Gujarat Themis Biosyn Limited (506879) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 and H1 FY '22 Earnings Conference Call of Gujarat Themis Biosyn Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Dr. Sachin Patel, Director at GTBL. Thank you, and over to you, sir.

Thanks very much. Good afternoon, everyone. I would like to wish you all a very warm welcome to GTBL's earnings conference call for Q2 and H1. I would like to begin by expressing my gratitude to you all for taking the time to join us today. Unfortunately, Mr. Rajneesh Anand will not be able to join us for this call as he is not feeling well. However, we have on this call with us Mr. Tushar Dalal, our Group CFO; Mr. Sangameshwar Iyer, our Company Secretary, Group Company Secretary and Compliance Officers; and Bridge IR, our Investor Relations team. Since this is our maiden earnings conference call, I would like to share a brief overview of our company and its recent developments before we get into the business and financial performance. GTBL was established in 1981 as a joint venture company between the government of Gujarat in form of GIIC and Chemosyn, and subsequently, it became a listed entity in 1984. GTBL has grown over years to collaboration with various other players such as the Pharmaceutical Business Group that is PBG and Yuhan Corporation. In due course of this time, GTBL established a strong R&D, which enables us to develop its own expertise and fermentation products. Today, GTBL is one of the few fermentation-based manufacturers of pharma intermediates in India with a robust technical know-how and capabilities. We have an environmentally friendly and sustainable process using a aerobic bacteria for fermentation. Our current product portfolio grew with rifampicin in 1991 and lovastatin in 2003. Subsequently, the company started manufacturing Rifamycin S as an intermediate for rifampicin. During the year 2020, we changed our business model from contract manufacturing to own manufacturing and sales model. After fulfilling all the contractual obligations, we were able to make the strategic shift, which has led to improved realizations and substantially improved margins. This change gave us better access to market and a competitive advantage to command better margins. Our current product portfolio comprises of Rifa S that is and Rifamycin S and Rifamycin O in addition to state-of-art manufacturing facility in Vapi, Gujarat. We are also expanding our R&D base to focus on new product development. As mentioned earlier, fermentation-based process for intermediate development has its own challenges. But with our own long -- but with our long experience of product development and making it commercially viable or confidence in time. I hope you must have gone through the presentation where we have also mentioned about our road map for development and launch of new [ intermediates ]. Also, we plan to move up the value chain and forward integrating to manufacturing APIs. As for numbers, the impact of the change in the business model is evident in the performance over quarters since the shift, firing, minor fluctuations due to lockdowns. Now coming to some key recent developments. As you're all aware, during the last 1.5 years, the world has witnessed an unprecedented calamity in form of the COVID pandemic, which brought the whole supply chain and the entire economy to a staggering cost. It impacted every aspects of our lives from personalized sales to businesses and industry worldwide. Like every other business, we were also impacted by the logistics and supply chain here due to various lockdowns to curb the virus outbreak. The second wave also led to a lockdown in the beginning of this fiscal year. However, being in the pharmaceutical sector, we were able to continue to cater to our health care industry. During the first quarter of '21, we undertook a planned -- sorry, during the last quarter of '21, we took a planned shutdown of our plants for approximately 3 months. This was from maintenance and upgradation of the facility which is done periodically. As a result, we were able to improve internal operations efficiencies when we resumed operations. On another note, we recently concluded our strategic partnership with South Korea based Yuhan Corporation and bought over their stake in a company to the parent companies, group companies. While Yuhan has been one of our oldest technology partners, the association had come to a station and there was no further value addition for either of the 2 companies. The decoupling was enable us to better formulate and execute future growth states in the later. Going forward, we are focusing on R&D and new product development and strive to expand our presence in the value chain and overall market. Now coming to the financial performance. I shall hand over to Mr. Tushar Dalal, who will take you through it. Thank you.

