Ipca Laboratories Limited (IPCALAB) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Ipca Laboratories Limited Q1 FY '21 Earnings Conference Call hosted by IDFC Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nitin Agarwal from IDFC Securities. Thank you, and over to you, sir.

Thanks, Steven. Good morning, everyone, and a very warm welcome to Ipca Labs Q1 FY '21 Earnings Call hosted by IDFC Securities. On the call today, we have from Ipca Management, Mr. A. K Jain, Joint Managing Director; and Mr. Harish Kamath, Corporate Counsel. I hand over the call to the Ipca management team to make the opening comments, and then open -- we'll open the floor to questions. Please go ahead, sir.

Thank you, Nitin. Good morning. Thanks for taking out time and joining us for Q1 FY '21 earning call. Today's con-call -- today's call and discussions and answer given may include some forward-looking statements based on the current business expectation, that must be viewed in conjunction with the risks our business faces. Our actual future financial projections, performance may differ from what is projected and perceived. You may use your own judgment on the information given during this con-call. We would like to inform you that company's business and financial performance for Q1 FY '21 has been strong in spite of testing time on account of global COVID pandemic. We have used our integrated business capabilities in furthering our global API and drug formulation business. The business and margins for -- margin growth in FY '21 is largely driven by the business opportunities due to COVID-19 on account of chloroquine and hydroxychloroquine API and formulations, higher currency realizations on exports, improved productivity at -- and lower cost of operations, reduced traveling and marketing cost, spillover sales from previous quarter due to lockdown for promotional branded formulation business. These upsides were, to some extent, offsetted by COVID-19 led to the lower India branded formulation business growth due to the reduced patient footfall; additional attendance incentive payments made to the plant workmen and staff during the period, the figure was almost around INR 20 crores; and increased freight cost. Having given the opening remarks, now I'll request participants to ask questions.

[Operator Instructions] The first question is from the line of Rahul Jain from Credence Wealth.

Congratulations for a wonderful set of numbers, sir. Sir, with regards to our quarter end results, we understand HCQ and chloroquine has almost contributed about INR 250 crores, INR 260 crores in this quarter. So leaving aside one-off businesses in quarter 1, can you understand what is the sustainable business? Or how much business should we could attribute to one-offs in quarter 1, which may not be again repeated?

Overall, hydroxychloroquine and chloroquine business related to COVID what we have done is almost around INR 259 crores on a consolidated basis. And that has also contributed significant margins to the -- overall to the company. That is basically, it's an incremental business over last financial year on these products on -- particularly on account of COVID. And -- so this is -- you can say that some of these businesses could be onetime business out of that. And there are no other exceptional other than the significant business what we have done on chloroquine and hydroxychloroquine. Rest is all normal operations. Apart from that, this also includes whatever institutional business on chloroquine what -- hydroxychloroquine what we have done in India. So it includes all promotional markets, generic markets, whatever additional API business what we have done on hydroxychloroquine and chloroquine. So it includes everything. It's a basically incremental business over last financial year first quarter. So that is, by and large, an opportunity on account of COVID, and that has helped us pertaining to this quarter.

So with regards to the guidance in quarter -- the previous quarter, you had given a guidance of about 14% to 17% for top line and improvement in margins by about 150 bps. So with the quarter gone by, can we understand that we can improve our guidance for the full year or -- in both top line and margin part?

See, COVID-related business opportunities have significantly come down now. Let's say, we are not seeing that kind of incremental business relating to that from Europe or maybe other geographies, except some API business are currently happening in some Latin American markets and all. So -- and mostly, the people bought the higher quantities in the first quarter itself. So they are still carrying the stock. So I don't foresee that there will be any kind of further additional businesses in these geographies. USA has already withdrawn the emergency authorizations as far as chloroquine and hydroxychloroquine are concerned. So -- and therefore, we don't see any kind of further business coming from there also. So as for -- the business of hydroxychloroquine now henceforth is likely to be more or less the normal business, which we used to do earlier. And that business opportunity may not be there to that an extent. And almost around 50% of our business is India formulation business. There, currently there are challenges are there. In the first quarter of the current financial year, of course, it has grown by around 8%. But that also includes the government business what we have done out of and -- if you exclude them, then I think overall, the India formulation business of that will be around 4% only, which also includes the higher hydroxychloroquine business. So there are challenges on India formulation business. Of course, there is a -- recoveries are -- gradual recoveries are happening. Each month is better than the previous month. But we are still to reach the full potential for -- maybe even to the -- that kind of level. Still, we feel that patient footfall is very low. Certain therapies like your antibacterials and derma and ophthalmology and all, we are still seeing some kind of decline. We are also seeing that malaria season, which normally happen from July to September, which is the peak period, we didn't find much of the malaria cases currently happening. And looking all that -- taking into account, our growth projections for the next quarter maybe it's around -- overall growth may be around 10%. And maybe in the next 2 quarters, we may start growing by almost around 12% or so. So overall growth of the company for the whole of the year will be little higher than the what projections we had given earlier of around 14% to 17%, it may touch -- 18%, 19% kind of growth is possible, but it's all depends how the recoveries are because 50% of our business is domestic formulation business and how recoveries happen in Indian market, that's very crucial for driving the business.

Sure. Just on the margin part...

Mr. Jain, sorry to interrupt, but for any follow-up, request you to rejoin the queue, please.

