Shree Ganesh Remedies Ltd Management Discussions

ECONOMIC REVIEW

Global: IMF, in its April 2023 report titled World Economic Outlook, reported that the world economy grew by 3.4%, a better-than-expected figure, in 2022. That too amid multiple inter-connected shocks such as the Russia-Ukraine war, inflation, aggressive monetary tightening, and other uncertainties engulfing the world economy.

Positivity was high at the start of 2022. Many experts believed that after Covid, inflation would be transient. Europes recovery was expected to be stronger than the USA, and China would register a strong growth number. The Russia- Ukraine crisis sent economies into a tailspin as inflation soared worldwide, energy prices in Europe climbed, supply-chain fragilities resurfaced, and sanctions impacted global trade.

The manufacturing PMI (Purchasing Managers Index), a measurement of the prevailing economic trends in manufacturing and service sectors, experienced a broad-based decline in successive five months ending December.

Notwithstanding intense uneasiness, economic growth was fairly decent in smaller nations. For instance, emerging economies showed more resilience than advanced economies, and their GDP grew collectively by 4% as per IMF estimate.

Economic growth further proved resilient during the third quarter of the year. With strong labor markets, robust household consumption, business investment, and well-adjusted adaptation to the energy crisis in Europe, the outlook for the world economy is not looking gloomy anymore.

Amidst high freight charges, rising interest rates, and persistent inflation, global trade hit a record US$ 32 trillion in 2022, with trade in goods growing by 10% to US$ 25 trillion. Services grew by 15% to a total of US$ 7 billion.

Outlook: IMF has projected the world economy to grow by 2.8% in 2023, while in 2024 the growth rate should be 0.2% higher. In 2023, advanced economies will continue to experience a slowdown, with GDP growth of only 1.3% as against 2.7% in 2022. As per the IMF, the price rise is expected to be contained within 7% in 2023 from 8.7% in 2022.

However, stubbornly high inflation and monetary tightening measures may result in a further slowdown in economic activity. Also, an escalation in the war will continue to remain a significant threat to global stability, which could destabilize energy or food markets.

Domestic: India remains a bright spot for the global economy even in FY23 amid high inflation, recessionary environments, and economic downturn worldwide. Fortified by good growth in agriculture, construction, and increasing infrastructure activities, the Indian economy surpassed all expectations to register a robust GDP growth of 7.2% in FY22-23.

The healthy GDP growth displays the resilience of the Indian economy. The uptick, combined with the overall optimism and compelling macroeconomic indicators, suggests a promising future trajectory for the Indian economy.

GVA (gross value added) at basic prices grew by 7% in FY22-23. Agricultural output had an estimated growth of 4% during the fiscal while mining & quarrying touched 4.6%, respectively. But unlike other sectors, manufacturing saw muted growth last fiscal. It registered a growth of 1.3% in FY22-23. Although, in the March quarter, it moved up quite a bit and grew by 4.5%.

While the average inflation in FY22-23 was 6.7%, it was higher in rural areas. Food & clothing inflation was higher in rural belts, whereas services inflation surged in the urban area. But owing to the RBIs action, the headline inflation dropped from 7.79% in April 2022 to 5.66% at the end of March 2023.

Despite high inflation, private final consumption expenditure grew by 7.5% in real terms in FY22-23, while government final spending expenditure saw an uptick of 2.3%. The gross capital formation, representing investment demand in the economy, witnessed a growth of 8.9% sequentially in the March quarter of FY22-23. It indicates the Governments sustained focus on capex and a pickup in private investment.

The total gross GST collection for 2022-23 was TI8.10 lakh crore. The gross collections in FY22-23 were 22% higher than last year, indicating improved economic activity, recovery and increased compliance.

Aligned with other global currencies, the Indian rupee witnessed high volatility in FY22-23. It depreciated by 7.8% and closed the financial year at 82.18 a dollar against 75.79 a year ago. To curb the volatility, RBI intervened in the forex market. Foreign exchange reserves which stood at US$ 606 billion at the beginning of FY22-23, went down to US$ 525 billion during the third week of October and settled at US$ 579 billion in the fourth week of March 2023.

