Ipca Laboratories Limited (IPCALAB) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Ipca Laboratories Q4 FY '21 Earnings Call, hosted by DAM Capital Advisors Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nitin Agarwal from DAM Capital Advisors Limited. Thank you, and over to you, sir.

Thanks, Monica. Good morning, everyone, and a very warm welcome to this Q4 FY '21 earnings call for Ipca Laboratories hosted by DAM Capital Advisors Private Limited. On the call today representing the Ipca management team, Mr. A.K. Jain, our Joint Managing Director; and Mr. Harish Kamath, Company Secretary and Company Senior Corporate Counsel. I will hand over the call to Mr. Jain to make some opening comments. And then we will open it for question and answers. Please go ahead, Mr. Jain.

Thanks, Nitin. Good morning to all participants, and thanks for taking out time and joining us for Q4 FY '21 earnings call. Today's earnings call and discussions and answers given may include forward-looking statements based on current business expectations that must be viewed in conjunction with risk that pharmaceutical businesses faces. Our actual or future financial performance may differ from what is projected and perceived. You may use your own judgment on the information given during the call. Q4 business performance has not been in line with our expectations. Domestic formulation business just delivered around 1% business drop for the quarter. Last financial year, we had hydroxychloroquine formulation business sales of almost around INR 37 crores for the quarter in domestic market. In view of significant demand of then President Mr. Donald Trump announcing it to be a game changer. Q4 FY '21, HCQS formulation business was around INR 20 crores. The base effect of lower domestic formulation business has impacted almost around 4% of domestic growth. We also upward lower domestic formulation business in last 10 days of March compared to normal. There could be 2 possible reasons for this. One is lower stocking by the wholesalers due to March year ending. Second could be possibly our full stop incentive linked to their annual debt. In this financial year, they have not earned much. There are -- some of the businesses were pushed by them to the next financial year. We can collaborate this by the opening first few days business in the current financial year. At hydroxychloroquine or pain therapy, which accounts for almost around 50% of the business, has recorded almost around 9% business growth over previous financial year. Our Cardiovascular business in domestic market has recorded almost around 6% business. Similarly the newer therapies, which are like CNS, 11% growth; neuro, 7% growth; derma has given almost around 23% kind of growth; and opthal has given almost around 61% kind of growth; even nutra has grown by around 43%, but these are smaller businesses. And we have seen that good revival overall in the business. But some of the therapies like antimalarials, antibacterials, cough and cold, they continue to show decline for the quarter and also for the whole of the financial year due to COVID impact. We have improved our overall gross margin during the quarter Q4 to 72% as against 68% in Q4 last financial year. This improvement is attributed to superior product mix for the quarter and overall prudent procurement to keep the cost in check in spite of all-round increases in the prices in the market. Overall, FY '21 has been a strong year for the company. We have achieved a consolidated business of around INR 5,482 crores. With 16% growth, our consolidated EBITDA is at INR 1,566 crores with 50% growth. Our captive back formulation business has improved to around INR 2,195 crores. 60% of overall formulation business of around INR 3,574 crores as against 56% last year of around INR 1,760 crores for last financial year, out of INR 3,130 crores formulation business what we did last year. So from 56%, the integration -- integrated business has moved to almost around 61%. This has been the key strength that company has been working to improve our delivery performance and keep the cost in check. Our FY '21 performance has also impacted overall positively by almost around INR 365 crores additional business we had done during the financial year on account of chloroquine and hydroxychloroquine business which includes both API as well as formulation business. We have done on formulation side, almost around INR 185 crores of additional business. On API side, that figure is almost around INR 180 crores for the financial year. COVID-19 has posed a tough challenge for the financial year due to supply disturbance, logistic issues, labor availability for production, full staff sitting at home for a considerable time, health care challenges of medical facility as well as uncertainties faced by us. We could still deliver a strong performance during the financial year due to dedication of our staff, support we received throughout the year from our vendors and customers and medical facility. Overall, our integrated business capabilities have helped us to deliver better. Having given this small brief, I would now like to open the floor for questions and answers.

[Operator Instructions] The first question is from the line of Rajesh Kothari from AlfAccurate Advisors.

Sir, is it possible for you to give a little bit more color in terms of how do you see the export opportunity? I think 6 months back or so we were talking about it in your Dewas CapEx update, and do you see more opportunities over the next 2, 3 years?

Overall, if you look at our business guidance for the current financial year, we feel that because we did a lot of substantial amount of your additional business last year on account of chloroquine and hydroxychloroquine, overall, business growth will be a little lower. But we are confident to achieve a business growth of almost around 9% to 10% in next financial year. We feel that our domestic formulation business will be very strong in the current financial year. And overall, we expect the business growth of almost around 16% to 18% in domestic formulation. Our promotional and branded business, which we do in the rest of the world market is expected to grow almost around 13% to 15% in next financial year. Domestic API will show a decline because of some kind of additional business what we did last year for supply of some API to the local company for their export to the U.S. So that was an additional business. So that -- there will be a domestic API business will decline by almost around 28% in the financial year. Institutional business. With last year, business has grown at almost around 95%, 96%. From that base, we are expecting a 5% improvement overall business growth in institutional business. And as far as generic business is concerned, that also includes a lot of onetime business we did on hydroxychloroquine. So overall business growth on generic side is likely to be around 5%. In API business, we will have a lower growth of around 10% overall. So overall, we expect around 9% to 10% business growth in spite of higher base due to the exceptional business what we did last year. And broadly, our margin guidelines would remain that our EBITDA could be around almost around 25% to 25.5% in next financial year. As far as Dewas is concerned, work is delayed because of COVID situation again. Last 2 months, practically oxygen is not available for [certification]. And Since we -- the land which we bought, the -- we had almost around 50,000 square feet variable buildings, which we converted into a COVID center, almost around 250-odd bedded COVID center to help the domestic -- the local administration to win the challenge over COVID in that particular area and provide -- we have provided also oxygen plans there and all. But on downside, what we said that there was a big rumor in construction worker that COVID center is coming up. And almost the site had almost around 300 workers and all disappeared because of that. So the contract was facing a tough time again to bring the construction work up. And I think the whole project work is getting delayed by 3 to 4 months because of all these kind of developments. So Dewas maybe in the third quarter end or fourth quarter, it may go towards the installation now in lieu of all these kind of scenarios.

