Natural Capsules Navigates Headwinds: Q2 FY26 Performance and Strategic Outlook

Natural Capsules Limited (NCL), a prominent player in India's pharmaceutical capsule manufacturing sector, recently released its Q2 and H1 FY26 earnings, painting a picture of both strategic progress and operational challenges. The company, known for pioneering vegetarian capsules and being a significant manufacturer of gelatin capsules, is also making a determined foray into Active Pharmaceutical Ingredient (API) manufacturing. However, the latest financial results indicate a period of headwinds, with the company reporting a net loss amidst external market pressures and internal scale-up complexities.

For the second quarter of fiscal year 2026, NCL's revenues from operations stood at ₹45.80 crores, reflecting a modest 1.33% sequential growth and an 11.11% year-on-year increase. Despite the revenue uptick, profitability was significantly impacted, with the company recording a negative EBITDA of ₹0.88 crores, translating to a negative EBITDA margin of 1.93%. The net loss for the quarter deepened to ₹6.99 crores, compared to a loss of ₹0.61 crores in the same period last year. This performance led to an Earnings Per Share (EPS) of negative ₹6.76. The management attributed these results primarily to external factors, particularly US tariffs affecting their capsule business and technical hurdles in the nascent API segment.

Financial Performance Snapshot

Segmental Dynamics and Strategic Pivots

The capsule business, NCL's traditional stronghold, faced unexpected challenges. The imposition of an 88% duty by the US on Chinese HPMC capsules and a 14% duty on Indian HPMC capsules created a significant market disruption. While Indian products still hold a competitive edge over Chinese alternatives due to the tariff differential, the overall market sentiment and demand in the US were impacted. NCL's management noted that this unforeseen tariff situation prevented them from achieving stronger revenues and healthier margins in the capsule segment. The company had originally anticipated capsule volumes to reach around ₹196 crores for FY26 but now expects to touch approximately ₹185 crores. Despite this, NCL is on track to commission a new HPMC production line by the end of the current quarter, aiming to fulfill customer demand and increase export volumes once tariff uncertainties subside. The company also highlighted its ability to convert HPMC lines to gelatin lines as a backup plan, showcasing operational flexibility.

NCL's ambitious foray into API manufacturing through its subsidiary, Natural Biogenex Private Limited (NBPL), continued to be a focal point. After securing all necessary Pollution Control Board approvals, the company aimed to ramp up commercial production from Q3 FY26. However, the transition from lab-scale to commercial-level production encountered technical difficulties, particularly in scaling up fermentation batches. Management transparently acknowledged these as common challenges in advanced process commercialization and assured that R&D and production teams are actively working to resolve them. To accelerate this, NCL has engaged a Chinese consultant firm to provide technical support and improve their processes to achieve desired yield levels. The API segment contributed a modest ₹1.22 crores in revenue for Q2 FY26, incurring a loss of ₹11.47 crores from operations, including depreciation and interest.

Strategic Outlook and Growth Drivers

Despite the immediate challenges, NCL's long-term strategic vision remains intact. The company is poised to benefit significantly from the Government of India's Production Linked Incentive (PLI) Scheme for bulk drugs. NCL's three key API products – Dexamethasone, Betamethasone, and Prednisolone – are approved under this scheme, which is expected to provide approximately ₹67 crores in incentives over six years. This financial support is crucial for de-risking the substantial investments made in the API manufacturing segment and enhancing its economic viability. The company's strategy for APIs involves initially competing in the domestic market, with a strong long-term focus on exporting to highly regulated markets like Europe, the US, and Japan, where higher pricing and superior margins are available.

NCL's commitment to R&D is a cornerstone of its growth strategy. With DSIR-recognized facilities, two granted patents, and three patents under filing, the company continues to invest in developing new value-added molecules in the steroidal and hormonal API range, alongside process improvements for enhancing yields and operational efficiencies. This focus on innovation is expected to drive future product development and maintain a competitive edge. The company also highlighted its strong market position in capsules, being the second-largest Indian manufacturer for gelatin capsules and the first to manufacture vegetarian capsules, supported by a diversified customer base across 28 countries.

Management's Forward View

Management has revised its full-year FY26 topline guidance to approximately ₹225 crores, adjusting for the impact of tariffs on the capsule business and the ongoing scale-up challenges in API. They aim to maintain capsule EBITDA margins around 12% for the current year. For the API segment, they anticipate ramping up commercial production from Q3 and achieving higher conversion levels by Q4 FY26. The company's strategic priorities include positioning the business to reduce margin volatility, growing sales in regulated markets, expanding global presence, introducing new capsule variants, and developing new value-added API molecules. NCL remains confident that as external conditions improve and internal challenges are resolved, its businesses will regain momentum and deliver growth aligned with its strategic ambitions.

Conclusion: Navigating Towards Resilience

Natural Capsules Limited is currently navigating a complex landscape of market tariffs and technical scale-up challenges. While these factors have impacted its short-term financial performance and necessitated a revision in guidance, the company's strategic foundation remains robust. With significant investments in API manufacturing backed by the PLI scheme, a strong R&D pipeline, and a resilient capsule business, NCL is actively implementing measures to overcome current hurdles. The focus on operational efficiencies, market diversification, and innovation positions the company for a potential rebound and sustained growth in the coming years, reinforcing investor trust in its long-term vision.