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

Ladies and gentlemen, good day and welcome to Q4 and FY 2023 Earnings Conference Call of Caplin Point Laboratories, hosted by Ambit Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Prashant Nair from AMBIT Capital. Thank you and over to you.

Thanks a lot, Tejaswi. Good afternoon, everyone and thank you for dialing-in. I am Prashant Nair, healthcare analyst from AMBIT Capital. I would like to thank the Caplin Point management for giving us the opportunity to host this call. From the management team today we have with us Mr. Shri. C.C. Paarthipan, Chairman; Mr. Vivek Partheeban, Chief Operating Officer; Dr. Sridhar Ganesan, Managing Director; Mr. D. Muralidharan, CFO and Mr. M. Sathyanarayanan, Deputy CFO. I will now hand over the call to Vivek for his opening remarks, post which we can go to Q&A. Over to you, Vivek.

Thank you, Prashant. Hello and good evening to everyone. Welcome to our earnings call to discuss Q4 and FY 2023 results. Please note that a copy of all our disclosures are available on the Investors section of our website as well as on stock exchange's. Please note that anything said on this call which reflects our outlook for the future or which could be construed as a forward-looking statement plus we reviewed in conjunction with the risk that the company faces. The conference call is being recorded and the transcript along with audio of the same will be made available on the company's website as well as the exchanges. Also do know that the audio of this conference call are the copyright material of Caplin Point and cannot be copied, rebroadcasted or attributed or required without specific and written consent of the company. Now, I would like to hand over the floor to our Chairman for his opening remarks.

Thank you. Good evening to all. Welcome to our investor's call. First, the 2 most important salient features of our company despite our strong top line and bottom line growth supplemented by benchmark cash flows are, one, the return on capital employed stands at 26.19%. Two, the cash-and-cash equivalents has increased some INR 17 crore to INR 770 crore in the last 10 years, despite investing INR 650 crores in CapEx during the same period. We are aware that living comfortable in the present business without understanding our queries with a friend or foe is not a sustainable solution. However, the following will make you understand that we are building our tomorrow's today. One, our additional line of subjects we produce a business of INR 80 crore to INR 90 crore from LatAm markets for the current year. Two, the brand marketing that we started in Central America, that is LatAm would also fetch us a revenue of INR 30 crores to INR 40 crores. Three, the introduction of generic business in West Africa might also result in an additional revenue of INR 10 crores. You are aware that we are currently doing only brand marketing in this part of the world. So our new initiatives in CIS and Southeast Asia could also fetch us a business of INR 20 crores to INR 25 crores for the current financial year. Five, Caplin Steriles would generate an additional income of INR 90 crores to INR 100 crores for the current year. Six, Caplin's liquid assets are in excess of INR 1,450 crore, whereas the payables are only INR 160 crore. Now accruals to cash balance has been INR 300 crore each year in the last 2 years and this will definitely continue for the future also. Further, we are aware that the 4 important factors that contributes to sustainability and scalability of company's are, a, men; b, materials; c, machineries; d, markets. Now the men and women. Employee talent comes at a cost, we at Caplin not only offer good salaries, but also performance bonus, ESOP and engage in employee experience. Recently we selected around 100 youngsters from various places and offered them good food and accommodation free of cost and also trained them for our necessary skills for the new normal. Materials, we've already developed 65 API's in our R&D in the last 3 years that consist of both general category and oncology. The AP facility that we bought in Vizag will go on-stream in the current year itself. This will help us in reducing the cost of goods and also consistency in supplying over a period of time. Machinery, currently, all of our new expansions in the existing and new facilities consist of imported machineries from Germany, Italy. These machineries are capable of increasing our productivity without any hassles in future. For example, the capacity of our Bosch line from our Phase II in Caplin Steriles is higher than the combined capacities of 2 of our machines from Phase I. Markets, since the generic business is based on the concept of supply and demand for profitability, it's not the markets that may matters, but the models. We are also aware that 85% of our business is benchmarking cash flows and profits comes from 6 smaller geographies of LatAm due to the business model differentiation. However, we are very keen to introduce the same model of end-to-end in the bigger geographies too in the next 2 to 3 years. We will also cater to the bottom of the company which is what brought us to where we are today. Once we complete the expansions of our oncology, OSD and API project and also the product distribution in the next 2 to 3 year, we are sure of being one and one of the few of these companies of our size. Finally, we sincerely believe that every phase of our business are first something relevant to all our stakeholders. We also understand that it depends on us whether we analyze the positive trends are just under pages it is for you to decide. Thank you. Thank you very much.

