Divi's Laboratories Limited (DIVISLAB) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the earnings conference call of Divi's Laboratories Limited for the Q4 financial year 2021. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. M. Satish Choudhury. Thank you. And over to you, sir.

Thank you. Good afternoon to all of you. I am M. Satish Choudhury, Company Secretary and Chief Investor Relation Officer of Divi's Laboratories Limited. I welcome you all to the earnings call of the company for the quarter and year ended 31st March 2021. From Divi's Labs, we have with us today Dr. Murali K. Divi, Managing Director; Ms. Nilima Prasad Divi, Whole-time Director, Commercial; Mr. L. Kishore Babu, Chief Financial Officer; and Mr. Venkatesa Perumallu, General Manager, Finance and Accounts. During the day, our Board has approved results for the quarter and year ended 31st March 2021, and we have released the same to the stock exchanges as well as updated the same in our website. Please note that this conference call is being recorded and a transcript of the same will be made available on our website. Please also note that audio of the conference call is the copyright material of Divi's Laboratories Limited; and cannot be copied, rebroadcasted or attributed in press or media without specific and written consent of the company. Let me draw your attention to the fact that on this call our discussion includes certain forward-looking statements, which are predictions, projections or other estimates about future events. These estimates reflect management's current expectations of future performance of the company. Please note that these estimates involve several risks and uncertainties that could cause our actual results to differ materially from what is expected or implied. Divi's Labs or its officials does not undertake any obligation to publicly update any forward-looking statements whether as a result of future events or otherwise. Now I hand over the conference to Dr. Murali K. Divi, Managing Director of the company, for opening remarks. Over to you, sir.

Good afternoon and thank you, everyone, for joining us for Q4 and annual results of financial year 2021. I hope that all of you, your families and friends, are safe and well during this severe second wave of the pandemic. While the spread in the second wave is faster due to various mutations of the virus, it is an optimistic and commendable sign that our government is acting swiftly and approving emergency authorizations for multiple treatment regimes. On another note, vaccination drives have started across the country, which will help us build the much needed vaccine-induced immunity [ against ] hospitalization. Moving on to our operating efficiencies. The company have put in place several measures to ensure business continuity, focusing on the ongoing expansions to creating a [ steady, complete ] platform. Having said this, we at Divi's are highly committed to protecting the health and well-being of our employees and their families. We are ever grateful and continue to applaud our employees' dedication and [ participations ] during these uncertain times. At Divi's, we were able to get most of our employees aged 45-plus vaccinated. We are implementing rigorous safety measures across all the manufacturing units; and will continue to do so until further guidelines from WHO, CDC and local governments. Being in the forefront of pharma industry, we clearly understand the need to fight COVID-19, and we have resumed our efforts to doing our part in helping communities around our manufacturing units. Divi's team is on the ground, undertaking sanitation activities in the communities and villages around its manufacturing units. Supports have been provided to government hospitals, community health care centers by providing hundreds of oxygen cylinders, concentrators; several health care equipment such as nebulizers, fumigation machines, oxygen cylinder regulators, oximeters, et cetera. In addition to these initiatives, we have also converted 2 of our [ PFK ] nitrogen plants to oxygen plants and installed them in 2 major hospitals. We'd like to believe that, despite all the challenges, there is hope. And Divi's shall continue to take measures to contain COVID-19. Together, we can fight the spread of COVID-19. During the current financial year, assets worth INR 1,179 crores have been capitalized. These have reflected the benefit of operations from the CapEx programs taken up by the company during the last 2 years. Capacity increases was completed in levodopa, pregabalin, mesalamine, carbidopa. These products are stable and are growing. The debottlenecking and backward integration programs taken up during the last 2 years have also become fully operational. And it has reduced our dependence on key starting materials; besides achieving productivity and increase in being a competitive and [ assured supplier in products ] like gabapentin, naproxen, valsartan, [ levetiracetam ]. INR 710 crores of capital works-in-process projects of custom synthesis and generic products are still under progress. New generic molecules with current dosage [ sale ] of $20 billion are selected, technologies developed, while reagents and regulatory submissions are under progress. Patents are expected to be -- expire between 2023 and '25. Additional contrast media products prospects are under validation. The new major fast-track custom synthesis projects with innovators is commercialized. Commercial shipments have taken place from stream 1, while [indiscernible] started at stream 2 and will be followed by commercial production at DCV-SEZ. The third stream of these new APIs was planned at Unit-I, as the innovator has given clearance to supply to domestic VL partners. Thank you.

