Laurus Labs Limited (LAURUSLABS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Laurus Labs Q2 FY '21 Results Conference Call hosted by Kotak Securities Limited. [Operator Instructions] I now hand the conference over to Mr. Chirag Talati from Kotak Securities Limited. Thank you, and over to you, sir.

Good morning, everyone. On behalf of Kotak, I thank the Laurus management team for giving us opportunity to host this call today. From Laurus, we have with us today, Dr. Satyanarayana Chava, Founder and CEO; Mr. V.V. Ravi Kumar, ED and CFO; and Mr. Monish Shah from the Investor Relations team. I now hand over the call to Dr. Satya for his opening remarks. Over to you, sir.

Thank you, Chirag. Thank you, everyone, and a very warm welcome to our results conference call for the quarter 2 and H1 FY '21. I hope everyone, their family members and colleagues are safe during this pandemic. Our manufacturing units, R&D center and corporate office all functioned normally during the quarter 2 FY '21. At Laurus Labs, we are committed to protecting the health and well being of our employees and their families, and we continue to implement rigorous safety and hygiene measures across all our locations. I'm very thankful to our colleagues for rising to this challenge and ensuring business continuity as usual. Moving on to our quarter 2 FY '21 revenues. Our revenue stood at INR 1,139 crores, showcasing a robust growth of 60% year-on-year for the quarter and 67% for the H1 FY '21 year-on-year. To begin with, I would like to share my updates on our Formulation business. The Formulation division reported its highest revenue for the quarter of INR 452 crores, showcasing a growth of over 180% year-on-year and a revenue of INR 804 crores for the H1, showcasing a growth of over 200%. Interestingly, the revenue contributions from FDF segment has improved to 40% of the revenues for the quarter as against 22% in the quarter 2 FY '20. The growth driver for the Formulation business remains LMIC business in partnership with Global Fund, PEPFAR and other various in-country opportunities. During the quarter, we also launched TLE400 in the LMIC markets, and we expect to generate good revenue in the coming quarters from this launch. Apart from the LMIC business, we are also seeing good growth in the developed markets of North America and Europe. During the quarter, we launched TLE in U.S., and the demand for hydroxychloroquine remain very soft after WHO halted its global trial. We don't foresee an increase in demand for HCQ in the coming quarters as well. In other products, we continue to maintain our market share of Q1, especially in pregabalin. In order to leverage our front-end operations in U.S., we commenced marketing of in-licensed products as well. Today, we have 8 final approvals and 8 tentative approvals out of 26 ANDAs filed so far. In Canada, we have 5 approvals and we have launched 3 already, and we expect to launch 2 more in this financial year. As far as the European market is concerned, we're very happy to share that the contract manufacturing opportunity for certain non-ARV formulations is doing very well. We have a very robust order book for FY '21. Besides, we are also in process of launching our own products in European markets under our own label. We launched 2 products, and we expect to launch one more in the current financial year. With the robust order book, we continue to invest in our FDF infrastructure to augment capacity. We have undertaken debottlenecking as well as capacity enhancement. We also expecting this debottlenecking will give some additional capacity partially in Q3 and as well as in Q4. Our brownfield expansion will be available to us in phased manner over the next financial year. On R&D front, we continue to invest in our FDF business. Of overall R&D, we have spent 4% of our revenue in the H1 FY '21. So far, we have filed 26 ANDAs in U.S., 9 dossiers in Europe, 12 in Canada and 8 with WHO and 2 dossiers in South Africa and several dossiers in various other markets. As we speak, we are always committed to expand geographies of our existing products. So we continue to invest in that fashion. When it comes to generic API, our API business recorded a healthy growth of 20% quarter-on-quarter, and also we did better in our H1 FY '21. The growth was led by higher volumes of Tenofovir and Efavirenz. Along with this, we also saw a higher sales from our external customers for dolutegravir and lamivudine. We also see healthy growth of second-line ARV APIs in the quarter 2. As indicated earlier, we expect this segment to deliver good growth this year, and we expect to achieve highest ARV API sale this financial year, surpassing the previous record. We are also very happy to share that our oncology APIs also recorded more than 40% growth year-on-year and 31% for the first half of this year. The growth was led by our key product gemcitabine and also other oncology products also shown very robust growth. As we mentioned, we have one of the largest high-potent API capacities in the country. When it comes to the other APIs, we have seen 18% growth for this quarter year-on-year and 80% for the H1 FY '21. The growth in the segment was driven by higher volumes of existing products, contract manufacturing for our European partner. We have also seen a certain amount of dedicated capacities for select opportunities in diabetes and cardiovascular segment, which will enable us to grow this business beyond what we are growing now. We have a very healthy order book for contract manufacturing of generic -- several generic API. On the back of sizable order book, new product opportunities and expanded capacities available gradually from this quarter onwards, we are very optimistic about the growth of other APIs. We're also planning to add several new manufacturing blocks in the existing units to meet our growing demand for our API business. Synthesis business recorded a growth of 36% year-on-year and a similar number for H1 FY '21. Currently, we have about 50 active projects, out of which 4 are commercial. As you're aware, we have incorporated a newly owned subsidiary called Laurus Synthesis Private Limited. This was done in order to give the business an increased focus, and eventually, we are also in the process of setting up a dedicated R&D and manufacturing sites. The proposed Synthesis R&D will come up at IKP, Genome Valley at an investment of INR 60 crores and will be operational by end of next calendar year. A new manufacturing site for this division will also be a greenfield project at Vizag, which will cater to the manufacturing needs of this division for the next several years. This site will have capabilities to handle steroids, hormones, high-potent molecules, apart from our large volume products. With that, I would like to hand over to Ravi to share financial highlights.

