In conversation withSucheth Davuluri,Vice Chairman and CEO

The strategic direction we have followed in recent years, with an increased focus on growing our capabilities and our Custom Manufacturing Solutions (CMS) business without compromising on our Generic Drugs Substances (GDS) strategy, is driving our sustained performance. Our strategy remains unchanged. As we continue to make the required investments, well supported by a healthy financial position, we believe we can unlock higher growth.

Neuland delivered a steady overall performance despite significant global disruption arising from the pandemic in some of our end-markets. The revenue at ₹953 crores is a 24.3% improvement over the previous year, driven by growth in our GDS and CMS verticals. Our EBIDTA has also registered an upward trajectory, increasing 54.3% over the previous year, while the operating margin was up by 340 bps. Change in business mix with higher margins coming from CMS business and certain specialty products, along with cost-optimisation initiatives, have helped to improve profitability.

Our balance sheet position and underlying business fundamentals remain strong. We continued optimising working capital and managed debt at moderate levels. This was achieved even as we made investments focused on building capabilities to ensure that our growth is sustainable over the long-term. The return on capital employed reached 12.82% (18.09% excluding goodwill) during the year as against 7.83% (11.11% excluding goodwill) in FY 2020. In terms of key liquidity ratios, our Net Debt to EBITDA improved from 2.03 in FY 2020 to 0.94 in FY 2021 even as our Current Ratio moved to 1.47 from 1.42 and Debt-to-Equity ratio moved to 0.22 from 0.37.

The strategic direction we have followed in recent years, with an increased focus on growing our capabilities and our Custom Manufacturing Solutions (CMS) business without compromising on our Generic Drug Substances (GDS) strategy, is driving our sustained performance. Our strategy remains unchanged. As we continue to make the required investments, well-supported by a healthy financial position, we believe we can unlock higher growth

While our overall performance hit the mark, there are areas where we did not deliver as per our expectations. First, there were delays in commissioning certain capital projects, which had an impact on the payback and the internal rate of return. Second, there were delays in executing a few R&D projects. Lastly, we had slightly higher than expected attrition for a segment of our employees.

In all these three areas, corrective measures have been taken to improve our performance.

While the delay in capital projects was in some part due to the non-availability of workforce at our equipment manufacturer’s site because of the pandemic, as an organisation we could have done a better job in anticipating those potential delays and taking steps to mitigate its impact. Wiser with the learnings, the projects are now back on track and progressing as per schedule.

For swifter execution of our R&D projects, we have established more robust cross-functional teams, invested in skill development, hired more people, and strengthened our information systems for early identification of impediments and specific action, or resources, needed to overcome them. We have also improved our overall review mechanism so that our leaders can play an active role in enabling our cross-functional teams. There is still significant progress to be made.

To reduce attrition, we did a detailed analysis of the concerned employee segment to arrive at the reasons behind the attrition. Since then, we have implemented certain SOPs and protocols, made the line managers more accountable, and set up additional communication platforms between the direct supervisors and people on the shopfloor so that the supervisors can better understand the issues at the ground level and take suitable action for their resolution. Additionally, taking advantage of the National Apprentice Promotion Scheme introduced by the Government, we have successfully onboarded apprentices, creating a strong chemist pipeline for shopfloor operations.

We have a dedicated and strong team for implementing product lifecycle management for our GDS portfolio. Under this, the focus is on optimizing processes, improving yields, and enhancing productivity. During the year, concrete steps were taken for products such as Ezetimibe, Levetiracetam, Deferasirox, Donepezil, Dorzolamide and Rivaroxaban to make them more competitive not only in terms of cost but also in terms of availability and capacity.

Another important initiative relates to strengthening of the Project Management Office to ensure that projects are completed on time and in full. The projects being handled by them relate to the new molecules that are being developed, whether under CMS or GDS vertical. Certificate training programmes and an e-learning module were rolled out during the year to further empower our project managers.

We have institutionalised customer surveys where the feedback from customers is shared across the organisation. Another focus area is our continued investments in green chemistry, which is leading to efficient use of solvents.

Following the COVID-19 outbreak, as is true for companies globally, Neuland had to deal with the challenges of employee safety, site safety, supply chain disruption, restricted logistics, and cash management. As an entity categorised under ‘essential products and services’, we also had the responsibility of keeping our manufacturing running for timely supplies to our customers. Moreover, we had to wrestle with the additional challenge of continually changing customer demand due to the lockdown and subdued economic activity in several of our end-markets.