Hello, everyone. This is Nilima Divi. I welcome you all to Divi's Labs earning call to discuss the results for the fourth quarter ending March 2021 and financial year ending 2021. I hope that each one of you, along with your family and friends, are safe, considering the continued existence of COVID-19 pandemic. The second wave has again impacted the operations across various businesses. I would like to update the scenario with Divi's. On the manufacturing front, we are currently operating at approximately 86% production capacity while following all the safety protocols. The second wave has amplified the logistical challenges attributing to lockdowns, [ port transitions ], blank sailings as well as the recent Suez Canal incident. We are anticipating that the challenges will continue as the global efforts to roll out vaccine puts pressure on already strained logistics resources. On procurement side, there are slight hiccups in incoming supply chains. However, we are able to mitigate most of these issues because of the significant investments that were made over the past 2 years towards backward integration to basic chemicals for most of our generic APIs as well as geographically diversifying supplier base. Moving on to operational performance, I am pleased to state that we have achieved a consolidated total income of INR 1,812 crores during the quarter, reflecting a growth of 24% over the corresponding quarter of the previous year. Profit before tax for the quarter amounted to INR 669 crores, a growth of 42%. We earned a PAT of INR 502 crores during the quarter, reflecting the growth of 29% year-on-year. Looking at the financials FY 2021. We have achieved a consolidated total income of INR 7,032 crores during the year, reflecting a growth of 26% over the previous year. Profit before tax for the year amounted to INR 2,666 crores, a growth of 47%. We earned a PAT of INR 1,984 crores during the year, reflecting a growth of 44% over the previous year. We have capitalized assets of INR 11 lakhs 79 crores for the year, of which capitalization this quarter was INR 173 crores. As of the end of the current period, we have cash on book of [ INR 2,156 crores ], receivables INR 1,677 crores and inventories INR 2,145 crores. Rupee has been quite volatile during the year under review. We have a ForEx gain of INR 4 crores for the quarter, while we have a ForEx loss of INR 4 crores for the year. Exports for the quarter accounted to 90%, and for the year, it's 88%. We continue to have normal business distribution across regions. Europe and U.S. accounted to 71% of our revenue. Product mix for generics to custom synthesis is 60% and 40% of the revenue, respectively. Constant currency growth for the quarter has been 31%, and 24% for the year. Our nutraceutical business for the quarter amounted to INR 156 crores, and 594 -- INR 595 crores for the year. During the year, the company had paid 1-month salary as incentives amounting to INR 34 crores to employees in appreciation of their dedication and hard work during the COVID-19 pandemic, who attended to their duties in plants and office, following COVID appropriate behavior and safety protocols, in order to ensure production of life-saving medicines. Thank you.

Thank you, madam. With this, we would request the moderator to open the lines for Q&A.

[Operator Instructions] The first question is from the line of [ Havish from Apex Capital ].

Yes, sir. Sir, I have 2 questions. First one is you said that the ratio of API versus custom synthesis is currently 60% to 40%, so what is your vision going forward? What will be the segmentation as -- we are expecting from it? And my second question is, do we have any price control on generic APIs? Like how do we manage the pricing of the contracts related to generic APIs?

Thank you. Your first question, the managing between generic and custom synthesis. Our aim is 50-50. The reason, in the generics we have an opportunity to decide when to make, how much to make; and utilize the equipment when they are idle or produce the product and [ stock ] when we have capacity available. Whereas in custom synthesis, the customer, the big pharma, he pretty much dictates the uses [indiscernible] that he would like to have in a particular month, particular quarter or so much of quantity. So giving the first preference to the big pharma, we can move around our generic products to attain maximum productivity, [ to apply ] the equipment to the maximum productivity. Now [ there's all this ], but what happens is that it can be 40-60. Either generic is 40% or custom synthesis 40%. It keeps moving, depending upon which products are moving faster, either custom synthesis or generics. It always keeps fluctuating. And we -- and we are not focusing in any direction that it should be generic more or custom synthesis more. Your second question. How do we keep our generic API [ clients ] and focusing on future -- API pricing. I thought you were talking about future APIs. So you are talking about generic API pricing, how we can sustain, how we can price. We -- the products where we entered 25 years ago, we are still in the same products. We did not leave any product. We only kept on adding more generic products. We started with the 2 products, naproxen and dextromethorphan; and kept on adding products. We became leaders in the world producing anywhere from 60% to 90% of the demand of the world for several generics. The only reason is that we are backwards integrated. We are -- we make our own starting materials for assurance of supply; and for the best cost; and more importantly, for the best quality or the consistent quality. As a result, we will be able to support our generic formulator without interruptions, so hence we are preferred, but the major is that we don't -- we are the only generic API manufacturer who do not make formulations and who do not compete with the -- our own customers. Every other API manufacturer entered into formulations, started competing in the market with the -- with their customer. As a result, we are able to command the premium price for not being in formulation; and playing a complementary role, not a competing role.

