Cohance Lifesciences Limited (COHANCE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '24 Earnings Conference Call of Suven Pharmaceuticals Limited. Before we begin, I would like to state that some of the statements made in today's discussion may be forward-looking in nature and may involve risks and uncertainties. A detailed statement in this regard is available in the results presentation that was sent to you earlier. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Cyndrella Carvalho, Head, Investor Relations, from Suven Pharmaceuticals Limited. Thank you. Over to you, ma'am.

Thanks, Joel. Good evening, everyone, and a warm welcome to you all on Suven Pharma's Quarter 3 FY '24 Earnings Call. Let me introduce you to our management team present here with us today. We have our Executive Chairman, Mr. Annaswamy Vaidheesh, our Managing Director; Dr. Prasada Raju, our CEO; Dr. Sudhir Singh, our new CFO, Himanshu Agarwal. Our management team will dwell into industry dynamics, strategy and operational highlights for 9 months and quarters. Following that, CFO, Himanshu, will provide in-depth insights into our financial performance. Later, we'll open the call for Q&A. Let us proceed with the opening remarks from our Executive chairman, Mr. Vaidheesh.

Thank you, Cyndrella. Good evening, everyone. We extend a warm welcome to all of you on our Q3 FY '24 earnings conference call. To start with, at a macro level, our third quarter results were in line as expected. As indicated in the previous quarter, near-term macro challenges persist due to industry-wide inventory destocking in specialty chemicals and impact on growth due to COVID supplies in the base for pharma CDMO. This is likely to keep our next few quarters' performance soft. However, we remain very confident about our midterm. We have focused on fostering customer relationships, optimizing operations and strategically positioning ourselves for long-term growth. We continue to have engaging conversation with our existing and potential customers on the early and late commercial projects. The current RFQs pipeline sustained a higher pace and we are witnessing traction in the RFQs conversions. We are striving towards business opportunities in the medium term. As you are aware that we have also announced our ESOP scheme, reinforcing our commitment to employee benefits and talent retention. The resolution is ongoing. ESOPs are intended to not only foster a sense of ownership and motivation, but also aligns directly with our growth objectives, creating dynamic environment. By linking employee interest with Suven's pharma growth, we aim to deliver value to both our employees and shareholders. On midterm, we continue to be optimistic and all our energies are driven behind what we think is a good growth opportunity in the midterm and long-term. So with that, I'll hand it over to Dr. Sudhir Singh.

Thank you, Vaidheesh. Welcome, everyone, on this earnings call. As Vaidheesh mentioned in his speech, the RFQ pipeline and conversions are progressing well, as we strive towards medium-term business opportunities. Our focus lies on prioritizing strategic customer relationship, operational optimization and fostering long-term growth. The ongoing progress of our R&D lab and Suryapet expansion, operational capacity expansion is consistent with our effort towards 7% plus growth trajectory. Our business development team position us for continued success in strategic growth opportunity as several discussions on early and late stage project management -- project engagements are ongoing. Despite near-term softness, our confidence remains strong in achieving the medium term growth. Now I will request our Managing Director, Dr. Prasada Raju, to open his remarks.

Thank you, Sudhir, and our Chairman, Annaswamy Vaidheesh. Very good evening to all of you, and a warm welcome to your company's earnings call. Our priorities for the coming year include persistent engagement with customers, building our respective teams, ongoing investment in infrastructure for EHS and ESG as a part of our strengthening our business fundamentals, consistent cost improvement and strategic investments in technology and capability building is an important priority. Apart from this, we are also focusing on extensive M&A pipeline. Near-term macro challenges persist due to industry-wide inventory destocking in specialty chemicals and impact of COVID supplies in the base. This is likely to keep our next few quarter performance soft. However, we remain confident about our medium term. We are pleased to welcome Mr. Himanshu Agarwal as our new CFO, bringing with him an impressive career spanning over 28 years. He has previously held key roles at Bennett & Coleman, Huhtamaki; Akzo Nobel India; AstraZeneca and ICI India. I will now invite our CFO, Himanshu, to share the financial insights. Thank you.