Overall exports registered a growth of 13.84% during FY22-23 to achieve US$ 770.18 billion. Merchandise exports have achieved the highest-ever annual performance of US$ 322.72 billion with 6.03% growth during 2022-23.

Indias current account deficit (CAD) contracted to a meager US$ 1.3 billion or 0.2% of the GDP, down from a whopping US$ 13.4 billion or 1.6% of the GDP a year ago.

Outlook: Despite some slowdowns, Indias economic strength seems intact overall. RBI projected Indias real GDP to grow at 6.5% in FY24. Case in point, there is already a rebound in manufacturing and investment by the end of the last fiscal. Further, Indias inherent ability to withstand external shocks will continue to protect the economy in a positive way.

Increasing private consumption and investment on the back of favorable government policies will likely improve the overall business ecosystem. Moreover, rising rural wages, record production of food grains, and lower food inflation may bode well for the demand outlook. A combination of lower CAD and lower capital accounts should keep the rupee mostly stable.

SECTORAL OVERVIEW AND OUTLOOK

1) Pharmaceutical Intermediates

API intermediates are chemical compounds which are produced and used during the synthesis of APIs which are key components of a pharmaceutical formulation. These intermediates play a defining role in the manufacturing process and have diverse applications, e.g. R&D phase of new pharma compounds. Moreover, these chemicals serve as building blocks for the synthesis of APIs.

A rise in chronic diseases and a growing prevalence of contagious diseases will increase the demand for APIs and intermediates. Further, rapid development in the biotechnology space is also creating demand for intermediates. Also, a wide array of applications and increasing adoption of pharma intermediates in clinical research are also creating lucrative opportunities.

Global Pharmaceutical Intermediates Market was valued worth US$ 29 billion in 2021 and is anticipated to grow from US$ 30.6 billion in 2022 to US$ 52.6 billion by 2030, growing at a CAGR of 6.3%.

Growth drivers for the industry

• Patent expiry is expected to provide a significant opportunity window for Indian pharmaceutical companies. Estimates suggest that products worth billions of dollars are going off-patent in 2023. The vacuum can be filled by affordable generic drugs by Indian players.

• APIs are crucial for the pharmaceutical industry as they produce the desired medicinal effect of formulations. Favorable government policy promise to increase API manufacturing to make India more selfreliant in API availability.

• Contract research and manufacturing (CRAMS) is a fast-growing segment of the Indian pharmaceutical industry.

Growth drivers for the Company

The commission of the new manufacturing blocks in FY22-23 will emerge as key business drivers for the Company going forward.

• The new GMP manufacturing block is designed to cater the demand of advanced API intermediates. In addition the GMP plant will also have the flexibility to be used for the manufacturing of those APIs whose intermediates are manufactured in-house.

• The Pilot block will facilitate seamless scale up of molecules from the lab scale to the plant scale. This will allow the Company to cater to customer demand faster.

• In addition, this block will also serve to boost manufacturing capability, especially for low-volume, high value molecules.

Opportunities for the industry

1) Psychiatric medicines: According to a WHO report published in 2019, at least 7.5% of the Indian population suffers from some kind of mental disorder. Mental illness constitutes nearly one-sixth of all diseases, and India accounts for nearly 15% of the global mental, neurological and substance abuse disorder cases. Here the treatment gap is enormous, which is the difference between the number of patients and the patients who receive treatment for their illnesses. In Indias case, it is more than 70%. The Covid-19 pandemic has also had severe repercussions on the mental health of numerous people.

Anti-psychotic drugs are primarily used to treat mental health disorders like schizophrenia, bipolar disorder and severe depression. These drugs work in the human body by affecting certain chemicals like serotonin and dopamine in the brain while regulating mood, behaviour and perception. Major factors for these disorders are substance abuse, genetic mutations and physical illness that can lead to depression. The growing prevalence of such disorders is driving the market for these drugs.

Depression is defined by persistent sadness and a loss of interest or enjoyment in formerly rewarding or pleasurable activities. The use of anti-depressants is increasing because of a wide range of conditions such as general anxiety disorder, obsessive-compulsive disorder (OCD), post-traumatic stress disorder (PTSD), etc. The market for anti-depressant is primarily driven by an increasing number of such patients, growing awareness about depression and advancements in R&D activities in the healthcare sector.

