SMS Lifesciences India Ltd Management Discussions.

[Pursuant to part B of Schedule V of SEBI (Listing Obligations and Disclosure Requirements) 2015]

The Management and Discussion Analysis Report sets out developments in the business, environment and companys performance since our last report. The analysis supplements the Directors Report and audited financial statements which together form part of this Annual Report.

INDUSTRY STRUCTURE AND DEVELOPMENTS

Covid19 and the Global Economy

World Health Organization (WHO) declared Covid19 as a pandemic on 11th March, 2020, and public health crisis that quickly spiralled into a tragic situation that catastrophically disrupted countries, economies, industries, and financial markets around the world. The infection and disease mitigation measures that were adopted and implemented in many countries have resulted in decreased incomes; increased unemployment; and a slowdown, or even shutting down of transportation, services, and manufacturing activities across sectors. According to the International Monetary Fund (IMF), estimations the global economy shrunk by 4.4% in 2020, and describes the decline as the worst since the Great Depression of the 1930s. Clearly, most governments in the world underestimated the rapid spread of the coronavirus and were largely reactive in their crisis response. the mounting human toll one year after the pandemic continues to raise concerns, even as increasing vaccine coverage improves sentiment. The global economic outlook is clouded by high uncertainty, owing primarily to the pandemics course. Much work needs to be done to beat back the pandemic and avoid divergence in income per capita across economies and continued rises in inequality within countries. After an estimated contraction of -3.3% in year 2020, the global economy is projected to grow at 6% in the year 2021, moderating to 4.4% in the year 2022.

More than a year into the arrival of the pandemic, the worlds population is gradually being vaccinated, thanks to the discovery and production ingenuity of the global scientific community. Notwithstanding the resurgence of second and third waves, coupled with more infectious variants of the corona virus, the steady progress in gradual immunisation is expected to lessen the need for social restrictions and power recoveries in many countries during the latter half of the year 2021. Despite reduced mobility, economies continue to adapt to new ways of working, leading to a stronger-than-anticipated rebound across regions.

The global growth forecast is still uncertain due to factors that are difficult to predict, including the pathway of the pandemic, the intensity and efficacy of containment efforts, supply disruptions, the repercussions of the dramatic tightening in global financial market conditions and shift in spending patterns. Moreover, although recent vaccination drives have raised hopes of a turnaround in the pandemic later this year, renewed waves and new variants of the virus could cause a reassessment of this outlook. The IMF also highlights that the strength of the recovery projected may vary significantly across countries, depending on access to medical interventions, effectiveness of policy support, exposure to cross country spill overs, and structural characteristics entering the crisis.

Covid19 and the Indian Economy

India had become the worlds 5th largest economy as per the IMF, when ranked by nominal GDP, the country had leapfrogged both France and the UK. However, the year 2020 saw unprecedented disruptions to lives and livelihood across the country due to the pandemic and caused a detrimental impact on the economy as well. The pandemic induced challenges into industries and businesses and the country had to shift into low gear, if not standstill. Hence, economic impact of the Covid19 pandemic in India has been largely disruptive.

Indias growth in the 4th quarter of the year 2019-20 went down to 3.1% according to the Ministry of Statistics. The World Bank and other rating agencies had initially revised Indias growth for the year 2021 with the lowest figures India has seen in three decades since Indias economic liberalization in the 1990s. In May 2020, CRISIL announced that this will perhaps be Indias worst recession since independence. In September 2020, the Ministry of Statistics released the GDP figures for Q1F21, which showed a contraction of 24% as compared to the same period the year before.

Road to Recovery:

Indian economy which has been estimated to have degrown by 8% in the year 2020-21 is expected to rebound sharply in the year 2021-22. Among the major economies India is projected to grow at the fastest pace of 12.5% in the year 2021-22.

