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

Ladies and gentlemen, good day, and welcome to Gujarat Themis Biosyn Limited Q3 FY '23 Earnings Conference Call. 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 of Gujarat Themis Biosyn Limited. Thank you, and over to you, sir.

Thanks very much. Good evening, everyone. I would like to wish you all a very warm welcome to GTBL's earnings call for the Third Quarter & 9-Months ended 31st December '22. I would like to begin by expressing my gratitude to all of you for taking the time to join us today. We have on call with us Mr. Rajneesh Anand, from GTBL and Adfactors, our Investor Relations team. Before we get into the business and financial performance, I would like to briefly share the company's key recent developments in our strategic focus area. I would like to begin by directly stating recent developments and its impact on sales volume for Q3 at GTBL. Our production volume during this quarter have been similar, have been at similar levels to previous quarters but the sales volume remained subdued. You are already aware that GTBL is a 2-product company producing Rifamycin-O and Rifamycin-S. The demand for Rifamycin-O continues to be strong in the market, and we witnessed a sufficient uptake of this product. However, Rifa-S offtake remained on the lower side during the quarter. As you know, Rifa-S an intermediate for antituberculosis medicines. This is largely a tender-driven segment. Delays in government and global tenders have reflected in lower sales volume for the quarter. However, we expect the tenders to open over the next 2 quarters, which would result in significant increase in volumes. Hence, we have continued the production of Rifa-S to build inventory for this upcoming demand. Unlike the last 2-years, this year, we have -- we have not undertaken a plant shutdown, so that we can continue to build inventory for the anticipated demand. I'm happy to share that despite the challenges stated earlier, we have already surpassed our finance -- our previous financial year's revenue and profit levels within the 9 months of this fiscal. The recent -- the recently announced CapEx plan of INR 200 crores spanning over the next 2 to 3 years is well on track. We have done about INR 14 crores of CapEx so far and another INR 13 crores is in CWIP. Our new API block is likely to start operations by June, July '23. The R&D facility is also likely to commence operations by the same time. As stated in earlier calls, these new facilities will be compliant with global international regulatory norms, hence, we should be targeting export markets in addition to the domestic markets that we already cater. Now turning to our financial performance. I hand it over to Mr. Rajneesh Anand, who will take us through the same. Thank you.

Thank you, Sachin. For the third quarter financial year 2023, we reported INR 28.2 crores in revenue during the third quarter of the financial year 2023, a [Technical Difficulty]. Growth was primarily driven by higher volumes compared to the previous corresponding quarter. Our earnings before [Technical Difficulty]...

Mr. Anand, the audio is breaking from your line, sir.

Is it breaking?

Yes, it's better now, sir.

Okay. Should I start from the beginning?

Sir, you may continue, sir.

Okay. Our earnings before the interest, tax, depreciation and amortization for the quarter stands at INR 12.1 crores, 23.6% increase year-on-year. EBITDA margin is 43%, down by 966 bps. R&D expenditure of about INR 2.44 crores had a bearing on our profit margins. Our PAT during this quarter is INR 9.8 crores as against INR 7.1 crores in third quarter of financial year 2022. Net profit margins stood at 34.8%. Earnings per share for this quarter is at INR 6.75. Now coming to our 9 months performance. We reported INR 120.8 crores in revenue during 9 months of financial year 2023, a 40.3% year-on-year rise [indiscernible]. Growth was mainly driven by rise in volumes. Our EBITDA for the period stands at INR 59.3 crores, increasing 31.9% year-on-year, while EBITDA margin is 49.1%. Our PAT for these 9-months is INR 46.3 crores growing 36.7% year-on-year as against INR 33.8 crores in 9 months of financial year 2022. Net profit margin stood at 38.3%. Earnings per share for this period is INR 31.85. In November '22, the Board of Directors declared an interim dividend for the financial year '22, '23 of INR 4.4 per equity share of face value of INR 5 subject to shareholders' approval. This is all from our side. We can now take questions. Thank you.