But this is just about that margin part, which has not been answered. So I just wanted to understand on the margin part. Very simple, sir, in the balance 3 quarters, I'm not asking -- we have been generally reporting around 20% margins for last 4, 5 quarters, somewhere around 20%, 21% margins for last 4, 5 quarters. Of course, 38% margins are not sustainable, but for the balance 9 months, can we expect the margins to be around 20%, 21% on a normalized basis?

We will continue to have some kind of margin improvement. The overall, let's say, cost pressures are down. Material cost pressures have come down significantly now. And overall, operating costs are also in control. Of course, there will be now -- in the first quarter, we didn't pay any kind of field operating costs. There are 5,000, 6,000 people who continue to travel and their daily allowances and their travel costs and all those costs was not -- was significantly lower in the first quarter. Of course, that cost is going to be there down the line. But since business is also at a reduced level, so even there will be -- some kind of reduction in the promotional cost would be there. But I don't think so there will be a significant amount of reduction in those kind of costs. But margin certainly is likely to be better than what we have earlier talked about.

[Operator Instructions] The next question is from the line of Prakash Agarwal from Axis Capital.

Just on the INR 259 crores that you mentioned. So this is across the -- which line items would it be, formulations, API, India formulations or the API domestic, which has also increased many folds?

It includes everything. In fact, what we have done is what hydroxychloroquine and chloroquine relating to export business, not -- I have not taken chloroquine normal business of India. So hydroxychloroquine business last year and business in this -- so incremental figure is taken of all the businesses. And whatever chloroquine export-related business is additional done, so that is added to that. And mostly, the India API business, what you are looking for, that is also the significant increase figure what you are looking is also relating to chloroquine for U.S. exports.

Okay. And you have all baked into this INR 259 crores is what you're saying?

Everything, everything is included in INR 259 crores, yes.

Okay. So India, API as well as exports is already baked in, in this INR 259 crores?

Domestic formulations, institutional sales in domestic, promotional market, additional business on hydroxychloroquine, generic market additional business on hydroxychloroquine, local API business on hydroxychloroquine additional business, export API business of hydroxychloroquine and also chloroquine for U.S. exports, which we have sold to the -- in India for U.S. exports. So put together, everything is included in INR 259 crore.

Okay. Fair enough. And second question is on the gross margin side. Is the 900 basis points improvement, you clearly mentioned part of it, currency part of it is one-off. So if you could just help us understand what will be the normalized gross margin going ahead, given that HCQS you are saying had higher gross margin, so we exclude that and assuming currency at INR 75?

Let's say, overall, if you look at our last financial year, our material cost to sales ratio for the whole of financial year was almost around 33%. And a year prior to that, it was a little lower because there was -- some kind of material cost increases were there. First quarter, it was almost -- last year, it was around 35% and then started 33%, 32%, that's the kind of overall material cost ratios were there. I -- we see that these ratios are going to be down in the next 2, 3 quarters. And it may be around 32% or 31.5%, that's the kind of ratio is going to be there. So there will be improvement in overall gross margins in the current financial year.

This would be led by what, sir?

It's lower material cost.

The next question is from the line of Surya Patra from PhillipCapital.

Congrats for the great set of numbers, sir. Sir, just on that INR 259 crore, one small clarification just wanted. First is that -- see, sir, you said, on the domestic business side, you also got the impact of this COVID and disruption and all that. So -- see, this is the incremental number, obviously, for the HCQS supply, but the business impact what we have seen, can you quantify that?

I have already said that overall business growth, domestic was almost around -- overall business growth is around 8%, out of which 4% has come because of institutional business. And -- otherwise, overall business growth is around 4%. So -- and if we take hydroxychloroquine out from that, practically, there will be around 2% kind of growth.

No. Okay. I was trying to understand what is the revenue that you lost in the quarter because of the COVID impact?

Our -- at the beginning of the year, we were looking for around 15%, 16% kind of downstream business -- overall business growth, and there was no projections for institutions. And against that, we have got 4% growth. So around 12% business is lost.

Okay. Okay. And this is recoverable or how is it, sir?

No, patients who are not treated, that business is lost once and for all.

Okay. Yes. Fine. Fine. My first question, sir, on the -- if you can just -- these are like a relatively long-term orientation -- oriented questions, like, see, you have already mentioned about filing few of products, DMF through Pisgah in US. So what is the update on that? How many products that you have filed? How many that you are having in the pipeline to file? That is one. And secondly, on the KSM manufacturing thought process you have said earlier, and you want to create a dedicated site at your acquired asset or acquired new company site of Maharashtra. So what is the outer timeline during which you can achieve that KSM manufacturing for your strategic products?

As far as KSMs are concerned, we have a very integrated business of API and KSM production is in -- a lot of KSMs are produced in-house. A lot of starting materials we import from China. And some of the KSMs also we import from China for all -- but for most of our larger products, KSMs are produced in-house only. Some of like, say, a product like Losartan, we have -- the BCFIs and other material, which is largely what's imported earlier from China, we've developed now certain indigenous suppliers for that. We are working on a continuous process plant, which is currently under installations and hopefully, by September, that plant will start operating. And BCFI, we will internalize, and that will also give a substantial cost reduction. Because conversion ratios are likely to be far, far better and cost reductions are going to be much better. That will further enhance our [indiscernible]. And by and large, for all larger APIs, we're producing KSM ourself. As far as your Nagpur sites are concerned, because of lockdown and other issues and COVID issues and all, we have really not taken any kind of effective step on that. Our first priority is to set up a plant at Dewas, for which we have already received now in this period, last 3 months, the lockdown period, the environmental clearance has already come. It has come at the end of the quarter. So we will be -- after, say, this monsoon period of August-September, we'll start the construction there and build the API facility there. API capacity constraints are currently there, and those we are -- we will be resolving through our Dewas facility. And thereafter, the priority will come on a lot of those kind of other scaling up of the KSMs and all, for which we are really looking for more such continuous operations. And so the R&D and piloting team are continuously working on that part. So at least 5, 6 products will be in the pipeline in time to come on that.