Thank you, Dr. Satya, and a very warm welcome to everyone on our Q2 and H1 earnings call. And total income from operations for the quarter is at INR 1,139 crores as against INR 712 crores [indiscernible] 60% robust growth. And for H1, we did about INR 2,113 crores against INR 1,263 crores, a growth of 67%. With a better product mix, we have seen an improvement in the gross margin, also like product mix and ForEx efficiency on a quarter-on-quarter basis, we have an exchange gain. Our EBITDA margin came at 31% for H1, and growth in EBITDA was mainly because of operating leverage and better product mix. Our diluted EPS for the quarter is at INR 4.50, and with a growth of 309% and INR 7.70 not annualized for H1 with a growth of 493%. Our ROCE improved to 37% on an annualized basis. This is because of the higher asset turn and the operating leverage asset turn. On the CapEx front, we invested about INR 262 crores in H1. This includes the capital work in progress, the -- some of the production blocks which we have spent for out of the INR 262 crores will be operational in the quarter 3 and quarter 4. We have many business opportunities for the rising demand on various -- all segments. So in order to meet those demand, earlier we were saying INR 700 crores CapEx in FY '21 and '22. We have revised our estimates to INR 1,200 crores of the CapEx for both -- for these 2 years. This includes, majority is [ greenfield ] expansion. Apart from it, we'd also initiated, as Dr. Satya communicated, for Synthesis, one R&D center, one manufacturing block. We are also keep on telling for last few quarters we want to have a second FDF site, which will be in Hyderabad. We have identified a land and that is another greenfield project. And we also want to have another manufacturing plant for an API, API division in Vizag. This is how we are expanding and we are expecting around INR 1,200 crores at this juncture. And based on the performance of the company, Board of Directors declared a dividend -- interim dividend of INR 0.80 per share of INR 2 face value. And one more point we want to highlight here, one of our director who resigned almost 3 years back, name is Srihari Raju, he requested for a reclassification of his shares category, from a promoter to non-promoter. And yesterday from BSE and NSE we have an approval, and we have communicated that. So with this, we will ask moderator to open for questions.

[Operator Instructions] We have our first question from the line of Nikhil Mathur from AMBIT Capital.

First of all, congratulations for a great set of numbers, again. My first question is on the API side of the business and mostly on the order visibility and in terms of pricing outlook. One of your large peers in its earnings call [indiscernible] has had indicated that the growth or the sales pace in the API business can kind of stabilize in second half of this financial year, it might even decline. That's because a lot of the panic buying is still happening because globally customers are a bit wary of a second wave of lockdown or something of that sort. So do you think that the momentum can kind of subside and there might be some bit of decline in second half and going into FY '22 as well? Or is it more company-specific as to what this company had alluded to?

We couldn't hear the question very well, Mathur. Can you repeat the question? There was a lot of disturbance in your voice.

Is it better? Am I audible?

Yes, now it is better.

Okay. What I'm trying to understand is the growth momentum on the API side of the business, is it sustainable into second half in FY '22? The reason I asked this is that we are getting some indications from some of the larger peers that a lot of global customers are still stocking on inventories because they are worried that there can be a second wave of lockdown in various parts of the world. So I wanted to understand how sustainable is the sales pace that have been recorded in first half, especially on the API side of the business.

Thanks, Mathur. Our sales of API also one of the highest in the company's history. And we haven't seen our customers are stocking these APIs because of continued challenge on the COVID because our order book is also swelling. So we have highest ever order book so far in the company's history and we have highest sales done so far. Based on this, we don't anticipate our customers are stocking our APIs. In fact, we have a lot of back orders for several APIs right now. We don't see that challenge based on the order book what we have. We expect to grow our API better than what we have done between Q1 and Q2. So Q3 and Q4, we will see more revenue coming from our API division based on the current forecast what we have, including our order book what we have.

Okay. And sir, in the opening remarks, you had alluded to that Tenofovir is seeing quite a bit of growth amongst the frontline APIs. Now for instance, let's say, supposing in FY '22, Tenofovir and Efavirenz have growth subside or in certain case have a decline, are there second-generation APIs like ritonavir, lopinavir on track, the ramp-up is on track to counter any sort of sales decline from the first-line APIs or lack of growth from the first-line APIs?

We are seeing decline of only Efavirenz in the next financial year. We continue to expect Tenofovir, lamivudine, dolutegravir volumes will continue to grow. In fact, we are increasing our Tenofovir capacity significantly from what we have right now. And we are also planning to increase our lamivudine capacity also significantly from what we have apart from dolutegravir. So we are increasing our capacities because we have visibility how much our customers are looking at and what is the growth in this segment. We expect Efavirenz will decline, whereas other APIs front -- first-line APIs will continue to grow.

Okay. Sure, sir. Another question I have on the CapEx side. Sir, I mean over the last couple of quarters or so, given the stellar run that the company has seen, your CapEx guidance has been rising. I mean a very fundamental question. So what has really changed over the last couple of quarters or so, so dramatically that you are having to almost raise your CapEx guidance by 70%, 80% in FY '21 and '22. Surely COVID has had some role to play, right? I mean as -- why wasn't this visibility, say, a couple of quarters back?

