Indoco Remedies Limited (INDOCO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Indoco Remedies Q2 FY '27 Earnings Call, hosted by Dolat Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rashmi Shetty from Dolat Capital. Thank you, and over to you, ma'am.

Thank you, Ira, and good afternoon, everyone. I, Rashmi Shetty on behalf of Dolat Capital, Welcome you to the Q2 FY '27 Earnings Call of Indoco Remedies. We thank the Indoco Remedies' management for giving us this opportunity to host the call. Today, we have with us the senior management of the company represented by Ms. Aditi Panandikar, Managing Director; Mr. Sandip Bambolkar, Joint Managing Director; Mr. Pramod Ghorpade, CFO. I will now hand over the call to the management for the opening remarks. Over to you, sir.

Thank you, Rashmi. Good afternoon, everyone. Thank you all 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 expectation of the future performance of the company. Please note that these estimates involve several risks and uncertainties that include a cost or actual results to differ materially from what is expressed or implied. And the call does not undertake any obligation to publicly update any forward-looking statement, whether as a result of new confirmation, future events or otherwise. Now I will request our Managing Director, Ms. Aditi Panandikar, for her opening comments.

Good afternoon, everyone, and a very warm welcome to Indoco Remedies Q2 FY '27 Earnings Call. The second quarter of FY '27 marks an important milestone in Indoco's growth journey. Despite a dynamic operating environment and near-term challenges, we have continued to make progress across key business segments, strengthening -- strengthened our operating performance and advanced our long-term strategic priorities. I'm particularly pleased to share that for the first time, Indoco has crossed the INR 500-crore mark in quarterly consolidated revenues recording INR 5,069 million in Q2 FY '27. . While we have made encouraging progress in improving our operating profitability, the expansion in margins was partially impacted by increase in material costs, along with elevated freight costs arising from ongoing geopolitical conflict. Despite these external cost pressures, we remain focused on driving operational efficiencies, strengthening cost management and improving profitability. These results reflect the progress we are making in strengthening our operating performance and building a more resilient business. Moving to our domestic operations. Our domestic formulations business continues to benefit from established brands, strong prescription franchises and leadership positions across select therapeutic categories. While the business has faced near-term challenges, we are encouraged by the continued strength of several of our core brands and the growth opportunities emerging from priority therapies. Cyclopam has further strengthened its position as a flagship brand, crossing the INR 200 crore threshold and now at a sales of INR 206 crores and maintaining its #2 position in the antispasmodics and anticholinergic market. The gastrointestinal portfolio recorded encouraging growth of 30.3% during the quarter, while our stomatological business grew by 34.8%, reinforcing the strength of our differentiated brand portfolio. We are also seeing promising traction in our newer introductions and emerging brands. These products represent an important growth opportunity as we continue to deepen our prescription reach, strengthen our presence in priority therapies and build the next generation of brands for Indoco. Our focus remains on improving the performance of our domestic franchise through sharper execution stronger field force productivity, disciplined brand investments and continued emphasis on high potential therapeutic segments. We believe these initiatives will help us progressively strengthen our domestic growth trajectory. Turning to our international operations. Happy to share that Plant 1 at Goa had a very successful inventory audit and as we just got the message today and the release has been made earlier this day, our CRO, AnaCipher, has also cleared the AnaCipher inspection. Our International Formulations business delivered a strong performance. We witnessed encouraging momentum across regulated markets, particularly the United Kingdom and Europe, alongside strong growth in USA and the Latin America. This performance reflects the strength of our international platform, our established customer relationships and our growing capabilities in contract research and manufacturing services. Regulated markets remain an important pillar of our growth strategy. We continue to leverage our regulatory approved manufacturing infrastructure, development capabilities and customer partnerships to pursue higher value opportunities and strengthen our presence across established and emerging markets. Our API business has also continued to demonstrate great resilience. Our integrated API capabilities remain strategically important in strengthening supply chain security, supporting our formulations portfolio and enhancing our competitiveness. Additionally, our Alive services businesses comprising of Indoco analytical solutions and AnaCipher, the CRO, continued their encouraging growth trajectory. We believe these capabilities will play an increasingly important role in strengthening our development and research platform while creating opportunities for future business expansion. As we look ahead for the second half of FY '27, our priorities are clear: strengthening domestic brand performance, accelerating international growth and improving operational efficiency while building capabilities that support sustainable profitability. We will remain focused on disciplined execution, prudent resource allocation and investments that create long-term value. This year is especially significant for Indoco as we are progressing towards celebrating our 80 years of existence. 79 years trust, integrity and nurturance has been the foundation of our journey. As we move ahead, our renewed focus on accountability, meritocracy, agility and resilience reflect our commitment to build a stronger, more agile and competitive organizations. We are new Indoco 80 years forward. We recognize that there is more work to be done, particularly in strengthening our domestic performance. However, the progress across our international formulations, API and Allied service businesses, together with improving operating mid prices and continued strength of our core brand gives us confidence in the opportunities that lie ahead. We remain optimistic about Indoco's long-term growth prospects and firmly committed to building a more resilient innovation and profitable pharmaceutical business that deliver sustainable value for our shareholders and stakeholders. Thank you. I will now hand over the floor to Mr. Sandeep to present to you the details of the financial highlights for the quarter.

