Caplin Point Laboratories Limited (524742) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Caplin Point Laboratories Q4 and FY '20 Earnings Conference Call hosted by Haitong Securities India. [Operator Instructions] Please note that this conference is being recorded. I now hand this conference over to Mr. Amey Chalke, pharma analyst of Haitong. Thank you, and over to you, sir.

Thanks, Nirav. Welcome to 4Q FY '20 earnings call of Caplin Point Laboratories. From the management side, we have Mr. C.C. Paarthipan, Chairman; Mr. Vivek Partheeban, Chief Operating Officer; Dr. Sridhar Ganesan, Managing Director; Mr. D. Muralidharan, CFO; Mr. M. Sathya Narayanan, Deputy CFO; Mr. Vinod Kumar, Company Secretary. Over to you, Vivek. Thank you.

Thank you, Amey. Hello, and good evening, everyone, and I am pleased to welcome you to our earnings call to discuss our Q4 and full year '19/'20 results. Please note that a copy of all our disclosures are available on the Investors section of our website as well as the stock exchanges. And also, please note that anything that is said on this call, which reflects our outlook for the future or which could be considered as a forward-looking statement, must be reviewed in conjunction with the risks that the company faces. Post this, you can -- I will hand over to our Chairman, who will give the opening speech. Thank you.

Good evening to you all, and welcome to the investors call. I hope that you would have read the results by now. Hence, I don't have to repeat what is mentioned in the report. First, I would like to convey some of the salient features of our Latin American operation during this COVID time. I hope that you would agree with me that the one most important factor for any business today is cash flow as the world is witnessing the pandemic that is unprecedented and uninformed. Coming to our cash flow, we generated an additional inflow of INR 75 crore in the last 75 days in the parent company. This has happened mainly because of our stock-and-sale business model, where we control the entire spectrum of business in the form of manufacturing, exporting, importing, distribution and the last mile coverage. Number two, the supply side advantage. We have acquired our channel partners. As a result, today, we have the inventory worth INR 280 crores, which are fully paid goods. It's again a boon to the company as it's closer to the customer and easy to get actually converted as a cash-and-carry business during the turbulent phase -- during this turbulent phase. Most of the local companies in this region have to depend on the API from China and India for their formulation business. And it will not be out of place to mention here that our payables are just INR 62 crores as per actually our report. As you all know well, pharma business comprises of prescription, institutional and generic sales. Prescription sales got affected because of the clinics and hospitals are closed due to COVID disruption, whereas pharmacies remained open and the generic sales flourished, and we are one of the beneficiaries. The operations in Latin America, for the last 16, 17 years, have created some of the following advantages to customers and Caplin Point: Number one, quality generics at affordable cost. When I say quality generics, we have been in this business for the last 15, 16 years in Latin America. If our generics does not have quality, we would not have sustained actually our business there. We say affordable cost because we have removed the intermediaries. There is nothing in the form of importer. There's no distributor. As I told you before, we control right from manufacturing to the last side; second, we have the maximum registrations in the last 10 to 15 years in the form of 400 to 500 products in most of these markets where we have to deal; three, generics -- the generics that we have, that we registered, are all in line with the WHO Essential Medicines List; four, we have been maintaining a consistent supply to customers even during these COVID times. We are constantly also reducing the low-margin and noncritical generics from our basket of products. And we also don't -- I don't have to mention that we have R&D in the form of API formulation, but that we also have CRO. Finally, to me, the future depends on those companies who focus on cash flow and COVID discipline. Thank you very much.

Sir, can we open the floor for questions?

Thank you. Yes, we can open up the floor for questions now, please.

[Operator Instructions] First question is from the line of Girish Bakhru from Bank of America.

So first question was on the U.S. business, particularly what's the outlook right now? And in terms of the demand scenario, are you seeing very significant demand during COVID and even at the current phase? And if you could also talk about the second line that is expected to be available, could we have that anytime soon?

Yes. Thank you, Girish. The business outlook for U.S., especially for injectables, continues to be positive because especially in COVID times, I think you'll see a lot of hospitalization as well for some of the patients that are more sick than others, the more symptomatic patients. So we've also noticed by ourselves and also through our partners that there is a little bit of stockpiling of injectables, especially that are used in anesthesia and surgeries and even blood pressure monitoring. So we feel that it is a positive for the company, for sure, number one. And number two is on line 2, we expect the line 2 to be ready by now. But with the travel restrictions between cities and states, I think there has been a little bit of a push, but we expect this to be cleared out by end of July. And we are looking at taking commercial batches of products that are already in the market by August for line 2. And with line 2 completion, we are looking at around 3x the capacity expansion. And in addition to that, we will also have complex products, such as suspensions in ophthalmics, that can be done on that line as well.

Right. And what have you seen in terms of the pricing? Has there been any major impact in the market? Or -- I mean, this question is even for Latin America. Has there been any significant price increase due to the nonavailability of certain products or the API?

