Management discussion and analysis Economic overview Global: Global growth in 2014 was a modest 3.4% against 3% in 2013, primarily due to a pickup in growth in advanced economies. Developing countries, which were the engine of global growth following the financial crisis, faced a difficult economic environment. As a result, growth in emerging and developing economies slowed as well. Despite the slowdown, emerging market and developing economies accounted for three-fourths of global growth in 2014. Headline inflation has declined in advanced economies, reflecting the decline in oil prices, lesser prices for other commodities and a weakening of demand in a number of countries already experiencing below-target inflation, such as the euro area and Japan. With regard to the emerging markets, lower prices for oil and other commodities contributed to reductions in inflation through 2014, with the notable exception of countries suffering sizable exchange rate debrciations, such as Russia. Overall, global growth is projected to reach 3.5% in 2015 and 3.8% in 2016. India: The full-year GDP growth for the fiscal year ending March 2015 settled at 7.3%, up from 6.9% in 2013-14, a tad lower than an official estimate of 7.4% (figures calculated as per the new series of national accounts with base year of 2011-12). This growth was due to the improvement in the performance of both services and manufacturing sectors. The Gross Value Added (GVA), a new concept introduced by Central Statistical Office (CSO) to measure economic activity, rose by 7.2% in 2014-15 compared to 6.6% in the brvious fiscal. The economy remained relatively unshackled of factors generally associated with an economic slowdown. Average Wholesale Price Index (WPI) inflation declined in 2014-15 to 3.4% (April-December) vis-a-vis 8.9% in 2013-14, owing to a sharp decline in fuel prices. Food price inflation moderated to 4.8% during April-December 2014 as compared to 9.4% in 2013-14. Average retail inflation, measured by Consumer Price Index (CPI), moderated to 6.3% in 2014-15 (April-December) from 9.5% in 2013-14. The country's Current Account Deficit (CAD) narrowed sharply to 1.3% of GDP in 2014-15 primarily on account of a lower trade gap. One of the heartening features has been the emergence of India as a large economy with a promising outlook, amidst the mood of pessimism and uncertainties that continue to persist in a number of advanced and emerging economies. The Reserve Bank of India has projected India's GDP growth for 2015-16 at 7.6%. The International Monetary Fund has forecast India's growth to strengthen from 7.2% in 2014 to 7.5% in both 2015 and 2016. The pharmaceutical space Global: Overview, Trends and Prospects Global spending on medicines is forecast to reach nearly $1.3 trillion by 2018, an increase of about 30% over the 2013 level. This level of growth—a compound annual growth rate of 4-7% on a constant currency basis—will be slightly higher than the 5.2% recorded over the past five years, as the introduction of new specialty medicines and increased accessibility for patients coincides with lower impacts from patent expiries in developed markets. Most countries could experience increased pharmaceutical spending per capita by 2018. Higher spending is expected on specialty medicines over the next five years, particularly in developed markets - about 40% of total global growth will come from these medicines. Among the major markets, the United States remains the largest, rebrsenting over one-third of the global total, and is expected to grow at a compound annual growth rate of 5-8% through 2018. Growth will be driven by population growth, an aging population, and improved access in pharmerging markets. Strengthening of the global economy, fewer patent expiries in developed markets, new medicines and growth in pharmerging markets will contribute to a CAGR of 4-7% through 2018. The global population aged 65 and over will grow faster than any other age segment, and will account for almost 30% of overall population growth in the next five years. Of developed markets, the U.S. will see the largest per capita spending increase from 2013 to 2018. Global spending on medicines is expected to shift towards generics as developed economies are increasingly implementing strategies for optimising healthcare expenditure. Generic medicines account for over 50% of the global brscriptions - in the US generic usage in volume terms is estimated at 86%. India: overview, trends and prospects The Indian pharmaceuticals market is the third largest in terms of volume and thirteenth largest in terms of value, as per a pharmaceuticals sector analysis report by equity master. The market is dominated majorly by branded generics which constitute nearly 70-80% of the market. The domestic formulations market, valued at approximately Rs.88,000 crore has grown steadily at a CAGR of 10% over the past five years. The strong growth has been driven by a confluence of factors, including - a) rising household income levels leading to higher expenditure on healthcare, b) increasing brvalence of lifestyle related diseases, c) improving healthcare infrastructure/delivery systems and d) rising penetration in smaller towns and rural areas. As a result, majority of the growth in Indian market has been driven by expansion in volumes and new product introductions as against price increases. Going ahead, the prospects for the domestic pharmaceutical sector appear promising. The Indian pharmaceutical sector is expected to clock total sales of US$ 27 billion by 