[Operator Instructions] The next question is from the line of Aditya Khemka from InCred Asset Management Company.

So Ajit, on the domestic business, domestic formulation. First of all, in your opening remarks, you gave a number as to dissolve the sales number for CQP and the CQS put together throughout FY '20 related to COVID. Can you repeat that number for me, I missed it.

Overall, hydroxychloroquine formulation business was around INR 151 crores and that is an additional business with it. And hydroxychloroquine business, formulation business was around INR 34 crores. So overall, INR 185 crores business we did, which is exceptional last year. And on the API side, almost INR 137 crores. And on API, which is a chloroquine business and hydroxychloroquine API business was around INR 43 crores, so INR 180 crores. So overall, exceptional business was around INR 365 crores overall for the year. And as we have -- I think in the first quarter -- the last quarter of the financial year, that hydroxychloroquine business for the quarter was almost around INR 37 crores. As against that, we did in this quarter around -- I think around INR 20 crores business. So it's down by almost around INR 17 crores. That's the overall number. And that has impacted almost around by this. Because of base effect, that has impacted 4% of the growth for the domestic formulation business in this particular quarter.

Understood. And sir, your guidance for next year's EBITDA margin was about 25%, is it? Or how much did you guide?

Yes, 25%, yes.

Okay. And now, sir, just understanding this particular quarter's gross margin. So I see that your domestic business has struggled in this quarter, and that's understandable. But your gross margins have substantially gone up from what you reported in 3Q and 2Q. What led to the expansion in gross margin, sir?

Let's say, it's a better product mix, which we have sold in the current financial year. Like say, lower margin business like antimalarial, antibacterial and all that. That business, even cough and cold, they were at lower side. And secondly, we did very good business in promotional market in this quarter, almost around 32% kind of growth. All these businesses are with much better overall margin. And also in marketplace, a lot of prices have moved up. But as far as we are concerned, we could still -- buy a lot of the APIs and all that at our intermediates are at a much cheaper prices because of our the contracts with the buyers on a little -- medium-term contract. So our overall cost on that account has not moved up overall. And that kind of benefit we are currently also enjoying. Maybe in the first half of the year, we will continue to enjoy those kind of benefits. And therefore, we don't expect in spite of significant rise in the API prices and intermediate prices, that may not impact us that much. But the packing material prices because of commodity rises and solvent prices and these kind of things will have very small because their conjunction to the -- overall conjunction may not be that significant. There, the prices have moved up significantly.

Understood. And sir, last question from my side. On the sales and marketing expenses that you report as a breakup of your other expenses. So I can see in FY '20 was about INR 212 crores, INR 213 crores. Could you give us a sense of what that number was in FY '21?

I think we have saved almost around INR 90 crores of expenditure on account of marketing in last financial year. Current financial, yes.

And as we go forward, you obviously would expect this to come back?

Yes, some of these costs -- a majority of this cost is expected to come back.

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

Sir, can you provide our capacity utilization at various plants in terms of API and formulation?

Overall, on formulation side, we have still good amount of capacity, so there's nothing to worry as far as -- and we are not really looking for much of the capacity expansions on formulation foundation side currently, except some -- putting some packing lines at our AC plant, in view of our future pipeline of products which are coming there. So except that, there are no proposal to expand overall capacities on formulation side. We still have good amount of capacities on the formulation side. So as far as API is concerned, yes, we are definitely running with capacity constraint and continuous basis, we keep on doing some kind of incremental changes and all that, which are resulting in a little higher capacities and all that. But I would say that we are still working on almost around API side or almost around 90% kind of capacity utilization currently. And we definitely need capacities, and those capacities will be available only maybe around on the end of the third quarter or fourth quarter as far as Dewas is concerned. But at a plan, we are some kind of work is going on and that should get over by the end of, I think, second quarter, completely valuated. And also those capacities could be available.

So Dewas you're saying quarter 3, quarter 4 is the installation and then the capacity could come online maybe 6 months later?

Yes, then the validations and all that will start your stability and other things. And then by the time it gets inspected and all, it will be almost around -- a lot of inspections are required, so It's 1 year overall business. And real business by the time we'll start producing intermediates here and start giving it to our plant side and then increase the overall output from there. So -- but in real terms, this plant API business will start -- will take us still maybe around 9 months to 1 year after the capacities are installed.

Sure. And with the intermediates, et cetera, getting supplied from Dewas plant, do we expect significant structural improvement in the gross margin from the current level in quarter 4?

No, intermediates, we are already producing on some of those products. So it's only the additional capacity will increase. It will not have additional margin increase as well.

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

So just in continuation to the previous participant. So your guidance on the API side, which is 10% to FY '20. So in regard to -- for the one-off that we had in FY '21. So that translates into a growth of about 21%. How would the new capacity slated to come only in FY '23? So what gives us this confidence of achieving this 10% year-on-year growth on the API business?

So some of the bottleneck issues were already resolved. So we have considered all those aspects and then look into overall kind of business growth. So API, we are confident of around 10% kind of growth.

