Akums Drugs and Pharmaceuticals Limited (AKUMS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q2 FY '25 Earnings Conference Call of Akums Drugs and Pharmaceuticals Limited, hosted by Ambit Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Prashant Nair from Ambit Capital. Thank you, and over to you, sir.

Thank you, [ Rupisa ]. Good afternoon, everyone. On behalf of AMBIT Capital, I welcome you to the Q2 FY '25 Earnings Call of Akums Drugs and Pharmaceuticals. We have the following members of the management team on the phone with us today: Mr. Sanjeev Jain, Managing Director; Mr. Sandeep Jain, Managing Director; Mr. Amrut Medhekar, Chief Executive Officer, CDMO; Mr. Sumeet Sood, Chief Financial Officer; and Mr. Sahil Maheshwari, General Manager, Strategy. I would now like to hand over the call to management for opening remarks, post which we can move to Q&A. Thank you, and over to you, sir.

Thanks a lot, Prashant, for the introduction. Hello, everyone, and welcome to our Q2 earnings call. I'm Sahil. Let me draw your attention to the fact that, on this call, our discussion might include certain forward-looking statements, which are predictions or projections of the future events. Our business faces several risks and uncertainties that could cause our actual results to differ materially from what is expressed or implied in such statements. Akums does not undertake any obligation to publicly update any forward-looking statements, whether as a result of new confirmation, future events or otherwise. I hope everyone has gone through the investor presentations and the results, which we shared on our website. I would now like to hand it over to Sandeep. Sir, do take over, please. Thank you.

Namaskar to everybody. Thank you, Sahil. Happy Diwali to everybody. We take pleasure in declaring the Q2 results of the company and thank all the stakeholders and shareholders of their continued support to the company. We are the largest India-focused pharmaceutical CDMO, with over 30% market share. Our company caters to over 1,500 clients, both Indian and MNC pharma companies, with whom we have long-standing relations. Today, 26 out of top 30 pharma companies in India are our partners. Our total consolidated revenue in Q2 was INR 1,047 crore, which is 2% higher on a Q-o-Q basis, however, 12% lower on Y-o-Y basis. This is due to a combination of 3 factors: muted demand resulting in lower volume growth; prices of several key APIs, including amoxicillin, cephalosporins, paracetamol, telmisartan, et cetera, continues to fall. As you are aware, our CDMO business is a cost-plus model. So when input costs fall, we experience revenue deflation as well. Falling API prices have another secondary impact. It affects order frequency because customer waits for API prices to bottom out before building up inventory. The continued fall in API prices of cephalosporin has also impacted our revenues and profitability of API business. Thirdly, we had some significantly higher revenues from an outsourced product development engaged in Q2 of the prior year. All this impacted our adjusted EBITDA margin, which is down to 12.9% versus 15.8% in the prior year. Our adjusted PAT margin expanded to 6.4% versus 5.2% in the prior year. Despite ongoing volatility, we continue to see strong long-term demand for outsourced drug development and manufacturing. We will continue to invest in building world-class capabilities to help our clients launch new formulations and therapies and support them in their enhanced growth and transformation. We continue to make robust investment in R&D to drive new product development. Our R&D spend was INR 64 crore for the half year, reflecting a robust pipeline of new pharmaceutical, nutraceutical and cosmeceutical formulations that will drive our growth in the future. We received 10 DCGI and 86 FSSAI approvals in H1 of the current fiscal. We are happy to announce that during the quarter, we received a patent for our formulation, room-stable hydroxyurea oral suspension. This is a breakthrough formulation aimed at managing sickle cell disease, which has a high disease burden, especially in geographies like India and Africa. Akums has been granted an exclusive right to further develop, manufacture and market the products innovated by Triple Hair Inc. Canada for India market. Akums will undertake development, obtain regulatory approvals and commercialize this product in India. The product is a topical solution targeting alopecia or hair loss. We are also actively investing in API R&D to develop robust global pipeline of API with cost-efficient processes. We have over 80 scientists in API R&D and have invested INR 7 crore in H1 '25. In API R&D, INR 30 crores has been invested till date. Similarly, we continue to invest in building production capabilities to support our future growth. In H1, we spent around INR 150 crores in CapEx. In Q2, we started commercial production at our new injectable facility in Haridwar. The facility has operational ampoule and SVP FFS lines, and we plan to start vial and lyophilized vials in Q3. Further in Q4, LVP FFS will also be operational. Akums was one of the early entrants in CDMO injectables market in India, and the new facility will further boost our ability to tap growth in injectable market of India. We have completed the land acquisition for Jammu plants, and civil works is expected to begin shortly. Commercial production from these facilities will begin '26/'27. Our focus on export markets continues. Let me share some of the development on that front as well. Till date, we have filed 2 dossiers in Europe to leverage our European GMP brands. We are building a pipeline with products which have high unmet needs and with limited competition targeting European markets. Akums has entered into MOU with Ministry of Health, Government of Zambia, to set up a joint venture to manufacture pharmaceutical in Zambia. The pharma market in Zambia is worth over INR 2,500 crore, with more than half being managed through government purchases only. Akums and Zambian government will jointly invest in setting up manufacturing facility in Zambia to cater to local Zambian pharmaceutical needs. We are also focusing actively on formulation exports, one of our key future growth driver in the future. We have fairly diverse formulation across multiple regions and therapeutic categories. We, today, export to over 60-plus countries, including Southeast Asia, South Asia, Eastern and Western Africa, CIS and have recently started in Middle Eastern markets as well. Our export portfolio ranges from overall solid to style formulation across acute and chronic therapies, with total dossiers filed at 367. In our API business also, we are taking progressive steps in increasing export to drive better production -- product realization in H1 '25. Around 9% of our API sales was from exports only, primarily to Asian countries. We also plan to file CEPs in European markets soon. We expect to file at least 2 CEP in H2, and also undergo European EDQM audit this fiscal. Looking ahead, we expect demand trends in the second half to be largely similar to the first half. There could be some upside potential if we see some improvement in API prices and uptick in industry volumes, but that remains to be seen. With that, let me hand over to Mr. Sumeet Sood, our CFO, for the financials.

Sandeepji, thank you very much. I'll come to the financials. And if you -- as Sandeepji mentioned that the performance was for the second half, and the first half looks similar. I think the quarterly results also if you look at the quarterly result, they also look similar. If you look at the total consolidated income, we were at INR 1,047 crores. This was 2% higher than the last quarter, but it was 12% over the year-on-year basis. Our consolidated EBITDA was INR 135 crores. This is 3% higher than Q1, but 28% lower year-on-year basis. Sandeepji did mention one large product development income, which came in -- which was for the last year and not this period. So that's 1 reason. And if we exclude the income, we would have seen probably a 15% EBITDA growth year-on-year basis. Consolidated EBITDA margin was at 12.9% in Q2, similar to Q1, which was 12.7%. However, the Q2 last year saw almost 15.8% EBITDA margins. Gross margins on a consolidated basis in Q2 were at 42.3%, similar to Q1, but higher than Q2 last year, which was 40.6%. The consolidated PAT saw an improvement to INR 67 crores from INR 57 crores in Q1. If we were to break the segment-wise revenue, the CDMO remains our driving force. It does add to almost 79% of the revenue share in Q2, followed by Branded and Generic, which does 16%; and API business adding to 5% of the revenue. Our CDMO business margins are at 15.4%. The Branded and the Generic EBITDA margins are similar at 10.3% in both the quarters, Q1, Q2, which is higher from the Q2 last year, which were around 4.5%. I think the continued profitability is on efforts to reshape our formulation portfolio and in favor of the Branded products, which are driving high profitability. The API revenue showed a marginal improvement of INR 4 crores, and for 6 months, increased by INR 36 crores. The continued softening of API prices had an impact on the margins of API business, wherein the margins for the quarter were negative INR 14 crores and negative INR 26 crores for 6 months. The cash flows for the company, the net cash flows, if we look at, there is a cash surplus of INR 341 crores, and the IPO proceeds have also come in. A large part of the IPO proceeds till November have been drawn down. Cash flow from operations for H1 September '24 was INR 71 crore positive. And the free cash flow post investing activities was minus INR 65 crores. The company's long-term rating sort of improved. We got AA(Stable) from ICRA on a long-term basis. And the short-term rating continues to be A1+. I think that's from our side. We are happy to take questions on the company and the performance. Thank you.

