Sunil Healthcare Ltd Management Discussions.

1. OVERVIEW:

Sunil Healthcare limited, having plant at Alwar; Rajasthan for manufacture of Empty Hard Gelatin capsules shell, HPMC and Pullulan Capsules shell. The company has commenced its manufacturing operation in the year 1976 with installed capacity of 200 million Hard Gelatin Capsule Shell, with gradual expansion, in the financial year 2017-18, the total installed capacity is raised 13 billion capsules p.a. Your company was also in Food Division till first quarter of the financial year 2019-20, which was subsequently discontinued owing to low growth visibility of the segment.

Your Company has navigated through Challenging Industrial landscape over the past few years and through several Operational Excellence initiatives, has strived towards increasing its market share in India and Overseas.

We remain hopeful of improving performance in the coming years.

FY 20 also saw the onset of Covid-19 Pandemic at the closing stages of the Financial Year in India. Though the impact of the slowdown due to this had begun to be experienced prior to its full blown onset in India.

Challenges of inclement Raw material pricing, coupled with demand side uncertainity is a deterrent on the earnings of the Company, however, the company has taken various steps to curb the cost and make its product more qualitative, affordable and competitive.

2. INDUSTRY OUTLOOK:

The product of the Company Hard Capsule Shell is used by Pharmaceutical and Food supplement Companies as a container for administering medicines and food supplements. Therefore, the growth of the industry is dependent on the growth of pharmaceutical and food supplement companies domestically and globally.

The committee set up in March 2017 under the Chairmanship of Mr. C.K. Kokate, submitted its report in December 2017 and recommended against the labelling by use of green/red dots to indicate its origin for information of the patients, as it commented that drugs is taken because of compulsion and not because of choice, hence proposal to compulsory switch over to HPMC capsules from The Gelatin capsule was rejected.

So, the scope of growth of market for both gelatin and HPMC capsules are tremendous.

As per estimates the Pharma industry currently employs about 5.5-5.7 lakh people. In spite of prevailing challenges in the Indian pharma sector, 58,000 additional job opportunities are likely to be created as the industry is expected to grow up to 45 per cent by 2025.

Executive Summary

Indian Pharma industry at present growth rate was 9.6% based on moving turnover basis and is expected to grow at 10-13 per cent in financial year 2020-21 despite the challenges. The Huge opportunity for jobs in Pharma sector is visible as Indian Pharma Sector is expected to grow up to 45% by end of year 2025. The exports are expected to reach US$ 20 billion by 2020.

India is benefited with blockbuster drugs going off patent and exclusive marketing right which aided the growth for Indian Export formulation period during 2011-12 to 2015-16, however due to wholesale consolidation in US market and rising competition, it had impacted substantially the formulation export players in the fiscal year 2017 and 2018, leading to a flat growth rate during the fiscal year 2018.

As per CRISIL Research, formulation exports increased in fiscal year 2019 as player in pharmaceutical sector focused on new launches in conventional segment and increased their focus on less competitive products. Export increased by 14% on the year during fiscal year 2020 (April-Jan) period led by newer launches in limited competitive products amid reducing pricing pressure in the US Market. Increased regulatory Scrutiny by USFDA, several large players received warning letters, which may result in delay approval of few products, thereby led to pressure on exports growth in near future, in addition, COVID-19 pandemic is likely to delay inspections and impact supply chain for the first half of fiscal year 2021.

During 2nd Half year ended on September 2020, India may witnessed outbreak of many diseases, which may resulted in growth of Anti infective segment.

Indian companies received 304 Abbreviated New Drug Application (ANDA) approvals from the US Food and Drug Administration (USFDA) in 2017. The country accounts for around 30 per cent (by volume) and about 10 per cent (value) in the US$ 70-80 billion US generics market.

Indias biotechnology industry comprising bio-pharmaceuticals, bio-services, bio-agriculture, bio-industry and bioinformatics is expected grow at an average growth rate of around 30 per cent a year and reach US$ 100 billion by 2025.

Pharmaceuticals export from India was US$ 19.14 billion in FY 19 and now reached to US$ 20.70 billion in FY20 i.e. growth of approx. 8.15%. Pharmaceutical exports include bulk drugs, intermediates, drug formulations, biologicals, Ayush & herbal products and surgicals.