Thank you, Dr. Prasada, and thank you to management team for welcoming in the Suven's family. At the outset, I would like to express my gratitude to Mr. Sunder and Mr. Subba Rao for their significant contributions to Suven's success. Moving to the results. I think as expected and as informed earlier, we are at Suven adjusting to a global destocking in the spec chem business as well as to the COVID molecule base effect. I think as has been communicated earlier, our nature of the business is such that a quarter-to-quarter performance is not really reflected of the 2 business performance. Our business performance is much better understood and reflected through the YTD numbers. Therefore, I will first cover the 9 months of FY '24. In the 9 months of FY '24, our revenue from operations was at INR 798 crores, reflecting a decline of 18%. However, as mentioned by Dr. Sudhir, the spec chem business is down due to global destocking and we still have COVID molecules last year base effect. If you were to exclude these 2 elements from our base, then the underlying business revenue is at a growth of 35%. And the pharma CDMO business, excluding the COVID molecule, has grown at around 2%. Despite the softness in the revenue due to macro headwinds, our adjusted EBITDA is at INR 348 crores, which is at a very healthy EBITDA margin of 44% and ahead of last year adjusted EBITDA margins of 41%. Similarly, the business adjusted PAT at INR 257 crores is at a margin of 32%, which is well ahead of last year adjusted PAT margin of 29%. As Dr. Sudhir said, our capacity expansion at Suryapet is going well. We had committed INR 200 crores on Suryapet and we progress in the right direction on that. And similarly, we have, as mentioned earlier, allotted a CapEx of around INR 30 crores to INR 40 crores in our new R&D facility, which continues in progress in line with our plans. As mentioned earlier, the quarter-to-quarter do not reflect the key nature of our business. Nevertheless, I will still cover the quarter 3 financials as reported. As you would notice in the press release, our quarter 3 reflects the costs associated with the new hires and the ongoing implementation of new systems and processes in the results. Our revenue from operations is INR 220 crores, which has declined 38%. While overall growth has been impacted by spec chem destocking and base effect of COVID molecule, excluding these 2 elements, the revenue grows at around 2%. The adjusted EBITDA is in line with the previous year EBITDA. So EBITDA margins is around 36% versus the last year EBITDA margin at 38%. Similarly, the PAT at INR 57 crores comes with a margin at 26%, in line with the last year margins of 28%. Now I will request Dr. Vaidheesh if you could give us a summary.

Thank you, Himanshu. So we anticipate that the near-term macro challenges will persist due to industry-wide destocking, which I mentioned at the beginning itself. And this is likely to keep our next few quarters performance soft. But as I mentioned, we remain confident about our midterm. In summary, our transition to new management is complete, and we have strengthened our senior leadership. And despite short-term challenges, our focus on customer engagement, strategic initiatives and medium- to long-term macro tailwinds remains unwaveringly strong. And with this, we thank you for your time and open the floor for Q&A. Thank you.

[Operator Instructions] The first question is from the line of Gokul Maheshwari from Awriga Capital Advisors.

I just wanted to check, what was the revenues from the COVID molecule in the same quarter last year, which you are referring to as a high base?

So Gokul, I mean what's important is that what we have highlighted that our business, excluding the COVID molecule, in 9 months is at positive 2%, okay? I mean, unfortunately, we would not be in a position to give an individual molecule by molecule level information.

Okay. Sir, the previous management had indicated that the COVID revenues in your FY '22 was INR 120 crores. So this was a bit of a surprise that in FY '23, there was no COVID revenues as such. So are you saying that there is no revenues in the Q3 FY '23 quarter for COVID? Because you are referring to the 9-month number as year-to-date figure.

Which is correct. Q3 FY '23 did not have a COVID revenue number.

Okay. In that case, the CDMO business for the pharma CDMO business has seen a 33% drop in this particular quarter. Is there any particular reason why there is such a sharp drop in the business in this particular quarter in this business?

No, I don't think so I have given you any number in terms of a pharma CDMO drop. I think what's relevant, as I said, that we have very categorically said that this business is not representative from a quarter-to-quarter perspective. We will have to look at this business from a YTD perspective because otherwise, the business will not give a sense. And see, that's very important for us to understand that we have to look at this business from a YTD perspective rather than quarter-on-quarter perspective.

Just the second question is on the Cohance merger, you mentioned in your annual report that there is a plan to merge these companies. Could you give an update on what is the strategy on that front? And what's the progress?

So from a Board perspective, we have passed a resolution for evaluation. And we are in the process of evaluating that merger. We will update you once we have more understanding.

The next question is from the line of Darshit Shah from Nirvana Capital.

Sir, I just wanted to know, so a few quarters back, there were around 5 molecules in Phase III trials. So would the management be able to tell us what this -- how many molecules are currently in Phase III ongoing?

