J. B. Chemicals & Pharmaceuticals Limited (506943) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to J. B. Chemicals & Pharmaceuticals Limited Q1 FY '22 Earnings Conference Call as on the 13th of August 2021. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jason D'Souza, Head of Investor Relations at J. B. Chemicals & Pharmaceuticals Limited. Thank you, and over to you, sir.

Thank you, Lisa. Welcome to the earnings call of J. B. Chemicals & Pharmaceuticals Limited. We have with us today Mr. Nikhil Chopra, CEO and Whole Time Director; Mr. Kunal Khanna, President, Transformation; and Mr. Vijay Bhatt, Chief Financial Officer at J. B. Chemicals & Pharmaceuticals Limited. Before we begin, I would like to state that some of the statements in today's discussion may be forward-looking in nature and may involve certain risks and uncertainties. A detailed statement in this regard is available on the Q1 FY '22 results presentation that has been sent to you earlier. I would like to now hand it over to Mr. Nikhil Chopra, CEO, to begin the proceedings of the call and give his opening remarks.

Thank you. Thank you, Jason, and good afternoon to everyone. A warm welcome, and thank you for taking time to join us for this discussion on the operating and financial performance for J. B. Chemicals & Pharmaceutical in this first quarter of FY '22. Before we begin, I hope all of you, along with your families, are keeping safe and healthy, and we hope that the worldwide vaccine drives will enable humanity to conquer COVID and we all will come out stronger from this whole experience. We look forward to a better times in the future. I will start with an overview of our performance and share some of our perspective on the businesses, following which our CFO, Mr. Vijay Bhatt, will take you through the key financial highlights. After that, we'll be more than happy to take your questions. Friends, we have begun the new financial year on a strong note. Taking forward the momentum from the previous year, revenue has grown by 16% to INR 606 crores during the first quarter, which is the highest ever top line recorded in any one quarter in the history of the company. While the operating environment remained challenging during the course of the quarter with lockdowns and supply chain-related limitations, both in India and some key industrial markets, the strategic initiatives undertaken over the last few months are starting to pay out -- play out to create a long runway for the growth in the businesses. We reported EBITDA margin, 27% for the quarter 1, and the margin performance takes into account normalized cost structure and higher logistic related expense in the quarter under review. We continue our efforts to institute the building blocks for sustainable growth of our organization. You would have noticed a significant number of new product launches, new divisions being introduced, cost efficiency initiatives implemented across the organization, various people-centric initiatives launch and focus on building a robust R&D team. Friends, while we continue to deliver in the short term, it's imperative for us to put in place a sustainable long-term growth strategy, thereby creating value for our shareholders continuously. Coming to our domestic business, which recorded another sterling performance during quarter 1, growing by 39%. All our big brands continue to record high growth rates, which have significantly benefited the businesses. Further, due to limited sales of our COVID portfolio, we feel confident about sustaining our market-leading performance. This also is indicative of sustainability and resilience of our revenue streams in the medium to long term. Once this heightened pandemic case is behind us and life returns to normal. As per IQMS data June 2021, our growth is 24% versus market growth of 19% for the Indian pharma market. And this growth of our -- what we have demonstrated is a very limited contribution from the COVID portfolio. Majorly, our growth is supported by therapy diversification and other transitions that derive leverage from the established organization stands. During the quarter, we announced our foray in the world of nephrology segment with the launch of new division, RENOVA, covering chronic kidney disease to end-stage renal ailments. Also, we have launched our NOVA division, which will focus on pediatrics and respiratory segments in India with a 350-member team focused on antivirus, corticosteroids, anti-allergics and nicotine replacement therapies. Both of these are the expansions aligned with our cost trends. Having implemented our new go-to-market model, we also continued to evaluate several new growth opportunities that will further drive productivity on a relatively stable cost base. We have implemented our new go-to-market model without any increase in manpower. The transformation story is supported by the continuous efficiencies driving initiatives like sales force automation; sales force excellence; incremental physical adoption, which is a combination of digital and physical; consolidation of resources not only across therapy areas but also in terms of geographical coverage and control. Coming to our international business. The situation remains challenging because of the uncertainty surrounding the second wave of COVID-19 and shipment challenges that we faced, which impacted revenue growth for selected pockets in the industrial business and the CMO business. However, the silver lining is the U.S. and the South Africa business continued to show a strong momentum, each of them delivering a growth in excess of 20% during the first quarter. Overall, the international business delivered flattish top line. We expect this capital to be transient in nature with underlying demand drivers and our market position remaining intact. We are also strengthening our R&D capabilities and that should support medium- to long-term growth opportunities in the international market where we stand today. The outlook for the rest of the year remains highly positive. We see continuing growth momentum along, while continuing our best cost efficiency initiatives. We are also strengthening our R&D capabilities that should support the medium- to long-term growth opportunities in the international market. Consequently, we expect stable margins even as cost structures revert back to normalized level. This will enable continuing cash generation and high return ratios. Overall, we remain well positioned to drive long-term value for our stakeholders based on sustainable gains and some key strategic initiatives. With this commentary, I would like to conclude my opening remarks much, and I would like to now hand over to Mr. Vijay to share with you a brief perspective on our financial performance. Thank you. Over to you, Vijay.

Thank you. Thank you, Nikhil. Good afternoon, everyone, and welcome to J. B. Chemicals Q1 earnings call. I will now take you through some of the key highlights of our financial performance for the quarter ended June 30, 2021. During quarter 1, we have recorded revenue growth of 16% year-on-year to cross the threshold of INR 600 crores for the first time in the quarter, as indicated by Nikhil earlier. Domestic revenue growth was 39%, led by large brands and market-beating performance in non-COVID therapies. However, uncertainties surrounding we saw COVID, a second wave of COVID impacted the growth in some of our international markets. Most importantly, the gross margin profile remained healthy during the quarter. This was aided by a positive shift in product mix. Despite our cost base returning to normalized level, EBITDA margin continues to remain strong. Compared to the preceding quarter, EBITDA margin during Q1 significantly improved to 26.9% against 23.4% in Q4 of FY '21. It also measures up well against full year FY '21 margin level of 27.4%. However, the decline in EBITDA margin on a year-on-year basis is primarily on account of suboptimal cost base in Q1 of FY '21 due to the COVID-19 lockdown. Going forward, we expect that the margin to remain healthy and in the range of last year's margin level despite cost structures reverting to the steady and normal levels. I would also like to highlight that the lower other income in Q1 FY '22 is the reflection of normalized bond yields in the fixed income funds compared to the volatile yields during the same quarter last year. We expect this trend to continue of -- we expect that this normalized bond yields level to continue throughout the current financial year. Based on the higher revenue and higher cost base, profit before tax of Q1 FY '22 came in line with corresponding quarter last year. Effective tax rate remained unchanged at 25%. Therefore, profit after tax is also at the same level of INR 119 crores on a year-on-year basis. Going forward, we will continue to pursue our strategic business objectives that is of delivering profitable growth on the back of multiple business initiatives and maintaining strong cash accretion. We expect that the business to expand by leveraging the existing days of manufacturing, distribution and relationships within our ecosystem. Further, we expect this initiative was continuously driving strong returns and create outstanding stakeholder value over the next few years. With that, I conclude my opening remarks. We would now like to open this forum for an interactive session with all of you and we'll be happy to respond to the questions. Thank you.

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

Two questions. So one is in terms of your international markets, while you said U.S. and South Africa has grown, we see the -- it's still flattish. So what are the moving parts here? And what is the outlook in terms of a little qualitative and, if possible, quantitative in terms of your export strategy and growth numbers?

So Prakash, if you look at the entire mix of business in our international market, major issues that we face because what we share, because of the issues of COVID in some of the geographies and because of the logistic issues in the BGx market, their things were down. But if you look at U.S. and South Africa, where our growth was excess to 20%. That is what I give the commentary. But from a perspective of future looking guidance, we are looking forward that things will stabilize, and we will return back to low double-digit growth in our brand and generic market as we stand today, because our order book for coming quarters looks very healthy.

This is for the business, which has declined, you are saying it will return from negative or decline double-digit growth?

Yes, yes.

So this is largely the lozenges business or there is something more to this?

As we said, Prakash, when we look at our international business, apart from our key geographies, which is U.S., South Africa and Russia, we have 2 main legs, CMO and other branded generics markets such as Asia Pac, Central America and LatAm. The business, which has been impacted, is largely centered around our Asia Pac, LatAm and Central America offtake in the BGx markets and also our CMO business. Because of the muted trends in the cough and cold segment. As we look ahead and based on the recent order flow, we are quite positive that we will see a revival of these specific pockets in the coming 4 to 5 months as well.

Yes, that is helpful. And in the past, you have commented that we have a vision or strategy to take this lozenges business to other geographies, higher-value geographies in terms of plant is quite qualified. So where are we in that journey?

In fact, over the last 4 months, we have already tapped into 1 customer in 1 of our regulated markets. We are working on concepts, which go beyond the conventional cough and cold, extending ourselves into segments such as immunity as well. Now these things take time because we are talking about established CMO customers where there is a right from the development to the approval at the customers, and it's a 12- to 14-month cycle. But we have seen good traction with 2 customers being tapped to -- new customers in that market being tapped into, and we are very confident about our plan. So that is underway.

Okay. And lastly, on the India business. So we have a mega brand in hypertension, then in gastro. So I mean, what we have done here is now entering some leads into other therapies. I mean, what is our strategy in terms of making another mega brand, and what segment would that be?

So we are trying to consolidate our position in the world of hypertension. If you look at -- Prakash, we have a big brand that is Cilacar, and the line extension in terms of Cilacar T, which is -- which conceptually is a life cycle management that we have done in the world of hypertension. Equally, we have got into the world of metabolics, that is with the launch of vildagliptin and dapagliflozin. Dapagliflozin as our brand, is -- has taken off well, and we are getting good prescriptions from the medical fertility. Outside this world, we have entered into couple of new therapies, which I spoke in my commentary in the world of pediatrics and respiratory, where we are glad to share that we are seeing good traction in first quarter of launch of these 2 initiatives. But building mega brands in India, as you know, it takes time. It is not easy, but you have to infuse the ecosystem. So we are on that journey, but we are confident enough in terms of what we are projecting as a guidance in the coming time. We will continue to deliver market-leading performance. And also, we will get some help in delivering this market-leading performance with some of the newer initiatives that we have put in place.

No, no. I totally appreciate that, and I do understand that mega brands take time. I was just trying to understand, with the various initiatives and the great initiatives we have taken over the last 6 months, in which category do you think the next mega brand coming is what I was trying to understand?

So we did -- that is what I told you. Within the world of hypertension, the life cycle management that we have done with Cilacar T that you will see, that drug already is gaining market share, gaining ranks. So that is the next big thing that we are looking forward to. And equally, you will see some -- not that mega brand, but you will see some brands picking up in the field of pediatrics and respiratory in the coming.

The next question is from the line of Rashmi Sancheti from Incred Capital.

Congratulations on good set of numbers. Sir, just to ponder upon international markets. When you said that there are logistics and this shipment issue, is it something that the revenues have been deferred and they're going to get recovered in the consistent process? Like for the CMS segment and the geographies, which you mentioned?

See, it's a combination of international demand trends and partly because of logistics issues, some of the customers, given the freight cost is extremely, extremely high, some of the customers have kind of pushed their open orders. Because if you really look at the freight container cost, it's gone up from $2,500 per container to almost $10,000. Having said that, one cannot run away from the fact that the end demand trends in specific markets like Asia Pac, Central America, LatAm have also been slightly muted. But we hope to -- hope that things are going to normalize as of all the kind of see through this wave of COVID.

Okay. And what about Russia market? Like you mentioned that there is a growth revival. So are we doing growth better than the Russian pharma industry growth or how is it?

Yes. Our growth is definitely better than the overall Russian pharma industry, especially in our covered market. We are much better than our counterparts. We are seeing revival trends, but the next 3 months are very critical for Russia market because these are the seasonal months for our product portfolio. And some of the signs which we see have been positive. So we are hopeful that Russia will recover from an extremely low base, obviously, business last year.

Okay. And sir, on domestic business, have you taken price hike during the quarter across the portfolio and specifically for the Rantac franchisees?

See, as far as price hike is concerned across products, there is a cycle for each product and you know the hikes are taken accordingly. With respect to Rantac franchise, we see the benefits accruing to us at the end of Q3 and Q4. We are still sitting with inventory of close to 3 to 4 months. Actually, what had happened was, during the second wave of COVID, to ensure supply security, we have kind of ensured that we are sitting with good material and finished goods stock. And we will see through it. So the actual benefit accrual will be somewhere around end of Q3 and Q4.

Whatever price hike we have taken on the franchises, that will come from Q3, Q4. And it will reflect on that quarter. That's what you mean?

Yes.

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

Sir, on industry, what we are hearing is many of the companies are talking about trade generics as an important growth driver. And some of the large ones are focusing -- it seems the market has grown higher than the prescription market growth, and some of the companies are venturing into it. So what is your thought process? And how do you see this market evolving and does that create some sort of a headwind for the prescription drugs?

So we have ventured into the world of generic generics and that happened in quarter 1. See, what we believe in is capitalizing on the opportunity, which is lying entire to and beyond towns. And through this entire distribution channel and fundamentally what we believe in, that philosophy of driving affordable access of medicines to the Indian population. So this will not only help in improving accessibility of our medicines, but also at the same time, we are looking at how do we maintain the right balance in terms of contribution, which is coming from the generic business to sustain our margin profile going ahead. But overall, this overall helps the entire -- and many companies have taken this initiative. This overall helps the -- of entire concept of accessible, affordable medicine to the Indian population in the local corner of the country, and that is how we have also got into this business. And this is overall helping Indian population from the regional perspective.

Yes. So this will have an impact on your overall growth, right? Because a part of the population will be supported through this channel. So the overall opportunity to that extent is impacted, isn't it? I mean, the prescription growth business to that extent would be lower than what we had anticipated.

See, there are 2 parts to this business. As far as we are concerned, we are being very cautious that the products, which we launch through generics channel, do not cannibalize the prescription products. So 2 different channels, 2 very different set of products to capitalize on the opportunity and provide affordable, accessible medicine as Nikhil mentioned. And we don't see any real threat of cannibalization. Our strategy is very different, and we want to stay away from any cannibalization impact.

Okay. Sir, how large is this business? I mean, is it very small at this point? Can you quantify?

It's too early to comment for us. Like what Nikhil mentioned, what we are going to be cognizant of is the fact that we maintained the balance effectively for us to sustain a healthy margin profile for our overall domestic business.

Okay. And sir, one more question, if I can ask, you mentioned about mega brands, which will be created. And how does that work out? I mean, in the sense that today, we are seeing most of the pharma companies are actually focusing on India a lot more. So how do you see -- is it going to be dependent on M&A happening or organically, you think it can happen? And what would allow J. B. to kind of differentiate itself and create those bigger brands?

See, first of all, first of all, I would like to at least talk to you that we have enough huge opportunity and scope in the existing big brands where we are placed. And the way we have positioned, and I've been talking about the new go-to-market model, in terms of how we have bifurcated what we want to focus in metro and Tier I towns and what -- and our strategy going ahead in Tier I and beyond towns. So we see huge scope in our existing big brands. And that is quite reflective, as reported externally and what we have reported for quarter 1, that these brands are not only gaining market share, but they are delivering market-leading performance. And mega brands are not created in a day. It takes time. So conceptually, if our people are able to -- if we are able to generate a revenue close to INR 7 crores to INR 10 crores for the first year of launch for a brand, consequently, we are more than happy because we have a critical mass of prescriptions, which we are getting from the medical opportunity and the brand is getting good support. So that is what is the intention going ahead. And we have selected our spaces where we want to play. Coming to M&A, whenever conceptually we get the right assets to evaluate, we will consider it. We'll not be shying away from that. But that also, from an Indian perspective, it takes time because you also have to look at from an M&A perspective what you want to buy and also strategically if it fits and is a part of your plan going ahead to meet your future aspirations.

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

How do you see the growth for the India business panning out for the rest of this year, given that the base for the acute therapies will still be favorable going into the second half of this year because our Rantac and Metrogyl prescriptions were impacted last year? And with respect to driving prescriptions for Metrogyl and Rantac in Tier II and Tier III markets, which was a stated strategy for you, how are some of those initiatives progressing?

See, Rahul, if I have to comment on this, we conceptually saw more than normal growth mainly for the demand and search that we saw in for Rantac and Metrogyl in this quarter. But I think this will normalize in the next 3 to 4 months. But what I spoke earlier that the entire new go-to-market model that we have put in place, which is yielding good results for both our flagship segments and people in new launches. So we maintain our endeavor to grow above market and close to high to mid-teens. That is what I can guide at this moment of time. And I think a lot of efforts have been put in terms of nurturing the big brands that we have, not only for Rantac and Metrogyl, but also what I spoke earlier in the previous question, which is in the world of hypertension, where we enjoy market share close to 50% to 60% for our Cilacar franchisee, close to 70% for our Nicardia franchisee. And we see huge scope in this brand also contributing and towards fueling the growth in the coming time.

Sure, sir. And with respect to this strategy of driving growth for these brands in Tier II, Tier III markets, so would that growth be driven by the trades in the segment or are you targeting different channels for driving growth in these brands in the Tier II, Tier III markets?

It's a combination of both, but the more inclination is to get prescription driven growth in the Tier II and beyond towns.

Sure, sir. And sir, with respect to this Rantac price hike, which you said will start reflecting from fourth quarter onwards. Now on the basis of price hike in that product, are we revising our EBITDA margin guidance for next year? Because historically, you are speaking -- you have spoken about margin expansion of 50 to 100 basis points every year. So with Rantac price hike benefit, would we be able to deliver better margins than what we have done historically for FY '23?

Rahul, we are very clear in terms of when we look at Rantac price. Rantac price has been very -- has been a respect for the industry. And if you look at from a product, it is how -- it is from an accessible perspective, affordability perspective, we believe this comes as a breather. But we are likely to see the benefit of Rantac, when I spoke earlier, by end of Q3, starting Q4. And we still have good inventory in the market close to 3 to 4 months. So -- and we have maintained this inventory because of the entire uncertainty during the COVID times, and we continue to guide -- in terms of EBITDA margin, the EBITDA margin was close to 27% as what we reported for the last financial year. And in my previous commentary, what we had given guidance that we'll be close to the same total of margin for the current financial year. So it's a combination of headwinds and tailwinds, that is how the business happens. So some of the issue that we are facing in international market, conceptually, what we faced in quarter 1, it will return back Rantac price increase. Benefit will start getting in Q4. So we continue to guide in terms of making the same profile of EBITDA margin, what we delivered in last year.

Sure, sir. One last question from my end. What was the free cash flow generation during the quarter?

Rahul, Vijay here. In third quarter, I would not be able to quantify, but there has been a very decent amount of free cash flow during this quarter. As you will see that we do not have any major capital commitment as of now and the profitability is quite healthy. So it has led to a good amount of free cash flow generation in this quarter.

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

So just 1 question around the 2 new divisions, RENOVA and NOVA. So if you can just walk us through the kind of investments that you have made. I understand that you made some comments in the opening statement. But have all the investments been made? Are you looking to still have more sales force? Some more details around that deal?

So I think what I -- if you recall the commenting that we did last time and what I spoke earlier, we have not added a single person on the field. We have reconfigured our go-to-market strategy, and we have reallocated our manpower. And we have got a team of around 40 people in RENOVA, which are going to nephrologist. There are around close to 2,000 nephrologist doctors in the country, and we have a good relationship with nephrologists as we are a good prescriber of our antihypertension meds. So we have launched in RENOVA half a dozen products, which are more into kidney supportive therapy. That is what is renal supportive therapy. That is what we have done. And quarter 1 was the first quarter for our RENOVA division. Equally, for our NOVA division, where we have got 350 people, they also have been resource allocated from our existing team in the entire new go-to-market model. And this business had a good starting point because we also shifted some of our products from the existing business in the world of pediatrics. And there are half a dozen new launches, which we have done in the field of respiratory. So all this conceptually, from a manning perspective, there is no cost which has been added. What we are trying to leverage our existing opportunity for nephrology, pediatrics and respiratory segment, and we are also happy to share that what -- any success that we have got in terms of prescription traction gives us confidence that this -- both the initiatives that we have put in place should help us to deliver market-beating performance across the company in India geography.

Perfect, sir. Just stating you're confident, you don't need any more investments this year, right?

No. So these are normal investment in terms of the entire medical marketing initiatives, which conceptually helps us in terms of disseminating the knowledge in the field of medical fertility. Otherwise, your -- the combination of products are in-house and P2P, which are helping us in terms of our field force mentioning into newer categories of business and some more and more number of patients in the field of pediatric, respiratory and kidney disease.

Got it. And just lastly, how many new products would you be launching in the next 2 to 3 years?

Sorry?

How many new products would you be launching in the next 2 to 3 years?

2 to 3 year, probably, if I have to talk about, that we already have launched close to 12 to 15 products in last 6 months in both these new initiatives and a couple of products in the world of metabolics. I think we are rightly poised at how do we get now the maximum from what we have launched. So we are not in a hurry to launch a number of products. We conceptually what we're believing in terms of how we can make it different to the life of the patient by getting something which is niche, innovative and also partner with the health care professionals in driving better quality of life of the patients.

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

Sir, my first question is with regards to the new launches that you have done. So going ahead, I mean, what is the kind of growth we see, because what we're guiding is for somewhere slightly higher than the market growth. But because of these 2 new divisions, shouldn't we grow faster than what we are guiding as of now?

So already, if you look at the growth, what we demonstrated in quarter 1 was close to 39%, and this was basically -- we saw good uptake in the field of Rantac and Metrogyl, but that growth is going to normalize. But what I gave in my earlier commentary that we will continue to deliver a market-leading performance and 4% to 5% element of growth should come from the new initiatives that we have taken in place. And rest of the growth, we look at from a volume perspective, our existing brands and whenever possible, we will be able to take the price increase. That is how we are seeing the business going ahead.

Understood. And my second question was on the Rantac price increase. So would be allowed to take a 50% price increase, but given in Q3 or Q4, would we be taking the entire price hike? Or this will again largely depend on how the market dynamic pans out within the molecule, which would compete with [indiscernible]?

We will -- at this stage, we'll try to maximize the price situation. The timing of this has already been communicated, and that's how we are thinking about it.

The next question is from the line of Ahmed from Unifi Capital.

Yes. A couple of questions. One, contrast media, can you help us through the numbers? What's the domestic for contrast media? Also, I want to understand the IQVIA data shows 22% growth for Q1, whereas we are showing 39% growth in domestic formulations. So besides contrast media, is there any other thing that would cause such a huge variance to beat both the numbers?

See, our contrast media business has kind of revised, because it was a very, very low base last year. And we are kind of having a very good momentum in this quarter. We would not want to specifically discuss the segment or product-wise details, but it shows a very, very healthy momentum as we look at Q1 of this financial year. With respect to overall variation and difference between IQVIA and what we have internally reported, see, these things kind of vary, right? What we saw was our internal demand really pick up because of huge surge in offtake during second wave of COVID for our products like Rantac and Metrogyl. Now it becomes very difficult for the external agencies to kind of add an exact tap on what tap surge is. And you will always see those bit of variations. Overall, as we think about our business, our primary and secondary trends are absolutely matching. We have our inventory levels absolutely under control and, therefore, quite confident of looking ahead as well.

Okay. And what's the productivity in Q1?

So what -- see, last time also what we have spoken, our productivity is now almost at par or more with the industry trend -- that the industry trend is around -- close to around INR 4 lakh, INR 4.2 lakh. We are trending close to around INR 5 lakh per person productivity, which conceptually will continue to grow at a healthy growth of around 12% to 14%.

Yes. That's good to know. And one finance-related question to Mr. Vijay. Now that the ESOP policy and the scheme is out, so when can we expect ESOP-related costs to hit the P&L?

I think the ESOP-related costs will start coming in from Q2 onwards. As of now, the industrial formulation of the approval of the scheme details upfront. So you will see from the coming quarters.

Okay. And so the EBITDA guidance is taking into account such costs or you're considering this as a one-off thing?

This is a one-off kind of transactions -- I mean, cost. So EBITDA guidance is something independent of this.

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

Yes. My question pertains to, in the Indian market, even Nicardia has seen a growth from -- for after quite some time. So if you could throw some light on what led to the growth and also what would be the COVID-related revenue from domestic market? Because in the sense, do you expect some tapering off going forward?

So Nicardia, what I spoke earlier, see, Nicardia is our flagship brand. And we have a combination of traditional Nicardia 30 and 60 milligram, and we also got XL, which is an incremental innovation. And this brand conceptually is rightly positioned, and it gets the entire prescription traction from nephrologists in the world of uncontrolled hypertension. So as a strategy, what we have taken in terms of how do maximum number of patients get benefited the incremental innovative product that we have put in the market in the form of Nicardia XL. So that is the strategy that we are following and this all -- this then enjoys 80% to 90% market share. And we only are trying to influence the ecosystem with this entire strategy that we are following from Nicardia. From a COVID perspective, Kunal, why don't you comment?

From a COVID perspective, see, we have very limited products, just 1 or 2. The contribution of these has been very insignificant to our overall growth. Yes. But what we saw was that during the second wave, some of our flagship brands did play an important role as co-prescription during [indiscernible]. But no specific significant contribution from main COVID therapy.

Okay. Like did you see any peculiar demand coming from the hospitals which were treating COVID with patients for Metrogyl or Rantac?

That's right. Rantac and Metrogyl did well. So their pickup was quite significant, and we did see a surge in demand for Rantac and Metrogyl during the second wave of COVID. And as was mentioned earlier also, as we move ahead, these demand trends will certainly stabilize. But outside this, with respect to main core COVID therapy, we just had 1 or 2 products, and there was very limited contribution to the overall growth profile which you see.

Okay. Okay. And my second question pertains to the challenges in shipments that you saw in Q1. By when do you see it coming back to normalcy? And like by when will it reflect in the export numbers?

See, unfortunately, very difficult to predict by when and how the logistics situation will normalize. Some of the factors regarding congestion at various transshipment terminals in China and all continue to worsen. We hope that the situation should normalize over the next 2 to 3 months, and that should certainly help our international business going forward. Also, we wouldn't really want to completely attribute the challenges only related to logistics. As we maintain that some of the demand trends should also likely improve going forward, specifically in pockets like APAC and Central America, and that, again, should have a positive impact on our business going forward.

And you expect that by when?

We are hopeful that as we look at the next 2, 3 months, the demand revival along the logistics situation should ease out.

Okay. Right. And what would be the lozenges utilization currently?

We are operating at close to 65% utilization for our lozenges.

Thanks, Charulata. We will just take the next question in the queue.

The next question is from the line of Neelam Punjabi from Perpetuity Ventures.