Introduction

Indian pharma industry is expected to grow at 12-15 per cent in financial year 2020-21. The Huge opportunity for jobs in pharma sector is visible as Indian Pharma Sector is expected to grow up to 45% by end of year 2025. The exports from India stood at US$20 billion in FY20 and expected to grow by 12-15% by 2021.

Globally as well as in India, the pharmaceutical industry is rapidly undergoing changes. The Indian pharmaceuticals market is the third largest in terms of volume and thirteenth largest in terms of value. India enjoys an important position in the global pharmaceuticals sector.

Installed capacity of Empty Hard Gelatin Capsule in India is 100 billion capsule p.a.

Advantage for Indian Pharmaceutical Industry:

In India, manufacturing cost is very much competitive as compared to western countries Pharmaceutical Industry i.e. lower than 33% as compared to US. The advantage to Indian Pharmaceutical Industry is shown as under with the help of chart:

The country also has a large pool of scientists and engineers who have the potential to steer the industry ahead to an even higher level. Presently over 80 per cent of the antiretroviral drugs used globally to combat AIDS (Acquired Immuno Deficiency Syndrome) are supplied by Indian pharmaceutical firms. The UN-backed Medicines Patent Pool has signed six sub-licences with Aurobindo, Cipla, Desano, Emcure, Hetero Labs and Laurus Labs, allowing them to make generic anti-AIDS medicine Tenofovir Alafenamide (TAF) for 112 developing countries.

Market Size

India is the largest provider of generic drugs globally. Indian pharmaceutical sector industry supplies over 50 per cent of global demand for various vaccines, 40 per cent of generic demand in the US and 25 per cent of all medicine in UK.

India enjoys an important position in the global pharmaceuticals sector. The country also has a large pool of scientists and engineers who have the potential to steer the industry ahead to an even higher level. Presently over 80 per cent of the antiretroviral drugs used globally to combat AIDS (Acquired Immune Deficiency Syndrome) are supplied by Indian pharmaceutical firms.

Pharma industry is expected to see annual compound growth of over 6% and reach $1.2 trillion in 2024 with R&D spending at 16.9% of prescription sales in 2024.

The Pharmaceutical sector is expected to generate 58,000 additional job opportunities by the year 2025.

Indias biotechnology industry comprising bio-pharmaceuticals, bio-services, bio-agriculture, bio-industry and bioinformatics is expected grow at an average growth rate of around 30 per cent a year and reach US$ 100 billion by 2025.

Investments

The Union Cabinet has given its nod for the amendment of the existing Foreign Direct Investment (FDI) policy in the pharmaceutical sector in order to allow FDI up to 100 per cent under the automatic route for manufacturing of medical devices subject to certain conditions.

The drugs and pharmaceuticals sector attracted cumulative FDI inflows worth US$ 16.50 billon (.50 billon more as compared to cumulative figures of FDI till March 31, 2019 in Pharmaceutical Sector) between April 2000 and March 2020, according to data released by the Department of Industrial Policy and Promotion (DIPP).

Some of the recent developments/investments in the Indian pharmaceutical sector are as follows:

• Between H1 2019, Indian Health sector witnessed 27 PE investment deals worth US$ 1.1 billion.

• In May 2020, Jubilant Generics Ltd entered into a non-exclusive licencing agreement with US-based Gilead Sciences Inc to manufacture and sell the potential COVID-19 drug Remdesivir in 127 countries, including India.

• Affordable medicines under Pradhan Mantri Bhartiya Janaushadhi Pariyojana (PMBJP) achieved record sales turnover of Rs 52 crore (US$ 7.38 million) in the month of April 2020.

• During December 2019, Indian Pharmaceutical Sector growth on moving annual total (MAT) basis was at 9.8 per cent, with price growth at 5.3 per cent, new product growth at 2.7 per cent, while volume growth at two per cent y-o-y.

• In October 2019, Telangana Government proposed Hyderabad Pharma City with financial assistance from the Central government of Rs 3,418 crore (US$ 489 million)

• The exports of Indian pharmaceutical industry to the US will get a boost, as branded drugs worth US$ 55 billion will become off-patent during 2017-2019.

