Indoco Remedies Limited (INDOCO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Indoco Remedies Limited Q2 FY '24 Earnings Call, hosted by Dolat Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Rashmi Shetty from Dolat Capital. Thank you. And over to you, ma'am.

Thank you, Dovin. Good afternoon, everyone. I, Rashmi Sancheti Shetty, on behalf of Dolat Capital, welcome you all on the Q2 FY '24 earnings con call of Indoco Remedies. I would like to thank the management of Indoco Remedies for giving us this opportunity to host the call. Today from the management team, we have with us Ms. Aditi Panandikar, Managing Director; Mr. Sundeep Bambolkar, Joint MD; and Mr. Pramod Ghorpade, CFO. I now hand over the call to the management for their opening remarks. Over to you, sir.

Thank you, Rashmi. Good afternoon, everyone. Thank you for joining this call today. Let me draw your attention to the fact that on this call our discussion will include certain forward-looking statements which are projections or estimates about our future events. These estimates reflect the management's current expectations of the 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 expressed or implied. Indoco does not undertake any obligation to publicly update any forward-looking statement whether as a result of new [ confirmation ], future events or otherwise. Over to you, ma'am, for your opening comments.

Yes. Good afternoon, everyone, and thank you for joining us today. We closed the second quarter of FY 2023, 2024 with a consolidated sale of INR 465 crore, of which domestic formulation business has contributed INR 228 crore. International formulations business has contributed INR 195 crore. API business has contributed INR 36 crore and shown a growth of 95.6% over same period last year. The remaining INR 6 crore have come from contract research and analytical business, which are the small service businesses of the company. For the second quarter, we have recorded an EBITDA of 72.4 crore. Before we start the call, I would like to update all members regarding an update that we have just sent to the stock exchange. A PAI or pre-approval inspection was conducted at Goa Plant I for 2 ANDAs. The inspection was conducted between 12th to 18th October, and at the closure of this audit late last evening, 4 483s have been issued to the plant. Our plant quality assurance and corporate compliance teams are -- will be working very closely with the FDA to resolve any queries that they may have regarding quality issues at the site. Now to come back to today's call. At our organization, we have been continuously adopting new technologies, aiming for higher productivity in a systematic manner and therefore aiming for the volume and value growth. Some of those worth mentioning are at our Baddi unit 1 formulation site we have received a GMP certification from EU health authorities in July 2023. This certification is a testimony to the fact that we are committed to remain CGMP compliant and ensure supplying quality products to our customers and patients across the globe. Our Waluj plant has undergone expansion recently to accommodate volume demand from emerging and India markets. Our API facility at Patalganga has been upgraded recently to include a larger quality control laboratory facility. At our CRO in Hyderabad, a new business of pharmacovigilance is being contemplated. Various IT-related projects are being undertaken with a broader road map spanning HR, operations, sales and GMP-related quality assurance concerns. This is being done at various manufacturing sites. Across many of our sites also, projects are underway to increase batch size; improve yields; and overall bring down overheads, specifically those involving human capital. These initiatives will eventually improve efficiency at our sites and make our products more competitive. With all the process improvements underway; expansion programs, both green and brownfield, under execution at many of our sites; new product launches; and continuous increase in our ANDA filing endeavor, the organization is rightly positioned to achieve its targets going ahead. This is from me. I will now hand over to Mr. Sundeep, who will take you through the financial highlights of quarter 2.

Thank you, Aditi. Good afternoon, everyone. I hope you all are doing fine. Let me first begin with the business highlights. Net revenues of the company for the second quarter FY '23, '24 grew by 15% at INR 465 crores compared to INR 405 crores. In the first half of the year, revenues grew by 9.9% at INR 878 crores, as against INR 799.5 crores. EBITDA-to-net sales for the quarter is 15.6% at INR 72 crores compared to 21.7% at INR 87.8 crores. EBITDA-to-net sales for the first half is at 15.4% at INR 135.3 crore compared to 19.9% at INR 159 crore. Profit after tax-to-net sales for the quarter is 7.1% at INR 32.9 crores compared to 12% at INR 48.7 crore. PAT-to-net sales for the first half is 6.7% at INR 58.6 crore compared to 10.8% at INR 86.2 crore. Earning per share for the quarter is INR 3.60 compared to INR 5.39 for the same quarter last year. EPS for the first half is INR 6.41 compared to INR 9.56. Above numbers are on stand-alone basis. We have declared results with consolidation, which includes results of subsidiaries. The Indian pharma market is valued at INR 55,718 crores, registering a growth of 7% during the second quarter of FY '23, '24, as against similar second quarter of last year. In the IPM, Indoco ranked 30th position in the second quarter, with a market share of 0.61%. The source is IQVIA July, August '23. Domestic formulations business. Revenues from this business for the quarter grew by 9.4% at INR 228 crore, as against INR 208.5 crore. For the first half, revenues grew by 8% at INR 441 crore, as against INR 408 crore. Major therapeutic segments, namely cardiology, ophthalmology, vitamin and stomatology, performed well during the quarter, as compared to same quarter last year. Now on the international formulations business front. Revenues from international formulations business witnessed growth of 11.9% at INR 195 crore compared to INR 174 crores same quarter last year. For the first half, revenues grew by 0.9% at INR 354 crore, as against INR 351 crore. Revenues from reg markets for the quarter grew by 1.2% at INR 149.5 crore, against INR 147.6 crore. And for the first half, revenues degrew by 3.9% at INR 283.9 crore against INR 295.3 crore. Revenues from U.S. business for the quarter grew by 17.5% at INR 81.4 crore, as against INR 69.3 crore. And for the first half, revenues degrew by 1.2% at INR 132.6 crore, against INR 134.2 crore. Revenues from Europe have degrown by 15% at INR 63 crore, as against INR 74.7 crore. And for the first half, revenues degrew by 6% at INR 143 crore, against INR 152 crore. Revenues from South Africa, Australia and New Zealand are at INR 4.7 crore, against INR 3.7 crore; and for the first half, at INR 8.5 crore, against INR 8.7 crore. Revenues from emerging markets for the quarter grew by 71.6% at INR 45.4 crore, as against INR 26.5 crore. For the first half, revenues grew by 26.1% at INR 70.7 crore, against INR 56.1 crore. Coming to APIs. The business for the quarter has grown by 95.6% at INR 35.8 crore, against INR 18.3 crore. And for the first half, revenues have grown by 127% at INR 71.5 crore, against INR 31.6 crore. Revenues from other business, such as AnaCipher CRO and Indoco Analytical Solutions, for the quarter grew by 73.6% to INR 6.4 crore, against INR 3.7 crore; and for the half year, by 41% at INR 11.2 crore, as against INR 7.9 crore. That's all about the business highlights for the second quarter. And I now request all the participants to put up their questions. [ Thank you, everyone ].

[Operator Instructions] The first question is from the line of Deepan Sankara Narayanan from Trustline PMS.

Firstly from my side: Management had guided for domestic business 11% to 12% for FY '24, so if by -- going by that, H2, we need to grow by 14%, 16%, so are we confident of achieving that kind of growth in domestic business in H2?

Yes.

Okay. So majorly, this growth will come from this stomatology division.

Not necessarily. For the current quarter, our subchronic therapies, specifically stomatological, ophthalmics and some others, have done very well. This is simply because, second quarter, which is otherwise a season quarter, the season impact did not come in because of rains which came late. So to some extent, the products which otherwise do well in the season, anti-infectives, anti-cold, respiratory, they will also pick up in current Q3 because of the push forward of season. And therefore, I expect the second half of the year to give a growth of minimum 15%.

Okay, okay. And also, in terms of Europe business, we were expecting some 90 crore to 95 crore quarterly run rate, but we are doing around 70 crores currently, so what is the reason for the same? And are we expecting some growth now from here on?

Yes. One of our products which we supply to U.K. got heavily overstocked during COVID and the following years. And as a result, the orders for the last 3 months have been very, very minimum, practically 0, but the situation will improve from now onwards. We have started receiving orders once again. So that was one of the main reasons for this setback.

Okay, so we are still holding that INR 380 crore, INR 400 crore kind of Europe business for this year.

Yes, INR 375 crores to INR 380 crores definitely. And we may do better.

Okay, okay. And lastly from my side: So what are the margin drivers we are looking at to improve the margin from here on to 17% to 18% for FY '24?

Yes. So if you have seen the performance this quarter, you must have seen that, cost of goods, we have shown good improvement. We've also shown a sustained or marginal drop in employee cost as percentage to sale, so fundamentally things are on the right track. There have been some additional onetime or short-term expenses that have come in other expenditure, because of which our margins have got impacted this quarter. Otherwise, we would have definitely shown a much better performance. When -- these are shorter-term kind of expenses. I would not call them one-off but definitely not perennial, so therefore, we believe that the margins will improve. Also, as you might have heard in my opening remarks, there are a lot of initiatives being undertaken to actually bring down the costs of operations across all our sites, so I feel very confident that going ahead we'll be able to deliver better margin.

Okay, ma'am. Can you quantify this onetime increase in that other expenses you are referring to?

