Natural Capsules Limited (524654) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Q2 and H1 FY '25 Earnings Conference Call of Natural Capsules Limited. [Operator Instructions] please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Mehra from TIL Advisors. Please go ahead.

Thank you, Ryan. Welcome, everyone and good evening. Thanks a lot for joining us on this Q2 and H1 FY '25 earnings conference call of Natural Capsules Limited. The results and investor presentation have been emailed to you and are also available on the stock exchange. In case anyone does not have a copy of the same, please do write to us, and we will be happy to send it over to you. To take us through today's results and the results for the quarter and the financial year and answer your questions we have with us today Mr. Sunil Mundra, Managing Director; Mr. Raj Kishore Prasad, Chief Financial Officer. We'll be starting with a brief overview of the quarter from Mr. Mundra, which will be followed by the Q&A session. I would like to remind you all that everything said in this call that reflects any outlook for the future, which can be construed as a forward looking statement, must be viewed in conjunction with the uncertainties and risks that the company faces. These uncertainties and risks, have been included, but are not limited to what has been mentioned in our annual report. With that said, I would like to hand over the call to Mr. Mundra. Over to you, sir.

Good afternoon, everyone. Thank you for joining us today for Natural Capsules Limited's Earnings call for the second quarter of FY '25. I am Sunil Mundra, Managing Director of Natural Capsules and I'm delighted to present our financial results and insight into our performance period this quarter. As we previously communicated, we have been focusing on enhancing our performance in the Capsule segment. And I am pleased to report that our efforts are indeed yielding positive results, as evidenced by the improvement in our gross margins. For Q2 FY '25, we have achieved revenue from operation of INR 41.22 crores, reflecting a year-on-year increase of 5.21%. Our gross margins have expanded due to a favorable product mix and increased demand for our vegetarian capsules. However, it is important to note that while our gross margins will improve, it has not yet translated into profitability due to a rise in other expenses. We are currently facing increased freight costs on our export shipments and higher power charges at our Pondicherry plant that have impacted our bottom line. Specifically, our profit after tax for this quarter stands at a loss of INR 0.6 crores, which is mainly due to additional provision of deferred tax, which reflects a decline compared to the previous year. We expect the additional freight charges to normalize in the current quarter and going forward and we hope to further streamline our operations and enhance efficiencies moving forward. Despite these challenges, our EBITDA for was INR 4.5 crores with an EBITDA margin of 10.93%. We remain optimistic about stabilizing profitability in the coming quarters as we implement measures to mitigate these expenses. Looking ahead, we are excited about the new HPMC production line that we had ordered earlier, which is expected to be operational by February next year. This new capacity will enable us to meet the growing demand for HPMC capsule particularly as we see lead times extending up to 90 days among leading players in the industry. Additionally, we anticipate price increase of about 2% to 3% in the current quarter, which should further support our bottom line. In our API segment, we are nearing our final approval from the Pollution Control Board for our production facility in Bangalore. Although there have been delays in this process, we expect to secure the final clearances within this quarter. We have submitted samples to 23 pharmaceutic companies and supply trial batches to several firms, laying the groundwork for larger orders once operations commence. In summary, while we are currently facing some short-term challenges with expenses impacting our profitability, the underlying strength of our capsules business is clear to improve gross margins and strategic investments aimed at future growth. We remain committed to stabilizing profitability while capitalizing on the strong demand within the industry. Thank you for your attention today. I look forward to addressing your questions during the Q&A session following this presentation. Thank you.

[Operator Instructions] The first question comes from the line of Yug Jhaveri from Molecule Ventures.

Am I audible?

Yes.

So my first question is on the capsule segment. So it's been a few quarters that we have installed our first HPMC line. However, we haven't seen any significant contribution or growth in the top line. So can you please let us know how the HPMC lines are performing? And what sort of additional growth can we anticipate when the additional 2 lines will be installed? Also feel like we know the planned timeline for the installation of additional 2 lines.

Yes. So the -- to answer your first question, that no significant growth was seen after addition of the first line. Yes, you are right, to an extent that initial first quarter, it come some time for getting the samples approved from various customers. Our major customers are in foreign countries in, say, in Brazil, in the Canada, U.S. So we have sent samples and those samples are cleared. And in Q2, we saw some movement, but now in Q3, we have seen some improvement in the volume business. Though the production has stabilized, the dispatchers were delayed because of these approval process. Now once these -- each of the individual HPMC line is carrying certain particular specific size. So currently, we have established our size 0 line. Our next size, double zero line is under the process of getting implemented. We expect it to come online by February next year. We are trying to get an optimum design of the capsule which runs on all types of machines in international market. So we expect that once all these 3 lines which we have now planned are full on board. And on an annualized basis, they should contribute about roughly around INR 35 crores to INR 40 crores of topline.

Okay. So my second question is on the recent fundraise. So can you help us understand the need of the recent fundraise, the planned utilization of those funds and can we use those funds to fast track the ordering of the new HPMC lines to accelerate the growth or we have been very blind. So initial plan timeline for the HPMC CapEx right. That's why.