Government Initiatives

Some of the initiatives taken by the government to promote the pharmaceutical sector in India are as follows:

• To combat with COVID-19 pandemics, the Government of India announced Rs 15,000 crore package, and Rs 4000 crores package was announced under AatmNirbhar Bharat for promoting herbal cultivation in India.

• India plans to set up a nearly Rs 1 lakh crore (US$ 1.3 billion) fund to provide boost to companies to manufacture pharmaceutical ingredients domestically by 2023.

• In Budget 2020-21, Rs 65,012 crore (US$ 9.30 billion) has been allocated to the Ministry of Health and Family Welfare is. The Government has allocated Rs 34,115 crore (US$ 4.88 billion) towards the National Health Mission under which rural and urban people will get benefited, Rs 6,400 crore (US$ 915.72 million) has been allocated to health insurance scheme Ayushman Bharat - Pradhan Mantri Jan Arogya Yojana (AB-PMJAY).

• As per Economic Survey 2019-20, Government expenditure (as a percentage of GDP) increased to 1.6 per cent in FY20 from 1.2 per cent in FY15 on health.

• The National Health Protection Scheme is the largest Government funded healthcare programme in the world, which is expected to benefit 100 million poor families in the country by providing a cover of up to Rs 5 lakh (US$ 7,723.2) per family per year for secondary and tertiary care hospitalization. The programme was announced in Union Budget 2018-19.

• The Government of India is planning to set up an electronic platform to regulate online pharmacies under a new policy to stop any misuse due to easy availability.

• Government of India unveiled Pharma Vision 2020to make India a global leader in end-to-end drug manufacture. Approval time for new facilities has been reduced to boost investment.

• The government introduced mechanisms such as the Drug Price Control Order and the National Pharmaceutical Pricing Authority to deal with the issue of affordability and availability of medicines.

Road Ahead

Medicine spending in India is projected to grow 9-12 per cent over the next five years, leading India to become one of the top 10 countries in terms of medicine spending.

Going forward, better growth in domestic sales would also depend on the ability of companies to align their product portfolio towards chronic therapies for diseases such as such as cardiovascular, anti-diabetes, anti-depressants and anti-cancers that are on the rise.

The Indian government has taken many steps to reduce costs and bring down healthcare expenses. Speedy introduction of generic drugs into the market has remained in focus and is expected to benefit the Indian pharmaceutical companies. In addition, the thrust on rural health programs, lifesaving drugs and preventive vaccines also augurs well for the pharmaceutical companies.

The Indian pharmaceutical market size is expected to grow to US$ 100 billion, while medical device market is expected to grow US$ 25 billion by 2025, driven by increasing consumer spending, rapid urbanization, and raising healthcare insurance among others Pharmaceuticals export from India stood at US$ 20.70 billion in FY20. Pharmaceutical export include bulk drugs, intermediates, drug formulations, biologicals, Ayush and herbal products and surgical

The Indian government has taken many steps to reduce costs and bring down healthcare expenses. Speedy introduction of generic drugs into the market has remained in focus and is expected to benefit the Indian pharmaceutical companies. In addition, the thrust on rural health programs, lifesaving drugs and preventive vaccines also augurs well for the pharmaceutical companies.

3. OPPORTUNITIES:

In meeting the global health challenge, the role of the pharmaceutical industry is of prime importance. With the current state of affairs, its a harsh reminder of whats at stake and its responsibility. Even though 188 countries in the world continue to battle COVID-19, the more critical question is of the post-COVID-19 pandemic economic resurgence. Despite all the bad news, the Indian Pharmaceutical Industry needs to see the current Covid-19 crisis as an opportunity. This is the most opportune time for the pharmaceutical industry and the Indian government to implement the Katoch Committee recommendations to ensure self-reliance and implement many of the suggested incentives to position India as the global pharmaceutical hub. As indicated in a 2015 McKinsey report , The Indian pharmaceutical market will grow from a market size of USD 12.6 billion in 2009 to USD 55 billion by 2020, with the potential to reach USD 70 billion in an aggressive growth scenario, the main reason for growth are i) India has most US-FDA compliant plant outside US. ii) Government support in Innovation and R&D iii) strong drugs manufacturing experts at lower cost of manufacturing in India i.e. about 33% lower than US and iv) Lauch of National Health Programme Ayushman Bharat has potential to grow Indian Pharma Sector.