With the U.S. per se, we have seen the prices have remained stable and, in some cases, prices have gone up a little bit. It has definitely not reduced. I think some of our partners have also come out and made a commitment to make their prices as stable as possible during this season. So in the U.S., at least to our product portfolio, we've not seen any reduction in prices. On Latin America, I request Chairman to throw in a few words, please.

Yes. Coming to Latin America, we have found actually, there is a premium available during this COVID period, which is due to the fact that there are not many companies from India and China, especially in the Central American part of business. Second, as I told you actually in course of my speech, there is no API facility available in Central America or Caribbean. Hence, they all don't -- they all have to depend on API facilities from China and India, and they have not been in a position to get this API. That's how we get actually a premium. And many of the essential medicines are in short supply. So the current situation is in favor of Caplin Point, I believe.

Yes. In fact, some of the products that were earlier touted as -- actually, even today, touted as essential for COVID, such as azithromycin, in several of our markets, we were pretty much the only company to have stock of this product. So the sales of essential products like azithromycin and vitamin C have been increasing quite rapidly in the last couple of months.

Right. And in Brazil, I know you don't have much presence there as of now. But with the situation from COVID, have you seen any like a way you could have serviced the market during this time? Or is there -- what I'm trying is to basically arrive at, is there an opportunity arising there to have, let's say, Brazil even focus on more API manufacturing locally, and you could look at something like that there?

So we are not present in Brazil at the moment per se. But if you look at the other markets in Latin America, such as Chile and Colombia, there have been some emergency tenders that have come up, and we have participated and we're also supplying to some of these markets. But specifically on Brazil, we have no presence at the moment.

Next question is from the line of Bhavesh Doshi from Dalal & Broacha.

Just I wanted to check out, there is a recent border tension between India and China, so some of the materials are coming from China also. Do you think that, that will affect, say, tomorrow if all the supplies stop, what will happen to your -- the supply side of your prices?

Yes. I would like to mention that the one which is being discussed today is about the APIs that are coming from China to India. But what we do is totally different from that one. We have been exporting formulation directly from China to South America. Since we control the front end there, we have no issues in the form of importing formulation from China. We don't import any API from China to India. Hence, we don't have to worry about the escalation in prices.

Okay. So I'm talking about the border tension, sir.

No, no. That's only the politicians know, I don't understand also. And it's beyond my comprehension, and we don't have to bother about this. Let us bother about our business, please.

Sir, I am talking about the imports you have coming from -- the imports that's happening from the China, so will that affect us, if you could...

Sir, could you please come again? It's very inaudible, please, can you please come again?

So I'm saying that you are importing some materials from the China also...

Yes.

So in that scenario, if tomorrow something bad happens, adverse effects of -- because of these political events happening, so will that affect our operations?

No. This -- I would give you an answer in this way. The products that we are currently exporting from China, we are also aware that one day or other, we will have to go for our own manufacturing. The focus is currently being diluted. At the same time, I'm sure actually that it will not be abruptly stopped. We will slowly reduce the impact, and then we will move it maybe in 2 to 3 years' time from now. Currently, we don't foresee any major issues because most of these products are registered in their company names, and we have an exclusivity for 10 to 15 years. So we don't foresee any major issues because we are not into API, as I told you. We are into the exports of formulation directly from China to Africa and South America. And I have not seen any escalation in price or any nonsupply of goods also from China to South America.

The next question is from the line of Hardik Shah from Prabhudas Lilladher.

Sir, there has been 2 acquisitions during the quarter and also a new subsidiary has been incorporated in Singapore. Sir, what would be the total amount paid for these acquisitions? And also, what would be the comparable numbers for the quarter ex of these acquisitions?

Yes. I'll request our CFO to answer this question, please.

Good afternoon. The Singapore, it's only a company that's actually incorporated, there is no outflow as such barring some minor few thousand dollars of incorporation. As far as acquisition, they have been acquired on book value gain and the consideration is on the book price. No premium on book price has been paid for the Latin American countries.

So what will be the comparable numbers for this quarter without the impact of acquisitions?

In a sense, you are talking about the revenue?

Yes, yes.

Revenue, what flows through from the subsidiaries, one subsidiary was acquired on the March end, so that didn't contribute anything to the sales. Other 2 subsidiaries, about 10% to 15% of the turnover comes from there.

Okay. My second question is with respect to the preference shares, sir. So I just wanted to clarify whether this is with respect to the Fidelity investment or no? And when will this get converted...

Sorry, can you please repeat the second question, please?

Sir, it is with respect to the preference shares. I just wanted to clarify whether this is with respect to the Fidelity investment or no? And when will this get converted?

Request CFO to take this question, please.

Yes. Actually, this is with respect to money received from Fidelity, we have issued preference shares. What was the next question?

Sir, when will this get converted?

No. Conversion, there is no -- this is an open-ended investment. There is no stipulated time as such. They're likely to be with us as long as they want us -- want the partnership to be there. There's no time line decided upfront.

Okay. And sir, my last question is with respect to the receivables. So, on an average, our receivables have shot up in the past 3 years. So in general, what I would like to know is what is the proportion of these receivables, which are associated to the LatAm business?