The next question is from the line of Prakash Agarwal from Axis Capital.

Congratulations on a great set of numbers, sir. Question is on the CapEx. So how much of the 18 billion CapEx that we had called out 2 years back is completed? And how much of it is -- you mention it's operational, but how much of the capacity utilization is happening now? And what is the CapEx outlook for future? That's my first question.

Okay. The INR 1,800 crores you mentioned. Actually it was INR 2,500 crores since 2018, when we started these capital expansions quite fast. At that time, in 2018, our turnover was 500 crores -- INR 5,000 crores. It's a PAT of -- PBT of INR 1,800 crores and PAT of INR 1,300 crores. This year, we reached INR 6,900 crores, a 38% increase; INR 2,627 crores of PBT, that's 46% increase; and INR 1,954 crores, a 50% increase. Now it's not that we have utilized all the capacity we created. We have still INR 700 crores of CapEx still to go into production. They are either in the [ just ] completions or validation of the progress. Or qualifications are under progress, but the investment that is already done, as Nilima mentioned, the 86% on an overall capacity is the utilization. Maybe some of the older products, mature products, we also tied with the debottlenecking, as much as 90%, 95%, whereas some of these newer products, we just added capacity. And we were able to sell only 10%, 15%, 20%; and still we have to sell maybe another 75% of the capacity. I think that is where the real [indiscernible] is the maturer products only we debottlenecked. We did make our own starting material for assurance of supply; and to prevent any threat from China saying that, "We won't send it," or they increase its price 2x, 3x.

And the CapEx outlook, sir?

CapEx outlook. The -- we -- the court has -- the Kakinada project is the main one. Court has given the final judgment, saying that the [ pharmas have ] to take the 10 lakhs. And they have dismissed all the claims. And we have all paid the 10 lakhs to the [indiscernible] or to the government. And we are supposed to be -- this happened in the last 1 week, and they should be handing over the rest of the land without any disputes. And as soon as the second wave of pandemic calms down, we are able, we will be able to allocate construction teams, whereby we should be investing the INR 600 crores what we planned 1, 1.5 years ago to invest in Kakinada. That is the immediate investment.

Okay, perfect. And sir, secondly, just clarification on the regulatory approval that might be required. So over this -- of the INR 2,500 crores, you mentioned INR 1,800 crores is already done. So these are currently operational and revenue generating. So would they not require regulatory approval from the regulators for exporting? Or it would, by default, being [ adjacent ]. And I think one is the new site, but could you help us about the regulatory requirement for these CapEx being used for exports?

Yes. The products where we expanded, they're not new. We were already producing them, the products like levodopa, the products like pregabalin, mesalamine, carbidopa, [ levetiracetam ]. All these products, we have been producing. We have the regulatory approvals. The question is we must [ now scaled it up ]. We must now -- maybe we backward integrated. Maybe we made it more efficient. Maybe we became more [ academician ] using solvent recovery, conserving raw materials, increasing yields. These are considered minor changes, but sometimes the regulatory agency may take 3 to 6 months to clear. Or the customer may make -- take 2 to 3 months to clear. These do not require yields to clear. These are of a few months. And the regular business of quantities will continue. The enhanced quantities may take 2 or 3 months.

Okay, so what I understood was this requires some approval, but these are minor approvals which might not include an inspection [indiscernible].

Yes, yes.

[Operator Instructions] The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.

Sir, just on molnupiravir. I would like to understand if this is an exclusive API supply agreement [ which can maybe ]...

Can you be a little louder, please?

Am I audible better?