The impact of the COVID-19 pandemic and the lockdown it triggered is both tangible and intangible. There are still no clarity on the deeper impact that it will have on Indias healthcare manufacturing and the global supply chain.

In recent situation of Pandemic, Made-in-India drugs supplied to developed economies are known for their safety and quality. In recent years, India has seen increasing competition from China, which it has been able to leverage due to its inherent cost advantage, manufacturing intermediates and APIs at a cost much lower than those in India.

Prime Minister for promoting make in India movement announced to the people become to vocal for local products. In response to the COVID-19 crisis, Indias Union Cabinet has approved an investment package worth $1.3 billion to boost the countrys Pharma and API production and cut dependence on China. This is a major step in the creation of a self-sufficient healthcare ecosystem in the country.

it is expected that due to patent off of many companies the export from India will grow, new affordable pharmaceutical product will be invented for sustainable growth of Indian Pharmaceutical industry.

4. CHALLENGES:

Competition in the global market is a common phenomenon for any industry. The company is also facing the same but is quite competent to handle the competition successfully. In the domestic the numbers of players are increasing and the capacity is also increasing, but market demand is also gradually increasing. The main challenges is to cope up with price war situation. Further, Regulatory framework w.r.t. import restriction from China, on which Indian Pharmaceutical Sector majorly dependent on it is one of the great challenges, and combating with the same your Company is already in process of developing supplier of its Raw material from other Countries.

5. COMPANY OUTLOOK:

Your company is the leading Hard shell capsule manufacturer in India and Pioneer in double lock and triple lock technology for capsules in India. The Company had started production of HPMC Capsule in August 2018 and in short span of time the sales brought in from HPMC have led to better performance. The Company had also started production of Pullulan Capsules.

Your Company is a Certified Empty Hard Gelatin capsules shell, HPMC and Pullulan Capsules shell Manufacturer

in India providing the premium quality capsules to the clients. Your Company was certified by the WHO-GMP, ISO 9001:2015, ISO 14001:2015 , ISO 18001:2007, ISO 22000:2005, Halal, and Kosher & USFDA for our quality standards. We manufacture the capsules at our state-of-the-art manufacturing unit under the observation of the scientific experts. The materials that we employ in the production obtained from the authorized vendors of the industry. Our capsules are 100% natural and safe as we have tested them on the predefined industrial international norms. Our quality experts ensure the best locking attributes which make the capsules perfect for any use.

Your company have Global Presence with Subsidiaries in USA and Mexico during the year.

The company is WHO-GMP certified Company and recognized Star Export House. With four decades of experience, and a strong brand equity "Sunloc" the company is a preferred vendor for large pharmaceutical companies. The company was the pioneer of double lock and Triple lock technology in India. With a strong focus on R &D, the company is constantly innovating its product line to cater to the industry requirements. The management is optimistic about the future outlook of the company in short, medium and long-term. The Company deals in Business segment of Manufacturing Empty Hard Capsule Shells and in nine sizes, which are 00, 0SEL, 0EL, 0,1,2,3, 4, 5. In this segment the company has reached to installed capacity of 13 million capsules at the existing facility. The company enjoys immense credibility in various Global Market. The management of the company Continued focus on achieving cost optimization and yield improvements through Economies of Scale. The company also renewed interest in the business with an aim to become the one of the leading Hard Shell Capsule manufacturer in the world.

6. RISK CONCERNS:

The Board of Directors of the Company and the Audit Committee shall periodically review and evaluate the risk management system of the Company so that the management controls the risks through properly defined network. Head of Departments shall be responsible for implementation of the risk management system as may be applicable to their respective areas of functioning and report to the Board and Audit Committee. Detailed report on Risk

Analysis is a part of this Annual Report. The details of the Risk management policy are available on the website of the company i.e. www.sunilhealthcare.com and can be accessed at weblink https://www.sunilhealthcare.com/uploads/ filemanager/6741q-5.pdf

7. INTERNAL CONTROL SYSTEM AND ADEQUACY:

The Company maintains adequate internal control system and procedures commensurate with its size and nature of operations. The internal control systems are designed to provide a reasonable assurance over reliability in financial reporting, ensure appropriate authorisation of transactions, safeguarding the assets of the Company and prevent misuse/ losses and legal compliances.