Sure. And so what would be your CapEx plan for the next 2 years?

I think next year, we will be spending almost because Dewas is a major project, which will be there. So overall -- and right now, only the fuel construction kind of work back to not fully completed. So overall, Dewas will have around INR 250 crores to INR 280 crores kind of CapEx. And there will be other -- other than that, almost around INR 300 crores kind of CapEx, INR 150 crores to INR 200 crores is our normal CapEx. And some kind of additional CapEx is there at the plant site and others. So overall, it could be INR 550 crores to INR 600 crores kind of CapEx in current financial year.

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

Congrats on a great year last year. Sir, 2, 3 questions. One is on your growth assumptions which you have given for next year, the expectation. I just want to understand on the promotional and on the institutional side. If you can just help me understand the kind of growth? Because on institutional, if I remember, there were some additional business which we had done in Q3. So you were expecting that may not repeat. But on INR 365 crore and all across quarters, our commitment or our discussion has been that INR 400 crore is the -- so the maximum size where we see in the institutional can remain. So if you can just help me understand what gives you the confidence of sustaining around 5%, 10% growth. And similarly on promotional, do you see that because the base is very low of last year and a lot of the patients are coming back to the market or coming to the clinic, which is giving us this 13%, 15% kind of growth, just to understand it better.

That's the overall broad assumption because by and large, COVID situation has supplied it in various continents overall. And even the countries like CIS, where the cases are low. So businesses are becoming normal. French-speaking African market and other business, the area which we have. That has given even last year good growth and they are in much better shape. So overall, that also will contribute another other geographies which were impacted by COVID, that also will contribute to the overall good promotional business. So looking into all that aspect, we have given that kind of growth projection for overall through the promotional market.

But on generic, contrary, your assumptions are quite low 5%. But I would have thought because we had issues with U.K. and we were expanding markets in Europe, and we were quite positive that as we expand the growth in Europe and sustain significantly, vis-a-vis that our growth estimate of 5% looks pretty low. So if you can just help me on a generic, where do you see this disconnect? Because the issues were much higher in generic markets, regulated markets last year?

This is mainly because, let's say, base figure has a lot of hydroxychloroquine formulation business, which may not be there in current financial year. On we have given a projection of 5% is also on account of overall much better business we may do in Europe in current year.

Okay. But ex of HCQS or...

Another area, which may impact is we have a lot of businesses related to the peristomal kind of exports where the prices have moved from 300, 350 to almost around 900 levels. It may take some months to subside, still maybe around 3, 4 months more to subside. Right now, it's a downward trend has started but not that much. Some supplies started easing off the materials there, the chemicals which they use, but major chemicals which -- para-aminophenol, the supplies are still not ease and therefore, the prices are high. And that may impact some kind of business on European generics on that account. So all that aspect we have considered. And base effect is also there because of hydroxychloroquine formulations, which is there. So all that we have considered and then given the 5% kind of growth.

Okay. Just one last thing. So if we remove HCQS and one-off issues of paracetamol, the underlying business for rest of the products, where we had brought in changes in U.K. and entered market. So ex of these one-off issues, is the business growing at 15%, 18%? Or what's the business growth trajectory?

Yes, yes. That's the kind of growth is being achieved regularly.

Okay. And lastly, on API. We've seen some drop. So on the export side, domestic side you explained. On the export side, is it -- so the start price drop has also played some role here? Or...

Certainly, yes. Carbon prices has definitely dropped and that also has played a role.

Okay. And how do you see over 3 to 5 years? Because the way we are seeing in terms of volume, the way most API players are talking of expansion in capacities and demand coming very strongly, any inquiry levels or any softer issues which you can help me understand how you are looking at things and how things are improving for us?

The API business has -- last 2, 3 years has definitely improved and will keep on improving. Demand side is very strong.

The next question is from the line of Chirag Dagli from HDFC Mutual Fund.

Sir, can you comment on our portfolio -- our API portfolio pricing scenario, how is it by and large?

Pricing side, certain prices are definitely down. And overall other product portfolios because of material cost increases, some kind of price increases are there. But overall, if you here our kind of intermediates we are producing overall, the price increase has not been that significant overall. Except like say, in Artemisinin and all the prices from 165 move to almost around 250 right now. But we have contracts for $165 for a little longer period of time. So we may not be getting impacted to that an extent. And similarly, there are some kind of other intermediate. Also we are able to get it much cheaper because of our overall long -- medium-term contracts and all. So that may not have much of impact on us.

Okay. Sir, that was helpful. And the second question was on any updates on the Natco side?

Natco side, because of COVID scenario and all, we could not attend to that much on that. And we have already, I think, in a recent time, we have applied for the environmental clearance. And that process will now go on for 5, 6 months. So as that process gets over and we start getting all the permission, then only we will -- so nothing great would happen on grounds on current financial year.

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

Yes. My question pertains to the second wave. In the second wave, are you expecting -- I mean how much would be the benefit in pain management for India?

Let's say -- we last looked at the pain scenario, we have been in the last 5, 6 years, we have been growing by almost around 18% CAGR on pain. And in last financial year also, as far as the pain is concerned, our overall growth has been almost around 14%, but that also included hydroxychloroquine looking. So overall pain segment has given very good growth. The overall brand has given almost around 18% kind of growth in the stock situation also in the current financial year. And we expect pain to be much higher growth in current year because of that scenario. And that's what I think what we are currently witnessing in first 2 months of the current year.

Okay. Right, that makes sense for me. Second -- my second question pertains to most of the growth in Q4 has come from institutional. So you expect similar growth to continue over the next few quarters?