However, India has been witnessing an eruption of a second wave of infections due to which most states have imposed restrictions and micro-lockdowns which is disrupting demand and supply and if prolonged, it could derail the economic recovery expected in the year 2021-22. According to S&P Rating report published on May 2021 Indias second Covid wave could knock off as much as 2.8% points from GDP growth in the year 202122. The Government is responding to the latest outbreak with a series of localized lockdowns, while avoiding a nationwide lockdown.

The huge and sustained vaccination drive; phased lifting of the lock-down; and the financial stimulus measures announced by the government have paved the way for an economic recovery and resurgence to pre-Covid levels. The Economic Survey of India for 2021, tabled during the Budget Session of the Parliament on 31st January, 2020, stated that "starting July 2020, a resilient V-shaped recovery is underway". This conclusion was based on indicators such as E-Way Bills, GST revenue statistics, commercial paper, steel demand and recovery in GDP growth. It further stated that, "the V-shaped recovery being seen in the domestic economy is being supported by the mega Covid19 vaccination drive in the country." "Together, prospects for robust growth in consumption and investment have been rekindled, with estimated real GDP growth for FY 2021-22 pegged at 11 per cent," the survey noted.

To fight pandemic in India, the Government introduced an aggressive calling for kick-starting its Atmanirbhar Bharat Abhiyaan (Self-reliant India campaign). The government is also planning to take several bold makeovers through measures. The Union Budget 202122 was also designed to focus on being socially inclusive and growth-augmenting. Higher Government spending and supportive policies announced in this budget are expected to help sustain corporate recovery and improve longer-term prospects.

Overview of Pharmaceutical Sector

The pharmaceutical industry is one of the worlds fastest growing industries and among the biggest contributors to the world economy. It plays a unique role in improving the lives of patients. Its role has become far more critical amidst the fight against Covid19 pandemic. The share of "Made in India" medicines in Indian Pharma market is now at 80% in 2020. most importantly, during the same period, the country has also established leading position in the global generic pharmaceuticals landscape.

Indian pharmaceutical sector is regarded as the "Pharmacy to the world" as it supplies over 62% of global demand for various vaccines, 33% of generic demand in the US and 25% of all medicine in the UK.

The Indian Government along with the local State Government of Telangana has taken many steps to reduce costs and bring down healthcare expenses in order to cater the scarcity of critical APIs & High- end Medical devices indigenously. The Centre had announced product-linked incentive schemes with an objective to decrease API dependency on China. Now, even Formulations are given incentives.

In addition, Hyderabad (Indias largest Lifesciences hub), continues to lead the country in the Bulk Drugs sector. Statistics show that five of the top 10 Pharma companies in India that achieved highest bulk drugs sales in the year 2021 are from the city. Ever since pandemic struck, Hyderabad based bulk drugs manufacturers have seen gains in both volumes and demand and witnessed higher bulk drugs prices and new enquiries from customers.

Your Company is into manufacturing of Bulk drugs (also called an Active Pharmaceutical Ingredient (API), a key ingredient of a medicine, which lends it the desired therapeutic effect or produces the intended pharmacological activity. Its believed that the API Industry will gain significantly, who have been growing steadily despite Chinese competition. Industry has also taken up backward integration to reduce dependence on Chinese raw material imports.

BULK DRUGS (API) INDUSTRY:

Global Market India Market
Three segments - Branded Prescription drugs, Over- the-Counter (OTC) drugs and Generic Prescription drugs account for a majority of global bulk drug consumption. The total global bulk drug consumption is expected to reach USD 215 billion by 2022 at a CAGR 6.5% during the forecast period out of which 80% is used for Branded Prescription drugs, 10% for OTC drugs and 10% for Generic Prescription drugs. India is expected to be the 3rd largest global markets for Bulk Drugs with a 7.5% increase in market share. There are 1150 bulk drug units producing about 350 important Bulk Drugs. The market analyst forecast the API markets in India to grow at a CAGR of 11% over the period of 2021-2025.

Elaborating on the boom in the industry, Pharmaceuticals Exports Promotion Council of India DG Mr. Ravi Uday Bhaskar said Pharma exports had increased by 15% in 2020-21, as compared to 2019-20.