The internal control system includes a well-defined delegation of authority and a comprehensive Management Information System coupled with quarterly reviews of operational and financial performance, a well-structured budgeting process with regular monitoring of expenses and Internal audit. The Internal Audit reports are periodically reviewed by the management and the Audit Committee and necessary improvements are undertaken, if required.

8. FINANCIAL PERFORMANCE:

Sunil Healthcare reported Gross Revenues from operation Rs 7012.93 lakhs, EBITDA of Rs 1086.3 lakhs, PBT (continued operation) to Rs (221.82) Lakhs and Profit after Tax (PAT) Rs (156.82) Lakhs, other Comprehensive Income is Rs 280.42 Lakh in the FY 2019-20.

The comparative financial analysis with previous financial year are as under:

• Sales: - There was decrease in the revenue from operation in the current year by 13.34%.

• EARNING Before Interest, Depreciation and Tax: - EBIDT was decreased by 14.05 % for the year over the previous financial year.

• Finance Cost: -There was increase in the finance cost by 5.69% as compared to previous financial year.

• Net Profit (continued operations): - The net profit decreased by 705.9 % as compared to previous year.

• Other comprehensive Income (OCI) increased by 1601.58% as compared to financial year 2018-19.

• EPS (continued operations):- The EPS was decreased by 537.5 % as compared to previous financial year

9. HUMAN RESOURCES:

The well-disciplined workforce which has served the company for 45 years lies at the very foundation of the companys major achievements and shall well continue for the years to come. The management has always carried out systematic appraisal of performance and imparted training at periodic intervals. The company has always recognized talent and has judiciously followed the principle of rewarding performance. The Company maintained healthy, cordial and harmonious industrial relations at all levels. Despite severe competition, the enthusiasm and unstinting efforts of the employee have enabled the Company to remain at the forefront of the industry.

In todays comparative world where creativity and innovation are increasingly becoming important, development of Human Resource is the call of the day. The Company is taking various steps to develop the skills and enhance the knowledge of the human resource which include the following:

a. Comprehensive and user friendly Performance Management System has been implemented to create a result oriented culture.

b. Development needs have been identified through Performance Management System.

These needs are being fulfilled through various training programs and lectures by internal as well as external faculty.

c. Regular Training programs are conducted comprising behavioral and technical programme.

Total 206 numbers of Employees are on roll of the company as on March 31,2020.

10. DETAILS OF SIGNIFICANT CHANGES IN KEY FINANCIAL RATIOS, ALONGWITH EXPLANATIONS (from continued operations):

Ratios Variation as compared to previous years with reason
Debtors Turnover During the financial year 2019-20 Debtor Turnover ratio was less than 25.45% as compared to financial year 2018-19, due to an extremely competitive market, coupled with onset of COVID 19 led to increased receivable cycle and lowering of Sales price.
Inventory Turnover During the Financial year 2019-20, Inventory Turnover was less than 41.9 % as compared to Previous financial year 2018-19 on account of COVID -19 pandemic across the globe, sales impacted.
Interest Coverage Ratio During the Financial year 2019-20, Interest coverage ratio is decreased by 39.4 % as compared to FY 2018-19. An extremely competitive market accounted for an of increase cost of Raw Material by 5%,erosion in Sales Price by 7% coupled with deferred of sales due to COVID 19.
Current Ratio No significant changes in Current Ratio in FY 2019-20 as compared to FY 2018-19.
Debt Equity Ratio No significant changes in Debt Equity Ratio in FY 2019-20 as compared to FY 2018-19.
Operating Profit Margin (%) During the Financial year 2019-20, Operating Profit Margin was decreased by 38.0% as compared to FY 2018-19. An extremely competitive market accounted for an of increase cost of Raw Material by 5%,erosion in Sales Price by 7% coupled with deferred of sales due to COVID 19 Pandemic.
Net Profit Margin (%) During the Financial year 2019-20, Net Profit Margin was decreased by 705.9% as compared to FY 2018-19. An extremely competitive market accounted for an of increase cost of Raw Material by 5%,erosion in Sales Price by 7% coupled with deferred of sales due to COVID 19 Pandemic
Return on Net worth During the Financial year 2019-20, Return on Net worth was decreased by 753.8% as compared to FY 2018-19. An extremely competitive market accounted for an of increase cost of Raw Material by 5%,erosion in Sales Price by 7% coupled with deferred of sales due to COVID 19 Pandemic