First of all, congratulations on some good numbers. Firstly, I wanted to know, given we had a higher contribution from domestic business, however, in this quarter, but that did not translate into gross margins. Is it because of higher contribution from Rantac and Metrogyl?

Neelam, I think, I would like to just answer this. The gross margin is a combination of several factors. The most important is the product mix. Rantac and Metrogyl big plays on role in this. This is not the only reason, but there are some cost factors that are also impacting the overall margin. Certain API costs are showing some indication of increase. And that's where the margin profile is so very strong, but has slightly remain at the same level of last year.

Got it. And my second question is on the ESOP cost. So according to our calculations, given the grant date and the exercise price, the noncash component will be calculated to be around INR 60 crores in FY '22 and around INR 75 crores in FY '23. Is that the right number? Of course, the fair value would be dependent on [ black show ], but ballpark, is it -- am I in the right direction?

I think this number, we are also just going to get calculated based on this [ black show ]. But more or less, I think, it should be in this range. I mean that number we have not also calculated.

Got it. And lastly, so brands are quite hard to find and expenses to acquire in India. So what's the ROCE profile that you're looking at when you are looking at your inorganic strategy going forward? Is this going to be ROCE dilutive?

From an inorganic strategy perspective, things are very opportunistic. It is too difficult for us to comment on how that essentially impacts our ROCE profile. One thing which we can assure you is that when we look at these acquisitive options, we are really end of the day looking at value creation and synergies which can come from a revenue side or operating synergies.

Got it. But can you just share any threshold limit for this?

Not at this stage.

Got it. And just one last question. What's the net cash around June?

I think I already mentioned in earlier reply to Rahul. But exact number is not available with me, but I think it is very close to about INR 180 crores to INR 200 crores because there are no major CapEx within this quarter.

The next question is from the line of Alroy Lobo from Kotak Investment Advisors Limited.

I just wanted to check, KKR normally gets very involved with providing strategic inputs to some of your group entities in all companies they invest in. Is it the same with J. B. Chemicals? And if so, is there any kind of expense that is being paid to any KKR-related entity for providing strategic inputs? And if so, what is the quantum?

We will not -- we would not like to get into details in terms of expense, but KKR has a role in terms of they conceptually have invested in this business. We have got 54% stake, and they have got the right management in place. And at the end of the day, it's a combination of collaboration which works. And we have got 3 people from KKR -- that's on KKR on the Board. And it's a combination of KKR as the independent Board members from where we get that guidance for the right purpose. Otherwise, the management team is fully responsible for running the business. And equally, from an opportunity perspective, as KKR is a rich global network, we look forward for help in terms of how we can enhance our entire work in the world of contract manufacturing. We also look at from a perspective of how we can fasten the opportunity available in the form of MMA. And that is where we stand from a perspective of how KKR comes in.

And just to add, specifically, there is no real cash paid to KKR. Nothing like that.

Okay. So all these inputs are basically part of their equity stake that they have in the company. They bring this expertise to the table with no cash outgo to any other KKR-related entity.

See, very clearly, as Nikhil stated, their strategic guidance will always be there. They've been the largest investor. And again, clarifying, no fees in any form.

Okay. And could you just comment on Metrogyl in terms of price trends? How are you seeing that product really shape up and going forward?

Can you repeat? Sorry.

On Metrogyl, could you just comment on how pricing has worked for that particular product? And where do you see that going forward?

So the Metrogyl, what we saw was good kind of demand picking up in Q1. As far as the pricing is concerned, the reviewed price was already factored in the base from last financial year. For us, it's a very, very important product. We are looking at life cycle management of Metrogyl across various SKUs, and we will continue to build on this flagship brand.

[Operator Instructions] Next question is from the line of Naresh Vaswani from Sameeksha Capital.

Yes. So how much of our total manufacturing is currently outsourced? And what was our overall capacity inflation in Q1?

So capital. Our capacity utilization remains close to 65% to 70%, and the outsource, which is majorly for India market, remains close to 25% to 30%. That is where we stand.

Okay. And on the international business, I was just -- I mean, you mentioned -- you gave the commentary, but why some markets have been impacted due to COVID in North -- South Africa and U.S., if you can help make get some color on that.

So in some of the Southeast Asian markets and African market, the timing of the COVID wave was considerably starting quarter 1 and I think in the month of close to month of June. And if you look at South Africa and U.S., they already are in the regular flow and the business was less disrupted. That is how we see quarter 1 going. And this constantly happens when you operate in different geographies across the globe. So you will have a combination of headwind and tailwind and that is how the business performs.

The next question is from the line of Julie Mehta from Mount Intra Finance.