Okay. About US filing, sir?

About US filing, I think, the 2 DMF work is done, and we are awaiting inspection there. And once that happens, then probably these 2 DMFs will be -- but they are all very high value and the small volume kind of products are there because there Pisgah doesn't have very large capacity. It's more of like a CRAMS kind of facility, and they have this -- all these narcotic products also they have licensed now.

Scope for a scale-up of this, sir?

There, we are really not looking for much of API production in U.S. currently.

The next question is from the line of V.P. Rajesh from Banyan Capital.

Sir, my first question is regarding your expenses below the gross profit. So last year, we had about INR 2,100 crores of expenses. Is there any guidance for that, given the -- some of the items you called out in your introductory comments about higher employee expenses, et cetera?

As far as this quarter is concerned, overall, let's say, your personnel cost has gone up by around 18%. Largely, it's because of around INR 20 crore additional we have spent on giving incentives to the -- particularly the staff and workers of the plants because it was very necessary to keep all the site operational. And around that time, a lot of fear factor was there in the mind of people. So a lot of activities we didn't -- did to avoid those kind of -- reduce those kind of fear. At the same time, announced the incentive so that people come and we are -- we should be -- because there was a huge amount of pressure from government. We needed to supply a huge amount of tablets, almost around 12 crore tablet we supplied to the central and state government within a period of 45 days, plus we had to cater to the domestic, ROW, all those kind of -- and increased production of hydroxychloroquine and chloroquine was required around that time. So we -- that's the additional cost which we incurred. Otherwise, in this particular quarter, there were some reductions in the marketing cost because promotional cost was low. And also, there was a -- your travel cost is low. So these 2 costs has come down. Overall cost -- and on manufacturing side, our operating cost has just gone up by 2%, except your on manufacturing and other expenses. Whereas, in marketing hike, there is a reduction in the overall cost. But I don't foresee any kind of -- marketing cost reductions are not likely to be that much. There will be some reduction because there will still be your restricted travels and all will continue to be there. And more digital activities are likely to be there from the senior management of marketing and sales, their traveling and others. And also a lot of those kind of the knowledge sharing and those kind of activity, which keeps on happening. So those costs is likely to be lower, but field operations are now continuing. In the first quarter, we have saved cost on that almost around 5,000 medical reps and their managers' traveling costs and their daily allowances and all that is -- was not there practically -- a very small part of that was there because a lot of those period, the people were not operating, they were -- so those costs were lower and promotional cost was also lower. So going forward, these costs will also increase now.

Right. So what will be the cost once you take all these increases, what is the expectation of the cost for the next 2, 3 -- next 3 quarters, basically?

Let's say, HR cost, if you look at, it will be likely to grow around 8% to 10%. It's not going to grow to that an extent. And on other expenditure side, your plant operating cost may have around 5%, 6% kind of growth. And on marketing side, there will be some cost reduction and some increases. So maybe around some 5%, 6% kind of overall cost rise would be there compared to last year with -- because freight cost is also -- is high and still it is high. So those costs are going to continue in the time to come. So overall, we see that cost will be at a lower side, yes.

Understood, sir. And you earlier said the cost of material will be around 32%? Or was it -- or did you say some other number? I'm sorry, I didn't catch that properly.

Yes, overall numbers is going to be because there is a tendency of the material prices going up significant in last financial year, which has come down.

Right. And what is the number you said for the remaining 3 quarters? It's going to be around 32% or lower?

It's around 32%. Yes. Yes.

The next question is from the line of Tarang Agarwal from Old Bridge Capital.

I have 2 questions. One, what were your capacity utilizations for Q1 FY '21 across all facilities? And the second question is, when I look at your overall revenue, it's almost up by INR 500 crores. Out of which, you said almost about INR 260 crores is on account of HCQS and maybe another INR 40 crores in the domestic formulations business. So the balance INR 200 crores, where did it come from? And how much of it is sustainable going forward?

I would say that, sir, your generic businesses, your API exports, your promotional market businesses, all those businesses, plus institutional businesses have done well. So all those numbers has come from these kind of businesses what we have seen in the first quarter of the current year.

So would it be fair to, therefore, presume that this is a sustainable sort of a market from where these revenues came?

What we had talked about earlier that we have projected, I think, your institutional business growth of around -- domestic -- that business around to be almost more than INR 200 crore. So that is perfectly achievable. The number of first quarter is seen that we have done significant, then second quarter number is likely to be good. So overall, we are -- we expect that, that business will be good. As far as the promotional market business is concerned, overall, for the whole of the year, we have projected around 17%, 18% kind of growth, also taken into account those kind of spillover shipments which we had in the first quarter of the current year. So that business growth is also good. API business growth is -- overall for the whole of the year is also likely to be in the region of around 20% kind of thing. So overall business growth is expected to be good for current financial year.