Yes. Thank you.

Yes. Just would like to understand on molnupiravir. Is this an exclusive tie-up of API supply to MSD? Or any other API supplier also can come in.

You must be -- Divi's is the MSD's authorized manufacturer for molnupiravir API. And we are allowed to supply APIs to MSD's VL partners in India. MSD has retained its rights for supply into Americas, the EU and other regulated markets. The VL is for rest of the world market. Now I have been talking about fast-track projects since, I think, about 9 months, when we entered. And we have developed the process, scaled up the process. We were involved from the baby stage. So we developed the process; scaled up the process; validated the process; commercialized; exported large quantities, several tons. Now the 1 stream is currently producing day and night. And the second stream, just under validation; and that will go into the production in the coming months for the regular commercial production in the DCV-SEZ. These 2 streams are mainly to export to the innovator. Because of these VL partners, because the innovator has given us that we are allowed to supply to the VL partners in India, we have created 1 more stream at Unit-I where it is produced for the VL partners in India. The validation already started. The production will continue -- commercial production will continue from [ middle and June ]. And between these 3 streams, 1 for India, 2 for exports, I think we will have a -- I think that gives clarity that -- our involvement with MSD.

Understood [indiscernible] that helps. Just secondly, on the -- again on the CapEx side. INR 700 crores is capital work in progress and INR 600 crores will be utilized for Kakinada, while we have a cash of good INR 2,000 crores. So how do we intend to utilize that?

Well, if you want to dream, sky is the limit. I'm a dreamer from day 1. At the same time, my feet are on the ground. So the opportunity in the -- some of these APIs what we are involved, the opportunities are 2x, 3x requirement. We are only concentrating on x. So if there is a second requirement, we are -- we want to be ready to invest such [ between ] INR 600 crores and [ INR 2,100 crores ]. We have INR 2,000 crores. So we still will have another INR 700 crores left, but to immediately cater to any sudden requirements one -- subject of any one of these newer ones -- I'm not talking about the traditional. The traditional big generic APIs, I think we are well covered, but we are talking about the newer ones.

Understood. And just lastly, if I may squeeze, on the nutraceuticals with 100% increase in the capacity, over what period of time this will be utilized.

I think the 100% capacity has been just increased. Now we are seeing 10% to 15% growth. As people are looking at -- with this pandemic, nutraceuticals are more and more being looked and being used to increase immunity. The game is immunity improvements, and I think this is nothing but utilizing nutraceuticals. So we expect good business. As I said, we are qualified by all the big players internationally. It's a question of how much of business they will give us as a percentage compared to where, how much they have been giving it to their traditional suppliers.

The next question is from the line of Cyndrella Carvalho from Centrum Broking.

Congratulations on great set of numbers. Sir, just wanted your thought, as we have had a stellar FY '21 and we look at the API segment, if we look at the custom synthesis as well as the nutra segment. If you could help us understand the key strategic priorities amid all these segments. Just looking at the generic side, how should we look at the top products like naproxen, dextromethorphan; and the newer products which we just talked about, like levo, mesalamine and all other products that we have done the expansion recently? And over 2 to 3 years, again referring back to your recent comment where you said sky is the limit: So how should we look at these business segments? If you could allow us some deep understanding over custom synthesis and nutra and the China [ pluses ] opportunity, which must be evolving in our favor when we say that sky is the limit and there are 2 to 3x opportunity in each products that we have, will be very helpful, sir.

