Ipca Laboratories Limited (IPCALAB) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '22 Earnings Conference Call of Ipca Laboratories Limited 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. Thank you. And over to you, sir.

Hi. Thanks. And good afternoon everyone and a very warm welcome to Ipca Lab's Q2 FY '22 Results Earnings Call hosted by DAM Capital Advisors. On the call today we have representing Ipca management team, Mr. A.K. Jain, Joint Managing Director; and Mr. Harish Kamath, [ CMP General Company Secretary ]. I hand over a call to Mr. Jain to make some opening comments. And then we will leave the floor open for questions. So Jain, Please go ahead, sir.

Okay. Thanks, Nitin, and DAM Capital Advisors for organizing this call. Good afternoon to all participants and thanks for taking out time and joining us for Q2 FY '22 earning call. Today's earning call and discussions and answer given may include some forward-looking statement based on our current business expectations that may be viewed in conjunction with the risks that pharmaceutical business faces. Our actual or future financial performance may differ from what is being projected or perceived. You may use your own judgment on the information given during this call. Our business recorded a strong performance for the quarter. Domestic formulation business delivered 30% growth for the quarter. And on improved base of Q2 last year, from INR 535 crore to almost around INR 698 growths. Domestic API business delivered around 25% growth for the quarter, from INR 67 crore to almost around INR 82 crore. Export business of formulations and API declined during the quarter, but excluding the exceptional business of Q2 last financial year, last year Q2, the branded generic business has grown by almost around 17%. Generic formulation business has grown by around 15%. And institutional declined by around 23%. And API business at around INR 287 crore, has declined by around 7%. Some of this business is also impacted due to the delayed availability of containers and shipment. Some of the key highlights of our domestic formulation business. Domestic market, our ranking has improved to 16th in the month of September. Our mid-ranking has also improved to 19th in September. And currently it is around 18 as per IQVIA. We have improved our market share to almost around 1.75% in [ met ] September 2021. Most of our therapeutic areas have delivered a strong performance. Our internal sales growth in key therapeutic areas, if you look at the pain segment, excluding hydroxychloroquine, it's delivered almost around 33% growth. Including hydroxychloroquine where we had the significant business from institutions last year has delivered around 24% growth overall. Cardiovasculars have delivered almost around 13% growth. Antibacterials around 37% growth. Cough and cold preparation, almost double practically, 95% growth. Dermatology, almost around 52% growth. CNS, 30% growth. Europe almost around 46% growth. And antimalarials has also delivered almost around 75% growth. The therapeutic contributions of key therapies in domestic market. Pain is now almost around 48% of our business. Cardiovasculars account for almost around 17% of the business. Antibacterials has now jumped around 8% of the business, antimalarials around 7%. And derma had significant growth by almost around 2 percentage point. And now it has increased to almost around 5% -- it's around 5% of the business. And cold and cold has also become around 4% of our business. Standalone EBITDA for Q2 FY '22 stood at around 23.60% for the quarter as against 27.28% for Q2 FY '21. We have witnessed a very significant cost rise during Q2 due to increase in commodity prices, energy cost, shipments and logistic cost. Raw prices also moved up, in some cases to almost around 200 to -- 2 to 3 folds, and more due to the energy issue faced by China and also impacted by the China's dual control policy since the key provinces where the chemicals and intermediate units are located were functional only for a few days a week, and that created the shortages. Lower energy allocation by China into the mining sector also impacted the prices of some of their raw materials very adversely. Higher prices trend is still continuing. And we are not seeing much of the sign of decline yet. Domestic prices of the key materials like solvents, acid, alkaline, specialty chemicals, pharma excipient in many cases has moved by almost around 100%. Higher inbound and outbound freight cost increase, as well as domestic logistic cost increase has also impacted overall overhead cost. As a result of input cost increase, material cost to sales ratio went up by 2.12% in Q2 in [ certain accounts ]. And overall EBITDA went down by almost around 2.65% compared to Q2 last year. But as against our earlier guidelines of around 25% EBITDA for the financial year '22, EBITDA is lower at around 24.63% for the Q2 FY '22. Having given some broad numbers, now I'll request participants to ask questions.

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

Sir, firstly on the overall guidance for FY '22 given the first half FY '22 performance, would you like to revise the full year guidance?