I am Tushar Dalal, Group CFO of GTBL Group. A very good afternoon to all of you. Now let me take you directly to the Q2 for the financial year '22. We reported INR 35 crores in the revenue during the Q2 financial year '22, 28.86% year-on-year rise. This growth was driven by higher volumes and better product mix. Our EBITDA excluding the other income for the quarter was INR 18.45 crores, an increase of 25.1% year-on-year, and our margin was 52.63 percentage. Our PAT during the quarter is INR 13.79 crores as against INR 11.35 crores in the second quarter of financial year '21, an increase of 21.5%. Net profit margin stood at 39.35%. The earnings per share for this quarter is INR 9.49. The [indiscernible] capital per share is only INR 5. For the half year end date H1 '22, we reported INR 67.49 crore in revenue during H1 '22, 57.46% year-on-year rise. Growth was driven by a strong rise in the volumes and the improved product mix. Our EBITDA, excluding the other income for the period stands at INR 35.17 crores, increasing 64.84% year-on-year. EBITDA margin is 52.11%, an improvement of 233 basis points. For PAT, during this half year is INR 26.71 crores as against INR 16.92 crores in the first half financial year '21, an increase of 57.8% (sic) [ 57.9% ]. Net profit margin stood at 39% higher by 11 basis points. Earnings per share for this period is INR 18.39. This is all from our side. We can now take the questions. Thank you.

[Operator Instructions] The first question is from the line of Srinath V. from Bellwether Capital.

Just want to get a better understanding of who are the key players in this market since this is the first con call, and we are just trying to understand your company. What will be the total fermentation capacities in India? And who are the key players? And I'm told that there's pharmaceutical application and nonpharmaceutical applications also for fermentation like [indiscernible] and so on. So I want to understand the dynamics and where we stand in this -- the whole picture. I'll come back for the second question.

I think as a company, we are purely focused on pharmaceuticals. So we would have little knowledge on the fermentation sector, which is not pharmaceutical based. As you rightly pointed out, you have sectors like food supplement, at the same time enzymes, too. So I would not get into that. But from a pharmaceutical perspective, there was a time where there were almost about a dozen or even more companies in India, which unfortunately could not stay for a very long time due to the competition that -- the pricing competition that came from China. So at the moment, there is probably a handful of companies that still remain. But as an independent company, I think it will be con call that we're one of them. And there are 1 or 2 more which are coming up as independent fermentation basis companies.

And this China competition that the whole industry faced a few years ago, was this driven by what -- which are the price cost levers that they had? And I can see power cost is a significant part of your process. But outside of that, what were the other advantages that China had and what has changed in the last 2 years for this migration back to India?

I think there have been 2 factors. So one is as you very rightly pointed out power. In case of fermentation, the largest cost in terms of utilities comes from power. The raw material cost is not as significant as the cost of utilities, which is essentially power. So that is definitely one. And as one sees across sectors, not just fermentation, but across sectors due to the increase in power cost of tariffs in China and also the unavailability of the same in certain areas that has been a disruption in supply chain, at the same time, prices also. So we have -- I don't think it is only related to fermentation, but overall, you have seen increase in prices of products coming from China, and this is one of them. And I think the only difference over here being that there are not too many companies that still continue to be in fermentation of pharmaceutical products in India. So we believe that there is a unique position that all those companies who are in the fermentation sector for pharmaceuticals that are there in India have going ahead.

A little basic question out here. So what is the complexity in fermentation that a large player who -- either the API large player who is buying the intermediate from you or the formulation player who is buying API is not doing the same thing in a captive manner, because our Indian pharma companies are largely champion companies who have now gained significant global market share in formulation. So what is the complexity of -- what is the specific reason why large companies don't prefer doing this in-house and would have players like you or Chinese players kind of handling this complex product?

The complexity starts from the fact that you need to have access or you need to be able to develop those microbes that are going to produce this product. That is only the beginning. The second part is they behave, these microbes behave very differently when you move them from a laboratory to 50,000-liter fermenter. So the economics completely, I mean, changed. So that is the second part of complexity which is there. The third is how do you design these kind of fermentation facilities from lab data to commercial data. So that's know-how and that knowledge is very important, which not too many people have. And fourth is -- which is probably easier, I would [indiscernible] this the CapEx, which is required. So you may start in the laboratory, but for example, a replacement value of a facility that we have right now would be upwards of INR 200 crores, excluding the land and the paraphernalia that goes with it. So that is the kind of CapEx that you need to put in while not knowing a lot of what is going to happen from the laboratory [indiscernible] panel production. And then there is time, because it will take at least 2 years, if not more to set up this facility. Followed by that, it would take even more time for regulatory approvals to come. And so there is a good gestation period besides the risk which is involved in going quarters.