Thank you, Chairman. So I would like to give a brief about our regulated market business, specifically the U.S. We are, of course, very happy with the progress Caplin Steriles has made in the last financial year, where we have grown nearly 70% and also achieved the full break even with a small profit as well. Now this is more -- we need to take into also account that this includes all of the expenses that we incur in the way of ANDA filing, the R&D cost, the regulatory costs, et cetera which I believe amounted to close to INR 20 crores, which is a direct hit and now specifically most companies I believe capitalize these expenses, whereas we charge them off with expenses. So achieving the breakeven despite a large regulatory and filing fees is something that we can all be appreciate to work. The mix at this point is still quite healthy we feel, the mix is around 70% product sales and 30% milestone and profit share. In the last quarter, we've received 3 approvals in quick succession. One of these products has just been launched and then 2 more are being launched in the coming few months. As we've explained many times in the past, our all recent deals have been non-exclusive and brings me to the next point where we'd like to inform you that we have just launched our first 4 co-labeled markets in the product, co-capital labeled markets in the product. This -- we will start to see some sales of this in the coming few quarters. We have 8 products under review with the FDA. We feel it can be approved within the coming 3 to 4 quarters and there is also another 13 products under stability right now, which includes 4 complex products as well, including ophthal mix bags and vial. All of these together we are targeting a revenue of an additional 50% growth in the coming year amounting to close to INR 300 crore. We should also -- it will not be out of place to mention that we are sitting on an order book of close to INR 230 crore to INR 240 crore as we speak. So the key is to make sure that we execute the production with high degree of compliance like what we have always maintained. The focus right now is to complete the validation of our new line, especially the ones that Chairman explained, which is high-speed and highly compliant line that we've bought from Bosch. Now we feel that this is going to significantly reduce our turnaround time. It will significantly increase our productivity as well. We are hopeful that this should go onstream by October of this year and that will free up quite a bit of capacity for us to continue doing our R&D work and exit work and stuff, which is the last thing that we need to do before filing for -- filing the ANDAs. We have also made some progress with regards to our front end in the U.S., but I'll be able to give you more information on this in the next 3 to 4 months because quite a lot of this is a work in progress as we speak. We also have some approvals that have come through in Canada and Australia. These are products that are the same for which we have received ANDA approvals in the U.S. At this point, the revenue potential from these are quite small, so we're not really taking into consideration these approvals or anything significantly materialistic. In terms of market share, for a majority of the products that we have live in the market, we have increased our market share. This is despite many of our peers complaining that there is significant price erosion and market share erosion, et cetera. We continue to maintain a lot of focus on our products and we make sure that we are increasing our market share as much as possible without reducing the prices in any way. But of course, the most important thing for us is to make sure that our business model is depreciated because that is the one that is going to be impactful over the long run and that is what is going to make it even more sustainable. This should happen once we start making more regular visits to the U.S., which will start in the coming couple of months onward. In addition to this, once we complete our Line 6, which is a pre-filtering line and also Line 7, which is our lyophilized product line, it will give us a complete portfolio of products and also by which time we will have quite a lot of visibility on our label products and our front in the U.S. as well, along with a good business model differentiation that we have showed in the past with Latin American markets, we feel that this could be a good potential combination for everyone. That's it from my side. I will hand over to our CFO for a brief description on the numbers that we've had in the last year. Thank you.

Thank you, Mr. Vivek. Good afternoon, everyone. This is Muralidharan. I will just take you through briefly on the numbers, as it already available with you, but still I thought I would take you through the salient features. Last year, we delivered good growth which is 16.4%, resulting in terms of INR it is a total increase in the revenue and the gross margin plus other income increase is amounting to INR 109 crores, of which INR 66 crores has been spent on expenses, basically on employee cost about INR 22 crores, other expenses about INR 24 crores, INR 46 crores is expenses increase and INR 66 crores is thrown into the profit loss one directly. So the consistency is evidenced by the CAGR we have reported, which is at 27% for the 10-year period, even at a larger base, it is 22.3% on revenue and 21.1% on PAT, which is more an evidence in the consistent growth year-on-year the company is delivering and the gross margins hover around 55%, which is what we committed in the last year's meeting as well. EBITDA is at healthy 33%, it is about 33% and then PBT is also around 30%. And PAT is about 25%, which is very good margins by industry standard. We happen to compare our process to comparable peers and very, very proud to say that we are ranking #1 in almost all the parameters with respect to the PS be it revenue, growth, be it ROCE which Chairman mentioned, ROE or EBITDA percentage or PBT percentage, okay? Vivek was modest enough to on the regulatory cost, we also spent INR 35 crores on employee costs and R&D consumables, that is also added, our profitability would have been more on pure commercial sense. This year, CSL has been a very impressive growth of 67% and reaching PAT level break even as we have given a column all very good gratification. And as he said, we have very good order book and then the key is to deliver and then take this company forward. And the -- in the front of cash flow and the cash and cash equivalents, Chairman has already mentioned, we are having about INR 1,500 crores worth of liquid assets, whereas about INR 150 crores to INR 160 crores is the creditors that we need to service and INR 732 crores of cash what we have today in CP will take us through the entire office that is planned plan for the current year, as well the accrual that is happening which is planned to be around INR 300 crores as our Chairman mentioned will see us good stead at the end of the year. And this is it from my -- in terms of numbers and we will be happy to take the questions. Over to Mr. Vivek.

