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

Ladies and gentlemen, good day, and welcome to J. B. Pharma's Q1 FY '25 Earnings Conference Call as on the 9th of August 2024. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jason D’Souza, Executive Vice President at J. B. Pharma. Thank you, and over to you, sir.

Thank you, Rio. Welcome to the earnings call of J. B. Pharma. We have with us today, Nikhil Chopra, CEO and Whole-Time Director; Kunal Khanna, President, Operations; and Narayan Saraf, CFO 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 in the Q1 FY '25 results presentation that has been sent to you earlier. I would like to hand over the floor to Mr. Nikhil Chopra to begin the proceedings of the call for his opening remarks.

Thank you, Jason, and a very warm welcome to each one of you. Thank you for taking the time to join us. I will share my perspective on J. B. Pharma first quarter performance and give some insights on the prospect for growth. I'm happy to share that J. B. Pharma has delivered a robust first quarter. And also for the first time, during any quarter, we have crossed quarterly sales of INR 1,000 crores. Reported revenue for quarter 1 FY '25 stood at INR 1,004 crores, which is an increase of 12% year-on-year. Gross profit margin stood at 66.2%, higher by 80 basis points. Our operating EBITDA, that is EBITDA excluding noncash ESOP cost, recorded a strong increase of 20% year-on-year to INR 292 crores. I shall now move on to our business updates. The domestic business has delivered traction with a revenue of INR 595 crores in quarter 1, up 22% year-on-year. Excluding ophthalmology, our domestic business has grown at 13% year-on-year. J. B. Pharma continues to be one of the fastest-growing company in top 25 in Indian pharma market, where we have delivered 12% growth against industry 9% as per IQVIA quarter 1 FY '25 data. Amongst our big brands, Cilacar, Cilacar-T, Nicardia, Metrogyl and Sporlac gained ranks as per IQVIA MAT June 2024 data. Along with the brands, our brand franchises are also registering strong growth. Our volume growth as per IQVIA Q1 FY '25 on a like-to-like basis, was higher by 300 bps than the IPM volume growth. I am also happy to share that with the recently added ophthalmology portfolio, our domestic business now accounts for 60% of our overall top line in quarter 1 FY '25. This is a significant achievement considering domestic business was 44% overall in revenue in FY '21. So from 44% in FY '21, in quarter 1 FY '25, we have 60%, domestic business is contributing 60% of the overall revenue. The acquired portfolios are also sustaining momentum. As per IQVIA MAT June 2024, Sporlac is a INR 100 crore brand, having delivered CAGR of 20% over 3 years. Our Razel franchise, that is rosuvastatin, delivered a robust growth of 29% during the year to a revenue of INR 89 crores as per IQVIA MAT June 2024 data. Further, our ophthalmology portfolio is scaling up well. We have had a smooth transition and have managed to attain revenue momentum for this portfolio in short period. Let me turn the attention to our international business where we have seen stable revenues of INR 409 crores during quarter 1 FY '25. International formulations grew at 5% year-on-year. And if you exclude South Africa business, then the international formulations grew at 10%, where RoW and Russia delivered robust growth. In the CDMO segment, we saw some moderated quarter due to muted cough and cold season across the world. Revenues were at INR 106 crores for quarter 1 FY '25 for CDMO business. This business is likely to pick up in second half of the year, starting September month. On the balance sheet, we have further strengthened the organization. The operating cash flows have improved. We have reduced our INR 249 crores of debt in quarter 1 FY '25 and our net cash position has further strengthened. We are maintaining our operating EBITDA margin guidance in the range of 26% to 28%. The domestic business should continue to grow better than the Indian pharma market backed by strong brand franchises and traction in the acquired portfolio. In CDMO, we expect realization momentum in the second half, as shared earlier. Russia and RoW business will continue to perform well and South Africa business should begin to record growth in second half of the year. As shared earlier, last 5 quarters, we had taken a haircut of around INR 150 crores for our South Africa business, which was more of a tender business. We remain focused on making the organization progressive and future-ready. That brings us to the conclusion of my opening remarks. I would like to call on Mr. Narayan Saraf, our CFO, to share his views on the financial performance for the quarter. Over to you, Narayan.