11. QUALITY INITIATIVE

A) Our Quality policy is:

"We shall produce capsules for customers delight by continual focused improvement plans"

We maintain a consistent quality of our product as per the norms of WHO-GMP. To maintain the stringent quality norms, we have modern quality Control Laboratory equipped with latest equipments and qualified persons operate them. Our Quality Assurance works hand in hand with our production to ensure products of customers requirement

The Company is registered with US FDA, which reflects standard of its quality. The Company has received the following certification in quality, which shows further, its quality standards:

ISO - 9001:2008-EMS 14001:2004 -EMS 18001:2007 OH&SM 22000:2005-OHSAS

Facility - WHO-GMP GMP-NSF / IPEC / ANSI 363 DMF TYPE IV

Product - Kosher Halal MSDS TGA ,Australia.

Process - GDP 5S Certificates.

Awards - Pharmexcil , Govt of India Business Excellence Award 2015

Healthcare Leadership Award from ABP News One Star Export House Award 2016-17

CERTIFICATION-RAW MATERIAL (GELATIN)

B) QUALITY FOCUS: Your Company had adopted below quality control measures at its plant in overall production process till final disposal for making its capsules defect free:

Internationally accepted measures; Stringent quality Compliance measures adopted for zero defect capsules;
TPAM, 5 S, Jishu Hozen across production line; Process R& D: Industry Leader for efficient utilization of primary Raw materials;
Six sigma for process control;
Stringent in process quality checks; Automatic Inspection Machines for automated visual Inspection.
Statistical sampling and testing;
Hourly Checks.

12. INFORMATION TECHNOLOGY

We are using modern technology available for improvement of Business processes across the functions by automating the routine administration tasks and creating various knowledge management databases. The Company also has its web site www.sunilhealthcare.com to provide all the details about the Company and its product. The Company has successfully migrated its operations on the SAP. Through strict vigilance aided by controls and alerts, the Company aims to further improve its operations, bring in greater efficiencies, and further tighten internal controls and systems

Stringent quality Compliance measures adopted for zero defect capsules;

Process R& D: Industry Leader for efficient utilization of primary Raw materials;

Automatic Inspection Machines for automated visual Inspection.

13. CAUTIONARY STATEMENT:

Statement in this Report, particularly those which relate to Management Discussion and Analysis, describing the Companys objectives, projections, estimates and expectations may constitute "forward looking statement” within the meaning of applicable laws and regulations. Actual results might differ materially from those either.

On the behalf of Board Reg. Office:
Sd/- 38E/252A, Vijay Tower, Shahpur Jat, New Delhi-110049
Anil Kumar Khaitan CIN No: L24302DL1973PLC189662
Chairman cum Managing Director Phone No: +91-11-49435555/00 Fax no 011-43850087
DIN-00759951 Email ID: info@sunilhealthcare.com
Place – New Delhi Web; www.sunilhealthcare.com
Dated- June 30, 2020

References:

1. Consolidated FDI Policy, Press Information Bureau (PIB), Media Reports, Pharmaceuticals Export Promotion Council, AIOCD- AWACS, IQVIA.

2. Information available at https://www.ibef.org/industry/pharmaceutical-india.aspx

3. Information available at https://www.crisil.com/en/home/our-analysis/reports/2017/09/sector-report-pharmaceuticals. html

4. https://www.livemint.com/Industry/Biiffg6MY8cdkjRREHdsWN/Panel-nixes-proposal-to-use-only-vegetarian-capsules- for-dru.html

5. http://employmentnews.gov.in/NewEmp/MoreContentNew.aspx Rs n=InDepthJobs&k=156

6. https://economictimes.indiatimes.com/industry/healthcare/biotech/pharmaceuticals/indian-pharma-industry-likely-to- grow-at-10-13-per-cent-in-fy21-icra/articleshow/73697191.cms Rs from=mdr

7. https://www.disruptordaily.com/future-of-pharma/

8. https://www.globalpharmainsights.com/markets/post-covid-19-challenges-and-opportunities-indian-pharmaceutical- industry

9. https://www.expresspharma.in/guest-blogs/how-pharma-2020-would-unfold/