All these factors have significantly increased the market for psychiatric medicines in India. Further, factors such as increased disposable income and growing awareness of mental health among the general population drive the demand for psychiatric medicines.

2) Increasing chronic ailments: Having the worlds largest population, India is going through a significant health crisis. Communicable diseases have decreased significantly over the last three decades, but premature death and illnesses due to chronic diseases are on the rise. Recent studies suggest that most deaths were due to non-communicable diseases (NCDs) like chronic respiratory diseases, cardiovascular diseases, cancer, diabetes, etc.

NCDs, such as heart disease and cancer, cause 63% of all deaths in India. Further, they are expected to cost India US$3.55 trillion in lost economic output between 2012 and 2030.

More than a 1/4th of the population in India was either diabetic or in the pre-diabetic stage. An astounding 11.4% of Indias population or 101 million people already have diabetes. Whereas 15.3% of the population or an additional 136 million people are pre-diabetic. This is of particular concern as researchers say that nearly half of these pre-diabetics may convert to diabetes within five years or so.

4) Innovation and R&D: To move up the value chain Indian pharmaceutical industry needs to focus on R&D to build a robust innovation pipeline of solutions for new- age ailments. The industry is working on complex generics and specialized drugs, which will uplift the industrys significance on the global stage and open up new opportunities for new drug development, biologics and other innovations. It will also increase the industrys capabilities in terms of technology, cell & gene therapy, biological sciences and other specialized spaces.

5) Production Linked Scheme for API: The Government of India announced the PLI scheme to promote domestic manufacturing of critical key starting materials (KSM), drug intermediates and active pharma ingredients in India. The purpose of the scheme is to attain self-reliance and reduce import dependence on these materials.

Opportunities for the Company

Shree Ganesh Remedies Limited enjoys a strong position in manufacturing API intermediates for Antipsychotic, Antidepression, Oncology, Diabetic, and Cardiovascular therapies. An increase in the incidence of these ailments and their chronic nature indicates sustained increased demand for the Companys products over the long term.

Specialty chemicals impact every part of our lives, from our personal care products to medicines, the electronics products we use, and the cars we drive. It provides building blocks for many end-user industries such as agrochemicals, paper, textiles, soaps, detergents, polymer additives, water treatment and many more.

The chemical industry has been experiencing positive growth for a few years and is valued at US$ 1,219.8 billion in 2023. While commodity chemical constitutes most of the global chemical industry, the specialty chemicals segment contributes 20%. The specialty chemical industry requires extensive R&D and product innovation, translating into better margins and profitability with lesser capex.

The last few decades have favored Asian specialty chemical manufacturers regarding manufacturing activity and consumption. From being a net importer, the APAC region has become a net exporter of a wide array of specialty chemicals that earlier were imported from the EU and North America.

Indian Market: India is one of the major production hubs of the world, churning out more than 80,000 chemicals each year. In terms of output, it is the third-largest specialty chemical market in Asia and the sixth-largest globally.

2) Specialty Chemicals

Global Market: Commodity chemicals produced in bulk by manufacturers dont vary much in nature, production quality or composition. Specialty chemicals, on the other hand, are tailored to address a particular issue or purpose that suits a specific service or need. The reason why it is exclusive to a select few manufacturers. Due to complex chemistries and a narrow range of applications, these chemicals are typically manufactured using a batch process.

The scale on which a specialty chemical company operates is essential because it helps gain a more significant share of the customers wallet. Further, customers over the world expect suppliers to adhere to global norms, which work as a significant entry barrier for smaller players.

One of the significant challenges in the domestic industry is the large number of unorganised players catering to small customers. For instance, specialty chemical players cater to small incense stick makers in flavors and fragrances.

Growth drivers

• India is a country with low manufacturing costs, a capable, talented, trained and low-cost workforce and an abundance of human resources which make India an ideal place for manufacturing.