Got it. Got it. And then last question before I get back into the queue is I want to understand from, again, a macro picture which are the therapeutic areas of products that use fermentation in the API? A significant portion of the API value is being derived out of fermentation. And so from where we stand here, I would like to understand the 5-, 7-year opportunity in therapeutic areas. And again, there are a lot of biologic products that are coming in from new drug discovery. Is there an opportunity in that space also in small batch production? So if you could kind of map the current fermentation landscape and how is it likely to change over the next 5, 7 years?

So I will address the question into 2 parts. The first is the therapeutic categories that involve fermentation, they are wide in [indiscernible], because you have something which is starting from penicillin derivatives to other anti-infectives and then you have something which is even in the field of statins, which is cholesterol reduction. So it is more depends upon what is the synthesis or how one product is produced more than therapeutic category. And our selection again is for products that we want to work on or we are working on in terms of the future is not therapy dependent, but it's technology dependent. What are we going to be good at in terms of producing, we believe. So that is going to be the strategy going ahead. And with regards to biologics, that's a completely separate area, we are not into it as yet. We don't know what we will do going ahead. But at the moment, our focus is on secondary metabolite fermentation product and not biologic. I hope that answers your question.

The next question is from the line of Keshav Kumar from RakSan Investor.

Sir, since December 2019, our margin has expanded considerably and your disclosures had attributed the change to change of the business model is the reason for the same. But I noticed that you had also started making rifamycin O, which is used for rifaximin around the same time. So how much of the shift or growth has come about due to Rifa O?

So the change has come in because of the change in business model and not necessarily in terms of what we are producing, whether it is Rifa O or Rifa S, because the concept essentially is that before that we were working on a cost plus basis or a fixed margin basis. And then we started working. We went out after concluding all those contractual obligations. We came out of it, and we started moving to market price-based model. So that was a big change that led to change in the margins rather than one product over the other.

And sir, on your website, I can see that it's largely a 2-product company. Is that right?

That's right.

So sir, could you elaborate if we do get a substantial chunk from Rifa O? Or is it not largely contributing a lot to the overall picture?

So I think it would depend from month-to-month. Overall, we would say that it is probably evenly balanced out.

The next question is from the line of Puneet, an individual investor.

Am I audible?

Yes, yes.

Congrats for the wonderful results. Sir, I have 2 questions. One is on the sales and operating profit margin. So can we consider the recent run rate of INR 30 crores, which is very good actually in the last 2 quarters. Is it sustainable? Along with your operating profit margins of 50% approximately. So one, it is sustainable and from where it is coming. Is it because of volumes or something else? That is question number one, if you can answer first.

So I think we would not be making any forward-looking statements in terms of what is going to happen ahead. So unfortunately, I will not be able to answer that particular question. With regards to where the margins are coming from, I think it is efficiencies and market price-related pricing with better efficiency. So that is where the margins I would say are coming from.

Sir, my second question would be what is your capacity utilization as of now? And any further plans for CapEx in the coming quarters or months?

Our current -- so last -- in the last financial year, our capacity utilization was about 75%. In the first 2 quarters, we are close to the almost complete capacity utilization. And we have significant CapEx plans going ahead considering that we want to increase the number of products that are there. We don't really feel the need to increase capacity for our current products, but we definitely see a lot of opportunity in terms of introducing new products, which we are working on in the facility.

So are we expected to be launched within this current financial year? Or the plans are further ahead?

It would be further ahead. There is a gestation period should be for the financial.

The next question is from the line of [ Ranvir Roy ], Individual Investor.

[indiscernible].

I'm not able to hear you very clearly.

Is it better now?

Not completely.

Sir your voice is breaking up, maybe request you to move to a better reception area, please.

Is it better now? Am I audible?

Yes.

Yes. Sir, I wanted to talk about the earlier participants of [indiscernible]. Sir you just mentioned that the plans are significant, but -- and the CapEx will start contributing from the next financial year. Is that correct understanding?

Yes. The return on the CapEx would be in the next financial year or even the year after that perhaps.

Okay. And this will be of production similar lines? I mean that the fermentation area [indiscernible]?

Our business will be focused on fermentation products, yes.

And sir, presuming I mean CapEx, I mean, would be larger [indiscernible] accruals [indiscernible] in the kind of cash related [indiscernible]

I am not able to hear you very clearly unfortunately.