See a couple of quarters back, we were somewhat conservative in putting CapEx. Right now, all our manufacturing blocks are running at optimum capacity. And for us to grow in all these segments, both API, Formulation as well as Custom Synthesis, there is a need for us to invest more to satisfy our current customers, to service our current order books. That is the reason we increased our CapEx significantly.

Okay. And then sir, one final question before I get back into the queue. What is the pricing outlook on the ARV side in Formulation? Now historically, we have seen that in the previous generation ARV formulations, the pricing has been declining. There's a usual pricing decline that keeps happening in this particular space. So what is the current pricing outlook from a 1-year, 2-year standpoint as far as the ARV formulations are concerned?

Since we became an integrated player in ARV formulations, we believe, we will have an ability to weather the pricing challenges. If there is a pricing challenge, if you observe our gross margin growth, we're able to grow our gross margins despite of some challenges in ARV formulation pricing because other businesses are continuing to deliver very good gross margins as we expected.

[Operator Instructions] We have next question from the line of Sachin Shah from Emkay Investment Managers.

And congratulations for a great set of numbers. At least I believe that last couple of years, everything that you have been aspiring, thinking, working hard for seems to be culminating and falling right in the place. And I would think very deservingly so, congratulations. Sir, when I look at the more holistic sort of our business mix, today, say, about, say, 2, 3 years back, we were largely an API company. And if I see today, we are almost balanced kind of API versus Formulation, even in terms of revenue breakup, maybe we will be about 50% to 60% of API, maybe 40% to 50% Formulations. So we have done this transformation quite well, I would say. But there are a couple of things which I would like to get your sense that are you looking at transforming that part of the business also. So 2 points. One is that when -- if I look at our business, even today, probably 80% -- roughly about 80% of our revenue probably comes from the LMIC side of the -- from the region and maybe 20% comes from the developed markets. So over a period of next 3, 4 years, how do you see this mix changing? That's first. And second, even if I look at the overall dependence on the ARV products, so even today, I think, I mean, including developed market, LMIC, all markets put together, including API, Formulation, everything, but ARV as a product is probably giving us about maybe 75%, 80% of our revenues and the other products are about 20-odd percent. How do you see these 2 mixes changing over put us next 2, 3, 4 years because -- what's your vision on that side?

So I'll give the journey what we have done so far. That will give you a perspective. From FY '16, 82% of our revenues came from antiviral APIs. And that went down to 34% for the H1 FY '21. When you look at the LMIC-driven revenue for APIs and Formulation put together, it is 60%, not 80%, as you mentioned. So 60% of revenue is coming from ARV APIs and Formulation put together, remaining 40% coming from non-ARV in the -- from the developed markets. So our oncology continue to contribute 7%, other APIs contributed 11% in the H1 and our Custom Synthesis business continued to generate 10%. So if you look at 30% of our revenue came from Oncology, Custom Synthesis and other APIs. In the Formulation business, 38% contributed by the Formulations in H1. Out of that, roughly 8% came from Europe and U.S. market. So if you look at that way, see 60% is ARV driven and 40% is non-ARV driven. That will change in the next 2 years. Maybe 50% will come from ARVs and 50% from non-ARVs.

Okay. And sir, what about the mix of LMIC versus the developed market? How do you see that moving?

I would put the same number.

We have next question from the line of Sudarshan Padmanabhan from Sundaram Mutual Fund.

Congrats on an exceptional set of numbers. Sir, 2 questions from my side. One is we talked about the TLE launch, both in the emerging markets as well as the U.S. market. One is if I look at the sales, I mean, is there any kind of bunched sales in the Formulations that we are seeing in terms of seeding in for the requirements for more than probably 1 quarter or so. I mean just to understand whether the -- this kind of seed in Formulations is something which is not without any one-offs and something which is fair in terms of delivery is concerned. Second, sir, in terms of working capital, I mean, while the gross profit and the EBITDA has been phenomenal, we have cumulatively done about INR 650-odd crores of EBITDA. But if I look at the EBITDA to cash conversion, I mean we have done something like around INR 336-odd crores of cash post tax. So conversion seems to be lower primarily because of higher inventory. Is that inventory primarily built for TLE400 and that inventory should start coming down as the inventory gets liquidated?

As of now, our inventory of TLE is very insignificant. Actually, we have back order. So there is no inventory of TLE400 for LMIC and U.S. market. So that you can remove from your apprehension. So there is no inventory buildup. Our overall inventory buildup is because of our capacity expansion in dolutegravir, capacity expansion in lamivudine and Tenofovir. When it comes to the cash conversion, maybe I'll ask Ravi to answer that question.

If you look at the [indiscernible] for the September, we ended [indiscernible] 172 days which is -- which consistently we've maintained in quarter 1 and quarter 2. I think it's in a better shape actually. We are not seeing any inventory period. Then coming to the EBITDA to cash. Yes, because we are in -- you have to take into consideration growth also. When we're growing at a 60% level, so you have -- the inventory increase will be proportionate to the 60% growth [indiscernible].

And would the intensity of working capital come down as we move up the value chain?

We think it can be maintained at this similar level. So if you -- we're also compared with the industry. We are not worse. We are comparable with an industry as such. And when we are -- when we already moved to the forward for formulations, we -- and we are -- most of our formulations are backward integrated APIs. So we will maintain this kind of a level.

And sir, on the question on Formulations, I mean, how sustainable is it? And as the capacity come, do we expect to see growth even from the second quarter numbers, I mean given your visibility in terms of order book and demand?

