Laurus Labs Limited (LAURUSLABS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Laurus Labs Limited Q1 FY '24 Earnings Conference Call hosted by Antique Stock Broking. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Monish Shah from Antique Stock broking. Thank you, and over to you sir.

Thank you, Karen. Well, good evening, everyone, and welcome to Laurus Labs for 1Q FY '24 Results Conference Call. We thank the management for giving us the opportunity to host the call. Today, we have with us Dr. Satyanarayana Chava, Founder and CEO, and Mr. Ravi Kumar, Executive Director and CFO, and Vivek Kumar from the IR team. I will hand the call over to Dr. Satya for his opening remarks. Thank you, and over to you, sir.

Thank you, Monish, for hosting this call. Thank you, everyone for joining us for Q1 FY '24 results conference call. We are pleased to have this opportunity to update you on our results and also answer your queries. During our last call, we emphasized on our growing commercial and scientific capabilities along with our customer centricity, which will position us to achieve a sustained future growth. During the current quarter, we have continued to build on it and further advanced our operational excellence. As we stepped up application of cutting-edge technologies like continuous flow chemistry, synthetic biology and precision fermentation. We also executed on several value enhancing business development work, including our first multi-year commercial contract with a leading Crop Science company and deepening our collaboration in cell and gene therapy. We increased our stake in ImmunoACT to close to 34%, which will support ImmunoACT with Phase III trials for their lead candidate, HCAR-19 along with the expansion of the multi-location GMP facility and scale up the manufacturing of CAR-T. Besides, we also collaborated with IIT Kanpur in in-licensing 4 patents for 3 gene therapy programs, and we'll also support the clinical activity there. We are also planning to set up a cGMP gene therapy and vector manufacturing facility at IIT Kanpur. Therefore, our team remained fully committed in driving scientific capabilities and delivering on long-term growth of business and efficiency, and also allocating resources very efficiently to forward on our transformative opportunities. During this quarter, our formulation unit, Unit 2 received EIR from USFDA. Moving on to our financial results. Our Q1 results were very challenging, driven by lower revenues and higher upfront cost, and also rescheduling of some of the supplies from -- by customers and global ARV agencies. It is also important to keep in mind that our year-on-year growth was subdued due to particularly strong quarter, where we had executed a large PO for a big pharma. As a result of these factors, our revenues have declined to INR 1,182 crores and EBITDA at INR 168 crores, with a EBITDA margin of 14.2%. We believe this is very transient and underlying demand for our key growth portfolio remains strong. We believe both our API business and FDF business will return to normal levels from Q2 itself. Our CDMO business improvements is on track along with execution on some very interesting projects and new partnerships. ARV revenues on overall basis have incrementally stabilized during the quarter and expect continued strength given our leadership position in many of the first-line therapy products. Our cost improvement programs are also progressing as expected. Therefore, we are optimistic about our Q2 and future quarters in the current financial year. To begin with, I would like to share key updates on our formulation business. We did INR 285 crores of formulation sales in Q1 with a decline of around 18% over last year. On sequential basis, revenues have dropped by 24%, mainly impacted by lower demand, particularly in the ARVs, but this should rebound from the current quarter itself. While the overall market volumes have largely remained stable in the LMIC business, a shift in the procurement timing from global agencies along with continued lower prices led to fall in Q1 revenues. This is transitionary in nature and expected to be back on track very soon. We remain intensely focused to stabilize ARV business through FY '24 and beyond, while navigating pricing headwinds created by the competition. We have successfully implemented several measures around expansive portfolio with cost to improvement initiatives, and we believe these measures will ensure our market leadership and confidence of sustaining our leadership position in the cost line products both in APIs as well as in formulations. Coming to the Developed market, demand for our broader product portfolio remains healthy. In U.S., we continue to get good market share on products, and also increasing volumes from the marketed products. During the quarter, we filed one ANDA. With that, cumulatively we've filed 38 ANDAs to-date, of this, we have received 15 approvals final approvals, and 13 tentative approvals. We continue to have diverse portfolio and pipeline including novel 505b(2) products across ARV, cardiovascular, CNS and GI franchise. In Canada, we have 20 filings, of those, we got 13 approvals, which we have launched in 9 products. And we intend to launch 3 more products during the current financial year. In EU markets, we have 15 filings and we got 12 approvals, out of those, we have launched 6 products. We have continued to deepen our CMO relationship and anticipate more volumes in