IOL Chemicals and Pharmaceuticals Limited (524164) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 and 9 Months FY '24 Earnings Conference Call of IOL Chemicals and Pharmaceuticals Limited. From the management, we have Mr. Pardeep Khanna, Chief Financial Officer; Mr. Abhay Raj Singh, Senior VP and Company Secretary; and Mr. Rakesh Mahajan, Adviser, Finance and Strategic. We also have an Investor Relations team from Adfactors. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Darshan Mankad from Adfactors PR for the opening remarks. Thank you, and over to you, sir.

Thank you, Darwin. Good afternoon, everyone. We welcome you to the third quarter and 9 months ended December 31, 2024 Earnings Call of IOL Chemicals and Pharmaceuticals Limited. Before we begin the earnings call, I would like to mention that some of the statements made during today's call might be forward-looking in nature, and hence, it may involve risks and uncertainties including those related to the future financial and operating performance. Please bear with us if there is a call drop during the course of the conference call. We would ensure the call is reconnected the soonest. I will now hand over the call to Mr. Abhay Raj Singh for his opening remarks. We'll then open the forum for Q&A. Over to you, Abhay Sir.

Thank you, Darshan. Good afternoon, everyone. First of all, I would like to thank you very much all of you for joining the third quarter and 9 months ended 31st December 2023 earnings conference call of IOL Chemicals and Pharmaceuticals Limited. As we connect for the first time in this new year 2024, let me wish all of you a healthy and prosperous 2024. Hope you all have gone through the results and the investor presentation available on the website of the company as well as exchanges. Before we dive into the financial performance for this quarter, and open up the floor for the Q&A session, we would like to briefly touch upon the economic and industry outlook. According to latest IMF outlook, the global growth is projected at 3.1% in 2024, and 3.2% in 2025, whereas India is expected to be the fastest-growing economy globally and is projected to grow at 6% to 7% in 2024. This strong domestic demand, government is spending on building infrastructure capabilities and higher per capita consumption are major drivers behind the growth projections. The pharmaceutical sector in India is currently undergoing a significant transformation with a strong emphasis on enhancing local value addition. The government policies aimed at promoting domestic productions of active pharmaceutical ingredients are expected to positively influence the sector's contribution to the global pharmaceutical supply chain. However, industry stakeholders are advocating for uniform tax implications throughout the value chain to further boost domestic manufacturing. We appreciate the government's ongoing commitment to promoting health care innovation, research and technologies as outlined in the recent budget announcements. We also anticipate that bringing the API segment on par with the formulations will definitely create a level-playing field. On the profitability front, we have observed some margin contraction compared to the previous quarter, largely due to lower realizations. The Specialty Chemical sector, as you must be aware, has not recovered as anticipated a couple of quarters ago. There are still signs of weakness in demand and certain volatility. However, on the positive front, the raw material prices are in control, which has helped the industry in limiting the margin contraction. With China still contributing majorly to global demand recovery, there is still a concern for higher price realization. During the last quarter, another impediment, we witnessed was the rise in the freight and insurance costs due to Red Sea crisis. With the crisis still on, we expect these costs to remain higher in Q4 as well. With this, I would like to hand over the call to my colleague, Mr. Pardeep Khanna, who will brief you about our financial performance for the third quarter and 9 months ended 31st December 2023. Khanna-ji.

Thank you, Abhay. Good afternoon, everyone, and thank you for joining us today to discuss our performance for the third quarter and 9 months ended...

Sorry to interrupt, but you are not audible at the moment, sir. I request you to please come a little closer to the mic, it would be better, sir.