In Q3, we are getting our debottlenecking capacity available only in the month of December. So we see some growth in Q3, but the capacity enhancement will be visible in Q4. So we still expect growth in Q3; and Q4, we'll see even bigger growth than what was in Q2.

And from a longer-term perspective, given the strong demand that you talked about, I mean, should we assume that even from these levels, annualized levels, say, FY '22, '23, '24, I mean, with the capacities also coming in, we should be able to do at least 15% to 20% CAGR in this business, the Formulation side?

We are creating capacity to meet that kind of growth. So I will leave at that stage since we are not giving any guidance. What we're doing, we are adding about 30% more capacity in APIs from now to next 18 months. That means we're adding about 1,500 kiloliters of capacity, and we will add about 5 billion more tableting capacity from now to next 18 months.

Okay. This is the Formulation side?

Formulation side.

And how much would that be, sir, as a percentage?

We are adding maybe 80% more capacity than what we are having currently in Formulations.

And there is no one-off in this quarter as far as the Formulations or APIs are concerned, one-off sales or supplies?

I think here, I want to make it clear. We haven't added any new product. We haven't added any new customer. We haven't generated any revenue from new products. So we are very clear that there is no one-off in Q1. There is no one-off in Q2. I think this is -- this growth is led by increased volumes of our existing products from existing customers.

We have next question from the line of Tushar Manudhane from Motilal Oswal Financial Services.

Congratulations on the great set of numbers. Just on this Formulation side, so what would be the current gross block with this debottlenecking and all that has happened?

Current gross block would be INR 550 crores around.

Around INR 500 crores gross block. And we have plans to invest about a little over INR 300 crores in the same site to expand capacity. Debottlenecking, we are spending about INR 50 crores, and we are getting about 1 billion tablet capacity extra.

Got it. So this -- just to make it clear, sir, INR 550 billion is -- so INR 550 crores for the 5 billion and then incrementally INR 60 crores for another 1 billion and then another INR 300 crores to double the capacity or rather increase the capacity by 5 billion, correct?

Actually, when I said around INR 500 crores, that includes our capital outlay for debottlenecking as well.

So given this asset turn of almost 3 times, safe to assume that kind of an asset turn for the upcoming CapEx as well?

I think, when the -- Tushar, when the asset gets matured, probably you may get kind of a level. But when you start 5 billion capacity, you can't get in for day 1.

No, no, over a period of 2 years post commercialization.

Yes. But you have to take into consideration even the API investment also. Like today, if you -- our average asset turn is 1.5, right?

Right. No, no, I was specifically looking for Formulation asset turn?

If you're asking an incremental, probably you can take it as 2.

Understood. And sir, secondly, just on this. So currently, the Formulation composition would be how much, ARV U.S. ANDA and then specific European customer for the quarter?

As we mentioned, our distribution of revenue coming from LMIC and other developed markets is 75%, 25%, around that number. And that number is almost constant for the last few quarters. And we expect that will continue.

We have next question from the line of Cyndrella Carvalho from Centrum Broking.

Congratulations on great set of numbers. Sir, I just want to understand our positioning in Tenofovir and lamivudine. If you could help us understand in terms of our global positioning? And is there any benefit that we are receiving today? Or is there any global supply chain disruption which these 2 names are facing? And how do you anticipate it going ahead, from our capacity expansion plan as well, if you could add?

In the ARV, the preferred first-line therapy is Tenofovir, lamivudine and dolutegravir, and we're expanding capacities of these 3 APIs significantly. And because of our scale and backward integration, we expect we continue to gain market share and we continue to maintain our margins in ARV APIs because of these things.

Sir, any color in terms of what could be our market share in these 2 names, if you will?

In the Tenofovir, we expect we have more than 1/3 of market share in APIs. I'm not adding Formulation what we're doing. And the lamivudine, we don't have 1/3 market share, but we are aiming to get more than 30% market share once the new capacity expansion comes live. And dolutegravir, we have 30% market share as API, yes.

And sir, if you could help us understand, is there any kind of supply disruption in the global supply chain in these 3 API side, which could then [ trick ] us right now or going ahead or...

We haven't seen any supply disruption in these APIs with respect to starting materials or with respect to intermediates and API. So our growth in this segment, these APIs, is primarily because of increased access. There were 3 million new patients added into treatment. And some of the nonintegrated players are getting approval using our API. So these are the 2 main reasons for growth in this segment. That is not because of any disruptions in the supply chain.

Also, our own Formulation also must be contributing? Is that correct understanding, sir?

We're supplying API to Formulation, but that API is not counted in our market share. When I said our market share in API as a third-party API sale, I didn't consider our supply to Formulation unit in that number.

Internal? Okay, okay, understood, sir. And sir, coming to -- I mean we have seen these extraordinary numbers and the growth trajectory is on a different league altogether. So would you be able to help us understand for FY '22, '23, what kind of in terms of the segments that we operate, what should we model to understand the growth trajectory and your [indiscernible] would be helpful?

See, we are continuously expanding our manufacturing footprint in all these segments. And we expect to grow from the current levels with good growth. And we also expect to maintain our profit margins because of operational leverage, because of manufacturing efficiencies. We expect to have good growth in our top line.

[Operator Instructions] We have next question from the line of Nimish Mehta from Research Delta Advisors.

Congrats for a great set of numbers. Sir, I'm just trying to understand from a broad perspective, the growth that we have seen in the Formulation business. Is it because of increased demand in the countries that we are targeting or it is something else? Like, what is the genesis of the growth? If you can explain, that would be very helpful.