Let's say, as far as the generic businesses are concerned, by and large or by many major except domestic formulation, most of the people have done their budgets and there were significant higher performance compared to the overall annual targets and all. So overall, because of that also, I feel that the businesses maybe in Q4 is on downside. But we will see return of business in the first quarter of the current financial year.

Okay. And last question, how many MRs do you have? And if you could give any change in the reach that has taken place?

In COVID scenario, we have really not expanded our overall sales force for size. And currently, we have almost around 4,000 medical reps currently. And in current year, we are just adding a few more reps in year-over-year cycle on opthal side, which are very small business segment, but they are doing well for us. And some more number of people maybe on derma side we made. But overall addition of people may not be more than 200 in current financial year. So once the COVID situation is behind us, then we will look for what kind of further restructuring is required to get the higher growth from domestic market.

The next question is from the line of Naresh Suthar from SBI Life Insurance.

Most of my questions have been answered. One clarification on the growth guidance. The 9% to 10% growth guidance, if I remember correctly, first quarter of last year had the majority of it this year. So is it right to believe that from second quarter onwards, the growth of 9% to 10% will be more like mid- to high teens? I mean, the normalization will take apart from second quarter itself?

Yes. So first quarter itself, I think first 2 months trend are very significant, and we will see much better growth even after project. They are taking into account the base effect of hydrochloroquine which [indiscernible] distribute last year. So even that business will be very, very strong. So overall, we are pretty confident that we should be able to achieve almost around 16% to 18% kind of growth. Looking at what kind of numbers we have achieved also in the first 2 months of current year, where the sales will translate into very good growth for the whole year.

Sir, my second is more on the overall business. So will it be like second half would be more kind of Y-o-Y 20%-plus growth and first half would be kind of 5% kind of growth because of HCQS, that's how I should look at it.

That's not because of HCQS, let's say, in first quarter, we did almost around INR 137 crores business on domestic API, which was an exceptional business. So that will definitely overall first quarter growth will be very, very low or maybe having a negative growth in first quarter because domestic, we are -- hydrochloroquine business was there in the first quarter in domestic market. So domestic will still be a growth in spite of that base. But some of the other things, other business like the API business will go down. And some of your even institutional business where a lot of other hydroxychloroquine formulations were exported. So there, you will see some kind of impact. So we may not be able to achieve the overall what kind of turnover we achieved in last year in the first quarter. But thereafter, business growth will be good.

Understood. Second question is more on the longer-term margin trajectory. So in FY '20, we did around 20%. Now with the savings of COVID or other things and operating levels, we are now guiding for FY '22, 25%, 26%. So now this significant increase over the last 2 years have been achieved. So after that, how we think about the margin trajectory in 2, 3 years' time? What are the levers you have to improve from here on?

Overall, our formulation side still we have a lot of surplus capacity. So we did not incur much of the CapEx on that account. So that average operating leverage is still available. Then your overall productivity, last few years, we have seen that good amount of MR productivities are moving up, except the current financial year because of COVID that has not moved up. Because is it down in current years. So that also will keep on improving and that will also help in overall -- maybe in the domestic market and also in the international commercial market, both the places. So those productivity expansion will also help in the overall margin. And third is what kind of your -- the process changes on API side. What we are continuously working on to improve the reduction efficiencies and all that, that's the continuous exercise to reduce the overall cost on that account. And overall drive of the company towards your integration, that is also helping. And you're seeing that our overall -- the captive back formulation businesses are definitely moving up and that also helps us to improve our overall margins and keep cost in control. So these are the things which we will keep on improving overall margin for the company for a few more years.

The next question is from the line of Tushar Manudhane from Motilal Oswal.

Sir, just 2 clarifications. On the API side, you said growth of 10%, 11% or on the guidance for FY '22?

Yes, domestic API will go down a little bit, but export API will grow, yes.

So overall API to grow by 10% to 11%? Is that it?

No, not overall. I said export API. Domestic API will go down. Overall API may show around the 2% kind of growth.

2% kind of a growth. And on the EBITDA margin guidance of 25%?

Yes, yes, yes.

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

Sir, any update on U.S. FDA? Have you heard anything, any clarification?

I didn't get your question, please.

Yes. The update on U.S. FDA, sir, anything we have heard from the agency?

We are in regular touch with FDA, but since we have -- we are import alert and all that, so probably what we understand from FDA is that there will be a physical inspection of the site and because of COVID scenario, they are not able to visit and inspect. So as far as we are concerned, whatever it was required to be done, that has been done. And we are also continuously getting our plants in suspense and practices and everything audited from third party even though that may not be required, but that's for our own confidence and all that. We are continuously doing that. But we are confident that once they visit us, hopefully, things would be much better for us.

And in terms of your domestic growth, if you see the first 2 months, we've seen a very strong growth in the domestic market. How is our expectation versus growth in terms of our portfolio? And any benefits of these COVID scenario, have we seen in the first 2 months? And across the globe, also, if you could give color how is the growth in this quarter as we speak?

We don't have overall COVID portfolio in domestic market. That basically hydroxychloroquine is a drug for rheumatoid arthritis. It was repurposed for the purpose of COVID. And in -- it was only the initial period of start out the COVID hydroxychloroquine business for the overall business was very, very high because of that initial requirement. But once the other drugs have started coming in the market like Or Ramdev severe and all, the overall sale of hydroxychloroquine was lower. And secondly, this is also very cheap drug. It's not a very, very expensive drug. Whole treatment happens with less than maybe around INR 100 or so. So it's a very cheap drug. So as such, we don't have access to the COVID portfolio. But in spite of that, we -- in the first 2 months of the current financial year, there is a significant recovery overall in the business and that may also be because of COVID because a lot of medical professionals who are not able to identify whether it's a COVID case or whether it's with typhoid case or whether it's a malaria case to start with in the rural India and also in urban India. So a lot of this kind of mix of treatments were given to the patient till the time identification happens and all that. So overall, your Antibacterial sales in the steel market is also good. There is a good revival of even in the antimalarial business. Cough and cold, which was not performing well, had a significant growth in the recent time. So overall, the portfolios which were declining for the whole of last financial year, suddenly, we saw a very good growth coming in that. And also, there is a revival in other businesses. And pain portfolio continued to do well and it's even much higher growth, which we are seeing compared to last financial year. So overall business has been good.

