Natural Capsules Limited ($524654)

Ladies and gentlemen, good day, and welcome to Q4 and FY '26 Earnings Conference Call of Natural Capsules Limited hosted by TIL Advisors. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Mehra from TIL Advisors. Thank you, and over to you, Mr. Mehra.

Thank you Neerav. Welcome, everyone, and good evening. Thank you for joining this Q4 and FY '26 Earnings Conference Call of Natural Capsules Limited. Results and investor updates are available on the stock exchanges. In case anyone does not have a copy of the same, please feel free to write to us, and we'll be happy to send it over to you. To take us through the results of the quarter, we have with us today Mr. Sunil Mundra, Managing Director; and Mr. Raj Kishor Prasad, Chief Financial Officer. We'll be starting the call with a brief overview of the quarter from Mr. Mundra, which will be followed by the Q&A. I would like to remind you all that everything said on this call that reflects any outlook for the future, which can be constitute 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 we mentioned in our annual reports. With that said, I'll now hand over the call to Mr. Mundra. Thank you, and over to you, sir.

Thanks, Abhishek. Good evening, ladies and gentlemen. On behalf of Natural Capsules Limited, I extend a warm welcome to all participants joining us today for our earnings call to discuss the financial results for the fourth quarter and the full financial year ended 31st March 2026. I'll begin with our financial performance covering the quarter and then the full year. For Q4 FY '26, we reported consolidated revenue from operations of INR 58.45 crores reflecting growth of 55% on a quarter-on-quarter basis and 30% on a year-on-year basis. EBITDA for the quarter recovered to INR 1.33 crores, an improvement of 157% over Q3 FY '26 with EBITDA margins at 2.28%. This represents a sequential improvement of about 844 basis points though margins remain 747 basis points below the Q4 FY '25 level. The loss after tax for the quarter stood at INR 4.98 crores, reflecting depreciation of INR 4.28 crores. and a finance cost of INR 2.89 crores. I will address the trajectory of these charges in the context of our full year performance. Now for the full financial year FY '26 consolidated revenue from our operations grew 11% year-on-year to INR 187.20 crores from INR 169.21 crores in FY '25. This top line growth is encouraging in the context of the operational disruptions we experienced during the year. However, I must be candid with you regarding the profitability outcome for FY '26. EBITDA for the full year was a loss of INR 1.56 crores at a margin of negative 0.83% compared to INR 17.52 crores and a margin of 10.35% in FY '25. This represents a deterioration of 1,119 basis points and is a result of 2 distinct factors. First, the operational disruption in our capsule business caused by the temporary shutdown of Puducherry plant and second, the pre-commercial cost burden of our API manufacturing subsidiary, Natural Biogenics Private Limited, which has been occurring manufacturing costs and fixed overheads, I had a meaningful revenue. Finance costs for the year were INR 10.95 crores, up from INR 6.31 crore in FY '25, reflecting the term debt drawn to fund from the Tumkur API facility. Depreciation was INR 17.14 crore higher than FY '25's INR 9.12 crores as the API facility assets entered into the depreciation cycle. Together, these charges resulted in a profit before tax loss of INR 27.92 crores and a net loss of INR 24.66 crores for the full year. I acknowledge the significance of these figures and wish to address directly how we intend to reverse this trajectory. On the balance sheet, total equity stood at INR 234.72 crores, operating cash flow for the year was a positive INR 10.92 crores, which reflects the underlying cash generation capacity of the Capsules business and provides us with a reasonable working capital base to operate from. Let me now turn to the operational account for the year, beginning with the Capsules business and then addressing the API segment. Q4 FY '26 was operationally the strongest quarter of the year for our capsule business. As we had guided on the Q3 FY '26 call, the deferred dispatches that accumulated during the Puducherry plant shutdown were cleared in Q4 FY '26. approximately INR 6 crores of revenue in the quarter reflect those deferred sales. Importantly, because the associated manufacturing costs were absorbed in Q3 FY '26, these despites carried a higher net realization contributing positively to the quarterly margin recovery. On capacity, we are pleased to confirm that the new HPMC line commissioned in FY '26, which increased our installed capacity from 19.5 billion capsules per annum to 20.25 billion per annum, is fully ready for double 0 capsule production. Revenue from this line is expected to commence in the second half of FY '27, subject to customer qualification and approval in the U.S. market. We are actively progressing those approvals. For FY '27, the Capsules business enters the year with 2 clear objectives: first, to optimize utilization across both our Mangalore and Puducherry facilities. And the second, to improve the product mix progressively towards regulated market customers and value-added variants. The contribution of the new HPMC line funds approved will support both revenue and margin improvement. I'm pleased to remove that Q4 FY '26 marked the commencement of commercial API sales at our Tumkur facility operated through our subsidiary, Natural Biogenic Private Limited. This has been a long journey in reaching commercial production is a genuine milestone for the team. During the quarter, Natural Biogenic also executed definitive framework and contract manufacturing agreement with Fermbox Bio Private Limited. Under this arrangement, Fermbox Bio will provide advanced fermentation technology and equipment at our Tungku facility while Natural Biogenic undertakes license to manufacturing, quality assurance and regulatory compliance. We expect this collaboration to improve utilization of our fermentation block and create an incremental revenue stream for us. The products we are producing commercially at present carry margins that are lower than what we ultimately expect from this business. The reason is that the higher value customer segment and certain export geographies require regulatory approvals that are still in the process. We are working with the relevant regulatory authorities and customers to obtain those approvals. And once secured, we believe the profitability profile of the API segment will improve material. We enter FY '27 with more operational clarity. The Puducherry disruption is behind us. Commercial API sales are bigger. The HPMC line is ready for qualification. The Fermbox collaboration has been formalized. All the building blocks are in place. Our task now is to execute with the discipline. We are conscious of the pressure on our balance sheet and the expectation of our shareholders after a difficult year. resstoring profitability at the consol level is our primary financial target for FY '27. Thank you. We are now ready to take your questions.