Sure. And sir, your utilizations in Q1?

Utilizations is a relative term. If I would say that as far as, we have produced a higher amount of hydroxychloroquine and chloroquine from our those facilities, some of the other APIs which we are producing, some of those shipments or some of those capacities got impacted because of additional production of those certain other plants. So those products could not be produced. But otherwise, I would say that API capacity is almost -- at full capacities, we are currently running. As far as your domestic plants are concerned, for formulations, maybe it's around 75% kind of running. And on generic formulations, on my particularly Athal plant, which is applying to the -- for most of the generic market, their capacity utilization may be around 75% or so.

The next question is from the line of Cyndrella Carvalho from Centrum Broking.

Congratulations on a great set of numbers. Sir, you mentioned about the continuous manufacturing and that leading to cost reduction going ahead. If I have understood this correctly, if you could give us a little more where you've said that you are adding 4 to 5 more products on a continuous manufacturing basis. So if we look at over 2 to 3 years time frame, how should this benefit us overall? And looking forward, do you think that industry would also shift to these kind of things and overall cost could come down? Is this a possibility?

See, we are an integrated player. So we continuously keep on working on the key starting materials. And normally, we like to produce key starting material either ourselves or give the technology to the smaller peoples and get it manufactured under our control. So that has been our business philosophy. Currently, I said that one product we have already set up a plant, which is likely to be operational in the -- is under installation currently and which is likely to be operational by September end or so. So a quarter thereafter, we will start seeing some kind of advantage. Other products are working and other products are in R&D. And as far as piloting is concerned, we have yet to order the certain plants on that. So as and when these operate -- R&D and other piloting work and everything is over, then we will also be going for -- going forward for more kind of those kind of automation plants. As far as the industry is concerned, it's very difficult to say that which company has what kind of strategy now. And we are also not tracking which company is also producing from what technologies and others so -- except looking at patents and all that kind of thing. So it's very difficult to know that what is their manufacturing practices and all those are there in terms of -- but I would say that very few plants are there in India which are on continuous process as far as API and intermediates are concerned. On chemical industries, I'd say, it happens, but not much on API side in India.

Okay. And sir, would that continue our benefit on the gross margin side as and when this comes in our base, as you're saying, so that should help us on the gross margin side? That's a clear understanding?

Yes, that happens because your reaction efficiencies goes up. Your shipping cost also goes down because number of people employed is also in handling and all everything get reduced because it's continuous operating plants where person sitting in your control rooms, he manages all the kind of operations.

Okay. And sir, on the export institutional side of business, if you could help us understand apart from HCQS and chloroquine, what else is driving it?

By and large, most of our institutional business is relating to malaria because we are not there in -- either in AIDS or TB or those kind of products are there. So it's only the antimalarial products, and that's what is currently driving that kind of business on institutional side here.

So the seasonality thing, we can say?

It's all different countries, different seasons are there. So by and large, it's more or less throughout the year that kind of business happens.

The next question is from the line of Charulata Gaidhani from Dalal & Broacha.

Sir, first, congrats for the amazing results. My question pertains to the increase in the scale-up in institutional business. You've mentioned that it is particularly in malaria. So do you expect it to sustain going forward at the same level?

See, we have -- in the last few years, we have added, you say, on Artemether/Lumefantrine dispersible tablets, we have added injectables. The injectable now plant is running at full capacities and all. So that is also helping us in overall business. As far as the global front supply chains are concerned, we are now a very strong supplier now when taking the -- again, the more market share therein. And that is helping us in overall our institutional because we are a backward-integrated company as far as all these antimalarial products are concerned because we are leaders in antimalarial. So that's our strength area. And that is helping us in the overall institutional business.

Okay. And second, the scale-up of the generics business in exports, do you see that continuing at the same level?

Generic business, we are, let's say, earlier, we used to have U.S. business. Right now, it's not there. We wish to be there on that market. And once that starts happening, then business will further grow. In Europe, we are now penetrating in more number of markets, but it's all through the distributors in those markets. We are not having any kind of setup. First, we are now really looking for having a setup in U.K., to start with. And I think that operations may start happening somewhere maybe on third quarter or little that kind of period. A lot of activities are currently happening. And we have already got a lot of approvals, so we will be commercializing that. So that's the journey which will be there. And European generic business and currently, generic business are being done in Europe, Australia, New Zealand, South Africa, Canada, so these all market -- in most markets, we have good growth currently.

The next question is from the line of Surajit Pal from Prabhudas Liladher.

Sir, I have 2 questions. One question is that in your insti business, you earlier gave some kind of very good guidance and given the kind of growth we are seeing this quarter, is it mainly again from HCQS and CQ or some normal business cropped up?

So there are no hydroxychloroquine, chloroquine business in institutional business. It's 0.

Right. So this kind of growth will happen in every quarter? Or do you think that this is just 1 or 2 quarters and after that it will be normalized?

See, institutional business, you can't say that same kind of number will get repeated. Sometimes there are country tenders. Country tenders comes at different, different level, different intervals and all. In this quarter, maybe one of country tenders were there, they may not be there in third quarter. Maybe there are some in fourth quarter. So some fluctuations keeps on happening there. But overall, I have guided that in current year, our institutional business is going to be more than INR 200 crores.

INR 200 crores. And it will be growing at 20% in FY '22 also as a result of...