Now the generic -- with our traditional generics, which are as we said the naproxen, gabapentin, for dextromethorphan, here we are reaching anywhere from 65% to 85% of the market. And the market is growing at the rate of 5% to 15% year-on-year. And we are talking about products with 5,000 tons of naproxen going at 10%. They need about [ another ] 500 tons next year. As people are aging, the products of naproxen, gabapentin, valsartan, [ levetiracetam ], these are the ones -- these are [indiscernible] medicines as well as life-saving medicines. So they have to be used. Once you are on them, as we age, you want to keep using them. It's not that you just use it for 1 week and you're off. So as you are aging -- people are aging, the existing patients now will continue using. And the new ones are being added [ at least per ] as the life span is increasing. Now the good point is that we are backward integrated and we are the best costing in the world. The products of like levodopa, pregabalin, mesalamine, carbidopa, especially the pregabalin and mesalamine, they're growing. They are the newer ones where we have 20%, 30% of the market. And we can easily reach to 60%, 70% of the market. The same thing is good with products like valsartan, where there was a lot of uproar on nitrosamine impurities. That's how people have been [ switching to us ], and today we are becoming the leaders. And going forward in the next 6 months to 1 year, probably we'll be getting majority of the business. The third group with the contrast media and other products I mentioned where we have been investing to increase from -- we are not even 10% of the business right now. Contrast media is growing at the rate 15% to 25% as more and more [ emerging needs ] happening because of the newer issues. Now we are only not even 10% of the current demand, so there is a great opportunity in the contrast media, where I have mentioned last time [ the specific ] how good you can recover the iodines, how good you can recover and reuse all the atoms [ and you'll be ] atom efficient. That atom efficiency is proof for the sustainability because iodine, there is only so much available in the world and you cannot deplete it. So the challenge is whoever can conserve, whoever can recycle better with the best technology, which we think we have with our already installed equipment. Technologies are proven now. So we are gearing up to take the market. The next one, [ the future ]: I think I mentioned that we have selective products of about today's dosage value of $20 billion, products like, [ well ], ticagrelor, lacosamide, vildagliptin, rivaroxaban, [indiscernible]. And there are about 10 products which are about 25 billion -- $20 billion of from [ dosage form sales ]. We have completed our technology. We are now -- we are developing the process. We've scaled up. Now they are under qualification and validation. So these are the futures that will go out, starting in '23 to '25. So between traditional generics that [ is everything is putting ], the generics with a path of growth with less competition and future generics where we will be entering, I think this is the scope.

Sir, on the custom synthesis and on the nutra side, if you could give a similar understanding. This is very, very helpful.

On the custom synthesis, I think one way to understand: All the big pharmas -- or I will say most of the big pharmas do not have any API manufacturing capacity. They have sold off the plants. Very few of them have few of the manufacturing plants to do the [ buy the n-1 ] and do the last phase. That's through probably small quantities, so they need to go somewhere for the discovered compounds, for the APIs to be manufactured. This is how we got into these fast-track projects [ of the ones that are there ], where we could make hundreds of tons. What then? If they go to somebody, somebody will make 2 tons. Somebody will make 10 tons, but if you want large volumes, the capacities are readily not available. But Divi's [ are good ] to have such capacity because -- with our quite large plants, 2 of them, at Unit-I and Unit-II. The second point is, I think, creates enough capacity [ in a spot of ] time. Now that we have the capacity, even if we don't have, we can do that between 3 to 6 months because we have standardized the equipment, whereby it is like-to-like and scale-up is much easier. So the relationship what we have with the big pharmas for the last 20 years, where we always played only a complementary role, never violated any [ certain ], never challenged them in anything, that puts us into a very unique position where they would like to work with us and share the technology.

The next question is from the line of Shyam Srinivasan from Goldman Sachs.

Just -- sir, just harping up on the opening remarks, related to 2 things: one, product utilization of 86%; and logistics challenges. Sir, just from a near-term perspective, if I look at fiscal '22 growth, how should we look at it? Would it be [ clearly to '21 ] growth rate of 26%? So just want to understand how should we look at growth over the next 12 months.

Logistic challenges. So one is raw materials, solvents; two, our product going out. I think these are the challenges. As Nilima mentioned -- I think she has covered in her initial talk that, by planning better, by planning advance with raw materials, following very closely with the suppliers geographically, directing the supply base. Though it's available cheap in China, we said, okay, that's 10% extra cost. Let's source from Europe [ and have ] 15% extra costs. These are key ingredients. Let us source from U.S. also, knowing which we have [ organized ] in such a way that we will not be interrupted [indiscernible]. So that way, we were able to eliminate the challenges of logistics of raw materials, starting materials. Another good thing with us is that we don't have any working capital. It's just our funds. So where we see Nilima's team foresee that there may be a possibility that we may run into trouble, they just go ahead and outsource and keep the stock 3 months, 6 months. It does not matter. So that way, we said we have less challenges during this last COVID of 1 year, few months. We never had a problem of interruptions of not having raw materials. The credit goes to that sourcing team. Coming back to the utilization of 86% and going up. I think, as I mentioned, that 86% of the capacity of [ several million latest ] what we have, it is like several big factories. So if you look at that, probably we can introduce another 10 new products into that capacity -- into the whatever capacity that is available. So in a way, we are in a good position to expand our products, introduce new products, at the same time take new opportunities. When you say growth, I have my own dreams. At least I want to make sure that you dream [ for me also ] because it's good to dream. If I say everything, then there's -- all the fun is lost.

