Ipca Laboratories Limited (IPCALAB) Earnings Call Transcript & Summary

Hi. Good morning, everyone, and a very warm welcome to Ipca Labs Q1 FY '22 Earnings Call, hosted by DAM Capital Advisors Private Limited. On the call today, we have representing Ipca Lab management, Mr. A.K. Jain, Joint Managing Director; and Mr. Harish Kamath, Corporate Counsel and Company Secretary. I will hand over the call to Mr. Jain to make some opening comments, and then we will open the floor for Q&A. Please go ahead, sir.

Good morning to all participants. Thanks for taking out time and joining us on Q1 FY '22 earning call. Today's earning call and discussions and answer given may include forward-looking statement based on our current business expectations that must be viewed in conjunction with risks that pharmaceutical business faces. Our actual future financial performance may differ from what is projected or perceived. You may use your own judgment on the information given during the call. Our business performance has been better than our own expectations for the quarter. The domestic formulation business delivered 25% growth over previous year. And excluding INR 54 crore of domestic hydroxychloroquine institutional business which we had done in last year first quarter, if we exclude that, then domestic formulation business has grown by almost around 41% in Q1 on a lower base. Some of the therapeutic area recorded a very strong performance. Our pain segment has given almost around 36% growth, which contribute almost around 49% of our businesses. That is excluding hydroxychloroquine business what we have done with institutions. Including that, the pain segment has just given around 6% growth overall. Cardiovasculars and antidiabetics has grown by almost around 14%, which has contributed almost around 18% of the business. Antibacterials has done really very well. The business from INR 18 crore has gone to almost around INR 50 crore. It contributes around 8% of the business. And overall growth in this business segment is almost around 173% for the quarter. Derma is another business where last year first quarter we were facing problems because of lockdowns and other things. That -- the recovery has been very strong. The business last year was almost around INR 13 crore. That has gone to almost around INR 25 crore, and the business growth has been almost around 89%. And derma contributes almost around 4% of the business. Similarly, even antimalarials in this quarter has done well, almost around 98% kind of growth, and its contribution is around 6%. The INR 20 crore business last year first quarter has gone to almost around INR 39 crore. Cough and cold is another segment where continuously in last financial year, there was a decline. There is -- but in this quarter, first quarter of the FY '22, there's a sharp recovery in cough and cold business. And that has also grown by almost around 83%, and it contributes almost around 3% of our overall business. So overall, it's broad-based. Most of the therapeutic area, we had very strong growth in the first quarter of the current financial. If you look at CAGR growth of domestic business in first quarter, on a base of FY '22, it works out to be almost around 16.34%. So that has been a really good growth on the base of -- first quarter's base of FY '22, if you look at, then it becomes almost around 16% kind of growth. Because there is no point in looking growth from the base of FY '21 because that was -- the business was facing problem because of lockdown. But on a base of Q1 '22, it's almost around 16.34% growth. The broad-based treatment of hospitalized patients helped the antibacterial business growth. At the same time, selective lockdowns did not much disturb the overall market in the first quarter of the current financial year. Excluding almost around INR 259 crore exceptional business in Q1 last year on account of chloroquine and hydroxychloroquine that we had done last financial year, if you exclude that and then on a lower base of last financial year, we have recorded a business growth of almost around 23% in the current year overall for the company as a whole. We have achieved an EBITDA margin of around 27.1% for the quarter in spite of 2% lower currency realizations compared to the last financial year, higher material cost at marketplace, increasing basic chemical prices, intermediate prices. Petroleum prices are at -- petroleum product prices are at very high, which includes all the solvents, which are used for API. So a lot of those costs and packing material costs because of commodity prices going up is also very high. And higher energy costs, transport costs and shipping costs, shipping costs more particularly, particularly the container cost, that has significantly moved up. And also the promotional cost has started returning back in the first quarter of the current financial year as the situations are becoming normalized now. The COVID-19 has posed tough challenge due to COVID infections at plant and loss of life due to COVID as well as selective lockdown also disturbed the plant productivity due to less availability of manpower at certain of our plant during the first quarter. Having given the brief presentations, I will now like to open the floor for question and answer. Thanks once again for taking out time and participating on this call. Thanks, Nitin.