FY '22 is difficult to say now. But yes, we have other products in the pipeline for prequalifications and all. So this business will have some growth in FY '22 also. But we don't see that this business is going to go to INR 400 crore and all because it's only antimalarial kind of business which is there. And it's a forward integration of our API basket. And we are really not looking for institutional business to be there in those kind of -- other kind of products like TB and AIDS and all. Of course, we are filing the products on hormones and others. And for prequalification, one product is already prequalified, another product is filed. We are waiting for prequalification. But more such products will come -- in time to come. So -- and largely, these products, again, goes in institutional business.

So bottom line you are saying is INR 200 crore plus you were guiding for this year. And mainly it is driven this year by injectables and next year could be by dispersible tablets?

Yes, yes. So next year's guidelines we'll give in next financial year.

Okay. Second question is that regarding your European business, which you were again saying, European generic-generic business is mainly driven by HCQS also. But if you can recall that last year, your major growth come from API as well as generic, mainly from sartans in European market as well as you have now 2 partners in U.K., I believe there are some issues from the partner side. Can you throw some light on these 2 aspects, please?

Partner side, we don't have 2 partners. We have only 1 partner there, and we will be starting our own also there as far as U.K. is concerned. And partner was facing some kind of delays on payments to us. And therefore, we have put some break till the time, again the account come in order. So there will be some kind of -- your lower business may be in -- it is also there in the first quarter current year and second quarter, there will be some lower business. But now things are again normal, and the business will start back on normal level.

And sartans?

As far as sartan businesses are concerned, yes, it's an important part of our businesses, and we are continuously doing well. We are producing losartan, valsartan, these are the 2 major products we have. And we are continuously -- we will be further increasing our capacities on those kind of products in time to come.

The next question is from the line of Sudhir Kedia from Principal Mutual Fund.

Sir, I have one question regarding your raw material. So in the current quarter, your raw material cost has gone up by only 6%. So could you give us some idea in terms of how is the volume and price breakup of the 6%?

Let's say, the incremental business relating to COVID has come at very high margins. So when you work out the ratios and all, that number may not be -- you will not be able to -- because of higher top line, this -- that will appear to be on the lower side. I have guided that overall, our material cost in the whole of last financial year was around 32%, 33%. More or less, there will be some reduction in the next 3 quarters on -- by around 1% or so, but because of overall soft prices and -- are there. But these numbers are likely to be in that region only.

No sir, what I was trying to understand that including your COVID-related sales, the overall sales have gone up by INR 450 crores, while at the same point of time, the raw material cost has gone up by only INR 25 crores. So we must -- may have seen a significant reduction in raw material prices or is something else? I'm just trying to understand that part. And how much of this raw material decrease, if any, is sustainable in nature? Or this is one-off in your view?

That's what I have replied that in coming quarters, the material cost ratio, which used to be 33% or so, there could be a reduction of 1%, 1.5% in that. But that's the overall number likely to be there as far as material cost is concerned. This quarter, because we have a significant higher promotional business where the margin levels are higher and also though other businesses where the margins were high change and exchange gains were also there because we've used the materials which were imported earlier, maybe at around INR 69, INR 70 level and realizations were almost around INR 76 level or so. So the higher exchange realizations has also helped in that. So when top line is higher and your consumptions are at materials, which are with a lower cost, so that is -- has helped in overall lower cost of material costs. But in future, it's likely to be on a level which was there earlier, a little less than that.

Sure. Sir, one more question. When I -- the total increase in sales about INR 450 crores and if I reduce the COVID-related sales, which is about INR 300 crores including the domestic part. So the rest of the sales have gone up by INR 150 crores. And at the same time, we have also mentioned that we have lost a significant part of the sales because not enough prescription has been given and similarly, the infection rate related with malaria and all is lower. Just to understand that...

See, a lot depends on your product mix profile. There are products where there are high material costs, there are products where lower material costs. In this particular quarter, businesses have happened where the margins are high.

Yes, that I understand. I was just trying to understand, this INR 150 crores, how much of sales you would have lost in -- due to COVID in our normal business, that's what I was trying to understand? This INR 150 crores would have been how much if the things could have been...

Our domestic business growth, if you look at last 5, 6 years, it has been around 14% -- 13% to 15% kind of range is there. And we have been always growing around, last 7, 8 years, by almost around 1.5x the overall market growth. So -- and current quarter, it's only around the, say, if you exclude the -- your all the additional business of hydroxychloroquine and also government business in the first quarter, our domestic business growth net will be around 2% only after excluding additional business of hydroxychloroquine and also institutional business. So on that domestic business, you have lost almost around 12% kind of growth.

The next question is from the line of Kunal Dhamesha from Systematix.

First question is on the API PLI scheme. But I think now the more details are out, and we are also planning to do CapEx on increasing our KSM production, so is it possible for us to participate in the scheme and bring our export as well as the domestic consumption in under one plant? I mean how do you think about that scheme? And what are some of the molecules which is looking attractive? Because I think sartans are also there. So are we looking to participate in the scheme? And second question, I'll...