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Saloni Hemnani from Molecule Ventures PMS.

My first question is regarding the capacity utilization. So what was it like this quarter?

So in terms of production, the capacity utilization is really related to production, right? So our production levels have been pretty much identical the last couple of quarters. So there has been no reduction in what we have produced and we plan to continue the trend. The sales has obviously been down for the reasons that I explained during the introduction. Essentially, that Rifa-S sales were significantly lower because the tuberculosis tenders, not just in India, but globally have been delayed, and that is the major reason why the offtake of Rifa-S not been in line with the production for the previous quarters.

But we're expecting in the next 2 quarters, the tuberculosis market will stabilize itself?

What we are looking at is the following data points that there is no indication to state that there has been a significant reduction in this particular disease globally. And considering that and what is in the pipeline with regards to the tenders, it is natural for us to expect that the same requirements will open up in the near future.

Sir, my next question is regarding the CapEx that we've been talking about. So last quarter, it was mentioned that we had already spent INR 22 crores in CWIP and this quarter, as discussed in your earlier talk, you mentioned INR 14 crore is spent and INR 13 crores in CWIP. So additional only INR 4 crores has been spent in the last 3 months?

In terms of CWIP. Yes.

Okay. So I was asking this because we had a timeline of July when we start the trial. We were expecting basically the trials to happen but...

We are still sticking to the timeline. We are anticipating that our API block will be up and running by June, July. And also, our R&D labs will be up and running in June, July. In terms of our R&D labs, we had 2 sections, 1 section will start running in June, July and the other section will probably be about November, but that should not impact us from -- our timelines in terms of development and whatever else that we plan to do.

So sir, you were mentioning the amount for API block to be INR 40 crores, out of INR 80 crores in the previous call. So are we expecting the money -- are we expecting INR 40 crores to be spent till the trial or the entire INR 80 crore of Phase 1 will be spent?

I would request Mr. Rajneesh Anand to comment on this, please.

Yes. Yes. So we will be spending all the INR 40 crores by July. So right now, a lot of money has gone out as advances to various capital equipment suppliers. So that would not reflect as CWIP right now. But as time passes, the deliveries will begin and then we will have a strong fund flow out.

Okay. Okay. Just last question, sir, on the acceptance of our products to the new customers that we have recently onboarded. So has there been any addition or any recent development with the new customers where we were just trying to set up new bases?

There has been progress. Unfortunately, a lot of it is still because of these tenders getting delayed. The tenders are out, but the finalization of it has been delayed. So I think once the same is done, there'll be a lot more clarity in terms of who requires how much quantity, because that is what we are really now looking at.

Ms. Hemnani, does that answer your questions?

Yes. Yes. That does.

The next question is from the line of Gunit Singh from CCIPL.

So if we look at the revenue numbers for this quarter, which is coming in at INR 28 crores, If we look at the December 2019 quarter, which is 3 years, the third quarter of FY '20, back then our revenues for the quarter were INR 31 crores. But after 3 years, our revenue standing at IND 28 crores. And if we look at quarter-on-quarter also, our revenue have almost fallen down to half. And also looking at the margins, if we look at the margin right now, we're at 42% margins versus around 52% in the last quarter, and around 50% in the same quarter 3 years back. So can you just elaborate why do we see such numbers?

Sorry, I'm not following the question. Can you repeat that, please?

Yes. So what I'm saying is that in Q3 FY '20, the third quarter, our revenue numbers were at INR 30 crores. However, despite 3 years passing by, we do not see any growth in the revenue numbers. They are coming in at INR 28 crores for this quarter. And also looking at the margin profile, the margins over the last 3 years, if we compare the quarter 3, they have gone down from around 50% to 43%. And also looking at quarter-on-quarter last quarter, our revenues have almost dropped to half and even the margins have dropped from around 51% to 43%. So I mean, what is driving this? So there is actually no growth if you look at the quarter 3 of FY '20 and compare it with the current quarter. So I mean..