The recent fundraise was as informed to the stock exchange was mainly for 2 purposes. One was to contribute to the subsidiary company because of the increase in the project outlay there. And delay in the implementation, there was some cost of cost implications, which the company has taken care of. Second is, of course, to beef up our working capital requirement and that could help us to meet the higher topline revenue because the working capital requirement is also there. Your another question was whether this funding would help us to expedite the implementation of HPMC line? So...

Yes.

To the extent, yes. But the funding for HPMC line was never a concern area. It was basically, from the point of view of getting the clarity of the customer approval for our capsules from the machine trial point of view. And also how the design optimization for the next 2 machines that what capsules we manufacture should be suitable for all types of machines across all the continents. So that -- those are the reasons that we're going little slowly on the HPMC line or else there is no constraint about the funds of that account.

Okay. In the last conference call, you had mentioned about INR 180 crores to INR 190 crores of top line, in the capsule business this fiscal year. So just because of the increase in realization and then incremental revenue is coming from HPMC line, do you think that we are on the track to meet those guidance this year?

Of course, there is an incremental revenue coming from increase in our selling price to the extent of about 2% to 3%. So that would add up. The HPMC line implementation of line #2 and #3 has been delayed because of some delay in getting the customer approval. So we still anticipate that we should touch about INR 175 crores to INR 180 crores if not INR 180 crores to INR 190 crores, INR 175 crores to INR 180 crore is receivable.

This year. Okay.

Yes.

For the capsule business, so what would be your guidance for FY '26 both in terms of top line as well as the margin profile? And how do you plan to achieve it?

We already mentioned that top line revenue could be in the range of the INR 175 crore to INR 180 crore.

So for this fiscal year, right? I'm asking about FY '26.

FY '26, yes, probably, we expect it to be in the range of INR 210 plus to INR 220 crores -- INR 210 crores to INR 220 cores with the full operation of HPMC 3 lines and improvement in the margins. We expect it to go to about INR 210 crores to INR 220 crore. Now how do we hope to get there? One, of course, is the in this year, the contribution of HPMC could be maybe not more INR 10 crores to INR 15 crores, but we expect another INR 20 crore or INR 30 crores coming from the HPMC line in full year of operation next financial year. The bottom line projection for the current year could be in the range of 14% to 15%. This is slightly on a higher side as compared to what we have achieved in the first half. We are hopeful of this because on the basis of improvement in our realization rates as well as some better contribution from HPMC. And HPMC capsules definitely give better EBITDA margins. So in FY '26, we hope to get this to a higher level of back to around 17% to 18% by which time our HPMC contribution in the overall revenue would be much higher than compared to the current year.

Okay. So for FY '26, you are guiding about INR 210 crores to INR 220 crores of revenue. HPMC would contribute nearly INR 30 crores to INR 40-odd crores with EBITDA margin between to 17% to 18%, right?

Right.

Okay. Now the next 2 questions are on the API side of the business. So it is extremely disheartening to see that we have not yet started commercial production in our plant. For the last 3 quarters, we have just been saying that for sure the plant will start in this quarter. But somehow, it just didn't happen. So can you please explain the length, which has caused the delays from the start where we are today and in the most conservative estimate, by when will this plant actually start.

Actually, I agree with you that it is a bit disheartening to note that there was a delay, which was some of the reasons were beyond our control, like the statutory approval from the Pollution Control Board. In fact, we got approval for our small volume lab sometime in month of March. But unfortunately, the larger facility was still not approved because of frequent changes in the Pollution Control Board level, the top management, the chairman got removed by the government, went to court. He got reinstated. Now finally he's being retired. This happened twice in last 9 to 10 months. And this gentlemen was appointed by the previous government. And due to this political tussle, he kept on all the projects on hold more than 1,600 files are kept on hold by this gentleman who was retired last week. Now we are hoping that the new -- in fact, in the last 6 months, we could get 2 steps Out of the 3 steps that were required to be done by us to achieve this final approval for the total plant concerned for the operation. One was the changes in the dimension, size, and the scope of the project. Second one was, of course, our ZLD inspection, which were done in last 3 months. And now the file is with the Pollution Control Board and we expect the committee to take it up very soon. And next few weeks, we are expecting it to happen. And meanwhile, our plant has been made ready and we have been operating the plant with the sterility batches in fermentation and trial batches or dummy batches on our synthesis plant just to make sure that the plant is ready. The moment we get the license we are able to start. So in the anticipation that our pollution license is expected in the next few weeks. We have already started the procurement of our all-main raw material, key raw material, and we hope that it would probably in sometime in December we should be able to start all the -- both the segments in large-scale facility.

So you are saying that by December or by max January, you will start commercial production after receiving approvals?

Yes, yes.

Okay. Okay. If the plant start contributing to the revenue from next year or from this quarter. So what is the sort of incremental top line that can be expected for last quarter also and from full next year, next fiscal year.

