Marksans Pharma Limited (MARKSANS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Marksans Pharma Q2 FY '26 Earnings Conference Call, hosted by DAM Capital Advisors Limited. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Nitin Agarwal. Thank you, and over to you, sir.

Thank you. Good evening, everyone, and a very warm welcome to Marksans Pharma Limited's Q2 FY '26 Post Results Earnings Call hosted by DAM Capital Advisors Limited. On the call today, we have representing Marksans Pharma Management; Mr. Mark Saldanha, Founder, Chairman and Managing Director; and Mr. Jitendra Sharma, Chief Financial Officer. I will hand over the call to Mark to make opening comments, and we'll open the floor for questions. Please go ahead, Mark.

Thank you, Nitin. Welcome, everyone, and thank you for joining us on our H1 and Q2 FY '26 earning conference call. We sincerely appreciate your interest and continued support for the company. I'm pleased to share that the Q2 FY '26 has been a strong quarter for our company, reflecting a healthy recovery from a softer Q1. The revenue grew 16% sequentially driven by improved demand across key markets and improved operational execution. In the U.S., we delivered a robust performance despite macro headwinds. Our strong order book moved into execution and new launches in digestive health and pain management health meaningful traction. It's encouraging to see that the tariff-related uncertainties have now stabilized, indicating that the business sentiments is returning to normalcy. Price erosion for Rx products remains in low single digits, which gives us confidence in sustaining this momentum. The U.K. business delivered stable results and saw improvement demand. Even with the ongoing pricing pressure during the quarter, our U.K. subsidiary Relonchem received 3 new marketing authorizations from UK MHRA. These approvals will strengthen our product portfolio and support growth in the coming quarters. Our goal to double U.K. revenues over the next 5 to 7 years remain firmly on track. On profitability, our EBITDA and PAT grew 44% and 70% quarter-on-quarter, supported by operating leverage and improved cost efficiencies. We also received several important milestones during the quarter. Our Unit 2 facility in Verna, Goa, which was erstwhile the Teva facility successfully completed our USFDA inspection with 0 Form 483 observation, reaffirming our strong compliance standards. Additionally, CARE rating upgraded our long-term credit rating to CARE AA- with a stable outlook, underscoring our sound financial position. As we enter the second half of FY '26, we do so with a strong momentum and renewed confidence. With improved demand, a robust product pipeline and a sharper operational discipline, we are well positioned to sustain growth to the remaining part of this year. We remain steadfast in our commitment to quality, innovation and sustainable growth, building the company that we consistently create value for our shareholders. With this, I'd like to hand it over to Jitendra for a detailed update on the...

Thank you, sir. In Q2 of FY '26, our operating revenue stood at INR 720.4 crores, an increase of 12.2% year-on-year compared to INR 642 crores in the same quarter last year. Revenue from the U.S. and North America market stood at INR 387 crores, an increase of 27% on a year-on-year basis. supported by new product launches across the Digestive and Pain Management segments. U.K. and EU formulation recorded revenue of INR 245 crores. Australia and New Zealand market recorded revenue of INR 61.3 crores The Rest of the World revenue stood at INR 26.5 crores. The gross profit for the quarter grew to 7.4% year-on-year to INR 411.8 crores with a gross margin of 57.2% compared to 59.7% last year, primarily reflecting product mix and pricing pressure in the U.K. We recorded EBITDA of INR 144.5 crores in Q2 FY '26. The EBITDA margin for the quarter stood at 20.1%, a decrease of 108 basis points year-on-year, an increase of 391 basis points from the previous quarter. EBITDA margin improved sequentially due to operating leverage and improved cost efficiencies. Profit after tax was at INR 99.1 crores, an increase of 1.4% year-on-year. EPS for the quarter was INR 2.2. Moving to H1 FY '26 performance. In H1 of FY '26, our operating revenue stood at INR 1,340.4 crores an increase of 8.8% compared to INR 1,232.5 crores in the same period last year. The U.S. and North America market recorded revenue of INR 714.8 crores up by 28.8% on a year-on-year basis and contributing 53% of our total revenue. U.K. and EU market revenue stood at INR 449 crores, contributing 34% of the revenue. Australia and New Zealand revenue recorded INR 118 crore of sales. The Rest of the World market recorded revenue of INR 58.2 crores. Contribution from these 2 markets stood at 9% and 4%, respectively. The gross profit was at INR 770 crores, up 8.1% year-on-year with gross margin of 57.4%, slightly lower by 35 basis points compared to last year. EBITDA for the period was at INR 244.6 crores. EBITDA margin stood at 18.2% compared to 21.4% in H1 of FY '25. The decline is primarily due to an increase in employee expenses to the headcount additions at the facility acquired in Goa. Profit after tax was at INR 157.3 crores. EPS for first half was INR 3.5. In H1 FY '26, the cash generated from operation came in at INR 75.2 crores. The CapEx during the period was to be INR 73.2 crores. Our working capital cycle improved to 150 days as tariff-related disruptions eased and inventory normalizations began. We expect further improvement in the coming quarters. We spent INR 26.2 crores in R&D in H1 of FY '26, which amounted to 2% of the consolidated revenue. We continue to remain debt free. And the cash balance stood at INR 666.5 crores as of 30th of September of 2025. With this, I would like to open the floor for questions and answers. Thank you very much.