Yes, I think there are a couple of points that I would like to highlight over here. You are -- so as I mentioned in the introduction, there is 1 product that we produce, which is almost 50% of the business, which is really a tender-driven market. So there will be fluctuations from quarter-to-quarter in terms of the numbers that you see. Now I think that the right parameter or yardstick to see would be either annual numbers or in this particular case, 9-month numbers. So if we look at the 9-month numbers, which are there that we have achieved this year vis-a-vis last year or even the year before, I think there is a reasonable growth both in terms of the topline and the bottom line. And with regards to increase in costs or perhaps a decrease in percentage margins vis-a-vis the sales turnover is concerned, there are matters that we need to consider, be it increased utility costs, increase in other fixed costs. And at the same time, our endeavors to develop products for the future and hence, R&D costs. So both these things combined together in terms of percentage has indeed increased our expenses. But I think if you compare more than a quarter over the last 3 years, you would find that there has been increase in the sales revenues and at the same time the bottom line.

So, I'm actually a bit new to the company. So are we looking to diversify to other products, per se, because if you were to move away from such fluctuations or if you were to rely on such tenders, the numbers might vary -- I mean, quarter-on-quarter like we discussed, but are we planning to diversify to any new products to ensure that we have, say, a clear visibility or maybe -- I mean, a clear revenue coming in quarter-on-quarter? Are we looking to do that? And also another question with that, we said that our production has been same while sales have declined. So I mean, do we have visibility of say tenders or orders going forward, that will make up for the loss numbers this quarter? And what kind of growth are we looking at for the next financial year?

So again, I'd like to start with the fact that I think we have -- we have a pretty good product that we are producing right now. So I wouldn't say that we have any intentions of moving away from this product. And that is clear from the kind of margins that we have at this particular moment. So I don't think there are too many products, which would have this kind of EBITDA margins and PAT. So even though there will be a fluctuation from a quarter-to-quarter, I think as a business, it's a pretty solid and pretty good business to be in. That said, that doesn't mean that we are only going to produce this and only going to develop this product. So we have, in fact, in previous calls and at the same time at an analyst meet clearly stated that we are working on a CapEx plan at the moment of about INR 200 crores, including a CGMP R&D center and also API facility. And of course, increase our fermentation capacity that we have currently from 450 cubic meters by another 550 cubic meters. So we are in the process of developing and adding to our current product basket that is there in terms of APIs. Sorry, these were the 2 questions. Was there another one besides this?

Yes. So we are maintaining our production levels despite the sales going down. So do we like have visibility of making up for the loss number this quarter? And what kind of growth should we -- looking at the yearly numbers, we see that the company has been growing quite significantly, so by INR 91 crores in FY '21 year, we are at around INR 150 crore for the trailing 12 months. So I mean, what kind of growth numbers can we expect for the next financial year, financial '24?

Look, the company is into the business of producing fermentation-based products. So typically, a fermentation manufacturing site is -- although it's a batch-wise production, it's almost practically continuous because you can't run it on half capacity per se. So -- and looking at the data points that we have right now in front of us, we continue to produce. We are not stopping our production because we anticipate that as the tuberculosis tenders open up, the demand is going to be there, quite a significant demand is going to be there. That is the first part. The second, so whether this will happen in the current quarter or the quarter after, is something which we will not speculate, but it should happen in the near future. And the fact that we are not stopping production is an indicator that we believe this is very realistic. And coming to growth in terms of how it is going to go about in the future, -- without speculating in terms of what numbers are going to come in, I can only state that for the last 2 years, we have been running our capacity on 75% which we are not doing. Right now, our plan for this particular year is to run the capacity -- production capacity at 100%.

The next question is from the line of Keshav from RakSan Investors.