Yes. Thank you, Nikhil. A very good afternoon, everyone, and welcome to our earnings call. I will now take you through the financial highlights for the quarter 1 FY '25. Revenues for the quarter were at INR 1,004 crores, representing an increase of 12% year-on-year. The domestic to international business mix was 59% to 41%, respectively. The domestic business achieved revenues of INR 595 crores with growth of 22%. The international business remained flattish, generating revenues of INR 409 crores. CDMO business was impacted due to muted season and the international formulations business, excluding South Africa, improved by 9% year-on-year. Gross margins for the quarter stood at 66.2 percentage, expanding 80 basis points from last year's quarter 1. In the quarter, our operating EBITDA, excluding ESOP cost, was at INR 292 crores, reflecting a 20% year-on-year growth. The margins were at 29%, an expansion of 190 basis points as compared to 27.1 percentage in the same quarter last year. On the expenses side, the total employee cost, including ESOP, increased by 12% to INR 167 crores. ESOP cost was at 4% of the reported EBITDA versus 5% year-on-year. Other expenses as a percentage to sales improved by 130 basis points, positively impacted by continuous focus on optimization of overhead and marketing spends. Freight cost continue to be higher impacted by geopolitical issues. Finance cost reduction is due to prepayment of term loan and hence, profit after tax was at INR 177 crores, which increased 25% year-on-year. Happy to report that our gross debt as of 30th June 2024 came down to INR 108 crores from INR 357 crores as on 31st March 2024. While our operating margins have improved significantly in Q1 FY '25, we reiterated our guidance for operating margins between 26% to 28%. On the balance sheet, side, we continue to focus on managing our working capital efficiency efficiently and improving on return on capital employed. Our operating cash flow continues to remain healthy, and we are net cash positive of INR 313 crores. As we continue on this journey of growth and transformation, we remain confident on a positive outlook through opportunities for the company and providing value to our stakeholders. That concludes my opening remarks. I now request the operator to open the floor for the question-and-answer session. Thank you.

[Operator Instructions] The first question is from the line of Tausif from BNP Paribas.

Congrats on a good set of numbers. My first question is on -- am I audible?

You're audible now, Tausif. Go ahead.

Congrats on a good set of numbers. My first question is on the domestic business or ophthalmic portfolio. I mean is it possible, can you share the overall growth this business witnessed on a Y-o-Y basis? And also, it has been almost 6 months of integration, what has been your key learnings, challenges? And how do you see this business going ahead?

On the ophthalmic business side, we have been very positive on how the business is shaping up over the last 6 months. Our main focus was to kind of reenergize the brand assets which we have taken, and we are seeing very good results after we have seen the transition happen on our side. Just to give you a sense, we have also kind of invested incrementally on the field force. So the reps who were working on the ground when it was taken from the erstwhile organization was close to 70. We have increased that fleet force size to closer to 105. And as a result of which we are seeing positive traction on the secondary demand as well. We have always maintained that this is a portfolio which we will grow closer to mid-teens. Just to give you a broad sense from an annualized run rate perspective, last year, the portfolio clocked annualized sales of close to INR 160 crores. We maintained that the annualized run rate for this financial year for us will be INR 180 crores and plus. So that gives you a sense of the growth, which we are looking at. And from H2 onwards this financial year, we will also be looking at adding some new introductions. A significant part of that will materialize in terms of commercial opportunity for us for the next financial year.

Sir, my second question is on the CDMO business after the muted start for the year. I mean, sir, do you maintain your guidance for double-digit growth for FY '25 with the business?

Yes. So what I shared earlier in my commentary is September onwards, we'll see the traction in the business. The way this business is positioned that because of the extreme heat condition across the globe and because of the climatic conditions, our order books are more in place for quarter 3 and quarter 4. And there are good number of new projects which are on. So by the end of the year, we should be able to deliver double-digit growth for CDMO.

The next question is from Rahul Jeewani from IIFL Securities Limited.

Sir, you indicated that the volume growth for us in the India business this quarter was 300 basis points ahead of the IPM volume growth rate. So can you just split out the 12% growth which we saw as per secondary data between volume plays and new launches?

So volume growth has been the main driver for us, which has been 4% plus. If you look at some of our key big, large franchisees as well, Cilacar, for example, has grown at 13%. Cilacar combination T has grown at closer to 20% volume growth. And even our Razel franchise as reflected in IMS is taking a volume growth of closer to 20% plus. Metrogyl is higher single-digit volume growth, which is substantial for a mature brand like this. So overall, if you really look at it, when we are looking at a 12%, 4% volume, close to 6% is coming in terms of price, and there are new introductions, which are attributed closer to 2%. And we maintain that this volume growth, which we have always mentioned, we should be higher than IPM, given the trends which we are seeing of our big brand franchisees, we'll continue to drive that volume growth going ahead as well.

Yes. And sir, on the gross margins, we have seen a very strong improvement this quarter. And this was despite the dilutive impact of the Novartis ophthal acquisition. So can you please explain in terms of what is driving such a strong gross margin performance for us?

So I think what was shared earlier, Rahul, is -- if you look at overall in India, the growth which we have seen, in particular, volume is coming in the chronic part of the business. Overall, the mix is improving, which is overall helping us in terms of deriving better gross margins. And in spite of what you shared that ophthal business being dilutive in gross margin, still we are able to maintain 60% -- 65%, 66% of gross margin. Also, this quarter, we saw very good performance in our Russia business, which also helped us in terms of maintaining our gross margins. And this was particularly in our supply to CIS countries that has helped us, and that will continue to happen for quarter 2 and quarter 3 for Russia business. And South Africa business, though it may be small, but overall, you should see top line growing. In quarter 1, our gross margin and profitability also have propelled up in a small way. So these all factors put together are helping us in maintaining gross margin 65% to 66% in spite of the ophthal business being dilute in gross margins.

Sure, sir. And sir, you indicated that the CDMO business would pick up in the second half of the year. And typically, the domestic and the CDMO business are the highest EBITDA margin segments for us. So given that in the first quarter itself, we have delivered operating EBITDA margins of 29% and with the scale up which we anticipate in the CDMO portfolio in second half, do you think that we are being conservative on our operating margin guidance of 26% to 28%?

See, Rahul, the way it works, if you look at overall, the trajectory for India business, being acute. And this year, acute portfolio has contributed overall as compared to where we were last year, but will subside down in second half of the year. So India business will continue to grow, but H1, you will see overall better mix and better gross margin for India business. That is point number one. And point number two, the way things are happening in the Rest of the World market and with the logistic issues that we are facing and material availability, keeping that into consideration all those issues, that is why the guidance continues to be 26% to 28%. And what we want to also comment that our overall EBITDA margins would be on the higher side of the guidance that we are giving to the market.

Sure, sir. And sir, one last question from my end. So are you still evaluating deals in terms of acquisitions in the domestic market?

So we continue to -- we have a team of five people who continue to evaluate assets depending upon availability, brands, midsize companies. So that is a process which continues to happen in the company, Rahul.

[Operator Instructions] The next question is from Rashmi Shetty from Dolat Capital.

Congratulations on a good set of numbers. When we see your Rantac and Metrogyl molecule, we are seeing that from last few quarters, and also, you have also indicated in the presentation that it is growing at a CAGR of 11% to 12% over 2 years. So just need to understand the dynamics that how is this ranitidine market and metronidazole market is growing? Even -- whether those -- that entire molecule market is also growing in double digits? Or J.B. is able to take up more share and growing in double digits? And how is the pricing overall in these two molecules?

So we'll just explain you how the market is structured. In both these markets, we have a significant market share, right? So if the market has to grow, J.B. has to grow, that's point number one. What we are seeing both in Metrogyl and Rantac, last year, we saw their demand being slightly subdued and we maintain that it was because of the moderate seasonal trend. But this year, however, we have seen a good offtake specifically for our metronidazole molecule category, where even in IMS reflection, you have seen a good volume growth. And internally also, if you really look at our numbers, our volume growth has been substantial. So we've been able to grow this despite the fact that WPI price benefit was not passed on to Metrogyl as a brand this year. But still, it has shown very strong growth. And metronidazole as a molecule category will continue to be a gold standard because there is really no substitute for any anaerobic infection. There are some seasons where the demand tends to be subdued, but that's pretty much about it. Also, we have done a lot of incremental innovation for this category. So we'll continue to ensure that the molecule continues to be relevant innovation in terms of ER, Metrogyl ER being an SKU where we are putting in a lot of trust, that continues to be our focus area. Same goes for ranitidine. Yes, the demand was slightly under stress over the last 2 years. But the good thing to note is that now the steady state has been maintained and we think within the H2RA category, ranitidine will continue to kind of drive the market in the gastro segment. So we are not very stressed about that. We will continue to do life cycle management of this brand, and that is how we are trying to grow the market and, at the same time, gain incremental market share as well.