Our domestic business is doing very well. Our institutional -- and it has recorded almost around 30% growth. In this quarter and last quarter also it was almost around 28% growth. And our overall projection for domestic market was almost around 16% to 18%. As again that, we are performing much, much better. So overall domestic business would be far better. And we hope that even some of the seasonalities due to the -- where the antibacterial sales was much higher due to the infections in the first half of the current year, even if they are at lower side we still feel that in second half also we will be doing better than what we have projected in the overall for the full of the year. And overall growth for the whole of the financial year is much, much better, going to be much better compared to last financial year overall. As far as the, our branded generic businesses are concerned, more or less our guidelines will remain same. Institutional business also our guidelines will remain same what we have given earlier. But our API business will see some kind of decline because of some disturbance on, more particularly on Sartan sales due to the azido impurities. We have already filed with regulators our revised processes and taken all the establishment batches and done everything. But there could be some time maybe regulators has -- may take around 2 months’ time to give approval. We expect that approval might come at December end or maybe early part of January. And therefore in the next quarter there could be some impact on business relating to API. So overall projection for the API business in third quarter particularly will go down. And there will be significant recovery coming back in the fourth quarter of the year. And overall, as far as the EBITDA numbers are concerned, right now we are not in position to give you the guidelines because the input cost, the rises are significant, and we are yet to see the kind of the retracement in those kind of prices, no signals are yet visible. Industry is hoping that maybe by fourth quarter things would be normalized, but we have yet to see the sign of that.

Understood, sir. Just on the -- so on the domestic formulation front, the pain segment has been giving significant growth. Any factors you would like to call out, and of course the sustainability for those factors?

Let's say most of our businesses have given good growth in the first half of the year. I would say that every segment we are in -- except cardio diabetes there we have given almost around, first half around 14% growth. But pain has given significant growth to us, almost around -- excluding the hydroxychloroquine business, what exceptional business we did, we have grown by almost around 34% in first quarter in pain segment. Antibacterials has recorded in first half almost around 81% growth. Cough and cold, almost 90%. Derma almost around 65%. And some of these higher numbers are also because in the first quarter last year the base was lower. But overall, the trend appears to be good, and we should be doing very well. And the factors for that is that as far as first and current years overall infection levels and all were very high. And therefore overall acute business was -- has improved significantly in the -- for all of the industry. We have not seen such kind of antibacterials and other things. But as far as pain is concerned, we continue to -- even in normalized period, we will continue to grow around 18% to 20% kind of business because we are significantly taking the market share from various other molecules in the market, and that trend would continue. We have a long way to go.

Got you. And just lastly, sir, on the gross margin, the gross margin is trending down despite higher share of domestic formulation business. So is that to do with the raw material price increase being already factored in 2Q? Or it will be more intense and visible in the upcoming quarters?

Let's say in the Q2 as against overall 10% growth in the top line, our material costs have gone up by almost around 17%. And that trend will continue maybe even in the third quarter also. Fourth quarter, I can't say what kind of visibility will come because if there is some kind of signal start coming at the end of December or early part, then some kind of reduction may happen in material cost. But we have yet to see those kind of signals, yes.

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

So first question is on the [indiscernible].

Sorry to interrupt. Sir, Your line is breaking. Could you come in the reception area, please?

Is it clear now?

Yes.

Yes, so the first question again on the input cost. Given we are highly backward integrated, shouldn't that be are kind of blunting the impact of the material cost or input cost increases for us?

Yes, that gives us some kind of advantage, but there are lot of domestic products also the costs have significantly gone up. Some example, like even caustic soda flakes has gone up by almost around 150% in this period. Even your product like phosphate gases has gone up by around 235%. Simple products like sulfuric acid has gone up by almost around 88%. Even some kind of solvent, the prices has been significant. [ NBC ] has gone up by almost around 107%. Toluene because petroleum product prices has gone up, it's almost around, rises around 27% to 30%. Ethylene oxide, almost -- dichloride, almost around 44%, 45%. So lot of solvent prices as methanol, almost 46% rise. So significant prices has rise of only -- and also the specialty chemicals, which are supplied by the Indian manufacturers, that has moved up. So all the -- your input costs, whether it's solvent, whether it's acid alkali, whether it's specialty chemicals and all that, they are moving up. For example, even like, say, commodity prices are impacting, like all packagings are in PVC, PVDC, that has moved almost around 28% to 30%. All plastic bottle, cap, PP -- your PET bottles has moved up almost around 35%. All paper products has moved by almost around 15% to 18% kind of -- those moments has happened. So all those prices are moving up. So -- and in case of, like say, all antibacterials, the [ PNG ] prices have moved up significantly, practically double. Common products like paracetamol, which used to be a year back INR 300, INR 350, now we are buying almost around INR 900 is the pricing now. So -- and everything you sell you are making losses today because it doesn't cover the prices today, the kind of prices which has gone up in the market. So there are lot of those kind of challenges which are there currently, is because of all the disturbance which are happening in the supply chain. And if it has stabilized, then, yes, then your material cost to sales ratio can again come down. But currently it's all disturbed.