the current financial year. Our FDF division continued to operate a total commission capacity of 10 billion units. We anticipate that some of the brownfield capacities will fully utilize over the rest of the financial year. On R&D front, the overall spending to sales for Q1 FY '24 was at 4%. We continue to make good progress on, and invest in portfolio with product-specific approach based on complexity and scale. During the quarter, we got approval for an NDA for HIV-pediatric oral dissolving films by USFDA, and we are working towards maximizing opportunity by leveraging this ODF platform in other therapeutic areas including HIV. We have total 54 products in R&D pipeline right now, with an addressable market size of over $40 billion. I would like to give you a status of our filings across the globe, 38 ANDAs in U.S., 15 dossiers filed in Europe, 20 in Canada, 9 with WHO, and 8 dossiers filed in South Africa, one dossier in Australia, and we filed 21 dossiers in India, and 23 products filed in various Rest of the World markets. Of the 38 ANDAs filed in U.S., we have 16 Para IV filings, and out of those 11 first-to-file opportunities as a sizable market opportunity. In the Generic API division, during the quarter one, 2024, we achieved a INR 597 crore revenue, increased by 2% year-on-year, but sequentially declined by about 16%. Our anti-viral business during Q1 continues its steady momentum and witnessed volume-led improvement growing 6% year-on-year and 17% sequentially with the revenues of INR 407 crores. The impact of ARV pricing have slowed down, and we continue to maintain a leading market share in the first-line HIV treatment. Onco API business for the quarter was lower and declined by 13% year-on-year and 50 -- and with revenues of INR 54 crores. Sequentially, there was a drop of about [ 15% ]. This was because we executed a large contract in the Q4 FY '23. As you are aware, your company has one of the largest High Potent API capacities in the country, and we continue to strengthen our global leadership in some of the molecules. In other API segment which includes cardiovascular, diabetes and asthma products, the revenue decrease by 1% year-on-year with the revenues of INR 136 crores. The decline was on account of temporary market dynamics and scheduling patterns from our partners. We are very confident that our underlying demand for our products under CMO orderbook continued to look better. In Q1, we filed 3 DMFs, out of those, 2 are in non-ARV category. With this, the total number of DMFs filed to-date is 83. In the Synthesis business, company recorded revenues of INR 250 crores, during Q1 FY '24. The revenues declined due to year-on-year comparison given large PO executed last year. Otherwise, the baseline business is seeing healthy momentum overall, and project pipeline continues to scale up with our existing as well as new customers. We continue to work on over 60 active projects, ongoing commercial supplies for about 10 products, out of those 4 APIs. We continue to execute well on our scientific-led approach to customer acquisition and retention. During quarter one, we signed a multi-year commercial supply agreement with global leader in Crop Sciences Company. We believe this agreement is a big milestone and the beginning of our journey towards leadership position in Crop Science Chemicals as well. With this, we've added a new global partner in our CDMO growth strategy. We're making good progress on new sites for CDMO division both R&D as well as manufacturing. Our animal health unit was inaugurated during June '23, and commercial validations will began from October '23. Our Animal Health side will have capabilities to handle steroids, hormones, high-potent molecules, apart from large volume products. Laurus Bio reported INR 50 crore revenue in the quarter one with a growth of 70%. The growth was driven by increased offtake in CDMO business, and partially booking of certain delayed shipments in the previous quarter. We have continued to expand our customer base with our strong pipeline. We're also optimizing our capabilities at R2 with the large-scale CDMO partners and further expect to complete the downstream debottlenecking during Q3 FY '24. This unit will achieve its peak revenues during FY '25. Our enhanced technical expertise in biotechnologies is expanding its application in small molecule manufacturing, which is helping the parent company significantly. Progress on our new greenfield site R3 is on track and expect expansion happen in a phased manner. This site should further strengthen Laurus Bio capabilities in offering CDMO services in animal-origin-free proteins and growth factors, apart from large scale biotransformations and fermentation. With a profound scientific team of over 2,400 people, 1/3 of our total talent works in R&D and quality. We are continuously evolving our R&D platform towards more sustainable technologies to be used in development and production of small molecules. We continue to implement and operate best-in-class R&D, manufacturing and quality systems in line with the highest global standards, along with a comprehensive EHS management. During the Q1 FY '24, a total of 31 quality audits were undertaken including several customer audits. To-date since inception, we have successfully passed 89 regulatory audits since 2007, including 44 audits from major global regulatory agencies. With that, I would like to hand it over to Ravi to share some financial highlights.