So one of our peers in this fermentation cum chemicals synthesis space has been struggling to scale and meet their costs for the APIs they manufacture and they have a pretty rapid parentage. So I would like to have your two cents on whether fermentation API space with mature molecules sort of could be a riskier bit from price erosion point-of-view compared to intermediates? Or should it not be looked at this way and it's rather on a case-to-case basis?

I would honestly say that it's a case-to-case basis because if we feel that we can produce anything in fermentation just because we do fermentation, I think it would be a tall task. It would be incorrect for us to state that we can produce everything under the earth. So I think for that particular reason, even in our portfolio, we have -- we are working on half a dozen, if not more products now because not all of them will find the markets because it is a technically challenging place to be. I think there is a fair bit of experience, which is required at the same time. There is a fair bit of risk for failure too. So I wouldn't -- I wouldn't put it down on any particular company or XYZ. I think it has its challenges, which one has to take, get over with time and effort.

Understood, sir. And sir, secondly, sort of building on that. So currently, bulk of our costs are power and fuel, basically, the energy cost to run our fermenters. So I guess in fermentation, taking the overheads constant, your yield would be the single most important variable to have good gross margins. And currently, our margins are phenomenal for the current products. So when we are convinced to take a product from bench to pilot, are we building on such high or, I mean, appreciably high gross margins, which we currently enjoy or is that the approach?

Yes, we have to. We have to look at gross margins very carefully. The reason is that, for instance, the facility that we are producing right now from is essentially depreciated, right? It's an old facility. But now we are talking about creating new facilities and depreciation will become quite a significant part of its costs. So we need to be very, very careful in terms of the products that we select so as to make sure that we have healthy bottom lines, which are much required to sustain this kind of business.

Sir, in the domestic raw material availability, one of the factors, like, for instance, certain fermentation molecules are -- use vegetable waste oil as raw material, which does not cost much. And the price is not very volatile as well. So is that one of the factors that we sort of choose to build on our products?

So at this particular time, so I think from country to country, one must look at materials, which are locally available in order to do fermentation. But I think at this time, we don't see raw material prices as a immediate challenge. It's not something that is of a major concern as we see it right now.

Sure. And sir, lastly, so of the 2 products, at least for Rifa-S we historically had a single customer arrangement and we went from toll to market pricing. But we -- haven't had the -- so basically, we haven't had the demand side risk per se because offtake was there. So for the newer molecules, we plan to make -- is there a pull factor also coming in from the clients we are in touch with that they require certain products, so we could utilize the capacities quicker than seeding the market and going from there?

As with investors, we have really not disclosed the molecules that we are working on and what we intend to take to the market. I think at the right time, we will do so. I think we have selected products whereby we don't foresee a major challenge in terms of commercializing them.

The next question is from the line of Ankit Gupta from Bamboo Capital.

Sir, can you talk about when do we expect to complete the CapEx for the 6 new molecules that we plan to manufacture that are in the R&D stage and when do you expect the commercialization of at least one molecule?

Our CapEx plans are divided into 3 aspects. One is the R&D. The second is our API block and the third is our fermentation block. As I mentioned in the introduction, the R&D CapEx and the API block should come through by June, July of this year, which means 6 to 9 months after that, we should be able to commercialize some products from our API block. And the fermentation block, the additional capacity that we are putting in will come through by June, July of next financial year. We're talking about '24. So from then, we start trial batches in production of the additional fermentation products, which are there.

And sir, I know you will not talk about the molecule that we have been manufacturing, but can you broadly talk about the market size that we'll be targeting because in the existing 2 molecules, we are a big player in the global market. So -- but how big will be the opportunity for some of the molecules that we plan to manufacture let's say, when we complete the R&D and start manufacturing them?

So on the -- from the API block, the R&D for producing the same has already completed. So we shouldn't be spending too much time on the R&D. We should be spending more time on taking the trial batches and the exhibit batches, which are required over here. I believe that one -- at least one product would have a significant potential in the very near future because it is something that is expected to change the current therapy, which is there, and we'll be one of the first few of the companies to launch this particular product in India and elsewhere, too. So we're counting on that.