Okay. And between, let's say, September to October also you are seeing increase, or they are more or less…

Now increase currently is not there. But currently it's a stabilized level of increased level. But we are not seeing any kind of retracement yet.

Sure. And second question on the other expense. Sequentially other expenses including R&D has gone up I believe some -- some are due to power, fuel as well as logistic cost. But in terms of the branding or sales and marketing effort, except for components, is everything back in the domestic market or the branded market in the cost item?

Overall, if you look at, I will just give you some kind of breakup on that kind of cost impact we had on the major items in Q2. Let's say, the fuel cost has almost moved by almost around 24%. And export freight and insurance, that's another area where it has almost moved by almost 51% in this quarter. Overall, if you look at factory level, overall against, let's say, 10% increase in the top line. My expenditure on factory level has gone up by almost around 12%. Marketing cost has moved up by around 7%. R&D cost has moved by almost around 18%. And other overheads which are -- is reduced by almost around 9%. So overall, there is a increase of 7% in other expenditure as against 10% increase in the overall top line. It's all because of, let's say, exceptional increases which has happened in the energy cost and also the freight cost. Marketing cost increase was significant in first quarter because last year the sales force was all sitting at home and there was hardly any kind of promotional cost. From second quarter onwards, the marketing costs started returning back. So from that level, we are not seeing much kind of growth. So marketing cost has only gone up by 7% in the second quarter of current financial year.

The next question is from the line of Viraj Kacharia from Securities Investment.

I just had one question, was on the subsidiary, there is usually some dip in the performance. So when -- if you can [indiscernible].

Subsidiary side, let's say we have major subsidiaries. One is Onyx at U.K., that's doing very well. Its income has almost gone up by around 50%, and they have a significant profitability. They have contributed that. As far as Ramdev is concerned, that we have talked that we are changing the product mix out there. And it was almost drug intermediate company. We are in process validating lot of APIs and also filing to [ DPM ] and other regulators. So that process is going on. So we have lot of those kind of intermediate business, this company was doing, we have stopped those kind of businesses, and more focusing on the API side. And therefore, business got disturbed, and there are losses for some more time. It's only a matter of time, I think maybe in 1 or 2 quarters, this company will be coming back to the profitability overall. We don't foresee any kind of difficulties there on that account. So only problem we have is the specific company where we have at Pisgah in U.S., that company, there are some kind of losses. It's -- we wanted to have the kind of CRAMS business which our U.K. subsidiary is doing similar kind of business there. There are -- because of pandemic and all, it became difficult to approach the customers and also talk on and also increase the manpower there and all that. So that business was disturbed there. We have started getting now the contracts on the CRAMS business and all. And hopefully next year that business will also start seeing lot of revival. And another company we have is Bayshore Pharmaceuticals, that's the front end what we have created for once our U.S. [ NDA ] will get cleared, we will -- that company will be front end. Currently, they are doing some kind of some product tie up from companies, and they are doing marketing. And there are some kind of nominal loss, and those losses are also on account of whatever their intellectual properties rights which we have capitalized that we are writing off. So the losses are only because of that. So other than that, by and large it's Onyx profit is by and large getting set off against the losses what we have in these 3 subsidiaries kind of thing, which in time to comp will definitely improve.

What kind of losses you have seen in say the U.S. and the [ sale ]?

I didn't get you.

So what kind of losses you have seen in the U.S. and [ sale ].

You are not audible…

What about now?

No, no.

Just one sec. Is it better now?

Yes, slightly better.

Yes.

Yes, I was just trying to understand what kind of losses [ these will have made the U.S. and the other one ].

Our losses, I will give you the number. Let's say that -- Bayshore losses is INR 4.62 crore, Onyx profit is around 18.5…

Half year.

This is half year numbers, is around INR 18.79 crore. Ramdev has incurred around INR 6.5 crores losses. And Pisgah around INR 7.67 crore losses.

So [indiscernible].

Pisgah may take a little longer time, but Ramdev may not take -- Ramdev may be I think in 2, maybe in 2 quarters once we have validated around 5, 7 APIs and all, things would be well. And things will start improving from third and fourth quarter there.

The next question is from the line of Abdulkader Puranwala from Elara Capital.

Sir, could you please provide some update on the capacity addition at Dewas and Ratlam API side. Where are we now?

I think Dewas, they have got little delayed, and I think it shall be operational in the first quarter of the next financial year. And as far as Ratlam is concerned, that capacity will be available from the next month onwards. The validation exercises are going on, and it should be commercially available from December, yes.