Thank you, Doctor, and very warm welcome to everyone for our quarter one FY '24 earnings call. Total income from operations, INR 1,182 crores against the INR 1,539 crores with a decline of 23%. As Dr. Satya explained the underlying reasons for that and we have more visibility from second quarter onwards. Gross margin for quarter one came at 50.6%, which is largely due to the product mix change, and partly fall in ARV prices over last year. But whatever savings we are expecting from raw material prices will affect from quarter 2. Our EBITDA for quarter one is at INR 168 crores with a EBITDA margin of 14.2%, because of operational deleverage and the raw material selling price decrease, et cetera. And we are expecting to improve from quarter 2 onwards, the order book RM price stabilization. Our diluted EPS for quarter one was at INR 0.5 reporting a decline of 89%. Our ROCE declined to 16%, against 21% due to weak operating results and stronger capital deployments. On the CapEx front, we invested around INR 200 crores for the quarter. As you are aware that for FY '24 majority of the CapEx in Synthesis and Bio divisions. Most of the expansion projects are on track to support our future growth. You can refer our Slide #7 of our IR presentation for more details. With this, I would request moderator to open the lines for Q&A.

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

Sir, firstly on the formulation revenue, how much is ARV and how much is non-ARV for the quarter?

INR 188 crores is ARV and INR 97 crores is non-ARV, 2/3, 1/3, yes.

Okay. And sir, given that the facility being started in November 2022, so how do we see the ramp-up for non-ARV formulation business?

The majority growth in formulations in FY '25 onwards will only come from non-ARV. See, we expect the similar trend in the diversification of revenues from formulations, similar to APIs. If you look at APIs, we -- around INR 1,500 crores, INR 1,600 crores of API sale in ARVs, but in our oncology, non-oncology and CMO revenue increased in API. Similarly, our formulation also we believe the ARV contribution will stabilize around INR 1,000 crores, INR 1,200 crores and the rest will only come from non-ARV formulations.

Sure. But the visibility for that will be based on the contracts you receive from the customers or products like ANDA product approvals?

We have [ enhanced ] our CMO for European customers significantly, this year when compared to last year. The volumes have gone up significantly, and we also got a few approvals from U.S. and in Canada. So those volumes are also adding up. So currently, our nominal capacity of FDF is 10 billion, but we are operating at 5 billion right now, it will go up to maybe 7 billion by end of the calendar -- financial year.

Okay. And just sir secondly on the guidance part, where you have highlighted that you've maintained the same guidance, but considering the shift of the procurement by the global agencies and CDMO coming up in second half. So firstly, are we going to see some 5%, 10% dip for FY '24 sales. And secondly, given the kind of profitability which we have achieved for first quarter, are we -- if you could also guide for the EBITDA margin for full year.

Can you repeat your last question?

Sir, both while we -- while in the presentation you have highlighted about...

Tushar Manudhane, I'm so sorry to interrupt, may I please request you to use the handset mode while speaking, as there is a lot of disturbance from your line?

Is this better?

Yes, sir.

Sir, while you have highlighted consolidation year for FY '24, but given that there has been shift in procurement by the global agencies and CDMO orders picking up second half, so just would like to sort of have a reiteration about the sales guidance in terms of whether we will be able to match or there could be some dip in the sales compared to FY '23. And secondly, given the kind of profitability which we had from the purchase orders in FY '23 and considering 1Q FY '23 EBITDA margin, how do you look at the full year EBITDA margin for '24?

The shift in procurement pattern from the global agencies ARV, overall here they will procure what they committed. They shifted from Q1 to Q2, so we will have more sales of ARV partners in the Q2. So that's what we mentioned is, the shift is only transitionary in nature, okay. And when it comes to the revenue, so as we mentioned, we will be very close to what we indicated earlier. So we are not giving any guidance right now on our revenue numbers.

But Tushar we -- whatever we have indicated as a consolidation year, there is no change in the statement. In fact, we are in par with our internal target or maybe we are better than our internal targets for the quarter one.

The next question is from Jeevan Patwa from Sahasrar Capital.

Sir, I have question on ImmunoACT. So we are also starting trial from Dubai and Mexico right, for ImmunoACT Phase III trial?

It's not Phase III trial, Jeevan. It is the Mexican authorities will do trial in Mexico using the product made in Mumbai. Yes, it is -- you can call Phase II only, not Phase III. Not in Dubai. It is only in Mexico. That's the current agreement. But they are working with many other countries to have the similar opportunity, but nothing finalized as yet.

Okay. Because we will be launching -- so as per our timelines, we will be launching it in end of '24 and start of '25 in India, right? So are we going to launch it in other countries as well at the same time line or could it be a little later?

No, no. It is only India.

Only for India? Okay. And secondly, sir on the Richcore site, so have we ordered for the R3 capacity? Have you ordered for the reactors and fermenters?

We are in the process of finalizing, yes.

But we haven't yet ordered it?

No, not yet. We will order during this quarter.

The land was acquired. The registration formality is completed, the other ground work is just began.

Okay. So once we order I think 9 months to 12 months will be taken, right after the order?

I think the facility qualification will start in 18 months from now.

The next question is from the line of Bharat from Quest for Value Capital.

Yes, may I know what is the CapEx for FY '25? This is for Ravi.

Sorry.

Sir, may I know what is the CapEx for FY'25?

FY '24 -- CapEx for FY '25, yes, you're right. So we -- especially the animal health whatever we have capitalized during FY '24 it start generating revenue even in FY '24 -- in the second half of FY '24. And -- but in FY '25, it will generate a full year revenue.

I mean, my question is about the CapEx, what is the CapEx for FY '25, how much of...

FY '25 capex, we have yet to crystallize. Yet to crystallize, actually without crystallization it's not fair on our part to comment. Probably September we will -- September result we will come back definitely. Okay. And my other question is to Dr. Chava. So I think this animal health would be one of the big growth trigger in FY '25, apart from animal health may I know what else are the growth triggers in FY '25?