Yes. I will answer this question. So the receivables that you see entirely is from the newer markets and also from the branded generic business that we get into. But as you would have seen, over the last 3 years, we've been able to manage it tightly to control it between 80 to 90 days. I understand that the industry average for receivables is anywhere between 90 to 120 days. Despite almost a 35% increase in our top line, we've still been able to rein in the receivables to less than 6, 7 days compared to last year. And I will also ask Chairman to give an -- his input on this, please.

I would like to add one more point to your question. As I told in course of my, actually, speech, in the last 75 days, we generated cash flow, cash and cash equivalent of INR 75 crores. This COVID situation is going to change everything for the current year and next year. We are very sure that we'll be in a position to actually enhance our sales, not only sales, but also the cash flow that will improve the receivable time and other things because the business that we do nowadays is more of cash and carry and less of credit business. Hence, we don't foresee any major issues in future.

[Operator Instructions] Next question is from the line of Sachin Kasera from Svan Investments.

Sir, my first question is regarding the gross margins, especially, gross margins for the year has come down. You have mentioned that in the Q4, there was some impact because you exported certain products at 0 margin because of COVID on humanitarian, this one, consideration. And you also mentioned there was some impact because you had some old inventory from the channel that you had bought. But at the same point in time, we see the share of your branded generic has gone up. Normally, branded generic has got a much higher gross margin. So for the full year, our gross margins are down by almost 350 basis points. So one, if you could just tell us what is the reason for -- if you could quantify, what is the impact of this COVID thing that you have mentioned? And secondly, of this inventory? And other than that, despite a higher share of branded generics, why are the gross margins down?

Yes. I would like to actually talk on the COVID supply. Here, the issue is, as I told you before, we are one of the few companies -- maybe only one company from India that has been in this market for the last 16, 17 years, that has not only created a goodwill among the people, also goodwill with the government. When they approached us to supply the products, we wanted to do it actually as a gesture that will always create a goodwill. In the process today, we were in a position to review $6 million worth of government order. So what is important today is not that few cents, which we have lost and maybe you know a marginal dip. But we stand to gain actually in the years to come. That's one because of actually the relationship that we have built. And that will help us actually because -- in the way of networking opportunities. And the remaining -- the thing which you have asked me, I would request my CFO to answer for it.

Yes. This is Muralidharan. As Chairman has put it, the COVID -- okay, is one part of it. Other part is that the channel partners had inventory at the time of acquisition, which they carried at their purchase cost. They had obviously made less margin than what we would have made as a manufacturing company. So that impact would be about 2 basis points -- roughly 2 basis points, which over this current year, it will get normalized. Once our stocks go there and then the sales happen out of that, and then the cost should be -- that of our cost when the old inventory once gets sold, it will get evened out.

So can we see the gross margins coming back to 55%, which was, say, the number for FY '19 in the current year?

Very, very comfortable going forward -- yes, sir, please go ahead.

See, the impact of the old inventory will get marginalized. Depending on the market situation, whether we -- sustaining for 55% or not, we are not able to comment right now.

So basically, you're saying around -- of the 300 basis point reduction, 200 basis point was because of this consolidation of inventory of channel partner, that was a major impact, right, and partly because of this COVID, that's how we understand, right, sir?

See, COVID situation is creating monopoly and near monopoly actually for some of the generics, which is similar to ours. So I'm sure that we'll be in a position to match your expectation in the years to come. To that extent, I can guarantee you. Thank you. Thank you very much.

Sure. Okay. Yes. Sir, my second question is...

Please. Please tell me. Your second question, please.

One thing I would like to add especially to Chairman's message on the cash accrued in the last 75 days, the INR 75 crores is accrual to our cash equivalent after meeting the day-to-day expenses and paying off suppliers in the last couple of months as well.

And one more thing which I have to add, although I have told in course of my speech, this INR 218 crore is of goods -- the inventory of INR 280 crore is of paid goods, as against the payable is hardly INR 62 crores. And despite the goods which is there actually next to the customer will definitely be converted actually in the form of cash and it will be [indiscernible] take up to India. That's going to happen in the current year. When that happens, it will improve the cash flow, it will improve, this thing, the performance of the company, too.

Sure. Sir, my second question is regarding the balance sheet, if you give some clarification. So if I look at the consolidated balance sheet, our receivables have gone up from INR 160 crores to INR 228 crores. But in the cash flow that you have submitted, it is showing an increase of INR 230 crores. So similarly the case on inventory, while the cash flow is showing a INR 7 crores increase in inventory, as per the balance sheet, the inventory has gone up by almost INR 200 crores. So I'm not able to actually tally these numbers. I would request if CFO could just help us understand this confusion.

Yes. Let me clarify. The balance sheet is as on 31st of March. When we do the cash flow, the impact of the -- as you know since the acquisitions have happened progressively over the year, so when we do the cash flow, we have to give impact of the cash flowing out of the operations. So what we have done is the opening whatever they had and then the closing whatever that -- that differential only is addressed in the cash flow. That is why you cannot directly match the cash flow statement with the -- that is the conventional balance sheet model what we normally do. You can't make the difference between the closing balance sheet and the opening balance sheet that is how conventionally cash flow is drawn. But this year, since there has been acquisitions over a period of time progressively, we have given as such to the opening and closing our current assets for the subsidiaries taken over.

Okay. Maybe, sir, I'll take it offline with you, it's a little complicated for me to understand.

Please, write to us. If you are still not convinced, I would request you -- if you are not still convinced, please write to us. We will also write to you back.

Sure, sir. Sure. Second question was regarding the U.S. business, sir. The market size that you have mentioned, is that the market size after the product have gone generic or is it the pre-generic market size that you're talking of?

Sorry, your question cut out a little bit. Your question was is that market..

I'm saying, sir, in the presentation, you have given the market size of the products is for in the U.S. that you have got approval for. So these are the market size which are post the products going generic or these are the pregeneric market size that you're mentioning?

No. This is the overall market size for the product. So when I'm talking about the $670 million, that is the overall market size for those 17 products that we have filed and some of which have been approved also.

Okay. Secondly, I believe you have got some approvals, which are to be launched in the month of July and August. So if you could give some sense on how are we looking at the U.S. business in FY '21 vis-à-vis FY '20?

Yes. So as you would have seen from FY -- from last year to this year, there's been a pretty decent growth. We expect that growth to continue. Like I said, we've only done about 4 launches so far. We are about to launch the other 5 products in the next 4 to -- 3 to 4 months. Without giving too much in terms of numbers, we want to hit the next goal line of at least INR 100 crores, which we are confident of achieving. But with our internal discussions, I think we want to go past that as much as possible.

Sure. And this year, sir, if you could just help, what is the type of profitability of the Caplin Steriles? Is it made EBITDA breakeven or is it PAT breakeven or -- that will be helpful if...

No. So in our -- in Caplin Steriles business, that is a little bit of a misnomer because we continue to file multiple ANDAs, and each ANDA costs us around $176,000. So in the last 3 months itself, we filed another 4 products. So as the number of filings keep ramping up, which will be the case this year and next year, the breakeven also gets pushed out a little bit, but from -- it is definitely an investment for the future. And 2 years down the line given, we might probably be doing 15, 16 products. We'll continue doing only complex generics where these products that we are filing now starts to get approved and then the funds started to -- start to flow in from that. So we feel that about INR 120 crore to INR 130 crore is the mark at which we will breakeven from Caplin Steriles.

When you say breakeven, at the net level, sir, or the EBITDA level, sir?

No, no. At net level, I'm talking about, cash flow level.

Okay. So which means that this year, we should be closer to breakeven in FY '21 in Caplin Steriles?

If you took out the -- actually, if you took out the, this thing, the filings and the R&D work that we're doing, we would have already broken even. But the thing is that's not the way to look at our business. We are taking up our business for the next 5 to 6 years. And we want there to be -- of course, like I said, cash flow breakeven is our target. And if it doesn't happen in the next 12 months, we are positive it will happen in the next 24 months.

Next question is from the line of Rishabh Kale from Indsec Securities.

Sir, I just wanted to know what is the money spent on the U.S. facility till date and the Chennai facility?

So both on CapEx and OpEx and also, this was prior to Fidelity's infusion, we had spent over -- close to INR 400 crore on CapEx, OpEx and R&D. And post that, our run rate is anywhere between INR 70 crore to INR 80 crore per year, which includes the filing fees as well.

So, sir, INR 70 crores to INR 80 crores will be from the internal accruals or -- so the -- sir, we have issued preference shares around INR 218 crore, so is this the plan going ahead to use that money for the CapEx?

So that money has already come in. And if I'm not wrong, as on January of last year, we've already started to use Fidelity's funds, specifically for Caplin Steriles only, both in terms of -- CapEx is not too much, but OpEx and R&D has been done using Fidelity's funds. So starting January 2019, I believe, we have no longer started to use Caplin Point parent's funds on the Caplin Steriles.

Okay. Okay. And sir, any view on the API facility? So how are we proceeding with it? And...

So on the API side of it, we are doing something which we probably should have done for Caplin Steriles. We are actually ramping up our R&D in a big way to the tune that where we've already completed about 17 products, which are going to be DMF files, hopefully, in the next 18 months. And we are on the lookout for -- actually, not on the lookout, we've already completed the procurement for the land in which the API facility is going to come out, and we already have close to 75, 80 personnel in both R&D and futuristic operations on the API side. This, we feel will give us a real advantage in terms of our entry into the U.S. because today, what happens is, when it comes to generics, I think more than the pricing of it, in injectables, people worry about the continuity of supply because your continuity is dependent on how your supplier is sending the product to you. So as long as we have that under our control, I think we could even potentially charge a premium in the market saying that for the next 3 to 5 years, my supply is guaranteed. So we could potentially ask for a little bit of a premium in terms of our ask towards the final consumer.

So sir, this API facility will be for Caplin consumption as well or it will be only for sales? I mean are you...

Initially, it will only be Caplin consumption, but we are looking at having provisions to expand it because many of the APIs that we are working on is very niche, very high margin as well. So if the business case makes sense, we may do some sales also. There are some companies that are selling the API to non-U.S. kind of markets, while U.S. remains captive, we might follow that model also if it makes sense.

Okay. Sir, and CapEx for the whole year? I mean any guidance for CapEx?

CapEx, we feel is -- most of the CapEx that needs to be done is already completed. We feel that API plant is the next one, which will not be very high. I think INR 15 crore to INR 20 crore maximum would be the CapEx spend for this year and next year.

Next question is from the line of Tarang Agrawal from Old Bridge Capital Private Limited.

Just a couple of questions from my side. So if I look at your revenue today, you closed FY '20 at INR 860 crores with an 86%, 6% and 8% split between LatAm, Africa and the United States. So if I look what is -- probably see it from a 4-year horizon or a 5-year horizon, basically from a medium-term perspective, where do you see the overall revenues to go? And how do you see the split change, the composition of the revenues change?

We are very sure that we'd be in a position to reach comfortably good numbers as we have created actually enough basis for our future. And I don't want to give the numbers. One thing in the next 5 to 6 years, hopefully, we'll become one of the actually top companies, that much we are sure. The reason being, today, we have formulation injectable facility, which has been approved by U.S. The companies of our size are hardly few and far between. And in addition to that, we are going for backward integration to support our formulations in the U.S. In addition to that, we are into smaller geographies of Latin America. This INR 860 crore, 80% to 85% of the business comes from the smaller geographies, which are 5 to 6 countries. And currently, we are expanding to the bigger geographies in the form of Mexico, Colombia, Chile, Peru, where the major business comes from the institutions in the form of government, and we are also planning to go for an API business, which will support our formulation business when we support -- when we supply to the tenders in these markets. On top of it, we'll also have more number of ANDAs in the next 3, 4 or 5 years' time. Hence, in addition to that, we also have a CRO to support our, actually, activities because most of these countries, when we go for OSD business, they expect BE/BA studies, which can be done in-house. Considering all these factors, we'll definitely become a force to reckon with in the years to come. That's how I would answer rather than telling you actually that we will do so many thousands of crores, which is not the right way in a public company to commit. I'm sure that we'll become a force to reckon with, I guarantee you.

I understand, sir. Sir, if you could probably comment on the composition of revenues in terms of geographical split that you probably would look at 4 years from now?

5 to 6 years, U.S. will become #1. As you know, U.S. is the biggest market in the world followed by, actually, South America. I will put it this way, we would focus more on North and South America, and then we'll go for other markets. So our major thrust now currently is in South America and now that the U.S. is -- also is the foci. So U.S. will stand at #1 in 5 to 6 years from now. Hopefully, South America can even match that numbers considering the kind of private and institution business, which we propose to do.

Okay. Okay. Sir, the next question was in terms of your ANDA filings, if you could give a sense on what is the average spend per ANDA in terms of R&D till the time it's filed?

Okay. So for the simple solution products, which were the ones that we had filed last year and the year prior to that, you're looking at around $400,000 to $500,000 in terms of both formulation and analytical work, and then there is another $175,000 for the filing fees. But as we move on to the slightly more complex products, this could go up by more than 40%, 50% also. But the flip side of it is, the number of competitors is definitely a lot lesser and the prices in the market also continue to hold rather than continue on a slippery slope, like what happens when it's a very simple solution. Having said that, I think injectables on the whole, you might have seen from the IMS data also that they don't crash in prices because there is always a lot more demand than supply. And even if you look at, let's say, the U.S. FDA shortage list on any given day, more than 80% of the products happen to be injectables.

Next question is from the line of Shrikant Akolkar from Ashika Stock Broking.

So Vivek, I would like to know the current market share of some of the products that we have launched in the U.S.?

Yes. So when you look at the 2 products that we do with Fresenius, one of them, they're at a very decent market share today. I think it's well over 12% to 13% despite having 8 people on the market. On the other product that they have launched, I feel this is a little bit in the high-single digits. And the first product that we have done on our own, Caplin Steriles, we're at about 11% market share in -- as on December of last year. And the fourth product that we do with Baxter, they are the top suppliers right now in the market. So all things considered, I think we are in a decent wicket. I think we are averaging anywhere between 7% to 12% for all the products that we have launched.

Okay. Okay. All right. And are we expecting this to go up all over in FY '22 and '21 end of the year?

So what will tend to happen is as there are more and more companies coming in, they might then, too, reduce the price, which is not something that we want to participate in. We would like -- as is always the DNA with Caplin, we always want the bottom line to be strengthened as much as possible even if it means a slightly reduced market share, we want the prices to remain stable. Having said that, I think some of the more complex products that we start to file, the prices in the market also anyway tend to stay quite strong. So market share is one part of it, but we would like the pricing side of it to be strong, more than anything.

Okay. Fair enough. Second question is now one of the biggest competitor in injectables, they have guided that first quarter revenue would be under pressure because of the hospitals in the U.S. So I was just wondering what will be your guidance at least for the quarter. How are we seeing the revenue ramp up in U.S. injectables?

Yes. So I am not sure if that is applicable to our company or a company of our size because, if I am not mistaken, the company that you're talking about has a huge presence in the U.S. and also I think their pipeline -- sorry, portfolio in the U.S. is also very, very large. What might be the case with companies like that is that there will be stockpiling of COVID-related products in the U.S. So that means some of the other products that they traditionally used to sell well could take a backseat for a few months. So maybe that applies to them. Their logic, definitely, I think, is valid, and it applies to them. But for us, I don't think it's the case.

Okay. That's good to hear. Two last questions. One is the -- this quarter, we have sold certain products at 0% margin. So can you please tell us what will be the percentage of revenue from these products in your top line at the moment?

So it was only 1 product, I'll explain the history also behind that. So this was at the time when hydroxychloroquine was touted as the main go-to product for COVID. And at that time, if you remember, I think even now, if you see, I think hydroxychloroquine export is still banned by the Indian government. So one of the key markets that we work within Latin America, the government itself had requested Caplin to supply the product to them and we found supply from China. And as part of our humanitarian efforts towards helping, I think we did that at a little over 2% to 3% margin only that we -- I think it was net 0 margin, if you consider the freight and all that. And the reward, like Chairman had explained, is that we partake in the same country to almost a $6 million tender with very, very decent margins. The exact figure of that hydroxychloroquine export, we will get back to you on that because it was a couple of months ago. I don't remember exactly the number.

Okay. Okay. So that is ended now. So for this quarter, it will not be the case, right?

No. It was a onetime help that we have done, and we've also definitely seen the reward...

Only to generate a goodwill.

It was to generate goodwill and the same could be reflected in the $6 million tender that we spoke about.

Okay. All right. And the last question is on the R&D guidance for FY '21, if you can share that?

In terms of R&D guidance, I think if you look at the CapEx side of it, we are pretty much done with most of the CapEx that we need in R&D. But on the revenue part of it, we will continue to have high R&D spend, which is very beneficial for the company in the years to come. In terms of guidance on numbers, I don't really have anything to comment on. But we are a very R&D-specific company today, as we speak. So yes, we will continue to spend well on R&D.

Okay. Okay. And one last question, if I may? So you are also planning to enter in other territories. So if you can share broadly the thought process going to other markets and your expectations going forward?

Yes. So as we build up our IP and as we build up our portfolio in the U.S., many of these products also have a very good uptake in similar regulated countries, such as Mexico, Australia and Canada. And many of these countries have the same RLD and same stability conditions as well. So our idea is to create a global dossier, a global scaling for these kind of products. And we are already starting to have discussions with our existing partners that are global, and they're also present in countries like Canada and Australia. So to make sure that we squeeze out most out of our R&D, I think we are targeting these countries.

Okay. Okay. And we will start with OSD products or go with injectables?

No. I think to begin with, especially, if you're talking about global dossier filing, I think we are more focused on the injectables' side of it. But having said that, with the CRO and with the potential U.S. FDA approval that will come with our CRO, we will also be getting into countries like Chile and Mexico with OSD as well hopefully soon.

The next question is from the line of [indiscernible] from Quest Wealth.

Sir, just wanted to clarify on this inventory number again. It's up almost INR 200 crores on a year-on-year basis. How much of the inventory increase has come because of acquisitions?

Yes. As I told you before, the inventory is nothing but actually the paid goods. In view of our acquisition, actually, the goods has come to our account. This one -- what we consider it as a boon, but not a ban. The reason being, it is closer to the customer. Any company, as you would agree with me, there are only 2 challenges, supply side and the demand side. When you go closer to the customer, you handle the supply side challenge. It becomes easy for the customer to come and buy the products that too during the COVID times and that the mobility is curtailed. That's how when we were able to actually increase our deposit in the last 75 days, and it will continue to happen because of that inventory. Hence, I don't consider that inventory as a constraint for the company, on the contrary is a contribution to the company.

Right. Sir, and just to clarify on the HCQ point you mentioned earlier, if I just do back-of-the-envelope calculation that just Q3 gross margin of 53%, it seems your HCQ sales are almost INR 20 crores in Q4 ballpark, is that number correct?

Sorry, what sales did you speak about? We couldn't hear you clearly.

If I take the same margins as Q3, which was 53% gross margins, your -- if we -- it seems your HCQ -- the low margin sales in last quarter of almost INR 20 crores.

I will request CFO to take this question, please.

This is Muralidharan. There are 2 aspects which you have mentioned and this was reason for drop in the current quarter margins: one is this COVID-related disrupt what the Chairman has elaborated; the second one is that, as I mentioned, there were some inventories with the channel partners whom we have acquired. They had inventories at the beginning of the time. So that was cost to debt to their purchase price, right? So the typical trading margin is about 24%, 25%. That's the margin at which they have sold. That has accrued to us. So that is another reason for the drop in overall margin, which I answered the other gentlemen also, it will get marginalized over the current year. Impact will be marginalized over the current year.

The next question is from the line of Pratik Kothari from Unique Asset Management.

