Ipca Laboratories Limited (IPCALAB) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Ipca Laboratories Q3 FY '21 Earnings Conference Call, hosted by DAM Capital Advisors Limited. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Nitin Agarwal from DAM Capital Advisors. Thank you and over to you, sir.

Thanks, Janice, and good morning. Good morning, everyone. A very warm welcome to [Audio Gap] earnings call hosted by DAM Capital Advisors. From the Ipca Management, we have today Mr. A.K. Jain, Joint Managing Director; and Mr. Harish Kamath, Senior Corporate Counsel. I'll hand over to Mr. Jain to make some opening comments, and then we will open the floor -- forum for question and answers. Go ahead, sir.

Thanks, Nitin. Good morning to all participants and thanks for taking out time and joining us on Q3 FY '21 earnings call. Today's con call and discussions and answers given may include some forward-looking statements based on current business expectations that must be viewed in conjunction with the risks that our business faces. Our actual future financial performance may differ from what is projected and perceived. You may use your own judgment on the information given during the con call. I'd like to inform you that the company's business and financial performance in Q3 FY '21 has been strong in spite of testing times on account of global COVID pandemic. We have used our integrated business capabilities to -- in the prevalence of our global drug formulations and API business. The business and margin growth in Q3 FY '21 in comparison with Q3 FY '20 are largely driven by domestic formulation business, has had a revival in this quarter. We have recorded around 8% business growth for the domestic formulation business. The business of Antimalarial, Antibacterial, Cough & Cold, Pedia segment continue to show decline. Pain and Cardiac business, which accounts for 70% of our domestic business, has shown 16% and 8% growth during the quarter. The Pain segment has recorded business of almost around INR 266 crore for the quarter against INR 229 crore in FY -- Q3 '20 at 16% growth. Similarly, Cardiac business has grown to around INR 94 crores as against INR 87 crore last year. Other segments like CNS, Derma, Ophthal, Gastro are all now turned positive -- positive growth during the quarter -- Q3 quarter. The reduced traveling costs and marketing costs has helped the margin expansion. API business has continued to record an overall 33% business growth. Institutional businesses recorded a significant business during the quarter of around -- almost around INR 138 crore as against INR 47 crore in the same quarter last financial year. Out of this, around INR 34 crores in onetime exceptional business has been booked. Institutional business for the first 9 months of the current financial year has been around INR 309 crore as against INR 136 crore in last financial year. It has exceeded, in fact, our own annual projection for the whole of the financial year. The upside -- these upsides, to some extent, was set off -- offset by the MEIS benefits are now not available. And annual -- we used to get around INR 12 crore of MEIS benefits per quarter. So that income is not there right now, and RoDTEP rates are still to be announced. Our materials costs on certain key intermediates and availability disturbances, there's also some impact during the quarter. The higher freight cost -- the higher cost of freight, almost by around 40%, 45% that has gone up is also impacting the overall margin. Overall EBITDA, in spite of all that, has been recorded around 26.98% as against 24.46% in last financial year, an increase of almost around -- Q3 last year, around 2.5%. Having given the broad presentation for the quarter, now I open the floor for question and answers.

[Operator Instructions] The first question is from the line of Saion Mukherjee from Nomura.

Sir, just your comments on the margins, particularly the raw material price and freight prices going up, I mean, can you comment, sir, the outlook on this? Is this something which has happened through the quarter, and we will have even higher impact in 4Q going forward? Any color, if you can give how the trend is evolving with respect to these costs?

It's a temporary phase because of certain disturbances also during the -- these time happens in China, largely on intermediate side because of pollution factors and others. So there are certain availability like, say, I would say, the example like paracetamol prices used to be INR 350 a kilo earlier. It has gone to almost around INR 550 to INR 600 a kilo, because of certain intermediates are not being available from China. Certain key intermediates also, we had to get from here because there were certain kind of supply disturbance, so additional freights are paid. So these are the things which are there, but it's a very temporary kind of thing. Maybe going forward, maybe on FY -- again, your quarter 1, things will be normalized here.