Got it, sir. No, no, very helpful. Sir, second question is on the margins. We have actually seen again significant expansion in margins during the year, close to now 40%-plus margins, so just want to understand what are the drivers for margins as we go forward. Do you think it would be more mix and the aspiration to do more [ CMO ]? Or do you think backward integration? There are those other levers on the cost side that are still left for us to see some margin expansion.

One, in the API industry, I always say for -- in the last 15 years that the most important thing is raw material costs. What is the material costs? So if you see on an average of raw material costs of pharma dosage from industry, they were from 26% to 33%. And most of the API industry is from 50% to 65%, whereas we have been maintaining lowering, lowering to 40%, 38%, 42% till last 2 weeks ago, but with all the backward integration, revisiting the process and introducing latest technologies. We are never satisfied with their technologies. We [indiscernible]. We always look for is there a better way of doing it. Will somebody come with a better way of doing it? Will somebody comes out -- raw materials better than us? Will somebody use less solvents than us? Will somebody increase the yields better than us? If so, in future. Why not us today? I think that is the always philosophy we follow. In addition to that, the automation. The automation we have introduced recently in several buildings is helping us to minimize the yield variations. So we are able to get more towards the upper limit, not in the middle or lower middle. So applying the tools of green chemistry gives highest yields, highest recoveries, least waste; consuming less raw materials; atom efficiency. I think these are the key to success and key to maintaining the margin and where, you mentioned 26%, 27%, I think it is possible to maintain. And also the most important is the human resource, the dedicated employees; the employees who [indiscernible] 20, 25 years ago. They are all listening. There are at least about 500 to 1,000 [indiscernible] in the plants, in research, in the engineering, in technology, several of whom I trained personally. So it is we have different teams who are highly dedicated, as Nilima said. During the pandemic, there's not even absenteeism. Whether the guy got [ a little ] COVID issue, he went home, got recovered 14 days, came back to the factory or office. As it is -- that is the reason we have -- 1-month salary was given as a bonus for their dedication.

The next question is from the line of Surya Patra from PhillipCapital.

My first question will be on the margins again. So because of the kind of global scale that we have achieved for the generic APIs as well as the kind of care and process optimization and the end-to-end integration, all that what we have achieved for the established large-volume APIs. So now having that situation achieved, so is it fair to believe that there will be no margin difference between the custom synthesis as well as the generic business?

I wouldn't say that. In every portfolio -- so we are looking at a basket of products. And in the basket of products, you have high-margin products, medium products and low-margin products, yes. So we need to -- we always work in custom synthesis and also in the generic. In generic, as you reach as a major supplier, people give you premium. [ It does and ] play a complementary role, assurance of supply. Not even one shipment is delayed. Consistent supply. They give you 5-year [ forecasts ], a guaranteed business day in, day out. So you get good marketing, good productivity. In the recently entering products into new generics, the margins are good. Volumes are less. [ Work is -- will ] be more because you need to carefully watch until it is scaled up to be a certain scale. In custom synthesis, it will be a lengthy process. It will be difficult to do chemistry. If there are only less number of companies who can handle such chemistry, the margins are going to be very, very high. If it is general chemistries, everybody can handle, but still the big pharma wants to work with you. The margins can be average to high, but the challenge here is you need to enter into the products. Once we're entered, you need to apply the tools, what I mentioned the green chemistry tools; and see that average products becomes at least not average profits or low profits, low margins, at least high margins or very high margins. It is [ Kaizen ], that [ Kaizen ] we follow. One step at a time, climb the ladder. And we make sure that -- we don't want to jump up. We just want to go one step at a time. That's how we've succeeded.

Okay. So obviously that means that the average margins for custom synthesis will definitely be ahead of the generic business. That is the kind of our understanding, sir, [ to be remained there ].

I think that you can say that the new entries, newer custom synthesis projects build you more margins. And the maturer generic products, where they already are becoming generics -- they can expand. The margins will be slightly lower than that, yes.