Good afternoon, everyone, and thank you for joining us today to discuss our performance for the third quarter and 9 months ended 31st December '23. I will take you through financial highlights for the third quarter and 9 months of financial year 2024. The total income of the company in the third quarter of financial year '24 stood at INR 529 crores as against INR 530 crores in the corresponding quarter of financial year '23 and INR 552 crores in the previous quarter ended September '23. EBITDA for the quarter was INR 53 crores as against INR 50 crores in the corresponding quarter of financial year '23 and INR 71 crores in previous quarter ended September 2023. EBITDA margin for the quarter marginally improved by 60 basis points to 10%, as against 9.4% corresponding quarter of financial year '23 and 12.9% in previous quarter ended September 2023. The net profit in the third quarter of financial year 2024 was INR 23 crores as against INR 24 crore in the corresponding quarter of the last year, and INR 38 crores in the previous quarter ended September '23. With easing of input costs on year-to-year basis, EBIT margin for the pharmaceutical segment was at 12.19% in quarter 3 of financial year '24, while EBIT margin for the Specialty Chemicals segment was 0.43% in quarter 3. CapEx for the quarter was INR 80 crores as against INR 75 crores in the corresponding quarter of financial year '23 and INR 82 crores in the previous quarter ended September '23. The exports for quarter 3 grew 27% to INR 180 crores as compared to INR 142 crores in the corresponding period of the last year. Exports for the 9 months period grew 17% to INR 504 crores as compared to INR 431 crores in the corresponding period of last year. With this, we open the floor for a question-and-answer session. Thank you very much.

[Operator Instructions] The first question is from the line of [ Deep C ] from 9 Rays EquiResearch.

Am I audible?

Yes. You're audible.

Sir, my question is, are we seeing any further decline in input cost and improvement in margins ahead in FY '25?

Good afternoon. I think the prices of both input and finished prices are now curtailed. And we don't hope any further reduction in the input prices. It's already bottomed out.

Okay. Got it, sir. And sir, what will be the EBIT margin trajectory for API segment in FY '25?

It will be improved because we are expecting some regulatory approvals and an increase in our export portion. So we hope it will improve from the present level.

Okay, sir. And sir, what are the CapEx plans for the next year and how it will be funded?

Usually, we incur around INR 150 crores to INR 200 crores every year. And from last 6, 7 years, it is all from the internal accruals. And for the upcoming CapEx, it will be from internal accruals only, primarily.

Okay, sir. So for FY '25, the CapEx would be around INR 100 crores to INR 150 crores?

No, it's around INR 150 crores to INR 200 crores.

The next question is from the line of [ Vivek Jala ] from JR Investments.

Can you hear me?

You're audible.

What kind of increase in revenue potential are we expecting from Losartan, which recently got CEP certificate in European market? And do we have plans to sell this product this quarter itself?

We have got the CEP in this current week only. But as of now, we have not set up any dedicated plant for Losartan. It is being produced in the multi-project facility of our company. And as per campaign-based, we're producing when the demand and the validation of customers then in upcoming 2 to 3 quarters, then we think about to set up a dedicated or increase the capacity of Losartan.

And just a follow-up with the Specialty Chemicals segment, which contributes substantially to your top line and very marginally to your bottom line? Apart from backward-integrated chemicals for API, how do you see this business go ahead?

First of all, the major portion of revenue in chemicals from ethyl acetate, which is not actively consumed, it is only for the merchant sale and other chemical like Iso butyl benzene, acetic anhydride, monochloroacetic acid, they continued around 80% to 90% to our actively consumption. And we are not focusing on the revenue of these captive consumption products, but these are mostly dependent on most -- for the self-reliance of our production activities.

Okay. And just last one. We are seeing sharp reduction in gross margin on a Q-o-Q basis. Could you give some color on that, please?

On the prices, the major cause of reduction in revenue and bottom line is primarily due to the reduction in finished good prices, especially of paracetamol. And we think, the prices of paracetamol now is maybe bottomed out and still -- although the prices of -- input prices are also decreased in that ratio also. So we hope that it will be bottomed out. And now all of finished products will likely to improve from the next quarter.

The next question is from the line of Neelam Punjabi from Perpetuity Ventures.

Sir, my first question is on the other API business. The revenues have been sub-INR 100 crores this quarter. And we had initially guided for the full year, delivering INR 500 crores of revenue. So are we sticking to this guidance because this would imply INR 165 crores of revenue in the fourth quarter? So if you can just give some comments around that.

No, no. you are -- Neelam, you are absolutely right that initially, we guided for achieving around INR 500 crores from non-Ibu business. And perhaps we could have achieved the same or maybe a little more than that. But you see there is a substantial fall into the prices of our non-Ibu products, majorly in the paracetamol. So we are not sure for now that we will be clocking the INR 500 crores and more than that, but we will be achieving something around INR 440 crores to INR 450 crores for sure.

Although the quantities of these products are growing, but the major affecting factor is price realization.

Understood. So sir, if you can just give some guidance to us as to how are you seeing this business in the next couple of years? You mentioned that you believe that the prices have now bottomed out. So going forward, what's the kind of growth that we can see in our non-Ibuprofen API business?

So the company is targeting as a whole, it is price growth or top line growth of 10% to 12% annually. And as regard to Ibuprofen, we are already on the capacity utilization of 85% and we hope that it will maintain our upcoming in this quarter and next quarter. And maybe when the demand comes, we may increase to 95%. And we are also -- in connection with this Ibuprofen, we are also hoping for increase in revenue in our non-Ibu segment, although this quarter and a little bit part of last quarter was affected due to price erosion. And we are targeting for around 25% of revenue for non-Ibu segment in upcoming 1 to 2 years.

So 25% revenue growth you're talking about, non-Ibuprofen APIs?

As of now, within the non-Ibu, if we talk about the -- it is around 21%. So as you rightly said that initially, we said that our non-Ibu will be growing at around 25% for 2 years, this guidance was for the 2 to 3 years. So we are literally hopeful for achieving the same considering receiving the CEP, so our export sale must probably be coming into the next quarter or by the first quarter -- first to second quarter of the next financial year. So we are confident of achieving the same.

Okay. Got it. So for exports of our non-Ibuprofen APIs, you're saying that next financial year, even first and second quarter, we start ramping up our exports business, right?

Little bit -- we have started adjusting, but there's still the validation of various customers are undergoing. And we hope that will be -- the seeding has already started and that we hope that within 2, 3 quarters, we will start getting orders from them, commercial orders.

And once our exports business starts ramping up, are we anticipating some good increase in our gross margins? And if you can just guide us to what kind of levels our gross margin can head towards with increase in export contribution?

There is some increase in prices in net sales realization, when we started exporting European countries and the other countries, [indiscernible] to say. And there will be the difference depending on the product to product. In some products, there is a little bit margin, but some of the product, it is maybe more than 20%, 25%. So we hope that the gross margin will increase, when we stabilize our export business in non-Ibu segment.

Okay. And for Ibuprofen, this quarter, capacity utilization was 85%. Is that what you mentioned?

Yes.

Basically, this is on account of being the last month, globally, the overseas markets remain slow in the buying side because of the holidays. So that is the main reason, having a little bit lower side of this capacity utilization. But this quarter and the first quarter of the next financial year, usually the Ibu quantity sale is better than the third quarter.

Got it. Okay. And sir, next on the Chemicals business. So given we had commercialized our acetic anhydride plant, however, that has not translated into any meaningful top line contribution yet. So if you can just comment around that what's the reason behind it. Has it contributed anything to the top line this quarter?

Yes. As you know that we have started around 2 quarters back. But after captive consumption, we sell in the market. But the biggest market for acetic anhydride is agrochemicals. And agrochemical is already on the downside. You must know that the performance of all agrochemical companies are affected from China and we are struggling for, you can say, good numbers. So that may be some reason that it may not contributed till now, but we are already seeding various customers and approaching various agrochemical and pharmaceutical companies. And we hope that it will be a struggle within next 2 to 3 quarters. And it will be reflected in the top line also.

Understood. Okay. If you can just comment around what was the price realization for Ibuprofen, paracetamol and metformin that would be helpful.

The price realization of paracetamol is drastically down from last -- in comparison with the last quarter of FY '23, it is down by 35% to 40%. Although the prices of major raw materials have also come down. And as regard to the Ibuprofen, it is around $10.

Okay. Got it. Okay. And is this $10 similar across our exports and domestic business for Ibuprofen?

That is net realization to the company.

The next question is from the line of Vikas Sharda from NTAsset Management.

Most of the questions have been answered. I just have one question that last year in the March quarter, you had a big bump in the margin. So what's the one-off? Or is it a quarterly phenomenon for you?

In March, due to the demand of APIs also increased and in chemical, we have got some good numbers in chemicals because of some operational efficiencies and with some good orders from the customers. So we have a little bit of hope that this current quarter of FY '24 may be stabilize as we have said in current quarter, maybe stabilized.

Understand. And just on the previous quarter to this quarter, the decline in the gross margins, you said is mainly because of the other APIs.

Other APIs, non-Ibuprofen, the price realization of non-Ibuprofen.

Understand. Perfect. And what's your expectation of improving the realization there? Or what period will it happen?