[Operator Instructions]. The first question comes from the line Ahmed from Unifi Capital.

I have a few questions. To start with, currently, how does the U.S. order book looks like? And how has been the offtake in the new season? And in a similar context, how do you see utilization trends for Unit 2 moving? And a parallel question to this is, are the new product launches in the digestive and newer areas from the new site?

Yes. So our order book right now stands at between $225 million to $230 million. So that's quite strong. And our Unit 2 is progressing. We are trending very close to INR 500 crores in terms of revenue based on our last 2 months' statistics. The order book from Unit 2 will basically now take momentum now that everything the USFDA, everything has been cleared. So it will grow in 2026. So we are expecting growth -- better growth in 2026 coming in. So basically, yes, I mean, our product portfolio is strong. We are still very much -- we are still very much in tune of hitting our objectives and commitment that we had given historically.

And for the U.K. business, how do you see the market conditions currently? Has there been any change in the pricing environment, the volume offtake? And how are the new product launches picking up in U.K.?

So the U.K., obviously, we've had tremendous price erosion and pricing pressures in U.K. But with new product approvals coming into play, we are looking at a better tomorrow. We are very optimistic on our growth strategy of doubling our revenue in the next 5 to 7 years. So our product pipeline is very strong and healthy, and we have done a lot of filings. We are expecting approvals. And as you can see, every quarter we are getting these approvals in place. These approvals are not so much top line drivers, but they are more bottom line drivers. And with regards to season, obviously, this is the peak season in the Western markets in Europe as well as in U.S. So we do see this quarter and the following quarter being much better than the first quarter.

Sure. And lastly, on the Europe side, how are we making progress in terms of organic and inorganic initiatives to build out business in Europe? If you can give some comments on that?

So Europe, basically, we are looking at expanding our geographies, and we have been looking for M&As, but we have actually started our operations in Germany. We are focused on 4 countries in Europe, [prima facie] and in 2026, we would get our operations started either organically or inorganically in these 4 countries. Germany, we are going since we have not managed to close an acquisition, we have decided to enter the market through organic route. And our present office setup is in progress. Our employees are being hired as we speak, and we are looking at FY '26 starting operations in Germany.

The next question comes from the line of Adityapal from MSA Capital Partners.

Congratulations on great set of performance, really wonderful that you have come back on a steady state again. Majority of my questions have been answered. Just wanted to do a bit deeper on Europe. So how are we thinking in terms of if you can enlist those 4 countries, one obviously Germany. Second is, when can we start seeing revenues coming from the European geography? And third is, the strategy remains the same where we will target the large customers and the business that we're doing with U.S. customers?

Yes. The market is slightly different in Europe and each -- and within Europe, each country has a different market. So we would have to tailor-make our strategies based on the market dynamics. German, obviously, as you -- as everyone is aware of, is more tendering market. So there are a couple of European countries, which follow the German way of tendering. Then -- but there are certain markets that are a little more branded and a little more diversified like U.K. So we would be basically targeting 4 major countries in regions within Europe. And from there, we will be adopting our strategy based on the market dynamics. We would always leverage our low-cost manufacturing base and our strength in these countries. So our strategy will be -- it will be in line with what we have historically done in U.K. and in U.S. So we are not debating from that strategy. And we would be, like I said, we will be leveraging our facilities out of India, both our facilities out of India to service these markets. So we do see from a revenue standpoint of view. Obviously, we are starting -- if it, for example, Germany, we are organically starting and our operations would be a full flow in the first quarter of '26, but you will see results probably in the second half of '26 coming from the German market and from the European market.

Understood. And sir, what I understand is that our current capacities can take up to have revenue capacity close to INR 4,000-odd crores. How are we thinking about adding new capacities? There's a land bank that we have with Teva for Teva as well where we can expand. And subsequently, we have with -- in our other Goa plant as well. If you can just touch base upon that in terms of capacity expansion?

So yes, basically, our earlier plant, which is the L-82 plant, we have a plot next door, which we are looking at acquiring. This will give us -- we are strategically planning to expand our present infrastructure and in tablets in our old plant to 2.5x and our soft gels to about 3x from where we have. But this project, we will undertake in 2026 from a CapEx point of view, and we would have to spend a bit of CapEx to look at us to take us beyond INR 4,000 crores, like you rightly said. Based on our capacity that we are sitting on, I think INR 4,000 crores is very much achievable. And beyond INR 4,000 crores, we would need to invest into infrastructure again. And either we acquire a facility, which is easier said than done or we construct one. But the cheapest way would be to basically expand on the land banks like you rightly said. And come up with blocks with shared infrastructure. This obviously helps us in operating leverage also. But more than anything, by just shifting capacity into these blocks, we can literally double if not triple our capacity from where we. So we are hoping somewhere in end of '26 to have a capacity of nearly 1.2 billion to 1.3 billion tablets coming out of our old plant. Right now, it is at -- right now it is between 700 million and 800 million. So we are looking at 1.3 billion of tablets, and then we are looking at probably 3x the capacity of our soft gel being enhanced out there.

Just last question before I go back in the queue. Just wanted to understand from you now the capacity that we have. When we are negotiating or when you are discussing with existing and new customers in the U.S. Does this discussion come up that if they are a bit hesitant to give us a large order, even though they want to shift it to a low-cost manufacturer in India?

No. That question does not come because today, we have ample capacity to see us through for at least a year to 2 years. Our Teva plant, I would say, is basically 30%, if not less utilized. So we have a huge scope of expanding our product portfolio. So I don't think if there is an opportunity, they would consider us as prime manufacturers. They would look at us favorably. The last 6 months has been -- as I've said in my previous earning call, the last 6 months, the uncertainty revolving tariffs were the stumbling block. But now with clarity coming -- emerging out of there, I think sentiments are returning back.

[Operator Instructions] The next question comes from the line of [Deepesh] from [Maanya Finance].

Am I audible?

Yes. You are.

Yes, sir.

Okay. Regarding the tariffs, what you mentioned. Since there is a clarity on the U.S. tariff, has it helped with a reduction of competition and pressure in the U.K. market also?

It will take some time. See, clarity on U.S. tariff has come into play right now. And the sentiments globally will improve in due course of time. It has unnerved the global sentiment by itself. But a lot of companies like us looked at and are still focusing on different geographies for the reasons of uncertainty in the U.S. Even today in the first half of this call, we've been talking about other geographies like Europe and other markets. But that drive from companies -- from Indian companies to explore different geographies will remain there because of the economy and what the U.S. is witnessing today. So there's -- one is obviously tariffs, which we talk about. The second is obviously inflation and more into recession type of things that most of the companies try to avoid. But that said and done, U.S. is still a growth driver. We still have done well in this year, and we'll continue to do well. We still have a very aggressive outlook. I know last 6 months has been with a pinch of uncertainty. But now with clarity emerging, I think we'll be back on track to hit our objectives. We are still targeting $300 million in a few years.

$300 million order book, as in...

Yes, order book. Yes.

Order book. Okay. And if you can give...

In couple of years -- in couple of years, not right now, not this year.

As in by FY '28?

Yes, we are hopeful, yes.

Yes. Can you give a guidance for -- I mean you mentioned that you're planning to get to around INR 3,000 crores of revenues by next year. But can you give a longer-term guidance of where the -- where -- what is your longer-term targets?

See, obviously, if you ask -- I mean, we have a business model that will take us to INR 5,000 crores, but it's not going to happen in the next 2 to 3 years. It will need a longer duration. Maybe 5 to 7 years looking at that horizon.

Okay. So by FY '30, we should expect around INR 5,000 crores of revenues?

Yes, that's safe to say. Yes.

Okay. Now my question was around for the Rest of the World business, especially in the MENA country. Being -- having a lower base also, but we haven't really grown over there. Is there a particular reason that, I mean, our focus is not right now on these countries? And more on U.K. and more on U.S., I mean, it's a very small base.

Yes. It is a small base. I'm looking at the opportunities and drive right from inception, it's been more into the Western markets. So obviously, we do see an easier penetration and we see strengths. Our infrastructure is more positioned to service these market. So resources, infrastructure, product pipelines are more focused into these huge markets that we are catering to. If you ask me why, you're right, MENA is -- I mean, has been a small base, it will keep growing for us. So we will continue to have our nominal growth. It will still be a relatively small percentage looking at the other market potentials and where we are in those markets and what we can do to take a leap in those markets. So I mean, yes, I do see other markets growing at a faster pace, including U.S. Europe being a fantastic market for us to look at growth and -- let's not forget, U.K. also, we have our strategy to double our revenue from where we are, but it's easier said than done, a lot of approvals are needed. And business has to take shape to take us to another level, and that's what we're working hard for.

Because you mentioned in your previous answer that you're looking at other markets also apart from U.S. and U.K. So will the MENA countries will be your focus or will Australia or -- and New Zealand will be more focal point?