2016, according to a recent report by Deloitte titled '2014 Global Life Sciences Outlook' from sales which stood at US$ 22.6 billion in 2012 and about US$ 23.6 billion in 2013. The Indian pharmaceutical industry is on a good growth path and is likely to be in the top 10 global markets in terms of value by 2020, according to the PwC - CII report titled "India Pharma Inc: Gearing up for the next level of growth" The Company Orchid Chemicals & Pharmaceuticals Ltd. is a leading pharmaceutical company headquartered in Chennai, India and involved in the development, manufacture and marketing of diverse bulk actives, formulations and nutraceuticals with exports spanning across more than 40 countries. Orchid's world-class manufacturing infrastructure includes US FDA compliant API and dosage form facilities at Chennai in India. Orchid has a dedicated, state-of-art and GLP compliant R&D infrastructure for API research, drug discovery and pharmaceutical research at Chennai, India. Orchid has ISO 9001:2000, ISO 14001 and OHSAS 18001 certifications. Orchid is listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) in India. Business highlights Received approval from the US FDA for the Abbreviated New Drug Application (ANDA) for Rivastigmine Capsules in 1.5 mg, 3 mg, 4.5 mg, 6 mg and Felodipine Extended - Release Tablets in 2.5 mg, 5 mg, 10 mg and Eszopiclone Tablets ANDA Received approval from the US FDA for the Abbreviated New Drug Application (ANDA) for Gemifloxacin Mesylate Tablets (320 mg) with 180 days of generic drug exclusivity Corporate Debt Restructuring Scheme (CDR) The Corporate Debt Restructuring Empowered Group (CDREG) has approved the CDR package for the Company in March 2014. The approved CDR Package inter-alia provided for the restructuring of debts outstanding as at the cut-off date on the following lines: a) The cut-off date for restructuring fixed at 31/03/2013. b) Reschedulement of repayment of all Term Loans over a period of 32 quarters commencing from the Quarter ending on June 30, 2015. c) Reduction of interest rates on all rupee borrowings (including Working Capital facilities) to 11% p.a. d) Carving out of the irregular portion of working capital facilities as Working Capital Term Loan repayable in 32 Quarterly instalments commencing from Quarter ending June 30, 2015. The drugs and pharmaceuticals sector attracted cumulative foreign direct investment inflows worth US$ 12,813.02 million between April 2000 and December 2014, according to the data released by the Department of Industrial Policy and Promotion (DIPP). e) Funding of interest on all Term Loans for two years (i.e.) from April 2013 to March 2015 f) Funding of interest on Working Capital Facilities for one year (i.e.) from April 2013 to March 2014. g) Funded Interest Term Loan to be repaid through 32 Quarterly instalments commencing from Quarter ending June 30, 2015. The approved CDR Package also provided for the transfer of Penem and Penicillin API manufacturing facility at Aurangabad and the R&D facility at Shozhanganllur, Chennai to Hospira Healthcare (India) Private Ltd. for a total consideration of US$217.50 million. The Business Transfer was completed in July 2014 and the proceeds of the Business Transfer were utilised for (i) Repayment of part of Borrowings and (ii) for Provision of Working Capital for the Company as approved in the CDR Package. The package also provided for the infusion of Promoter's Contribution which was brought in by the Promoters in July 2014 and deposited in the Trust & Retention Account maintained at SBI for implementation of the approved CDR Package. Against the infusion of Promoter's Contribution, 1,48,09,801 equity shares of Rs. 10 each have been allotted to the Promoters @ Rs.49.79/- per equity share on brferential basis based on the approval from the Shareholders and Stock Exchanges. The implementation of CDR has facilitated availability of working capital for operations and enabled the company to stabilize operations with the support of lenders. The Management is confident of gearing up the performance in the years to come. Financial overview Profitability • During the 18 months period ending on March 31, 2015, the Company has earned a cash profit of about Rs.84 Crore as against a cash loss of about Rs.300 Crore during the corresponding brvious period. • The EBITDA for the 18 months period ending on March 31, 2015 stood at Rs. 362.23 Crore (21% of the Operating revenues) as against Rs. 169.62 Crore (9% of the Operating revenues) during the corresponding brvious period. • With extraordinary income of Rs.270.62 crore (net of deferred tax impact ofRs. 145.26 crore), net loss for the 18 months period ending on March 31, 2015 came down to Rs. 191.04 crore (after tax) as compared to a net loss of Rs. 530.22 crore (after tax) for the corresponding brvious period. • EPS for the 18 months period ending on March 31, 2015 stood at a negative Rs.26.11 as compared to a negative Rs.75.26 for the corresponding brvious period. Components of Revenue & Expenditure • For the 18 month period ended March 2015, the Company's net revenue declined by 8.6% to Rs. 1,779 crore from Rs. 1,946 crore during the corresponding brvious period. The Company had revenues from Alathur, Irunkattukottai and Aurangabad facilities until July 03, 2014 and from Alathur and Irunkattukottai facilities for the rest of the period during the 18 months period ended on March 2015, as the Aurangabad API facility was transferred to Hospira Healthcare on July 04, 2014. The Operating revenues from Alathur and Irunkattukottai