the industrys global competitiveness and the increasing demand for Indian pharmaceutical products worldwide.

Source: [https://economictimes.indiatimes.com/industry/healthcare/ biotech/pharmaceuticals/indias-pharma-exports-rise-10-to-usd- 27-9-bn-in-fv24/articleshow/109560417.cms?from=mdr1 The outlook remains equally promising on the domestic front. Domestic sales are expected to grow by 8-10% in FY 2024-25, with the chronic segment playing a pivotal role due to rising lifestyle-related diseases and heightened health awareness among the masses. The increasingburden of diseases and healthcare needs in the country, coupled with favourable government initiatives promoting the development of healthcare infrastructure, has created a fertile environment for the industrys growth.

Source: [https://www.businesstoday.in/industry/pharma/story/indian-pharma-industry-aims-for-8-10-growth- with-strong-domestic-and-export-sales-to-regulated- markets-397906-2023-09-11]

Indias pharmaceutical industry has consistently remained one of the fastest-growing sectors due to its immense domestic and international demand. In FY 2023-24, it gained significant momentum by forging strategic global alliances with numerous countries, solidifying its position as a significant global player. India has maintained its status as the third-largest producer of pharmaceuticals by volume and the fourteenth largest by value.

The growth of the pharmaceutical industry is being complemented by significant growth in the Indian animal healthcare market, which is witnessing a parallel surge. This market will continue expanding at a rate of 7.8% CAGR until CY 2032. Animal healthcare encompasses a wide range of practices, products, and services, seamlessly integrating to enhance and sustain the health and well-being of animals. Its scope extends from companion animals such as dogs, cats, birds, and small mammals to livestock species including cattle, poultry, pigs, sheep, and goats.

The Indian veterinary healthcare market is projected to reach US$ 1.25 Billion in CY 2024, and US$ 1.89 Billion by CY 2029, recording a CAGR of 8.63% during 2024-2029. This can be attributed to increasing animal health expenditure, rising pet ownership, growing livestock population, and heightened awareness regarding animal healthcare. The industry is set to play a crucial role in ensuring the well-being of animals and contributing to the overall growth of the Indian pharmaceutical sector.

OPPORTUNITIES

Increasing Pet Ownership

Pet ownership in India is on the rise, with the country estimated to have more than 10 Million dogs and 2.4 Million cats in FY 2023-24. This is driving the demand for veterinary APIs. The widespread use of NSAIDs and other drugs for pain management, anti-inflammatory treatments, and osteoarthritis in companion animals presents lucrative opportunities for veterinary API manufacturers. As pet owners become increasingly conscious about animal healthcare, the veterinary API market is well-positioned to capitalise on this expanding consumer base. This is likely to further foster innovation and production of high-quality APIs tailored to meet the diverse needs of Indias burgeoning pet population.

Livestock Production

Given the emphasis on efficient livestock production to meet the increasing demand for protein, there is a significant opportunity for veterinary medicines to bolster the health and productivity of livestock. This is crucial for ensuring the sustainability of the food supply chain. Veterinary medicines play a vital role in supporting the health and productivity of livestock, ensuring that animals remain healthy, disease-free, and productive throughout their lifespan. These medicines are essential for preventing and treating various diseases and health conditions, ranging from common infections to more complex illnesses.

Zoonotic Disease Awareness

The animal healthcare market in India is experiencing a surge in growth, driven by the escalating incidence of zoonotic diseases across the country. Factors such as demographic shifts, land encroachment, and agricultural practices are contributing to the increased prevalence of these diseases, which also impact animal populations. In response, the Government has initiated preventive measures to curb the spread of zoonotic diseases. Market stakeholders are actively involved in raising awareness about these diseases and advocating for their prevention, thereby fostering growth in the animal healthcare market. As more individuals recognise the importance of precautionary measures, the demand for animal healthcare services is anticipated to rise significantly. Additionally, the availability of diverse treatment options is expected to further bolster the growth trajectory of the animal healthcare market in India.

Increase in Government Support

Government initiatives addressing animal welfare and public health contribute to market growth. They foster a conducive environment for the development and use of veterinary medicines, presenting significant growth opportunities for market stakeholders. The Governments investments in R&D endeavours to develop efficient vaccines and financial support extended to veterinary research laboratories are significant drivers fuelling market growth. Additionally, enhancements in animal treatment and vaccination facilities are underway, augmenting the Indian veterinary healthcare market. Furthermore, the advocacy efforts of animal welfare activists for animal rights are fostering a burgeoning population of animal enthusiasts. This is accompanied by heightened Government backing for animal healthcare products.