Yes. Rather than quantify, I can tell you the nature of those expenses. As you know, we got OAI to -- for Goa Plant II earlier this -- a few months ago. And after that, we've started -- 6 months ago actually, we started remedial, remediation actions, so there are some costs of remediation. There are also certain costs which have come at the site to improve certain equipment, layout; and so you would have seen plant machinery repairs having gone up this quarter.

The next question is from the line of Sudarshan Padmanabhan from JM Financial PMS.

I'm just continuing from the previous participant on the remediation costs. I mean given that we are looking at around 17% is what we were initially looking at in terms of run rate for this year. Given that we have some kind of a, I will say, not necessarily one-off in this quarter, but because of the spend towards regulation, one, is there a change in your guidance? And how do you see the margins in the second half and the spend towards remediation and some of those costs getting rationalized?

So in the second quarter this year, a couple of things are going to happen. A, we expect international formulations to do much better than it did in the first half. Also, a lot of the season products in India business, their incremental sales did not come in, in Q2 the way it was expected, so we do expect that in the second half our margins will be much better, helping us come close to our guidance. Agreed that, in the first half and probably when we made the guidance or gave the guidance, the remedial costs and their impact may not have been fully understood, but every endeavor will be done for us to try and match the 17%.

Would there be more cost, ma'am, I mean, on the remediation side in third quarter -- or some of these costs to continue? And how much would it be in contrast to this quarter?

We expect for 1 more quarter to have some impacts, probably remediation costs.

Sure. And now to the U.S. business. It looks like this quarter has been pretty strong. Just to understand: Was there a quantum contribution in terms of profit sharing in this quarter? I mean, if you can quantify it, it would be great but just to understand. Going forward, should we see the similar run rate just continue? Or what is a kind of run rate that we are...

So in terms of value, yes, we are confident of continuing this kind of top line deliverance on U.S. numbers and even better. Regarding profit share, et cetera, I think you may -- you will agree that with our customers there are several confidentialities, so we don't feel free to discuss this thing now in the call, but yes, since our model is of cost and profit share, our model is of certain amount of dossiers to be sold. There will always be some amount of dossier income or profit share in our U.S. sales element.

In this quarter, was it much higher than usual now?

Not really.

Sure. And one more question from my side is if I look at and estimate the balance sheet. We have higher cash, but we've also taken higher long-term loans. I mean, interestingly, in our -- are we looking at any kind of sentiment there? I mean, why should we take loans and cash that has remained higher? Is it because of M&A? Or is it just the closing of [ seasonal? Do we have M&A ] [indiscernible]?

Yes, so if you see the cash, one, it's about certain investments we have made, while our CapEx, if you see over a period of last year and this year; and certain investments, strategic investments, such as investment into U.S., we have incremental funding on the other side. So we have taken ECB basically to cover up the -- a certain cash requirement for the acquisition. Aditi or Sundeep...

See, the drawdown of the ECB temporarily is part for usage for future requirements. So temporarily, you may be seeing some cash on hand.

Sure. And if we are looking at M&A, what would be our priorities, I mean, in terms of [ filling up demand ]?

We can't hear you. There's a lot of noise in the background. Can you repeat that?

Ma'am -- so if we are looking at M&A, what is the priority that we would be looking at? I mean, would it, will it be filling up [ pan-India ] brands? Would it be looking at more of assets towards the international markets?

So I don't think we said we are doing any M&A, but we are always looking for one, to be very honest. So regarding M&A, you mean acquisition. So in India, we've always been scouting for good brands. And internationally, we are keen to look at good facilities, but neither comes cheap and neither is available, to be honest.

Ma'am, one final question before I join the queue is this quarter you mentioned that it has been [ interesting ] on the subchronic side. And if I look at we have built -- whatever the investments that have to be made and whatever that has to be done in terms of investments towards faster growth have already been made, can you talk a little bit more in terms of what is driving this growth? Are we seeing more prescriptions coming in from specialists just compared to that of GPs in this segment? So some color on this. And where do we see this proportion of segment in the next...

Yes. So thank you for that question. We are ranked 20th among -- in the industry when it comes to the number of prescriptions we generate. And you'd be surprised that we are a couple of ranks above Glenmark as well for the absolute number of prescriptions we generate. At the same time, we are ranked 30th when it comes to our achievement in rupee terms in the market. That simply means that the percentage of acute contributing to our total top line is skewed very heavily in our case compared to many other companies. So we do generate prescriptions, but typically they are for one strip of Cyclopam, one strip of Febrex Plus, amongst other things. Going forward, this category of subchronic, that has been developed by us. That is prescriptions coming from other than general practitioner, as in pediatrician, ENT and ophthalmologists, dentists, gynecologists. These are called mass specialists. And when they write acute products, the -- they write the product for a longer-time usage because, beyond treating symptoms, they actually want to treat causes as well. So that has been the orientation of the organization to have -- a better contribution comes from other than general practitioners and from mass specialists. And we see that reflected in the performance, especially in the last 2 years when, because of COVID, at times acute did very badly. And other times, it did very well, but returns coming from categories such as stomatologicals, ophthalmics are quite stable throughout. And that gives a good indication of the kind of work we are doing with these specialities in the market. And we believe, because of this, going forward, we will be able to derisk ourselves from the 30%-odd contribution we have to top line, 30% to 40%, that comes from anti-infectives and respiratory. I hope that answered your question...