So I just wanted to ask what is the contribution from the top 5 brands? If you [ gave the number ] on that?

It's close to 75%. And when you talk about 5 -- top 5 brands, these are not top 5 brands. These are consequently 30 different SKUs. And this top 5 brands, which comprises of 30 different SKUs, go to different variety of specialties in different geographies of the country. So that is what I admire about the company, that we have done the right life cycle management of these brands at the right time, which is fetching us good results, and we are able to deliver market-leading performance.

70% of domestic.

Yes, 70% of domestic.

Okay, sir. And sir, I just wanted to know, like how was the growth like from those brands?

So those are brands that grew at a healthy pace of around 20% -- 20%, 25% plus. And they all quarter-to-quarter that [ IMF ] are only gaining market share and delivering market-leading performance and gaining market share. We are considering they are leader from a market share of 40% to 70%.

Okay, sir. And I just wanted to ask like, going forward, what is the vision for the domestic market?

So I shared that in my commentary. The domestic market will help us in driving market-leading performance, which is a combination of big brands that we have. And this market-leading performance will also be supported by some of the new initiatives that we have taken are launching a couple of new divisions and around 8 to 10 new brands.

Thanks very much Julie.

The next question is from the line of [ Gavin Karija from Kodak ]. And that will be the last question for the day.

So my first question is around Rantac price increases. I think 3 SKUs have been qualified under the -- obviously, for a price increase. Those 3 SKUs would constitute how much of your Rantac franchise in India?

Close to 70% to 80%.

Okay. And would it be a reason to assume that going ahead, those 3 SKUs would become more or less the entire coverage of Rantac franchise for you? Let's say, you're going ahead by FY '23 also?

So we have around 7 to 8 SKUs in Rantac and there are different products positioned at different specialty. We have got a Rantac OD brand, which is constituting the incremental innovative product, which we continue to focus in the clinic of respiratologist, pathologist, orthopedics. And also besides this traditional brands of Rantac, we have about Rantac MPS, which is what pediatricians specialty. So the composition will continue to remain the same because these 2 brands are much more progressive and much more prescription-oriented.

And have you seen new entrants in ranitidine or maybe a more increased sort of focus of presence from existing peer suppliers in the ranitidine portfolio post...

So there are a couple of brands which are in the market in the fridge of ranitidine, and they have their own strategy to focus. And there are some -- there are 2 to 3 brands in the world of generic, generic also. But every company has their own strategy in terms of how they would like to play the entire opportunity in the field whenever they get from a prescription, whether it is a prescription product, whether it is generic, generic play.

Final question from my side. Cilacar and Nicardia are your pivotal brands and you've demonstrated very, very healthy volume growth in these brands. And you also indicate that the runway is still long here. If you could give us some idea of the market size and the evolution of how amlodipine versus cilnidipine fare from a therapeutic standpoint. Are you seeing a continuous shift from amlodipine to cilnidipine? If you could give us some sense of how this market is evolving, it will be helpful.

First of all, just to give an indication of the size of the opportunity, just in terms of incidents and the patient pool, which is on therapy. We are talking about almost 350 million hypertensive potential patient pool. And only 140 million to 150 million are being on some form of therapy. So there is a big, big opportunity still to shape therapy and expand the patient flow. With respect to its comparison with the other competitor, amlodipine, we believe that both have their own strengths and both have their own place in the treatment protocol. Cilnidipine has its own strengths. Where cilnidipine really scores is that it has very limited side effect profile with respect to renal complications, and that's where it's a preferred choice. As we look at how do we really need to expand on our antihypertensive basket, we are very clear of the cilnidipine advantages and where it needs to play irrespective of the other [indiscernible].

Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for their closing comments.

So I would like to thank all the participants for patient hearing, and in whatever capacity, we were able to answer all the questions from the audience. I just would like to conclude that the outlook for the business for the rest of the year remains positive and we see continuing good momentum along while continuing our cost efficiency initiatives. Also, the fundamentals remain in place where we are well positioned to drive long-term value growth for all our stakeholders based on sustainable gains from our key strategic initiatives. Also, I would like to wish all the participants. Be safe, be healthy and all of you, if you have bought one dose of vaccination, conceptually, the second dose of vaccination should be taken at the right time because that is how we will be able to get out of this entire pandemic of COVID which the entire world has been suffering. Thank you, all. Thank you, all, for patient hearing.

Thank you. Thank you, everyone. With this, we end the J. B. Pharmaceuticals earnings call. Thank you, everyone.

Thank you. Ladies and gentlemen, on behalf of J. B. Chemicals & Pharmaceuticals Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.