FY '25, we will start supplying the Crop Science product, later part of FY '25, and some of the projects in the CDMO will move into higher clinical phases, so we'll get more volumes. And some of the large volume APIs in the generic also will be commercialized in FY '25. So the growth will come from generic APIs, generic formulations and ag-chem, animal health and also CDMO. So we expect as Ravi mentioned, FY '24 is a consolidation year. We see these investments will start giving good returns next financial year onwards.

The next question is from the line of [ Balaji Boina ] from JM Financial.

Sir, happy to talk to you about the man in the ground levels, and you're giving the AP, Telangana product formulation and with super compliance systems with your company. And from the -- as a investor, from last 2 years, we are dragging in terms of results and that is reflecting in our stock prices. So any improvement can we expect in next financial -- next quarter or after 6 months?

See, the biggest [ 2 ] CapEx is going on into commitments what we made to do manufacturing at the commercial scale for several CDMO projects. That was the biggest 2 commitment in capital what we do. And when it comes to improvements, as we mentioned, we are very sure, the improvement will be visible from Q2 FY '24 itself.

Sir, as a promoter you are -- from the market perspective, you are holding very low equity as a promoter. Is there any probability to buyback or acquiring from your end to make it more than 30%? Because it will -- actually you have a good name in the market saying that Mr. Satyanarayana Chava is maintaining ethical values for the company and as well as employees. That is the proud of our State. And -- but if you are increasing the stake for the investor point of view, it will help to the investor [ confidence ] more know, sir? Is there any -- can we expect anything, sir?

We don't have any plans for that right now. See, whatever money company is generating is going into deployment which will benefit every shareholder of the organization rather than few. So we have no plans of buyback in the near future.

The next question is from the line of Madhav Marda from Fidelity International. [Technical Difficulty] Sir, I'm so sorry to interrupt, may I request you to please hold for a minute while we have the management reconnected. [Operator Instructions]

Yes. My question was on the Crop Science business, the contract which we won, so if you could just give us some more details in terms of duration of the contract, size of the contract and are we [indiscernible] some more details, that will be very helpful.

As we mentioned, this is a multi-year contract long-term. It's not one, 2, years, it's a long-term contract. And it is a -- volumes are reasonable, I would say, and that partner has lot of portfolio, so we have the ability and interest from both sides to work on more projects. We can give that much details right now.

Got it. And basically this product was being made by the partner in-house since they're now outsourcing or it's being shifted from a different vendor that they were buying from earlier?

We can't give you those details right now.

Okay. Is it a patented product or is it off-patent?

Pardon?

Is it a patented product or is it off-patent?

Still under patent.

Still under patent. Okay, got it. Understood. And on the CDMO projects which we are doing $100 million plus CapEx this year, typically what is the asset turns for the CapEx was for the CDMO [indiscernible] for us?

See asset CDMO -- CDMO assets are not utilized fully round the year. So if CDMO assets are utilized fully round the year, the asset turn is very high. But this, you can consider maybe I think similar to our API business, yes, I would say.

No, sir. I was just asking that you said it's similar to the API, but typically, what is that? Is it 1.0x, 1.5x asset turn, we can expect typically in a year from the CDMO CapEx?

See, what is happening right now as I mentioned earlier, the CDMO partners are asking us to deliver commercial scale batches for Phase II, Phase III onwards, especially, Phase III onwards. So your facility will be idle for a reasonable time once you deliver Phase III molecules, Phase III volume and wait for significant amount of time. If the block is fully utilized, asset turn ratios are over 2x, in some cases. In some cases it is around 1.5x. But it is safe to assume at a fully utilized basis for a mix of products you can assume 1.5x asset turn ratio.

Understood. Okay. And sir, if I could ask one more question in CDMO business, what's the total gross block that we have invested now excluding what we'll be doing this year like end of FY '23, what was our gross block?

FY '23 gross block is, we don't have any -- it is a common facility. The exclusive block -- gross block is INR 250 crores, exclusive gross block. INR 250 crores to INR 300 crore, but the -- but it is a common facility.

The next question is from the line of Ranvir Singh from Nuvama.

Sir, on ARV side of business, 2 queries I had. In formulation side, the price erosion what we witnessed, has it stabilized now or we feel that further scope of price erosion is there, looking at the kind of competition? That is one. And second question that in ARV API, we saw a good uptick in this quarter. So again, we see that, that is going to sustain or this is -- this will remain volatile quarter-on-quarter. So that's 2 things I wanted to know, Satya sir.

The ARV API business, we have very good order book and visibility. So we expect ARV API sale will continue like that. And, your first question of price erosion of ARV formulations. It was very drastic in the last financial year, but now, we believe it is very close to stable, yes.