Sure. And the other set of fermented products that you are working on, how big can be the opportunity size for them?

I wouldn't comment on that particular question right now because, as I said, we are working on multiple projects in R&D. We still need to be very clear in terms of which is the one that -- which are the ones that are first going to come out from R&D to fermentation. And we are still some time away because our fermentation block, comes up by next June, July. Not this June, July, but next June, July. I think to speculate that far ahead would be a bit out of line.

The next question is from the line of Kalpesh from JSN Advisory.

I have a couple of questions. You mentioned on your CapEx plan that we are planning to invest INR 200 crores over the next few years. So can we have a broad understanding of what type of turnover we can generate post this entire CapEx plan?

So the principle that we are really using for what products we go in and the business strategy, which is there is more based on ROI rather than turnover. So we are trying to -- our objective would be to minimize the number of years in terms of ROI for projects, the CapEx that we are taking up rather than say that with INR 200 crore CapEx, we are expecting so many INR 100 crore turnover. I think that will not be the best possible way of looking at the subject, considering the kind of industry that we are in.

Fair enough. Then probably any ROI that you would like to have it in your mind probably for the entire thing that you would be comfortable with in the next 2 years, 3 years type of things. Will the current ROI is a good indicator that you would be comfortable? Or you would be targeting a better ROI from the new businesses as such?

I think the current ROI is pretty healthy. So I think it would be -- for a new facility, this is for old facility, for a new facility, if we can get something like this, that will be pretty -- we will be pretty satisfied with that.

And when we move for the power integration or anything, the margins would remain in this band? Or sir, or can we expect margins to also expand with the current -- the new product streams as such?

If we are moving into forward integration, I don't believe that the margins would be as healthy as they are in fermentation. Because the minute you are moving into forward integration, there is significant number -- there are a significant number of companies that are doing the same thing. So the real value of what we are doing over here is -- comes from the fact that there are a limited number of companies, there's a limited amount of capacities that do this. And I think that is the differentiator. But that does not mean that we won't forward integrate. We do forward integrate because that just ensures that the business is pretty much in our hand.

Okay, then probably we would be aiming or targeting a better or higher turnover from the new forward integrated part?

That's right.

And the margins will get compensated over -- through the volume part?

That's right.

The next question is from the line of [ Abhilash Hiren ] individual Investor.

Sir, can you explain the [indiscernible].

There is some echo coming from your line.

Hello.

Sir, still we are getting an echo.

Well, I'm on mute, so it's not coming from my end.

Mr. Hiren, please go ahead with your question.

Sir, can you explain the tender processes for the...

Sorry, I'm not able to hear. I'm not able to hear Mr. Hiren.

Is this better now?

Can you please use the handset mode sir?

Yes, I'm on the handset. Am I audible?

I'm afraid not very clearly.

Is this better now?

Let's try, let's try.

Yes. Sir, can you explain the tender processes for Rifa-S, when are the released? And how is it different in the global market vis-a-vis the Indian market?

Sorry, I could not hear the question. If someone...

Mr. Hiren, we request you to please rejoin the conference. We'll move on to the next question from the line of Ankit Gupta from Bamboo Capital.

The API growth that we are commercializing on that for the construction will be completed by June, July of this year. What kind of [indiscernible] on this or what kind of revenues can you generate from API block once we reach optimal capacity utilization?

Sorry, what was the question that what kind of revenue can we generate from the new API block once?

Yes sir.

I think it's something that we have really not come out and giving those numbers. But what we are looking at is a 25% to 30% growth in terms of where we are this year in the next financial year. So this particular API block should help us attain that kind of growth level.

Sure. Sure. And how many products will be manufacturing from this API block?

One high-value product, but multiple small products will be produced wherever we feel that the margins are very healthy.

The next question is from the line of [ Abhilash Hiren ] Individual Investor.