In conversation with Sucheth Davuluri, Vice Chairman and CEO

As we look at FY23, we will continue to see challenges on supply chain in terms of both availability & cost given the uncertain geopolitical situation. Our priority is to make the business stronger with focus on understanding the constant evolving customer needs better.

Sucheth Davuluri Vice Chairman and CEO

This year was not a satisfactory year in terms of financial and business performance due to lower than expected demand for some of our key products such as Levetiracetam, Dorzolamide on the Generic Drug Substance (GDS) Business as well as delays in execution of projects on the Custom Manufacturing Solutions (CMS) side. However, we did see an increase in demand for some of the Specialty APIs such as Apixaban and Paliperidone Palmitate Sterile. The gross margin for the overall GDS business was better than expected due to favourable product mix mitigating the impact of lower demand. Though we are positioned well, some of the Prime APIs in our GDS segment continue to face competition. In terms of our strategy for GDS, we will continue to invest across our portfolio of molecules in terms of capacity, cost optimization, procurement strategy, and technology to establish a leadership position. We continue to focus on filing DMFs for APIs with higher entry barriers.

When it comes to CMS business, the demand side was as expected with customers continuing to show confidence in Neuland’s capabilities. However, we faced delays in execution owing to technology challenges and shifting of development timelines. Our priorities for the CMS business are to continue investing in building deep technological capabilities that help us execute projects to meet customers demand while building an organization which is constantly adapting to evolving customer needs.

We saw our revenues remain flat at ₹ 953.2 crores Margins were under pressure due to the volatility induced by the second wave of COVID and other geopolitical issues including shutdowns in China. Our EBITDA for the year stood at ₹ 144.3 crores as against ₹ 162.5 crores in the previous year, while EBITDA margin stood at 15.1% as compared to 17.1% in the previous year. The operating margins were impacted by higher operating expenses incurred for significant manpower hiring for ramping up Unit-III and for building future capabilities in R&D. In fact, this year our R&D investments was 50% higher than the previous year. Our capex for the year stood at around ₹ 96 crores. Even though substantial capital investments were made, our net gearing ratio continues to be low at 0.3x and the current ratio is 1.57 up from 1.47 the previous year. Our ROCE is at 8.55%, which is lower than last year’s 11.93%. We expect to see a significant improvement in ROCE as Unit-III ramps up.

An important development during the year was the alignment of the senior leadership team on our strategic priorities framework that will guide the Company over the next five years. As you will read elsewhere in this report, these priorities are aimed at enabling us to deliver differentiated technological capabilities with deeper competence and build a differentiated GDS portfolio catering to quality focused customers, manufacturing and project management capabilities which would make us agile and responsive to customers, while developing the requisite digital and people capabilities which will ensure Neuland will be the API solution provider of choice.

As we look at FY23, we will continue to see challenges on supply chain in terms of both availability and cost given the uncertain geopolitical situation. Our priority is to make the business stronger with focus on understanding the constant evolving customer needs better. Even as we focus on creating a culture of feedback and greater alignment to customer, we will also be looking at optimizing our costs.

Before I dive into answering some of the questions which are frequently posed by our shareholders, I must acknowledge the tremendous hard work and commitment put in by the team to continue servicing customers and keeping all our facilities running despite the severe impact of the second wave of COVID.

  • What is Neuland’s unique value proposition?

    Neuland is a pure play API Company with a continued focus on deepening our capabilities to deliver better value to our customers. Our customers consistently appreciate Neuland’s ‘no-conflict’ business model and it’s focus on APIs. We are strengthening further by investing in deeper technological competencies and customer and project management capabilities which will make us a partner of choice for both innovators and leading generic formulators. We realize that the capabilities required in the GDS and CMS business are vastly different, yet there are significant synergies between the two. We are leveraging our experience of over 3 decades to create an organization which is uniquely positioned to serve both the segments without compromise.

  • What were some of the highlights of the year?

    Even before I mention the highlights, I would like to state that the disruption brought about by the second wave of the pandemic in India and a volatile global commodity market made the past year challenging. Looking back, while there are areas that we could have done better, I believe that we responded well to the challenges. I am particularly proud of how our teams managed to ensure continuity of business.

    Among the highlights, the CMS segment saw significant revenue from products in development close to commercialization and the filing of five DMFs for the GDS business– including one sterile API. We have commercialized two CMS projects during the year. We made good progress on scaling the utilisation of Unit-III for both GDS and CMS businesses.

    The other highlight for the year was the work done on the Strategic priorities in terms of the alignment of the top team, and key leaders driving the related KPIs. Based on that work, we have strengthened our Project Management function elevating it to the corporate level and focusing on further developing customer responsiveness and agility. Over the last few years, we have seen most of the traction for new CMS projects come from North America and Japan, and are now starting to see momentum from Europe as well. There are a number of other capabilities critical to our strategic priorities which we have also invested in during the course of the year.

We have commercialized two CMS projects during the year. We made good progress on scaling the utilisation of Unit-III for both GDS and CMS businesses.
  • In which areas could Neuland have performed better?

    One area where we faced issues was in terms of execution of some of the complex CMS projects, where timelines were extended beyond the original due date. While this is something which is inherent to the nature of the project, there is scope for significant improvement on that front. We are strengthening our process engineering capabilities and ramping up for focus on cross functional training to foster better collaboration in being able to anticipate issue and take mitigating steps.