[Operator Instructions] The first question is from the line of Tushar Manudhane from Motilal Oswal.

Sir, just on this -- on raw material costs, so how do you see the outlook now for the coming next 3 to 6 months, whether the costs are stabilizing or continue to rise?

There is still continuing rising trends are there. More particularly, again, the flood in China and a lot of other issues are still disturbing the markets for -- more particularly, for the basic chemicals and your intermediates.

And so would be the logistics cost as well?

Logistic cost is also -- in fact, they are -- container hiring cost is further going up. The European containers, which was available much earlier at a much lower price, now is almost around -- reefer containers are almost around $6,000, $7,000 now. And U.S. container sales -- because of -- a lot of the shipping companies are from China, and the tremendous amount of disturbance as well, and we have to book container well in advance. And so there is a lot of disturbance as far as the freight is concerned, and that cost is moving up, yes.

So would that -- given that we had some amount of inventory, which would have taken care of for this quarter, so maybe will that cost impact could be more reflected in the coming quarters?

Let's say, cost increase is there, but at the same time, the pricings are also continuously revised -- getting revised. In domestic also, we are taking a little higher pricing. Normally, we take around 4% kind of price rise. This year, our average price rise may be around 6% now. So that -- to some extent, that will get compensated. And as far as API business, it's a quarter's lag because what inventories you have, you price the product in line with that. And then price goes up, again you revise the prices in the market. So we don't sign any kind of long-term contracts. So prices keeps on revising. So it doesn't have much of impact there. Maybe it's -- short term, some kind of impact may come.

And just lastly, if you could also -- like extending the API on the sales aspect, like how do you see for the full year? Is there any one-off for the quarter? Or this is kind of a normalized run rate to go by?

Let's say, we have -- the business was good in the first quarter of current year. Domestic API business, we were expecting very significant decline because of, last year, we had almost around INR 136 crore of API business, which we have sold API to an Indian company, which in turn exported the product to U.S. for COVID. But excluding that also, against our expectations, the API business has done very well. And the current trend also appears to be good as far as domestic is concerned because domestic market is also growing very well. So domestic API may do a little better. On export side, we have projected for whole of year around 10% kind of growth. There could be some impact here and there because of, we were exporting some API to market like Iran where there are issues currently because India is not buying the oil. And therefore, your rupee payments mechanism, which is there, that rupee is not available. Even though you have orders in hand, but shipments are not happening. So that may have a little impact here and there. But more or less, it's going to be in line with our overall expectations of the current year.

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

So first question is regarding the gross margin. So if I look at our mix, it has not sequentially shifted much, as now the domestic is still around 40% of our revenue. But if we look at the gross margin, they have compressed quite a lot on a sequential basis. So apart from high raw material costs, are there any other reasons for that?

Basically, there are 2 reasons. One is, let's say, the product mix, which is sold in this particular quarter. As I told you that there are significant amount -- significant jump in the -- some of the product portfolios like antibacterials, antimalarials, so those kind -- cough and cold and all those kind of portfolio. Traditionally, their margin levels are low. Their cost of manufacturing is higher. And some of the antimalarials, we have very, very low margins. And their business growth has been significant. So that also impacts. So we cannot see the pharma business sequentially. It has to be seen with reference to the -- quarter-over-quarter, we cannot see that. It has to be -- with reference to each quarter, product mix is a little different. So that's one factor. Of course, the cost of material has also gone up, but it's also the product mix, which is also impacting overall on material cost side. And last year first quarter, if you look at most of those business relating to chloroquine, hydroxychloroquine, which has happened, that has happened at a much, much higher margin level. And therefore, the material costs were almost around 27%. But if you look at overall, our material cost for whole of the year, it was around 32% kind of material cost. And currently in this quarter, it's around 33-point-some percentage point, 33.4%. So it's a little increase also is because of overall product mix changes, yes.

Sure. And second question is on other expenses. So you alluded that now that the promotional activities are coming back, but still I believe we are still at around INR 300 crores. So do you expect this INR 300 crore cost line to move up materially in the coming quarter?