Sure, ma'am. One final question, if I can squeeze in, with respect to the European market which has probably seen a temporary decline in this quarter. I just want a little clarity given that, a part of this, this is tendered through AOK. And of course, a part of this is also fixed-volume contracts. Would that be a right assumption, that there might be variance between this quarter, but you have a fair amount of [ visibility ] in terms of the full year delivery? So as I think you mentioned earlier on, [ this will play the catch-up ] going forward.

Yes, yes, yes. There's good visibility for orders. And this was a little bit anticipated by us as well as the front-end client, okay?

Yes.

[Operator Instructions] We have the next question from the line of Rashmi Shetty from Dolat Capital.

So one question is that, since you have lost the order in the European business and we do have a good order visibility, what kind of guidance do you give for the Europe business this year? Because earlier, we were anticipating that we will be able to do around 18% to 19% sort of growth in the -- in Europe.

Yes, Rashmi, we have not lost any orders. It's just that this fast-moving product was overstocked for [ a continuous thing ] by our front-end partner, in anticipation that it would be flying off the shelves, which did not happen, from July, August, September and October. Now we have started receiving orders, which will be manufactured in November and dispatched in December, so we have not lost any tender or any orders. It's just overstocking. Just to clarify: The AOK tender is going on properly, but just out of abundant precaution, I said that we will do somewhere around INR 375 crores.

Okay. And in the U.S. business, of INR 81 crores, have we recognized any profit share this quarter?

Yes. There is always some element.

But from the brinzolamide and all what we were anticipating, has that profit come in? If you can quantify. And if you can say that -- in quarter 3, quarter 4, will that be sustainable?

I will answer the second part first. Yes, in quarter 3 and 4, it will be sustainable. On the first question, as I said earlier, because of certain strategic confidentialities with our front-end customers, we are not now free anymore to disclose numbers on this.

Got it, ma'am. And what is the R&D guidance? Because in first half, you will have done around 5.5% of sales as -- you have spent as an -- R&D expenses. So any particular guidance, if you can give, for the entire year?

It will be around the same, Rashmi, 5%, 5.5%.

Okay. And my next question is related to debt. Whatever debt we have taken up, is there any repayment schedule? Or for next 2, 3 years, the debt, more or less, number would remain same.

Yes. So Rashmi, we have just a term loan which is repayable on a quarter-on-quarter basis. So this particular year, in second half, we have a repayment close to about 24 crore; next 2 years, in the range of about 45 crore to 50 crore each year.

Okay, okay, so debt would be reduced by that extent.

Yes, yes.

Okay. And in terms of the domestic business, while -- I can understand that we have not shown growth in anti-infective and respiratory segment, but I'm also seeing that there is no growth in antidiabetic and pain management, so if you can explain, what is the reason for that? And how can we ensure that -- in next 2 quarters, from where the growth will be driven around 14% to 15%.

Yes. So on pain and specifically, Rashmi, you might be aware that I've never spoken of pain as a therapy area of focus for any of our divisions. So if pain has done well for us, it is probably because of a portfolio which is being supplied by our institution division which caters to armed forces, railways, ESI and those. It just gets reclassified under therapy is doing well or not. It is not specifically from any of our ethical divisions, okay?

Okay.

Yes.

And finally, on the EBITDA margin front, you said that there will be 1 more quarter where we will be seeing this remediation cost coming up. And in the first half, we have done around 14.6%, so to achieve around your guidance numbers, we will have to do around 20% EBITDA margin in second half, so is that achievable? Or you feel that it is a bit challenging given the remediation expenses and R&D and everything will be high.

So Rashmi, we are -- we have strategized to do the kind of value sales which can allow us to do those percentage margins, but of course, there are always challenges, so I specifically said we will be trying to achieve the 17%.

[Operator Instructions] As we have no further questions, I would now like to hand the conference over to the management for closing comments. Over to you, ma'am.

Yes. Thank you, everyone, for your active participation. And have a good weekend. Thank you very much.

Thank you.

Thank you.

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