par drugs chemicals ltd Management discussions

Global economic overview

The global economic output is expected to witness stable growth, fuelled by stabilising inflationary pressures, reviving consumer sentiment and investor confidence. The employment scenario in the US and other advanced economies has recovered from pandemic levels and higher disposable income is also expected to facilitate growth in the coming years.

Emerging and developing countries are also experiencing substantial growth across multiple sectors, powered by governments focus on infrastructure and manufacturing sectors. China has also recovered from its COVID impact on the economy and businesses and is on the road to recovery.

Central banks monetary policies are anticipated to bear fruit causing a drop in global inflation from *8.7% in CY22 to 7.0% in CY23 to 4.9% in CY24. It is anticipated that the pent-up demand in numerous economies, coupled with a sharp reduction in inflation, will accelerate economic growth in CY23. [*Source: IMF World Economic Outlook, April 2023].

The global economy is anticipated to register a growth rate of 2.8% in CY23, which is likely to gradually increase and stabilise at 3.0% in CY24. Emerging markets and developing economies, including India, are powering ahead in many cases, with growth rates expected to significantly jump this year.

[Source- IMF World Economic Outlook, April 2023]

Outlook

Despite the inflationary pressures, the global economy is buoyed by a strong labour market, higher domestic consumption, an influx of foreign capital and a prudent response to the energy crisis in Europe. Many emerging markets and economies (EMDEs) are already witnessing a solid rebound, which has bolstered real incomes. An optimistic global outlook would also be determined by the speed and efficacy of fiscal and monetary policy actions undertaken to drive economic expansion. Global central banks have been tightening monetary policy, which is expected to curb sticky inflation and foster sustained growth.

Indian economic overview

The Indian government has successfully maintained a conducive domestic policy environment and prioritised structural reforms, enabling the countrys economy to remain resilient amid global challenges. Projections suggest that Indian economy will continue to expand at a rate of 7% during FY 2022-23¹. Additionally, the countrys stable inflation rates, higher disposable income and consistent investment in infrastructure development are expected to bode well for future economic growth.

Numerous high-frequency indicators, including GST collections, railway and air traffic, electronic toll collections and E-Way bill volume, indicate a robust economic recovery in India. This upward growth momentum has positioned India as an attractive investment destination. Furthermore, India is expected to retain its status as the fastest-growing G-20 nation in the coming years. Indias presidency of the G20 Summit in 2023 has also bolstered its international stature.

Despite facing challenges, the Indian governments schemes, such as the PM Gati Shakti - National Master Plan, the National Monetisation Plan (NMP) and the Production-Linked Incentive (PLI), have been essential in fostering economic growth. The Reserve Bank of India (RBI) has also taken prudent and proactive measures to ensure financial stability and address liquidity constraints. These factors have contributed to the Indian economys resilience and pitched in substantial investments.

Outlook

India is well-positioned to be among the fastest-growing major economies in the world in 2023-24, accounting for 15% of global growth, the second-largest contribution and higher than that of the US and EU combined.² Growth will likely accelerate in the coming year as investments kickstart the virtuous circle of job creation, income, productivity, demand and exports, backed by favourable demographics in the medium term.³

With need-based measures in place to curb sticky inflation, manage the depreciation of the Indian currency and mitigate the immediate effects of the fiscal deficit on the economy, it is expected that there will be a significant improvement in business prospects. This, coupled with a favourable policy environment, is anticipated to enhance consumer confidence, bringing some modest relief to the domestic economy.

Global pharmaceuticals industry

The global pharmaceutical industry is growing at a rapid pace. Mathematical modelling is being preferred as a tool by the pharmaceutical industry and regulatory bodies to boost the sectors productivity and the effectiveness of new medication development procedures. Over the following five years, there will be an increase in both worldwide spending and demand for medications, reaching roughly USD 1.9 trillion by 2027 at a 3–6% CAGR. Global pharmaceutical markets are expected to grow by USD 500 billion between 2020 and 2027, with vaccines accounting for the majority of growth.⁵

The CAGR for the global pharmaceutical API manufacturing market is predicted to be 9.1%, up from USD 179.05 billion in 2021 to USD 195.29 billion in 2022⁶.The global market for active pharmaceutical ingredients is also being driven by the increasing prevalence of chronic diseases. Due to rising incidences of chronic diseases, the Active Pharmaceutical Ingredient (API) market is anticipated to grow at a rapid pace throughout the forecast period from 2023 to 2030. The global API market can be classified into in-house manufacturing and contract manufacturing. It is expected that the in-house manufacturing segment will continue to dominate the worldwide API market. This is because in-house manufacturing provides the flexibility to change as and when necessary, making it useful for a company to respond quickly to market changes without relying on another company or anyone else.

Indias pharmaceutical industry

The pharmaceutical sector in India is presently valued at USD 50 billion and is on an upward growth trajectory. India ranks third globally in terms of production volume and fourteenth in terms of value. Since 2013–14, Indias pharmaceutical exports have surged by 103%, rising from INR 90,415 crore in 2013–14 to INR 1,83,422 crore in 2021–22. India is rightfully considered the ‘Pharmacy of the World since it supplies about 20% of all generic medicine exports worldwide.⁷

20%

Indias worldwide generic medicine exports

A strong network of over 10,500 manufacturing facilities, as well as more than 3,000 pharmaceutical businesses, can be found in India, which also has the biggest number of US-FDA-approved manufacturing plants outside of the US.⁸

3000+

Pharmaceutical businesses in India

Indias emergence as a distinct supplier of bulk drugs has been remarkable. As far as APIs are concerned about 8% of the global API industry includes 500 domestic API businesses. These companies contribute 57% of APIs to the WHOs prequalified list. It is expected that the Indian API market will grow at a CAGR of 13.7%, which is nearly 8% faster than the generic API market, from FY24 to FY28. For many investors and venture capitalists, the Indian API market has proved profitable in recent years.

India has a competitive edge because of its large domestic market, advanced chemical industry, skilled labour force, strict quality and manufacturing standards, as well as inexpensive cost of setting up and running a new facility (approximately 40% less than in the West).⁹ India is a major supplier of generic medications. It produces roughly 60,000 different generic brands across 60 therapeutic categories, constituting about 20% of the worlds generic supply.¹⁰

Exports

India is a major pharmaceutical exporter, with around 200 countries receiving Indian pharmaceutical exports. India meets approximately half of Africas need for generic medications, more than 40% of the US market for generics, and roughly 25% of the UKs total drug demand. In 2021-2022, drug and pharmaceutical exports totalled USD 24.6 billion, up from USD 24.44 billion in 2020-2021.¹²

In FY21, Indian pharmaceutical exports saw a solid 24% growth. The outlook for Indias domestic pharmaceutical sector thus remains optimistic. It is projected to increase from an estimated USD 41 billion in 2021 to an estimated USD 65 billion by 2024 and then USD 130 billion by 2030.

Drugs, pharmaceuticals and _ne chemicals

When compared to the data from FY20, medical and pharmaceutical exports recorded a growth rate of 22% from April to October in FY22. In FY22, total foreign direct investment in the pharmaceutical industry surpassed the USD 20 billion mark. In addition, due to regulations that promote investment and help define a promising outlook for the sector, FDI inflows surged fourfold between FY19 and FY23, reaching a net worth of USD 699 million.¹³

Opportunities

Imports from nations including China, Italy, Germany, France and Malaysia meet Indias primary demand for APls. China is witnessing halted growth due to power concerns and rising utility costs. However, it still fulfils the majority of the global needs for APls. Chinese manufacturings slump may thus present a significant growth opportunity for domestic API businesses.

In the near future, India has a greater opportunity to grow into a full-fledged pharmaceutical supplier. The domestic API producers will be able to boost their production capacity and compete in the global market owing to the governments adequate regulatory assistance, which includes enough infrastructure facilities, subsidies and loans with low interest rates. The ongoing import of API raw materials is one of the factors that will fuel the expansion of the API market in India in addition to the government incentives.

