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

Ladies and gentlemen, good day, and welcome to Gujarat Themis Biosyn Limited's Q2 and Half Year FY '24 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 a guarantee 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, Gujarat Themis Biosyn Limited, for his opening remarks. Thank you. And over to you, Mr. Patel.

Thanks very much. Good afternoon, everyone. I would like to wish you all a very warm welcome to Gujarat Themis Biosyn's earnings call -- earnings conference call for the second quarter and 6 months ended 30th September 2023. I would like to begin by expressing my gratitude to all of you for taking the time to join us today. We have with us on call today Mr. Tushar Dalal, Group CFO and Adfactors, our Investor Relations team. Before we get into the business and financial performance, I would like to briefly share the recent developments and our strategic focus areas. Our production levels were maintained at optimal capacity during the quarter in discussion. However, in the previous quarter, we had sales from unsold built-up inventory from the quarter before that, which has led to higher sales. Since the impact of built-up inventory normalized this quarter, therefore, turnover appears lower than before. However, demand for both our products continues to be strong, based on this we are continuing with current production levels. This quarter witnessed higher growth in production and sale of Rifa S vis-a-vis Rifa O. While the product sales mix helped improve gross margins, higher investments in skilled workforce and R&D costs exerted pressure on the EBITDA margins. As stated, CapEx plan is progressing as planned. We are in the process of obtaining the required approval towards getting our R&D facility commissioned. The new facility will expedite our product development efforts and help broaden our fermentation-based product portfolio covering diverse therapy areas. We have also been investing in our talent base to support this. In terms of our forward integration endeavor, the process of commissioning our API block is going on track. We shall explore development of key APIs, which not only leverage our core competencies, but also have a high growth potential. We shall focus on developing Rifapentine since it is more likely to be recommended by the WHO as the preferred treatment for TB over Rifamycin. However -- moreover, Rifapentine also has the potential for treatment of latent tuberculosis. We are in advanced stages of development of some more APIs to add to this portfolio. Both our R&D and API block should be commissioned by December 2023. As the last leg of the CapEx plan, construction of additional fermentation capacity is underway and is expected to be ready by 2025. Overall, in terms of the CapEx status, INR 60 crores is under capital work-in-progress as of now. As already stated in earlier calls, these new facilities will be compliant with global regulatory norms, enabling us to target export markets in addition to the domestic market. Overall, we believe that with these strategy -- strategic developments and course of action underway, we are well positioned to leverage our expertise and capitalize on opportunities in the global market. Our vision remains to provide quality healthcare products while generating value for all our stakeholders. Now turning to our financial performance for the second quarter, that is Q2 FY '24. We reported INR 39.65 crores in revenues during the second quarter vis-a-vis INR 47.69 crores in the previous corresponding quarter. Change in product mix -- product sales mix helped improve gross margin. However, our EBITDA for the quarter stands at INR 16.82 crores, decreasing 31% year-on-year, and the EBITDA margin is 42.42%, down by 875 basis points year-on-year. Increased investments in skilled workforce as well as R&D costs impacted EBITDA margins during the period. Our PAT during the quarter was INR 12.54 crores as against INR 18.7 crores in the previous corresponding period. The PAT margin stood at 31.63%. The EPS for the quarter is INR 8.63 per share. Now coming to our half yearly performance. We reported INR 89.24 crores in revenues during H1 FY '24, a 3.66% decline over the previous fiscal first half. Our EBITDA for the period stood at INR 40.33 crores while the EBITDA margin is 45.19%. Our PAT for this -- for half year is INR 30.27 crores as against INR 36 crores in H1 last year. PAT margin stood at 33.91%. EPS for the year is 20.83. The company furthermore undertook a subdivision of its equity share with each share of face value of INR 5 divided into 5 equity shares of face value INR 1, each effective from 11 October 2023 after all regulatory, statutory and shareholders' approval was received. This is all from our side. We can now take questions.

Thank you very much, sir. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Dhruv Bajaj from Smart Sync Investment Advisory Services.

So, my first question was that you have earlier guided that we are working at full capacity and building up inventory in Q4 to ensure that we can grow our volumes in FY '24 till the time new capacity comes up. However, as you have mentioned in the commentary earlier that since we earlier got the benefit of inventory in previous quarter, so our growth was not very good in this quarter. So, I wanted to know now what will be the guidance for the full year and when can we expect the new CapEx to start yielding some revenue?