For the Q4 of the current year, probably we are -- we're going to do not more than INR 10 cores to INR 15 crores, INR 20 crores. Maybe because right now, we are targeting only the customers in domestic market with the generic product line. So there the -- because right now the plant is approved under Schedule M GMP by the government of India. Whereas now the WHO GMP is the next stage that we have to achieve for getting entry into some of the bigger companies, which is already in the process is on that we have put our 3 products on stability. And once the stability batches achieve 6 months of stability, we need to call the drug controller team for inspection, and we get the WHO GMP. So till that stage is achieved, we will not be able to get entry into some of the larger companies. But keeping in mind that we are catering to the generic companies, we should be able to achieve about INR 10 crore to INR 15 crores of topline revenue in Q4.

And for FY '26.

FY'26 we are keeping, say, I have a conservative based about INR 80 crores to INR 90 crores.

INR 80 crores to INR 90 crores of top line?

Yes. Yes. We don't expect some export business also to materialize. We are in advanced discussion with some of the regulated market player, but they cannot take directly, so they are buying it through some other country operation where they have their own factory. So, those discussions are also on and there are online evaluation of the facility is going on. So we are hoping that, that will also materialize.

So in FY'26, we are guiding INR 80 crores, INR 90 crores. So this will be from generic companies only or you will try to get approval from those companies also.

So at the moment what we have forecasted is that even if we get the schedule M GMP license by middle of next year say, July or so, it might still take another 3 months for us to get approval from some of these Schedule M requirement companies like the bigger Indian corporates and all. So we have anticipated 50% of the revenue coming from exports to some countries where we are hopeful that after this current evaluation, the audit process, online audit process, which is going on, that will materialize and balance will come from the domestic market.

Okay. And so this year, almost this year, we will spend our time to get approvals from government bodies. So are they putting in a case forward to extend our PLI benefit by 1 additional year. And this year has been almost delayed by the government's end.

We have taken up this issue with the Department of Pharmaceuticals. And in fact, with the Commerce Minister's Open Session, which was there in the last week of September in Dehli. I had attended that and there we have taken up this issue. But government is non-committal at this point of time, but we can expect a positive reply in coming year or so.

Okay. Last quarter, you spoke about increasing size of APIs. But I think in this quarter again the prices have started inching down. So what is the actual situation? Can you please help us to understand that?

Yes. In fact, the API prices across the board have been facing reduction. And this is mainly due to dumping or probably selling at cheaper rates from China. So this is bothering across the API industry and pharma industry at large. The matter is before government. Government is seriously considering putting antidumping duty in few cases wherever possible and also imposing minimum import price in several cases where the data is made available to them. So in our case also we have represented the government along with our cost statement. Government has said that we must start production first and again approach them. They will help us in imposing the minimum import price. So that could help us to get our reasonable recovery of our cost and reasonable margin.

And the realizations.

Yes.

Okay. And last question is finally on the consolidated level so where do you see Natural Capsules as a company 5 years down the line both in terms of capsule top line and margins as well as API top line and margins down the line 5 years.

5 years? Yes. Our vision on capsules and API is clear. Capsules at this moment of time we are on a consolidation mode, whatever the capacities that we are putting up for HPMC. We want to consolidate that and start. Our vision is to increase our exports and reach out to better quality of customers so that our sales to the generic place goes down and margin improvement. Our 5 year down the line without any addition of capacity with the current capacity whatever as in plan, we see at least the top line revenue going to INR 250 crore to INR 270 crore with EBITDA margin of upwards of 20%, around 20%. Whereas in API business, definitely, there will be significant changes. Our aim is to get the facility approved by U.S. FDA, EU GMP and maybe by fourth year by the PMDA Japan. Our aim is to get 75% of the revenue coming out of these regulated markets, with EBITDA margins of not less than 25% on a weighted average basis. And I expect topline revenue in the range of INR 250 crores to INR 270 crores in the year...

From API, next 5 years?

Yes.

The question comes from the line of Ankit Gupta from Bamboo Capital.

So my question was on the API division. So like you have already started supplying samples to the big pharma companies in the domestic market. So any indications from them? How is the product because in this the quality and all becomes very important since it's a fermentation product. So if you can talk about that, how has been the -- what has been their response towards our product.

The response has been good, and we have so far submitted samples to about 23 customers out of which 9 to 10 companies, we have made commercial sales also. So response has been good so far. So generally companies do put these samples on stability studies within their company. They convert into the finished product and then into stability for seeing those products. So the results will be generally known by accelerated stability in 3 months, 6 months. So a few companies have achieved that and they have started buying from us and few are in the process of getting that accelerated stability study reports. Once they get that, probably we'll be able to start supplying.

Sure, sure. And sir, like once we start commercial operations, what we, from a limited understanding of the fermentation business, from lab scale to commercial stage is something which is very difficult to achieve in fermentation product. So like how confident are we of achieving that?