So my question was in a context that because the new tender cycle has started for formulation, and we expected that we'll gradually will see the overall revenue moving up, then 2 elements here, so price erosion is one. And I believe that volume has also been -- not been witnessing any uptick. So am I right that volume is also stable and then price erosion that is impacting or it is volume we are seeing the improvement, but it is the severe price erosion which has impacted the revenue there?

In the Q1 -- Q4 to Q1, the price erosion is not much. And volume only went up. And we expect the similar pricing in Q2, both API as well as formulations in ARV, but we -- Q2 volume is looking much better than Q1 in formulations.

Okay. Fine. And on margin side, I think, I see 3 elements here, so operating deleverage is one. Secondly, the price erosion in formulation would have impacted. But on the other hand, we see the raw material prices has also softened and that is visible in your gross margin profile also. So there also I wanted to understand next quarter when we see that most of business vertical will see a better Q-on-Q growth, then raw material prices, do you see that this will also help going forward? So if any kind of on an annual basis if you could guide the margin that what kind of EBITDA margin we -- ballpark number we can expect.

The raw metal price has -- have definitely softened. And, we don't expect and we don't wish the prices should go down to unsustainable levels. So if prices go much below unsustainable levels, some of them will stop manufacturing, and then it will have a very bad impact on the prices. They will go up. So we believe the prices have softened enough, I think it will maintain at that level.

The next question is from the line of [ Harshal Patil from Mirae Asset. ]

Sir, just one question -- one clarification I need for the oncology and the other API segments, where we've got a transient issue in this quarter. So sir, is it possible to quantify the impact?

No.

But we are quite confident of it getting re-bounced into Q2 onwards.

Yes. That is based on order book and visibility what we have.

The next question is from the line of [ Devvrat Mohta from Capital International ].

Yes. I just had one question, can you just walk us through -- you called out the reason for why margins fell so much this quarter. Can you -- I mean, without specific numbers, can you just walk us through what are the levers for margin to improve Q2 onwards?

[ Devvrat ], the reason is in FDF -- ARV FDF offtake is lower. That is one reason. And then operate -- because of that operating deleverage took place. And the CDMO business is, of course, when you compare to the last year, quarter one, this is much lower. These are the 2 reasons. And then, selling price is also whatever it impacted in the first quarter, especially one or 2 APIs. The selling price benefit has not been there, sorry, raw material prices decrease has not been affected in the quarter one. That will be affected in the second quarter. These are the 3 reasons for the decline in the EBITDA margins.

And what drives the improvement as we go forward? Because I mean, again next quarter if you look at next quarter if ARV formulation revenues pick up, and CDMO, I mean, you know, you are saying that improvement is really second half onwards. So then -- I mean, the mix is again adverse right, there will be more ARV versus CDMO even next quarter, so what gives you confidence that margins will improve from where we are today?

ARV FDF, we have an order book actually for the entire second quarter, and we will be doing better in the ARV FDF, #1. #2, oncology also it is going to go up, #2. #3, the overall volume we are expecting to go in the second quarter. These are the 3 reasons. Fourth reason is, whatever this raw material price is softened, all these raw materials will be utilized in majority of the second quarter. I don't say entire second quarter, but majority of the second quarter. These are the reasons we are expecting the margins will improve in the second quarter onwards.

Got it. And sir, if I can ask one more question with regard to the animal health care, when does that really start contributing from a meaningful -- I mean, from a meaningful revenue contribution perspective?

From the second half of FY '25. So with this second half of FY '24 commercial validations will start, [ Devvrat ]. And then supplies will start from second half of FY '25.

But FY '25 you will have a more meaningful full year revenue, [ Devvrat ].

Got it. But do you think second half FY '24 itself revenue start coming through, but the full blown impact is FY '25?

Yes.

Yes. Correct.

The next question is from the line of Nitin Agarwal from DAM Capital.

Sir, 2 things, one is on the CDMO business, now we've got 3 verticals in CDMO, we've got human health, animal health and now the crop protection. Sir, typically the crop protection margins are much lower, we've seen in some of the -- some of our peers who do this work. So is that a right understanding that our margin mix is going to change in CDMO once we have a larger share of crop protection coming through?

See, we are not in the crop protection B2C, is B2B, our margins are similar to other CDMO projects.

Okay. So I guess whatever the margins you're making right -- used to making human health, you're saying the same margins are applicable even for the larger volume contracts which are there in crop protection?

See, current contract what we have signed is a medium volume. We have to experience if we sign a very, very large volume how the margins look like. But the current products what we have signed is a complex chemistry, so margins are good. [indiscernible] 2 step, it is a multi-step synthesis so complex chemistry, so margins are good.

I got it, sir. And sir, if you were to look at maybe 2, 3 years down the line when all of these 3 streams are firing. Is there a broad sense you have in terms of the mix could be -- that could be there for us in terms of the key verticals for in the CDMO business?

Definitely, in the order of revenues, we can say human health, animal health and ag-chem.