So, first and foremost in the first quarter of this current year, we were carrying on inventory from the previous quarter or previous two quarters of last year, and similar was the situation last year whereby we were carrying inventories from the last two quarters. Now, currently, the way situation is, we are -- the inventory is pretty much regularized, we don't have any carry forward inventory, which means whatever we are producing, we are selling. I can only say as we see the situation right now is that the demand is strong and we feel that the capacity utilization is pretty good. So, if we were at, let's say 75%, 80% capacity utilization, and the capacity utilization -- I mean, sales, we hope to do better this year the way we see the demand right now. So that is with regards to the growth and how we see the rest of the year. With regards to the CapEx coming into place, we should start seeing additional revenues come up in the next financial year from the API block that we have created. As we said, the same is going to be commissioned by December, which means we can take about 6 to 7 months, maybe 8 months after that from where the exhibit batches would have finished the stability studies, and we would be able to sell the same in the market.

Got it sir. My second question is that how has been the pricing for our products considering we have seen a sharp drop in the gross profit margins as well? And will the margins for Rifapentine be higher than our current ones considering it is a forward integration initiative?

So, we definitely expect the margins for Rifapentine to be better than where we are right now, no question about it. Otherwise, it would not make commercial sense for us to go up the value chain and make this kind of CapEx. So, absolutely, yes. So with regards to the gross margins which are there or the overall EBITDA margins which are there, there are two factors which impacted us this quarter. So, if you see overall through quarters, almost for about the last two years EBITDA margins have been reasonably good. But two things that affected us this year more than production costs, etc., were, I think some one-time expenses, at the same time R&D expenses with more people coming in. And this is going to happen because we will have R&D expenses come up more than what they were before if we want to grow the business and if we want to increase our top line and increase our product mix. So, this is a part and parcel of it. But not to this extent as we have experienced this quarter because as I said there were some one-time expenses that we had to make.

Got it, sir. And sir, if I can squeeze-in one another portion then I wanted to ask if my understanding is right, then Rifapentine is an API that will be produced by Lupin as well. So, earlier we used to supply them intermediates, which were then used by them to produce the API. So, will our forward integration efforts affect our relationship with them or like how are you telling them to sell this considering earlier we were dependent on only two customers for our entire sales?

So we don't intend to disturb any of our relationships, and we are planning things accordingly whereby we are able to fulfill the requirement of all our partners and yet be able to do what we aspire to do in the future. So, that is something that we are working on. How we are going to manage to do this is something that we have not put out in the public domain yet. To answer your question, both the customers are very important for us. We will continue to cater to them and yet we will also follow our aspiration.

The next question is from the line of Tarun S from Sanchay Capital. Please go ahead.

Firstly, congratulations on a decent set of numbers despite the inventory issue that you were facing last time. Also, it is very encouraging that you have acknowledged that you people are going into Rifapentine. Because this is a new announcement, I just wanted to understand the lay of land as in what is the competitive and the intensity of this particular API and how much of that is being produced domestically vis-à-vis import -- is being fulfilled by import, so if you can help understand what is the domestic consumption of this API and what percentage is being met by imports?

Dr. So Rifapentine relatively is a very new kid on the block because it was only last year that the WHO came out with the guideline stating that Rifapentine should be used as a first line treatment for tuberculosis rather than only latent tuberculosis and the reason being that use of Rifapentine rather than Rifampicin reduces the duration of treatment for tuberculosis patients from 6 months to 4 months. So, as you can imagine, this is a very recent development. Countries are gearing up to it, WHO is gearing up to it, other funds are gearing up to it. So, while Rifapentine has been in the market globally for a very long time, it is very recently that the companies have started developing it and are developing it. So that's a bit of a background to the Rifapentine story. So, we are all preparing for scale or large-scale manufacturing of Rifapentine on behest of this guideline coming out from WHO, where we anticipate on the basis of the benefit that the tuberculosis patient has, that the market will shift from Rifampicin to Rifapentine as time goes by. And we are there to capture whatever we can in lieu of the entire supply chain that we have. So, in India, I think the tenders for Rifapentine are just floated, some of them about to get finalized, but a lot of them will be finalized in due course of time. So, it's all very new for everyone, but I think the important thing is to have those capacities put into place to be able to fulfill the requirement of whatever the demand is, directly or indirectly.

Based on some understanding I think Sandoz bought a capacity of close to 10 metric tonnes and Lupin also got close to 20 metric tonnes. Is that the right understanding if you can help with?

No, no, I don't know what the capacity is for Sandoz or Lupin are for Rifapentine.

In that case, just to flip it around, what is the initial capacity that we are looking at?

We have built a capacity for about 7 to 8 metric tonnes per month.

Something related to that, so, domestically how big this opportunity could be in terms of metric tonnes?

Very early days to say because the first bit of tenders that have come out from the Indian Government to talk about anywhere close to 30 to 40 metric tonnes of Rifapentine for the year,, maybe a bit higher. But, we have a long way to go.