Okay, sure. Sir, for my second question then: See, from the various studies that we are witnessing now who -- in the post-COVID era, there is a -- I mean while it is known that Europe is a manufacturing hub for the global pharma; and their disproportionate dependency on China, what was there. So in the post-COVID period, era, I think there is a kind of necessity of, I mean -- so there is a kind of understanding that people understood the necessity of derisking from Chinese supply chain. And hence, there is a kind of rising dependence on Indian pharma, whether it is for generic APIs, intermediate. Or it is patented APIs or intermediates. So if that is the case, have you seen any kind of enhanced momentum for your custom synthesis business? Or even the -- any kind of intermediate even for the post-patent life cycle management-based product opportunities?

It's a very good question. I think, after the first wave of pandemic, when there was shortage of hydroxychloroquine, when there is shortage of favipiravir, everybody jumped into the gun, including U.S., and said, "Come on. Let's manufacture our own hydroxychloroquine. I'll give you [ 500 million ]. I'll give you [ Europe some million ] support from the government," but until now they couldn't produce a gram because one needs to realize, in U.S., Europe or Japan, to get clearances to set up a facility, manufacturing facilities for these active ingredients, which are considered as highly polluting, [ aging ] factories, it will take minimum 3 to 5 years getting the clients, the approvals, products, [ else ]. Then they need the technology. They need to develop. Then they need to manufacture. Once they've manufactured, just like us, they have to wait for the FDA to clear the dosage forms. So this total process is at least 5 years and limited 8 to 9 years. If they have some existing factories in U.S. and Europe and if they want to make these products, still it will take them 3 to 5 years. And the cost of the investment [ will be placed to connect then what is ] to create a capacity [ than us ]. The cost of running that plant probably is again 10x more expensive, minimum, as it is if I am selling naproxen at [ $500 ] per kilo. [ You don't ] want to produce naproxen. They cannot do it [ at then $100 per kilo, but this will likely ] jump the dosage form prices in the generic industry, which cannot afford to do that.

[Operator Instructions] The next question is from the line of Jiten Doshi from ENAM AMC.

Dr. Divi, I have not too many questions, but first, many congratulations on the wealth creation that you have done for your shareholders. Your performance has been very, very impressive. And you have done this with very high integrity, so from all of us at ENAM AMC, many, many congratulations to you. I also want to compliment you for the quality of your disclosures, annual reports and the current calls, which has been a sea change from what you have been following a few years ago. So please keep up that good work. And if I may, just one question: Have you any thoughts on the longer-term sort of payout policy for the company?

Well, thank you for your compliments public comments. The last compliment comment you made that I have changed: I have changed from the way I used to be more conservative, the more I used to be secretive, to more open is because of the new blood introduction into the company. It is Kiran Divi and Nilima Divi, the major shareholders of the company, they pretty much changed this, where in fact we are more open now -- pardon?

Many congratulations to Nilima and team. Many, many congratulations.

Thank you so much.

Got it.

So all the credit goes to both of them, Kiran and Nilima. Having said that: Now the payout used to be around 27%; and it went as high as 36%, 37%. So we always want to make sure that -- you know that, for the last 15, 18 years, we never borrowed money. We borrowed only once last time, paid it back to [ IDBI ]. And we never either went to these banks or shareholders for any money. This is because of the discipline we followed. And we all want to make sure that INR 500,000 crores is there. Save it for a rainy day. Or is there an opportunity into [ these sudden investments ]? That's how we are able to do that. I think that the payout, what we have done [ 1,000% ], is about 27%. We could have gone to the [ 1,300% ], which is about 35%, 36% normal, but we felt there are a lot of opportunities which we don't want to -- we may need sudden cash, and that's the reason. I think Nilima and Kiran wanted to go to 37%. Probably I played a little bit of [indiscernible] role. I hope I clarified.

Yes, absolutely. And wishing you, Nilima, Kiran, all of you, the very best. It is a great pride of India, a company like yours. And really it's we are privileged to be shareholders of your company, so keep up the good work. To you, Nilima and Kiran, all the very best.

Thank you very much.

Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Satish Choudhury for closing comments.

Thank you all for joining us today for earnings call of Divi's Laboratories Limited. Due to lack of time, we have closed. And in case you need any further clarification, please reach out to our investor relations. Thank you.

Thank you. On behalf of Divi's Laboratories Limited, that concludes this conference. Thank you all for joining. You may now disconnect your lines.