Thank you, Aditi. Good afternoon, everyone. Let me first begin with the financial highlights. Stand-alone revenue -- net revenue of the company for the second quarter, '26-'27 grew by 2% at INR 4,381 million compared to INR 4,293 million for the same quarter last year. Consolidated net revenues of the company for the second quarter '26-'27 grew by 7.4% at INR 5,069 million compared to INR 4,718 million. Stand-alone EBITDA to net sales for the quarter is 9.2% at INR 403 million compared to 12.4% at INR 534 million. . And for the immediately pre-quarter, EBITDA is 10.3% at INR 422 million. Consolidated EBITDA to net sales for the quarter is 9.2% at INR 464 million compared to 9.1% at INR 431 million. And for the immediately preceding quarter, EBITDA is 8.8% at INR 410 million. Domestic formulation business, revenues from domestic formulation business for the quarter are at INR 2,128 million compared to INR 2,261 million. Major therapeutic segments like stomatology, gastrointestinal, urology and dermatology performed well during the quarter as compared to the same quarter last year. On the international formulation business front, revenues from International formulations business grew by 12.1% and at INR 1,720 million compared to INR 1,533 million. Revenues from regulated markets for the quarter grew by 21.1% at INR 1,109 million as against INR 915 million. Revenues from U.S. business for the quarter grew by 16.4% at INR 391 million as against INR 336 million. Revenues from Europe for the quarter grew by 23.5% at INR 675 million as against INR 547 million. Revenues from South Africa, Australia and New Zealand grew by 31.2% at INR 43 million against INR 33 million. Revenues from emerging markets for the quarter are at INR 612 million against INR 618 million. Revenues from API business for the quarter grew by 4.6% at INR 451 million against INR 431 million. And finally, revenues from AnaCipher CRO and Indoco Analytical Solutions, for the quarter grew by 20.8% at INR 82 million against INR 68 million. That is all about the business highlights for the second quarter. And I now request the participants to put forth their questions. Thank you all.

We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of [indiscernible] from unique BMS.

Ma'am, my first question is on the other expenses. So in the first quarter, we had converted expenses and go expenses. We had also mentioned that all the initiatives that we have taken we reduced the number of people by 1,000 or something. But still, the expenses are up this quarter. So one, what is the problem here? And secondly, how do we control these on a sustainable basis?

Yes, it's a good question. As you correctly said most of our expenses and most of our other expenses are actually fundamentally under control. What has happened this quarter is we have got impacted in a healthy manner on account of freight, which has impacted most of our international business. The employee cost as a percentage of sales have actually dipped by a couple of percentage points. So we feel going forward, I know the current situation because of the war. I don't know till when we will have to bear these kind of additional freight. But -- that is it. And otherwise, there is no other concern. So I feel -- I mean, I know we had always guided at around [ INR 160 crores ] on a consol basis. We have slightly inched above it in this quarter.

Can you quantify the freight impact, ma'am?

About INR 12 crores to INR 13 crores.

About INR 13 crores .

INR 13 crores additional impact? .

Yes.

Okay. Because we've always maintained INR 150 crores would be the number that we were targeting.

Yes, yes.

Second question on the domestic business. So all our priority therapies are doing well. but then that growth is again offset by an acute business or some of the other headwind. So how do we solve this problem also because now it's been, I mean, we've not had single-digit growth for this year. We've not had -- I mean, we wanted to grow low double digits, but we have not been able to grow the domestic business. So how do we work on this?

Yes. So what you said is true. I mean, it is very surprising that when Cyclopam and [indiscernible] portfolio is growing by 30%. So you have 3 winners, you have Febrex Plus, Oxipod and APM degrow by almost similar percent -- of a similar value that has been literally [indiscernible] of this quarter. What are we going to do? Of course, as we work on the portfolio and reduce our dependence on the seasonal acute therapies, this should come under control. . But this has been a very, very different year or different season, I think you might have seen across all segments basically. So we would have to -- as we improve this dependence -- reduce our dependence on the seasonal portfolio. I'm sure India should do well. What is more happening is that almost INR 100 crores on a MAT basis are now coming from products launched in the last 2 years. And these new products, I believe, are all in growth segments. And as big as stabilized and established, they will create an environment for us in which we can probably better face the challenges like we faced this time.