Okay. And so by and large, what would be the blended increase in capacity once the Ratlam comes in place?

I think overall increase will be, at Ratlam will be around 10%. And once Dewas come, it will be almost around another 25% capacity it will add.

Sure. And just 1 more question on this API [ price trend ]. So I understand your commentary on the raw material increase. But how pleased are the customers? And I mean, are we approaching our customers with renewed pricing? Or are we still waiting for Q3 to move out and then we see what is the scenario and approach our customers [indiscernible].

Normally what happens is we have almost around 3 to 4 months order in pipeline always. So on those orders, prices cannot be revised. And when your prices moved up, like say, solvent prices, acid, alkali and chemical prices, when they -- but we generally know that what kind of trends are there, some kind of coverages are there for intermediates. But these are spot buyings. So when these prices move up or energy prices move up, we can't help it. And you can't pass on them to the customers immediately. And as far as intermediate prices, when overall trend which are the major building blocks, you revise the prices, but after your service all those kind of pending orders. So it takes some time. It's a gap of almost 4 to 5 months in the overall prices revision take place. So to the extent you are covered maybe around 2, 3 months, that helps you. But some of the prices moves immediately, some prices you're already covered. So we still get some kind of lower prices material. But it takes almost around 4 months or 4 to 5 months to get the higher price risen. Customers also know that, yes, what kind of intermediate prices trends are taking place. So you get a price increase. It's not that you -- these all price increase whole industry is passing on, but there is a time lag.

The next question is from the line of Ankit Jain from Spoon Advisors.

Sir, my question is regarding the associate company [ transpired ] biochemicals and industries. Now they have been incurring losses from last 4 to 5 years. And if I can recall, last con call it was said that we could break even in this quarter, that is third or fourth quarter. But if I look at the numbers, apart from equity we have put in around INR 30 crore plus INR 80 crore of preference capital, further INR 100 crore is expected. It could be [ difficult ] the number. But the preference capital has been put at 9% [ rate ]. So when do you think that perhaps can service this debt with its own operating profit? And if you see sales, last like half year sales is roughly around INR 16 crore. So a rough figure says that maybe around INR 120 crore, INR 130 crores of sales could help them just service the step with their own operating profit. So for how long does the parent company, Ipca, see that they will keep putting in capital in this associate? So overall, if you could also -- overall, also, if you could just say, like if you could like describe the issue. Is it more from the production side? Or is it like there's no demand for this for what we are -- like for what Krebs is doing? So just to understand how the numbers will move in case of Krebs?

As far as Krebs is concerned, they have 2 plants. The 1 is at Nellore, which is producing some kind of APIs which are not fermentation-based API. Another plant is at Vizag, which is a fermentation plant. As far as our Nellore plant is concerned, that has always come in the profits now. And as far as Vizag plant is concerned, we were producing some kind of fermentation products like Serratiopepetidase, that demand which used to be almost 3 to 4 metric tons, practically we were selling every month. That has come down significantly during this kind of pandemic period. It is also [indiscernible] in Simvastatin and Lovastatin. So those all demands also got disturbed. And therefore the overall whatever journey we were planning, that didn't happen that way. Demands are now coming back. We have already started selling Lova. Good quantities has started selling now. Simva also now is picking up. And Serratiopepetidase, we have our own captive demands and also demand from other customers. So that's also picking up. So hopefully it's only a matter of time, maybe around 2 more quarters, we should be able to get your -- the Vizag plant also in the -- overall in the breakeven.

Okay. So is that like 2 quarters? Are you saying that within 2 quarters Krebs will turn profitable?

Yes, it should be.

Okay. So it looks like very ambitious, that is like we are expecting almost like 3 to 5x in the revenue within next 2 quarters. So is that kind of dependency we have on this [ Vizag plan ] or, I mean, because…

The overall guidelines, it's a listed company, so I can't talk much about that. But broadly, I can say that, yes, we are on the cost.

Okay. So maybe with the next 2 quarters we could see something very good from a Krebs.

Better results, yes.

The next question is from the line of Dipali Patadiya from Sameeksha Capital.

Yes. So I think my question -- most of my questions are answered, but I wanted to ask that in exports, we are maintaining our guidance for generic and branded, right, for FY '22. So that means…

Name and institutions, yes.

Yes. And in the institution, so there were approval for antimalarial vaccine, so in the long run how are you looking at it? How would be the impact and revenue in institutional business?

As far as this vaccine is also to be given with some kind of your antibacterial, antimalarial tablets. So it's not that vaccine is administered alone. So your traditional products will continue to have good sales, yes.