Okay. Okay, that's helpful. And sir, second question, if you can give some color on the API business. I mean this year has been very strong. And I mean is there any component that you can call out, which has driven the numbers? And how should we generally think about it for next year and Q4?

The API business during the overall 9 months has been very, very strong. And largely, it was also helped by your hydroxychloroquine and certain chloroquine-related business of COVID. So that exception was also there during this period. And overall if -- company as a whole, I think in first quarter, we did almost around -- exceptional business of around INR 260 crore or so. And some business of that nature continues but that maybe broadly maybe -- or up to now, maybe around -- exceptional business maybe around INR 350 crore which I'm taking put together, not API, it's all formulations and API and everything put together, domestic tender and everything put together. So that has been the exceptional business. But otherwise, let's say, higher capacity utilizations, and overall, the business penetration has been good for us. And also, our sartan business has done very well and continue -- will continue to do well. So that will certainly help overall in API business in fact.

Sir, this exceptional business, like Q1 was very strong. But just for this quarter, you mentioned about the institution business where you have INR 34 crore income there. Any other such which you think is exceptional or rather COVID related, which is there in this quarter in any of the segments?

Nothing. Nothing else other than that INR 34 crore of exceptional business. That's a one-time...

And just, sir, one more thing, if I can. Sir, the sartans, it's still holding on. I mean what is the -- how has it trended through the quarters? And how are we now in sartan in terms of the pricing, volume, if you can throw some light? And how large it is in our overall scheme of things in API, sir?

Let's say, one of the key intermediates, which is used in all sartans, are the starting material. Their price used to be almost double, and that has come down to half the level. And that is also resulting in overall reduction in the sartan prices in the market because whatever cost reduction is received by company, that is being passed on to the consumer -- to the customers. So that trend is there. So overall, price trend is down because of some significant reduction in the raw material costs. So that's with the overall trend in sartans.

Okay. But now you would say it is stable, sir, this intermediate prices are now stable?

Yes, now intermediate prices are stable, yes.

The next question is from the line of Kanchan Kerai (sic) [ Damayanti Kerai ] from HSBC.

This is Damayanti. Sir, my question is on the export formulation business. So on the generic side, we continue to see good momentum. So can you update us on recovery on the U.K. business? And on the branded promotional market, why we are seeing a bit softer trends?

Overall, let's say, EU, including U.K., has given a very good business in the quarter, I think. As against INR 76 crore in last financial year Q3, we had done around INR 113 crore, so around -- almost around 49% of growth. Our other markets like Australia and New Zealand has also grown by 13%. Canada has grown by 37%. So -- and there is some reduction in the business on account of South Africa where last year, there was some kind of tender award and all that was there. They have yet to decide in this year. So that business is a little lower by -- from INR 43 crores last year to around INR 16 crores, INR 17 crores. So there is some reduction. So overall, generic business has grown by around 14% for the quarter. And put together with institutions, it's almost around 49% growth for the quarter. As far as your branded promotional businesses are concerned, let's say, your CIS part of the market, more particularly Russia, was impacted by COVID. And if -- you will recall that in first quarter, we had a significant amount of shipment, which to go in March, and subsequently, they went. Thereafter, because of the COVID, offtake in that market with distributor was less because of COVID. So in second quarter, shipment significantly reduced in CIS, and we further reduced the shipment in this quarter. I think Q3 last year was almost around INR 52 crore of shipment. This year, in Q3, we have done a very minimum shipment of almost around INR 16 crore. So that has impacted, it's all because of COVID, and we have adjusted the inventories in that market. Q4 is likely to be normal, and overall branded promotional business for full of the year will show around 10% kind of growth overall. Let's say, business in Middle East, Africa, your West Africa, all that are doing very well. I think West Africa is growing by 23%. Your Middle East, Africa is almost growing by around 40 -- 46%. Asia is more or less at the same level, that is at last year's level. And Latin America is more or less, there are 5%, 6% decline is there. That's likely to get covered up in the first quarter of the current year. So that -- it is only the CIS where the COVID impact was very high. That has been first 6 months of the current financial year, even though shipments were there, but actual sale on ground was low, and that inventory adjustment has happened in Q3.

So, sir, CIS should normalize from first quarter of next fiscal onwards, right, broadly?

Business growth now is very good. Overall, it has started returning to normalcy. But whatever shipments were made in the -- which were planned in the month of March, they were -- because of lockdown, all that happened in first quarter. So that time, shipment was very high, almost around INR 70 crore shipment went there to CIS, yes. And that -- those inventory remained in the system and because of COVID. And in this quarter, we have completely controlled the overall inventory in that market.

Okay. That's helpful. Sir, a follow-up on the generic part. So you mentioned pickup has been good across market. So I was specifically asking how has been pickup on the U.K. market because I think last quarter, we had some pullback on the receivable side, right?

That has normalized, and we did almost around INR 60 crore business in U.K. as against INR 21 crore, INR 22 crore in last financial year in Q3, yes.

Okay. And my second question is, can you provide us update on some of the key CapEx projects, okay, Aurangabad, Dewas? So how are things moving up on the CapEx front?

Okay. On CapEx side, the measures, one with your -- one API plant we are further constructing at Ratlam, and that project is going very well. There are some delays because of, again, COVID because of your civil construction part, all machines have all landed at the plant. And probably in the month of March, we will start overall commissioning work. And by May or so, the plant will be completely ready for your validations and all. So maybe from the second quarter of the year, we will start the commercial production from that plant. So that's the one. And I think, overall, that investment may be around INR 100 crore there at Ratlam. As far as the Dewas plant is concerned, we have already started the civil work for 2 plants there, And that's going full swing. And I think, hopefully, by September, October, the entire installation should be over. And by maybe on fourth quarter of the next financial year, the plant should be ready for, again, from production. So these are the 2 projects currently happening. In addition to that, we have done some kind of one automated plant that -- for producing company intermediates has been setup at Aurangabad. That plant is fully commissioned, and it's -- because of, again -- because of COVID, a lot of installation and deliveries of equipment got delayed, and now they were to happen maybe around the second quarter of the year, but significantly delayed was that. And now the plant is commissioned and working well now. And we will -- looking at maybe I think 1 more month result, we will further set up another plant there for maybe around 50 tonnes or so to scale up further production of that -- on that particular intermediate in the next financial year.

Okay. And sir, budget for next quarter, earlier, we indicated INR 300 crore to INR 350 crore. That broadly stays or you have planned to increase?

Broadly, the CapEx is going to remain in that range only.

The next question is from the line of Abdul Puranwala from Anand Rathi.

Sir, my first question is with relation to the India business. So any color you would like to provide that about the growth outlook for FY '22? And how do we see this promotional cost panning out in the next 6 to 8 months or whether it would be scaled up to the previous level or there might be some cost savings which would be possible considering we would be moving a little bit on the digital end as well? [Technical Difficulty]

Ladies and gentlemen, we've just lost the line for the management. Requesting you all to please stay on the line while we reconnect the management back to the call. Ladies and gentlemen, thank you for patiently holding. We have the management reconnected. Sir, the question is from the line of Mr. Abdul Puranwala.

So shall I repeat my question?

Go on. I didn't hear you.

Yes. So sir, my question was with regards to India business. First of all, I'd like to know what would be the growth outlook for FY '22? And the second part of the question was in relation to the promotional cost to -- for which, as you mentioned in your opening remarks, there were some benefits seen in the quarter as well. So going ahead, how do we see this cost rising up? Would it be back to the pre-COVID levels or there might be some cost savings, which would be possible?

Okay. As things are normalized in India, and if the second wave of COVID doesn't happen, I think we should record almost around 13% to 14% kind of growth in domestic market in next financial year. And the business will then be absolutely normalized. As far as cost is concerned, there will be some amount of savings will continue on account of whatever this continuous medical educations and conferences part is concerned. A lot of those activities will continue to be on electronic mode and also the medical professions and companies are realizing the benefit of that, that the travel takes a lot of time and that with these kind of conferences, the professionals also save their time because they can participate sitting from their clinics or home or whatever it is. So those kind of costs will have a significant reduction, but all other costs may get -- start to get normalized in the next financial year. The travel cost, both international and domestic, in this year was hardly any. I think, overall, we must have saved almost around INR 25 crore on account of those kind of travels. So I think once things get normalized, there is no substitute for travel because -- and -- but it may not happen to that extent. Some cost reduction compared to, say, FY '20 will continue to be there, but the cost definitely will move up.

Clear, sir. And sir, my second question is with regards to the API business, and this is a follow-up on the previous participant as well. So sir, I mean if I had to understand on the current plant capacity, then what will be the current capacity at what we are operating? And would that be sufficient enough to drive the 12%, 13% growth, what has been guiding in the last con call as well? So would that still be achievable in FY '22?

So let's say, excluding the exceptional business, what we have done, that kind of growth is possible, absolutely. There are no reason that why it should not be there. So we are confident to have that kind of growth. But certain exceptional business, what we have done, those business may not be there in next financial year. So overall, growth numbers will depend on that and that numbers, whatever is there, we will give after the fourth quarter that how things will pan out. But overall, API business will have that kind of growth. As far as capacities are concerned, we are continuously debottlenecking and creating capacities within the existing infrastructure and also now have started setting up the new plant. At Ratlam, one plant is under setting up right now, construction and all, and 2 plants at Dewas. So hopefully, next year, the additional capacity will also be there. So that will drive the overall future growth in coming years.

The next question is from the line of [ Kunal ] from Emkay Global.

Yes. So the first question is on the one-off businesses that we have done in this year till now. So you have said it's INR 350 crore. So if I recollect it, I don't know, I think INR 40 crore was the HCQ business that we did with the government, INR 26 crore was the shipment that was delayed in the branded ROW market that we did in quarter 1 and then another INR 34 crore we have done this quarter for the institutional business. So all put together, it's somewhere around INR 100 crore. So is it safe to assume that the rest INR 250 crore additional business that we have done with this one-off is into API business?

It's not API itself. Also formulation businesses are there and international, like, were more relating to HCQ's use, which were there in the COVID and also chloroquine use in COVID in initial period. So those businesses were -- both API were there and also formulation businesses are also there out there. And mostly, those -- and we had given I think in first quarter almost around INR 260 crore number. That was the exceptional business. And in that, we are not taking this CIS business as exceptional because those shipments were just shifted here and there. That's a normal business, normal kind of thing. It's only the business only relating to chloroquine and hydroxychloroquine, whatever we have done, additional business on account of COVID, that is the number which I had given that up to now, it's almost around INR 350 crore.

Okay. Now that...

So that's not only of API. It's also there of formulation, it's also there of domestic tender and all that. Yes. It's formulations in generics, formulations sales everywhere. So that's the overall additional business.

Yes. But now that we have seen the API within that also, you have -- sartan, you have kind of deflated significantly. So just want to understand what would be our growth profile for API business next year.

Overall, we are -- our budgets are under preparations right now, and we are working on that. So in the fourth quarter, when we present our results around that time, we will give the complete projections for the next financial year of all businesses.

Okay. And second, on the tax front. So how much MAT credit do we have left? And what is the runway there for us to grow? And when will our tax rate might be resetting to a normalized level?

I think we have around -- as of now, around INR 360 crore is the MAT credit available, out of which, I think, in current financial year, we'll be using around INR 100 crore. And next year, some benefit on account of this Sikkim plant will go away. So next year, we may be utilizing almost around INR 160 crore, INR 170 crore -- around INR 160 crore or so, broad calculations are there. So thereafter, there will be hardly any MAT credit left maybe around INR 40 crore, INR 50 crore. So at that point of time, we will have to decide whether we are opting for 25% rate of tax. So the tax rate, which is currently, say, 17.5%, 18%, that will go to around 25%. So still there is 1 year and depending on what kind of MAT credit will be left out, we will decide which is -- what could be beneficial in FY '24.

Okay. Okay. And the last question is on -- I think I missed some of your starting comments on the gross margin. But can you just, like, quantify what would be the impact of MEIS and when the mix shift towards the institutional business because we have seen exceptional business there and is there any pressure in our core business on -- so what would be the sustainable gross margin level that we should kind of look forward to?

I think overall gross margin levels, material cost ratio will be almost around 31% or so practically in the next financial year also.

The next question is from the line of Chirag Patel from Adinath Shares. As there is no response from the current participant, we proceed to the next question from the line of Dheeresh Pathak from Goldman Sachs.

Yes. First, for the branded export market, I think if I heard correctly, you said 10% growth. Did you say that for the full year, FY '21, we will have 10% growth?

Yes.

So then Q4 would be quite a good growth, right, because of a low base, and year-to-date growth has not been there. So is that a correct understanding? Are you seeing that in your Jan shipments?

Yes. Q4 would be a good growth.

Almost like INR 120 crores or something like that is what I should expect, right? And that will be like...

Yes, Q4 will be a good growth, yes.

Okay. Sir, for the Q4 domestic business also, if you can give some guidance. I think in last quarter con call, you had mentioned that we might see low teens growth, I think. Is that possible in Q4 of FY '21?

Overall, this quarter, we have achieved around 8% kind of growth, and some of the businesses have now started showing growth. And others also, for the businesses, what we have talked about, the Cough & Cold, then the Antimalarials and Antibacterials and more particularly, Pedia segment, there -- the decline has reduced in Q3. So Q4, these businesses will further be better. So overall, we see that from 8% overall, the growth can be around 8% to 10% in fourth quarter. And next financial year, it could be around 13% to 14% kind of growth.

Okay. Just to confirm the CapEx number. So API Ratlam CapEx is INR 100 crores, which will commission in Q2. And Dewas was a INR 300 crore CapEx, which you said, will commission in Q4 of FY '22?

Yes. But some of the expenditure will be done this year. Civil constructions and all are going on, yes.

Right. Right, with the tenants. So API Ratlam was supposed to add 10% capacity and Dewas was -- is supposed to add 20%, 25% capacity. Is that correct, sir?

Yes, Dewas will -- yes, Dewas will add, yes. That's the kind of capacity Dewas will add, yes.

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

Yes. Just on the export front, I wanted to check whether in the month of the December, we have seen many companies say things are pretty challenging [Technical Difficulty]. So even you have seen any impact of that for your trade. That is one. And regards the export growth for the following year or next year, having seen the strong base of the current year, what trend that also you would look at? So do you see that the integration benefits should start seeing in the next year? And hence, even after the high base of the current year, the growth momentum would remain strong?

[Audio Gap] integrations are concerned, we are currently also maybe around 62% of our entire formulations is backed up by our own API. That's a broad number for 9 months. 62% of our formulations are backed up by our own API. So it's a significant amount of integration already there in the system currently. And that's why in spite of our revenues, a lot of those kind of native products could expire [Audio Gap] generic, we still have a good [Audio Gap] in the business and [Audio Gap] would continue. Right now, what we are talking in terms of is, broadly, let's say, journey, henceforth, is going to be bigger journey will also happen on intermediate side. And intermediate side, right now, there is only one small plant on piloting on 10-tonne basis -- 10-tonne plant we have put up at Aurangabad. That is commissioned already and showing good results now. Based on whatever learnings what we have, we will be setting up another plant in next financial year of around 50 tonnes or so. And thereafter, the major expansion on the intermediate side would happen at our Nagpur facility for which now we have initiated the environmental clearance right now. So [Audio Gap] will happen in next financial year because environmental clearance and pollution board's clearances and all will take around 6, 7, 8 months from now. And then [Audio Gap] we'll start on ground. So maybe very -- small amount of CapEx may happen in next financial year. Major will happen a year thereafter to set up those. And there, maybe probably larger integration of intermediates to API side will further happen.

Okay. And did you get any impact of the trade challenges during -- in the month of December, sir?

No. We didn't face those kind of challenges.

Okay. And interestingly, sir, you had mentioned about your level of integration which is now 62%. If I remember, in the last quarter, in the fourth quarter, you had mentioned that your level of integration was 55%. So that means, despite all these challenges, you have progressed on the integration front so far as your formulation business is concerned. Is that correct, sir?

Yes.