More or less, let's say, cost increase trend will remain a similar kind of trend which we have witnessed in the first quarter. First quarter, there is some kind of exceptional entries also there of some provision of diminution in value of investment. So around INR 16 crore we have provided on that. So excluding that, there are no exceptional as far as expenditures are concerned. If you look at your energy costs as almost your [ A4 ] cost has moved up almost around 50%, 55% in this quarter. So energy cost has significantly moved up. Then your promotional costs -- shipping costs have significantly moved up. And promotional cost has come back. Last year, first quarter, most of the field staff was sitting at home. So they were only paid the salaries. Normally, there are almost around 5,000 people who travels every day. So the travel cost. And also there are allowances. So that cost was not there. So that cost has returned back. And secondly, on human resources cost side if you look at, since the domestic business has outperformed and has given a significant growth, so we also made much higher provisions for the incentive payment to the overall to the field people. But a lot of those incentive payment also depends on how they perform in subsequent quarter. So it's based on our judgments we have made in higher provision, maybe practically double the amount we have made provision. So it all depends that how in future that will work out. There could be reversal or there may be requiring additional provision. Let's say, your -- but generally, trend is good. July trend has been very good, and August has also opened very well. So we don't see any kind of concern as far as domestic is concerned.

Sure. And just a small follow-up on that. We were expecting to add around 200 MR in this year. So has that cost also be incurred? I mean, have we kind of hired those many people and that's already built into our number?

That is already built up. Let's say, we have added people in your, CNS segment is one segment we have added people. Another we have added people is in ophthalmic segment, we have added people. And some people we added in towards the derma business. And derma business for us is doing very well now. Very good recovery in this economy. So it's not that these products, people have become productive. Their cost has come in the first quarter.

The next question is from the line of Damayanti Kerai from HSBC.

Sir, my first question is on India business. So you have mentioned we have seen very good recovery in some of the segments. So just to understand, like, are these -- I understand like most of these are seasonal in nature. So how do you see India growth panning out in next few quarters?

As already indicated that yes, there was some impact of COVID also in that because anti -- there was a growth of people for the hospitalized patients, and there is a sharp recovery in antibacterial. But normally, the antibacterial sales happens very within your rainy season because a lot of infections happens around that time. The first quarter is one where the -- those infections are at a lower level. But this year, it is also helped by the overall those kind of infections there. And overall, let's say, trend appears to be good. We have projected for the current year that this domestic business should be growing around 16% to 18%. If this is not the trend it appears, then we may have to revise our guidelines possibly.

Okay. So this 16% to 18%, you might revise later on. But so far, you are seeing good trends.

Yes. We are seeing good trend, yes.

Okay. Sir, my second question is on your capacity expansion for API. So can you please provide update there?

We are still facing problem because that whole expansion got delayed because of COVID. At Dewas, we were -- we are still in the process of setting our plant. But we also created there 250-bedded COVID hospital. And because of that, the workers ran away. And we had almost around 3 months gap in project implementation. So project was somewhere to becoming operational at the end of third quarter. Now it will go to the fourth quarter to do your entire validations and also -- basically that plant will not be available for any kind of commercial production in current year. The capacities will become operational in the next financial year only. And we are setting up one more plant at Ratlam that also got delayed. And I think that should be somewhere at the end of third quarter that should be the operational, yes. So some kind of additional quantities may be available in fourth quarter for business, yes.

Okay. So broadly, we should be expecting these new plants will be contributing from next fiscal year onward?

Yes. Next fiscal year onward, yes.

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

On the export side, I just wanted to understand the outlook. I mean, clearly, this quarter is an impact of high base of last year's quarter. On the outlook side, how do we see the branded business and the generic business shaping up, especially in Europe of generic business?

Some of the branded business which we are doing currently in, let's say, CIS market, there is also impact of currency that -- ruble has moved almost around to 72, 73 level from 68, 69 level. So there is a minor impact of that is also there -- will be there. Some of the markets are also disturbed like Myanmar, where we were doing good business. And currently, because of all those turmoil which are there, so that market is disturbed. But some of the other markets, maybe in Africa and French Africa and African markets, are doing really very well. So it's a mixed trend. We have projected almost around 14% growth. But it's likely to be a little less than that, maybe around 12% or something like that. So that will have some kind of little disturbances as far as that business is concerned. Generic businesses, last year, we did a lot of businesses relating to hydroxychloroquine and all. And also, the para prices -- paracetamol is also one of the good products which goes in Europe and other market, big volume, because of para prices moving up to almost around double the level than last financial year. Currently, the buying levels are low. So your generic European business may have some kind of impact of that. But overall, your API business, we should be able to achieve around 10% kind of growth. Domestic API should be able to do better than that. And overall, our guidelines continue to remain around 10% kind of growth -- 8% to 10% kind of growth for the next year -- for the current financial year. But looking at overall trend after second quarter, we will decide on and revise our overall guidelines for the current financial year.

Okay. And any outlook, sir, for the gross margin? You mentioned not to look at quarter-on-quarter, but there is a sharp jump in the high-margin domestic business. So how do we see the upcoming year as the gross margins? Because this seems pretty low to us seeing your past performance.

Our guidelines for this year on EBITDA margin side was almost around 25%. And in first quarter, we have recorded around 27% kind of growth. And the trend is likely to be better in the -- so after second quarter, we will revise our guidelines upward, yes.

Okay. But any color on gross margin, sir?

Gross margin is a quarter-on-quarter kind of -- let's say, in this quarter, a lot of those businesses happen where the cost was on higher side. But that trend may not continue for a longer period. So overall, material costs will come down a little bit, yes. So gross margin levels will improve.

Okay. And lastly, on API business, we're looking at your annual report. So currently, this Pisgah and Ramdev still at loss-making at the PBT level? And how do we see the turnaround? I mean there was a thought that you'll consolidate and scale all these businesses. What is the 1-, 2-year outlook on these subsidiaries?

Pisgah in current year may continue to remain in loss-making. But basically, we have taken that for the CRAMS business. And now the business has started happening. We already won the 2 projects, and there is good amount of work in progress is happening on that. So it takes time to -- for a new entity to establish there and all that. So that work is currently happening. So Pisgah, we don't expect that to make money. At the Ramdev, we are changing the complete product portfolio because they were more on intermediate side. And we are -- in Ipca, we don't do much of intermediate business. There is hardly any intermediate business. So we are now focusing more on API side. So a lot of APIs are taken for qualifications and a lot of stability. And those kind of works are going on. So maybe current year, they will be on losses, but on a longer term, maybe next financial year, we should be able to turn that down.

Next question is from the line of Surya Patra from PhillipCapital.

Congrats for the good set of numbers, sir. Sir, just on the -- just a clarification from the earlier question that you mentioned Ramdev, which has been in the intermediate business and you're trying to switch this to API manufacturing one. So while we are creating capacity for intermediates and backward integration and all, like in Ratlam, also in Aurangabad as well as in Dewas, why are we changing here, sir, Ramdev?

These are small, all small. Ramdev is not a very big plant. It's more suited for small -- high value, small API kind of thing. So it's not a plant for intermediate. So they were doing mostly the intermediate for smaller products, which are not there in the our product line. And we don't want to be there on those product lines. So it's not -- so it doesn't make sense. As far as the intermediate journeys are concerned, that's for basically to support our captive consumption. We don't do any kind of intermediate business as such. We don't sell intermediates. Yes. so that's the change. Wherever we are setting up the intermediate production is only to support our API.

Okay. Okay. And my first question is about this thing, sir, that -- so you mentioned that this Dewas project possibly will be commercialized starting FY '23 or something like that. So is it early part of the FY '23? Or do you think that it will be only in the second half of FY '23 or something like that? And also, what is the update on the debottlenecking project that you have been doing in Aurangabad? You said about the Ratlam. So...

Ratlam, that project is progressing well. I think third quarter that should be commissioned. So fourth quarter, they should be available for business. As far as Dewas is concerned, it's a new site. So we will have to -- after for qualifications and we do everything, it may not add immediately to the business because we will have to generate data and file everywhere, with the regulators and then invite them for inspections.

Even if for intermediate?

Yes. No, in intermediate, we don't do. So what we do is the initial phase, we will produce the intermediates for our N-1 at here and then send it to Ratlam. So we will increase our Ratlam productivity. And by the time, let's say, 6, 8 months' time, all the data will be generated and then submit to the regulators. And then there will be some kind of time lag for their inspections and all that. So after that, once the site is qualified, then only you can export API from that site. So any kind of new sites you create, there is some amount of pain for -- till the time you get all those kind of approvals. So even in '23, there will be some -- that pain will remain because it's a process by itself. That process has to be completed. Regulatory approvals need to be taken, and then you start exporting. So that time will be required for any new greenfield site. Some additional -- at additional -- your existing site, whatever expansion you come, from day 1, you can do the business.