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

Yes. I wanted to know if you could quantify the delayed shipments or exports because of container unavailability?

That number we have not worked out, but let's say institutional business we have seen around 23% decline in this quarter. That's purely because of your nonavailability of containers. Even in your branded generics business we have seen a lower growth, it's also because of almost around $2 million worth of shipment got delayed. So those are the things. But exactly, I don't have quantifications right now. As far as the institutional business is concerned, we maintain our guidance for whole of the year that whatever guidelines of around INR 400 crore we had given in the beginning of the year, that will happen. And our overall branded generic market is also doing well. So we should be able to deliver on our guidelines. There will be disturbances as far as the generics are concerned, and there will be also your -- is also because of lot of the API prices are higher. Lot of our export goes to Europe, and Europe is still disturbed. And there were excess inventory in the market and demand is sluggish. So Europe, we will see some kind of challenges are there. Other markets like South Africa, Canada, Australia and New Zealand, they are doing well. But on Europe side, there could be some kind of challenges. In API, there will be some kind of disturbances because of Losartan part overall. And that's for 1 quarter. Next quarter there could be disturbance. And thereafter it should be back. So by the time our -- the azido impurity-free process will get an approval from EMA, and we should be able to be back in the business in whatever normal business what we are doing, we were doing. Even in first half, our Losartan shipments are by and large much higher compared to what we have done in the first half of last financial year. But because of price drop because of intermediate prices coming down or Losartan, overall there is some kind of decline is there, but once azido impurity -- free process comes up, prices are again moving up. And therefore the overall business could be better. But time being for a quarter there could be some more disturbance.

Okay. And in terms of the degrowth in exports, how much of this degrowth can you attribute to price erosion?

So there are no kind of exposed -- there are no price erosion as such. It's basically [ input cost and ] can we do lot of European business on generics practically. And there we are facing problem because market is sitting with higher inventory because there are still lockdowns and so many other things. And Europe is -- was operating with much higher inventory levels. And your -- most of the -- your distributors are sitting with higher inventory. And therefore your overall order flows are slow. And therefore there are some kind of declines in European market…

Yes, okay, okay, okay. And in terms of the China, increase in costs from China, by when do you expect this to settle down?

It's a very difficult question to answer. We have not yet seen any kind of prices coming down. So I can't really make out when it will happen. Industry is hoping that by fourth quarter, that's what we hear from industry players that hopefully it will settle around fourth quarter, but we have not yet seen those kind of signals.

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

This is Prakash from Axis. Sir, my question is on the clarity on the cost aspect you talked about, China disruption, et cetera. So the current quarter would have seen only impact in September because you would be sitting on existing inventory. Would that be correct understanding? And you are yet to see a full quarter impact in terms of rising costs, et cetera?

I think it started from the, let's say, part of August and September, yes, so those issues were there. So around 1.5 months there will be little excess prices paid. And some of these cost like your acid, alkali, your solvents and all, they started moving from the beginning of the quarter itself, so yes, yes.

Okay. So knowing that and seeing significant cost increases on something which we can control on our expenses, are there any efforts so that we can maintain or improve the margin or at least not let it go down. What are those measures, sir?

Let's say those measures are on a regular basis, those kind of, let's say, cost-cutting exercises and all are regularly done. So more particularly on overhead side and to reduce the overall operating cost and on. So those are, exercises are regular. But some kind of price increase or play will also come up as -- so therefore even if there is a higher increase in the cost, that will start getting offset by the -- our increases in the prices also. And most of, let's say, our domestic market-related price hikes has happened in the late first quarter and in second quarter, per se. So those all effects will also come in third and fourth quarter because there we work with almost maybe around 60 days inventory overall in the cycle. So I think those extra realizations will also start coming in as a result whatever cost increases we have compensated. So somewhere the overall trend, I would say that, yes, the cost increases are higher. And compared to the, whatever top line increases are there. But some cost reimbursement will also come in, will start coming in. And full impact will come in the third quarter, definitely, of the overall cost increase. I agree with you.

Okay. So I mean, we -- I mean, in the Q2 quarter's EBITDA margins, we could see some further pressure or we with the cost-saving measures we will be [ enterprising ].

We could see some further pressure on that.

Okay. Fair enough. Got it. And sir, second question is, sir, just clarity on this API impurity. This is largely pertaining to the European markets is what you said?

But once say it is out in Europe, every country wants those kind of impurity-free kind of product. So some -- there are disturbances in business currently.

And we seem to be certain about resolving by Q4?