We are certainly looking at -- to participate in this kind of scheme, which we will do. But as far as the scheme is concerned, this -- the incentive, what government announced is purely only on the domestic sales, not on export sales. And also for the -- all other -- the larger incentive parts are there on fermentations, not on the other products. Each company-wise annual incentive could be around INR 2 crore or so for each participant, something like that which government has said. So incentive is not going to be that great. But yes, in spite of that, the -- it's the Government of India program, and we also have those kind of products in our pipeline and all. So we will be applying for under PLI scheme for certain products. But it all depends that in -- given certain metrics on price and also on the -- what kind of volume you want to produce and all that certain -- so on that, they will be deciding which company they want to award that. The incentive, I would say, it's not because of incentive that we will be going for PLI because we want to produce those kind of products and also at a competitive cost to take a larger market share in India and international market. Those will be the considerations to go for it. Incentive will never be a consideration to go for a kind of investment.

Okay. And is it possible for us to bring the manufacturing for the export as well as domestic consumption under one roof or we have to follow different processes for, let's say, export markets, which are more regulated like Europe or U.S. and then domestic, the processes would be different or -- and then hence, the compliance costs, et cetera, could be different or we can just bring our export volume and domestic under one roof, although we will only get incentive on the domestic consumption?

See, at a particular plant, you can -- it's all your -- what kind of capacities you are set up for which plant. Under that plant, if there are certain kind of -- you can expand there, then on those plants, you can put those kind of products which government has announced. So like, say, we have plants which is the upcoming plant at Dewas, and we have plants which is there in Gujarat. So some of these products, we will take it up there. So it's not that -- except Dewas which we are planning as a new site, the other site is an existing site. And as far as the pharma industry is concerned, your one roof question, I didn't understand because we have large number of plants. Some plants are producing a different kind of doses form, some producing tablets, some producing injectables, some producing your orals. So all these plants are different and at different, different sites. Then we have API plants. So in my Ratlam itself, we have around 22 API plants. And then we have other plants like Indore. So these plants are going to stay. So how do -- I didn't understand that what do you mean by bringing under one roof?

Yes, yes. So the question is, let's say, you get a machinery to produce valsartan, but let's say, valsartan manufacturing process that you have to follow for the U.S. or Europe could be different from what you could do in India for the domestic consumption?

It doesn't go that way, what you are talking about. When you do a regulatory filing, there are different kind of processes. And if a customer has approved you from a particular process, then you have to supply him -- continue to supply till the time he shifts on different processes. So each customer specifications are different, each -- suppose -- and you continue to keep on improving the processes. So you have filed process 1, process 2, process 3. So some customer may be on process 3 and some customer is old customer, he doesn't want to -- willing to shift, he may be on process 1 also. So API industry is highly, highly regulated. Till the time he takes the regulatory approval for process 1 to shifting to process 3, he cannot shift. He will continue to buy the material from process 1. So that kind of harmonization is not possible till the time. Either you lose that customer. Okay, if you don't want to supply process 1, then you will lose that customer. So it all depends on economics and other things.

The next question is from the line of Nikhil Upadhyay from Securities Investment.

Congratulation on a good set of numbers. Sir, one bookkeeping question. So earlier for our regulated plants, which were under import alert, we were making -- so they were having a negative impact on our P&L. So if I'm correct, that was around INR 70 crores, INR 80 crores, right?

It's around INR 60 crores, yes.

So now with the HCQS production, which we have done, so probably they would have -- that contribution would also be there in the EBITDA margins of this quarter or -- so -- and if you can just help me with what is the utilization now?

Let's say, there are 2 plants which are still there on formulation side. One is our SEZ Indore plant. And another plant is at Piparia, these are 2 formulation plants which are largely dedicated to U.S. And then capacity utilization is at a lower level. Let's say, Piparia plant, utilization is further lower. There, we have produced some kind of hydroxychloroquine for other markets also. But as far as the SEZ Indore plant is concerned, we have not produced anything for U.S. from that plant. And there, capacity utilization is on the lower side, and we continue to have some kind of losses on these 2 plants.

Okay. And secondly, sir, on the margin side, if I just want to understand, because if we see last year whole year, we had that INR 50 crores, INR 60 crores of one-off costs, which included the ForEx and the impairment charges which we have taken in the last quarter, which itself was around 1%, 1.5% of impact on the overall cost margin. Secondly, on the gross margin also, you mentioned that we are getting a benefit of around 100 basis point because of the lower RM cost, which we are seeing -- which should flow us for the next 2, 3 quarters, which means for the full year, the margin improvement and overall other expenses as the number which you have mentioned, it's all under -- around single digit as compared to the sales growth of 17%, 18%. So if we just add -- do a back-of-envelope calculation, that itself had 250, 300 basis points to the EBITDA margins. Am I missing something here or...

No. You have to also see the quarter-to-quarter. See, what we have guided, the first quarter numbers are exceptional. For the next quarter, what we have...

No, sir, I'm just taking on -- so if you leave the first quarter, just the next 3 quarters because first quarter was abnormal quarter and whatever numbers we have to see, we have to adjust and then see those numbers.

Yes, yes, yes.

So just on the next 3 quarters, based on the guidelines which you have given and based on the one-off costs which were there, if you just add back those numbers, that itself means that for the full year, even on a normal basis, we would have like 200, 250 basis point of margin improvement. So I'm just trying to understand, am I missing something? Or is it like the cost escalation could be much higher or...

Cost escalations -- I have already guided on cost escalation that overall manufacturing costs are not going to go up that much. Your HR cost is going to be -- going by around 8% to 10% kind of cost, which is there currently in the system. And overall cost pressures are not going to be that much. But yes, if you look at your domestic market, in the first quarter, almost around field staff practically were at home. So those traveling and those costs was lower. In the next quarter, those kind of costs are again going to be there. And also the promotional cost, of course, that may not be at that level. But yes, at a lower level, the cost will be there. It depends. So those savings are not going to be that much.