Opportunities, Threats and Outlook

The Company is engaged in only one segment viz. Bulk Drugs / APIs

The domestic API industry has been expanding in a secular manner over several years and the outlook remains positive in view of the expansion in the economy, increased spending on healthcare and improving lifestyles in the country.

Your Company will be able to place itself in a strong position by expanding strategically, increasing its manufacturing capacities and enhancing capacities across the organization. We are looking at different opportunities in untapped markets and also across a value chain. Further, we are also planning to set up alliances with business associates in the global market, in order to boost the selective existing products like Famotidine, New APIs/ intermediates, Contract manufacturing and manufacturing collaborations.

We are fully conscious of our responsibility towards our customers and our efforts are directed towards the fulfillment of customer satisfaction through the quality of products. As the consolidation of this industry gains momentum along with need for reliable API / intermediate manufacturers as alternative to Chinese manufacturing, the company is focused on sustainable processes with impetus on EHS, quality and regulatory requirements

The Company is focused on efficiency through new technology and cost improvement initiatives to create value for stakeholders and we will continue to focus on training and motivation of manpower so as to develop teams of qualified and skilled personnel to effectively discharge their responsibilities in a number of projects and activities.

Production Linked Incentive (PLI) scheme:

The pandemic has aroused renewed interest for the China+1 strategy to enhance supply chain resilience, by diversifying manufacturing activities into other countries. Global companies stepped up efforts to implement the China+1 strategy, of diversifying and de-risking their supply chains in the wake of the Covid19-induced disruptions and US-China trade tensions.

This provides a unique opportunity for India to emerge as a global pharma manufacturing hub.

India stands out as an attractive option due to its strategic location, a large domestic market, skilled labour and low labour cost, among others. On top of these arguments the policy offer, Production-Linked Incentive Scheme, announced in April 2020, is proving to be attractive to many manufacturers, more importantly to pharmaceuticals manufacturers. After the pandemic, Global Pharma majors are securing supply chains and reducing dependence on China. Chinas huge economies of scale account for the 25-30% cost difference between Chinese and Indian APIs and intermediates.

India imports 68% of its requirements from China. The government has launched a 3,000 crores scheme for setting up bulk drug parks. It has also announced a production-linked incentive scheme of Rs 6,940 crores, targeting domestic manufacturing of 53 APIs with high dependence on imports. Additionally, in February 2021, the cabinet also approved a production linked incentive scheme for Pharma sector, entailing an outlay of Rs 15,000 crores. The China+1 policy coupled with the Government of Indias PLI scheme, is likely to improvise the competitiveness of Indian Pharmaceuticals Manufacturers in the long run.

Your Company through its Wholly-owned Subsidiary (Mahi Drugs) is in the process of making an application for availing the benefit of the aforesaid PLI scheme.

Ranitidine update:

Ranitidine HCL occupies major contribution in aspect of both volumes as well as value for the Company. The said molecule is being manufactured since inception i.e., 1990 (pre-demerger) and being sold to various markets except highly regulated markets like USA.

Your Company is one of the pioneers in manufacturing and exporting Ranitidine HCL. However, in a discovery in September, 2019 released by one of the scientific laboratory in the US stating that Ranitidine HCL may contain NDMA (N-Nitrosodimethylamine) impurity at low level, which leads to carcinogenic effect on prolonged use of the dosage form.

On 13th September, 2019, USFDA informed that they are evaluating the presence of this impurity and the impact thereof (if any) on patients. However, in a fresh news release dated 1st April, 2020, USFDA has advised all manufacturers to withdraw all Rx and OTC Ranitidine drugs from the US market immediately as the impurities in some ranitidine products increases over time, when stored at higher than room temperatures and may result in consumer exposure to unacceptable levels of impurity.

USFDA has made an official announcement as reproduced hereunder:

"We didnt observe unacceptable levels of NDMA in many of the samples that we tested. However, since we dont know how or for how long the product might have been stored, we decided that it should not be available to consumers and patients unless its quality can be assured".