Sir, sir, just relating with the same phenomena, if we see that our domestic core and base business have been growing stronger and if this similar trend continues over the coming 6 months also, do we think that the promotional and all other expenses in relation to the overall business also this could help us deliver better margins than our guidance?

The margin guidelines we have given based on the, say, overall taking into all those kind of scenario. But if in case drastically differs from our overall projections, then probably the margins, the guidance would -- margins would be definitely different. But we have considered all those aspects like how much of the promotional cost is going to come back and what kind of -- overall 16% to 18% of growth we have projected in domestic market, looking also into the -- what kind of growth which we are getting in first 2 months of the current year. And it's very difficult to say that what kind of scenario will be there after -- even in June, if it's very difficult to say that. And it's also very difficult to say why so much of antibacterial were selling, while so much of cough and cold and even antimalarial were selling in current period. So it's difficult that tomorrow's situation may be a little different also it's very -- but looking into the overall revival of the business, overall, our specialty business growth, that's what we have been proceeding more towards the specialty business in the last few years. And overall growth in pain portfolio and cardiac portfolio, we have given that kind of growth projection.

The next question is from the line of Yash Gupta from Angel Broking.

So my first question that you have given a domestic growth guidance of 16% to 17%. So sir, how much you are expecting a volume growth and the pricing growth? Is that we are expecting a good pricing growth in FY '22?

The pricing growth this year in Indian products pricing growth is hardly an even less than 0.5%. So that may not be there. And overall, our prices are normally, the increases are in the range of around 5%. So maybe 5% to 6% price growth on non formulation and practically 0 growth on scheduled formulation, which are price control formulation. So overall, it may not exceed more than 5%.

Okay. And second question, that you have mentioned that we have medium term context for the raw material. Sir, is this product continued -- if this product pricing continue to like suppose next 6 to 9 months. Then also will we be going to remain out of price contract will be at the same price? Or is there any even in the raw material price?

Prices are applicable only up to the period of contract. So prices will keep on taking into account overall, say, our volume of purchase and also -- so sometimes when your volumes are high, you get much better prices. So that advantage definitely will be there on some of the work. And some of the drugs where volumes are lower, you may have to pay even the higher prices. So that definitely will be the scenario. But by and large, for a large part of the current financial year, we have a good amount of contracts, which will keep the cost low.

The next question is from the line of Ritesh Rathod from Nippon India Mutual Fund.

Yes. I think you've answered this question in previous participant's question. But still current [indiscernible] of around 20%, you're guiding to 25%. There are headwinds such as sales and marketing costs normalizing in second half of FY '22. What are the tailwinds you have assumed to assume to reach the gap of 500 basis points from the current quarter mark?

You have seen that overall, our gross margin levels in last financial year has also moved up, and we are continuously improving overall our material cost to sales ratio. And also overall product mix improvement is there. And also, there is the better realizations are there also on account of your currencies compared to overall. So these are factors which are there, which are helping in overall in margins.

Okay. And maybe second...

And demand is continuously there.

Okay. And second question on the API capacity addition, which will come in FY '23, like it would start ramping up. What kind of growth you will see post FY '22 in the API business on a normalized basis? Will it 10%, 12% kind of growth number or will be 15% to 20% number?

All right. Once the plants are commercialized, then we would like to give the guidelines. May not be the upfront because today, I give you guidelines and then if there are some delays and some exceptional or third wave comes in, we really don't know today. So I would not like to give the guidance before my capacities are put in place. So once capacities are put in place, we will definitely give the guidelines on that.

And what will be the capacity addition to the existing API capacity, both Dewas and this one or the other one in the plant?

Dewas plant will have a capacity for almost around 300 tonnes of overall production and Ratlam what we are currently doing -- we'll also add to around 150 tonnes of overall API production.

That will be what percentage to the base number?

Maybe around 10% to 15% capacity additions will be there, depending on production, yes.

The next question is from the line of Ranvir Singh from Sunidhi Securities.

So just on margin front, you have -- let me explain. But just wanted to clarify, in case -- assuming that exceptional revenue, which we got through from year if you remove this part, then what would have been EBITDA margin in FY '21?

See those kind of businesses came with significant margins also. And that's why our overall margin in current year is almost around 29%. We are guiding a 25% margin, which also has some kind of improvement. So overall, and our beginning of the year, if you see, we were guiding for around 1.5% increase only from 22%, 25% kind of EBITDA, we were talking of around 1.5% improvement. As against that, your overall improvement has been significant in the current year also because of the factors of additional business what we did in current year. And from that level, we are guiding around 25% kind of margin improvement, which also includes overall improvements in overall margin. So everything of that is taken into account.

Okay. Because even -- so you are saying 150 bps kind of improvement from this margin, excluding that margin that's what [indiscernible]

The current year, we are not taking 150% kind of gross margin improvement because a lot of those costs, which are relating to R&D, which are relating to marketing will come back. So we have only factored around, say, on a normalized margin, around 0.5% improvement in current year.

Because around INR 365 crore exceptional income, or income from that HCQS even we take a higher range of a 60% or 50% of margin if you assume, still we get some 27% kind of EBITDA margin of 26.5% in FY '21. That's why I was wondering that whether on metric growth and got more than the [indiscernible]

Your voice is breaking, sir.