• Regarding specialty chemical consumption, India still lags behind most developed nations on a per capita basis. But the recent growth in disposable income, increased urbanisation and significantly improved lifestyle has led to the growth of many end-user industries like paint, personal care and textiles, etc.

• Many major players in India spend as little as 3% in R&D activities, leaving a vacuum in the research and development space compared to their global peers. The domestic industry is highly generic, and only a handful of companies produce innovative and unique products. This provides significant room for players manufacturing complex chemicals.

• The Indian Government has mandated a BIS-like certification for imported chemicals to prevent dumping cheap and substandard chemicals in India. Also, they allowed 100% FDI (Foreign Direct Investment) under the automatic route in the chemicals sector, excluding hazardous chemicals. It also aims to increase the share of the chemical sector in the GDP in the next ten years.

Growth drivers for the Company

The Companys state-of-the-art manufacturing block dedicated to high pressure reactions will enable it to cater to a wide range of product categories in the Specialty Chemical and Pharmaceutical. Thus helping us solidify its presence in the new chemistries and technologies, expanding the horizon and capability for catering on new projects.

Opportunities

1) Demand for agrochemicals: The amount of landmass available for agriculture is shrinking yearly, and the demand for food products is rising. Hence, increasing land productivity and maintaining soil health is vital to enhance the capability of cultivable land in terms of crop production. Further, there are problems with pests and herbs which impede farm productivity. These factors will likely drive the demand for agrochemicals over the foreseeable future.

2) Demand for electronic chemicals: Indias Electronic Chemicals & Materials market has witnessed significant growth in value terms during 2018-23, owing to the rising investment in electronics manufacturing by international Original Equipment Manufacturers (OEMs). Further, the governments policy initiatives such as ‘Make in India is providing thrust to manufacturing both in the chemical and electronics sector of the country. The three major drivers for the industry in India are wet chemicals, PCB laminates and silicon wafers.

In India, the demand for these chemicals is primarily met through imports in the absence of significant local production. Value addition by local manufacturers is quite limited, as most high-value and critical materials are still imported. Competition has started to intensify because of the diversified portfolio of the companies and technological advancement. With many global players already set up shop for expansion and huge domestic demand for electronic components and products, the demand-supply is likely to be reduced in years to come.

3) Demand for construction chemicals: Increasing government investments in infrastructure and rising construction activities in the country are driving the growth of the construction chemical sector. Further, the Governments impetus on creating world-class infrastructure through the massive allocation towards infrastructure in the Union Budget 2023-24 will further drive demand for construction chemicals northward.

4) China-plus-One policy: Chinas crackdown on specialty companies consequent to its Blue Sky Policy has forced many in the space to shut down operations. Further, the pandemic-led supply issues have forced global consumers to widen their vendor base to other dependable geographies, which include India. Along with that, the US-China trade war has contributed to the cause of international players seeking India as their next destination for manufacturing specialty chemicals.

5) Europe-plus-One policy: Europe is the second largest chemical producer in the world. But at present, the European industry is going through a large crisis. Apart from the geopolitical and macro situation, high labor & raw material costs, an upsurge in natural gas prices and new sustainability norms have heightened the challenges for Europes domestic chemical industry. This opens new opportunities for Indian companies to cater to Europes top buyers like US and UK.

6) Rising demand for sustainable chemicals: Being at the forefront of sustainability efforts, most advanced countries have devised their strategy for using different types of chemicals, including a long-term vision for a cleaner environment. Such regulatory initiatives and consumers becoming increasingly aware of the environment have prompted chemical companies in the end-user industries to innovate and develop sustainable chemical solutions.

Opportunities for the Company

Shree Ganesh Remedies Limited has a wide array of products catering to the diverse sectors including Aroma & Health, Agrochemicals, Polymer and Electronics. A growth in these sectors is expected to widen the opportunity canvass for the Company going forward. In addition, widening of process capabilities will further amplify the opportunity horizon for the organisation moving ahead.

3) Contract Manufacturing

Major pharma companies outsource their production primarily because of cost reduction, which by some estimates can be as significant as 15%. Small and midsize drugmakers can save significant amounts of money in expenses on R&D labs and GMP / FDA-approved commercial-scale manufacturing plants. These factors eventually work in favour of the major drug companies because now they can launch their medicines quickly in the market and reach a wider customer base in the process.