[Operator Instructions] The next question is from the line of Naresh Suthar from SBI Life.

Sir, my question is around this guidance again for revenues. Sir, if we exclude the benefits of HCQS for the full year, if you can give guidance as of this opportunity for FY '21 for revenue?

See, we have given the guidelines for the next 3 quarters that overall growth is going to be around 10% to 12% in next 3 quarters, which includes the HCQS also, but HCQS now is more or less a normalized business. There's nothing to exclude further because whatever additional business was to be done, that has been done in the first quarter. And I also said that the European and other customers have bought an additional materials and they are already having. So in the subsequent quarter, there could be some kind of lower shipment also compared to last year of hydroxychloroquine. As far as India is concerned, yes, hydroxychloroquine business is more or less 10% to 12% additional compared to last financial year, so it's -- in a month-to-month basis. So it's not a very big number as such on hydroxychloroquine currently. So whatever opportunities was there that was there in the first quarter, and we are not seeing any kind of significant rise in that number in the next quarter. So what we have projected for next 3 quarters is around 10% to 12% kind of growth, and it also depend on how the India revival happens -- Indian market revival happens. So a lot depends on that also. That's the one kind of risk factor which we have because almost around 50% of that business comes from -- overall business come from India basically.

Okay. Okay. And sir, one question on API side. We have been seeing the peers talking about the API side, they're talking about getting benefited from the increased activity in terms of shift from China to India or any other place. So many players have announced CapExes and they are benefiting out of that. So can you share some outlook for next 2, 3 years, how you're looking at the business and the CapEx over there, particularly from this trend of shifting from China to India? And your revenue trajectory which, I think, used to be a 10%, 12% kind of growth, which can be in mid-teens kind of growth, can we say that?

API business growth is good. Current year also, we are talking of almost around 20% kind of growth on API business. So that business is going to be good in the current year. But I also said that we have a lot of capacity constraint, and which we need to resolve in order to take up this business forward. We are continuously doing debottlenecking of capacities which is aiding the capacities and allowing us to do the higher business. In first quarter, a lot of API business, other drugs has suffered because of certain additional productions we had to take out from existing plant on producing the KSMs and also for the additional production of hydroxychloroquine. So those businesses also we will try to recover. So overall, API businesses are going to be around 20% kind of growth in whole of the year.

No, sir, so my question is more of a longer term to ask because of the increased inquiries, are you, I mean, seeing more CapEx over the next 2, 3 years? Or...

We are already in a process of setting up new plant. We will take care of that.

The next question is from the line of Sameer Baisiwala from Morgan Stanley.

Congrats, it was great numbers. So just on the quarter, how is the pricing for your products, both branded and APIs? And was there a material change, quarter-on-quarter?

No, there is not much of change, except I think the Russian ruble has a little devalued compared to the earlier number. So that realizations are on lower side. Other than that, the pricing part has not changed much on other products.

Okay. Great. And sir, for this INR 259 crores of COVID sales, if I reverse engineer, looks like this must have come at 80% or so gross margins and that then flows down to PBT levels. Would that be a fair assessment?

Yes, yes, that assessment is fair, yes.

Okay, sir. And then final question, how much was the spillover of sales from 4Q to 1Q?

It was almost around INR 26 crore or so.

The next question is from the line of Anubhav Sahu from MC Research.

A couple of questions. First, regarding CapEx, now since we have got the environmental clearance for Dewas facility, could you specify timeline for commissioning here?

I think we will start construction maybe in the month of October or so. We are in process of finalizing the contracts and other. And overall, the Dewas project will be almost around INR 250 crores. INR 250 crores, if you add further capacity, it can go to around INR 300 crores. And overall, timeline would be around 15 months on that. Implementation period will be around 15 months, the plant to be ready, yes.

Okay. And sir, one clarification. You mentioned 75% capacity utilization. So this is for the formulation part, right?

Yes.

And does it exclude all the one-off items which we did for this quarter?

In capacity utilization, there is no one-off.

No. I mean, the additional production which we did for hydroxychloroquine and those kind of things?

But that only additional cost was INR 20 crore what we have paid as an incentive -- onetime incentive to the staff and workers of the plants -- most of the plants -- all plants. So that's a one-off cost -- additional cost.

[indiscernible] not substantial. The INR 20 crores that we had is not a very big...

Capacity. Yes, yes.

This you are asking on the normal business...

Capacity utilization. Yes, yes, yes. Yes, for the normal business. Sir, for the formulation business, what is the normal or the average capacity utilization which we have right now?

Formulation capacity utilization, let's say, 2 plants, capacity utilizations, which are there for exports are very, very low. One is Piparia plant and one other is Sitapur plant, and these plants still continue to have some kind of losses there. These plants were, by and large, built for the U.S. and once U.S. start and some generic business we have started taking from these businesses, but still capacity utilizations are low. Other plants are relating to what, by and large, for the domestic formulation business and all those kind of international businesses of Europe, Canada, Australia, New Zealand, South Africa and all those markets. There, the capacity utilization is around 15 -- 75%, yes.

Okay, okay. And that goes well for the Sikkim plant also. I think that is mainly for the domestic formulation?