Thank you, sir. Prashant, we can open the floor for questions right now.

[Operator Instructions] We have our first question from the line of Girish Bakhru from OrbiMed.

Just on the U.S. thing to begin with, I mean, right now, I mean, given that you have a good order book visibility, I mean, just trying to assess in the longer time frame, I mean, couple of, I think quarters ago we had painted a possibility of $100 million sales by CY '26. So I mean just trying to assess if that number is still quite visible in terms of the launches? And if you could comment on these 3 approvals, Carboprost, Thiamine and Rocuronium, my understanding is Carboprost could be a very decent opportunity given that there are very few players?

Yes, so the overall projection in terms of what we targeted, we continue to believe that this is possible. Of course, we are not able to give you year-on-year what we expect the market is going to be like, obviously, because it is still a very dynamic situation in the U.S. If you consider the approval that we've got recently, we believe they are all very good products, I mean, each of them have different types of markets like you said, Carboprost probably doesn't have too much by way of competition, even timing doesn't have too much by way of competition, whereas a product like Ketorolac or Rocuronium for that matter has more competition, but the volumes are also larger. As a smaller company, we would like to believe that over a longer broader portfolio, we would have a good hold on the COGS. And once we go for backward integration on a few of these products, we will have even more control on COGS as well. So we can be certainly encouraged by what we would see in the market on these products.

Yes, one more thing, I would like to add...

Yes, sure. Go ahead.

Sales which you mentioned from my speech that is likely to come in somewhere by October or November, where the capacity actually in terms of production will be high, that would also reduce the cost of actually groups. Thank you. Thank you very much.

Correct. And when you actually talk about these high-speed lines, higher capacity, you mean there is room to take more market share in existing products, right? Is that the correct understanding?

Yes. So as we -- actually, the truth is, because we have a large pipeline of products that we are working on, we are constantly balancing between what would take up commercial production, what slots would be taken up for exhibit batch if, et cetera. So because we only have 2 lines and we have multiple approvals, this third line wireline I'm talking about, which is basically Line 5, will significantly increase our production capacity and also without getting too technical, there are certain kinds of products called terminally sterilized products versus other kinds of products on accepting products. Now the former is the one that we are going to be doing in Line 5 and we will be dedicating with both terminaling life products, which have larger volumes and quicker turnaround time. So typically, this is what we are trying to achieve with higher productivity and by all means I think you can say that we will be aiming for higher market share because right now we're actually sitting on more back orders than before because of the amount of orders that we have received and also the newer approval.

And when do you expect PFS client to commercialize?

Our first choice is to make this Bosch line ready that we expect to happen sometime in October and November. PFS line will be in 2 months after that.

Just on the non-U.S. piece, this branded generic versus generic mix right now being 25 to 75, I mean you were talking about this in the initial remarks that West Africa launch and brand marketing in LatAm. How should we read this? Is that mix going to change significantly over, let's say, next 3 years and what will be the to the margins?

We will go step-by-step on this. The volumes, as I told you, that might even result in INR 30 crore to INR 40 crore, but the profitability will be quite high. And the advantages that we have today is in the form of bio equivalents and bioavailability, which we can do it in our own Amaris clinical lab, which has been approved by U.S. 58. We've already completed 8 to 10 products now. We are likely to do another 20 products also in the future. As we increase the bio studies, that will actually somehow represent the quality and also it will create a new image for our generics in LatAm. So we are sure that would be entries of our brand marketing over a period of time. The idea is to generate a new revenue stream, but will increase the cash flow and profitability.

And just one more if I can squeeze before I join the queue. On the audit side only where you're mentioning, there's been no audit on the U.S. side, right, since 2019.