Telemedicine Tools Transforming Animal Healthcare in India

The Governments increasing emphasis on promoting telemedicine tools within the animal healthcare sector presents a lucrative opportunity for industry participants. The adoption of digital products by pet owners is fuelling demand for remote consultations and pet health monitoring. Consequently, stakeholders in the animal healthcare market are making substantial investments in R&D activities, thereby fostering growth in the sector. These technological advancements are significantly enhancing the delivery of veterinary healthcare services throughout the country.

THREATS

Regulatory Challenges

The Indian animal healthcare sector faces significant challenges due to a cumbersome regulatory framework governing veterinary drugs and products. The lengthy approval process for new medications, with the average duration ranging from 20-40% longer, often leads to delays and severely impacts the timely launch of new products. This further impedes innovation and hampers market competitiveness.

Of particular concern are the regulatory barriers imposed by the US Food and Drug Administration (USFDA) in the past. The heavy reliance of the Indian pharmaceutical industry on the US market exacerbates the impact of increased scrutiny by the USFDA for compliance with good manufacturing practice (GMP) regulations. Such scrutiny can result in substantial delays or even rejection of product approvals, further complicating market entry.

Counterfeit Products

The prevalence of counterfeit and substandard animal health products is a multifaceted challenge within the industry. These fraudulent products, often sold as legitimate medications, pose serious risks to both animals and consumers.

Firstly, counterfeit products compromise the efficacy of treatments. Animals may not receive the necessary dosage or active ingredients required for effective therapy, leading to inadequate treatment outcomes. This not only prolongs the suffering of the affected animals but also contributes to the spread of diseases and infections.

Moreover, the presence of counterfeit products undermines consumer trust and confidence in legitimate veterinary medications. When consumers unknowingly purchase fraudulent products that fail to deliver the expected results, they may become disillusioned with the entire market. This erosion of trust not only harms reputable manufacturers and suppliers but also creates confusion and scepticism among consumers, making them hesitant to seek veterinary care. Furthermore, counterfeit animal health products pose significant risks to market growth. As consumer confidence wanes and concerns about product authenticity grow, the demand for legitimate veterinary medications may decrease. This can stifle innovation and investment within the industry, hindering its overall growth and development.

Dependency on Imports from China

According to a report by Crisil Ratings released in mid- November 2023, Indias dependence on imported APIs remains significant. Nearly a third of its API requirements are being sourced from abroad. In FY 2023-24, API imports surpassed 35,000 Crores, with approximately two-thirds originating from China. In response to this reliance on bulk drug imports, particularly from China, the Government has initiated efforts to bolster domestic manufacturing. Various schemes, including the PLI, have been rolled out to incentivise the production of critical key starting materials (KSMs), drug intermediates, and APIs within the country. Projections from CareEdge ratings suggest that by the end of FY 2023-24, Indias dependency on Chinese imports is anticipated to decrease by 12%. Despite government initiatives, there are still challenges such as infrastructural limitations, regulatory hurdles, and technological constraints, further threatening the reliance on imports.

Economic Uncertainty

Economic fluctuations, inflation, and currency devaluation are common occurrences in any market environment. These factors can significantly influence consumer behaviour and purchasing power, ultimately affecting the demand for veterinary products and services. During periods of economic instability, consumers may adjust their spending habits, prioritising essential expenses over discretionary purchases such as veterinary care products. For manufacturers, suppliers, and service providers in this segment, navigating these economic uncertainties becomes paramount. They must closely monitor economic indicators and trends to anticipate shifts in consumer demand and adjust their strategies accordingly. This may involve optimising production levels, managing inventory effectively, and implementing pricing strategies that remain competitive yet reflective of changing economic conditions.

COMPANY OVERVIEW AND PRODUCT PORTFOLIO

Established in 1981 by Narayan Ganesh Lawande, NGL Fine-Chem Limited (NGL or The Company) specialises in manufacturing pharmaceuticals and intermediates, focusing on APIs for both veterinary and human health sectors. While the Companys veterinary pharmaceutical raw materials primarily serve the animal health business, its APIs and intermediates cater to both veterinary and human health sectors. With a commitment to delivering exceptional quality and value-added goods, NGL has established a robust presence in Latin America, Asia, and Europe. Notably, around 65% of the global animal APIs and intermediates market targets the livestock industry, aligning with NGLs primary focus. The Company prioritises cost-effectiveness while upholding the highest standards of product quality. With strong client relationships spanning over 400 customers across more than 45 countries, NGL has emerged as a prominent player in the industry. Looking ahead, the Company aims to become a global leader in the animal health APIs market through long-term strategic initiatives. To achieve this objective, it will continue expanding the product line and exploring new markets worldwide.