Neuland has been successful in overcoming most of these challenges. With employee safety being our topmost priority, we quickly adopted new ways of working. For employees whose roles allowed them to work-from-home, remote working was implemented by enabling them with the required tools and technology. Strict safety protocols, including physical distancing and sanitisation, are being followed at all our sites. Special buses were organised for safe transportation of employees during the peak of COVID-19 outbreak in the country. All employees are also mandatorily required to fill an e-self declaration form daily form health and safety management.

With China being the epicentre of the COVID-19 outbreak and a supplier of some key starting material (KSMs) and intermediates for certain APIs, raw material supply chain for the API sector was disrupted. In Neuland’s case, the planned and strategic changes we have made to our supply chain over the past three years - including shortening the supply chain and de-risking the vendor base – ensured minimal disruption to our operations and timely delivery of our products.

The pandemic has brought forth our team’s agility and cross-functional collaboration and is undoubtedly the biggest reason for our business resilience. For instance, our sales and development team stayed constantly in touch with the customers and regularly updated the demand forecast. Thorough understanding of evolving customer demand helped our manufacturing team to quickly adjust inventory to avoid insufficient or excessive inventory. The finance team, in turn, demonstrated nimbleness in redeploying resources basis the production requirements. This is reflected in the balance sheet in terms of our free cash flow and our working capital utilization which stood at a fraction of our approved limits. In a nutshell, maintaining business continuity, while keeping our people safe, has been a vital part of our response.

While the vaccination programme is on in full earnest, the world is not yet done either with the pandemic or its economic effects. We are also cognizant that we operate in a competitive and dynamic market and must be prepared for future events. To deal with uncertainties and challenges head-on, Neuland has in place a strong Enterprise Risk Management (ERM) process that is actively managed by the senior management team. We also have a cross-functional team which is constantly updating the risk register and implementing steps to mitigate the impact of these risks. In fact, one of the reasons why Neuland was not significantly impacted by the supply chain disruption is because that risk was included in our risk register and appropriate response tactics had been formulated and implemented well in advance. Had we not done that, the impact of the pandemic on our operations would have been at a larger scale.

While we are exercising prudence in managing costs to conserve cash, we continue to prioritise investments in R&D, capacity for key projects, quality systems, compliance, safety, and digitisation to shape the future of Neuland. Capacity creation and allocations for key products are also taking place keeping the longterm in perspective. We are systematically undertaking digitisation across functions and working towards integration at an organisational level, which will be critical for sustainability as an organisation.

An important pillar of our future preparedness is the investments we are making in our people. We are building a strong leadership team and hiring the right talent to address the needs of our customers and realise our strategic priorities. We also remain laser-focused on building a learning organisation. Our learning and development programmes are designed around the short and longterm goals of the organisation while meeting individual needs. Multiple online learning initiatives were launched during the year for upskilling.

The future belongs to organisations that are resilient and can quickly adjust to the reality of the market. Accordingly, Neuland will continue to stay focused on building on its agility to maximise value creation.

During the year, we operationalised Unit III, a manufacturing facility that we had acquired three years ago. The integration of this facility with our operations has enhanced our capability and capacity in scaling up molecules and managing projects. Unit III will continue to be an important driver of our continued success. Further, we are prioritising optimisation of capacity for agility enabling quick flexible response to customer needs.

The number of CMS projects that we are executing has been steadily increasing. This reflects the trust that our existing customers are placing in us as well as recognition of Neuland’s capabilities by new customers. Our strong pipeline of CMS projects - currently 78 active projects with 24 in late-stage development, and the continued emphasis on targeting molecules in the later stages of the clinical cycle, position us well to grow our revenue in the coming years. Building deeper competency and capabilities in R&D will be essential to our growth.

On the GDS side, our quality-led portfolio is driving market penetration for both our prime products as well as our specialty APIs. We are looking at filing DMFs in products we are excited about, which will further bolster our product portfolio and present new growth opportunities. We are focused on quality conscious customers and looking to further build a product pipeline differentiated on technology.

This is all underpinned by the Company’s healthy financial position, supporting our ability to invest in our capabilities and deliver long-term sustainable performance.

An important pillar of our future preparedness is the investments we are making in our people. We are building a strong leadership team and hiring the right talent to address the needs of our customers and realise our strategic priorities.
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