Managing Directors Review
At the outset I would thank you for being with us and reposing your confidence in itsmanagement. 2015-16 has also been very turbulent year for your company and your companywitnessed increased financial stress due to unruly economic variables that continued toaffect the business normalcy and all performance parameters badly shaken. During thefinancial year 2015-16 the company registered a top line of INR 831 Million whileincurring loss of INR 4852 Million. As reported in the previous Annual Report yourcompany had also undertaken a financial restructuring with its lenders through CDRmechanism and the restructuring scheme was approved by CDR-EG in March 2013 and standsimplemented. The performance of the Company was also going as per CDR projections and theCompany had achieved turnover of Rs. 447 crores against CDR projection of Rs. 516 croresin financial year ended on 31-3-2014 with a little pressure on EBIDTA figures of 15 croresagainst projected 32 crores because of delay of six months in disbursement of funds by thelenders. However In the month of April 2014 Statutory Auditors of State Bank of India(lead bank) reviewed the calculation of the Drawing Power and revised lower the valuationand the drawing powers with retrospective effect (w.e.f Sept 2012). Drawing power of thecompany was reduced by Rs 50 Crores which resulted in the company becoming NPA technicallyfrom back date of revising. It continues to adversely affect the operations of the companybecause of long drawn out break in the working capital cycle for smooth operations in thecompany. The availability of funds for maintaining the working capital cycle of thecompany further deteriorated due to a fast depletion of funds due to heavy losses. Therequest of the company for second debt restructuring was rejected by the bankers whichultimately led to failure of the debt restructuring under CDR Forum and consequent exitfrom the CDR Forum. The account has been declared as NPA by all the lenders. The effortson the part of the management to bring in a strategic investor have also not beensuccessful due to a hardline stance adopted by the lenders in addition to complexitiesinvolved in dealing with so many lenders. The above NPA has affected the credit records ofthe company very badly due to which Credit was not available in the market and the companyhad to procure its raw material on advance payment terms. The company couldnt importthe raw material and its shortage continue to prevail and resulted in significantunderutilization of its manufacturing facilities and thus resulted in heavy cost anderosion of its earning at gross and net levels. However JM Financial Asset ReconstructionCompany Private Limited has been assigned the debt by four lenders namely State Bank ofPatiala State Bank of Hyderabad ICICI Bank Limited and Uco Bank in the last FY 2016 andcurrent year. Presently Indian Active Pharmaceutical Industry (API) has been facing verysevere competition from China. The India Pharma Industry is importing over 85-90% of itsAPIs requirement from China. Since critical raw material is being sourced from Chinaat highly competitive costs standalone API manufacturing Industry in India is in deeptrouble. The margins of Indian API manufacturers having main dependence on un-regulatedmarket in India and abroad are very low due to high infrastructure cost high cost ofpower less export incentives high finance cost and price competition from China.Recognizing the above reasons National Security Adviser (NSA) has also confirmedthe view that Indian Pharma Industry must take immediate concrete steps to revive the APIIndustry so that India can become self-sufficient in health care industry. The governmenthas already set-up a commission to examine and revive the domestic API manufacturingindustry.
Standalone API industry in India is going through a tremendous amount of stress due tocompetition from China. To avoid the Chinese competition PDL diversified into regulatedmarkets like US Europe and Japan as these markets offer high value addition and some ofthe negative impact of high cost of infrastructure in India is negated. However till FY2014 only 15% of the companys topline came from the regulated / semi regulatedmarkets with a 2x-3x pricing advantage over unregulated markets like India and China.PDL has been in the process of making a sound foothold in the regulatedmarkets with an already established world class manufacturing infrastructure developmentof non-infringing processes DMF filings. It has got certifications from EuropeanJapanese Korean Mexican and Chinese authorities and USFDA is in the pipeline. Thecompany had signed long term contracts with Ranbaxy Sun Pharma Sandoz Lupin Midas(Germany) Pfizer (USA) Meiji(Japan) Summit Pharma (Japan) Alkem Shinogi and Merck butdue to deadlock situation in terms of funds availability as well NPA asset status with thelenders it could not make much headway in this direction since the efforts of the companytowards approval of second restructuring and availability of working capital funds did notresult in a positive outcome. There are very few plants in India with this infrastructureas it takes huge investment and time to build. The company is quite confident that theexisting assets and infrastructure plus the regulatory approvals that the company hadbuilt over years continue to have a huge potential. In addition to this the sustainedrelationship with the suppliers and customers the company is sure of leveraging thestrengths once a debt resolution is in place. The Promoters had started an initiative toget a strategic investor to solve the immediate requirement of necessary liquidity for theworking capital cycle. For this the Company had also signed mandates with some leadinginvestment bankers to bring in a strategic investor in the Company. However due to variouscomplexities involved in dealing with multiple lenders none of the strategic investorscould come forward despite showing a great interest in the well-developed infrastructureand huge potential the company has. The promoters of the company are willing and puttingin their sincere efforts to work with the lenders and ARCs for arriving at a debtresolution so that the operations are scaled up to ensure that the value of the assets andthe interest of lenders and public shareholders are protected. With your support I lookforward that with the debt resolution the company shall be able to revive and shall beable to re-energized beginning towards the success of its business.