Just on the Dewas. It is -- the objective is to have an external sale? Or it is largely to have more of a backward integration for the existing operations, sir?

No. Dewas is purely for external businesses and captive consumption. Not intermediates, yes. It's basically an API site.

Okay. Okay. Fine. Second question, sir, on the -- sir, if you can just talk something about the -- how should one really look at the associate companies where we have gradually expanded our holding, let's say, Krebs or the Trophic Wellness or the Avik. So all these 3 are having some unique capabilities, but we are at almost like at the threshold levels before having a kind of a majority stake. So your viewpoint on those, what is the kind of outlook that one should really have for Ipca?

Overall, let's say, Trophic Wellness is a company which is dealing into neutraceutical product. And that's a different kind of marketing model there. It's -- we have direct selling to the customers. That's the kind of model is there. And that business is doing very well. I think overall, last financial year, we did, I think, business of almost around INR 100 crore in that company and had a profit of more than INR 20 crore. So that is there as far as the Trophic Wellness is concerned. And that business is also shaping up very well for neutraceuticals. So in -- your wellness is one particular area where in longer term, that businesses will do well and will have a much higher growth. So we have increased our overall holdings because there were -- when this company was started, there were 3 partners who were there. And one of the partner wanted to exit, so we bought their -- his stake. So there were 3 partners in this, right? Ipca was also one of them. And with that, your -- overall, our stake has gone up, and we have become now -- it has become our subsidiary company. So that's one. And as -- I have already talked about Ramdev. That -- it's -- Ramdev plant is more suiting for the high-value, small volume kind of -- those kind of products, and that's the journey we are having from that particular plant. And as far as Avik business is concerned, it's more on the steroid side, steroid and --- that business. And we have not increased our stake in that company, has more or less remain at the same level. And as far as Krebs is concerned, yes, it's basically a fermentation plant. There are 2 plants. One is at Nellore and another is at Vizag. Nellore plant is already on breakeven, and it started earning money. But as far as the fermentation plants are concerned, we are still facing some kind of issues there. But hopefully, by this year-end, we should be able to -- because we have -- overall a lot of changes we have already made there, and we are also changing the product line, and we should be able to now come to the breakeven in by the, I think, maybe third or fourth quarter of the current financial year. And the -- it's basically a fermentation plant with very, very high -- very large fermenters base. It's not a small fermenter base. Very large plastic fermenters are there in that plant. It basically was producing simva, but their process is not efficient. So those also we are changing now.

We take the next question from the line of Kunal Randeria from Edelweiss.

Sir first, on the domestic business. A lot of your top brands like Zerodol and extensions, CTD, Folitrax, see these are #1 in the market and have a huge market share. So I'm just wondering if the upside, at least in terms of market share expansion, seems challenging. So just wondering what your thoughts are for the longer-term growth for some of these brands?

Zerodol is a very large brand today. And at that level also, if you look at in last whole year, we have grown by around 18% on Zerodol, and the whole market was challenging. In current year, even in first quarter, Zerodol as a brand has grown by almost around 36%. And we are very confident that we will take the brand to the newer level. So there's huge potentials to -- still to be tapped on this kind of product. So there is nothing -- as far as we are concerned, there are no worry as far as Zerodol growth is concerned. As far as your hypertension brand, CTD, is concerned, yes, we are market leaders. We are expanding that overall more offering as far as in terms of your combinations and others on CTD brand. And again, here, as far as overall hypertension markets are concerned, it's very small, if I look at that way. And we have a long, long way to go to make it further very big. So I don't think so we have any concern on that. And as far as other therapies are concerned, like rheumatology, we have more than 40% kind of market share where most of those brands are having a leadership at the marketplace. All rheumatologic brands, most of the brands we have leadership. Recently, we have launched, I think, in November, tofacitinib also in the market. And that product is also having leadership for -- in the market, and we are doing very well on that. And your disease prevalence of rheumatology is very high. It's autoimmune disease. We have -- we are continuously expanding the market. It's only last 1, 1.5 years of because of COVID, we're having challenge in expanding markets. So overall little growth has come down on rheumatology side. But on a medium term and longer term, we don't foresee any kind of issue in growing that market further and continue to maintain leadership and still grow that market very well, yes. And other most therapies of ours are, basically it's a growing -- we are -- like I say, derma, it's a growth market for us. It's -- or urology is a growth market for us. CNS is a growth market for us. Our ophthalmology, all these are high-growth markets for us. So they will continue to do very high growth. At the same time, we don't foresee any kind of issue in growing our existing these kind of portfolio. Our challenges are only relating to antimalarials, which has become very small part of the overall market, overall in our pie. Of course, in first quarter, it has become 6%. But overall, for the whole of the year, it is only around 4% of our business. So that's the only one which is a declining market. And some of the old legacy products like beta blockers and all, they are on declining side on cardiovascular. And so rest is all our -- our portfolio is more linked to the -- overall to the growth markets.

