Panchsheel Organics Ltd Management Discussions.

INTRODUCTION AND OVERVIEW

The pharmaceutical industry is expected to grow at 19% in 2020 & the domestic pharmaceutical market is estimated to touch US $ 25 billion by 2020.The Indian pharmaceutical industry ranks among the top five countries by volume (production) further, estimated the healthcare market in India to reach US $31.59 billion by2020. Low cost of skilled manpower and innovations are some of the main factors supporting this growth. According to the Department of Pharmaceuticals, the Indian pharmaceutical industry employs about 340,000 people and an estimated 400,000 doctors and 300,000 chemists.

Rapidly changing global economic & business conditions and technological innovation are creating an increasingly competitive environment that is driving Companies to transform their operations globally. While the expectations of the customers have increased manifold; we are committed to satisfy the clients with improved quality and accelerated delivery schedules with a focus on developing long terms relationships and strengthening strategic partnerships.

Drugs and pharmaceutical industry plays a vital role in the economic development of a nation. It is one of the largest and most advanced sectors in the world, acting as a source for various drugs, medicines and their intermediates as well as other pharmaceutical formulations. Being the intense knowledge-driven industry, it offers innumerable business opportunities for the investors/ corporates the world over. The existence of well-defined and strong pharmaceutical industry is important for promoting and sustaining research and developmental (R&D) efforts and initiatives in an economy as well as making available the quality medicines to all at affordable prices. That is, it is essential to improve the health status of the individuals as well as the society as a whole, so that positive contributions could be made to the economic growth and regional development of a country.

INDUSTRY STRUCTURE AND DEVELOPMENT

The Indian drugs and pharmaceutical industry, over the years, has shown tremendous progress in terms of infrastructure development, technology base creation as well as product usage. On the global platform, India holds fourth position in terms of volume and thirteenth position in terms of value of production in pharmaceuticals. The pharmaceutical industry has been producing bulk drugs belonging to all major therapeutic groups requiring complicated manufacturing processes as well as a wide range of pharma machinery and equipments. It has also developed excellent good manufacturing practices (GMP) compliant facilities for the production of different dosage forms. Besides, the amendment to the Patents Act, 1970 [enactment of Patents (Amendment) Act, 2005], has opened up new avenues for the sector.

The new patent regime has ushered in the era of product patents for the pharmaceutical sector, in line with the obligations under theWorld Trade Organisation (WTO) and Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement. As a result, the Indian pharmaceutical industry has become self-reliant in several areas and has developed a more sound and technologically advanced R&D segment.

The industry offers several opportunities for investments and trade owing to the following advantageous features:-

Self-reliance displayed by the production of 70 per cent of bulk drugs and almost the entire requirement of formulations within the country;
Low cost of production of quality bulk drugs and formulations
Low R&D costs
Strong scientific, innovative and technical manpower
Excellent and world-class national laboratories specializing in process development and development of cost effective technologies
Increasing balance of trade in pharma sector
Efficient and cost effective source for procuring generic drugs, especially the drugs going off patent in the next few years
Excellent centre for clinical trials in view of the diversity in population
Fast growing biotech industry which has great potential in the international market
Apart from its strengths in manufacturing and exporting allopathic medicines, the systems of medicines like Ayurveda, Unani, Siddha, Yoga, Naturopathy and Homeopathy are also prevalent in the country.

The drugs and pharmaceutical is one of the most diversified of all the industrial sectors. The accumulated knowledge of traditional medicinal system and large bio-diversity of India offers great advantage to the drug industry. The rapidly changing economic, trade and intellectual property scenario, nationally and internationally, poses many challenges to it, including the challenge of becoming leaders and competitors globally. This necessitates a shift in the approach of the industry, that is moving away from manufacturing only known drugs to discovering and commercialising new molecules through innovative process routes. It would mean that the Indian pharma industry has to focus more on R&D, so as to enable India to maintain its status in the world pharma market and move ahead to become a global leader. In other words, the strength of the industry lies in leveraging the countrys power in organic synthesis and process engineering as well as developing cost-effective technologies in the shortest possible time for drug intermediates and bulk activities, without compromising on quality.

SMES IN THE PHARMA INDUSTRY

According to the Confederation of Indian Industries (CII), there are around 8,000 small and medium enterprises (SME) units, accounting for about 70% of the total number of the pharma units in India. Indian SMEs are also opening up for emerging opportunities in the pharmaceutical industry in the field of CRAMS, clinical research etc. These would drive them to play a definitive role in the transitional global pharmaceutical environment, where a sizeable number of drugs are expected to go off patent in the coming years. The Indian government has been making every attempt to support SMEs through several incentives. One such effort is the development of SME clusters in various parts of the country.