All the big global pharmaceutical companies are adopting the strategy of moving their productions to some CDMO companies. It clearly hints at a huge potential for this sector. While most of the CDMOs now operate from Europe and North America, a clear shift in trend was witnessed towards Asia-Pacific owing to inexpensive labour and raw materials compared to the West.

Further, there is also a strategy in play by the major pharma companies who want to shift their dependence on one country namely China.

Owing to a trade war between US-China, very strict Covid restrictions and Chinas regressive Blue Sky policies are obstructing growth in that country. Because of these factors, most international companies now want to diversify their manufacturing base and are very interested to invest in Indian CDMO.

The trend has been further encouraged by favourable government initiatives such as the PLI scheme for the pharmaceutical sector. Naturally, these pharma majors are looking forward to moving their manufacturing base to India as their China plus one strategy and Indian companies are more than ready to capitalise on that.

India can be a potential gainer in this transition. India is already the third largest drug manufacturer in the world, with a large number of FDA, WHO-GMP or EDQM- compliant factories. India already hosts 3,000 pharma companies and more than 10,500 factories most of which adhere to the major global standards.

Further, 500 API manufacturers meet only 8% demand of the Indian market. Also, India is already the largest exporter of OTCs in the USA with a 40% market share. Indian CDMO is more profitable with an EBITDA margin of ~35% while in the West it is ~20%.

Moreover, the capability to provide Integrated services (R&D, commercial manufacturing, clinical trials, primary & secondary packaging) by Indian CDMO companies, the ability to manufacture synthetic drugs and augmentation towards bioinformatics, protein isolation, synthesis, characterisation and large-scale manufacturing are some of the factors creating big opportunities for the Indian CDMO sector. Hence, the next decade can be a gamechanger for the Indian CDMO sector.

Challenges & Risks

Inflationary headwinds: Owing to the Covid pandemic and subsequent disruption by the Russia-Ukraine war, the global supply chain faced significant headwinds that persist. The direct impact of these events is visible in high crude prices and elevated logistics expenses, which in turn increase the price of the raw materials.

Regulatory challenges: One of the current challenges includes quality and regulatory challenges that can potentially restrict growth in the coming years. Since India exports a considerable amount of specialty chemicals, the products are subject to extreme regulatory scrutiny. This makes compliance the top priority. Non-compliance can have severe implications for business sustainability.

Government regulation: Considering the hazardous nature of inputs, reactions and end-products, strictly aligning with global safety standards is critical. This entails considerable capital and operational cost.

Challenges and risks for the Company

External factors could impede the Companys profitability and progress. Experts opine that the world will experience elevated inflation despite the remedial measures undertaken by various Governments and Central Banks to curb its rise. The resultant increase in input prices could impact the cost sheet and hence profitability of Shree Ganesh Remedies Limited.

On the regulatory front, the Company could be impacted by the fast evolving regulatory landscape especially in view of the growing concern from the environment. The Company maintains a hawk-eye on the regulatory announcements and ensures that it complies with them proactively.

About the Company

Founded in 2004, with two decades of experience in the pharmaceutical sector, Shree Ganesh Remedies Limited (SGRL) is one of the leading manufacturer of Pharmaceutical Intermediates and Fine & Speciality Chemicals in India. SGRL employs world-class instruments and dedicated & talented teams to produce world-class products sustainably, which they supply to many different markets worldwide, including the domestic one.

Our companys product finds application in multiple industry including pharmaceutical, polymers, agrochemicals, electronics, aroma industry and many others. The company has achieved success through its strategic backward integration and in house plant engineering capabilities. Thus enabling, SGRL for its growth and the high profitability in the industry.

SGRL has two operational different manufacturing units in the close proximity to each other, located at GIDC Ankleshwar in the state of Gujarat. In addition to this, it has acquired the adjoining company with land area of 20,100 SQM to unit-1 which is now merged and future phase-wise expansions has been mapped out aligning to its growth plans.