Yes, Sikkim plant, yes, also for domestic formulation, yes.

The next question is from the line of Cyndrella Carvalho from Centrum Broking.

So sir, one question I wanted to understand from a product expansion perspective, so what are the key products which we would be looking forward to expand our basket domestically and in export business? The second question is on the Krebs side of fermentation-based facility, what PLI benefits that we should expect? And the third is on the U.S. benefit -- U.S., any discussion, any understanding from the FDA agency?

As far as the Krebs are concerned, we are not there in all those kind of products which are antibacterials and which is very large investment, and we are not a very strong player as far as antibacterials are concerned. So we are really not looking for those kind of opportunities. But there are certain products out of that PLI schemes on fermentations, which we have done the backward integration. Forward integration is still pending. So we are looking for whether we can go and participate in that kind of scheme for one particular product on fermentation. So that is there in the plan. And other than that are all steroid kind of products are there, where we have -- we don't have much of -- currently, neither we have those technologies to forward integrate those products. So right now, we are not looking for participating on that on PLI scheme.

Sir, on the U.S. FDA side, anything? And on the future product basket expansion?

As far as U.S. FDA is concerned, we have done mostly -- our remedial actions, and we have already informed to FDA, and it all now depends on them when they will be coming. They don't say to us that when they will be coming. And in the COVID period, probably they are not traveling. So only after some things get normalized that travel may happen. So it's very difficult to give any kind of timeline on that.

So basically, we've not heard anything from them?

No, we have regular meetings with them, and we are discussing, but we have not heard so far anything on that.

Okay. And sir, future product basket expansion in domestic and export-related areas?

We are -- we don't add too many products. In a year, we made around -- we have it on one product or so in every division or so. Sometimes we add in 2 years, 1 product. Because we don't want too many baggages in the system. We want -- whatever product we take, we take seriously and we do brand building. So for our kind of size, we have very, very less amount of products. So we don't -- our business philosophy is to not to add too many products in -- because in a division, you have around 3, 4 power brands and some kind of supporting brands. So you can't have more than that. So -- our -- we don't get add many products. As far as API is concerned, yes, we have a good number of APIs in our product basket. But right now, since we have capacity constraints, so those products are not being taken up for further exploitation. So once the further capacities are added at Dewas and all, we will further commercialize more number of APIs.

We take the last question from the line of S. Mukherjee from Nomura.

Sir, on the API side, I just wanted to check on Dewas expansion. I think that's critical for future growth. How large is the capacity? And how much it adds to your current capacity, just if you can give that context?

We'll be spending almost around close to INR 300 crore on that plant, and that will add almost around -- production capacity of around maybe 300 tonnes of overall API. So that's the overall number going to be there.

And how does it compare to your current, sir, in terms of tonnage that you're currently doing with 100% utilization?

Maybe around 20% kind of capacity we'll add.

Sir, do you think this is enough or you need to add more capacity going forward, given the strength that you see in the API business?

No, we will be adding more capacity in time to come. That's -- but still not crystalized, so I will not be able to talk on that, yes.

Okay. Sir, would it be fair to assume that since the capacities are full, the growth can be a bit subdued in the near term and then when this capacity comes on stream, you said 15 months, maybe in a couple of years, the growth would accelerate. Would that be a fair assessment of the API business?

So we continuously to do debottleneckings. So that is -- so we are -- right now, except 1 or 2 products, we are losing business. We could have doubled the business, but since capacities are not there. But incremental businesses are coming from those kind of debottlenecking, which is coming at a much lower operating cost and also much lower CapEx.

Okay. Okay. And sir, you talked about this continuous plant and -- for API and intermediate. I mean this is for a specific product that you're looking at or there are more than 1 product for which you want to put this?

I said, we are working on almost around 5 to 6 products. One product, we have already in the process of installation -- that plant is under installation, balance is at R&D and piloting stage. So as and when these products start coming in, but we are working on 5, 6 products to make them continuous process, yes. And by and large, these are intermediates, not APIs.

Okay. Intermediate. Sir, one last question, sir, if you can really help get a split of the API business. So when you look at the export plus domestic, the overall API pie, how much is sartan and how much is like chloroquine, hydroxychloroquine? Any kind of breakup that you can -- because you focus on a very few segments? So just if you can help us understand that profile of the API business currently?

Largely, it's -- let's say, the major part of business comes from cardiovascular, antimalarials, pain. These are the 3 main segments that we have. Yes. So major businesses come from these segments because we have been strong players on beta-blockers, and now we have added the strength on sartans and all that kind of things, plus we also have a lot of these diuretic products. So cardiovascular is a major basket we have. On antimalarial, practically everything we produce. So the good basket is there on antimalarial. On pain side, we produce hydroxychloroquine, allopurinol, etodolac, serratiopeptidase. So those kind of products are there.

So these 3 segments would be more than 75%, 80%, would that be a fair assumption?

Yes, yes. Yes. And Cardiac segment is the biggest one out of that.

I now hand the conference over to the management for closing comments.

Thank you, everybody, for participating. And as far as the U.S. is concerned, our continuous commitment is there to resolve all the issues and then come out of it and then again start our U.S. business because that's very, very important for us. And in our overall business scheme, where we want to be a very strong player on products what we have, U.S. is important to us, and we are definitely working on that on continuous basis. Thank you so much.

Thank you. Ladies and gentlemen, on behalf of IDFC Securities, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.