during the 18 months period ending March 2015 was Rs. 1047 crore as against Rs. 1007 Crore during the corresponding brvious period. • Material cost for the 18 month period ended March 2015 was Rs.781.33 Crore (45% of the Operating revenues) as compared to Rs.958.27 Crore (50% of the Operating revenue) during the corresponding brvious period. • The other operating cost, including employee cost for the 18 month period ended March 2015 was Rs. 635 crore as against Rs. 818 Crore during the corresponding brvious period. The reduction was on account of Business Transfer completed in July 2014. • The effective interest cost for the 18 month period ended March 2015 was Rs.495.03 crore (Net of interest reversal of Rs.41.98 crore included in exceptional items) as compared to Rs. 520.38 crore during the corresponding brvious period. • The Debrciation & Amortisation for the 18 months ending March 2015 was Rs. 321.37 crore including amortisation of Intangible assets under development. • Exceptional items for the 18 months period ending on March 31, 2015 amounted to Rs. 157.26 crore as against a net gain of Rs. 51.11 crore during the corresponding brvious period, which included Profit on sale of land and investments amounting to Rs. 107.27 crore. Balance Sheet • The Equity and Reserves as at March 31, 2015 stood at Rs.439.40 Crore as compared to Rs.488.17 Crore as at September 30, 2013. During the 18 months ending March 2015, the Promoters have brought in a sum of Rs.73.80 Crore as Promoters'Contribution for implementation of CDR Package. • The total borrowings as at March 31, 2015 stood at Rs. 3,165 Crore as compared to Rs. 3,414 Crore as at September 30, 2013. Human resources and industrial relations In line with Orchid's HR policy of providing safe, rewarding and professional environment for the employees, Orchid's HR function is continuously monitoring the environment to align with the Company's overall vision and road-map. In spite of the financial crisis faced by the Company, the Company was able to retain the talents through various HR initiatives taken. During the period under review, Orchid maintained a cord ialindustrial relationship environment at all manufacturing units of the Company. As at March 31, 2015, Orchid had approximately 1800 permanent employees including corporate, managerial, sales and manufacturing staff, who continue to strive for successfully meeting various stakeholders’ expectations as well as creating wealth for the investors. Risks and their management Orchid has an active risk management and mitigation strategy, taking a fairly wholesome view of the internal and external environment to address challenges, to large extent possible. Key elements of the program are summarized below: Foreign exchange risk A significant part of the Orchid's revenue, costs, assets and liabilities are denominated in foreign currencies. Unhedged trade and financial exposure thus creates potential to adversely impact its operations and overall profitability. Risks are recognized at the contractual juncture and are attempted to be hedged progressively under natural hedge process at various stages of operations depending upon the nature of the transactions and in accordance with the hedging policy and strategy of the company. During the year, risk management practices continued to focus on minimising the economic impact on company's profitability arising from fluctuations in exchange rates. Interest rate risk Though at the beginning of the year, we were exposed to differential interest rates, risks associated with interest rate fluctuation have been substantially mitigated with implementation of the CDR Package wherein the interest rate on all restructured Rupee loans/facilities has been fixed at 11% p.a. Credit risk With the active support of CDR lenders, the implementation of the CDR package, with deferral of interest service and rescheduled principal repayments, Orchid has significantly mitigated the risks associated with debt service obligations. This support has strengthened the cash flows of the Company for improving the performance and reducing risk associated with credit repaymentsduring moratorium period. Internal audit and control The Company has in place adequate systems of internal control commensurate with its size and nature of its business and ensure proper safeguarding of assets, maintaining proper accounting records and providing reliable financial statements. Based on the Management and the Audit committee review, suitable steps are being taken periodically to strengthen the adequacy of the internal control systems in various functions.The Company has external teams carrying out various types of audit to strengthen the internal audit and risk management functions. The Company's effective control system is supported with Enterprise Resources Planning (ERP) operating on the enhanced version - SAP ERP ECC6 EHP5 - for its main business processes. Cautionary statement Statements in the Management Discussion and Analysis describing the Company’s objectives, projections, estimate, expectations may be “forward looking statements” within the meaning of applicable securities laws and regulations. Actual results could differ materially from those exbrssed or implied. Important factors that could make a difference to the Company’s operations include, among others, economic conditions affecting demand/supply and price conditions in the domestic and overseas markets in which the Company operates, changes in the Government regulations, tax laws and other statutes and incidental factors. |