All the businesses last -- what we did last year was even at much higher than margin than what you were talking about. And so because of that, only this overall EBITDA has moved to 29% kind of thing. All our guidance was only around 1.5% kind of improvement, which has improved a little better because of your expenditure side, it was much, much lower on marketing side. But then your domestic business also did not happen.

Okay. Okay. And just another one. Can you give a breakup of -- geography-wise breakup of revenue?

Domestic business, we did almost around INR 1,982 crores of sales. Promotional market around INR 403 crores in the year. So domestic business has 4% growth overall for the year. Promotional market had 6% growth for the whole of the year. As far as generic businesses are concerned, we did almost around INR 804 crores as against INR 560 crores in last year. So around 22% kind of growth. Institutional business from INR 176 crores, it became almost around INR 385 crores. And overall formulation export business was around INR 1,597 crores as against INR 1,222 crores last financial year. So around 31% growth was there in export formulation business growth overall. On API side, the domestic API has moved up significantly also because of that INR 137 crore sales onetime business that we did. And that business growth is almost around from INR 250 crores to around INR 386 crores. But that includes INR 137 crores of the exceptional onetime business. And your export API business from INR 922 crores, it has moved around INR 1,200 -- INR 1,120 crores. So almost around 21% growth on that overall. And if you look at the quarter number, your domestic formulation business is around INR 434 crores overall. And on promotional market business is around INR 101 crores from INR 76 crores in last financial year. Generics, by and large, if you look at is around INR 159 crores as against INR 164 crores last year. So there is a decline of around 3% there. Institutional business is at INR 76 crores as against INR 40 crores last year, so around 92% overall growth. And overall export formulation business is INR 338 crore as against INR 282 crores last year, so around 20% kind of growth. And overall formulation business growth is around 8% to INR 771 crores as against INR 713 crores last year. That's the overall break up.

The next question is from the line of Prakash Agarwal from Axis Capital.

My first question is, sir, on the raw material prices, we've been hearing it on some calls that the prices have gone up. So what is our on-ground check? Are you feeling the same and what's the gross margin outlook?

Let's -- I will give you the price trend on various business segments. Overall in, let's say, formulation side, whatever API we procure, except paracetamol and except 1 or 2 small API, we didn't pay any kind of much higher prices. And most -- and also, you will notice that we have a good amount of integration. And therefore, our formulations side, the prices are not moving up, except there are some also 1 or 2 other small products. As far as intermediates are concerned, let's say, your antimalarial -- you have that Artemisinin prices have significantly moved up in market. But our more or less procurement has remained at a lower price, which we -- I have already talked to you earlier. Another big impact comes from another drug called [indiscernible], there your intermediate prices have moved up, but we had a kind of mix of that, some where we have paid higher price, some where lower contracts were also there. So that's the mix of it. As far as other intermediate, like, say, metformin and some of the -- your chloroprene kind of intermediates and furosemide intermediate, there, the price increase has been in the range of around 15% to 18%. Kind of those prices increase has happened in the last quarter of the financial year. So there, some of the higher prices are paid. As far as solvents are concerned, by and large, if you look at, it's around 18% to 30% kind of prices rise has been there in solvents like -- but some of the solvent prices has not moved up like said, IPA prices just moved by 2%, which we use. But methanol prices have moved up by almost around 45% toluene prices have moved by 20%. Methylene chloride price has moved by almost around 23%. So significant moment for there. But overall, their consumptions may not be even 5% of overall API cost side. So that overall doesn't have much of impact. As far as packing materials are concerned, we have seen significant rise in prices because of commodity prices has gone up. If you look at aluminum prices, by and large from 15% to 26% kind of price rise we have seen. On plastic side, 12% to 30% price regime prices, we have seen kind of 12% to 30% kind of rise on resin side. On paper side, if you look at from 5% to almost around 17%, 18% on different kind of paper. Recycled paper has gone up by almost around 19%. Craft paper has gone up by around 18%, 19%. But your other paper has not moved up that much or your FBB board which used for show boxes, which is a large consumption has just moved by 6%. So and as far as glass is concerned, there is almost around -- because of LPG prices going up and oxygen going up. Those prices increase was also very significant. So I have given you segment-wise price increases overall.

But do you expect to absorb or pass on to the customers and your gross margin outlook, sir?

Gross margin outlook we have already given -- yes, that -- on gross margin side, yes.

Okay. And second question, sir, on the various acquisitions we've done on the API side. [indiscernible] 2, 3 years back. So we have talked about synergy benefits, which would play out in the next 2, 3 years when we acquired it. So where we are in the overall journey? And when do we see the build up on these 3 assets?

See, Bayshore has started giving profits in the current year, right? So the front-end kind of thing for us. And that ramp-up of that Bayshore will happen only when your -- it can get qualified and that the FDA issues are clear because that's going to promote our -- by and large, this will be front end for the U.S. business. So till this time, they are only doing the trading -- small trading with -- which doesn't have a large percentage of but they have still given almost around INR 5.5 crore profit on INR 164 crores sales in the current financial year. Last year, they were in loss around INR 155 crores and INR 13 crores, INR 14 crore kind of loss there. Second that company, what we have is our Onyx Pharmaceuticals in U.K. That business growth is very strong. They get EBITDA margins of more than 30%. And at that level, they contributed almost around INR 23 crores of tax on almost around INR 96 crores, INR 97 crores of business. So that's another company. Around there, a lot of restructurings are getting done. We are doing some kind of validation there. And therefore, capacity utilization was also lower. And there were a lot of intermediate sales force happening from there, which we don't foresee to be our strategy. So we are discontinuing those kind of products which were contributing around INR 30 crores of business. So their sales as in the current year has come down, but they will bounce back. And they have contributed around INR 8 crores of loss on some base side. As far as another associate side is concerned, we have a company called Trophic Wellness, where we have now increased our stake to around 40% in the company. And they are a nutraceutical marketing company. They have done a business from INR 85 crores last year to around INR 103 crore in current year. And their PET has improved from INR 15.5 crores to almost around INR 22 crores in current financial year. And there is another company called Krebs, which is at Bangalore . Their operations has resulted in losses. But we are continuously working to improve that. A lot of processes are getting improved. Capacity utilizations are an issue there. So that's what -- we need some kind of new product introductions and all our plants. Hopefully, Krebs will also start performing there. And hopefully, the losses will come down significantly in current year. And thereafter, it can turn in profits here.

Okay, sir. And one more, if I may. On the other expenses side, sir, I mean, percentage to sales is higher. I understand sales in Q4 is lower, but is there any one-offs in other expenses?

If you look at our overall expenditure side, more or less, it's around INR 275 crores or so. INR 275 crores to INR 300 crores. In current year, also expenditure side is more or less on that line, except that around INR 13 crores, we have provided for impairment on Krebs in current year. So to that extent, it is higher. And also, there is a higher expenditure on some kind of repairs and maintenance side. Almost this quarter, we have paid almost around INR 9 crores to INR 10 crores higher compared to the normal, which is a very abnormal cost. It is largely because a lot of those kind of costs which was getting postponed has happened in the -- because of COVID scenarios and contract that's not available. A lot of other issues are being faced in the current year. So a lot of those kind of work has happened in the last financial year -- last quarter of financial year. So that cost is higher, you can consider that's an abnormal. But that's the normal cost. Otherwise, would have come in the all the quarters otherwise. So that's not a cost, which can be postponed or it's not an abnormal cost. But abnormal is therefore only for this quarter. And overall, if you look at last year, the expenditure base was very low. So because of that, you are seeing that overall, there is a significant increase in other expenses. But when you compare it with the other quarters of the year, then you don't find that that's exceptional. Except these -- that 2 cost of -- 2 costs I have talked about, that's higher. And another cost, which has moved up significantly is your freight. Sea freights are practically double. Airfreight somewhere has gone up to 5x to 10x now. And that cost, we must have paid in last -- even in fourth quarter, where overall exports are a little lower. Also, we have paid almost around INR 5 crore additional costs. So the freight costs are significantly higher at current time.

INR 13 crore impairment is for this quarter or for the year, sir?

This quarter, we have provided INR 13 crore impairment.

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

Sameer Baisiwala. So sir, maybe you covered this or maybe I missed it, I don't know. So if I look at your fourth quarter sales, every segment, every single segment, you have 6, 7, of those have shown a meaningful quarter-on-quarter decline. Why is that so?

The business segment on -- say, there are 3 segments where we have seen decline. One is your antimalarials has declined. Another is your cough and cold has declined. And antibacterial has declined in the current financial year. These 3 segments are -- has declined. It's by and large, the effect of COVID in the current financial year. So cough and cold, nobody was going to the doctors. But the [scenario] is absolutely reversing in the first quarter current financial year. And the malaria incidences are low. But all other segments with the -- even in the first quarter, derma, neuro, CNS, those segments were declining, but they have seen a very good recovery and good growth as given in the second half of the current financial year. So some of the -- like say, pain has done overall, let's say, that's almost like say, the reason which is promoting Zerodol as almost around 18% kind of growth they have reported. So a mix of everything is also because of the abnormal situation because of COVID.

So fair enough. So I think you're breaking down the domestic branded business in different segments. So the overall business composition, which is exports, branded institutional, generics, API domestic, expos, all of them. All of them have shown a very meaningful decline, a quarter-on-quarter decline. That is what is a bit surprising to me.

Let's see. If you look at the Q4 projection, which -- numbers which are given, the overall promotional business has declined by -- grown by almost around 32% in the current year. Yes, generic business has declined, except our institutional business, which has grown by almost around INR 92 crores -- 92% on that. So overall formulation business in exports are around 20% kind of growth.

And sir, to the fourth quarter, so fourth, not full year, sir, fourth quarter?

Fourth quarter, I'm talking. Fourth quarter number.

Yes. Execution has come down from INR 138 crore to INR 76 crores, it has not grown 96%?

From 39% to -- we don't see from your sequential basis. I said that it's not -- we don't see them quarter-to-quarter. We see on last year versus every quarter is different and demands of drugs are also different according to seasonalities and others. So that works in IT, doesn't work in pharma on that way.

Okay, sir. Okay, that's fine, sir. Sir, the second question I had is I think the industry made some representation to the government for better pricing for domestic formulation I'm referring to . Any update on that? I think for non-NLEM to give for this year, higher price more than a 10% limit that the government has set.

It's all discussion today. There are no commitment has come. The personal but formulations currently we are solving is at selling it at a huge loss from price from 300 has moved to almost around 900. So nobody is in the industry is making money on that. It's being sold at a huge loss, and you can't -- in fact, the business is also higher because the COVID demand is so much on paracetamol. So industry is still continuously selling and nobody is stopping that kind of business because there are losses. But yes, there are proposals with the government. And normally government at COVID time and when the crisis time, they normally don't consider price increase. But maybe when situations are a little stabilized, government may look into it some kind of industry demand on that.

Sir, one final one, if I may. And that is for the 3 sites for the import alert. I'm just wondering because these observations are, whatever, 2, 3 years or maybe more old and the remediation work is also. So is there any concept of obsolescence when FDA comes away does that these things have expired and the [indiscernible] becomes unfortunately all over again or it's not like that?