Product-Wise Performance

The veterinary API sector is a crucial contributor to NGLs revenue stream. With 32 APIs in production, this division produces compounds utilised in various treatment categories, including ecto and endo parasiticides, anthelmintics, and growth nutrients. Additionally, NGL is actively engaged in manufacturing three APIs tailored for human health. These play a vital role in treating prevalent conditions like diarrhoea, angina, and malaria. Committed to delivering top-notch quality, the Company ensures that the APIs meet the requirements of customers in both veterinary and human health sectors. In FY 2023-24, NGL expanded the portfolio by introducing 6 new products, with number of other products currently in development.

FINANCIAL OVERVIEW

In FY 2023-24, NGLs total sales revenue amounted to 328.97 from 275.06 Crores in FY 2022-23. EBITDA stood at 60.19, while PAT reached 38.52 as against 20.12 Crores for FY 2022-23. The R&D expenses of the Company increased by 44% in the current financial year, while the EPS saw a increase of 91% reaching 62.35 per equity share.

Financial Ratios

MANUFACTURING CAPACITY

NGL takes pride in its cutting-edge facilities, which enable the production of a diverse range of high-quality products. The Companys production facilities, situated in Navi Mumbai and Tarapur, Maharashtra, boast a combined production capacity of 600 tonnes of APIs. Spread across 10,800 m², these are equipped with state-of-the-art infrastructure, including 194 m³ stainless-steel reactors, 12 m³ gas- induction reactors, and 102 m³ glass-lined reactors. Maintaining an average capacity utilisation rate throughout the year leading up to 31^st March 2024, NGL remains committed to enhancing operational efficiency. The Company had slowed down the pace of capital expenditures last year due to tough market conditions and demand uncertainties. However, NGL is now cautiously optimistic about demand recovery and plans to re-evaluate accelerating the capital expenditure early next calendar year. As part of the growth strategy, it plans to invest approximately 160 Crores in capital expenditures over the next three years, further reinforcing its commitment to innovation and expansion. The pilot plant for the new greenfield facility is scheduled to start operations by Q4 of FY 2024-25. The complete plant is expected to be ready within 12-15 months after finalising the equipment installation plans.

Greenfield Expansion

• 50% capacity expansion underway to meet the demand for new products in the pipeline.

• Estimated capex of 160 Crores to be financed through debt and internal accruals.

• Civil construction in progress; 45 Crores invested until Q4 of FY 2023-24.

RISK MANAGEMENT

NGL has instituted a robust risk management system to identify, assess, and address potential risks affecting the operations. Additionally, the Companys internal control systems are tailored to identify and mitigate risks, safeguarding NGLs assets and ensuring the accuracy and integrity of financial records.

INTERNAL CONTROL SYSTEM

NGL emphasises on adhering to local regulatory standards to ensure orderly and efficient business conduct. The Company has implemented a robust internal control system to track and report day-to-day activities, safeguard assets, detect and prevent fraud and errors, maintain comprehensive accounting records, and ensure the timely preparation of reliable financial information.

Regulatory Compliance

Committed to upholding numerous laws, regulations, and policy requirements, NGL ensures that its operations adhere to legal frameworks and ethical business practices. The Companys internal control systems efficiently monitor compliance with these requirements.

Internal Auditing

NGLs internal auditors play a crucial role in confirming the effectiveness of the Companys internal checks and control systems. They monitor and regulate day-to-day activities to ensure compliance with regulatory standards and provide recommendations for enhancing specific areas of the internal control systems.

HUMAN RESOURCE

At NGL, fostering a robust work culture centred on performance, role clarity, cooperation, and mutual respect is of utmost importance. The Company invests in its people and processes to ensure every employee feels valued.

Training and Development Programmes

To cultivate a motivated and skilled workforce, NGL offers regular training and development programmes.

The Company recognises that investing in employee development is essential to stay abreast of industry trends and technological advancements. It ensures that employees are well-prepared to meet evolving business needs.

Recognition Programmes

NGL acknowledges and rewards exceptional performance to inspire and motivate employees. Various recognition programmes are in place to honour outstanding contributions, fostering a culture of excellence and driving overall performance, to the benefit of both the Company and its customers.

Health and Safety Measures

Prioritising employee safety and well-being, NGL maintains stringent health and safety protocols to ensure a secure working environment. The Company operates in compliance with all relevant laws and regulations governing occupational health and safety. Regular policy reviews and updates ensure continuous improvement in safety standards.

As of 31^st March, 2024, NGLs workforce comprised 390 employees.

CAUTIONARY STATEMENT

The estimates and expectations outlined in this Management Discussion and Analysis may include forward-looking statements within the meaning of applicable securities laws and regulations. Actual results may differ materially from those expressed or implied. Key factors that could impact the Companys operations include economic conditions, Government regulations, tax laws, and other incidental factors.