[Operator Instructions] The first question is from the line of Abdulkader Puranwala from ICICI Securities.

Sir, could you please quantify on the one-off income, what you had in the last year, same quarter? And was it a part of the CDMO revenue as well?

Yes. So last half year, we had a one-off income of INR 82 crores, which was of the CDMO business, right? So there was a product we had to develop for a particular customer, which we did. Now if you look at the 6-month number, Abdul, so you'll see our EBITDA is INR 265 crores, while it was INR 295 crores for 6 months last year, right? So while that was a huge income, which came in, which was not here in this particular period, but we've sort of still maintained the company's EBITDA pretty well.

Understood. And sir, could you share some highlights on -- some mentioning about the export orders, both for formulations and API. And then how do we see the traction getting built up in this particular space?

Sure. So on the export side, Abdul -- on the export side, we -- as we said, we continue to gain traction. So we are expanding our portfolio, as we mentioned, right, from OSD to injectables. We have also filed a couple of dossiers in Europe. We have multiple others in pipeline. We have a few of our plans as well, which will soon be triggering the European approvals. So the idea is to go stronger and deeper in markets we currently are, which is Southeast Asia, Africa and South Asia, and build a robust pipeline and presence in Middle Eastern markets as well as the European market. So that's there. As we said, we are expanding, not just for distributors, we're also recruiting people so that we build a brand recall in these markets of prominence. So that is there.

Okay, okay. And sir, the formulations, would it be fair to assume that API would see kind of backward-integrated operations entirely?

Abdul, can you please repeat your question?

Yes, sure. So sir, for the European formulation business, would that be a backward-integrated project? That is, your current API sites would be utilized for the APIs for those formulation products?

No, Abdul. So API, as we said, largely, we have the cepha, and the Lalru has limited general API as of now. So this is forward-integrated. In a way, you can say the European operations will largely be supply formulations from our CDMO business. So that is forward-integrated. I would not really call it as a backward within API.

Okay. Okay. And next on the new injectable site at Haridwar. So I understand you would be commissioning that in phases till the end of this fiscal. But any color you would like to provide as to what are the products you're getting manufactured in here? And in terms of your existing site, what is the overlap with your previous manufacturing units as well?

[Foreign Language] This was the low dosage forms [Foreign Language] one is ampoule and one is FFS ampoule [Foreign Language] lyophilization and vial [Foreign Language] fully occupied today.

Okay. And sir, final question on the sickle cell product. So congratulations on this patent. But when do we see the commercial revenues building up from this product? And this would be -- are there [Foreign Language]? Or this is the contract manufacturing opportunity?

[Foreign Language] Our cost is around 1% to 2% of the total cost. [Foreign Language] We have already approved all of these things as per regulatory system. [Foreign Language]

[Operator Instructions] The next question is from the line of Ashish [ Shriram ] Thavkar from JM Financial.

Sir, I had this question on our exports business. Like you spoke about Zambia, the European dossier that you guys have filed in. When do you see the real commercial benefits going in from whatever investments we are making into export markets?