The growth in Formulations, there are 2 factors here. One is growth in our ARV formulation share primarily because of market itself expanded with the number of millions of people accessing the ARV treatment. That is one. And second, our contract manufacturing revenue from Europe is also increased. And we're also launching our products in Canada, our products in Europe and in U.S. So the growth is coming from these 2 segments. The growth in patients accessing the ARV treatment and launch of more products in more geographies.

Okay. Okay. Understood. Just to dwell a little bit on that. You mentioned that growth in those ARVs basically because of expansion in market. Generally, we would think that in times when there is a pandemic like this, other treatments are generally not seeing any increase, especially the anti-infective treatment or infections treatment. So is there any specific reason why more patients are getting treated for antiretro -- I mean for HIV even in a situation like this where usually other clinic, other doctors are not operating, and most of them are actually only working for COVID patients?

During this pandemic, there is a slight shift in dispensing pattern. More countries move to multi-month dispensing rather than every-month dispensing. Either they're giving 3 packs of 30 or they're giving a pack of 90 for the patients. So patients need not come and see the dispensary or a doctor frequently. So that shift happened.

So there is basically more -- in a way, there is more stocking for patients, which is happening because of COVID and that is one of the reasons driving the growth in the ARV market. Is that a fair understanding?

There's no stocking up. So whenever the patient comes, instead of he get 1 pack of 30, he is getting 2 or 3 packs of 30, so that he may not come to the dispensary quite often during this crisis, yes. There is no stocking of the inventory. So they started buying more of multi-month dispensing right now. So there is no stocking up, yes.

I see. But in terms of the number of new patients getting added, that may be a normal factor only. It cannot be any significantly different, right?

In the last 12 months, all these countries and agencies were able to add 3 million new patients into treatment. That was primarily because of the development goal of 90, 90, 90. That is 90% of the people who are aware should get treatment and 90% should have viral reduction. That -- in fact, people want to revise it to 95, 95, 95, that means more people will have access to the HIV treatment. Early the treatment, minimum the new infections, that is the kind of the message these global agencies are propagating. We expect the number of patients will continue to increase current year and year after as well.

We have next question from the line of Nitin Agarwal from IDFC Securities.

Sir, just continuing on the ARV business, just to help understand a little better. Sir, the market share which is happening in there is largely a TLE to TLD market shift. We were already strong in the TLE segment earlier. So the growth which is happening in the business now, are we getting market share from -- on -- in general in the ARV market versus what you were 2 years back?

You're talking about the Formulations or API market share?

Put together, sir, I mean, because the thing is our API business has still -- so today, we are almost give or take with the API and Formulation put together almost INR 3,000 crores of ARV at a current run rate versus a INR 1,500 crore API business we used to do earlier. So obviously, the market has not expanded as much. So has it just been a very significant market share shift that we've got as our regime has shifted from TLE to TLD?

You're right. We have absolute leadership position in Efavirenz. But Efavirenz, the treatment moving to dolutegravir, 3 things happened. One is, earlier, we were selling more Efavirenz, less of other drugs. Now we are selling all 3 components of the preferred treatment, that is Tenofovir, lamivudine and dolutegravir. And also, we are getting Formulations sale in the TLD because we are one of the first company to get approval. We are the #3 to get approval. Although there were 8 approvals right now, we continue to enjoy market share because of our backward integration, because of our ability to supply on time and we're able to price it very cost effectively. So we -- you're right, our market share when you club both the API as well as Formulations, it is very good right now.

Sir, what would be our -- what's your sense -- what would be the market of the -- what share would we have with the total TLD market today from API perspective and from a Formulation perspective and both the categories put together?

We are at 20% of TLD market share ex South Africa.

On the Formulation side?

On the Formulation side.

And sir, on the APIs?

API side, maybe you can add another 10%, 15%.

So we currently about 30%, 35% of the overall TLD market across APIs and Formulations. So I mean basically, the overall -- we are -- 30%, 35% of the TLD market we are present in either through APIs or through Formulations.

Yes. That's a good assumption. Yes.

And sir, how much can we scale this thing from here on?

I think we expect to remain at that level, but what we need to consider is the number of people accessing treatment will go up. Even we remain at that percentage, the base will grow.

Okay. Okay. Sir, secondly, on the U.S. market, when you take a 3-, 5-year view of the business, barring -- so how should we -- what are the big opportunities in the U.S. for us in terms of, is it going to be the same -- I mean we obviously have done a few ANDA filings, some PIV shared -- PIV filings. But is it just market share gain in these launches? Or are there some larger sort of products, where -- which can meaningfully impact the U.S. business growth for us in the next 3 to 5 years?

We expect to see significant jump in the U.S. because of our new product approvals will come next year. We don't have very large products we are launching this financial year. We will have some significant launches in the next financial year.

We have next question from the line of Aakash Mangani from BOI AXA Mutual Fund.

Congrats on a very good set of numbers. A couple of questions, sir, to start with, this CapEx that you highlighted of INR 1,200-odd crores, by when will this get commercialized? And by when do you expect to operate at maybe 80%, 90% or more utilizations on this expansion?

The majority of the CapEx will be operational by June FY -- June 2022, yes.

Okay. And from -- if you could reiterate the split of the CapEx looking at 3 segments?

It's...

Also how would you be spending the CapEx...

Broadly, we are spending 40% in APIs, 40% in Formulations and 20% in Synthesis. That's the broad number you can take.

Okay. And how would you be funding this CapEx of INR 1,200 crores?

It's internal.

Okay, the entire INR 1,200 crores in internal assets.

Yes, it will be done internal. That is the one reason where we are not planning to reduce our current debt, and we want to invest the cash profit we get into either in funding working capital or creating more infrastructure.

And in your estimate, once this gets commercialized by June '22, it will take what 2, 3 years to utilize it completely?

Out of these CapEx, majority is being done brownfield -- greenfield. So we don't anticipate that much delay in generating revenue from this new capital expenditure.

Okay. And what would be the sort of revenue mix that you may achieve, say, 2 years down the line after commercialization of this CapEx? Today, as of H1, API is 52%, Formulation is close to 40%. How would this look at -- look by FY '24 or so?

We expect the percentage should remain broadly the same. So 40% coming from Formulations, maybe 40 and odd percent coming from APIs and remaining coming from Synthesis. We don't see that percentage changes significantly, but the base will increase significantly from the current levels.

Okay. So that means your profitability that you achieved in this quarter or the first half, I don't know what base would I consider. But would that be similar 2 years down the line?

You're talking about the absolute number or percentage wise?

Percentage, EBITDA margin, let's say, you're at 32%, 33% in this quarter. If the sales mix were to remain similar for the next 2, 3 years, I mean, would you be able to sustain this level of profitability?

We hope so.

Got it. And so thereby, your ROCE profile should look in what range if you put sort of guide on that once this CapEx is commercialized and utilized at peak capacity?

Current ROCE is very attractive. See for H1, we had ROCE over 37%. But that will come down because we are putting significant CapEx in the next 18, 24 months. But we believe it will be industry's best, yes.

Got it. And last question on the Synthesis biz. I mean you mentioned that 4 things -- molecules are commercialized and you have a lot under development. Could you give some road map as to how you want this business to shape up because there's a lot of potential on the CDMO side of things. What's the vision for this side of the business?

See here, our growth in this division depends on how the molecules are performing in the clinical phase. We have several molecules -- interesting molecules in various clinical stages. We are not anticipating all those will be successful, all those will be failures, but there will be a certain amount of assumptions we did, how many will succeed in going to the next clinical phase. And we have very interesting molecules in the development right now. That is the reason we -- we are creating a dedicated R&D and we are in the process of creating a dedicated manufacturing site to give them flexibility to take projects or increase the number of projects what they currently handle.

We have next question from the line of [ Jeevan Patwa from CandyFloss Advisors ].

Congratulations, sir. 1 question I have. So apart from your Custom Synthesis business, is there any contract manufacturing revenue in your API and FDF verticals?

Yes, we have. See our contract manufacturing of APIs or contract manufacturing of Formulations is not constituted in our Custom Synthesis business.

So how much would be that?

Maybe 20% of our other revenue coming from contract manufacturing.

So that includes Custom Synthesis, right?

Apart from Synthesis, say, about 10% of our API revenue, 10% of our overall API revenue coming from Custom Synthesis and Custom Synthesis -- custom manufacturing I would use, 10% of API revenue is coming from contract manufacturing. Probably similar number, 10% of our Formulation is also coming from contract manufacturing. So the 20% of our revenue is coming from contract manufacturing of generic APIs and Formulations and about 10% of our revenue coming from Custom Synthesis. So if you look at our overall revenues coming from contract manufacturing and Custom Synthesis, it's close to maybe 25%, 30% of all our overall revenue.

Great, sir. Great. So that is something similar to what [ DBS ] also does, right? So another question I had was -- see, I look at Laurus Labs as a process innovator. So Laurus has actually done it in the past successfully. It has done it for Efavirenz and then it had done it for dolutegravir as well, it had done it for Metformin as well. So if I look at, say, next 3 to 4 years, which are the large APIs where you are basically targeting for this process innovation? And you want to be the cost leader in those APIs. If you don't want to disclose the names, you can just tell me what kind of size of APIs you're looking at?

We have 25% more market share in 7 APIs what we make. And we want to expand that number to 15 APIs where we would like to have 25% or more global market share in the next 3 years.

How big would be those APIs, if I can ask?

No.

Are they like $1 billion-plus kind of APIs?

There is no API sale which is $1 billion. So there are very large volume APIs. Maybe each of these APIs will have the ability to generate $10 million or more. Maybe I can give that number. When I'm saying global leadership, we are not talking about 100% leadership but generating $1 million revenue. We are talking about leadership on large volume APIs.

Okay. And there, you will also have the Formulation also, right? The vertical integration you will have there?

Majority of those will have Formulations, but some of them may not have.

We have next question from the line of Naresh Suthar from SBI Life Insurance.

Sir, my question is around the CapEx plan which you highlighted. You said your Formulation facility will go up by 80%, 5 billion tablets. So just wanted to know to utilize this facility, what are the drivers like -- are these LMIC driven ARV or these are developed markets like U.S. and Europe? So which are the key markets to utilize this facility?

The expanded capacity in Formulations, majority of that will be utilized for Europe and U.S.

Okay. And for that, I mean, the ANDA pipeline, which you have built, that will be the key for this utilization, right?

Yes. Yes.

We have next question from the line of Ritesh Rathod from Nippon India Mutual Fund.

Can you help me how dispensing of ARV medicines has changed in this COVID era in LMIC countries, like on ground level?

The dispensing, what we believe from the reports and also commentary given by these agencies, they are gradually moving from single-month dispensing to multi-month dispensing. So they're moving from a bottle of 30s to bottle of 90s and 180s, so that people will have to come to the dispensaries fewer times.

Okay. And when you said 3 million new patients got added, was it on a base of -- its annual addition on whatever base? What was the base on which it got added?

These are the new patients who were enrolled to receive antiretroviral treatment.

So what would be the base -- was it annual addition?

When they are added into the treatment, they continue to be on treatment. So assuming 3 million new patients added, that means there will be 36 million bottles of some kind of treatment is required. That is 3 million x 12 months. So they will need 36 million bottles of some kind of ARV treatment.

And you spoke about the target of 90, 90, 90 for reaching that HIV of WHO target. So where they are in the journey, can you give us some idea according to your estimate?

So right now, they are not at 90, 90, 90. Some countries achieved the target, but some countries falling behind the target, but there is a great progress done. So if you multiply 90 x 90 x 90, about 72-odd percentage has to get the viral load suppression, but that is about 62% right now. So when you compare 62% to 72% and odd, still there is a 15% to 20% gap is there. So there is enormous need of HIV medication to reach that 90, 90, 90 goal. But this UN, they want to revise the target to 95, 95, 95 with an aim to reduce the number of people dying because of HIV to less than 0.5 million per year.

And since you said you were the third player who got the approval from the -- has the status for supplying these formulations, how many new players have got added until now?

About 10 active players in HIV. Some of them are fully integrated, some of them are partially integrated, some of them are not integrated. So there are about 10 companies active in HIV space in the LMIC markets.

We have next question from the line of Harith Ahamed, Spark Capital Advisors.

Earlier, we had talked about an aspirational market share of around 15% in the LMIC first-line ARV formulations market. So could you give a sense of where we are in that journey towards 15%? And so our current market share, has there been an improvement versus what our share was in FY '20?

FY '20, our Formulation sale itself is not that significant. So -- but we expect to maintain this market share and our base will increase as the number of people accessing the treatment will increase.

So have we reached that 10% share mark already or you're moving towards that?

We are at -- in first line, we believe we are at 15% market share right now.

Okay. And on the API front, I believe you said you're seeing strong growth in our external sales of Tenofovir, lamivudine and other frontline APIs, excluding Efavirenz. So here again, the question is whether our share has increased in these APIs or is this growth being driven by an expansion in the market for these APIs? So I'm just trying to understand that.

We also have very good market share in the first-line APIs for third-party API sales. If you put both the API and Formulation in the first-line treatment, we have very good market share. And we expect to continue to retain that market share despite the growing number of people accessing the treatment.

We have next question from the line of Krish Mehta from Enam Holdings.

Congratulations on a great set of numbers. I have 2 questions. The first is, can you tell me how much incremental revenue this quarter we got from TLE400 and 600? And the follow-up to that is how much of this is us just taking share? Or is this onetime stocking in the local supply chains?

We're not giving that minute details of the split between our revenues in TLE400, 600 and DLT. We believe our growth in these revenues is not because of stocking. As I mentioned, we also have highest order book in the company's history. That clearly demonstrate that there is no one-off in our numbers in Q2.

We have next question from the line of Sameer Shah from Valuequest Investments.

My first question is apart from HCQ, do we have any other play in any of the COVID-related drugs, whether APIs or filing?

We are not there in any COVID-related API or formulation. We are not in remdesivir. We are not in favipiravir. We are not in dexamethasone. We are not in any other therapy except HCQ. But as you're aware, the treatment based out of HCQ in the COVID maintenance is negligible right now. So our revenue related to COVID treatment is negligible or close to 0.

Right. And sir, second question on the Custom Synthesis business, if you can give some more color in terms of what are -- what is our target segment, what are the kind of orders that we are targeting and stuff like that? And what kind of a size in next 2, 3 years do you want this business to become?

The Custom Synthesis, we have specialized in, one is steroids and hormones and second one is oncology and third one is large volume. I think we have projects in all these 3, both -- all 3, steroids, hormones. We have several molecules in clinical phase in oncology. And we are also working on molecules where the capacity requirements are very large.

And sir, if you can give some color on this, like you said, U.S., some significant approvals are expected next year. So what are these filings?

I can't give you any specific details right now. So we can only give details about the filed so far, but not the future filings. So we can only give a number, but not the specific names.

Okay. So -- but these are in which segment, I mean those also would be in oncology kind of segment?

No, we are not filing any ANDAs in oncology formulations. So these are non-oncology formulations.

We have next question from the line of C. Srihari from PCS Securities.

Congrats on a great set of numbers. My question is centered around the dosages business [indiscernible]. If you can please give the volume growth data both Y-o-Y and sequentially, overall LMIC and Efavirenz. And secondly, on this part of [indiscernible], how do you look at the per unit realization going down the line over the next 2 to 3 years?

Srihari, can you repeat your question? Your voice is not very audible.

Yes. Basically, I wanted to know on the dosages front, the volume growth Q-o-Q and Y-o-Y, overall LMIC and for Efavirenz.

LMIC and Efavirenz, you're talking?

Yes, the volume growth, the figures.

In Efavirenz, actually, there was a degrowth, yes. So if you recollect our investor calls several quarters, I think most of the questions were related to Efavirenz, how is the growth, how they shift to dolutegravir and all, at least to -- I'm happy that you asked this Efavirenz question. Our Efavirenz revenues in the overall company's revenues are less than 10%, it is a single digit. It used to be 50% earlier, now it is a single digit. There is a degrowth in volume. But our market share has gone up in Efavirenz because many people are not manufacturing it, we became the preferred supplier. Still it is an interesting product for us, but other molecules are growing. So the percentage of revenues coming from Efavirenz is going down. But as an absolute number, still it is an interesting product for us.