Threats

Along with the constant threat of natural disasters, wars and trade restrictions, markets are also exposed to distinct economic and political risks. Over the past year, the costs of basic raw materials and utilities have significantly grown and this trend is expected to continue in the near term, thereby increasing the price of APIs. The demand for APls on the domestic and international markets will be impacted by the rising price of APls. However, the Company is safeguarded from any unfavourable events in any specific country or region owing to its extensive worldwide presence and lack of reliance on any one market.

Key growth enablers

• Government support - Incentives from the Government include allocations worth Rs. 21,940 for Production Linked Incentives 1.0 and Production Linked Incentives 2.0. The three proposed bulk drug parks in Gujarat, Himachal Pradesh and Andhra Pradesh will ensure Indias drug security and offer a reliable supply of bulk drug active ingredients.

• Medical tourism - When compared to costs in the United States, Europe, and South Asia, India has the lowest cost while delivering high-quality services.

• Infrastructure development - India is home to the largest number of US-FDA-authorised pharmaceutical plants outside of the US, with over 10,500 manufacturing facilities and more than 3,000 pharmaceutical companies.

• Strong domestic demand - The introduction of the -Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (AB PM-JAY) has increased domestic demand. The domestic pharmaceutical market in India was worth USD 41 billion in 2021 and is expected to reach USD 65 billion by 2024 and USD 130 billion by 2030.¹⁵

Government initiatives

1) The Strengthening of Pharmaceutical Industry (SPI) scheme is being implemented by the Department of Pharmaceuticals, Ministry of Chemicals and Fertilisers, with an investment of Rs. 500 crore for a duration of FY 2021-2022 to FY 2025-26. Three sub-schemes are part of the scheme, which are discussed below:

(i) Assistance to the Pharmaceutical Industry for Common Facilities (APICF) to enhance infrastructure facilities by providing infrastructure support for pharma MSMEs clusters.

(ii) Promotion of Technology Upgradation Assistance Scheme (PTUAS) to address the challenges of a specific pharmaceutical companys technological upgrade.

(iii) Pharmaceutical and Medical Device Promotion and Development Scheme (PMPDS) to organise lectures, activities and surveys to raise awareness.¹⁶

2) A production-linked incentive (PLI) scheme for the development of local production of key starting materials (KSMs), drug intermediaries (DIs) and APIs was approved by the Government with an allocation of Rs. 6,940 crore. Under the PLI scheme, India has already begun producing 35 APIs, or around 67% of the APIs for which it is 90% dependent on imports.¹⁷

3) The proposal from the states of Himachal Pradesh, Gujarat and Andhra Pradesh under the Promotion of Bulk Drug Parks plan has also received in-principle approval from the Department of Pharmaceuticals. The programme offers financial assistance to these three states for the development of bulk drug parks, with a budget of Rs. 3000 crore to lower the cost of producing bulk pharmaceuticals by building top-notch shared infrastructure facilities and boosting the local bulk drug industrys competitiveness.

4) A pharmaceutical park near Chaygaon, Kamrup Rural, with a projected cost of Rs. 153.64 crore, has also been suggested by the government of Assam.¹⁸

Company overview

Par Drugs and Chemicals Limited (PDCL), founded in 1982 and promoted by Mr. Falgun Savani and Mr. Jignesh Savani, is involved in the development and creation of APIs. The Company currently produces APIs and fine chemicals for both the domestic market and exporting its offerings overseas. The Company owns and operates a manufacturing facility in Gujarats Bhavnagar with a 9,700 MT yearly capacity. It is also Indias leading manufacturer of magnesium hydroxide, sucralfate and trisilicate.