[Operator Instructions] First question is from the line of Ajmera from Artha Capital Management.

Sir, my question is at strategic execution level. you are simultaneously trying to grow the HPMC capsules in regulated markets, a release scale gelatin capsules business and ramp up the API commercial scales. And qualified the fermentation block and partner with Fermbox Bio on a new project. Now these are close to 5 concurrent strategic priorities for the company. at a near 0 cash balance and a loss-making consolidated P&L. So how are you actually trying to prioritize management bandwidth and working capital across all of these initiatives at once.

As far as management bandwidth is concerned, we have dedicated teams working for all these divisions. like for gelatin capsules and HPMC capsules, we have dedicated teams operating there about totally 18 members in our marketing team across the world who are working on that. As on date, we have order book which is having a backlog of almost 36 days of all types of capsules. In HPMC capsules, there is -- definitely, we are working aggressively to get approvals in U.S. market working with a few customers. to whom we have sent the samples. And once those are approved, HPMC business should start. Having said that, there is definitely a slow situation in U.S. market, and we are working to overcome that. by means of having aggressive marketing calls. On Gelatin side, the domestic team is very well positioned. Our approach is to reduce the sales to the customers whose our net margins are less and concentrate on customers where the margins are better. Now coming to API sales, API or regulatory approvals, the facility, it's a process. So once the DMF-related ATD work starts, that is a technical dosier work it takes time and then we start the filing process and then the updation of PM has to happen. Post that, the concerned regulatory authorities will come and trigger the audit and they will come and audit the facility. So it's a process. So there is a dedicated team working there and this process will go on. Regarding Fermbox, the contract is concerned, as very clearly, I said in my opening remarks, all the technology and operational supervision will be in control of Fermbox, only operational ground operations will be under our control. So we have nothing to worry there because ultimately, the batches and all the action will be under their control. So I think on the operational point of view, we are more or less secure. Now on the other front, which you mentioned about the liquidity situation, yes, is an area where we are definitely need to work upon because of the continuing pressure on the balance sheet and the liquidity position because of the API business, we are looking at various options to do fund raise.

Okay. So are you planning to dilute further equity? Or are you planning to add debt if you can share some kind of thoughts with us?

So there are various options. We have also made an application under government's RDA scheme to Burak, and I am hopeful that we might get some funding as being a deep tech company here in pharma API line. We expect to contribute equal amount from our side, which should be in form of equity. We might do a kind of a preferential allotment where the promoters could also participate and we could also do a right issue. So at this point of time, the promoter group doesn't want to dilute much on the overall holding.

Got it. Got it, sir. