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

Ladies and gentlemen, good day, and welcome to the Caplin Point Lab's Conference Call for Q2 FY '21 Earnings Conference hosted by Centrum Broking Limited. [Operator Instructions] I now hand the conference over to Ms. Cyndrella Carvalho, from Centrum Broking. Thank you, and over to you, ma'am.

Thanks, Lynda. Good morning, everyone. On behalf of Centrum Broking, I Cyndrella Carvalho thank the management of Caplin Point Laboratories Limited for giving us this opportunity to host the Q2 FY '21 earnings con call. Today from the management team of Caplin Point Laboratories, we have with us the Chairman sir, Mr. C.C. Paarthipan; Chief Operating Officer, Mr. Vivek Partheeban; Managing Director, Dr. Sridhar Ganesan; Chief Financial Officer, Mr. D. Muralidharan; Deputy Chief Financial Officer, Mr. M. Sathya Narayanan; Company Secretary, Mr. Vinod Kumar. At the outset, I would like to thank the management for this opportunity again and congratulate on delivering good set of numbers in these unprecedented times. Now I hand over the con call to Mr. Vivek for their opening remarks. Over to you, Vivek.

Thank you, Cyndrella. Hello, and good morning, everyone. Welcome to our earnings call to discuss our quarter 2 and half yearly results. Please note that a copy of our disclosures are all available on the investor section of our website as well as on the stock exchanges website. And also, please do note that anything that is said on this call, which reflects our outlook for the future or which could be constituted as a forward-looking statement must be reviewed in conjunction with the risks that the company faces. Please allow me to hand over the floor to our Chairman, Mr. Paarthipan, to talk about the major developments and key initiatives, specifically on Latin America business. Over to you, Chairman, sir.

Good morning to you all. With your permission, I will now give you a quick brief about our company, Caplin Point. And the COO will give his presentation of the U.S. business in Caplin Steriles later. You are aware that 85% to 90% of our business comes from Latin America. Hence, I will start with the starting points of our business from Latin America. Let me list out the 7 things first. Number one, simple generics. When we went to this part of the world, we now had an extraordinary technology that's why we call it as simple generics. Number two, ordinary people. when I say ordinary people, this includes the promoter, mediocre promoter with the low key professional. That's how we went to this part of the world. Number three, extraordinary physical risk. We are aware actually the kind of physical risk one has actually in this part of the world because this is where -- this is -- Central America is the place where you have all kinds of drug trafficking. Number four, unregulated markets that, of course, helped our registrations faster. Number five, less expensive approach to manufacturing, which means most of our products are outsourced, and we had one simple factory to manufacture the generics and export to Latin America. Number six, differentiated business model. We never went to appoint distributor there or importer. We went there actually and created a business model in the form of we not only manufacture and export, we also control and manage the input distribution and the last mile, which really helped us to give the best price to the bottom of the pyramid. When we cater to the bottom of the pyramid, we were in a position to give good quality, variety, novelty at the best price, which has created a stickiness factor among the BOP. Finally, fearless execution led to limitless possibilities, the lesson learnt is if you are unwilling to risk the unusual, you would have settled for ordinary. Now we are on the way from ordinary to create an extraordinary status for Caplin Point. We're also aware that we can't simply subsidize our way to prosperity. Hence, let me first highlight some of our unique areas in a nutshell. Number one, maximum business from minimum populations of Central America. We are aware that the best company from India who does an export of $150 million in the bigger geographies of Latin America for formulations, whereas Caplin has exported $100 million worth of goods in the last year. And number two, goods, people and promoter are close to their customer in Central America and other parts of Caribbean and South America, unlike other Indian and Chinese companies of our size. The outcome is the cash flow in the form of INR 180 crore in 180 days. Also, we have generated reasonably good profits and comfortably we are solvent. Number three, unique geographical presence. There is Latin America, which you are aware which is not very close to India and China. Hence, we had that unique geographical advantage. Here, the competition of our size, especially the company of our size is still few and far between. Number four, new market creation in addition to creating the market share in the existing markets. We are now moving to a well-diversified product portfolio with the help of the new formed R&D and R&A. Expansion to bigger geographies in Latin America, such as Chile, Colombia, Peru, Mexico and Brazil in the coming years. This is how we turned around the company from 0 to 1. Otherwise, we would have remained as 0 forever. We always choose to take the road less traveled and make it as a high road for growth. We don't operate on the fringes of quality. As you are aware, that there is no partial pregnancy. Similarly, there is no partial quality trust are integrated. Hence, we have introduced the benchmarking behavior in our manufacturing facilities. It is time to optimize our growth potential, understand the basic premise of learning everything we need to know about strategic planning, what it is, why we need it and how to implement it, which alone can get our company up for success in the coming years. Now let me give the list of activities that are people and product specific, also the market and manufacturing specific for future. The first one is the asset-light model to asset-heavy infrastructure from internal accruals. Here, I mentioned the major one that -- which also is our USFDA facility. We are aware that the U.S. business is a 1,000 mile journey where we don't see many companies of our size from India and China. It is also true that the infrastructure -- the investments I mean in the CapEx and OpEx is instrumental for the dip in the ROC, ROCE and few other ratios. But I promise you, this is a dream destination and there are very few Indian companies, especially the big -- other than the big companies, which are planning to enter into this biggest market of the world. And we are very close to reach the destination, and the revenue stream will increase say 1 to 2 years from now, and I will also list out the reasons for it. Today, we don't do anything from scratch in our Caplin Steriles. We do it from experience. Now that we have put our people first and the best people give us cross-pollination of ideas due to their exposure to various domains. All the initial hiccup is almost over, be it in the form of capacity constraints, low margin products, API challenges and we are now moving towards more number of registrations with a new introduction of complex generics. The details of which, of course, COO will present next. The creation of various divisions such as API and formulation R&D, regulatory affairs, CRO, helped us to finalize close to 150 to 160 products for our future registration in various countries of Latin America such as Chile, Peru, Colombia, Mexico, Brazil in addition to our existing markets. We also have plans to get these products registered in South Africa and Russia. Now that we are also in the process of creating a centralized warehouse to beat the stock out situation in Central American market and also to handle the effective deliveries for the new markets too. This will help us to efficiently handle the supply chain constraint and increase the business while reducing the demand side shocks. With the help of our R&D, we will also eliminate the low-margin and noncritical generics and will -- and our focus will be shifted to unique products to ensure more profits as the competition for the same will be few and far between. Number 5, business model differentiation in the bigger geographies. Tender business is the major mainstay in all these bigger geographies. Hence, we'll also focus on tender business in addition to our core competence of concentrating on the private markets. Our entry to API manufacturing will also help us to get into this business in the near future. Number 6, our focus will be on the following: a, micro focusing to create an employee and customer experience. We are one of the very few companies which offers ESOP at par rate. Today if the share is quoting closer to INR 500, the ESOP is offered to our senior executives and some of the contributing employees at the rate of 2. That way, we are in the position to attract and retain the talent that creates the employee experience. And to create the customer experience, since I told you the business model and the way in which we have created the stickiness factor, that itself shows actually we have created the customer experience at the bottom of the pyramid in Latin America. The macro focusing is staying -- sorry, staying solvent in the years to come too; b, enrollment of new people for projects, R&D and manufacturing to update and upgrade our systems; c, creating new revenue streams every year to achieve sustainable progress; d, low-cost manufacturing in the sense making our system more efficient in the area of purchase of raw materials and changes in various process, which includes existing formulas of the product that we sell in Latin America. Now let us look at our plans for new projects to achieve the growth in the form of geometrical progression in the next 24 to 30 months. Now we are sure of creating a cash resource of INR 350 crores to INR 400 crores in the current financial year, and the same will be deployed as follows: number one, a general category facility for regulated markets in the form of tablet, capsule, ointment, and maybe liquid orals; number two, an oncology facility for oral and injectables for regulated market; number three, hormone facility for injectables, orals and semi solid and I hope you are aware, there are not many injectable facilities for hormone available in the country, especially for the regulated market. Number four, penem facility for regulated markets. And also, it will not be out of place to mention that our 10X Healthcare portal shows continued traction in generating business through retail pharmacy in places where our boys are not able to reach due to COVID-19. Finally, our major goals in the form of truly novel alternatives; a, KSM to finished products. KSM when I say is the key starting material. You are aware the country also is focusing on import substitution rather than depending on the import from the country, in the form of 70% to 75% of the import comes from China. Hence, the focus is more on intermediates, key starting materials, intermediates, APIs to finished products. This will become an end-to-end technology platform for Caplin. And we are aware that we already have an end-to-end business model, that we will expand our marketing subsidiaries, which will not only import and distribute but will also go for the last mile; C, digital intervention; B, we'll also go for a meaningful acquisition from the internal accruals with a second wave of cash reserves in future. Gentlemen, the world is full of fighters and pushers. If you have low profile, the competitors will walk all over us. The competitors will walk all over us. The steps that we take now is for the real business transformation by leveraging the business opportunities. We believe in making money with respect. When others invest money and money, we are -- sorry, when others invest time and money, we have invested our life in the toughest parts of the world to create value for Caplin. Thank you. Thank you very much. Now it's time to the next gentleman, Vivek.

Thank you. So I will give a little update on Caplin Steriles, the U.S. business, as Chairman was saying. So we continue to see decent revenue pickup in the U.S. So when we compare the first half of last year versus first half of this year, our revenues have gone up by about 30%. On the same angle, the milestone revenues that we received last year is higher than this year, that is in line with our strategy that we will only be signing nonexclusive distribution deals in the U.S., because we are planning to have our own front end presence over there shortly. For the filings for this year, we have done about 3, and we will -- sorry, we've done about 4, and we will be doing 1 more before end of this financial year. What has happened is because of COVID, we've had some shortages in terms of men and material supply. We've had some restrictions over the last 6, 7 months. But thankfully, in the last 2 to 3 months, we see that has changed significantly, and we have almost at about 90%, 95% manpower today. And our qualifications, expansions and everything in Caplin Steriles has been completed. Our scale up on exhibit batches which is basically the last stage before filing an ANDA has once again resumed starting from last week. So our filing target for the next 12 months is we hope to file at least 14 products. Ideally it would have been about 10, but 4 products that were pushed over from this year, we will be combining that to the next year also. With regards to capacity expansion, as I was saying, we have completed it, and there are 2 more expansions that are pending to be done. This is getting into the pre-mix bag line. The machine is getting manufactured, it is getting fabricated in Germany right now. It should reach us some time in early next year, and we are hoping to start taking trials and qualify the machine by end of the first quarter of next calendar year. We are also putting together plans to get into pre-fill syringes. This has been a very niche area, and we've got very good expertise within our R&D on many pre-fill syringe products, not only for the U.S., but also for other countries like Brazil and Mexico. So we are trying to put that also in place within the first half of probably next year. With regards to market, I think many will have questions about what kind of slowdown was expected. And yes, because we are a hospital-based manufacturing product, right? We are manufacturing hospital-based products. So when it comes to that, because of not many outpatient services that was happening in -- specifically in the U.S. between the times of, I think, around March to around September of this year, there was a little bit of a lull in demand. But we see that has gone back up. Right now, the demand is coming back. And I think when it comes to forecast from our partners, they also see that despite the second wave coming in, the outpatient services has not stopped. So we remain hopeful that we should be in a position to finish the year strongly. In terms of pricing, as you all know, yes, there is a little bit of pricing erosion in the U.S. year-on-year. But for many of the products that we are doing, it has stabilized. We have not seen a specific product being -- showing more erosion or anything like that. With regards to backward integration, as Chairman has explained, we have already completed the detailed engineering and design drawing for our API plant. This is going to be near our injectable plant in Chennai. We expect this to be completed by 12 to 15 months from now. And this will be catering to not only the U.S. markets, it will be also catering to the ROW markets. We have made some last-minute changes to the plant to expand capacity a little bit more that we can simultaneously do 3 products at the same time. We expect to file our first ANDA within the next 12 months. And this will be done through a contract manufacturing company. And then the idea is once our facility is ready, we bring that back into -- transfer that back into our own plant. In terms of complex products, as we have mentioned in our press release, we have signed 3 agreements with partners of the U.S., two of them are for complex injectables and one is for an ophthalmic suspension. We expect to file these products in 18 months. And then hopefully, the approval happens within 30 to 32 months from now. These are products that don't have any competition in the markets right now, but we hope that it remains that way with very, very minimal competition by the time the products are out in the market. With regards to non-U.S. countries, as explained in our press release, we are about to sign agreements with a couple of companies. One of them is our existing partner that has a presence in Australia also for 3 products there. And then with a new partner in Canada, is one of the top 3 companies and one of the fastest-growing companies in Canada. We are going to sign with them for about 7 products. These are not new products, by the way, these are our U.S. products that we are basically extending into non-U.S. markets. And as Chairman was saying, our business has always been about end-to-end. So on the one side, we are getting the backward integration. On the other side, we want to fast track our entry into the U.S. We see that there is significant opportunity there to increase our margins and increase our market share potentially. So when we had initially envisioned something around 24 months, we are probably going to speed that up and move it up by at least another 6 to 8 months from now. So we expect having a presence in the U.S. by middle of 2022. Apart from that, everything else is going on. We will likely see that once the next wave of projects have been filed, we will start looking at much more complex number of products. And then the specific number of products per se, will start to come down. We will not be filing 15, 20 products a year, we will be focusing on about 6 to 7 products, but products that are difficult to manufacture, which see much, much less price erosion in the U.S. And we are trying to take whatever measures that are necessary to make sure that we are not depending only on the U.S. from the specialty. That's why we are putting together plans in place there. We are getting into Mexico and Brazil and Canada with this plan, which would be additional streams of revenue, hopefully in the near future. So that's about it from the U.S. side. I think this might be a good time for us to open the floor to questions please.

[Operator Instructions] Our first question is from the line of [ Aditya ] from [ Ingrid Asset Management ].

So a basic question on the capital allocation. So Caplin Sterile, obviously have big plans in the injectable market in the U.S. and I also read in your investor presentation, you are putting more capacity for oral solids as well. And you also spoke of your front end presence in U.S. in the middle of 2022. Basic question, when you look at the other pharma companies doing this business, the U.S. business, it doesn't seem that those companies are able to be immensely profitable, to be honest. I mean, if you look at your -- some of the larger peers in the Indian pharma industry, they get a majority chunk of the revenue from U.S., but the percentage of profit they make from that geography is actually quite low as per what they tell us. So with that backdrop, how -- why is or how well thought is this U.S. entry? I understand scale. That market being the largest market, you can get scale in that market. But how do you think about the profitability in that market?

Yes. I will take this question and then I'll pass on to Chairman also for final comment. So in the U.S., with whatever little knowledge that we have, everything goes in cycles, right? When we're talking about our entry, our envisioned entry in the U.S. that was some time around 2010, 2011. And at that time, obviously, everyone wanted to get into the U.S. because there was huge amount of shortages, and there was a demand and supply gap. And then everybody wanted to put in plans to get into the U.S. whether -- but of course, most of it was in oral solid dosages, injectables I think even today, you see much lesser competition. In terms of pricing, yes. So we get asked this question quite a lot, right? So when you're comparing, I think, 10 years ago to now, it is a different space, of course, because most of the companies, especially Indian companies that were early entrants into the U.S., they were used to making 5x, 6x kind of margins. That is agreed. But even today, I would not say that the margins are low or anything like that. The products that we are doing, the lowest margin products that we are doing, if you take out our expenses, we are still grossing around 50%, 40% to 50%. And the prices have stabilized to an extent where there is no chance for it to go down further because then nobody wants to be in those kind of products. So I will accept that, yes, compared to about 7 to 8 years ago also, I think the prices have come down. But I will not say that they are unprofitable. They still remain very much profitable. And if you compare that to our Latin American business, yes, our Latin American business is a little bit different in the sense that we control everything right from sourcing down to selling. And we are trying to replicate that in a small way in the U.S. as well in the coming years. So I expect that our profitability will go up once we have our own front end in the U.S. But there has always been a demand and supply gap in injectables. There continues to be a demand and supply gap in injectables. So I don't see this as something that we have made a mistake or anything like that. Whatever that we envisioned in 2012 was a cycle, what is happening today in 2020, that's the cycle as well. So we need to make sure that we are putting together some plans in place that makes -- show that even though we are not the earliest entrants, we need to make sure that as a late entrant, we are one of the last ones remaining sustainable in the markets in the longer period.

I would like to add some more points here. I'm sure you are aware that U.S. is the #1 market in the world. And if you observe what has happened actually to the #1 and #2 generic companies of U.S. And although -- it is better to actually mention the name so that it becomes easy for you to understand. The #1 was Teva and the #2 was Endo. They were the #1 and #2. And today, they are not the #1 and #2. They have given way for other players actually to make it in U.S. Why I'm telling this and what will happen actually after a point of time, people who are actually doing maximum business, one day their overheads actually will increase and they have to think of leaving the generics and get into specialized areas. Today, we are the last man standing, which means last one to get affected or the least one to get affected, because I don't think there will be enough number of people of our size who will get into U.S. market. This is one -- one of my humble submission. Number two, we have not been leveraging the debt. Everything, whatever we have invested in the form of CapEx and OpEx has come from our internal accruals. So which means even if it is slightly delayed for 1 or 2 years, we can withstand and will make it. Number three, you are aware that Fidelity also is 25% partner here. In fact, the other day I said, coffee never know, it will taste nice and sweet before it met sugar. So the role of sugar is played by Fidelity today. If Fidelity did not see an opportunity in Caplin, they would not have invested also to a 25%. So this is what actually few things, which I would like to convey to you, sir.

Thank you for that comments. So just -- I mean, on the comment that Vivek made. So Vivek, I agree with you the gross margins would be 40%, 50%. The concern that we investors have had historically with the U.S. market. And you are right, I mean it goes in cycles, but the last 4, 5 years has been a down cycle. And in that down cycle, what we have seen is despite 40%, 50% gross margins. And if you take the R&D expenditure that you have to incur to keep the engine running, and then if you account for the gross book for the asset that you build, and then if you account for the working capital, which is a very high inventory today, if you incorporate all of this, the return on equity you end up making on that business, which I guess will come from your Caplin Sterile financial. The return on equity has been really below cost of capital for most of the companies that we have seen in the last 5 years. So that was just a limited point, and I hope you guys do very well. On the injectable side, again, if I just look at the number of competitors who are building capacity. I understand it's a segment, which has shortage today, I understand it's a segment which has had shortage for the last 10 years. But if I just look at the amount of capacity chasing that space. So again, you can count on your fingers all the large pharma players in India, all of them have building -- have been building injectable capacity, compliance of which is a challenge. But as and when these guys get compliant, they can't remain noncompliant forever, right? So as and when these guys get compliant, there will be a glut of capacity coming to flood the injectable market. So how do you sort of choose your products when you look at the pipeline, how do you choose your products. How do you ensure that there is no overcapacity?

I would like to answer to this question first. Yes, sorry. I would like to answer to this question first. I fully agree with you that we will not be in a position to say that we would make it in a very big way in the U.S. But as long as there is no debt, as long as we have the capability to withstand the pressures that we are facing there, one way or other definitely we will make it. On top of it, what we are doing today, we are getting into the bigger geographies of Latin America, which is our forte, like Mexico and Brazil. So while most of the companies concentrate on the tender business, we will concentrate on the private market. Today, we have around 500 to 550 people working, the Latins working actually in South America. Even the biggest companies, except one or two who have the factory in this part of the world, they don't take this amount of people. Why I mentioned this one, these people will help us actually to expand in this type of markets without taking people either from India or from actually the local market. So we have certain advantages. We will have to use the advantages that we have in South America. That will definitely help the company, help Caplin Steriles to strengthen the bottom line.

Fair enough, sir. So just one last question. When do we -- sorry. Go ahead sir, you were saying.

Please, please go ahead. Please go ahead.

Okay. So one last question. How much is the capital expenditure we are budgeting for the U.S. market over the next 3 to 5 years, if you have made a capital plan there?

I would ask Vivek to answer, yes, please.

So in terms of CapEx for the next 2 years, we are pretty much done with most of it. Like I said, whatever that we are doing from now is incremental CapEx, the pre-mix bag line that we're getting into, that's going to be at the cost of around INR 9 crores to INR 10 crores, And the PFS line as well would be something similar around INR 6 crores to INR 7 crores. So very large CapEx. We don't have any plans over the next 2 to 3 years and unless something changes drastically. But we feel that whatever expansion that we have done so far is good enough for the pipeline of products that we have till 2024

Right. And I also saw your R&D budget moving from INR 6 crores to INR 36 crores over the last 6 years. How would you forecast your R&D budget over the next 2 years, Vivek?

See, as Chairman has explained during this call, in the initial periods, we were going after what we internally call as guerrilla marketing. So today, we are a company that embraces technology. And we know that the path forward for us, especially when we're getting into niche area such as hormones and anticancer and antipsychiatry products and all that, we need to embrace R&D as much as possible. In terms of numbers, I would say that probably whatever level that you're seeing in the R&D right now, that is likely to continue.

We'll take our next question from the line of Vinayak Mohta from Augmenta Research.

Congratulations on a great set of numbers. I had 1 or 2 questions. One was what can in future be the contribution from the U.S. as a proportion of total revenues, maybe like somewhere 3, 4 years down the line?

Yes. What we have given out in the past is that in the next 5 years, we expect the U.S. to contribute to around 30% of our overall revenue, 30% to 35% of our overall revenues.

Okay. And sir, second, I saw in your press release, you had somewhere mentioned, there was -- there's a possibility of an acquisition or greenfield expansion in India or Mexico. So any color on that within what lines are you looking for in acquisition, it would be?

I request Chairman to take this one.

The acquisition in India, probably in the API area. The acquisition in Mexico today, of course, it has to be a meaningful acquisition. First, to look at it in the form of a liquid and ointment facility for which you don't have to go for clinical studies. So if we come across something like that, yes, we'll be in a position to go for it. Number two, we also have plans to go for CRO there. We have a CRO in Chennai. The bioanalytical will remain in Chennai. We only have to go for clinics there. So if we also get a company with a good number of registrations, then there is a possibility for us to actually acquire a company in Mexico, too. It all depends, it all depends upon the timing and as I told you before, it should be a meaningful acquisition.

Okay. Sir, just a follow-up on this. Like will it be -- if in case the acquisition comes through the funding would be through internal accruals or you would be looking for a mix of debt and accruals?

In fact, today, we think of only internal accruals. If we find something extraordinary, then we may think of actually a mix of debt and equity both.

We'll take our next question from the line of Hardik Shah from Prabhudas Lilladher.

My question is just an expansion of the previous question. So sir, what will be the breakeven levels of revenue for the U.S. business and by approximately how much time we'll be able to achieve that?

Yes. We feel that the minute we cross around INR 125 to INR 130 crores in Caplin Steriles, that will be the point where we will probably do a cash flow breakeven. In terms of timing, of course, with COVID still progressing here and there, we don't want to give very finite number, but we hope that over the next 18 months we cross that threshold.

18 months. Okay. Okay sir.

Yes.

Sir, my second question is with respect to the LATAM business. So now, sir, have we finished the process of acquisition of the channel partner, sir? Or is it still pending?

We almost completed the channel partner acquisition. And we don't have anything in the near future. Maybe if we come across something very interesting, we may think of it maybe in the next financial year.

Okay, sir. And sir, will you be able to share the total amount of cash spent on this acquisition?

Yes. It's already -- I will ask the CFO to answer to your question, please.

Yes. This is Muralidharan. We have already shared the details in the annual report. It's about [ INR 2.66 million ] is the acquisition for one of the major [ partner ]. We have to had a mix of processes. We have invested into some companies. We have bought over the shares of minority shareholders in some companies. It's a mix of both. So we have invested on par value of whatever is the net worth on the day of their acquisition.

Okay. Okay, sir. And sir, as on date, do we have any COVID-related products in our portfolio, sir?

It's; only on the immunity side, like a vitamin -- nutritional products, but most to the COVID products are repurpose drag. In fact we developed one product, then we decided not to pursue because it's not that promising to be very honest with you. Today people who survive, we don't know whether they survive because of the drugs or because of the immunity or because of both. So when such is the case, there's no point in going for a product whose shelf -- whose life may be limited, hence we have not been pursuing anything like that.

So sir, is this the same product you're talking about for which we were expecting our approvals?

No, no. That is...

This is semi product, semi product. We have developed this product and then we didn't pursue it actually for the commercials.

Okay. Okay. And sir, we have already filed for approval for some COVID-related products also, right?

So this is a COVID-related hospitalization product and we are expecting approval for it in the next coming months, hopefully. It is basically an anesthesia drug and this is in the U.S.

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

Good morning. Last quarter, we talked about 10% to 15% cost reduction for top 10 products. So if we can get where have we reached in achieving that kind of cost reduction?

I will request the CFO to take this question.

Yes. Actually, what we mentioned last time was when we get into our own API manufacturing that will -- and chairman was mentioning about 2 products, which contribute 20% of sales. We are working on the API ourselves, backward integration. So that is when it will happen, that is yet to certify. Despite that, the gross margins have improved compared to the last quarter because of the value-added products being introduced and the operational expenses have stabilized as compared to the previous year. There was a spike in the last couple of quarters that has been stabilized. And as a company in India, our operating expenses have been very much under control, and we have reduced our expenses. This will all add to the profits in the coming quarters and years.

And specifically on that question, Shrikant, so this is an ongoing process, right? So typically, what happens is you will start to see that the benefits accrue to the company probably in 3 to 4 quarters. So these are, of course, easy gains for us because these are all approved products, and we have the technology to get into the backward integration of it. But these are very large-scale kind of APIs. So it will take at least 4 quarters for us to see -- yes, it takes time for us to see that -- the benefit into numbers. But actually we are still also working on reduction of the acquisition costs as well, acquiring the API is the key starting materials. So we are actually working quite aggressively on that as well right now.

Okay. Okay. And another question is on the bag line and ophthalmic line. So when realistically do you think that we will start commercialization? And what would happen if we're not able to get approval soon and what will happen to the next year's internal projections?

Yes. Ophthalmic will be much faster because we are talking about -- we've already filed an ophthalmic product in the U.S., and we were supposed to have an inspection in June, but obviously, COVID that hasn't happened. We are remaining very bullish on ophthalmics, because this is an area that is not very crowded, number one. And number two, the pricing also seems to be largely stable. We have in our pipeline, at least around 9 ophthalmics, of which 4 will be filed in the next 8 months. So in terms of pre-mix bag line, this will take little longer. The machine itself is likely to reach us only by February of this year. So we might be filing our first product in the U.S. by end of next year. So in terms of commercials that we can expect from these 2 lines, I would say, end of 2022 for ophthalmics and end of 2023 for the bags.

Okay. Okay. And if I may ask another question is on the working capital. So we have seen higher inventory levels and receivables after we acquired distributors. So when we can expect normalization of working capital?

Okay. Sure. Let me give you actually an answer to this question. If you look at actually the business of various companies, it differs from one company to another company. Our business is something unique. I would request you to look at it here. In all humility, I claim that probably ours is one of the few or the only company to achieve a business of close -- to achieve a business of, say, around INR 1,000 crores in the current year, mainly from the ROW market for generics. So when such is the case, what happens, there are times we will have to keep the inventory closer to the customer. Then only your cash flow will be faster and good. That's the reason I even told you in the last 6 months, we were not -- were in a position to increase the cash flow by INR 180 crores. So sometimes, if the goods is -- the inventory is more, that doesn't mean the inventory lies in Chennai. Inventory is there in the market. The receivables, of course, the receivable doesn't actually -- I think it's at 94, do you feel is still higher. Receivable is at 94 days. Do you feel it's still higher, please?

I particularly wanted the question on the inventories. We have -- after we started -- after we acquired distributors and there was a spike. And then what we understood that in 6 months, it will normalize. So specifically on inventories, if we can get.

This is Muralidharan. Yes, what chairman has told, inventory has got more than 3 parts. One part is the raw material and semifinished goods, finished goods lying in our manufacturing facilities. That has not gone up substantially. The second part is, the inventory in transit. Because it takes anywhere between 45 and 60 days depending on where it goes, from India or China to reach the end destination. From then on, it will take another 15 days before the goods are made available to the warehouses, because custom clearance, quality checks all happen. So 60 days is already taken in transit time, then the goods have to be sold. So if you see inventory has come down substantially, INR 60 crores has come down in the last 6 months. When we say normalization, the question was relating to the contribution market. What we said was, the Q4 of last year, the contribution margin dropped by about 3 percentage points because of 2 reasons: One, we had to sell certain products at cost because of the government requests on COVID related products; second was on the -- our subsidiary is selling the products at pre-acquisition costs. That is gradually coming down, the normalization is already visible in the H1 contribution margin going up from 52% to 55%. That is what we mentioned. Normalization is the process will take at least 4 quarters. Once the stock is exhausted by the market, this will get -- I mean either it will stand at 55% or 56% is what we are confident of.

We'll take our next question from the line of Nikhil Upadhyay from Securities Investment Management.

I had 2 questions on the stand-alone on our -- the LATAM part of the business. Now if I look at it over the last 6 months, there has been a significant reduction in the receivables. And I think that's a good thing, which we have seen in the strong cash flow generation. If you can just help me understand what has helped us in reduction. Because as I understand that when we were buying from the distributor, we were buying out the distributors, the money would have been released as the retail stockist inventory gets liquidated, which would have meant the receivables would have increased. So is it like now the business is stabilizing, and this is the receivable days, which probably will sustain? Or if you can just help me understand there.

Yes. I would like to answer to your question. See there are 2, 3 reasons to it. Number one, we are increasing our registration, especially products which are very complex. Initially, as I told you, in the course of my speech, we went with simple vanilla generics. Today, we have the best of the best R&D. Hence, we are in a position to register products, which -- for which the competition is few and far between. So when we go to the market, they are in a portion to understand that we are very uniquely placed. Then we also demand if you want this type of products, you'll have to pay us. That really helps us. One is actually the unique products. The #2 is actually the range which we have. Number three, of course, even the COVID situation also has helped us to certain extent because we kept the goods closer to the customer, as I told you before. These are the 3 reasons that really helped actually the cash flow.

Sir, just continuing then probably the third part of the reason which you have mentioned may not sustain on a longer term. So probably the receivable days of -- the significant reduction in receivables, which we have seen -- is going to go off, right?

I got your point. I'll give you the answer to it. As I told you before in course of my actual speech, we are preparing 150 to 200 actually dossiers now. These are from various categories such as oncology, hormone products, psychiatric and neuropsychiatric and penem as I told you before, in addition to the generic products, generic -- generics that we have in the market. Even COVID or no COVID, the way in which we are registering the products is more of actually the new products and complex product that will increase the volume of business, increase the cash flow, increase the profitability. The only issue it cannot happen overnight, it will happen actually 2 years from now.

Got it. Okay sir. Secondly, sir, on LATAM part of the business. Now one of the things, which I understand, like with the reason why we were able to make such a high-margin were because we had a lot of -- like a mix of outsource come in-house production where outsource was much larger. Now as we are going for increasing production of putting the API plants and bringing in-house production, it's purely on the LATAM part sir. Do you see there could be escalation in the cost or on the revenue line also, you see there is some setoff which we can get as a result, the margins can sustain.