    We could have also done a better job in responding faster to customer feedback. We have a customer base that demands high quality work to support their filings and as a result we have made customer feedback central to our meetings, investments and other decisions. This will result in a stronger and agile Neuland.

    We have also ramped up our efforts in creating new infrastructure to support our growth as well as ensure alternate production lines and buffer capacity to meet variations in demand.

  • How do you see Neuland transforming in light of the strategic priorities?

    The terms ‘agile, focused and customer-centric’ are the operating words when it comes to Neuland’s transformation. We are very clear about the kind of organisation we want to be, the areas of research in which we will invest, the geographies in which we want to be, and the products that we want to develop to achieve the optimal configuration for success.

    As we pursue our strategic priorities, we see Neuland emerging with differentiated scientific, technological, and manufacturing capabilities that are greatly valued and trusted by customers. In line with one of our priorities, we will become significantly more digitised and therefore more agile to make quick data driven decisions. An example of digitization where we are beginning to see significant benefit is on the procurement side where the complete 'Procure to Pay' process is automated. We will have a portfolio of complex and differentiated molecules on the GDS side; and an organisation with advanced project management practices to meet customers’ ever-changing needs, particularly relevant for our CMS customers as they need a partner who can understand and adapt to their requirements. Finally, our strategic priorities will enable us to evolve the talent of our people and unlock their full potential to drive higher performance.

  • Achieving strong environmental, social and governance (ESG) performance is important for achieving a sustainable future. What measures has Neuland taken in this regard?

    Neuland is committed to being a successful, sustainable and honest Company. Materiality assessment is conducted annually to assess which material topics have the greatest impact on long-term value creation. We are tracking, measuring and reporting our performance on material sustainability topics, details of which can be accessed on our Annual Sustainability Report.

    We have adopted the 10 key principles of Green Chemistry to minimise our environmental impact. Our growing focus on green chemistry is reflected in our process improvement and development (PID) program. As part of PID, dedicated people are re-looking our existing processes, raw materials and chemical products for driving sustainable and safer operations. Around 8-10 such targeted programs are carried out every year by the PID team. Additionally, we have key goals such as reduction in freshwater consumption, zero landfill of hazardous waste, energy conservation, and renewable energy generation, among others, to make our business more sustainable.

    Aligned with our focus on establishing a sustainable supply chain, a comprehensive set of sustainability criteria is being used to onboard new suppliers. Further, over 80% of our existing suppliers have signed their acceptance of our Supplier Code of Conduct. In parallel, we continue to work towards re-risking our supply chain to improve supply chain resilience and reliability. Currently, we are dependent on China for around 13% of our materials and are actively working to reduce this further.

    At Neuland, we strive to earn trust through transparency. This includes being committed to good governance and promoting sound ethics and compliance. We also embrace a holistic approach to risk management for sustainable value creation and protection. A cross-functional team is involved in identifying key risks and mitigation measures. Digitisation of enterprise risk management (ERM) processes is underway to further strengthen ERM.

    Neuland firmly believes that the value created for our employees and communities is just as important as financial returns. We invest in our employees, promoting their learning, development and well-being and creating an environment that allows them to reach their full potential. We practice corporate citizenship in our local communities through healthcare and infrastructure provision initiatives.

  • What are the challenges you foresee for FY2023?

    Among the biggest challenges that we continue to face is the steep increase in prices of certain raw materials which is impacting our margins. We are working through those challenges in terms of negotiating long-term contracts including our cost position and negotiating better terms with our customers.

    Even as we see challenges on the broader macro-economic front due to the volatile geopolitical situation especially the Russia-Ukraine war, we are also seeing an intensification of competition for certain Prime molecules where competitors and new entrants have invested in capacity over the last 2 years.

    While we continue to invest in people and building the organization, nascent attrition is an area of concern as is the competition for talent.

    However, through the enhanced ERM program, we have a comprehensive risk register of over 100 risks which have been rated on Severity, Probability and Velocity by key SMEs (Subject Matter Experts) across the organization. The digitization of the program allows for more key individuals across the organization to raise risks and challenges, along with working on mitigation plans. Active monitoring of progress of the risks and the mitigation plans on the ERM tool will give us much more control over the process and outcomes.

  • Finally, what are the growth drivers for Neuland for FY2023 and beyond?

    The external environment is vibrant and encouraging. Capital funding for the biotech sector remains robust, US FDA product approvals are increasing, and a growing number of R&D programs are entering the clinical pipeline of innovator companies. As a trusted contract development and manufacturing organisation (CDMO) to the global pharmaceutical industry with a strong focus on partnering with biotech players, these market trends augur well for Neuland. Further, our established business presence in the US, Europe and Japan, which are the global innovation hubs, also holds us in good stead.

    In the medium-term, overall improvement in product mix, more efficiencies coming from our operations and Unit III going fully operationalised will help in improving our margins. We expect one or two of our molecules to transition to commercialisation in FY2023, which will enable recurring revenues; however, the revenue potential will depend upon the success of the drugs. We also remain focused on capturing new opportunities for the CMS segment by entering into partnerships for Phase II and III projects as these projects offer high prospects for commercialisation and revenue addition. In our GDS business, the pipeline of new products offers the possibility of exciting growth opportunities.

At Neuland, we strive to earn trust through transparency. This includes being committed to good governance and promoting sound ethics and compliance. We also embrace a holistic approach to risk management for sustainable value creation and protection. A cross-functional team is involved in identifying key risks and mitigation measures.