So in our case, we are having a team of scientists who have worked on these products at the similar size at which we propose to do. Right now, though we did all our R&D batches at a very small level of a 300 liter pilot fermenter, but we are scaling up to 60 kl fermenter where our batch size would be, our working volume would be about 42 kl, 70% of the vessel volume. So we are confident that we will be able to scale it quickly because the persons who are in charge and running this fermentation facility are guys who have worked for about 7 to 8 years on this 60 kl fermenter.

Sir, once this -- let's assume by end of Q3, we get approval from the Pollution Control Board and like we start commercial operations from Q4. So what will be our depreciation and interest cost per quarter for the new for the API plant.

I think We are anticipating total annual business depreciation of about INR 7.5 crores. So on a quarterly basis, it will be about INR 1.85 crores.

And interest cost.

Interest cost is about roughly INR 80 lakhs per quarter.

So not much like interest cost is not that increased compared to what we have currently.

Yes. So we have not considered working capital cost on this. So this is INR 80 lakhs is towards the loans...

CapEx only.

Yes, the term loans and all.

Yes. Okay. Okay. And sir, on plant has been delayed quite a bit. So we have seen CWIP increasing even for the past -- for the first half of this year as well. So how much has been the preoperative expenses which have been capitalized in, let's say, in our CWIP till date?

So right now, since our only small volume kilolab was ready, and we have calculated that the capacity in proportion was not more than 10% of the overall capacity. We have capitalized only preoperative expense up to -- so about INR 25 lakhs has been capitalized. And I think the rest of the preoperative expenses are still under the work CWIP. So once the final operation starts, we'll be capitalizing the total preoperative expenses.

Okay. Any amount that you can give if you have that handy?

Yes. Originally preoperative expense was anticipated about INR 8 crores to INR 9 crores. This is going to be somewhere around INR 18 crores INR 20 crores.

Okay. Okay. And then like let's assume if we start our operations from Q4. When do we expect to break even on EBITDA level and how much will be our fixed cost per quarter for plant operations?

As I mentioned it is depending on the kind of margins that we are able to derive next year. We are -- next year, first year of full operation, little bit of uncertainty in terms of kind customers that we will cater to in case we are able to get some of the good export orders at which we hope to get. In that case, our blended margin could be about 10% EBITDA. If we get that, then we'll be able to break even in the next year itself.

Okay. Okay. And I think once you start operation at least few quarters it will take to stabilize also the plant.

Yes. I think about it, one quarter should be enough to stabilize the operation.

Sure. Sure. Okay. And let's say, once -- like in FY '27 onwards is what we can see a significant improvement in our profitability in our API plant.

That's exactly right. FY '27 is the year in which we anticipate approvals from EU GMP and maybe going forward U.S. FDA and we see a much better quality of customer and our exports going up significantly. And that's where we see the significant improvement in EBITDA.

The next question comes from the line of Madhur Rathi from Counter Cyclical Investments.

Sir, I'm trying to understand whether in the fourth quarter, we can expect losses from the API plant.

Yes. I think API plant's first quarter will be the fourth quarter of the current financial year. Obviously, there will be losses and on consol basis, losses will be there yes, yes, you are right.

Sir, so and in the answer to the previous question about capitalizing the preoperative expenses. Sir, did I hear you correctly that INR 18 crores to INR 20 crores of preoperative expenses will be capitalized under fixed assets?

Yes. Yes.

So ideally, sir, is it not better to book them to the P&L and take advantage of the losses to set off the taxes?

See, these are preoperative expenses before starting production. So obviously, we would like to capitalize them. Those which are directly identifiable with the current running production capacity, we are directly debiting to P&L.

And sir, since our new API plant is quite small, I understand from the investor presentation. So how does our cost of production compared with the landed cost of imports? And sir, because I'm assuming the Chinese and other locations, the plants might be really big. So they must be enjoying economies of scale. So in that, so what's your thought about our cost of production versus the competition?

So our production size of the fermenter at 60 kl is more or less comparable with Chinese major players of steroid. Even though lately there are few people who have entered at a little higher capacity of the fermenter 80 kl to 100 kl. But cost of production is more or less that what we are currently seeing, the information that we have, that we are at par with the Chinese yield levels. But the challenge that we currently face is the significant amount of dumping that is happening from China, not only in our steroidal API segment, but all segments. That is because I think the government there is probably offering them some sort of incentive to export or there is overcapacity there. Or the players they're also facing some significant losses. So I would say that if the Chinese prices come back to normal, or our government imposes from MIP minimum import price problem, which is basically based on a fair costing. We should be at par with Chinese and we will not be at any disadvantage in terms of cost competition. Having said that, probably PLI benefit will help us to meet that competition much better.

Sir, as of the current landed price of Chinese imports, are we -- I mean how does our the cost of production compared with the current import parity price.