INVESTMENT IN THE INDIAN PHARMACEUTICAL INDUSTRY

100% foreign direct investment (FDI) is allowed under automatic route in the drugs and pharmaceuticals sector, including those involving use of recombinant technology. Also, FDI up to 100% is permitted for brownfield investments (i.e. investments in existing companies), in the pharmaceuticals sector, under the Government approval route. The drugs and pharmaceuticals industry attracted foreign direct investment to the tune of US$ 22.17 BN for the period between April 2018 and January 2019.

FACTORS INFLUENCING GROWTH OF THE INDUSTRY

The Indian pharmaceutical industry ranks 14th in the world by value of pharmaceutical products. With a well-established domestic manufacturing base and low-cost skilled manpower, India is emerging as a global hub for pharma products and the industry continues to be on a growth trajectory. Moreover, India is significantly ahead in providing chemistry services such as analogue preparation, analytical chemistry and structural drug design, which will provide it ample scope in contract research and other emerging segments in the pharmaceutical industry. Some of the major factors that would drive growth in the industry are as follows:

Increase in domestic demand: More than half of India‘s population does not have access to advanced medical services, as they usually depend on traditional medicine practices. However, with increase in awareness levels, rising per capita income, change in lifestyle due to urbanisation and increase in literacy levels, demand for advanced medical treatment is expected to rise. Moreover, growth in the middle class population would further influence demand for pharmaceutical products.

Rise in outsourcing activities: Increase in the outsourcing business to India would also drive growth of the Indian pharmaceutical industry. Some of the factors that are likely to influence clinical data management and bio-statistics markets in India in the near future include: 1) cost efficient research vis--vis other countries 2) highly-skilled labour base 3) cheaper cost of skilled labour 4) presence in end-to-end solutions across the drug-development spectrum and 5) robust growth in the IT industry.

Growth in healthcare financing products: Development in the Indian financial industry has eased healthcare financing with introduction of products such as health insurance policy, life insurance policy and cashless claims. This has resulted in increase in healthcare spending, which in turn, has benefitted the pharmaceutical industry.

Demand in the generics market: During 2018-2019, prescription drugs worth about US$ 500 bn are expected to go off patent, mostly from the US. Prior experience of Indian pharmaceutical companies in generic drugs would provide an edge to them.

Demand from emerging segments: Some of the emerging segments such as contract research and development, biopharma, clinical trials, bio-generics, medical tourism and pharma packaging are also expected to drive growth of the Indian pharmaceutical industry.

Indian pharmaceutical industry: SWOT analysis

The SWOT analysis of the industry reveals the position of the Indian pharmaceutical industry in respect to its internal and external environment.

Strengths

Low cost of innovation, manufacturing and operations
Low cost of skilled manpower and proven track record in design of high technology manufacturing devices.

Weaknesses

Stringent pricing regulations affecting the profitability of pharma companies
Presence of more unorganised players versus the organised ones, resulting in an increasingly competitive environment, characterised by stiff price competition.

Opportunities

Opening of the health insurance sector and increase in per capita income - the growth drivers for the pharmaceutical industry
India, a potentially preferred global outsourcing hub for pharmaceutical products due to low cost of skilled labour.

Domestic Markets

The Company has a wide range of pharmaceutical products in its portfolio. We try and tap every lawful opportunity coming our way and follow a focused approach and increased marketing efforts. All these have resulted in increased growth of the Company in the recent years. In the coming years, we shall strive hard to build a strong reputation for ourselves and carve a niche for our products.

International Markets

The Company is continuously trying to build a large overseas business and revenue from export business accounts for a sizeable component of Companys total turnover. The Company is continuously tapping potentially new markets and exporting a wide range of products to these countries.

Threats

Other low-cost countries such as China and Israel affecting outsourcing demand for Indian pharmaceutical products

Entry of foreign players (well equipped technology-based products) into the Indian market.

Drug Pricing

The domestic pharmaceutical industry is very much dependent on the governments drug pricing policy. It is important for the Government to introduce free and fair competition rather than arbitrary drug control measures to decide prices of essential drugs.

This will ensure that Companies like us can manufacture and market all the vital life saving drugs at economical prices.

Rising Costs and Availability of Materials

The prices of many APIs and intermediates have risen significantly due to restriction in production by various Chinese manufacturers. Other factors contributing to such price hike are rise in price of petroleum-based products, frequent shortages and general inflationary conditions.

All these adversely affect the production schedules and overall margins of our Companys products.

SEGMENT-WISE PERFORMANCE

The operation of the Company consists of the single segment. The Company deals in bulk drugs. Hence, Accounting Standard on Segment Reporting (AS-17) issued by Institute of Chartered Accountants of India does not apply.

OUTLOOK

The Indian economy has shown a substantial growth in the year 2018-19 and this will have a positive impact on all the sectors. However, to tap the full potential of this emerging opportunity, the domestic industry needs to improve its cost effectiveness, scale of operations and quality/reliability in order to be able to compete with other global suppliers in the export market.

Commodities prices have maintained their high volatility, making it difficult to take long-term view on prices. The appreciation of rupee against dollar has further been a cause of concern for exporters.

