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Chairman and Managing Director's Review:
Adversity breed resilience
2011–12 STARTED AT A PROMISING NOTE FOR US AT SEQUENT. HAVING COMPLETED AN ORGANISATION–WIDE CONSOLIDATION PROGRAM, WE WERE ATTRACTIVELY POISED FOR GROWTH. HAVING BUILT UP A ROBUST FOUNDATION BASED ON OUR LARGE AND FLEXIBLE CAPACITIES, DEMONSTRATED R&D SKILLS, ABILITY TO MEET RIGID GLOBAL QUALITY STANDARDS AND A WELL–DIVERSIFIED BUSINESS MODEL WITH PRESENCE IN HUMAN AND ANIMAL HEALTH, WE WERE EXCITED ABOUT 2011–12. OUR OPTIMISM EMERGED FROM THE FOLLOWING FACTS:
i. Pharmaceuticals sector globally is insulated from the global economic upheavals to a large extent
ii. Being in an Pharmerging market, we expected increased product partnership opportunities from global players
iii. We had contracts in place for four of our largest products
Sensing the huge opportunity that awaited us, we remained focused to create, nurture and deliver value through our products, processes and presence to our stakeholders. However, 2011–12 unfolded otherwise.
The input costs continued to remain northbound, thereby impacting the operating margins. In addition, our company suffered two–way margin erosion on account of foreign currency fluctuations. While majority of our raw materials are imported from China, the Chinese Yuan Renminbi appreciated against US Dollar while the Indian Rupee depreciated against the US Dollar. This impacted us both ways. While the import commitments became more expensive, higher competition resulted in falling realisations even in exports markets. As a result, the advantage of an appreciating dollar didn't translate into improved numbers. During 2011–12, we recorded a profit of Rs.15 mn only on account of forex fluctuations.
We were also hit hard during second quarter of 2011–12, in wake of an unfortunate industrial accident at our Tarapur Plant. The incident at this plant, despite our global safety standards, led not only to the closure of the unit but also resulted in irreparable loss of four human lives. This event had a larger impact on our operations on account of capacity impairment. However, owing to our demonstrated track record of practicing global safety standards across our units, this incident didn't lead to a larger impact on any of our other units.
At times like these, we had the option to lie low and wait for the storm to pass; but we chose to persevere.
We persevered to survive, prepare and excel
Rough seas make better sailors. At SeQuent, we continued to wade through multiple challenges diligently, patiently and persistently. During 2011–12, we completed the first phase of our ambitious Penems project and also achieved operational stability across our units post completion of capacity expansion/modernisation.
Our investments made over the years into an integrated business model also stemmed the decline. Even though our largest business division (Animal Health – APIs and Formulations) witnessed a decline of 14 per cent, Human APIs registered a 91 per cent increase, followed by 18 per cent increase in Specialty Chemicals divisions. This enabled us to post a 20 per cent increase in the net sales to Rs.3.3 bn during 2011–12.
In wake of growing competition and increased inflation, cost control emerged as the biggest challenge during 2011–12. We focused on critically analyzing each process and product to clearly identify avoidable elements in the cost structures. This enabled us to improve efficiency, process time and capacity utilisation without any compromise on the end product/process quality. On the other hand, increased in–licensing agreements, which in–turn ensured profitable utilisation of our existing capacities. Even though the company's EBIDTA declined by 21 per cent to Rs.468 mn in 2011–12; the initiatives taken during the year are expected to translate into improved numbers in the coming years.
2011–12 was also a year of achievements and new initiatives. We continued to add new clients across all our divisions. We utilised the blend of our competitive cost structures with our global standards in R&D and synthetic chemistry skills to partner large pharma companies for long–term product development. Presently, we have forged four long–term partnerships for our products and derive 37 per cent of our total revenues from these partnerships.
Long–term growth still intact
The Emerging Markets are expected to grow at four times the growth rate of Established Market, largely on account of lower base as well as highly underpenetrated healthcare and large population. India remains attractive on both counts – being a large market and also the largest pharma hub outside US. We at SeQuent had realised this opportunity few years ago. Our strategy to improve capacities, strengthen cost structures, fortify product/process quality, expand customer base and ensure presence in diverse yet integrated verticals of the pharma value chain makes us attractively poised to capitalise upon the impending upturn. We believe that the input costs have also peaked and are only expected to go southwards in the coming months. We look forward with optimism on fructification of new developments during the current year.
Our existing unit at Mangalore is expected to conclude USFDA audit by third quarter of 2012–13. This coupled with our extensive investments in R&D centres (Bengaluru and Mangalore) and demonstrated delivery capability is expected to be a key driver of our growth in the coming years in the high–margin regulated and semi–regulated markets.
Our product pipeline comprising of more than 55 APIs under development and 33 DMFs will also propel our growth in the coming years. At the same time, our recent foray in domestic market for animal health formulations holds a huge latent potential in one of the fastest growing markets in the world.
Perseverance always rewards in the long run
Tough times are not controllable. However, one's reaction to the tough times is. At SeQuent, we believe that strong and respected organisations are built with a long–term vision and each adversity, obstacle and hardship plays an important role in shaping them, nurturing them and preparing them for bigger challenges to come. Being in the sixth year of our journey, we have just begun. Having built a robust base, we are striving to create a better organisation for all our stakeholders – our clients, financial partners, suppliers, shareholders, employees and communities. We would like to extend a heartfelt appreciation of your support. We will continue to persevere for greater excellence in everything we do.
K R Ravishankar,
Chairman & Managing Director