We are in the midst of U.S. FDA audit 5 days are completed, 3 more days to go.

[Operator Instructions] We have our next question from the line of Karan Dubey from Anubhuti Advisors LLP.

Just 2 questions from my end. First, regarding the delay in series of our projects, first, Caplin Steriles the commercial batches was supposed to start from first quarter of FY '24, now it has been delayed to third quarter FY '24 and same for oncology, overall soluble dosage for first 2 completed by December '22, now it has also moved further. So what would be the reason for the thing, first? And second, regarding the cash and cash equivalents, in the presentation, it has mentioned INR 772 crores. But according to us, it should be INR 724 crores, so what mistakes are we doing? Can you please provide the breakup of cash and cash equivalents?

I'd like to talk about the project overrun. See normal, this is quite common for any such generation on for net. You see, we, in fact, we had sufficient professionals to take care of it. However, there is a delay, but that has not resulted in a huge cost overrun, but there is a delay in projects. Luckily, we have not been borrowing money to complete the project since there is nothing in the form of action, you know last 2, last in the form of like you know, if you borrow money, then there is the interest cost. But of course, there is a loss in the form of opportunity, but again, we'll be able to ask that we consciously start actually our commercials. And the second one, we, in fact, we went for simultaneously we went for 3, 4 projects, in between, we had to buy a API project and then the priority was shifted towards first Phase II in Caplin Steriles. Now also some 30%, 40% of the work is completed in Phase III. Then we recently bought a key KPI in Vizag, we are trying to actually remodel the whole thing to suit to the U.S. FDA, so that the APA that we manufacture in Vizag can be used in our products that we have already registered in U.S. FDA. So it's happening, it's a question of time. It may happen actually few months later, but that doesn't mean actually we are in trouble, there's nothing such. It happens to every businessman today. Post-COVID days, this creates a new normal in the form of actually difficult to understand the mindset of the people. There are people who are getting sick, there are people whose attitude also slightly changed. So this is part of our new normal, of course, each and every answer from -- has to undergo this one. We that way -- we haven't lost anything as I told you, there is a delay, but there is no denial of opportunity. For your second question, can you please repeat regarding the cash flow?

Yes, in the presentation, the cash and cash equivalent is mentioned of INR 772 crores, but as per balance sheet, the break up, I mean like as per balance sheet we had calculated, it comes to INR 724 crores. So can you...

Now I request our CFO to answer your question.

I will just take the question and then thanks to Ind AS, the cash and cash equivalents, it will take some trouble to figure out for anybody for that matter, this is scattered around 5 to 6 places, okay.

I'm sorry, sir, your voice is sounding muffled.

Am I audible now?

Yes, sir.

Okay. Just let me repeat the -- what is stated. Ind AS adoption, the cash and cash equivalent is not reported in the balance sheet in one place, it is split over 4 to 5 places depending on the -- whether it is current, non-current, whether it is bank balance, whether it is fixed deposit, et cetera, et cetera. I can give just the break up for INR 772 crores. In the interest of time, we don't want to do that, the INR 46 crores what our friend has pointed out is part of other financial assets, intercorporate deposits. We also -- about couple of years back, we had large mutual funds, post Franklin Templeton fiasco, we withdrew everything from mutual funds, we are not into mutual funds at all. We invest our funds in scheduled bank and AAA-rated company deposits and the intercorporate bonds actually. So INR 46 crores, I think our friend has missed out, is sitting in INR 71 crores other financial assets. Yes, that will add INR 72 crores.

And one more question, sir, from my side, so in -- other expenses has been dropped INR 52 crores this quarter from INR 62 crores last quarter, INR 64 crores last quarter. So what is the reason for drop in that?

Primarily, last quarter, we paid a huge facility fees of INR 7 crore, INR 7.5 crore in CSL, which is paid in October annual fee, okay? So which is not repeated this time. So that's the main reason for that.

We have our next question from the line of Chirag Fialoke from RatnaTraya Capital.

Congratulation to the -- and for the continued execution, good luck. I have a couple of questions just on the Central America and the LatAm business. Firstly, could you share what the gross margin of that business right now must be running out, even if it's an approximate number for the year or for the quarter?

I will leave this actually to our CFO to answer this.

Sir, if you say, 54.5% to 55%, that is average what we get.

And for Steriles, what would be this quarter's EBITDA number, sir, if you can just share that as a bookkeeping question.

EBITDA number for the quarter?

Yes.

INR 135.33 crores.

Sorry, sir, I couldn't hear that, can you repeat that please?

INR 135.33 crores.