Right. So European business, we'll likely see within a couple of fiscals. So we have already filed, as you would acknowledge, that these take approximately 2 years to finally get the approval. And these are prescription-oriented products. So these will slowly and steadily build volumes in the European market. Zambia as well, so we have recently entered into the MOU. Once finalized, we will start setting up a facility, which will take anywhere between 18 to 24 months. This will have a quick ramp up compared to the Europe because this is essentially a government procurement, which will enable us to procure -- to supply the essential medicines in Zambia. So that is there. Apart from this, while these 2 are the focus ones, the other ones are of continued focus as well. So we continue to file dossiers in the Europe -- in the Southeast Asian and the African markets, the Middle East market as well. So the current business, which is largely propelled by these geographies, right? So we still have almost 350 dossiers in the pipeline. We gained approvals -- significant approvals in the first half as well, almost 80-plus approvals. So that is, Ashish, the focus area.

Yes. Good enough. Sir, just -- so since you said the second half would be largely similar to first half, not expecting any positive surprises. But then with whatever initiatives you have and your current engagements with your clients, how do you see FY '26 panning out? Because the way, obviously, investors are looking at this business is a proxy to the IPM, right? And so if you could make any comments on how do you see FY '26 panning out? And can we return to mid double-digit or mid-teens kind of EBITDA margins next fiscal?

So Ashish, a couple of points, which, initially, Sandeep has also mentioned, which looks a drag on the financials currently. One is, as it is a cost-plus model, the API prices have an impact. An update onto it is, while we saw the API prices soften in Q3, most of the intermediates of the KSMs have started showing some solidifications. So either in Q3 or Q4, I expect the API prices will actually average or normalize. So this will have an impact on -- positive impact on our revenue cycle, right? And the volume of the industry, while the Q1 was strong on the volumes, as I said, the continued fall in the API prices and the stocking, which happened in the Q1, that resulted in the H1 volumes being largely flattish, which is similar to the industry, right? So if the industry volumes and the new launches, they pick up, I feel that FY '26 should be moving on those lines essentially.

Sorry. By any chance, are you guys losing market share on the volume side?

So Ashish, while we have not done an updated calculation on that front, but that is not the case. I think if you really compare to the industry, we are performing as the industry, right? So that should not be a case on the loss in the market share. Additionally, we have, as I said, we have a couple of plants which recently got commissioned, the injectable facility as well as the Baddi facility. I'm happy to announce also the penam facility has successful client audits as well. So with these utilizations in the capacity, we should have an increased volume going forward in FY '26.

Sir, lastly, on this API, the EBITDA loss. And so internally, are we still on track of making this business EBITDA breakeven by quarter 4 of FY '25? Or you feel those time lines could get shifted ahead?

No. Ashish, this is Sumeet. So I think the API prices softening has not helped the cost, right? So to answer you very directly, I don't think that in the Q4, you know that this will turn around or it would not be EBITDA positive. I think we'll have to give it 6 months from here, and we'll revisit our business plan starting April. But in the short term, next 3 to 6 months, honestly speaking, we don't see that this is going to turn EBITDA positive.

Okay. And sir, at least on whatever corrective or the-- because you were trying to set up your own SVPs at Parabolic Drugs, right? So all those activities are over or they are still going on?

Okay. All activities are complete now, sir. [Foreign Language]

[Operator Instructions] The next question is from the line of Prashant Nair from AMBIT Capital.

Yes. Just first question is on the CDMO business. If I remember, in the first quarter, you had good volume growth. I think double-digit growth. Your prices dropped but volumes were growing. Can you share what's the volume growth? I mean, would you have had volume growth in the second quarter, if you adjust for the onetime contract you had in the previous year? Or have volumes dropped even after adjusting for that?

So Prashant, yes, so we had -- we did not experience the volume growth. We had a volume decline of roughly 11% this quarter.

And this is on the full base? Or it's after adjusting for the onetime contract you just called out last year?

Prashant, this is volume. So that was R&D. So that had no commercial supply.

Okay. Got it. Got it. And so what is driving this drop, in your view? Because while IPM growth has been sluggish, there should be some growth in volume. So is this timing? Or is there any other factor which you can call out, which may have led to lower volumes?