Thank you, Darshit. As of now, we don't get any new update of the movement. As you understand, it's a long term in nature. And quarter-on-quarter, significant movement cannot happen. And still they are at the same stage.

Right. And so earlier, we used to get details on the number of projects we are currently ongoing and the phase-wise details. So would the new management be kind of able to provide those in your presentation and now so that we get an idea of how many projects we have added and which are in which phases. Your thoughts on that?

Darshit, just to let you know, as you understand the kind of innovative customer that we deal with, we are abide by certain NDAs, and we prefer not to dwell onto their pipeline status. And you would have to kindly bear with us. We would not be able to dwell deeper into it.

Right. And sir, we are seeing that given the global situation starting right now, we expect next few quarters to be soft. So when we expect normal growth kind of to return to the business, providing that none of the Phase III molecules kind of go into commercial in the next few quarters?

Darshit, as you understand, currently, we still are watching to understand how the bottom out of entire decline happens. We feel we might be at the middle of this cycle. Unless we clearly get a sense of whether it is completely bottomed out or not, we would not be able to really tell you how much time it will take for recovery.

Got it. And sir, lastly, can you help us understand what this adjusted EBITDA, I mean, the old inventory provision that you have kind of provided in the recent presentation?

Yes, I'm requesting our CFO, Himanshu, to take this. Himanshu?

Darshit, as you would notice, I think we have in the press release mentioned that the old inventory provision has been adjusted for around INR 134 million, so which is INR 13.4 crores. So that's the number that has been provided for as a onetime provision.

So this is just for this onetime -- for this quarter itself or it will be a recurring thing now henceforth in our kind of presentation and press releases?

No. So this is -- as I said, this is a onetime provision for the old inventory that we have assessed at this stage.

[Operator Instructions] We have the next question from the line of Mayur Parkeria from Wealth Managers India Private Limited.

Am I audible?

Yes.

So sir, I just had 1 question. And I understand that this is a qualitative remark and you may not, but just to understand, there has been a reasonably long period of consolidation and which we have been looking for as a company also. So if you can give some perspective about what do you mean when you say that the near term is challenging, but in the medium, long term, you are there. So does the medium term mean 1 year plus? Or is it a long-ish period than the medium term or less?

So Mayur, just to give you a perspective, there are 2 important challenges are happening. One is on the specialty chemicals side, which is definitely a cyclical phenomenon is happening on the destocking...

Sir, ex of agrochem, if you can -- I understand. Sorry, just -- I understand. I should have clarified in the question. I mean ex of agrochem, how do you see that, sir? CDMO pharma is also only 2% kind of growth. So ex of that, how do you see?

Pharma CDMO has multiple challenges to address. One is definitely, as you understand, we have to depend on the customers' growth and customers will eventually depend on the clinical success of the molecule. Number two, we also look at some of the stock and inventory optimization levels. So these are the 2 important phenomenons. It's very hard for us to really predict when a Phase III molecule can be ready for a readout and followed by the NDA filing and approval. Hence, we stay relevant to our customers and wait for them to have a successful clinical closure, which normally takes anywhere between 1.5 to 2 years' time. That's how we are not able to exactly define what would be the terrain at which the success comes.

So sir, at a broad level, you are still not in a position to give us any indication about what does the medium term mean? And how many quarters we still go through the selling side? Is that right?

Yes. Just from pharma CDMO on a YTD basis, you said that 24% is the number. I think it's not 2%. Just wanted to clarify.

YTDs. Sir, just one clarification. Sorry, I misunderstood. There was a question, Q3 of FY '23, there was no COVID molecule, right?

No, no. I think there is a clarification. Quarter 3 of previous year has COVID molecule. It is there in the base of the COVID molecule...

Right. So that is what I was also coming because your reference just went a little high, that is why I got confused. So correct. So Q3 FY '23 had.

Yes. Yes.

Okay. Sir, last question from my side. We have been trying move the business, I mean, apart from the CDMO and agrochem, we have been trying to enter into intermediates and -- sorry, the API chain also and there was a more integrated kind of play for us. Where are we in the discussion stage with the client? Or is that still there? Or is it only going to be mainly after the merger happens? Or is it somewhere which -- how do we see that aspect of business playing out over the next 1 year?