So at this moment, there are I think the difference is there to the extent of about 30%, 35% the cost of production that we have and what is the current landed cost from China, there is a gap of about 30% to 35%. And this is what we have brought to the notice of the government. And this drop is also noticed in last 6 quarters. We have given the import data of last 6 years to government. And we have proven that the prices even pre-COVID at least 3 years, pre-COVID, during COVID have all around at a particular level, with plus minus band of 15%, 20%. But there is a -- these are the historically lowest prices at the current moment and the prices are much lower as compared to the last 6 years' average trend. So the government is also aware of the matter and hopefully, they'll take some action.

Sir, do we have some kind of time line before which we can see some kind of antidumping or tariffs on these Chinese imports.

So in this regard, we had several rounds of discussion with the Department of Pharmaceutical, Ministry of Commerce. The government has given assurance that they will take it up. But only thing is, in my last meeting with the Deputy Secretary of the Department of Pharmaceuticals, they made it that once your start production of all the 3 PLI products, and they will come and inspect and probably they will announce -- or they will consider our case.

So sir, in that case, if we start next year, I would expect because in Q4 I would expect it would be the operational aspect of it. But full-fledged production if we start in FY '25, FY '26, so I would expect another year. So sir, can you expect that there would be losses if there is no anti-dumping duty by the government, which takes around to 9 months to get into the final order. Till that time, there could be some kind of losses in the API segment.

So we don't foresee losses because we are also trying to push ourselves on the exports front. With the technical grade API, we are able to find nearly 50% market for exposures, where the margins are better, and they will see that we will be -- whatever the kind of negative margin that we have in the domestic sales, probably will be compensated.

Sir, if API prices are down everywhere. So is that not the case with the technical API exports that we are speaking about.

Yes. This is a technical grade API being exported to some regulated market player. So there, the price levels are altogether different. So their price levels are not impacted this much.

The next question comes from the line of Chirag Fialoke from Ratnatraya Capital.

Am I audible?

Yes, sir.

Could you share the volume for this quarter and last quarter on the capsule side?

Volume for the current quarter on the terms of sales are slightly -- one minute I'll just -- yes the sales what we did in Q2 of FY '25 as well as compared to the not significant change. We did about 4.04 billion in Q2 of FY '23, '24. And we -- in the current quarter -- the last quarter, we did about 4.17 billion for the Q2 of FY '25. More or less.

Got it and Q1.

Q1 we did almost against 4.1 billion. Our quantities have been more or less stagnant and they are almost as we are running our plants at the 96%, 97% of the capacity. The volume quantities are more or less being achieved in -- I mean the same level.

Understood. So that's clear. In the current P&L, are there any costs that are sitting for the API plant as well.

Yes. We -- part of it because as we have said, already we announced small volume production in small volume kilolab before March this year. So a small part of our API P&L is being debited -- charged to P&L. The expenses revenue are being debited to revenue. The rest are getting capitalized. That's roughly around 10% or so.

10% of cost? You are saying of the [INR 16.7 crores, INR 17 crores], INR 1.5 crores to do for the API plant, sorry.

Yes. In the last quarter, we have how much is the charge for NBPL here -- last quarter is how much in terms of the cost? NBPL? INR 52 lakhs. INR 52 lakh is the expenses charged to the consolidated P&L.

INR 52 lakhs. So this quarter's EBITDA would have been higher by INR 52 lakhs had it not been for the API.

So standalone basis our EBITDA will be in the range of about 12% as compared to 10.95% what is being given...

The standalone difference is the entirety of that difference, is that correct?

Yes, that's the difference yes.

So the standalone will be a very accurate representation of just the...

Capsule business.

Okay. Perfect. On the gross margin side, obviously, if I look at a more long term average, our gross margins are more in the 54%, 55% range. I know you're taking about a potential price increase in November, December of 2%. I guess that will get you to the 54%, 55% gross margin range for the capsule only business, is that how you see it?

Yes. See, actually, the gross margin has dropped last year to about 48%, 49%. Fortunately, in the last 2 or 3 quarters, we are seeing a very small but baby steps kind of a growth, 4%, 3% gradually, we have seen the last 3 quarters. So we are back to around say 51% kind of very gross margin at the moment. But we hope to achieve 53%, 54%, maybe in next 3 quarters or so when our HPMC line is back because that has got a little better gross margin.

Understood. And my next question was on exports. One, could you share what percentage of revenue was from exports in the first half? And second, obviously, a lot of this pricing -- we've talked about in the previous calls, you can offset a lot of the pricing pressure by having larger, more regulated clients. Where are we in that process? What portion of sales do you think now come from clients where market movement of capsule prices will not impact us.

To answer your first question, what percentage of our sales are from exports, I would say roughly 1/3. So we out of INR 40 crores of top line revenue INR 40 crores, INR 41 crores we have done INR 13.5 crores of exports. Now you're talking about your second question, the sales to those kind of clients where the prices will not get impacted by the market fluctuations, yes. Our efforts are on to increase the share of those kind of clients and at this moment we sell roughly apart from the export, out of the domestic business, roughly around 20%, 25% business comes from such clients. Rest of the clients are either Indian mid-corporates or MSME industry. So therefore, our aim is to increase the sales to these kind of clients where our, all the kind of clients who would use them for the ultimate finished product, which goes to their regulatory market supply. So there are those kind of challenges are not seen. So probably in next 2 years, we will see that this percentage of sales to such clients will be going up.

Got it. And is it fair to assume that almost all exports are to such clients. So almost 50% of sales are now to more sort of clients the requirement is such that the pricing is more fixed than anything else?

No, even export price also are sensitive to market conditions. There are different areas we export to U.S. now we export to Canada, we are exporting to -- in Southern America to Brazil, various countries in Far East and Russia also we have started again. So the client depends on some of the African countries like Kenya, Uganda. There, some of them are price-sensitive, but some of those in Latin America, in Central America they are not that sensitive. So we can't say that 100% of the exports are non-sensitive to price variation, but those 2 African markets. Yes, they are little bit price-sensitive.

Understood. Just last question on the CapEx side. The first one, receivable days have sort of seen a significant uptick and have finally has further increased this quarter to more like 140-odd days. Could you just talk about that? And what is the CapEx estimate for the year for the consol company?

Actually, this is an area of concern for us as well, because actually what is happening in pharma industry, there is a government deadline for 31 December to upgrade their plants. So many of our clients are holding payments, diverting all their funds towards facility improvement. There are many such cases. Secondly, another reason I told is that the preference to MSME industries which the government has pushed all the industry players to give so that has caused the stretch in the payment to non-MSME company. So in this quarter also we have seen there is an increase in the number of days effectively. But if you gave the gross level, gross sales which would mean that from the revenue number you have to add GST part of it. Probably this would go down to about around 112 days or so which is 120 days, sir. So still, we would consider that is high because as compared to FY '23 when we touched this is about 70, 75 days. So our aim will be to bring it down. We are working on it, we hope that next year it will improve.

Understood. One follow-up here and then just your CapEx estimate for the year. The last couple of years there had been a few provision for credit losses -- is that -- what is the quantum of that in H1. Is that also a concern now with days going up? Is there also possibility of some of them turning bad and your CapEx estimate for the year.

I think on the credit loss side, we are fully covered. We have provided for that and we have a way certain policy in which we are covering all those losses, and we don't foresee any major amount P&L getting impacted out there. And in this first half also, I think we have provided additional probably in about 35 lakhs odd as additional provision. On the CapEx side, your question was on the CapEx, right?

Yes, for the year for the consol, what will be the CapEx?

CapEx for the consol of course, we have already done the CapEx in our API plant on the subsidiary side. On the capsule, we have already incurred costs for the project which is ongoing. The amount is sitting in working progress accounts. So probably we'll end up the year with where we will be capitalizing about something around INR 8 crores to INR 10 crores of assets in the parent company. And in subsidiary company, probably will be once the total production starts recapitalizing we will be capitalizing the whole CWIPs.

Under H2 there is no real CapEx outflow. And for the year probably, the estimate is closer to INR 21 crores. That's my estimate. Is that correct?

In H2 in capsule division, we have done very minor this thing. But we expect this, HPMC line to come. So there will be about INR 7 crores to INR 8 crores of additional investment related to that line.

Okay. So on a cash flow basis, probably INR 35-odd crores on CapEx, is that right? INR 35 crores.

That's right. You are right.

The next question comes from the line of A.S. Basra an investor.

My question is related to the API segment. So we have 4 patents already granted and some of them are under approval and under filing. I just wanted to understand, so these patents are into which geography? Are these patents specific to India or what geography? That's what I want...

These are purely Indian patents as of now.

So these are Indian patents, all right. And do these patents are on the chemistry side, I mean, fermentation.

So -- we are so far filed 4 and fifth one is in pipeline. So we have 2 on fermentation and 3 on chemistry.

2 on fermentation and 3 on chemistry. All right. I just wanted to understand. So are Chinese counterparts, so more or less, are they also using the fermentation for specifically the kind of APIs we are going to produce?

Absolutely, yes. They also use the same fermentation. Most of the route of synthesis is common because we have also been doing R&D after 5, 6 years. We also realized that and fermentation is the basis. I mean, we have people who worked with Chinese industries and have good connects there. So we know what is the route of synthesis in there. So it is fermentation and synthesis combined, it is a sandwich process.

Okay. I just wanted to understand. So this, for example, this fermentation route is, as per my knowledge, it's difficult to synthesize and now we are doing that. So does this give us some pricing power to the customers that they'll prefer the product, which has been produced through fermentation route.

So worldwide, the idea is that the steroidal APIs are now concentrated only in China. No other country manufactures it. Though the original innovator of this product was Pfizer in U.S. the Pfizer facility in Europe as well, they were doing that. They stopped long years back. They transferred technology to China. Chinese companies have been doing it. India also never did it. It is the first time that we are trying to do it here. Now for last 15 years since 2010 onwards, most of the steroidal API manufacturing has shifted to fermentation. Prior to 2010, a large amount of it was being done through chemical synthesis route, a plant extraction route. But since 2010, maybe one or two companies in China, which moved around 2014. Otherwise rest of the industry moved in 2010 towards fermentation.

All right. Very beautifully explained. I just wanted to know one more information. So as we can see that the people in R&D for our company has increased to 52. I just wanted to know the approximate amount per quarter we are spending on R&D.

I think in terms of subsidiary company alone, these numbers are subsidiary company where the API is getting manufactured with the amount of revenue expenses that we spend on R&D per quarter could be about INR 120 lakhs.

All right. One more question. On the capsule side, sir, I just wanted to know, maybe just a gross picture of this scenario. What are the actual margin differences what we earn and what our largest competitor in India, the largest manufacturer in India earns. So what's the gross margin difference approximately between us and them?

Yes. So the largest competitor for us is a company called ACG in Mumbai and your -- to answer your question, I would say that the cost of the production is more or less same. But it is the difference in the revenue, the sales realization per unit of production that brings out the difference. So the gross margin, what we claim around 40%, 50%, 52% at this moment, probably in case of ACG could be another from 8% to 10%, maybe 60% because a significant part of their business comes from clients which are supplying to regulated markets, and they have almost about 40% of their revenue coming from exports.

All right. All right. And in the future, when all these 3 HPMC lines are commercialized. So do we envisage to gradually shift all our lines to HPMC and get done with the previously manufactured capsules, the old ones, which doesn't fetch us much margin.

Yes, our focus is on that because gelatin capsules have been the major manufacturing volume at the moment. HPMC is a product which is getting more attention in almost all the other regulated markets, especially in North America and Europe. So we feel that HPMC will have much better, significant advantage over gelatin in terms of -- in future. So our aim also would be to replace the gelatin machines with HPMC machines over a period of time. Maybe annually, we take a target and replace 2 to 3 machines. That kind of plan we may take up in future.

All right. All right. Sir, one last question on the API front. In your previous one of the interviews a longtime back, probably 1.5 years back. So we -- you discussed regarding that initially, we'll be producing with the one API, which is that's I think maybe hydrocortisone, you, I guess, you told that...

That's right. Yes. Hydrocortisone. Yes.

We will be producing that and subsequently, you'll be coming on to prednisolone beta and delta. I just wanted to know -- and in that interview, you mentioned that initially, we will not be self-sufficient in all the raw materials. One of the key materials we'll be importing from China. So since we are behind the schedule by probably 7-odd, 8-odd months, and we have gotten the time with others. Have we worked on that chemistry so that we can backward integrate and start. Have you utilized that 7, 8 months? Or we are -- the whole process is behind schedule now.

No. No. So I'm happy to inform that we have utilized these last 7, 8 months to overcome the challenges, especially in this hydrocortisone, prednisolone line. now we are confident that as soon as we start our fermentation plant, probably in about 6 to 8 weeks or maybe 10 weeks, we should be able to produce our completely internally produced prednisolone. So that will be our first aim. There are 2 more products dexamethasone and betamethasone. There we are working on some of the steps where we probably are confident that once we are done with prednisolone manufacturing, dexa and beta also will be coming online. At this moment we need to meet the requirement of the customers and all that. We had imported some intermediates from China, which is say maybe N minus 4, N minus 5 kind of thing for dexamethasone, betamethasone and those products we were -- we manufactured and supply these samples and put into our stability which was for getting the licenses and regulatory approvals. So I think going forward, our aim would be to completely integrate it domestically.

All right. And since you are -- have been in the industry for like more than 20 years and so. So I just wanted to know with your experience what is the current scenario. For example, as per me since last 5, 6 years, U.S. FDA was very critical in their inspections and giving a lot of objections coming out to inspect the specific plants in India. And has the scenario changed with the view as to -- they want to have one more option rather than China. Basically, my question is on China plus one. On ground, is it happening? Is it U.S. FDA and maybe EU GMP a bit relaxed on giving the -- during the inspections to Indian companies? Or more or less the environment is same there. Heavily critical.

My understanding is regulatory requirements will not be relaxed just because the government there wants to give preference to China plus one story. But what might happen is the companies there in those countries like North America or Europe, probably will give preference to Indian companies to -- and will consider them as an alternative supply chain in addition to China. So that is the kind of understanding I have.

The next question is from the line of [Devarsh Shah] from SPL Investment.

Am I audible?

Yes, sir. You're audible.

So most of my questions were asked by the earlier participants. Now I'll just 2 questions. So you mentioned you have a higher gross profit margin but due to higher freight cost and power cost the probability of this quarter impacted. So can you share what is the usual percentage of revenue of these plan items.

No, no, your question was not -- I couldn't understand. Can you please repeat it again?

So higher freight cost and power cost impacted profitability of this quarter, right?

Higher power cost and -- what is the other thing that you...