Sir, my question is just a little to understand broadly that basically, it seems we are importing from China and supplying to LatAm business, and we are having really very good and high margins. So wanted to understand that we are the only company -- just now you said in this last 16, 17 years, we are the only company who is supplying to these countries. So which are the strengths specifically with us and why other companies are not venturing out there? So just to understand.

Yes. Thank you. If you are aware, ours is a turnaround story. When we say there are 2 things probably, which will help you for a turnaround; either, you need to know something which not many people know or you have to go to countries where other people fear to go. I took the road less traveled. In the process, I went to Africa, initially not to the East Africa where, you know, you see only Indian and Chinese companies. I went to the West African markets, which are Francophone countries where the language, food, everything is different. Then when we started business, I was the first one to introduce generics in Guinea. And when I started this business, people came and told me also about all the physical risks that I would face. Somehow today, I'm in one piece, nothing has happened. Then what happened I moved to various countries like Somalia, finally I landed in Angola, I even opened a restaurant to create my own business, that's how we strengthened. The essence of being actually from survival to growth actually started in Angola. When my sons came into business, I didn't want to show the uncivilized parts of the world. I took them actually to the civilized parts of the world in the form of Latin America, where I didn't see many Indian and Chinese in the pharmaceutical business. And we selected smaller geographies because the entry barriers were very limited. And that's how we started. When we started, we also faced certain risk in the form of physical risk. However, we faced it and the biggest advantage today we have, we were the early entrant, and we're also the early gainers. That's now it has happened. There is nothing phenomenal, actually, in the form of intelligence or high IQ or something. It's nothing but actually one man with courage has become a majority.

Great. Great, sir. Great. Sir, second point, another role you seems to be turning along is entering China. And what -- one of the slides says is that China is in requirement of maybe intermediates as the case because there are so many closing of plants and all. So a little bit more clarification around this thing, what is -- how you see the situation changing? Because China, everybody is dependent on China. We ourselves are importing so much from China and exporting to LatAm. So this different angle if you can explain...

Can you please come again because it's little inaudible. I'm sorry, I could not hear properly. Can you, please, speak...

Yes. Basically, our entry to China, it seems to be very rare from Indian companies to enter China [indiscernible]. So a little bit more on the -- because this also seems to be road less traveled by Indian companies.

You're very right. Very, very true. In fact, I traveled 1 year continuously to find out where exactly the opportunity lies. And as you rightly said, China today, they expect American quality and African price. That's what I found as far as formulation is concerned. But again, I found a space in certain intermediates, which they are not manufacturing in China. That's why we teamed up with one of the distribution company, which is considered as a $14 billion company. When we are about to start our warehousing for the intermediate, the COVID issue started. And coming to formulation, registration and export to China, as you rightly said, it's a long haul. It's not going to be that easy. It's even actually tougher than even U.S., you're very right. But things will never remain the same way as it is today, it might even change. Let's hope for the best.

So you see a bigger opportunity in China.

China, see, I won't say it's a bigger opportunity. One thing which I observed in China, if you can convince the Chinese and if the Chinese makes money through you, then there is a bigger opportunity. Otherwise, he'll only replicate whatever you are doing there. So your shelf life is very limited there. That is China.

All right, sir. And sir, my last question is what's the CapEx we have done to capital Caplin Steriles asset -- Steriles facility?

Yes. I'll ask the COO to answer your question.

Yes. Sorry, the question is on, what is the...

Caplin Steriles -- we just now, I think, answering to someone's question, we said we invested total INR 400 crores during last so many years, so how much we invested in Caplin Steriles facility?

Specifically on CapEx, you mean or both CapEx and OpEx and all of that?

Yes. CapEx, CapEx.

I believe -- and CFO can back me up, because I believe the CapEx part of it alone was around close to INR 200 crores, if I'm not wrong.

Right. And that CapEx is more now. We don't require any major CapEx now?

We don't have any immediate CapEx. I mean incrementally, there might be INR 7 crore, INR 10 crore kind of a CapEx year-on-year, but we are done with our CapEx for Caplin Steriles at least for the next 3 to 4 years.

Next question is from the line of Rishabh Kale from Indsec Securities.

Sir, just wanted to know the -- we have made around INR 70 crores in the U.S. So how many products does contribute this revenue?

So the number of products we have launched is 4 right now. Having said that, this revenue that we've seen is both mix of milestone and product revenue. And we are about to start -- we've already completed the manufacturing of one of the new products that was approved. We are about to start manufacturing for the second new product next week. So all put together, I think, for the next 5 products, by August, we would have launched them in the U.S.

Sir, and you expect FY '21 revenues to be around INR 100 crores approx?

That's the target. Hopefully, we achieve it. And hopefully, we go past it, let's see.

Sir, on the EBITDA margin front, sir, we have seen a huge incur in the research and development cost expenses. Sir, is it fully expensed or has that portion been capitalized?

Yes. We expense out all of the R&D. That's why I think and I think people when they ask why there is a slight, very slight dip in the margins, you will understand that there is almost a 90% increase in our R&D spend on the revenue side of it. We fully feel that this is something that is going to help us on the long term. And this is not very generic R&D. Some of the products that we are working on is very, very niche, and the company will start to see the benefits of this, I think, in the next 2 to 3 years.

