Q&A with Vice-Chairman & CEO

Neuland has achieved significant milestones in the financial year 2022-23, driven by the continuous growth of our CMS and Specialty API businesses. These achievements validate the effectiveness of various initiatives we have implemented in line with our strategy over the past several years.

We made progress on the journey defined in FY 2022 which provides a practical framework of six strategic priorities. This plan guides our decision-making, enabling us to focus on areas of importance and steer clear of any needless deviations. Our capital allocation, technological investments and infrastructure enhancements have been aligned with these priorities. Our progress against the strategic priorities is on track.

The year was not without its challenges, as the Russia-Ukraine conflict and intermittent lockdowns in China disrupted our supply chain and impacted input prices. Additionally, the spike in demand from our customers tested our agility. Our ability to adjust and realign our capacities to meet the increased demand enabled us to overcome these challenges. We are able to do this as our capital budgeting process is flexible and responsive to business needs rather than being rigid. Our comprehensive approach towards strengthening our team also resulted in better project execution and realising our business objectives.

On a full-year basis, we have achieved strong financial results. Our total income reached ₹ 1,200.9 crores, a 26% increase compared to the previous period. This growth was driven by 10% increase in our GDS revenues and 57% increase in our CMS revenues. Our EBITDA surged by 94.8% to ₹ 281.1 crores, resulting in an EBITDA margin of 23.4%, up from 15.1% in FY 2022. This happened through a better product mix, operational leverage and cost improvement plans that offset the rise in raw material prices.

To support our growing operations, we have continued to invest in upgrading our facilities, with ₹ 66.1 crores invested in capital expenditures during this period. We generated a free cash flow for the year of ₹ 172.4 crores, and our net debt position stands used to ₹ 63.0 crores. Our current ratio now stands at 1.7, indicating improved liquidity and the ability to meet our financial obligations. Furthermore, our ROCE has risen to 21.3% in FY 2023, reflecting our efficient use of capital.

Neuland's simple yet robust business model, focussed solely on the development and manufacturing of complex APIs, resonates with our customers. We remain committed to customer-centricity by building a high-quality portfolio and expanding our capabilities and capacities to meet evolving customer needs. During the last year, we have increased our focus on customers rolling out a survey which helped us arrive at a Net Promoter Score (NPS). This also allowed us to make the customer’s voice central to key internal meetings as well as our actions. By nurturing long-term partnerships with customers who value our differentiated strengths and by fulfilling our ESG commitments, we are confident of delivering sustained growth in the years ahead.

In my annual communications, I also aim to address the key questions frequently raised by our shareholders. These communications are driven by our commitment to transparency and providing valuable insights that empower stakeholders to make informed decisions about our Company. Before moving to the Q&A section, I want to express my heartfelt appreciation for the tremendous hard work of our team throughout the year. Their exceptional skills and unwavering dedication will propel Neuland to greater heights.

Neuland's performance in FY 2023 was not the result of just a few actions, but rather the culmination of numerous strategic initiatives undertaken over the years. We believe that companies thrive by doing a multitude of things right, and we have diligently focussed on multiple fronts that have been instrumental in our success.

Firstly, our emphasis on specialty APIs, which have higher barriers to entry, allowed us to enter the market and gain a competitive advantage. Additionally, our focus on developing and manufacturing innovative APIs for biotech companies has played a crucial role. Several projects that we had seeded and worked upon over the years were successfully commercialised in FY 2023, further driving our growth.

Another important factor has been our commitment to protecting margins. While we achieved robust sales growth, we have placed equal weightage on cost management. Through careful analysis and optimisation of fixed expenses, continuous process improvements and the qualification of alternative vendors, we have safeguarded our margins while driving growth.

As for the sustainability of our performance, I remain optimistic. Our success rests on a solid foundation built upon a diverse portfolio of molecules and a loyal customer base. The transition of molecules to commercialisation in our CMS business is expected to drive recurring revenues, except in the eventuality of the drug not being commercially successful. Further, by maintaining our focus on quality, nurturing strong customer partnerships and pursuing operational excellence initiatives, we are confident in our ability to deliver consistent performance over the long term. However, the growth is not likely to be linear.

Last year, among the biggest operational achievements was driving a shift in our business mix towards higher-margin products. This aligns with our goal of building a better-quality business that stands out in terms of complexity and technology of our molecules.

Our steadfast pursuit of cost improvement has yielded positive results. We focussed on enhancing recoveries, exploring environmentally and cost-friendly alternatives, reducing cycle times, minimising wastage and improving overall efficiencies. Working closely with subject matter experts, we challenged various cost line items, leading to significant cost optimisation.

A key driver of cost improvement has been our emphasis on finding and qualifying alternate vendors closer to home. Our team is continuously working to ensure that our supply chain is being de-risked from a geographic as well as a product perspective

Being agile and adaptable is absolutely crucial in today's dynamic business environment. At Neuland, our strength lies in our ability to take swift actions and realign ourselves with market trends. Let me give you a clear example of our adaptability. While we carefully allocate our capital in our budgets, we never hesitate to reallocate it when unexpected changes arise. This flexibility allows us to quickly shift resources to different areas of our business that require immediate attention.

This year we took our agility to the next level. When we noticed a surge in customer demand for our products, we swiftly responded by ramping up production and ensuring that we could meet their needs. This was made possible because of our strategic focus on creating flexible capacities and modernising and automating our plants. Continuously improving our systems and processes for project planning and management, along with our digitisation strategy, has also made us more agile to our customers' changing requirements.

In terms of attracting external talent, transparency plays a crucial role in this process. We believe in open and honest communication, both internally and externally. Through our social media platforms, we share updates on our achievements, customer feedback and performance management practices. We want potential candidates to connect with our story and feel inspired to join us on our journey. We actively engage with talent through campus visits, management trainee programs, recruitment drives and walk-in interviews. Additionally, we work with the top recruitment agencies in the country to identify and attract the best talent.

We have spent a lot of time in the past few quarters on the people strategy. We have taken a comprehensive approach starting from clear identification of the required competencies at various levels, creating individual development plans & group interventions, talent placement based on the 9-box, etc. We are working on filling identified gaps in talent as well as creating succession plans, all in line with our strategic priority of having an organization capable of delivering on our plan and priorities.

Regarding culture, it has been an ongoing evolution for us. In recent years, we have placed a strong emphasis on customer-centricity. The impact of our products and projects on the customer is at the forefront of all our discussions and decision-making processes. We have made customer satisfaction a central focus of our project management, communication, planning and execution. Additionally, our top leadership team is dedicating significant time to foster a culture of strong cross-functional teams. These teams are empowered to make decisions and are equipped with the necessary capabilities to bring focus to the customer.

In terms of our recent achievements, we received a noteworthy rating from S&P Global. With a score of 48 out of 100, we were placed in the top 8% of 343 companies rated in the drug manufacturing domain.

ESG serves as a comprehensive framework for building a sustainable organization. It is not a mere choice; rather, it is an essential approach if we aim to create a business capable of enduring beyond our time.

At Neuland, we fully embrace the principles of ESG and strive to integrate sustainability across all aspects of our operations. In terms of our recent achievements, we received a noteworthy rating from S&P Global. With a score of 48 out of 100, we were placed in the top 8% of 343 companies rated in the drug manufacturing domain. This recognition highlights our commitment to ESG practices and motivates us to continue advancing our ESG strategy.

The world is constantly changing, and it is crucial for organizations to stay ahead of potential risks. That is why we have significantly strengthened Enterprise Risk Management (ERM) at Neuland. We are always on the lookout for emerging risks that could impact our business, and we proactively plan interventions to mitigate those risks. It is a big focus area for us.

One of the key aspects of our risk management approach is taking an external perspective. We closely monitor emerging risks from the outside-in approach. We pay attention to reports and insights from reputable sources like the World Economic Forum. We align their identified macro risks with our own risk register to determine risks most relevant to Neuland. This helps us estimate the potential impact on our organization and take appropriate actions.

In addition, we have expanded the scope of risks we consider. Each risk is assigned a score, and we develop specific action plans to address and mitigate them. By implementing the mitigation plans, we effectively reduce the overall risk for the organization.

Several trends are shaping the industry landscape. First, we see a shift in the mindset of pharmaceutical companies as they recognise that they cannot possibly do everything on their own. They are divesting from API production and focussing on their core strengths. They are also recognising the value of collaborating with subject matter experts who can excel in specific areas. Further, drug development by emerging biotech companies is rising rapidly, spearheading two-thirds of the R&D pipeline in 2022. As smaller biotech companies are usually limited by infrastructure, this creates a growing demand for reliable and specialised API companies, presenting a positive trend for the industry.

Another important trend is that unit cost is not the sole determining factor when evaluating partners. Pharmaceutical companies are now placing greater emphasis on working with API companies who have a proven track record of quality and compliance. This shift highlights the importance of reliability and trustworthiness when outsourcing API development and manufacturing.

Uncertainty surrounding China has also influenced the industry. People are unsure about the situation and are seeking more predictable alternatives. India, despite its own challenges, has been seen as a more stable option. Furthermore, the trust quotient has shifted for American companies. They see India as a new home and are steadily showing greater confidence in the country's capabilities.

Interestingly, Europe is emerging as a strong player in the API space. While some may have predicted the dominance of China and India, the reality is different. European companies are competing fiercely, and from an Indian perspective, Europe poses stiff competition.

In the coming year, there are several factors that will drive our performance. First and foremost, the success of the molecules we have recently commercialized on the contract manufacturing side will have a direct impact on our business. Additionally, two more molecules are expected to become commercial over the next year or so, and we are genuinely excited about their potential.

In our GDS business, market penetration, especially for our specialty molecules where we had an early launch advantage, will be a significant factor for driving our growth. We will also focus on regaining market share for some of our prime GDS APIs that did not perform well in the previous fiscal year.

Our Unit III operations have been steadily ramping up, contributing to our recent growth. As we move into FY 2024, with a change in the product mix, we expect Unit III utilisation to increase to around 68%-69%, providing a window of growth and improving operating leverage. Another crucial aspect that will drive our business is the successful transfer of technology from our laboratory to the production plant with minimal disruptions. To meet the demands of our customers, we will also be adding new production blocks in Unit III and investing in R&D infrastructure.

While the external environment remains unpredictable, we believe we can navigate these challenges, like we did in the past. The API development and manufacturing market is vast, and as long as we continue to invest in our organization, build our capabilities and deliver quality, the opportunities out there are exciting.