And the last question on this line is, if you can help with, is it predominantly being catered with import or is it that domestic people are able to meet the requirement?

So, one of the conditions for Indian tenders is as a part of the Make in India project is that 80% of the products that you are supplying to the government should be made in India. So, it is imperative that whoever wins the tenders and whoever supplies the product to the government, the raw material, which is a major component of the cost of the product should be produced in India, to be qualified for public tenders.

yes, that is about India tender business. What about WHO tender just in case we are applying for that? I don't think that could be updated a bit for global tenders.

So, for global tenders, I think they are still supposed to come out, it is still going to take some time, but it will happen during the course of a year or two years.

Still, our customers, for example, say Lupin, would be pretty much participating into tender because they have already got a volume contract from WHO and global funds. So, even from their perspective, is it that -- predominantly that API is being supplied by Indian producers or is it import play as well?

I would not be able to comment on all the details of what Lupin does, because as you can imagine this is their business and it is something that they would not share with us so openly.

The next question is from the line of Keshav Garg from Counter Cyclical PMS.

Sir, I'm trying to understand that last year in the call you had mentioned that we were expecting around 25% to 30% growth in FY24 in terms of revenue. So, that should translate between INR 190 crores to INR 200 crores top line for the current year. So, is that understanding correct and are we on track to achieving the same?

What I had mentioned is that if 100% capacity utilization is there, that is where we should grow and that is what we are looking at because as we have mentioned in the investors presentation that we have put up and as I have mentioned in my opening remarks, essentially we are selling whatever we are producing now, so we don't have any backlog of inventory left, which means if the same trend continues over the next two quarters, we should arrive at those kind of numbers and what we can say right now is that the demand is looking pretty strong.

But like last quarter, second quarter we did INR 40 crores top line and we produced and sold our full capacity. So, going by INR 40 crores quarterly top line, we will reach somewhere around INR 160 crores on annualized basis without any change in inventory. So, I mean that's...

That's not the correct number, right, because we are at about INR 90 crores right now.

Sir, but in first quarter we had some past inventory which we sold, but in the second quarter it was a fresh slate.

So, you might as well take the second quarter numbers, right?

Right. So, INR 40 crores if we annualize it, so it gives us INR 160 crores revenue and not INR 200 crores, it's not closer to INR 200 crores. So, we need to reach somewhere around INR 50 crores top line to reach INR 200 crores annualized revenue. So, are we on track for that?

No, no. It will not happen this year. The capacity as we mentioned is what we are using right now.

So basically INR 40 crores per quarter is our optimal capacity and we are already operating at the same, so we should expect the same trend going forward until...

Maybe a little bit up or down you'll see, but yes, on the whole, you are right.

So basically, for the next -- till the middle of next financial year when our new API block revenue start coming in, we should expect broadly the same quarterly top line of around INR 40 crores, is that understanding correct?

Yes. Roundabout, yes.

What kind of jump can we see by, let's say, three, four quarters down the line once the API revenues kick in, so what kind of delta can we see in the quarterly run rate?

I don't think that we are going to go out and give those statements right now. We can only say that our API block is beginning in December because as I explained in the previous answer that I gave, one of the key products that we're going to be working on is Rifapentine. It's a new kid on the block, the upside is massive, the pricing is extremely interesting right now. So, the numbers could be significantly different from what we are seeing right now, but it all depends upon how Rifapentine as a product picks up. While I said that, I also mentioned what is the scenario with the Indian government in terms of tenders and what is happening globally where everyone has moved to the Rifapentine. So, I can only say that Rifapentine is looking quite interesting. Now how much we are going to sell once our API plant starts, I think it's something that would really be a forward-looking statement.

Lastly, sir, there was an announcement that we are working with Themis Medicare API division for some joint work or some sharing of infrastructure and sponsors. So, if you could shed some light that what exactly are...

The two sites are next to each other and maybe some analytical services, etc., are shared between the two and because it is a related party transaction, we have to put a kind of approval process in place that, you know, this amount of money could be spent on either side for using each other's infrastructure, so it was on account of that and nothing else.

Then sir, can the revenues from that infrastructure sharing, etc., can it be significant like if you could...

It's less than INR 5 lakhs. But it's a related party transaction just to be compliant and good governance.

The next question is from the line of Nirvana Laha, an individual investor. Please go ahead.

So, my question is more towards understanding the relationships that you enjoy with some of your most important customers. So, a few years back, you changed your model from a contract-based model to a more market-based pricing which has led to significant expansion in your EBITDA margin. But your customer, at the other end, I'm just trying to understand that this must have also had an impact on their sourcing price and therefore their ability to compete in the market by procuring intermediates from you. But the relationship seems to have remained intact and is going as strong as ever judging by your commentary and also by the numbers. So, can you help us understand what has caused the relationship to stay intact even after such a big change?

Sorry, I've missed one particular one. Did you say, what has made sure that the relationship is intact even after such a big change?

Yes, even after such a big change in terms of your pricing towards them.

I think we went away from that model, moved to this model. So, first of all it's quite an old story, but nevertheless it remains intact because we still work on a win-win relationship, it's not that we are looking at taking advantage of the whole scenario or we are being opportunistic in our business. We are working with all our partners whereby we can maintain this kind of a relationship over the long term. So that is the only reason why any relationship like this would continue, right?

Right. Doctor, if you could help us understand the win from your customers' perspective, because that is something we're not able to understand. So, unless there's something that you would...

That is something that you should ask my customers because I feel it's a win-win on both the sides and anything more detail than that would be very strategic in nature and confidential if I may say so.

All right. So my next question is that if you look at your customer, I am naming the customer. If you look at Lupin, there are competitors for Lupin from India now who have announced that they are backward integrating into say Rifa S under PLI. So my question is, will this not put Lupin also under pressure to compete on cost with them. And we understand that they are also capable of manufacturing the Rifa S. So but we are right now supplying to them. So how do you see this evolving? Is it likely to affect our relationship's in the future?

I don't think so. I don't think. I think everyone -- so as you rightly said, the announcement was made some time ago. There's not a recent announcement, right? So I think everyone has prepared themselves for whatever has to be done in the future to make sure that they have their business secured. It's not just us or our partners or someone else's in the market. Everyone would take care because the investments that are required in this kind of a projects are quite significant. So unless you have a certain surety of business, you will not embark upon something like this. So I think we're not overly concerned about any new production that may be coming up in India.

Okay. Okay. And would you be able to confirm that the announced capacity has actually started producing and supplying or not, as far as you know?

No, I don't want to comment on what anyone else is doing.

Okay. And last question from my side. Dr. Patel is with respect to China. Now you've addressed this before, but just trying to understand what are the dynamics with respect to exports from China for us right now? And do you think that it is possible that there is a shift towards sourcing from China for say global contract, et cetera, because for India, you've explained, but do you think that remains a threat? Or have we gone beyond that and that is no longer relevant?

I think it is always relevant. I think any other producer across borders, producing the same product and competing, there's always a possibility. But as I've said in the past, the market is only so much, whoever enters into the market and is disruptive should do it for a good reason and that good reason hopefully is profitability. So we'll have to wait and watch what is happening. But I think we are reasonably okay with our planning and our strategy and hence the commitments towards the CapEx that we are doing.

[Operator Instructions] We'll take the next question from the line of Saloni Hemnani from Molecule Ventures.

Am I audible?

Yes. But just the voice is not very clear.

Yes, it's muffled ma'am. I would request you to use your handset, please?

One second. Hello?

Yes, ma'am. Please continue.

Yes. I just had 2 questions regarding the CapEx. So if I calculate in FY '22, we did INR 14 crores in '23, we did INR 24 crores. And in the last 6 months, we did INR 41 crores. That equals to around INR 78 crores spent in the last 2.5 years, which was around INR 80 crores our Phase 1 CapEx. So are we through the Phase 1 CapEx or do we require some more until the plant gets commissioned in December?

We may require a little bit more. I'm not very frankly speaking, very sure of how much exactly is required. Unfortunately, Mr. Rajneesh Anand, who is also supposed to join this particular call, but for unfortunate reasons, he has to be occupied elsewhere. But we are -- it's not going to be a very significant amount, which is now going to be required, if any to commission in the last month, which is there.

Okay. So...

So I don't think we are going to go -- there's any significant overrun to what we had budgeted in the past.

Okay. and sir, in the PPT that you have mentioned -- we have mentioned FY '24 to be the time line, but we are sticking to our original December, right?

Yes.

Okay. Okay. And in the next 6 months, you are assuming that the trial will get started and commercialization will happen.

That's right.

Okay. Sir, any revision in the earlier INR 200 crore capacity expansion amount due to the new areas that we are thinking of exploring and developing in terms of new products that you mentioned?

Yes, we are currently working on this. The initial plan was about INR 200-odd crores. On the basis of -- of a new projects that we are working on. We are thinking about this might increase significantly upwards. But it's something that is not finalized yet. Once it's finalized, we will come back and report on this... It is work in progress.

You mentioned significantly upwards, a ballpark figure or any range would also help, if that's okay?

At least double.

At least double. Okay.

If not more. So it's something that we are working on, but not finalized as of yet.