Sir, and the major growth is coming from the GPs or it is a mix of GPs and the specialists? And is it something that are we seeing any shift to some PPIs to this ranitidine market?

For us, the demand continues to come from consulting physicians and GPs. For the life cycle management of certain SKUs, we tend to focus more on gastros. So for example, Rantac OD, for example, the demand will come from gastro and CP, whereas for plain Rantac, it will come from GPCP, right? So that continues to be the trend for us. Sorry, could you repeat the second question?

Are we seeing any shift from PPIs to, that is your pantoprazole, omeprazole, from there to this ranitidine market. Any shift is taking place because of the higher side effect or it is still the same?

Doctors continue to be guarded about the long-term side effects of PPI. But in all fairness, we don't see any significant prescription shifts happening as of now. As we mentioned, H2RA have their own relevance, and they will continue to have their relevance in this segment.

Okay. And my second question is on Azmarda. What is the monthly sales run rate you currently have? How is the pricing and the competitive scenario in that molecule?

So the market is consolidated for sure, whatever initial intense competition we saw, that has stabilized, and it's become a game of top 4 to 5 players only. We are pleased to say that over the last 4 months, our demand has been steady, moving up from 110,000 units to 120,000 units. So we believe our product has achieved a steady-state demand of 120,000 to 125,000 units, and we should only see volume growth of double digits from hereon.

The next question is from the line of Sumit Gupta from Centrum.

I just want to understand on the EBITDA margins. So what was the primary reason behind the improvement in the EBITDA margin?

So very clearly, like I mentioned in my commentary as well, the primary reason of EBITDA margin was better control on our overheads and marketing spend, which had given us almost 130 basis points of improvement as operating leverage. And secondly, it was by the gross margin where we clearly saw 80 basis points improvement, resulting in almost 200 basis points improvement in EBITDA margin and the GC mainly came from better price mix and COGS benefits.

Right, sir. So -- and for -- just for bookkeeping business, what is the ESOP charge for like for FY '25-'26, how much do you expect it to be?

It's -- for the Q1, it's around 4%. So for the year, we have guided to around INR 42 crores to INR 45 crores.

INR 42 crores to INR 45 crores.

INR 42 crores to INR 45 crores. Okay. And sir, regarding the debt position. So do you have any repayment plans? Or do you plan...

Like I mentioned that we have already repaid almost around INR 249-odd crores of debt. Now we are left with around INR 108 crores, out of which we are expecting to pay everything by March of FY '25. And there's equal installments, which we pay every quarter.

The next question is from the line of Alok Dalal from Jefferies.

Nikhil, the organic growth of 13% that you achieved in the quarter, is that sustainable for the full year?

So we should be -- Alok, we should be growing at mid-teens. That is what quantity we've been giving. We expect market to grow at around 8% to 10%, Indian pharma market. We should be able to grow between 12% to 14%. That is mid teen, that is what we have been guiding.

Okay. And second question on new launches. So how many new launches are being planned, including line extensions and which areas will those be in?

So our new launches will be in the world of pediatrics, will be in the world of GI, will be need of probiotics. That is how we try -- Alok, we try to launch the products where at least we have the big franchises. So you will see us launching some new launches in the world of -- we have -- last month only, we have launched a topical application for Metrogyl franchise, and we are getting into the world of Sporlac franchise, all those new launches, we will see one or two products being launched every 2 months. That is how trajectory we'll see and new products today are contributing to around 2% to 3% of overall growth. Alok, why I shared that we should be able to grow better than the market because you have to understand that if you look at today, our presence in the categories where we are in India, India business, if you look at cardiology market, which is growing at 14%, our cardiology growth is around 16%, 17%. Portfolio hypertension, heart failure, lipids, overall put together. The pediatric market is growing better than the Indian pharma market. Probiotic market is growing better than the Indian pharma market. Pediatric market is growing better than the Indian pharma market. And we have now good dominant presence in all these categories. That is why at least we are confident in terms of delivering mid-teen growth for India business.