Okay. And sir last bit on this, sir, we are currently about INR 250 crores thereabouts per quarter on the human health CDMO business. And I guess, sir, where you see that this piece of the business scaling up over the next 2, 3 years, what kind of projects or any color if you can give us this -- scale of possibilities which are there in this part of the business?

Just I want to correct one statement. Here in the CDMO of INR 250 crore, we haven't mentioned that entire thing came from human health. It's a combination of many other -- many segments. See, we are not giving segment-wise revenues in our CDMO, it will confuse everyone. So maybe at some point of time, when all the things become very big, we'll give. But otherwise, we are not fragmenting our synthesis revenues segment-wise.

I got it, sir. But, sir just coming back to the human health opportunity as you see in your pipeline right now, how should one think about this opportunity over 2, 3 year time period?

Which one in that?

The human health.

Well, it is very good. We are very bullish on that. Yes.

And sir, if it's possible, if you can give us a sense how many molecules you'd possibly see getting commercial in the space over the next 2, 3 years?

It's -- no, we would like to defer answering that question, actually.

Okay sir. And lastly sir, on the other API segments. Again, taking a 2, 3 year view of that business, what would be the driver -- we've done very well in that business over the last 4 to 5 years in terms of the way we've scaled it up. I mean, is it getting to a size where incremental growth is going to be little more taped, or do you see opportunities to grow this business at the rate you've grown the business in the past and what will drive it?

I think it all depends on how many new partners we'll bring into that CMO space. So currently, we have done very well with one partner, we have added another one, so portfolio is increasing, and we are talking to third one to add. So see, we expect it will grow, but it is very difficult to quantify what will be the growth. We're happy there, that segment.

And sir, are there apart from the CMO partners any other drivers for this business? Earlier you talked about entry into diabetes, cardiac and those anti also, products scale up that will drive the business?

Yes. I think our CMO approach in generic APIs and formulations is, okay, we are not doing potent formulations, but in -- when it comes to APIs, yes, we're doing potent, non-potent, all. So there is no therapy preference for us.

[Operator Instructions] The next question is from the line of Kunal Shah from Carnelian Asset Management.

Two questions. One question was on [indiscernible] so, we had about INR 1,600 crores-odd of borrowing, and then we plan another INR 1,000 crores of CapEx in the current year. So how should we look at our borrowings [indiscernible].

Kunal, sorry. Your voice is not clear.

Okay. Is it audible now.

Slightly better, but not very clear.

Mr. Shah, may I please request you to use the handset mode while speaking.

Yes, sure. Is it audible now?

Yes. Better.

Yes. So I had 2 questions. So one was on borrowings. So as on 31 March 2023, we had about INR 1,600 crores-odd of borrowings and we plan to do another INR 1,000 crores of CapEx in the current year. So how should we look at this borrowings figure in the current year? That was the first question. The second question was on the expenses part. So you did articulate when explaining on the margin front that since our revenues have kind of went down, the EBITDA margins have kind of compressed due to the operating leverage part. So just wanted to understand now you'll have animal health CapEx of the CDMO front to start in the second half. So how should we look at the expenses -- employee expense and other expense, which is about INR 160 crores-odd quarterly right now employee and other expenses at about INR 270 crores-odd right now. So how should -- how do we see this moving ahead?

Yes, first question on the -- so we already indicated even in the last call, our debt, net debt is going to increase by March 24, maybe by INR 300 crores to INR 400 crore, but again start declining from FY '25, that is one. Second on the expenses part, some of the like animal health is already some of the employees or maybe most of the employees required for the completed production block has already been engaged, but we will recruit more people in the second half. So you are right, the expenditure on account of manpower will increase in the second half. But the -- most of this is manufactured at the ground team, maybe in the bottom 3 layers, so we are not expecting too much of an increase there.

Okay. But you would want to guide some amount to have a better understanding for the whole year that would come up in the second half on account of employee addition?

No, we don't have, and we are not disclosing, but if you are very particular be touch with Vivek, he will provide you.

The next question is from the line of Aditya Khetan from SMIFS Institution.

The first question was on to the FDF business. Sir, that business is witnessing de-growth from the last 5 quarters. So what gives you confidence that it will improve from the next quarter? Can you throw some light on it?

Aditya, we haven't heard you clearly, so please don't speak on the speaker.

Sir, on the FDF business, so that business is witnessing de-growth from the last 5 quarters. So what gives you the confidence that it will improve from the next quarter?

So we have order book. So that's the reason we are saying they'll improve. Yes, your observation is right. In the FDF book, the growth is bumpy, but we expect some stability will come.

Okay. Sir, my second question, so despite the -- so weakness in numbers in first quarter, so we have given a guidance of consolidation for the full fiscal. So can we assume that on top line basis, we would be almost flattish for FY '24?

Yes. That's what we are expecting.

The next question is from the line of Anirudh Shetty from Solidarity Investment.