SGRL remains a high performance company, except for some minor hiccups during Covid time. The Companys revenue CAGR for the last 3 years in FY22-23 was 22.50% while EBITDA and PAT CAGR for the same time period remained at 18.84% and 20.39% respectively.

Financial Performance

Key Financial highlights

• Revenue from Operations stood at Rs. 902.2 MM against Rs. 712.9 MM, a growth of 26.6% YoY.

• EBITDA before other Income stood at Rs. 232.6 MM against Rs. 179.2 MM YoY. EBITDA Margin for the year at 25.8 %.

• PAT stood at Rs. 170.2 MM against Rs. 133.9 MM YoY. PAT Margin for the year at 18.9 %.

• The Board of Directors has recommended a final dividend of 5% (i.e., Rs. 0.50 per equity share of paid-up value of Rs. 10 each and Rs. 0.30 per equity share of paid-up value of Rs. 6 each) out of the profits of the Company for the financial year 2022-23, subject to shareholders approval.

Internal Control & its Adequacy

The Company has in place adequate internal control systems commensurate with the size and nature of its operations. The company has a strong system of internal controls to insulate and preserve its assets from loss, illegal use, or disposal. All transactions are approved, documented, and reported to the Management in a timely and prompt manner. Internal control processes are followed, which consist of adopting appropriate management systems and implementing them. The Company has a qualified Audit Committee, independent Statutory Auditors and Internal Auditors who submit reports periodically, which are reviewed and acted upon.

Human Resource

SGRL understands the value of its intellectual capital as the cornerstone of its successful business journey. Its the people, their intellectual capital, dedication and disciplined determination, which differentiates the Company from others in its business space.

The Company is led by a 110 strong workforce as on 31st March 2023. The companys team is dynamic and reflects a blend ofyouthfulness and experience.

SGRL believes in upskilling the team. It inculcates a culture of self-learning where team members can be encouraged to expand their horizons in the latest scientific developments and other areas of interest, aligning with business goals.

The Company focuses on creating a safe and amiable working environment that fosters team bonding. It invests in automation solutions where ever possible. This allows it to utilize its human capital to add value to plant and business operations.

The HR team is focused on strengthening the leadership across various verticals. The IT department is developing solutions for increased transparency in business operations and better connectivity with customers.

CSR

Since its establishment, SGRL has initiated and backed numerous programs, particularly in critical domains like education, environmental preservation, healthcare and hygiene, skill enhancement, and communal progress. The company possesses a keen awareness of the broader requirements of the nation and extends its support to ventures aimed at conserving heritage, helping underprivileged as well as empowering individuals to achieve self-sufficiency. The companys CSR philosophy is aligned with its core focus on sustainability and empowerment of community around it.

Risk Management

In a rapidly changing business environment with dynamic customer requirements, business risks are constantly evolving. As a result, there is significant variation in the emerging risks landscape across businesses.

SGRLs risk strategy is determined by a risk appetite defined by a series of risk criteria. These are based on sectoral circumstances, internal capabilities and our earnings target within the accepted volatility limits.

Risk management at the Company is an integral part of the business model, focusing on making the business model emerge stronger and ensuring that profitable business growth becomes sustainable.

Cautionary Statement

Investors are cautioned that this discussion contains forward-looking statements that involve risks and uncertainties. When used in this discussion, words like will, shall, anticipate, believe, estimate, intend, and expect and other similar expressions as they relate to the Company or its business, are intended to identify such forward-looking statements. The Company undertakes no obligations to publicly update or revise any forward-looking statements, whether due to new information, future events or otherwise. Accordingly, actual results, performances or achievements could differ materially from those expressed or implied in such statements. Readers are cautioned not to place undue reliance on the forward-looking statements as they speak only as of their dates.

r Particulars	2022-23	2021-22
Revenue from operations	902.2	712.9	26.6
EBITDA before other income	232.6	179.20	29.8
EBITDA Margin (%)	25.8	25.1	70 bps
Profit before tax (PBT)	225.8	180.1	25.4
Profit after tax (PAT)	170.2	133.9	27.0
PAT Margin (%)	18.9	18.8	10 bps
EPS (Rs.)	13.86	10.96	265