We have only resolved. We have already resolved and filed. The process updations are already filed with and regulators has given us almost around 60 days to get approval. So hopefully by December end we should get approval. But it's because of Christmas holidays and all it gets delayed, then maybe in early part of January we should get an approval. And we have already started sampling to all customers. So practically all our customers we have sampled them, so that they can do the testing and everything is our -- except European manufacturer, all others need not to wait...

So sir, is that specific or it is industry-wide phenomenon that you are seeing?

It's an industry-wide phenomenon.

Okay. Okay. And lastly, sir, on the inventory side, I don't know if you covered, there is a decent spike. If you could explain that as well. Inventory and receivables more so.

In fact, inventory has gone down, I give you the overall numbers.

Receivables, receivables, sorry.

I will give the overall numbers, yes…

Sorry, there in the BSE sheet, just wanted the number on the receivable move from [indiscernible].

If you look at our inventory turnover ratio, in 2020 it was almost around 107 days. In 2021 it has come down to almost around -- it was around 109 days. In September '21 it's 92 days. So in fact the inventory-to-sales ratio has -- currently we are -- as against 107 days inventory in FY '21 and 109 days inventory in 2021, we are currently at 92 days inventory. So we have, in fact, all -- yes, reduce the inventory level. As far as receivable cycles are concerned, in 2020, it was almost around 71 days, which in '21 it has come down to around 56 days, is largely because a lot of those incremental businesses and all of the hydroxychloroquine and chloroquine that has happened on advance payments and all. So it has come down. But currently we are at around 63 days overall inventory level, so -- from receivable levels. So practically we have improved from 71 days to 63 days. So it's not on higher side yet.

The next question is from the line of Kunal Randeria from Edelweiss.

Sir, can you share how much is the Sartan contribution in the API business? And how much is the price corrected from…

Roughly both the Sartan contribute about 30% of my API business.

And how much is the price corrected?

Mr. Jain has already said no, whatever price correction that has happened is because of the reduction in the intermediate prices and whatever reduction was there it was passed on.

It's almost 20% reduction was there in prices, yes.

Got it [indiscernible]. And just…

Even though our sales quantity tonnage wise is more than what it was in the first half of last financial year, but realized area lesser because of this price correction.

Understood. Understood, sir. And just sir, you had earlier mentioned that you typically see a 3 to 4 month lag on price renegotiation. So I mean, just a hypothetical, would it be fair to assume that in case the input price remains elevated, you can pass on the entire increase to customers and still protect your [ former ].

What is happening today no, because of this phenomenal increase in the prices, even customers are also not very sure whether to increase their inventory or reduce them. So they are also into a tight corner what to do. That is also the reason why even the order inflow has reduced because of this issue.

Sir, also this is more like a hypothetical question. But I'm just assuming 3 or 4 months down the line the prices don't correct. So I mean, what is the typical practice? Do you sort of…

If prices don't correct, there is no option. Manufacturers will increase the price, and customers will buy. See today paracetamol prices are so high. So inventory in the market is also reduced because people are not willing to buy, they are not willing to give order at this price. So because of that also generic business has impacted. It is not only paracetamol. Several of the API prices have increased like this.

Sure, sir. That's extremely well. And just, sir, one more if I can squeeze in. So do you maintain the tax rate guidance around 18%, 19% for this year and next…

We are a MAT company. So actual tax output there won't be any difference percentage-wise. As far as the deferred tax is concerned there will is more capitalization of asset, there will be more default tax. But it is a noncash outflow item.

All right. And that will increase only in FY '24.

It will increase maybe even next financial year. Once you capitalize your Dewas new API facility, it will increase. So it is a difference between the IT depreciation and company-side depreciation, right? So on that tax whatever amount is there.

The next question is from the line of Sonal Gupta from L&T Mutual Fund.

Sir, just on the azido impurities, I mean this is an older issue for rest of the industry. So why is it coming for you now? I'm just trying to understand.

No, no. Initially, in the Sartan it was not azido impurities, it was something else. This is a new phenomenon. Yes.

Okay. There was some nitro some…

Nitrosamine, yes, that was the issues. This is something different. Yes.

Okay. Okay. And this is again because of some input KSMs or is this -- that is what is driving the reason for this?

Let's says there are side reactions happens in Sartans. And as a result of this in part of billions there are some kind of impurities generated, which was earlier not, the regulator's overall requirement was say your inquiry levels was little higher. These regulators have now reduced that level. So we have to qualify the process now at a reduced level of those kind of impurity. And therefore the whole process correction has happened. There is one more stage, there's increase in the manufacturing of another purification stage. And therefore all our cost of productions are also going up, is increasing. And the market prices are correspondingly is also increasing of those products. So azido impurity products are 20% higher the pricing compared to the -- is the normal material. So that's all process corrections and everything is done. It's already filed with regulators. We are just awaiting the approvals. I would say that other markets may not wait to that an extent for the -- to get the…

EMA approval.

EMA approvals. But whatever EMA markets, like say European markets are there, supplies will there only happen after the -- your revised [ CFT ] approval is received. And therefore, to that extent, there will be some kind of disturbances are going to be there. Then some kind of additional existing inventory also need to be reprocessed. So instead of producing new, your capacities will go in purification side. And therefore, some kind of disturbances would happen as far as the business of Losartan is concerned or -- in the current quarter. That's why I say that the business would decline in the third quarter for Losartan and Sartan, and it will come back in the fourth quarter of the next year in current…

Got it. Got it. So you do not really see this fundamentally impacting your market share in this…

It's not -- it's only time being impact, yes.

Temporary impact. And just again another broader question on the API side, like you mentioned that the inventory levels with distributors, et cetera, are high and the manufacturers are high as well. And at the same time, prices are going up because there is a lot of input cost pressure. So I mean, do we see that as -- I mean, like this is not just for you in specific, but I mean like do we see that the API manufacturers therefore have to bear more of the brunt because in terms of margin because last year of course there was a very strong margin because the demand was very strong. But now we're seeing a normalization or worse than that because demand is weak and the price inputs are going up?

My comment was with refers to generics. Europe more particularly with reference to generics in Europe. The European generic manufacturers are having higher finished goods inventory of all the finished formulations. Not with reference to -- the API. API is bought by the -- your producers. They don't keep higher inventories of API. So those -- and they are what -- Mr. Harish has given the comment that when there is a price increase, the order size goes low because they don't want to buy higher at those prices. But they also see that what kind of trends are going to be there. So at higher prices they give a lower order. So order flow will get reduced. That's why he commented on that.

Got it. Got it. But just on the API side, do we see the potential to pass on the cost pressure fully? Or do you think there will be some margin…

It's not we, whole industry is passing on.

Ultimately everybody has to pass on, no, there is no option.

Whole industry is passing on. The cost -- absolutely everybody is passing on. Nobody can afford the cost. It's only time being maybe 3, 4 months’ time you suffer because whatever your orders are there in -- with you, you can't revise those prices.

The next question is from like of Sameer Baisiwala from Morgan Stanley.

So just taking from the previous participant, so you are passing on prices for API domestic formulation and for export formulation as well, so all lines of your businesses your able to pass it on?

Yes. European business since business itself is slow there, it's a little difficult. It's like -- because market is having higher inventory. So there passing on will take a little longer time. Rest all business that is happening maybe at a gap of around 3, 4 months’ time.

Okay. And sir, if you are, say, in January 2022, looking back, what sort of a portfolio-wide, company-wide pricing increase would you have taken or something that you need to take?

Each product-wise impacts are different. So each product-wise price increases are there. I can say about domestic market, our normal price increases used to be around 4.5% or so. Now this year it's almost around 6.5% to 7% price increases are there, beyond which we can't go because there are the portfolio which is in price control there -- this year there was no price increase was there. So it almost around full price increase of 10%, whatever is there for the -- for nonscheduled formulation, we had taken 100% full 10% price increase on almost all products of the company. So that -- and lot of those price increases happen in the end of first quarter and in the second quarter because you can take price increase on a…

12-month rolling basis, yes.

So 12 months rolling base. Suppose price increase is due in September, then you can -- you would take in only in September. So some of the prices increases are taken late. So they will become effective after say 2 months’ time when your overall company inventory get exhausted.

And what would be the -- what would be a similar number for export formulation in API?

Export formation, each product-wise it differs. Impacts in each product is different. Some products there are no impact. Some product there is a significant impact. Like say metformin and all, which used to sell -- currently the prices are practically double. So 100% it is passed on to the customer. Some product maybe 5%, some product maybe 10%, some product maybe 20%, each product-wise it's different because it's not that everything is coming from that 8, 10 provinces, which are there, some are coming from other provinces where disturbances are not much. So it's different on each product, yes. So I can't give on API's side those number. I can give on formation. Yes. And I would say that European price increases was not much, even though their input cost because there is only resistance from customers because he's holding higher inventory. So the buyings are at a reduced level. So their price increase has not been much.

Got it. And sir, any update on the FDA's reinspection for the 3 warning letter sites?

No, Sameer, nothing. It is just status quo.

Okay. Even though the agency has started to come down for international…

Yes, yes. But we have not received any notification so far.