Sir, I had 2 questions around our CDMO business. You know, sir, the last 2 years has been a bit of a topsy-turvy period wherein it's also given us an opportunity to do projects that really push us to the next phase. So can you just share some of this trends around our CDMO business, what makes us a unique player compared to the other CDMO players? Where do our strengths lie? And my second question is, there are other players in the CDMO business that don't do formulations, because they believe that it can either create conflict of interest or a perception of conflict of interest with the innovator customers. So how do we manage that given that we do both formulations and CDMO?

The conflict, we are managing very well, because we are not filing anymore Paragraph IV filings with the partners with whom we are working. Yes, that is one conflict management we did. And second, with whom we're working, there they haven't expressed their concern so far. So with the partners with whom we're working, they never talk to us expressing their dissatisfaction that we are in formulation. Some -- with some, we are doing some of their formulation work also now. So actually, we are expanding our offering from API, intermediate to API, API to some formulation work. So we are moving up in the value chain because of having formulation capabilities.

Yes, sir. And my first question around what makes our CDMO business a differentiated business if you just talk about some of our strengths.

Okay, I'll -- Sorry, I couldn't get your first one, now I'll answer. The differentiator is our R&D strength where we have well over 1,000 people, and our ability to do bio-catalysis at scale. We have the -- one of the largest hydrogenation capabilities in the country. And the ability to deploy large reactor volume at a short notice, ability to allocate our technical resources at a short notice, these are our differentiators.

Got it. And sir, if you are comfortable sharing, in our CDMO business today, how much would be commercial -- business from commercial molecules and how much would be more early stage?

We gave number. We have over 10 commercial projects, out of those, 4 APIs. That we are giving, but we are not giving breakup of revenue coming from those commercials.

The next question is from the line of [ Sajal Kapoor ], an individual investor.

I've got just 2 questions. One, once a novel molecule fails during the clinical phase or becomes commercially successful, the same team of scientists can support a new project right? So to grow 5x on the current CDMO base we need not double our scientists, that's one. And second question is on Laurus Bio. The design and construction of R3 will take all the learning from R2 downstream debottlenecking. That's my understanding. So we should expect a relatively [ smoother, faster ] ramp up when R3 goes commercial.

I think you put a very valid point. Our learnings from Q2 -- R2 debottlenecking will certainly help R3 design which we have done keeping those in mind. The one challenge at R2 was availability of land. So we work on that by taking an adjacent piece of land for debottlenecking. That problem was not there in R3. R3 is a 27-acre site. So we are designing it very well, keeping the challenges what we faced at R2.

And on the CDMO side, Dr. Satya to grow 5x current base, we need not hire or we need not double the Scientific base, because once the project is either fails or goes commercial, the same set of scientists can pick up the next available project, right?

You are absolutely right. So we -- to grow our CDMO business, we need to add capacity, not scientific staff more. We need to add some, but not in the same arithmetic proportion, yes.

Yes, sure. And finally on this CDMO Slide 13, you mentioned solid outsourcing trend. And, please can you shed some light on the indicators that lead to such bullishness? Is this on the expectation of supply chain risk mitigation coming from innovators, where they are shying away from staying overly committed to a single country or a single organization for their entire basket of CDMO projects or is this bullishness backed by innovators' commitments and contracts?

It is on the visibility of number of projects we are talking. See earlier, our growth in CDMO came from -- we were -- we started with Phase I, went with the program Phase II commercial and all. Now, off-late we're getting opportunities when the molecule is in Phase III, sometimes even when they file the NDA, they're coming and trying to add us as the additional source. So that is because of de-risking definitely.

Okay. And finally, this new ARV synthesis filings, they kick-off in the second half. So is that the reason we have stopped using the old synthesis process because it wasn't cost effective and the new filing or the new synthesis route is cost-effective, and that will kick-in from second half of this fiscal?

It is not new synthetic routes. It is the only process scale optimization, solvent recovery optimizations and lower RMC prices. We are not changing processes. That will be a very lengthy approval timelines.

The next question is from the line of [ Darshil Jhaveri from Crown Capital ].

Sir, I just wanted to ask about, now we see better results going forward with the Q2. So would we see the margin that we've done last year in Q2, Q3, or how has the margin progression been? Will it be a linear growth or would we be able to just jump back to the margins that we had?

Going back to healthy margins of 28%, 29%, [ Darshil ] will need not just this year, maybe we will achieve during the next financial year.

No. Not 27%, 28%, but maybe from 14%, could we see a movement towards 24%, and then maybe next year 28% or how would it work out, sir?

It will be gradually go up. Yes. See, if you look at why we are saying that, our margin is not impacted, our sales were impacted. Our margins are around 50%. Our sales was impacted, that has an impact on every key metrics, yes.

Yes, sir. Gross margin was not impacted. So we -- so with better volumes we'll be able to see better margin. Okay, that helps me a lot, sir. And sir, revenue -- so sir, we would be able to -- we are confident that there would be no other threat to it right, so we are now back to whatever bottomed out, we've done and now will be back to the track that we have sir, right?

