Smruthi Organics Ltd Management Discussions.

COMPANYS PERFORMANCE

The management is pleased to inform the members that the company has performed well in FY 2020 - 21 despite the challenges posed by the COVID pandemic.

The net profit has increased from Rs. 8.4 crore to Rs. 17.1 crore registering a growth of 102% Year on Year (Y-o-Y).

The net profit margin as a percentage of sales also rose from 6.4% to IB.5%, expanding by 710 basis points Y-o-Y. This surge in margins is primarily driven by significant decrease in raw material costs as evident from the improved EBITDA margins from 15% to 23% of sales Y-o-Y.

Growth in EBITDA and net profit is attributable to the following factors:

1. Process Development

In line with our vision to be a low-cost high-quality manufacturer as mentioned in the previous annual report, we have been successfully developing technology to improve our manufacturing processes through R&D efforts. This has contributed significantly to reduce raw material cost, in spite of increasing global raw material prices. The reduction of raw material cost from 62% to 52% of net sales viz. a contraction of 10% is a significant factor in improving margins.

2. Finance Management

We have prudently managed our working capital requirements throughout the year.

We reduced our short-term borrowing while building significant cash on the balance sheet.

The companys net debt is zero and the company is cash positive. These measures have reduced our finance cost by over Rs. 2 crores Y-o-Y or from 2.3% to 0.8% of sales.

3. Operational Efficiency

Our continued efforts at improving operations through use of technology and process improvements have also reduced our manufacturing costs other than raw material and labour by Rs. 2.9 crores Y-o-Y i.e. 15.5% Y-o-Y.

The companys cash and cash equivalents have grown from Rs. 3.6 crore to Rs. 16.1 crore at the end of March 2021.

The company is glad to announce its intentions of giving part of this cash back to its shareholders via the proposed dividend. However, a large portion of this cash will be utilized for future investments in ongoing and upcoming projects such as Finished Dosage Formulations (FDF) marketing division, R&D expansion, facilities upgradation for regulatory approvals and debottlenecking. The company does not foresee the need to raise any debt to implement its expansion plans in FY 2021 - 22 owing to favourable cash position.

The revenue growth was dampened slightly last year primarily due to manpower and material disruptions owing to the Covid-19 pandemic. In the first quarter of FY 2020 - 21, a lot of production days were lost due to lockdowns. Even as the country was opening gradually, the plant was running at lower capacity utilization due to manpower and material shortages. The supply disruptions particularly in raw materials saw either shortages or huge price increases or both. This factor also contributed in reduced volume off take as the companys ability to supply products on time was impacted. However, the company was able to pivot its customer base to more reliable and profitable customers during FY 2020 - 21.

The company developed new customers in the export market and increased its exports from Rs. 47 crore to Rs. 58 crore Y-o-Y.

We are constantly working to build a stronger customer base for sustainable and profitable future.

Research & Development

The companys R&D efforts in developing new API products in the previous year have delivered 3 APIs (Valsartan, Vildagliptin and Teneligliptin) at a commercial scale in FY 2020 - 21 from a total of 5 API developed at the lab scale. These APIs are under various stages of adoption by clients and will start generating revenues in a few quarters.

FUTURE PLANS & STRATEGY

As per our plan, the company has set up its Finished Dosage Formulations (FDF) division in FY 2020 - 21. The Division shall become commercially operative in the current financial year.

The companys future will be driven by two divisions: API and FDF.

API

The company has built a good foundation in the API business. The company is executing its strategy of building its API product portfolio as discussed in the previous annual report. The future holds great potential for accelerating revenue growth while maintaining high margins. The company is leading this effort on a multi-pronged strategy:

1. Product Portfolio Expansion

The company is planning to increase the budget of its R&D program this year by expanding the team size and additional equipment in line with our growth plans.

The goal is to develop 5-6 molecules on the lab scale and launch 4-5 molecules on the commercial scale.

These APIs will be from the diabetic and anti - platelet therapeutic areas. We see strong and sustainable growth in these segments as elaborated in the previous annual report.

In addition, several key starting materials and intermediates will also be developed in line with our backward integration strategy particularly to reduce import dependability.

This product portfolio expansion is opening up several new clients and markets and will be a significant growth driver for the future.

2. Market Expansion

The company lost significant time in expanding its geographic reach during FY 2020 - 21 due to Covid - 19 pandemic and consequent global travel restrictions. However, the company will be building its API Marketing and Regulatory Affairs (RA) teams to cover more countries for export in FY 2021 - 22. The company is focusing on making inroads in Latin America, Middle East, China and East Asia. The company aims to file several Drug Master Files to gain access in these markets.

3. Regulated Market Approvals

The company is planning to re enter European market by securing the necessary regulatory approvals for its manufacturing site.

The company is building its Quality Assurance and Quality Control teams to strengthen its quality systems and qualify for site inspections by European Regulatory Agencies. The company will also be investing in information technology solutions for the same purpose. Although the company is actively working to secure EU regulatory approval at the earliest, the timeline is uncertain due to the COVID pandemic and consequent travel restrictions.

With these initiatives we foresee significant increase in revenue growth over the next few years. Due to the premium pricing of API in some of these markets, the company expects to improve its margins along with revenue growth.

The company is not planning any capital expenditure for capacity enhancement in FY 2021 - 22. The companys existing facilities have enough head room to accommodate any foreseeable increase in volumes of its products. However, the company will be incurring some capex for strengthening its manufacturing infrastructure and quality systems with an aim to achieve regulatory approvals for its facilities. The company plans to fund these initiatives through internal accruals.

In summary, after having laid a strong foundation with our existing API, we are in the market expansion phase. We are working diligently to deliver good performance in our API business in FY 2021 - 22 and beyond.

FINISHED DOSAGE FORMULATIONS (FDF)

Initial commercial operations of Smruthi Healthcare, the FDF marketing division, will start in 4 Southern Indian states of Andhra Pradesh, Karnataka, Tamil Nadu and Telangana. The company has identified 39 headquarters for beginning its operations and most of the team building was completed in FY 2020 - 21.

The company has launched 8 oral solid dosage brands with 15 stock keeping units (SKUs) in the diabetic and cardiovascular therapeutic segment.

Both the therapeutic segments are growing segments in India and the company is targeting to gain good market share in its first year of operations.

The company is getting FDF products manufactured at third party contract manufacturers. For several FDF products, the companys API is used in manufacturing the FDF. The company is focused on first building its business through marketing efforts and stabilize its operations in these regions. Upon achieving expected milestones in these states, the company plans to expand to other states to become a pan national player. The company is committed to invest in the FDF business by building its team and expanding its geographic reach. Simultaneously, the company will also increase its product portfolio over the coming quarters.

Although the FDF division will generate revenues in FY 2021-2022, the initial high marketing costs will not be compensated completely in the said year. The company is working towards achieving break even in FY 2022 - 23 for the FDF marketing division. We expect the contribution of FDF to increase in our top line and bottom line over the next few years.

Cautionary Statement

Statements in this Management Discussion and Analysis section of this report describing the Companys objectives, estimates and expectations may be "forward looking statements" within the meaning of the applicable laws and regulations. Actual results might differ materially from those either expressed or implied.