One is this portfolio problem. And the second is also we were trying to work on our distribution again. So any progress on there? How long does this take to get better?

So it is a branded business. The way we do it, nothing can be done really overnight. We are working on it. We believe fundamentally, things are improving because even Febrex plus, which is in heavy degrowth, is rolling at the prescription level. So that -- and the same division, which carries Oxipod also carries Tital and Cyclopam, the other 2 products which have delivered. So I don't think there is much concern on effectiveness or efficiency. We really -- I mean, if you look at anti-infectives and respiratory, 1 time, we used to have more than 50% in these 2 therapies. Today, I think our total dependence must be around 30% and which is pretty heavy. At the strategic level, what we are trying to do is with anti-infective, anti-cold, in particular, we are trying to minimize impact going forward by looking at the mass doctors that we meet for these products. But having said that, these are categories which get maximum prescriptions from the general practitioners, who are dependent on footfall, and it has been a difficult year. So we are working on various things to improve this. As and when we see improvements specifically in a quantum levels in how some of these therapies perform, we'll be the first ones to share it with you.

Next, coming to the international business. So while this quarter was at 12%, the half. If we look at H1, it is still in single digits. Given the kind of work that we've done, I think we were expecting far better growth here. So again, -- because Europe is also -- yes.

Right. Our international business in total comprises of the reg markets and the emerging -- what typically happens is that the emerging business, of course, Q1 was not good for emerging business. Q2, they have done a little better, but not up to our expectations, but our reg markets have grown by 21%. So that is very healthy. Emerging business have also taken impact slightly of the Optal portfolio sales in Africa, which no longer now belong to us. And then we continue to promote the products for [indiscernible] around INR 10 crores of sales has got impacted on account of the Solvay's portfolio of in Africa has gone away. . Our own [indiscernible] market business, I would like to speak about the Europe, U.K. steady order positions, good offtake. And we feel confident that these businesses will show very healthy growth in the years to come also. Emerging business, there are cycles, and I feel by Q3 even this business will come to mark.

In the regulated market business, say, Europe, U.K., can these markets grow at 20% plus for the next couple of years. .

Yes. That is the target.

Okay. The one question on our audit that happened. So while we were ready, we still had 7 observations, once again. So if you could just explain what were those observations? And do we expect the plant to get resolved?

So I think I said this in the last MDA discussion call with management, but I will repeat now. We have just finished giving FDA a major outline on how we are going to respond to their concerns. One update on data and work done thereafter has also gone to [indiscernible] I believe this is the time when they are looking through our responses, looking holistically at the whole picture. And like I said, by first week of December, is the earliest we are going to know about which way this goes. I feel pretty confident that our team, because the observations might look many in number but none of them are specifically related to any DI, data integrity, any cleanliness or cleaning validation or any of those major things. Most of them have got to do with expectation of the agency on how we investigate, how we do certain procedures and processes. So a lot of the responses this time have been about training people to meet up with the regulators' requirements. So I feel pretty confident and keep hoping for a positive outcome. But best we speak about this after December.

One question on our CapEx. So until last year, we were maintaining that all the CapEx had been done, and you were expecting about only INR 40-odd crores of CapEx for the next 1, 2 years. But if I look at the cash flow statement, I see about INR 60 crores CapEx in H1 itself. So one, again, what is this? And if we expect the high export this year? .

Yes. So, Nirmal, basically, CapEx, what you see there is a capitalized amount on account of intangibles. The work which we do on [indiscernible] those are capitalized, but...

Actual CapEx for land, et cetera, is not more than INR 25 crores, I think, this year. .

Less than that.

Even less than that.

But then how does it -- Pramod sir how does it reflect in the cash flow statement in the investing activities .

Yes. Because the -- we do capitalize the ANDAs and the approvals based on -- R&D expenses are capitalized. What we can do, we can do more disclosure, we can bifurcate that between PPE and others extent. .

Okay. Understood. Understood. And so 1 question on Warren. We had incorporated a new subset for the API business, I think, so if you could explain the reason for separating these 2 businesses or if you're looking at anything additional, are we trying to get any fund .

No, no. I mean I'll just address your basic query. Why? Because we have many businesses inside Indoco and some of them are really as different as [indiscernible] and cheese. So the OTC business on remedies in the API manufacturing business of Warren remedies are very, very different. We believe, therefore, that consistently, whenever we look at Warren remedies performance, we keep checking the performance of the API division financially and the back of the OTC business separately. . And I don't think this is healthy. Therefore, we have just, at this point, registered a company in the name of Warren Life Sciences with an intent possibly of separating the 2 businesses. That's it.

Next question is from the line of [indiscernible] from ithought Financial Consulting.

My question was about the CapEx. In the last PBT, we were doing some more CapEx on the warren side. What is the nature of that? And is that completed now?

Yes. Yes, yes. We were just completing some portion of the API site, I think finished product side, and that is also done.

Got it. Got it, ma'am. And when are we expecting U.S. audit for that API plant?

I'm hoping in -- by second quarter of next year. We have already filed. We have CEPs also approved. Our DMS are already in the FDA books. And our own formulation team is triggering this. So we'll have to wait and see.

Got it. Got it. And ma'am, what would be the revenues in first half for FPP business? .

If I'm not mistaken, we have done in excess of INR 100 crores.

Got it. Got it. And we have been profitable in this first half, if I'm not wrong.

Yes.

So ma'am, what should be the sustainable EBITDA margins and PAT margins for this business going forward?

So we are not talking of a branded business. You know how the U.S. market is. Of course, we are very selective about the product portfolio. But looking at how things are, we would like to wait and watch. I think it is -- we take great pride in the fact that within 3 years of acquisition, we've been able to turn around [indiscernible] that is good at. It is also very healthy because Cetem ground is always good. we get much better understanding of what is happening there. And we are growing this business and feel very confident going forward also. We'll be able to keep this business. I'm not saying -- we may not grow it too large, but we would like to keep it making decent profit.

Understood. And any specific headwinds that are -- that we are witnessing for this business as of now?

For SPP, not really the typical regular problems there, I don't think we should call them headwinds anymore -- more like the characteristic of that geography. With generics, you currently see price erosion, you see more competition -- but what we do is we try our level best to be vertically integrated on most of the products we supply to U.S., whether through FPP or otherwise. . And that gives us much better ability to live through these times. But other than that, more competition, yes, but we have a good team, which manages to get the right orders, we do a good balance between -- with how much we sell to home now. And we don't just go after the market.

Got it. Got it.. And on warrant remedy side, the initiative would be very helpful for analysts also since API and OTC business are very different. So what are the current revenues out of these 2 segments within warrant remedies?

Our Warren toothpaste division has done around INR 36 crores this quarter. .

Okay. And on the AP side, ma'am within...

It is mostly on consumption since we don't have any approvals yet. So it is starting material, KSM purchased by [indiscernible] Anything we sell from here at this stage is going to be a cost or something. So we don't really manufacture too much. So right now, we are using this time to take validation batches move a whole lot of portfolio, create extra capacities for the products we make at [indiscernible] and try to bring in more of the case and then starting materials for [indiscernible] which we are making outside.

And then what would be the breakeven level of revenues that we would need here to reach breakeven.

So that is also a very funny question to answer. I could tell you that for this quarter, our toothpaste division has almost broken [indiscernible]. But that is because we probably have slowed down some of the expenditures on advertising. So this is a business which requires a whole lot of support and funds to create consumer awareness for media, for television, for digital and for trade marketing. . So all those campaigns are going to come up. So if I tell you it's broken even now, you will hold me by -- hold me true to it for the next quarter when I would have invested to further my sales and then I will not be able to do that. Like I explained in 1 of my calls earlier, at least for the first 3 or 4 years of such a business we should concentrate on growing sales.

Understood. Understood. And hypothetically, I think we work on a single shift .

Yes, yes. Our OpEx -- our operating expenses at the toothpaste factory are completely under control because we built it in a way with the highest technological kind of addition. And we need very few people. We are able to control shifts. We are able to control the number of people. We are also steadily bringing in certain other contract manufacturing income of other cosmetic products that we make for IRL, the parent company. And that remains. But yes, we'll run it in one shift right now.

Got it. I meant across all our plants. I think we operate on a single shift. So hypothetically, can we add more shifts as and when we require it?

Of course, we can -- that was the planning. .

Got it. And ma'am, if all our plants start to work at peak capacities, what would be our revenues look like? I'm not asking about any time line, just a broad...

No, no. I mean, see, we are in a business where we make a very commoditized product like paracetamol and a very, very interesting product like probably one of the suspensions of ophthalmic. And you really can't compare this, and I cannot give you numbers like that. But still, I think I can tell you very clearly that with this infrastructure, the company can very well go to 4x the kind of top line we are delivering for international.

Understood, ma'am. That was very helpful. And ma'am, are we on track to repay our debt for this year, the numbers.

We have been repaying also up to now. First half, we must have repaid close to INR 40 crores, INR 50 crores, about INR 50 crores. INR 65 crores at consol level.

Next question is from the line of Kiran from Leo Capital. .