Yes.

Any threat we could see sir?

Pardon?

Sorry, sir. I just meant, do we see any threat or risk, other than the normal businesses for something specific that might be on the lookout sir?

See, all our facilities are regulator inspected. There is no regulatory risk. So we have good visibility of orders in ARV APIs and formulations. So we believe the risks are minimal. So we can't say risky zero, the risks are minimal.

The next question is from the line of Tushar Bohra from MK Ventures.

[indiscernible] starting with your introduction, we see a lot more emphasis on the gene therapy and ImmunoACT. There is also this crop protection deal that we signed. So increasingly, we are seeing efforts now starting to become intense on the need to diversify from ARV and the traditional areas you were working on. Sir, can you just throw some more qualitative light and also maybe some milestones to look out for over the next, say 2, maybe 3 year, on the different areas that you're working on including maybe ImmunoACT and gene therapy itself, maybe on flow chemistry, fermentation-based products, there was in one of the earlier calls talks about your efforts on injectables or you are looking out for injectables. Just to understand the bridge from where Laurus is today, and in say 3 years’ time, where we would be from a therapy and area of work perspectives?

Thanks for asking this interesting question. If you look at our investor presentation Page 15, we clearly put transformation, what we have done in the last 5 years. In FY '18, 73% of revenues came from ARV, both APIs and formulations. In FY '23, 37% of revenue only came from ARV, APIs and formulations. So that's the big transformation. So when we initiate any transformation activity, we also need lot of gestation period. And going back to your question, what are the areas which will drive our future growth, will definitely come from our CMO, generic API and formulations, CDMO and Laurus Bio. These will drive our growth.

Sir, this is -- so this is like something that's already understood. What I'm trying to understand is, let's say, within Laurus Bio what are the initiatives being taken today qualitatively what areas you're focusing. Flow chemistry, you've mentioned, so what exactly are you looking at something on those lines? Maybe a bit more granular and not sticking to generic API and CDMO kind of response.

In the CDMO space as we mentioned and 3 or 4 investors also asked questions. Our animal health, ag space and human health advanced clinical programs will give a lot of benefit. In the Laurus Bio -- so we are expanding capacity to cater to precision fermentation. We are also getting into tap in space, we're also planning to get into media space there. So there are several initiatives in CDMO, yes.

And in flow chemistry, sir?

Pardon?

Flow chemistry.

Flow chemistry. We had 2 flow chemistry commercial missions installed at Vizag. I think that will continue to help. See, what is happening in the overall reactions skills right now, we have a one flow chemistry in out of 10 reactions. So unless we have flow chemistry capabilities, we can take up the entire projects. Similarly with biocatalysis. If you're doing 10 chemical steps for a program, one biocatalysis, one continuous flow or 2 biocatalysis 2 continuous flow. So those are the capabilities helping us to get customers attracted towards us in providing manufacturing.

And on ImmunoACT sir, we are now at about 34%. The idea is to consolidate this eventually? And does this also mean that we are looking at CDMO projects in this space, maybe? What is the ambition for this segment sir?

Right now no plans, Tushar.

Okay. Sure. You mentioned on the CMO activity on formulations that you're moving up from APIs to formulations. Sir, if we could understand what kind of projects are we picking up and what is the potential? And is this also -- is this mainly to sort of fill up the large capacities or is there an element of specific capabilities at play that are helping us get high margin CMO activity?

You're asking CMO generic formulations?

Yes.

We -- last year we did close to 1 billion units. This year that number may inch closer to towards 1.5 billion, 1.6 billion, yes. Hello?

Hello, right sir. Sure, I thought you were [indiscernible].

Tushar, if you have any questions, let's take offline.

The next question is from the line of Rishabh Shah from Dalal & Broacha.

So my concern would be that in the ARV business which declined last quarter, so the reason for the dip -- one of the reason for the dip in ARV business is, because we did not have procurement by -- procurement of ARV intermediaries by global agencies. So this quarter, where do we stand now? And over the course of time, in FY '24, how do we expect the business coming from global agencies regarding the ARV intermediaries?

It's looking very healthy right now. So both API front and formulation front is looking very healthy. The only challenge what we had last year was the pricing erosion, so this year we expect price erosion will not happen.

Can you share any ballpark numbers regarding this?

We shared the API sales around INR 400 crores ARV and about close to INR 190 crores formulations, and about INR 600 crores of Q1 sales came from ARV, APIs and formulation put together.

Okay. But other than pricing improvement, there are no -- there is no any specific improvement for getting orders from global agencies?

See we have more supplies planned in Q2 than in Q1. We can give that much guidance.

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for their closing comments.

Thank you, investors for asking very insightful questions, and want to thank Monish for hosting this. And I want to thank everyone for your active participation. Thank you.

Thank you all, Monish, [ Karen ]. Thank you.

Thank you. On behalf of Antique Stock Broking that concludes this conference. Thank you all for joining. You may now disconnect your lines.