We are committed to deliver quality products on a consistent basis and at competitive prices. Our strategy has been to make optimum utilisation of the resources, raw materials, timely production and delivery schedules, safety of the workforce and finally develop strong customer relationship and thereby backing our prime motto to be a customer driven Company.

Factors that may affect our results of the operations

Our financial conditions and results of operations are affected by numerous factors inter alia

Growth of unorganized sector and threat from local regional players
Change in freight and forwarding charges
General economic and business conditions;
Our Companys ability to successfully implement our growth strategy
Fluctuation in Exchange rates.
Prices of raw materials we consume and the products we manufacture;
Changes in laws and regulations relating to the industry in which we operate;
Changes in political and social conditions in India;

Our Results of Operations

The Break-up of Revenue and Costs of Company is as given below:

PARTICULARS Year ended March 31 Year ended March 31
2019 2018
(Rs.) (Rs.)
INCOME
Sales & Income from Operation
Domestic 47,11,16,000 41,26,19,000
Export 1,12,29,000 1,40,74,000
48,23,45,000 42,66,93,000
(Increase)/Decrease in Stocks (10,02,000) (9,06,000)
Less: Excise Duty 0 28,70,000
Add:-Other Income 27,87,000 7,23,000
Other Operating Income 93,000 1,46,35,000
TOTAL 48,42,23,000 42,93,80,000
EXPENDITURE
Operating Expenditure 36,79,56,000 31,27,66,000
Administrative And Other Expenditure 4,60,79,000 4,32,24,000
Finance Charges 38,74,000 53,73,000
Depreciation for the Year 1,16,46,000 1,22,21,000
TOTAL
Profit Before Tax 565,80,000 518,68,000
Less: Current Tax (1,82,64,000) (1,70,61,000)
Deferred Tax 20,53,000 19,30,000
Profit After Tax 4,03,69,000 3,67,37,000

(1) Total Income

Our revenue has decreased from Rs. 42,66,93,000 to Rs.48,23,45,000 as compared to previous year i.e. 2017-18. Sales in export market have decreased and increased in domestic market

(2) Operating Expenditure

The operating expenditure has increased from Rs.31,27,66,000 to 36,79,56,000 as compared to previous financial year.

(3) Administrative and other expenses

The administrative expenses have increased from Rs.4,32,24,000 toRs.4,60,79,000 as compared to previous financial year.

(4) Depreciation

The Depreciation cost has decreased from Rs.1,22,21,000 to Rs.1,16,46,000 in Financial Year 2018-2019

(5) Net Profit

Net profit for the financial year 2018-19 isRs.32,090,246.21

Other Factors:

(1) Known trends or uncertainties

The world economy has witnessed an unprecedented economic crisis causing severe recessionary trends in various countries but Indian pharmaceutical industry remained less affected compared to other sectors.

(2) Future relationship between costs and revenues

Our Company doesnt see substantial increase in labour cost or other cost related to the product except that raw material prices may go up in near future due to rise in commodity prices. However; any increase in raw material prices would be duly covered in the sales price of the product.

(3) Dependence on Single or few suppliers/Customers

The Customer base of our Company is very strong as we do not deal with a single customer or supplier. We have a very cordial relationship with all customers and suppliers with whom we have been dealing for a very long time.

(4) Significant developments subsequent to last financial year.

In the opinion of the Directors, there are no significant changes since the date of the last financial statements, which could materially affect the operations, and Profitability of our Company.

INTERNAL CONTROL

The Companys internal control procedures are tailored to match the organizations pace of growth and increasing complexity of operations. This ensures compliance to various policies, practices and statures.

We have an adequate system of Internal Control which enables reliable financial reporting, safeguard of assets and encourages adherence to management policies.

The Company has a system for speedy compilation of accounts and management information reports to comply with applicable laws and regulations.

We have a reasonable budgetary control system so that the management can monthly review actual performance against the budget. A well defined organization structure is in place with authority level, internal rules and guidelines for conducting business transactions.

Transaction in which the management is interested in their personal capacity

During the year, there are no materially significant related party transactions entered into with the management that may have potential conflict with the interest of your Company.

For Detailed Discussion, refer Note No. N(II other explanatory notes and information)in Notes to Accounts.

Human Resource and Industrial Relations

Industrial relations of the company were cordial during the year and continue to remain peaceful at the factory & office at Indore and the corporate office at Mumbai and all the employees are working with the company for a common objective.

Cautionary Statement

Statements in this Management Discussion and Analysis describing your Companys objectives, projections, estimates and expectations, may be ‘forward looking statements are within the meaning of the applicable laws and regulations. Actual results might differ substantially or materially from those expressed and implied. Important development that could affect your Companys operations include a downtrend in the international market, fall in onsite, offshore rate and significant changes in political and economic environment, environment standards, tax laws, litigations and labour relations.