Currently, your Company does not have any Ranitidine API sales to US market either directly or indirectly. We are confident of providing a safe product with continuous improvement as per requirements and shall communicate accordingly with various stake holders. However, we need to wait for the guidance of health authorities of ROW / domestic markets. In view of the above, usage of Ranitidine tablets could reduce.

Risks & Concerns

Company faces risks and uncertainties that are typical to that faced by players within the global pharmaceuticals industry. These along with few other issues as mentioned below are some of the major risks / potential pitfalls in the immediate future:

• Impending waves of Covid19 pandemic, further lock downs, if any and the hiccups in the vaccination drives;

• Impact of changes in regulatory guidelines related to Ranitidine HCL product;

• Exchange rate fluctuations risk and Global Supply chain disruptions.

These are determined via robust assessment considering our risk context by the Board of Directors with inputs from the executive management. The Board is satisfied that these risks are being managed appropriately and consistently.

Note: Risk Management Committee is not applicable to the Company pursuant to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Financial performance with respect to Operational Performance

The revenue from operations for the year ended 31st March, 2021 amounted to 260.25 Crores as against Rs 256.92 Crores for the previous year. Thus the income from operations of the Company has marginally improved by about 1.29% as compared to last years revenue from operations.

(Detailed report on financials form part of the Directors Report.)

Human Resources

Every organization which values and appreciates its Human Resource succeeds in its goals and receives positive results. Companys Human Resource policy aims to make SMS Group a preferred place to work. This is being achieved through various initiatives including skill development, personality enhancement and employee engagement through internal communications to foster happiness at work.

During the year under review, the industrial relations with Employees/workers at all the Companys locations continued to be harmonious and positive. The total employee strength of the Company as on 31st March, 2021 stood at 523.

Particular 31.03.2021 31.03.2020 %Change Reason
Debtors Turnover Ratio 9.29 12.64 26.48 As the operations were improved in the second half year outstanding receivable have increased by the year end. Hence there is significant change.
Days 39.27 28.87 36.02
Inventory Turnover Ratio 4.17 3.75 11.20 -
(Days) 87.45 97.41 10.24 -
Interest Coverage Ratio 6.90 5.04 36.90 As the PBITD as the improved significantly the interest coverage ratio has also improved
Current Ratio 1.30 1.27 2.36 -
Debt Equity Ratio 0.17 0.21 19.05 -
Operating Profit Margin 11.88% 9.92% 19.76 -
Net Profit Margin 5.03% 3.53% 42.49 As the net profit has improved significantly these ratio has also improved.
Return on Net worth 10.42% 8.08% 28.96

Internal Control Systems & their adequacy

The Company has a strong and adequate internal control system suitable to its size and nature of business. We constantly upgrade our systems for incremental improvements.

The internal controls of the Company are being reviewed by an independent chartered accountants firm i.e., M/s Adusumilli and Associates, Internal Auditors and the Audit Committee of the Company on periodical basis. This results in an unbiased and independent examination of the adequacy and effectiveness of the internal control systems to achieve the objective of the optimal functioning of the Company. The scope of activities includes safeguarding and protecting the Companys assets against unauthorised use or disposition, maintenance of proper accounting records and verification of the authenticity of all transactions.

Research & Development

Department of Scientific and Industrial Research (DSIR) of Government of India, Ministry of Science and Technology, New Delhi has accorded prestigious recognition to in-house Research and development (R&D) unit of the Company situated at Sanath Nagar, Hyderabad vide letter dated 25th January, 2021. The lab is well equipped with the latest and sophisticated equipment and machineries and is focused on technology transfer activities for API /intermediates and collaborations with customers globally.

Cautionary Statement

Certain statements in this Management Discussion and Analysis Report may be forward looking within the meaning of applicable securities law and regulations and actual results may differ materially from those expressed or implied. Factors that would make differences to Companys operations include competition, price realization, forex market, changes in government policies and regulations, tax regimes, economic development within India and the countries in which the Company conducts business and other incidental factors.