Sure. Sir, as a follow-up to this, sir. Aceclofenac as a compound, is that also you believe can grow at 12% to 15% in the coming years?

Aceclofenac is continuously taking your market share from others because the GI issues with aceclofenac is much less compared to all other NSAIDs. So -- and it's continuously taking the market share from others. And we are driving that basically.

Sure, sir. Just one more clarification, sir. What would be the tax rate guidance for this year and next year?

I think current year and next year, we will remain on net. Thereafter, we will opt for that lower rate of tax of 25% because by the time then your net credit should be -- almost whatever accumulated net credits are there, that will be consumed.

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

Sir, congrats on the good set of numbers. I -- my question was more pertaining to the sartan prices. How do you see growth with the decline in sartan prices?

Let's say, sartan prices have sharply come down. Losartan was the main product for us, and there also prices have sharply come down because of overall intermediate prices coming down. And that whatever cost reduction is there on material side, that we have passed on to the -- overall to the market. But what we have done overall, our business has not grown up on that, but our volumes has gone up. So we had taken more market share in quantity terms, but our overall top line on rupee terms has not moved up in the first quarter of the current year. But we have sold higher volumes in the market. More market shares in terms of quantity we have taken. So that's reflected in the, let's say, your overall revenue going down, but we have to produce more quantity to compensate for the reduction in the prices.

Okay. So are you looking at -- I mean, how do you plan to overcome this?

Plan to overcome is, let's say, the market forces will always play. Sometimes the intermediate prices are higher, sometimes the prices are lower. We also are developing a lot of sourcing from India also on that, so that your knee-jerk reactions are not there to these kind of markets. But it's a dynamic situation. Sometimes there are more number of producers comes in the market of intermediates, and intermediate prices fall. And sometimes some plant gets some issues or a bigger plant has issues relating to any kind of pollution issues or some kind of breakdowns or all, then suddenly demand moves up. Those demands are not fulfilled, then market prices move up. So it's -- these are the issues can only be addressed if you are having your captive productions of some of the intermediates or some of those are in your -- supporting manufacturers are producing that. So that's the long-term focus for us, to internalize some of those intermediates.

Okay. Okay. And do you expect improvement in profitability going forward?

Our profitability continuously last few years are moving on and will continue to move upwards as our -- the products mix are moving towards the higher value chain, yes.

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

So we are planning to commercialize Dewas probably in FY '23. But will we have higher operational costs related to it once we kind of commercialize, but then there will be no revenue, at least as you suggested, for some time till we get the plant inspected and all? And what could be the quantum of those operational costs initially?

Let's say, when you start the plant, immediately their operational costs may not get fully recovered. But as I said that we will produce N-1 from this particular plant and shift it to our Ratlam plant and keep on producing API from there. So we will -- it's not going to be a complete loss or no revenue. That situation will not be there. They will be transferred -- the N-1 will be transferred to Ratlam. And then from there, the APIs will be produced. So that's going to be initial journey until the time plant gets regulatory approvals from the regulators. So it's not that this will be incurring huge amount of losses on operational costs and all, yes.

Sure. And the second question I have is again on sartan. I think few quarters back, we were thinking to add a continuous manufacturing facility for sartans. But then I think the market forces have moved quite significantly. So are we still on track to do that investment? Or...