So if we take a ballpark number of EBITDA margin, will we be able to maintain at 30% or...

See, I think we've been working at more than 30% EBITDA. I think we've been -- even today, I think we're at about 33% compared to 35% of last year. So this is just a very small dip that I -- you see. And this is despite the fact that we've grown on a higher pace. And this is also despite the fact that we have expensed quite a lot of R&D. We've also had a decent size CapEx also in the last year. So I think compared to companies our size, I think our EBITDA is at a very high level, very healthy level. I also request Chairman's inputs on this.

Today, our focus is more on cash flow. If we can increase our cash and cash equivalent, actually double by the end of this year, then there is a huge opportunity for us to go for a meaningful acquisition, which will definitely answer your questions, actually. In addition to that, we are planning to go for API, and the API business will definitely support our existing business in South America to import. That will increase our EBITDA, which I'm very, very sure about it.

Sir, currently, where are we sourcing our raw materials from?

Most of the raw material from India, 90%, 95%. That's for ROW markets. Coming to U.S. market, I will ask the COO to reply.

So for our ROW markets, most of it is from India. When it comes to U.S., we have a wide range. I think many of it is from Europe. We have some from India. We have a couple from China as well. It's all over the place because you need to go for only DMF-approved sources.

So have we faced any supply disruption in this COVID scenario from -- on the imports?

So in our Rest of the World markets, we have not faced any supply disruption because our business model is not conventional, right? We don't depend on API supply from China. We export the formulations directly out of China. And also our partner in China, who is the largest company over there, even during the middle of the COVID crisis in China, they were continuously working, right, from February 10 onwards even despite all the issues they have faced, they continue to be -- continue to supply products to us. And on the U.S. side of it, except for 1 product, which we have not been able to launch for a few months because of some pollution issues in China, we've been -- we've not faced any supply constraints for the API.

But do we -- we supply -- we import from China, right, as you said, for the U.S. formulation?

Only one product. And that also, they've just turned around the corner. We are expecting the API supply by end of June or early July.

And going forward as we are making an API facility, so will that issue be resolved going ahead? Or are we planning -- are we thinking on those plans?

Absolutely. For many of the products where we have good hopes for, we want to have a secondary source API of our own. And that's not just to do with cost or compliance, but continuity of supply, that is very important. And without putting a real number on it, we want to try and make sure that close to 60%, 70% of all the products that we file have factor-integrated API from our own side.

Sorry, I didn't get the number, 60%, 65%?

60% to 70% of all the products that we file in the U.S., we intend having factor-integrated API.

Sir, and one last question. If I ask you if you are focusing on the U.S. market or the Latin market, which is the Brazil and Mexico, which is the largest market in Latin America, so if we see now, what the focus is on? Is it only U.S.? Or given the condition, given the COVID scenario, are we not focusing on Brazil and Mexico right now? And so the focus will be...

Yes. So we are focusing on Mexico in addition to U.S. U.S., of course, is our major focus. We're just starting, actually -- in fact, started the office. And unfortunately, 2 of our office people fell sick due to COVID in Mexico. Now they are okay, they've come back actually from the hospital. We'll start the registration in Mexico. Brazil, of course, we'll not do it at this juncture. We'll make it actually maybe as the last one. And U.S. will continue to be our main focus.

The next question is from the line of Gaurav Shah from Kotak Mahindra Bank.

Sir, my question is very simple. Sir, this is from a long-term perspective growth channel. Post COVID era, what do you expect? How many years will it take for your current conversion of your top line into bottom line? How many years do you foresee?

This -- look, I can guarantee one thing that post COVID, we'll be one-off actually the fast track -- lot of the companies which are on the fast track. The reason being, A, coming to U.S. market, we are filing our dossier. We are more -- we are concentrating more on filing the dossier rather than actually exporting the product. There are times we give priority for filing, not for the commerce, not for the commercial sales also. And coming to South America, as I told you before, we are getting into bigger geographies, bigger markets, both in terms of private and, this thing, government business. On top of it, in addition to formulations, we have 3 major R&Ds, 2 for the API -- sorry, 4 major R&Ds, 2 for the API and 2 for formulation, 1 actually for the injectables for U.S., 1 for OSD for the ROW market. In addition to that also, we have CRO, and we are all about to start actually our own API production. With all this, we are sure that we'll be in a position to make the company a force to reckon with, that much I can guarantee. We don't foresee any problem after 2 years. The only thing which we are probably not in a position to understand, which you also know well, you know right from a scientist to spiritualist, nobody can give an answer to COVID, and nobody knows the duration and intensity of this unprecedented and uninformed [ pure ] genius, that's it.

Thank you very much. Ladies and gentlemen, that was the last question for today. I will now hand the conference over to Mr. Amey for closing comments.

Thanks, Nirav. And thanks a lot to the management for answering all the questions, and also giving us opportunity to host this call. Thank you. Thank you, sir.

Thank you very much Amey and team and also Haitong Securities for hosting the call. Thank you very much.

Thank you very much. On behalf of Haitong Securities India, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.