Currently, Mayur, there is 1 active project for graduation from a registered starting materials to API by one of the innovative company. Project is still active. But as you understand, it has to follow through certain procedures, including quality checks and also customer visit to the facilities, which is active, but we cannot exactly decide by when it will be over and it will be converted into commercial. Second part of your question, you're also referring to, can we convert that into formulation and be a forward integration, we don't expect even the midterm also that is going to happen because we, as a country, don't have a precedence of providing formulated product to innovative companies. I hope it clarifies your question.

[Operator Instructions] The next question is from the line of Ashish Soni from Family Office.

Sir, in the opening remarks, you spoke about some M&A activity and some RFQ discussions. Can you throw some better light on it, just want to understand in detail what are our thoughts there?

There are two parts you mentioned. One is on the M&A side. As you understand, we have surplus cash in the balance sheet. As a part of our overall growth strategy, we are also evaluating potential possibilities of inorganic ways to expand and accelerate our growth aspirations. Currently, we are actively pursuing and looking for a few technology platforms, which can differentiate ourselves from the existing crowd and also stay very relevant to our existing customers. That activity is happening right now.

And what about this RFQ, like you said that RFQ pipeline is increasing. So when do you see some impact over revenues, maybe 6 months, 12 months? Can you throw some light on that as well?

As you understand, RFQs definitely, we have seen improved inflow, but as you understand, it takes time for RFQ conversion by the customers also. We expect in the next 1, 2 quarters, some of the results should come in. It will not take more long either way, whether we win or we lose, we will get to know in the next 1, 2 quarters' time. That's a common cycle that we follow.

And M&A, when you said you're exploring some inorganic opportunities. So do you see something closing in the next 1 year?

That is the aspiration that we have, but we would not be able to create any speculation at this stage unless we are clear. But definitely, there is a healthy pipeline of M&A opportunities that we are pursuing right now. Appropriately, we'll come back to all of you.

And last question. There have been a lot of capabilities and capacity upgradation we have done in the last few years. When do you think we can optimally utilize to our strategic perspective in the next 2, 3 years this capacity what we have built or upgraded?

So again, this is an ongoing exercise of current capacity utilization in the case of various units of Suven that we have. More importantly, Suryapet, new capacity expansion has been one more addition to us. Currently, we are planning for in the next 2 years' time, we should be able to really bring this capacity to an optimal level. That's our internal endeavor. Today, we have enough capacity available for us.

The next question is from the line of Darshit Shah from Nirvana Capital.

Sir, just on the M&A side. So we understand we have INR 1,000 crores roughly around that amount with us. So when you're talking about newer technologies and platforms that we are looking at. So this is over and above the Board consent that you've probably got to kind of merge Cohance also. So this is over and above what we are planning to probably looking at Cohance and other relevant technology and platforms also. Is that understanding correct?

Darshit, currently, we are looking for what is the M&A opportunity, which can be more meaningful and strategic for driving the Suven growth is a top priority right now. Hence, your understanding is correct.

And sir, lastly, you've been talking about a 5-year vision for the company. So when can we expect something to be out in the presentation for the investors?

Darshit, currently, it is at a draft stage. As you understand, last quarter call, we were mentioning it is work-in-progress, but definitely, our teams have kept a lot of effort, and we have reached to a draft stage. We are contemplating how can we really convert that into a final blueprint. Sometime towards the closure of the year, probably we can come back with some specific outcomes of the overall blueprint. Otherwise, we are at an advanced stage of closing it.

[Operator Instructions] The next question is from the line of Ashish Soni from Family Office.

Yes, just regarding -- I think you're talking about near-term weakness. So what's your CapEx plan? Are we putting that on hold or do you want to still continue with that if you can some throw lights on that for next 1 or 2 years?

Ashish, as you heard us consistently today, our endeavor is to deepen our existing relationship with customers and fill up the current capacity which is relatively suboptimally used right now, then appropriately plan for the CapEx. That's how we are looking for right now, which means your understanding is very correct. Midterm, we try to decide based on our overall strategic options in which assets that we have to have a CapEx allocation.

But any guideline on maintenance CapEx, which will definitely be required in next 1 year or 2 years?

So normally to maintain our facilities, we continue to have the CapEx, which we will -- historically, we have been spending the same amount will go. I'm talking about more of a growth CapEx, we will wait till we reach to a certain stage of optimal usage of capacities.

When you say optimal is like 50% sort of thing or lower than that?