So Prashant, if you really observe, Q1 saw limited volume growth, but we had it, right? So CDMOs are 1 or 2 months advance of the industry. So while Q2 saw a positive volume growth, we had that in Q1, right, while we are still better off limited to the industry. So that is the cycle, it's there. So I don't see it's a challenge of us not being able to wrap volumes, it is an industry cycle. I think based on what we see, as you said, H2 will -- H2 overall was positive. H1 was positive on the volume trend. So when we say H2 will always -- will be similar to H1, we still see that overall volume will be up compared to H1. Just the Q2 -- previous Q2 compared to previous Q2, we had a dip in volume.

Okay. Understood. Secondly, on the API pricing issue, which impacts your value sales in CDMO. So when did this start? Does this start sometime towards the end of last financial year? Or is it kind of a first quarter onwards issue? I'm just trying to figure out when the base will normalize.

[Foreign Language] because of the scenario of global [Foreign Language] number of chemical-based API formulation [Foreign Language] less than 0.5% of the current view last year [Foreign Language] we are very much confident [Foreign Language]

Okay. And one last question from my side. So on the marketing side, on your formulations business, we generally -- how much more adjustment is needed? Or how much more time would it take to normalize that business, get it to a stage where you want it to be?

So Prashant, we are significantly -- as we also discussed last time, we significantly scaled down this business because it was operating at a very low margin. And hence, to better utilize that cash, we invested into exports, for example, in filing of dossiers, right? So it is on track for now. I think H2, we should be able to bring it at a monthly positive level that H1 had limited loss, I think, the bleed is largely because as we are scaling that down, we have to get rid of some of the prior inventory. So largely, this is a story for this fiscal only.

[Operator Instructions] The next question is from the line of Gautam Gosar from Monarch AIF.

So my first question is on the trade generics business. As the last participant mentioned, sir, if you could quantify how much was the trade generics revenue during the quarter? And how much was the loss on that?

So the way we have presented our financial results based on the segment reporting. But the segments are put together, so we don't disclose that separately. But as Sahil mentioned that there is a very, very nominal. So it will be, on a monthly basis, less than INR 1 crore on an EBITDA basis, which these businesses would be doing so. While we are constrained to give you numbers only based on the segments that we have, but to assure you, as Sahil said, that this will remain that way, that the numbers for the trade generic businesses are looking good now.

Okay. Just secondly, on the CDMO business. So since you have seen a volume decline of 11%. And if you see the industry, the peers are showing a positive volume growth on their side as well as in the CDMO business. So sir, if you could quantify like what is the reason for the decline versus the peers, and we are losing market share in this ?

Yes. This is Amrut Medhekar. As Sahil said earlier, we, as CDMO, operate at least 2 to 3 months ahead of the market. So typically, the difference between the 2 quarters' behavior comparing directly with IPM may not be prudent. It will be easier for us to look at what is happening now will possibly be seen or recorded in the IPM history in the coming times. Number two, there is also mix of products, which we sell vis-a-vis other CDMOs. So to say that what is the product mix impact, we'll have to analyze in terms of how other CDMOs are built in terms of their basket vis-a-vis us.

[Operator Instructions] The next question is from the line of Ashish Shriram Thavkar from JM Financial Mutual Fund.

I just had 1 question on this government's notification on MSMEs, although, wherein they have to up their compliance levels, up their quality standards, is there an opportunity there? And by what segments do you see some discussions can get into commercial discussions there?

[Foreign Language]

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[Operator Instructions] As there are no further questions from the participants, I now hand the conference over to the management.

So as a company we are the largest contract manufacturing company [Foreign Language] more plants European, more collaboration with different type of government also or partners also. We are very much sure. [Foreign Language] One more thing. Our next generation, we will be fully aligned [Foreign Language] Thank you.

Thank you. Thank you very much.

Thank you very much, ji. Namaskar to everybody. Thank you for joining.

Thank you. On behalf of Ambit Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.