[Operator Instructions].

We'll just take a question which has come on the board. This is a question on interest cost. Do we see interest costs coming down in the next few quarters?

Yes. Hi, everyone. So we do expect that the interest cost coming down to almost INR 3 crores for Q2 compared to in Q1, we incurred INR 6 crores because of the prepayment of loans. So this will continue to come down as we prepay all the loans by 31st March 2025.

[Operator Instructions] The next question is from Pranav Chawla from Antique Broking.

Congratulations on a good set of results. Sir, can you just provide what is the update on our CDMO? We had planned some expansion. We were planning new client additions as well as expanding into new therapeutic areas. Is there an update on that?

Yes. So already our lozenges have started going to four countries in Europe. That is immunity and wellness lozenges we have supplied though our partner into Europe and probably by January 2025 it will be available probably in more parts of the Europe, that is point number one. This is lozenges for immunity and wellness, combination of zinc, Vitamin C, peppermint. That is number one. Number two is you should see our melatonin-based lozenges also should touch the market, probably some markets in Middle East and Southeast Asia by year end that should happen. Already there's work-in-progress happening for our pain lozenges, flurbiprofen, which would see the daylight in mid of FY '25, that should happen. By year-end or by quarter 4 financial year, a small quantity of our branded lozenges would also be made available through our partner in U.S. These are some of the progress that we have made in the world of lozenges, and we continue to work on many other projects, which at the right time, we'll be able to share. So these are some of the progresses that we have made in the world of lozenges.

Sir, and what would be the rough impact of this Red Sea crisis on our other expenses?

So some of the logistics costs have certainly been kind of impacted. So freight costs, if you really look at route-wise freights, they have for some -- out of our 6 to 8 major dominant routes, 5 to 6 are already looking at -- we are looking at pre-COVID levels. And that's why we are keeping a very close watch on the emerging freight scenario. But that's primarily kind of impacted us a bit.

Okay. Sir, and one last question from my end. What is our MR count productivity? And is there any plans to expand our field force in this system?

Apart from the nominal numbers, which we spoke about in ophthalmology, there is no real significant increase in MR count. So we continue to maintain the same number of reps as we have mentioned in the presentation also, close to 2,300 reps plus managers. And in the near term, we don't see any need for significant expansion.

[Operator Instructions] Our next question is from Rahul Jeewani from IIFL Securities.

Sir, we obviously have been doing very well in the cardiac portfolio. But can you indicate your plans in terms of the diabetes segment, because I think we were also trying to scale up in diabetes. So have you seen any traction there?

So we had launched -- Rahul, we had launched three products in diabetes, that is vildagliptin, sitagliptin and dapagliflozin. Unfortunately, a couple of products, vilda and sita have not done well. But dapa, the market has progressed well. We continue to have a run rate of around INR 15 crores annually. That is where we stand with the dapa franchise. Not any big plants we have for metabolics, but we'll continue to look at what more we can do in the world of cardiology with our existing franchises.

Sure, sir. So within cardiac, do you still see gaps in your portfolio?

So recently, we have in-licensed one product from Novartis that is inclisiran, which is for LDL and triglyceride-lowering agent, which is one of its kind. The cost of therapy is as high as INR 3 lakh a year, and it is one injection on day 1, second injection on month 3 and third induction is on -- is 6 months. That is the starting first year dose and then subsequently two injections in a year. We are one of the company, Novartis has in-licensed this product to three companies in India. And based on our cardiology presence, we were one of the partners who has been chosen. So we'll continue to look at this type of opportunities, whether it comes in terms of in-licensing, indicating whether it comes in terms of partnering or tomorrow organically, we want to launch any of the portfolio which can fulfill the gap and need in the market.

Sure, sir. So on this product, we are one of the three in-licensees for this product.

Yes. Yes.

Sure, sir. And sir, on the export business, we started this rationalization of the South Africa tender business, I think, in last year second quarter. So -- and now it will be in the base going forward. So do you think that our export business -- export business growth would now start picking up from second quarter onwards given that the South Africa rationalization would be in the base?

So that is what I shared in my commentary, Rahul, that quarter 2 onwards, we should start seeing mid-teen growths -- mid-teen growth happening for our South Africa business, and that will contribute to growth for our international business in the coming time.

And sir, in terms of outlook for the overall international business in terms of growth because, obviously, we don't have the base for the South Africa business to model in that growth. But in terms of overall export business, how do you think the growth would pan out?

So if you look at what I shared earlier, Rahul, that see the way this business happens, and I think earlier also has spoken about because of the entire logistic issues that we have been facing, material availability issues that we have been facing, the order book looks robust for quarter 2 onwards. That is where we stand. And our -- you should see business coming back to double-digit growth quarter 3 onwards for this part of the world, that should happen.

The next question is from Vilina Jain from Perpetuity Ventures.

Sir, could you highlight the margin benefit that we could get from improvement in the South Africa business?

The South Africa business is INR 250 crores, which is hardly contributing 5% of the revenue. So it will have some impact, some improvement in terms of margin, but that would not be any big significant. That is how it will stand.

The next question is from the line of Maulik Varia from B&K Securities.

Yes. I hope I'm audible. I had one question regarding raw material costs. Sorry, I joined a little late, so if it's a repetitive question. So there are geopolitical issues and are there any issues being faced by us? You mentioned something about raw material to previous participants. I wanted a little more clarity on it, sir.

On the raw material side, what we maintain was that our gross margin should be in the range of 65% to 66% despite the fact that ophthal portfolio has come in and our earlier estimate was that we'll be able to maintain this steady state 65%, 66% without ophthal. Having said that, we have shown that within ophthal also because of a good product mix, good contribution from India, we have been able to drive good performance on the gross margin side, and we should be able to maintain this range of 65% to 66% going ahead also. Having said that, we are kind of watchful about what the situation is. And the best we can do is try to focus on driving cost improvement initiatives. And a lot of these initiatives around raw materials, packaging material have shown us benefits apart from the healthy product mix.

[Operator Instructions].

We just have another question on the board. The question is on Azmarda. Has there been -- what has been the overall performance of Azmarda and how is the market for Azmarda, Sacubitril and Valsartan?

The market for Sacubitril and Valsartan, heart failure is -- continues to be extremely attractive. The last 1 year post the LOE event saw a significant influx of generics, and that's why there was the competition intensified probably more than what we had initially anticipated. But this is a molecule category which we believe will continue to grow in double digits volume terms for the next 5 to 6 years. We have already spoken about the fact that more than 10 million to 15 million patients suffering less than 15% diagnosis. So there's no reason why the market should not expand, and we will continue to be a dominant player in this category. The good thing now is that it's consolidated. So it's become a game of 4 to 5 key players, and we continue to be amongst the top 3 players in this category. And we are also seeing good steady state demand improvement for our portfolio. So our run rate continues to increase from -- continues to be in the range of 120,000 to 125,000 units per month, and we only expect double-digit volume growth in this particular category going forward.

Well, that was the last question. I would now like to hand the conference over to Mr. Nikhil Chopra for closing comments.

Yes. Thank you all for participation in today's call. And as shared earlier, the company is moving towards how do we build the momentum in terms of what we have achieved over last 3, 4 years being now -- quarter had ended being now INR 1,000 crores, the onus is on us in terms of how do we build on this trajectory that we have achieved, which is a milestone for us. And continue to grow the business mid-teens and EBITDA margins, as what we shared earlier, between 26% to 28% and deliver EBITDA margins on the higher side of the guidance that we have been giving and we want to grow the profits better than the top line and basically create value for all our stakeholders and build an organization which is more progressive and future-ready. That is what is the intention going ahead. Thank you all.

Thank you.

Thank you.

Thank you very much. On behalf of J. B. Chemicals & Pharmaceuticals Limited, that concludes this conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.