Freight cost and power cost.

Freight and power cost. Yes.

Yes. So what is the usual percentage of revenue.

Okay. So generally, power cost, what has happened is in this quarter we suddenly got a rising power increase in our Pondicherry plant where the power went up by -- there was -- power was on hold, power increases were on hold for last 3 years. Suddenly they took a not only power revision, but also trying to recover the old gap, whatever the last 2, 3 years, they've not raised. So there, I think our incremental bit is on an annualized basis roughly around. Annually it will be roughly around INR 1 crore kind of additional hit to the bottom line for the additional power cost that we are having. So that is one. The percentage-wise if you say, earlier we used to spend something like about 10% of the -- 9%, 10% probably it will go up by another 1% much. That's what I think. Now coming to the freight cost, what will be meant freight cost. I meant was export freight cost. So as you are aware, the recent significant changes in the geopolitical situation as well as in some months prior to the September ending, suddenly, the export freight container cost suddenly went up. And this has come down to a bit to some extent, but it has not yet fully come back to the original position. For our export shipments, we used to have export freight almost around 16% -- 14% to 16%. Now in this last quarter, it went up to 18% to 20%.

Okay. So since -- what are you are seeing for the next quarter as well? Or we see some improvement over this area.

We will see improvement in terms of freight in the current quarter. It may not go back to same 16%, but maybe a couple of notches going down and next quarter it should normalize?

Okay, fantastic. And I have just second question. So in your investor presentation, you said about, you will get financial incentive around INR 67 crores from PLI. Can you share some lights on that?

So this INR 67 crores is calculation based on our total 6 years of revenue that we generate against these 3 products. 20% incentive on all our sales, once we achieve the conditions that has been prescribed under PLI, one is to achieve the committed capacity, 90% domestic value addition. And of course, the incentives to be given on the agreed amount which we have quoted at that point of time. So based on these 3 conditions on the prices that we had committed, those prices still lower than the market prices or more or less now they become almost come into the level of market prices. Earlier those market prices were higher and we have quoted less. So based on these INR 67 crores, the incentive that we hope to get over the 6 years.

The next question comes from the line of Chirag Fialoke from Ratnatraya Capital.

Sir, I just have one follow-up to the question from one of the participants...

Mr. Chirag you're not audible.

Can you hear me, sir. Sorry.

Yes. Now I can hear you.

Sorry, sir. Just a follow up on one of the questions from the one of the participants, the one previous of me. You said on a cost basis we are similar to the Indian largest competitor as well as Chinese competitor. Is that right? I thought my understanding was that especially for our 4 million plus capsule per day line and even our 2.5 million capsule per day line, we will probably be the lowest in the world and probably lower by 10%, 15% to the competition, is that not correct or is that...

Yes, Mr. Chirag, you're right to the extent that our capsules produced on those 4.8 million capsule capacity machines, the cost is less. At this point of time, 50% capacity still comes out of the older generation machines. On a weighted average basis our cost will be more or less similar to what ACG produces. So if I take standalone basis, the high-speed machine, my cost, apple-to-apple comparison, they are cheaper than what ACG produces.

Got it. And the older machines would be similar, right? Will not be -- because older machines are also 2.5 million, if I'm not wrong...

No. No not all older machines are 2.5 million. There are only 2 lines of 2.5 million. Rest we have 10 lines of -- 4 lines of 1.5 million and 6 lines of 1 million capsules. So the older lines produce, I mean, there the efficiency levels are low, cost of production is higher because mainly because of the lower output and higher power consumption.

And on a global average. Not just the Indian competitor, but on a global average, if I take the top 3, 4 global suppliers, their lines are more in the 1.5 million range or the 2 million, 2.5 million.

So it is across I mean in China most of the companies have about 2.5 million kind of a thing. Only the company like Capsugel, which is the world's largest producer, they have capacity of about 4 million, ACG has about 4.2 million. Rest all I think -- in China, across China the companies have between 2 million to 2.5 million.

Sorry, ACG also would be a 4 million capsules per day type of thing.

It will be about 4 million, 4.2 million, per day capacity in machine lines.

Machine lines, not the overall capacity but individual lines.

Yes. Yes. I'm talking about the capacity per day.

Not the overall but per line. You're saying the 4 million faster lines?

4.2 million capsules per day capacity of the machine.

Correct. Those lines are available with ACG as well as sort of some of the Chinese players.

Capsugel, Capsugel which is now part of Lonza, a swiss company called, Lonza. Yes.

As there are no further questions. I would now hand the conference over to Mr. Sunil Mundra for his closing comments.

Thank you. Thank you all for joining us today for our earnings call. We appreciate your time and interest in Natural Capsules Limited. Should you have any further questions or require additional information, please do not hesitate to reach out to our Investor Relations advisers, [TIL] Advisor. We look forward to continuing our conversation and updating you on our progress in the future. Thank you once again, and have a great day ahead. Thank you all.

Thank you, sir. On behalf of Natural Capsules Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.