Normally above 50% is the right trigger point. As you understand, Ashish, the CapEx has 2 components. One is building a civil structure, second one is equipment installation and qualification. Infrastructure of civil takes a long time. Hence, our trigger point is to keep the infrastructure of civil first, then wait for the product level mapping and the customer level mapping comes into play. So we decide after 1.5 to 2 years once we reached 50% of the capacity, we start building a civil structure. Again, in our business, our 80% is 100% of utilization because we do not want to run with more than 80% of the capacity occupancy because we will lose the flexibility to the customers. That's how we look at the CapEx decisions.

And one last question. This M&A, are you planning in India or outside of India?

Currently, at least first few assets, we are hoping to have it in India right now. But again, we'll come back with specific answers, as Darshit was also asking, you should allow us for some time. There is a healthy pipeline. We'll get back with specific answers soon.

The next question is from the line of Gokul Maheshwari from Awriga Capital Advisors.

I'm just trying to just -- sorry to harp on this on the COVID thing. I'm just referring to your Page 24 of the annual report, where you had mentioned that and I quote the growth seems to be subdued owing to the one-off revenue from the COVID-related projects in FY '22, which was absent in FY '23. If we take these numbers out, the growth of the number is aligned with your growth business estimate. So I'm just a bit curious and confused in terms of what base are you referring in terms of COVID molecule revenues for FY '23?

So Gokul, let's take this offline because I have not had the opportunity to look at what you're looking at.

Okay. This is the Page 24 of the annual report, which you may -- I'm happy to take this offline, but I'm just quoting it that it's in your annual report, which is mentioned.

Sure.

The next question is from the line of Mayur Parkeria from Wealth Managers India Private Limited.

Sir, first a follow-up on the last one because again, it has cropped up, we would request you to finally issue a press release if there is any change in the understanding we have. It will help us all of us because it is in terms of overall disclosure also. So if there is any change in the requirement, request you to kindly release a press release which will help us. Secondly, sir, on the generic side...

Mayur, if you can just hold for a moment, can you just elaborate? We could not follow your request, please.

Sir, I was saying, referring to the last question because whether -- with respect to the COVID base -- COVID drug base, there is some confusion. So instead of having only one analyst as offline, request you if you can issue a press release, if there is any change in your current disclosure requirements, if any, sir?

It's more of a clarification. It doesn't have any materiality. However, we take your point. We'll ensure that there is no information as I mentioned. Thank you.

The question actually I had on the generic and formulation side. There has been some uptick which you are seeing after, again, quite a long period of that opportunity not being and our tie-up with or our understanding with Rising Pharma, which was there. So how should we look at that segment from 2 perspectives? One is, are we going to now see a sustained growth coming up? And secondly, in the initial phases, are the margins on that a little back-ended as we -- the minimum sale and then it percolates down to the bottom line later phase? Or does it -- is it more evenly spread as we go ahead overall in terms of segments? If you can just give us some understanding of how we see that in the next 1 year or so as far as this formulation is concerned.

So I'll try to divide this question into multiple pieces. One is definitely the extent of commercialization of some of the filings, which have happened in the past, we see progress happening right now. And as we speak even last quarter, which is Q3 ending December of '23, we had 3 ANDAs approved related to 2 products. And we also seem to have the commercialization also of the molecules happening. And the way we look at here, last year, it was Casper asset is actually making a loss. And this year, we expect loss can be minimized. And next year, definitely, based on the extent of commercialization of these approved ANDAs, definitely loss-making to a profit-making will always happen. Number two, in terms of the margin, it always follow the revenue. And in some cases, there is an extent of composition of profit share happens in the business. On an accrual basis, it also gets recognized. However, this is a continuous ongoing activity. Obviously, it will recur going forward. These are all the 2 points. I hope it answers your question.

So sir, current set of molecules which have gone into commercialization are more evenly spread on margins or they will as profit share, current share which we are seeing an uptick, sir?

Difficult to share that right now. But definitely, the composition has both. Composition of molecule comes with both, hence, margin also will be evenly spread. That's what I'm trying to say.

[Operator Instructions] Ladies and gentlemen, I would now like to hand the conference over to Mr. Cyndrella Carvalho for closing comments. Over to you, ma'am.

Thank you, participants, for your time. Any questions unanswered, please reach out to the Investor Relations of CDR at your convenience. Thank you so much.

Thank you. On behalf of Suven Pharmaceuticals Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.