Unfortunately sir, your voice is very faint. We are unable to hear you clearly.

Is it better now?

Yes, sir.

So the CapEx would be largely funded from internal accruals? Or how did this -- I mean, or debt funding has also been acquired for the CapEx?

For moment, it will be internal accruals, but we are open to moving to debt, too, considering the fact that the project cost is anticipated to be in the vicinity of about INR 200 crores plus.

Okay. Okay. And this INR 200 crore CapEx, if you guys have [indiscernible] like entire INR 200 crore CapEx commissioned over the next financial year or the year after that?

No, it will be spread over 2 to 3 years.

The next question is from the line of Nikhil Upadhyay from Security Investments.

Congratulations on a good set of numbers. Continuing on the discussion, you mentioned that basically, if you look at in last one year, the way government has moved around on the fermentation sector or in the [indiscernible] -- and the PLI teams which are coming up, are you looking at participating in any of the PLI products? Or is it purely new products which you are developing?

No, our strategy is not focused around PLI products. Unfortunately, our products don't match what we are looking at. So our products are pretty much out of that box.

And what -- can you just share what is the pipeline of product in terms of number of molecules? Would it be like 5, 7 molecules in -- which are currently in the R&D stage and would be build up?

We're looking at 6 products for now.

Products, and these would be like their commissioning would be in line with the [indiscernible] commission.

Absolutely.

And a large part, what we understand is from discussions with various players is like China was a key player in the fermentation facility globally and even in India. These 6 products, would it be largely like import substitution kind of a market which we are looking at? And given on export in the fermentation-based products, has there been significant price, prices have gone up significantly where you see that are entering those molecules may make sense now versus earlier?

I think -- so the strategy that we are going by has to be a mix of replacement of imports, plus new products, which have literally just come out. So we can't work on a strategy, which has been clear replacement of China. I don't think it would be a -- let's see something that would be great. So it is a mix of both. And our product selection and how we intend to commercialize the same is also very clear in our plan. Obviously, this is something which would be I think trade secrets at this stage.

Just my question could be a naive a little bit. But -- what we understand is like the reason why most companies, as you mentioned, is that the CapEx is a major deterrent in terms of any new player entering the presentation fermentation manufacturing et there are many very limited capacities in India or players who are able to do it in successful base. How do you see the scenario playing out? Because what has happened is that the pricing has also gone up for many of these molecules with the issues around China Incrementally, there could be more players. So is it capital the only reason for not putting capacity? Or is it like the ability to handle the molecule in a successful way or larger [indiscernible]?

So I think the 4 points that I raised, I in fact, raised capital as only the fourth point, which I said was insignificant because you will always be able to find capital. So I don't think that is a deterrent if projects have viability, I think it is more of the know-how and people. These are the 2 key points I believe in this industry going ahead. Capital will come from one source or the other in my opinion.

And lastly, you mentioned like 3 years back, there was a change in the contractual terms from cost per model. So can you just educate me what was the earlier arrangement and whom we had the arrangement with and what was the reason for the change in model. So is it like that it was -- we decided to end the contract, the customer is the same? But on a new price basis, we have entered the contract because I'm new to the company, so I don't know what was the history of earlier and now what is?

So we had a contract which was a cost-plus-based contract where we had 0 risk in terms of the cost to be covered, and we had a fixed margin business over there. And from there, we decided that we are -- and we were working with a single company. And we decided that we would like to come out of that, take the risks. We should come with moving into non -- with a market price model rather than a cost-based model, which means that if we were not able to sell, we would have a problem. But we decided to come out of that contract and enter into a sales contract, which was market price based.

This contract was not related with our parent company, maybe was in the content [indiscernible] ?

Yes, it was an independent company. It was nothing related to the parent.

The next question is from the line of Dhwanil Desai from Turtle Capital. As there is no response from the current participant, we move to the next question from the line of Vaibhav Badjatya from HNI Investment.

Just I have 1 or 2 questions. So on the existing contracts that we have with the customers, if you can help us understand what is the general typical nature of the duration of the contract and how the price resetting mechanism [indiscernible] I mean -- is it resettled every 1 year, 2 years, 3 years or -- and what is the general tenure of the contract?

So I would only say that fairly they're stable contracts. Anything beyond that would be difficult for us to put out in the public domain.

The next question is from the line of Karthi Keyan from Suyash Advisors.