Your best case, sir, what's…

No idea if anybody get.

Okay. Okay, no, that's fine. And sir, I heard all your commentary, pluses and minuses. But your full year guidance for sales was 8% to 10%, and the EBITDA margin was 25% for fiscal '22. So does this stand? Or keeping all the pluses and minuses?

See, see, as far as guidance is concerned of domestic, Mr. Jain has already explained, we will do better than the guidance given. And the same is whatever guidance given for institutional business also we will do. But today issue is about API export business and the generic business, especially Europe. So we are into such a situation, very, very difficult. So maybe end of third quarter, third quarter, along with the third quarter result we will give the guidance. So this quarter is very crucial. Mr. Jain has already explained, API there are issues. Generic business, especially Europe, which is a very big market, there is a problem today. So very difficult to say at this juncture. And also the, all price increases and other things. Even though we are trying to pass on, the benefit will come after a quarter or 4 months. So next quarter will be crucial.

The next question is from the line of Rahul Jeewani from IIFL.

Now with respect to the Pithampur and Silvassa formulation facilities because these facilities are under-utilized because we are not exporting to the U.S. market right now, what is the EBIT toward operating expenses on account of these 2 facilities?

As far as these 2 facilities are concerned, there is no -- any improvement in their capacity utilization. Unfortunately, as we explained today, Europe generic business is also not in that kind of a good shape. So overall, whatever margin pressures were there on these 2 units are continuing today also.

Okay. But in past you have indicated that the quantum of operating, fixed operating expenses, which you were incurring from these 2 plants were to the tune of INR 50 crores to INR 60 crores. So is that number, correct? Or that number higher than…

That number has not increased. That is what I said. So except whatever inflation-related and increments to people, other than that there is no change in these numbers. Where capacity utilization of both these plants are almost similar last year or so and till today also.

Sure, sir. And sir, my second question is on the Sartan market. You indicated that the intermediate prices for Losartan have come down, but they have again started inching up. But how do you see the overall pricing in the Sartan API market to shape up over the next 12- to 18-month period, given that the formulation products in the U.S. market has been seeing price pressures. Whereas some of the other Chinese players who had vacated the Sartan market, they could also incrementally make a comeback in the market. So how do you think the overall price environment will play out in the Sartan API portfolio for you?

Let's say the prices of mainline intermediate used to be almost around $28. From that it came down to around $12. It again started moving to around $18. And since this new issue of azido impurity has come up, so everybody was busy with revising their processes and meantime that demand dried out for the suppliers, for the Chinese suppliers. So the prices have again come down to around $12 or so. So there has been too much of zigzag on prices of all these kind of intermediates are there. And this azido impurity issue is only -- is a very -- nitrosamine impurity for industry took lot of time because lot of process correction was required. Azido impurity is not going to take a long time for industry. We have already filed our process and many other manufacturers, they have also filed the process, revised processes maybe in a month or 2. So it's only a time being difference, time being difficulties for industry, but it will be resolved very quickly.

Okay. But do you expect the overall Sartan pricing to hold up over the next, let's say, a 12-month period despite the incremental competition which might come in from China?

Right. Prices will increase by 20% now because your additional purification will be required by everyone. Then there is additional purification one more step, your overhead goes up. And also there are some kind of process loss are there. And your -- since your cost goes up, that prices. So currently also azido impurity free prices are almost around 20% higher than your normal pricing. So those prices would again increase. It's already increased here.

Okay, sir. But that is related to the cost of production for us also going up because of this additional purification step which we have in the process. So that 20% price hike would actually not flow to margin [indiscernible] for us.

It will also cover the margins, yes.

The last question is from the line of Dipali Patadiya from Sameeksha Capital.

Yes. So I had a broader question. Can you help me understand that we have almost [indiscernible] top 7 products are vertically integrated. So in such environment where prices are going up, is there any area where, I know shipping and other costs are going up, but is there any area where we are benefiting because we are vertically integrated or in the longer run if such crisis in China, power crisis, would we be able to benefit because we are vertically integrated and we are also strongly present in the API which is again vertically integrated?

See vis-a-vis a company which is not vertically integrated, definitely to that extent we will benefit. Other than that, it is a normal industry phenomenon. There is nothing called more benefit and all. Every company which is vertically integrated will have a better margin in their formulation business.

Okay, sir. Got it. And the second question is the longer run, again, the answer goes for that as well right?

Yes, correct. Right.

As there are no further questions I would now like to hand the conference over to the management for closing comments.

Yes, yes. No, no further comments. Since there are no questions, we will 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.

Thanks. Bye.