This is the EBITDA number for steriles?

No, no, are you talking about Steriles or the company, when we talk, we about Caplin as a group.

Okay, okay. Sterile?

Steriles EBITDA, just give us a minute, I will just...

You want steriles EBITDA for the quarter, quarter 4?

Yes, yes.

It is around INR 8.5 crores.

So this year that means we would have probably made close to around INR 23 crores -- INR 33 crores, INR 34 crores of EBITDA in Sterile right for year-on-year?

For this year, sterile EBITDA is around INR 20.3 crores.

And just back to the question then I had for Chairman sir. You outlined a large number of initiatives that might come on board in '24, things that you have been working on in the past and will bring fruits in '24. Could you just talk about the Latin America business a little bit more, sir? I'm going back to your opening remarks, if you can just detail out a couple of more initiatives that you are taking there, obviously, growth has been sluggish in that part of the business for the last couple of quarters. But how do you see going forward? And particularly, is there any geography that is under stress because of any macroeconomic or macro indicators? That will be my last question. Thank you.

Yes, to tell you, to put it in a nutshell, if you look at actually in the form of a holistic approach, overall, actually, the cash flows and profits under the thing, I think, I think we are very, very comfortable. As you rightly said, in some geographies, there is a slight actually decrease or increase that happened because of the focus, sometimes what will happen, given the business profile and the profitability sometimes from the private market or the government market are little actually competition, extra competition. These are things which would clear actually certain amount of decrease in profitability and sales. However, we, in fact, we are not only getting into generic business, we're also getting into the various areas of brand marketing. And to create a niche to our brand marketing, as I told you before, we are adding our bioequivalence and bioavailability which normally only the big companies do it in their smaller geographies, like especially the multinational. The Indian companies, big companies they are not interested in smaller geographies, they always go bigger geographies for the cash, Mexico, Brazil, Argentina, Columbia that kind of start. So these particular market where we are today, we will continue to grow, but only thing post COVID, our focus has been actually on the U.S. market, it's not only the market, but also the facility and as you know well last 4 years there was no inspection, so were all focusing actually on the U.S. FDA inspection which is happening now. So going forward maybe one to 2 months from now you all will get into the market, we will also increase actually the sales and profitability. So is there anything you would like to want me to continue please?

No, this is very helpful sir and if I'm not wrong...

Please, Please go ahead.

Well, in your opening remarks, if I'm not wrong what you said is that the soft gel line will help us being around INR 80 crores to INR 90 crores this financial year and INR 30 crores to INR 40 crores on brand marketing and initiatives that we have taken in LatAm geographies, is that broadly right?

This is broad guidelines and suppose which we are suppose -- we'll definitely be able to do it actually in the current year, we'll be able to increase the sales.

One last question from my side sir, on the core business, outside of Sterile, if I just look at the core outside of Steriles business, what would you think is a sustainable EBITDA margin for that part of the business?

Our core business as of today, as you know well is LatAm business. Today, generally, whether it is U.S. or other markets, as I told you before, it is not actually the technology or other things which really met -- except in community areas of maybe a biological product or biosimilar. And most of the products whether it's in U.S. or in any of the regulated market, the competitors are there and the world is moving towards monopoly. The only way which we can create actually a substantial differentiation is to create a value monopoly. And we look at it this way, there are only 2 things that are permanent in the world, one is change and the other one is poverty. As long as you cater to the bottom of the pyramid, by removing the intermediaries and the bottom of the pyramid business itself will become a creamy layer and that is what actually has helped the company to where it is today. So we'll continue to do the same business, we'll try and do the same thing in the regulated markets, ROs and the bigger geographies. Only difference is it takes time. It's not like actually the ROW market where the re-station gets completed in 6 months, their own places where we have studies, their own in fact actually expect the kind of those years and the regulatory hurdles that we have in the biggest geographies is not there. However, we will continue to grow in this domain and we will also go for something long term in the regulated markets where the big boys are ruling currently.

Any views on the margin front, EBITDA margin for the core business? Is there any view there that you might have?

So far we don't have any issue in the form of margins and there will be small challenges in the top line. Top line challenges is going to happen, maybe for 2, 3 years, but our cash flow and the profitability will continue to remain, as I told you in course of my talk, last year and last before we in fact -- what I mentioned in the form of accrual to cash balance in the form of INR 300 crores every last 2 years has been happening and it will continue to happen. That means most important as you understand I hope you will understand with me, is you have bottom line and cash flow, top line is vanity, bottom line is vanity, cash is, I hope you would agree with me.