No, it's not like that. And as a practice, we are also getting our plants continuously audited by international agencies. Even current year also, we have got it audited. So that processes are robust processes are in place. So we are not worried on that to come.

The next question is from the line of Amar Moria from AlfAccurate Advisors.

Sir, just wanted to understand, like if I reduce the one-off revenue and one-off margin, is it like on a yearly basis, our margin would be around 20%?

No. It would be higher, much higher, yes.

Okay. So because as you indicated that INR 365 crores kind of a revenue would have a margin probably higher than 65% to 70%. So...

Gross margin.

Sorry, gross margin. Okay. Okay. So EBITDA would be what, sir, 20%?

No, somewhere more, yes. Somewhere very high, somewhere yes, [indiscernible] of 25%, somewhere very, very high.

Okay. Okay. So basically, around 23% kind of the base margin you would be?

A little higher than that.

Okay, okay. So basically, on 23%, 23.5%, we are talking about 150 basis point margin expansion in the financial year '22. Is that fair to assume?

We have projected around 0.5% kind of -- so it's around 24.5% that kind of level and 0.5% improvement in current year, yes.

Okay. Okay. And secondly, sir, what would be our overall capacity in API today? And if you can indicate like you had highlighted, but if you can indicate what is the expansion we are doing on the overall capacity in the next 2 years?

Overall capacity, if you -- that's a very difficult thing to talk about because some products may have 20 states, some product may have 2 states, 3 states or if you produce larger amount of [indiscernible] volume, it will be -- your capacities are very, very because -- it's a very, very less sizes and overall production numbers are very high. Tonnage is very high. So -- but broadly, if you look at -- we are currently at around almost around 90% kind of capacity utilizations. That's what -- and some kind of capacity we keep on creating by incremental work throughout the year-end. Because of that, we are able to overall increase the business in API side.

The next question is from the line of Rahul Sharma from KARVY Capital.

Sir, what a perspective on the different regions, the export market where we had performed the year like in Europe, CIS, Africa and others.

Rahul, in this financial year, that is FY '21, EU there is a growth of 31%. Australia, New Zealand there is a growth of 18%.

The numbers could you give?

EU is INR 419 crores versus last year INR 319 crores. So INR 100 crore growth. Australia and New Zealand, INR 151 crores versus INR 178 crores, 18% growth. And this year, there was also some U.S. sales of HCQS in the beginning of the year, about INR 21 crores. Last year, it was not there. And Canada from INR 78 crores to INR 105 crores, that is 34% growth. And there is a decline in South Africa business from INR 110 crores to INR 80 crores, INR 30 crore decline because there it is a tender business basically. generic from INR 660 crores, we have done INR 804 crores, that is 22% growth.

So INR 78 crores, to what decline in which region was that?

South Africa from INR 111 crores to INR 80 crores.

So before that INR 78 crores...

INR 78 crores is last year of U.S. and Canada put together, which has become INR 127 crores this year. But this INR 127 crores also includes INR 21 crores of U.S. HCQS business, which was not there in the previous financial year.

And CIS, sir, how much is CIS, sir?

CIS is more or less flat, INR 167 crores versus INR 164 crores. So in some continents because of this COVID situation, the sales got impacted.

Okay. Okay, sir. Another thing was how R&D shapes for the year, sir?

There is a slight 0.5% incremental expenditure as a percentage of sales in the R&D cost this year.

The next question is from the line of Saion Mukherjee from Nomura.

Sir, on the margin -- EBITDA margin guidance that you're giving. So now we have a new base. So when we think about next 3, 4 years, and I think you mentioned that there can be improvement on this space. So what kind of numbers do you think the margins would stabilize as your capacity?

Saion, if you see our audited financial results, in FY '20, we had a margin of about 22%, 22.5%. And in the beginning of the year, we gave a guidance of 150 basis point improvement in the margin, correct? We service debt, our margin ended up at 29% because of some additional business in HCQS and . Okay. So excluding those additional business and its margin, on a standardized basis, maybe this year, we did an EBITDA margin of about 24%, 24.5% versus 22.5%, which was there in FY '20. So about 150, 200 basis point improvement in the margin, which was the guidance what we gave, okay? And this margin is at the back of decrease in our marketing expenses by about INR 90 crores. Similarly, we also lost business. Okay. This year, the marketing cost will come back. Our domestic business will improve. So that will get offset. And on the EBITDA margin level, we are guiding about 25% EBITDA for the current financial year. So going forward, our guidance remains same, 12%, 13% top line growth from the next financial year onwards and about 100, 150 basis point improvement in the EBITDA margin. And the same in our guidance for last 4 years, we have not deviated from anything. This year, there is an improvement in margin, mainly because of this extra sales in HCQS, and they came with a very, very good margin and a reduction in the marketing cost.

Okay. And so the marketing cost in the fourth quarter -- so you said INR 90 crores for the full year. So how much is the fourth quarter, like how much...

Fourth quarter more or less, everything was back on track. For us, except for last maybe week of March because of lockdown coming in again. But most of the cost will get spent in the current financial year, but we don't foresee there is any reduction in those costs. But we will also see good growth in the domestic branded business sales.

Thank you. I would now like to hand the conference over to the management for closing comments.

Yes. Apart from all your questions asked and answers given, we have nothing more to add. Only thing we reiterate our guidance for the current financial year, top line will grow by about 9%, 10%, and we are confident of achieving about 25% EBITDA margin for FY '22. With this, we close this session. Thank you.

Thank you. On behalf of DAM Capital Advisors Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.

Yes. Thank you. Bye.

Thank you, everyone. Have a good day.

Yes. Thanks, Nitin.

Bye.