Sir, more of the same set of questions. So just trying to understand the business a bit better. My first interaction, so kindly bear with me. A couple of things you talked about developing 6 different products. So can you talk about the process involved in developing new products? And is any of this coming from a customer request or do you develop these independently? And secondly, also the capacity you are planning to put up, can you give us a scale perspective in terms of what percentage of the local requirement would this be able to meet or global requirement? I wouldn't have a context, if I may. Talk about that. And also is there any dependence on China for the basic material sourcing the microbes, basic [indiscernible] or whatever, would those be coming from China? These are the 3 broad questions that I have.

So think in terms of -- I'll address your second question first in terms of the capacities, we are the total fermentation capacity we have at the moment is about [ 450 ] cubic meter. And we are planning to double this, for which we have already received the EC clearance -- so that's on the capacity side. With regards to raw materials or anything else associated with this project, we are not depending upon China. And could you repeat the first question again? Was it with regards to the product?

I was asking you about the product development cycle involved and whether there is any customer input involved in the past?

Yes. The products are developed in-house, which means that we are not expecting nor are depending upon any customer to provide us any help on this particular front. In terms of the cycle, it typically involves having the strain, growing it in the laboratory, growing it at a pilot facility, understanding the strain, how it grows, what is the most productive, most efficient way of reducing it and then scaling it up to a commercial level. So it's a step-by-step process. At each stage, you understand what are the environmental conditions, which are best suited for a microbe to grow and produce what you wanted to produce. And that's how the process works. And finally, when you move to a large market, you have to figure out how you won't be able to extract the product of interest from this broth, which has a lot of things, including the microbe to its pure form that is required as a pharmaceutical product.

Broth contours, I understand. What I asked you was what was the time involved in developing these 6 different products. And so if you start today, by when would you be able to commercialize a particular product?

So we envisage that in about 2 years, we'll start producing them for the Indian and the ROW markets and 3 years for the regulated markets.

So in 3 years, you will be able to target the regulated markets?

Yes.

Interesting. And when you said that there is no China independence, so these are locally available basic materials as such?

Yes.

Interesting. And would you be able to indicate the areas -- the broad areas, at least to say, therapeutic or otherwise?

No, unfortunately, not because that would, it would give a very clear idea in terms of what molecules we would be perhaps working on.

And in terms of yield, would you be able to confirm whether you are at a reasonably commercially, [indiscernible] viable company? Have you been able to achieve that? Would you be able to say anything on that?

Yes, that's we can because we cannot compare it with other companies because we don't know what's necessary the yield is, but we can compare it with the market price.

Right. And you think that you are in a good place?

We are in a good place, yes.

The next question is from the line of [ Pratik Poddar ], and individual investor.

Sir, just a bit curious. When I look at your balance sheet, the CWIP is INR 4 crores, you talked about INR 200 crore CapEx. I'm just trying to understand where you get this confidence of -- even if I look at your net fixed assets, they're just like INR 17 crores, and you're setting up a INR 200 crores kind of a CapEx, where is this confidence coming from? And when does this CapEx really start contributing to your revenues? Is it H2 of FY '23 or FY '24? That's question number one.

I think we -- in terms of confidence, we see an opportunity, and we see cash flows. And both these things combined together we feel that -- and we have the knowledge. I think probably the third part was the most important, the knowledge and the know-how to be able to do that. So that, I think, gives us a reasonable confidence that we should go ahead with these projects. And with regards to when the projects will come to, it could be end of '23, beginning of '24. But I would say 2 years from now, we should be in a position to have something for the Indian or ROW market, Indian and/or ROW market.

And sir, what is the size of opportunity of these 6 molecules not getting into the names, et cetera? Just broadly, what kind of potential are there for these molecules?

So the way we are calculating it is that if we are doing a CapEx of INR 200 crores, we should be able to see an ROI within 3 to 4 years.

That's really helpful. And lastly, sir, is it fair to say that you are a company since 1981. Was this contract manufacturing, something which was a shuttle to you? And once you got out of that contract that now we will see the true potential or you can see the true potential of your R&D getting commercialized on this?

I wouldn't say that. I think the contracts that we had before was also a very important one, because those were turbulent times in this industry. The opportunity that we see at this time did not exist at that time. So I think it's a question of standing in the right place at the right time.