The paracetamol was primarily -- comes near to the prices of pre-COVID level, demand is still there, but the prices are drastically down from last year price by 35% to 40%. Although the prices are now, we think that it has stabilized now and bottomed out now. The demand is still there, Let's hope the -- maybe the viability for many players may not remain there because we are backwardly integrated for paracetamol. We may be have an edge from other competitors. And hope so the price will be increased, hope so.

And out of this INR 450 crores or so of other API sales that you're targeting this year, how much of that is paracetamol?

Around you can say -- it is not more than 10% as of now.

Not more than 10%. That's very good.

The next question is from the line of [ Sheikh Muhammad Ayaz ] an individual investor.

Sir, my question is regarding, sir, some data I got from Internet regarding export. It was through Arihant Chemical Research and EXIM. There is 26% growth year-on-year in export and 9.7% growth in quarter-on-quarter. I just want to confirm, it is -- whether it's right or wrong.

For which product?

Overall export data, it is increased by 26.8% year-on-year, 9.7% quarter-on-quarter.

What for -- the export growth for which product?

All product. Allover export data.

I can't -- I have not seen the number, but I have heard that the export has been increased for the country as a whole, but I could not comment on it as of now. I don't know the exact number.

Okay. Sir, my next question is regarding the -- what kind of margin we are expecting -- what kind of revenue and margin you are expecting in the next quarter because last March was super? And this March -- and in terms of revenue also, management used to guide 10% to 15% -- 10% increment, but I don't see even 5% increment in the revenue because for that, we need INR 700 crores of revenue, and I don't think it is possible. But whether it is possible for a 1.5% growth which we have achieved last year in FY '23, INR 600 crores, is it possible in March quarter?

As of now, considering the current market scenario and geographical uncertainty, that number will not be achievable for this quarter.

And what kind of EBITDA margin you are expecting from next quarter? And what -- why I am asking large scale is, already for Q4, already 1 month and 8 days been over, what kind of improvement you are seeing in terms of EBITDA or increments?

We understand that there -- a little bit improvement will be there, but I can't comment on the exact numbers, but it will be a little bit improved, we expect that from the last quarter.

Okay, sir. Sir, my next question is Granules India is coming with a backward integration of para-aminophenol and DCDA, it is around -- already 100-tonne capacity of DCDA will be commenced by this year end. How it is going to affect IOL CP? And are we going for DCDA plant?

No. We are already in the manufacturing of para-aminophenol and all -- existing capacity totally backwardly integrated with 100% para-aminophenol in-house, we are not buying from anything. And like DCDA, as of now, all are buying from the China, including Granules. But Granules is just -- we understand that they are starting with their pilot plant and their commercialization production will come in FY '26 for DCDA.

Okay. Sir, there is the Red Sea crisis. Do we see any impact of Red Sea crisis on our exports?

Pardon?

Red Sea crisis. Red Sea crisis is going on, I think and I hope you are aware of that.

Yes, yes. Red Sea crisis. Our delivery time is also increased by 3 to 4 weeks in our export has -- not with the IOL but all the industry is facing such problems and even insurance cost and freight cost have also increased.

So how the shipping costs are being decided, means we are passing...

Already contracted orders are at -- the amount is being borne by company. But for upcoming contracts, we are negotiating with our customers for passing on these cost to them.

The next question is from the line of [ Deep Chitalia ] from 9 Rays EquiResearch.

Yes, sir. My follow-up question is, can you -- sir, can you tell us the margins of exports and domestic business separately?

As already discussed, it will depend on the product and it depends upon the market also. If we sell in the regulatory market, it may -- in some products, it may be at par, but in some other products, it may be 15%, 20% increasing in export market compared to domestic or on a regulatory market.

Generally, the price utilization is better than domestic by 10% to 20%.

Okay. Got it. Sir, as you mentioned that there are 8 products in the pipeline to be launched. So sir, I wanted to know that when these products will get launched and how much revenue we can expect from the very first year.

We will not launch all the products in 1 year or 2 years, it will take, certainly, longer time to set up these plants. And first, we start with only a multiproduct facility, then when we get the good demand, then we will set up dedicated plants. So as of now, we can't comment on revenue from these pipeline products.

The next question is from the line of [ Hemant ] from Norasia Trading.

Sir, I just joined in late, so please help me with having a sense. So what is the plan on the paracetamol API expansion you were supposed to update us this quarter?

You're asking paracetamol capacity enhancement?

Yes, yes, yes. Capacity expansion.

So I think we have not given any announcement regarding this. So we will be updating all the stakeholders in an appropriate time. Yes, the management always keeps on consideration -- considering the market responses. But we will announce you or update you regarding this at an appropriate time.

Abhay sir, the reason why I'm asking is because since the last 2 quarters, you have been saying that -- and we have like running on 90% capacity utilization. Also, we are the fourth leader. Thirdly, sir, we have a huge runway for growth in paracetamol API itself and also we are backward integrated. So I'm just trying to understand what are the challenges you are facing, are we -- and you also have the same customer base for Ibuprofen as well as paracetamol? So where exactly we are facing challenges that is why it's taking so long.

You are very much correct, Mr. Hemant what you are saying all is strategic thing, and the management is also considering all the things in the same direction you are talking about. But what I'm saying -- because we have not decided anything on it so far, and this is -- unless it is decided, we are not able to communicate this. So what I'm saying that we will be communicating at an appropriate time.

The next question is from the line of [ Sheikh Muhammad Ayaz ] an individual investor.

Sir, my just -- I just need to ask one silly question, what was the intention behind opening and closing of IOL U.K. Limited subsidiary?

So we were thinking -- I mean at the time when we were thinking for opening of the U.K. company, we were thinking to do some business from that company. But because now U.K. is not that perfect destination, this is also not in the EU, so we are thinking something else, and we will let you know at an appropriate time with the different decision.

This is the last question. What kind of capacity expansion we can expect from the company in upcoming quarters?

Capacity expansion of what?

Any products we are manufacturing or which are the products in pipeline?

No, no, we are thinking for -- we'll continue to see enhancement for various products. But as no decision has been taken so far. So anything, if I say, will be the forward-looking statement and the SEBI doesn't allow us to say anything, which is forward-looking statement.

But we are exploring various formats.

And the strategy, we keep on evaluating various options and also depending on the market situation as well. So once we decide, we will let you know.

The next question is from the line of [ Vivek Jala ] from JR Investments.

Sir, are we on track to achieve around INR 500 crores revenue in FY '24 from the non-Ibuprofen?

The line for you is not clear.

Sorry. I was asking are we on track to achieve around INR 500 crores revenue in FY '24 from non-Ibuprofen?

Mr. Vivek, actually, initially, we were targeting about INR 500 crores revenue from non-Ibu products this year. But considering the current market situation, it looks tough. We will not be able to perhaps clock the INR 500 crores revenue from non-Ibu, but surely, we will be able to drop something around INR 450 crores something -- near about INR 450 crores.

[Operator Instructions]. The next question is from the line of [ Dinkel Shah ], an individual investor.

Sir, my first question is could you just give us some breakup of price and volume growth for the current quarter for API as well as the Specialty Chemicals segment?

Where breakup?

The price and volume growth for the quarter and the breakup between API and Specialty Chemical segments.

Thank you for the question, but let me tell you that the prices of APIs have been decreased during this quarter, not increasing. There is no growth in prices of APIs. Little bit prices of chemicals, especially ethyl acetate has been -- you can just take like that, maybe 0.5% or 1% increased. But the prices of APIs are not growing in the -- not grown in the last quarter.

But sir my question is in spite of API segment, they're procuring higher margin, but the segment in general has degrown, especially on Y-o-Y and Q-on-Q basis, any particular reason in spite of higher margin we are degrowing?

It is only the price that decreased in cost and we got decrease in the input prices. That is the main reason for degrowing the profitability or margins of API segment, and which we hope that it is already bottomed out now. And also, it will be started increasing from -- in the next 2 quarters.

[Operator Instructions] Ladies and gentlemen, we have no further questions. I would now like to hand the conference over to Mr. Rakesh Mahajan for closing comments. Over to you, sir.

Thank you, everyone, for joining us today and discussing our third quarter and 9 months ended 31st December 2023 performance. The company continues its strategic focus to diversify revenue and geographical base. We are on an intended path of entering regulatory markets. So some of our APIs are -- which we have received the approval from the regulators. As discussed, this would help us in expanding the margin and unlock value for investors and shareholders alike. Thank you very much again for attending this call. Have a nice day.

Thank you. On behalf of IOL Chemicals and Pharmaceuticals Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.