Sir, I wanted -- in your overall growth, what has been the volume growth, that is what I was asking, in the dosages business.

Efavirenz, there is volume degrowth, in fact, yes.

Yes, I'm talking about overall business and LMIC business.

The volume in the sense you were talking about -- you're talking APIs or Formulations, Srihari?

I'm talking primarily about Formulations, sir, 5 billion tablet capacity that you have.

Okay. Formulations, the current capacity majority utilized for LMIC markets. New capacity what we're setting up will be majority used for Europe and U.S.

Yes, sir. I mean I understand that. I mean I wanted to know what is the volume growth for dosages Y-o-Y and Q-o-Q?

Maybe can you send a e-mail to Monish and then we'll be able to respond, because we're unable to hear you properly and we're unable to answer you straightaway to the query what you had. Maybe you can take it off-line with Monish, yes?

Yes, sure.

We have next question from the line of Andrey Purushottam from Cogito Advisors.

Congratulations for a great set of numbers, sir. I had basically a question regarding, one, sustainability of margins, which are very high, right, 32% and -- 33% and 22% EBITDA and PAT margins. And going forward, I think you said somewhere during the call that the mix that we currently have of what 50, 40, 10 between these businesses is likely to remain similar in the near future, but if I misunderstood that, please correct me. And I also wanted to know, so how should we look at the growth rates in these 3 segments over, let's say, a 2- or 3-year period? And if you could advise me as to whether the Formulations business is essentially more profitable than the API business? And if that is so, and if that share is going to increase, can we look forward to enhanced margin on account of that?

All 3 divisions will continue to grow. In API division, the new growth primarily will come from non-ARV onco APIs. And in Formulations, the growth will come from both LMIC ARV and non-ARVs in Europe and U.S. The Synthesis business is, as I mentioned, we are specialized in large volume in oncology and steroids and hormones, all those will grow. I think if you look at the where we generate significant margins, it's in Synthesis business, oncology, non-oncology APIs. And when it comes to the ARV APIs and Formulations, I think because of the volume is very large, we generate much asset turnover ratio. And even though the margins are a little lower, but we generate a very good EBITDA number there, yes.

So will these volumes sustain, sir?

We expect so. The revenue growth will continue, and that will help us to have operational leverage. And also, our R&D spend in absolute term will remain around INR 160 crores, INR 170 crores, but as a percentage terms will go down. And also our manpower cost will not grow proportionally to our revenue. So this will help us to maintain our EBITDA margins.

Ladies and gentlemen, we take the last question from the line of Ranvir Singh from Sunidhi Securities.

Sir, just a few clarity. On LMIC market what you are selling, it's purely a tender business or we have some product outside tender also?

In the LMIC, this -- this is on the tender based. And as we clarified in the previous calls, these tenders are not onetime tenders. These tenders are multi-month tenders. So for example, we have visibility what product we supply to which country in June 2020. That is the kind of visibility these agencies will give and tenders are not meant for next month sales. So these are very long-term sustainable tenders. And in many a case, these tenders are not winner takes all. So even the L1 will not get 100%. So there is a sustainability built in, in the tendering process. So evenly divided across the players based on their performance, quality, their capacity, their ability to meet short-term demands. So there are many factors influence these tenders, and we are very comfortable right now with the order book and visibility what we have in the LMIC markets.

Yes. So LMIC market, you said 75% of our Formulations is LMIC, right?

You're right, you're right.

Okay. Okay. And on CapEx side, you said INR 1,200 crores CapEx would be in 2 years. So this is from FY '21 to '22 or '22 to '23. How this is...

It's FY '21 and '22.

Okay. And like in ARV market, because dispensing is moving from single month to multiple months, does it anyway imply that some bunching of demand happens because the multi-month discounting since multi-month requirements are [ procured ] at onetime. So is there anything to do with that bunching of sales or if you could clarify?

We couldn't hear your last question because there was a lot of disturbance in your voice and also here. So we couldn't hear your last question, Shah (sic) [ Singh ], yes.

Yes. So what I am asking, that because we are moving from single month dispensing to multi-month dispensing, does it anyway imply that we -- the clients would procure more at once, means that there would be bunching of orders or bunching of demand for that ARV prescription?

The shift is gradual. We also started supplying multi-month dispensing right now. So I think there is a bunching of orders. The orders what we have for the future is more for 90s and 180s rather than 30s. But currently, we are still supplying large volume of 30s. So there is no bunching of orders, yes.

Okay. And in Synthesis business, what would be the contribution of supplies to Aspen?

We can't give you specifically, but that's attained a peak level of our steroids and hormones. So the growth is coming from non-Aspen business, that much I can make that statement.

So Aspen business is scalable from here or it has already reached its peak?

Aspen business reached its peak and the growth in Synthesis business is coming from non-Aspen business.

Ladies and gentlemen, that was the last question. I'd now like to hand the conference over to the management for closing comments. Over to you, sir.

Thanks, everyone, for your interest in the company and also very insightful questions you are asking. Some of these questions will help us to realign our priorities and interest to keep the entire stakeholders' value continuously growing. Thank you.

Thank you.

Thank you, very much, sir. Ladies and gentlemen, on behalf of Kotak Securities, that concludes this conference call. Thank you for joining with us, and you may now disconnect your lines.