The Company has also initiated a new production line-up (one new manufacturing block), which will boost its production capacity, while also focusing on our current product line. The Company has four dedicated manufacturing blocks at Bhavnagar for different products. Block 1 is an API block, Block 2 is a Magnesium Hydroxide block, Block 3 is allotted for Fine Chemicals and Block 4 has both API and Fine Chemicals.

Strengths

• Diversified portfolio: The Company manufactures the entire antacid product line. The product portfolio now includes 10 fine chemicals and 15 APIs sold both domestically and internationally.

• Global presence: The Company has a wide geographical footprint and has a strong foothold in both domestic and international markets. Its products are exported to roughly 16 nations, including Germany, the United Kingdom, Bangladesh, Iran, the United Arab Emirates, Indonesia, Japan and South Korea.

• Promotional Experts: The Company is led by skilled and experienced promoters and key managerial personnel, who have in-depth knowledge of and familiarity with the business environment concerning APIs and possess the insight necessary to drive the Companys sustained growth.

• Comprehensive chemistry capabilities: Research and development are consistent processes in the Company. The Company implements targeted R&D initiatives focusing primarily on streamlining processes and reducing manufacturing costs.

• Wide sales and distribution network: The Company operates a robust distribution network comprising 13 agents worldwide and over 40 dealers.

Product portfolio

The Company is engaged in the manufacturing of Active Pharmaceutical Ingredients(APIs) and Fine Chemicals. It is also one of the largest manufacturers of Magnesium Hydroxide, Sucralfate and Magnesium Trisilate in India.

APIs

• Magnesium Hydroxide – Widely used as an antacid. It is also used as an intermediate for obtaining magnesium metal, residual fuel additive, sulphite pulp, uranium processing.

• Sucralfate – It is primarily used to treat active duodenal ulcers and for the treatment of gastroesophageal reflux disease and stress ulcers.

• Dried Aluminium Hydroxide Gel – This find application in manufacturing of lake colours, inks, catalysts carrier and is utilised primarily as an active ingredient in antacid formulations.

• Magaldrate - It is a common antacid drug that is used for the treatment of duodenal and gastric ulcers and esophagitis from gastroesophageal reflux.

• Magnesium Trisilicate – Used as an antioxidant, decolorising agent, industrial odour absorbent.

Fine chemicals

• Precipitated Silica - pesticides and detergents, free flow salt and anticaking agent, cosmetics.

• Allusil - It is a composition of silicate and aluminium salt used for paper, paint and coating applications.

• PARSIL–HT - Used in Specialised Agro Formulations.

• Magnesium Aluminium Silicate - Used as a plant growth supplement.

• Magnesium Aluminium Silicate - Used as an antacid raw material in a specific antacid formulation, ceramics, suspending agent, thickening agent.

Outlook

The Company continues to retain its generally stable and forward-looking growth outlook as it aims towards expanding its business.

Financial highlights

Particulars	2022-23	2021-22	Y-o-Y change
Revenue from Operations
Sale of Products
Finished Goods Sold during the year
1) Domestic	7,511.92	5,627.27	1,884.65
2) Export	1,997.59	1,792.74	204.85
3) Other Operating Revenue	65.38	87.43	-22.05
Add: GST	1,256.96	977.52	279.44
Gross Turnvoer	10,831.85	8,484.96
Less: GST	1,256.96	977.52	279.44
Net Sale of Product(A)	9,574.88	7,507.44	2,067.44
Other Income(B)	23.83	18.39	5.44
Total Revenue from Operations (C)=(A)+(B)	9,598.71	7,525.83	2,072.88

Details of significant changes in key financial ratios and net worth, along with detailed explanations, therefore:

Ratio Analysis	2022-23	2021-22	Variance (%)	Reasons (if variance is more than 25%)
DebtorsTurnover	5.64	4.07	38.57%	Due to effective collection process, Debtors turnover ratio has been increased.
Inventory Turnover	17.80	15.93	11.74%	Inventory has been increased in consonance of increasing in turnvoer as compare to last year resulting to increase in inventory turnover ratio.
Interest and Coverage Ratio	7,747.05	43.46	17725.70%	Due to repayment of debts, interest coverage ratio has been increased.
Current Ratio	3.53	2.93	20.48%	Current ratio has been increased due to increase in cash in flows invested in current assets like cash, account receivable, inventory and decrease in trade payable.
Debt Equity Ratio (%) Operating Profit Margin (%)	- 0.29	- 0.31	- -7.26%	There is no debt. So, Debt Equity Ratio is Nil. Material costs have increased, resulting in reduced Operating Profit Margin.
Net Profit Margin (%)	0.16	0.17	-6.91%	Due to decrease in operating profit margin, Net Profit Margin has been reduced.
Return on Net Worth (%)	0.16	0.15	3.38%	Due to Increase in revenue from operation, Return on Net worth has been increased.

Risks and mitigation measures

Risks are an inherent part of the Company operations due to the highly regulated and dynamic nature of its operating environment. The Pharmaceutical industry is one of the most extensively regulated industries in the world and rightfully so, considering the rapid lifestyle changes. These regulations impact the creation, approval, marketing and distribution of products and present new compliance challenges. Another major challenge faced by the Company is that it generates revenue in foreign currency, which makes it vulnerable to exchange rate volatility. This can negatively impact the Companys overall revenue and profitability. However, the Companys conservative stance assures that the expected exchange rate is maintained to ensure profitability.

The Company has implemented a comprehensive risk management framework to make sure that it is geared to address any negative effects posed by financial, operational, strategic, or regulatory risks. The risk mitigation strategies of the Company determine the identification of potential risks as well as any changes in the effects of already existing ones. The strategies also ensure that mitigation plans are in place to manage those risks. The core tenets of the Companys risk management strategy include promoting proactive reporting, assessing and mitigating business-related risks while also driving stable, long-term growth. The Company has an effective risk management policy that clearly defines the Companys approach to risk assessment, risk management and risk monitoring, which is routinely analysed by the Board.

Human resources

The Company strives to create a professional workspace by fostering the values of fairness, equity and respect; encouraging knowledge exchange and teamwork; and ensuring an effective human resource management to drive the growth and success of the Company. Through efficient human resource management procedures, the Company strives to accomplish department business plans, team performance objectives and corporate targets. Also, each employees performance in relation to their job-related qualities, actions and outcomes are assessed periodically. The Company conducts several skill building sessions to help enhance their capabilities and provide them with opportunities to grow in their respective careers. A total of 105 people are employed by the Company as of March 31, 2023.

Total number of employees

Internal controls systems and their adequacy

Internal financial control over financial reporting in an organisation is a procedure that provides assurance that financial reporting is reliable and that financial statements are prepared for external purposes in accordance with generally accepted accounting principles. A companys internal financial control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorisations of management and directors of the Company and (3) provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use, or disposition of the Companys assets that could have a material effect on the financial statements.

The Company has, in all material respects, an adequate internal financial controls system over financial reporting and such internal financial controls over financial reporting were operating effectively as at March 31, 2023, based on the internal control over financial reporting criteria established by the Company considering the essential components of internal control stated in the Guidance Note on Audit of Internal Financial Controls Over Financial Reporting issued by the Institute of Chartered Accountants of India.

Cautionary statement

Forward-looking statements may be found in the Management Discussion and Analysis when they discuss the Companys goals, estimates and expectations. As a result of different risks and uncertainties, actual results could significantly differ from those that were expressed or inferred. Important variables that could affect the Companys operations include the political and economic climate in India and the nations where the Company conducts business, the volatility of currency exchange rates and changes in governmental laws. The Company focuses on building core competencies that reflect the values and abilities required for success on both a personal and organisational level. It continuously tracks employee growth and conveys any persistent concerns to help the employees achieve objectives while coordinating performance expectations with corporate targets, regulations, tax laws, statutes and other unrelated elements. The Company disclaims any need to update or alter forward-looking statements due to new data, unexpected developments, or other factors.