See Australia and New Zealand are all smaller markets. MENA will be a focus to grow if you are looking at that region from that angle. But if you look at the whole geography, I think our growth will come from our core markets that we are strong in. And besides the core markets, we are looking at the growth to come from Europe, which is still a virgin territory for us. So we do see these being -- we are launching also Canada by 2026. So we do -- it's a smaller market, but I think it will be a -- we will be targeting such markets also smaller markets. But I do see Europe being -- besides the countries that we are strong in today. I do see Europe taking shape in the next 2 to 3 years as a very prominent contributor to the revenue.

Specifically Germany?

Germany and the rest of Europe. Obviously, Germany is the largest market in Europe. So yes, Germany followed by 4 countries that we are focusing on.

[Operator Instructions]. The next question comes from the line of Prolin Nandu from Edelweiss Public Alternative.

Mark, I wanted to elaborate a little bit on this tariff uncertainty that you highlighted, right? While we understand that maybe customers as well as companies like us are slightly not sure as to how should we go about. But when you talk to customers, what are they saying in terms of -- if in case the worst case scenario were to play out, how do they engage with you? Or are there any alternative modes of mechanism which you guys are working on?

When you say a worst case scenario, this is regarding what context?

No, you're talking about that still the tariff uncertainty is still there in the market, right, in a way. So I just wanted to understand, just add a little bit more granularity on the same, right, in a way where we have to cater to an end market, right, in a way. So where is that uncertainty, which aspect of the business is that uncertainty there right now?

So I must emphasize that, that clarity has emerged. The uncertainty has diluted to a great level because the current administration has made it clear that pharma tariffs are not going to come -- are not -- tariffs are not going to be put on pharma on pharmaceutical products. And even whatever investigation they are doing on that sector, they are not going to pursue it or with regards to any pharmaceutical tariffs. So I think the generic outline and the tariffs on the generic part of it on the pharmaceutical part of it, I think that clarity has now come in the last 1 month, 1.5 months. So I think people are now just beginning to realize that the risk is not there like what they assumed it was. See, I mean, in the last 3 months, things took a back turn where India was had with tariffs of 50% and so things were very -- I mean, I can't stress more. We're very uncertain in the last 6 months because while tariffs started in April, then things took from back to worse turn where India was concerned. Now things are shaping better for India because we have talks of it being reduced and probably a trade deal happening. But nevertheless, while the rest of the industries would probably have a better -- a far more impact on the tariffs. The pharmaceutical, we have relatively escaped the brunt of the tariffs. And uncertainty whether the pharma would come into the tariffs because there was a lot of talk 2 months back. I think that has been put to rest and clarity has emerged that the pharma will not come into tariffs. So if you had asked me 1.5 months back, 2 months back, my answer would have been -- I would probably answering you differently. But today, I have the confidence to say that, that has been put to rest. So when clients do approach us, some of them are very well educated with what is going on. Some are not updated with that fact. We do emphasize on the fact, and we do -- we are seeing a better traction than what we were seeing maybe a month back. That said, and then there are a few clients, which our -- Print says that whether the administration will change their mind tomorrow, which is always the case. It's been happening all over -- all the time. But I don't see tariffs coming into play now, not -- I think the worst is behind us where that is concerned.

And second question would be just on your working capital, right? So while we had some inventory issues and U.K. related issues in Q1. Even in Q2, our working capital days are close to 150, which is higher than our average of say, 125 to 130 days. So do we expect that -- I mean, nothing has changed fundamentally in the business, which will entail a higher working capital, right? We should get back to 125, 130 days...

Yes. We should, we should. But it will take some -- see, we consciously built up because of this uncertainty of tariffs, right? So we consciously took a call of being very heavy on our inventory, on our stockholdings so that in case things go south. So we, at least have enough of inventory to sustain till we take proactive actions to meet the new world or the new requirement, you can say it. So we did increase a lot of our inventories, and that's where the working capital did increase to a great extent. It will take time, it may take a few months to come down to that level because we were sitting on nearly 5 to 6 months of stock. So I think we should see better days, but it's not going to happen like in a month's time or 2 months.

But let's say, for example, Q1 FY '27 onwards, the normal run rate should resume, right? Is that a fair assumption?

Yes, I think so, definitely. Now it has started coming down already. So if you see the levels from Q1 to Q2, already the trend has started showing. So I think in next 2 to 3 quarters, it should come back to 120, 130 days.

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

Mark, on the U.K. business, now I think we've seen Q1 in the recovery in Q2 gone by, what are your thoughts maybe speaking on what happened in Q1? And do you clearly think now the sort of one-off which happened and then we could be -- and Q2 is a more normalized base for us to think about U.K. as we go forward?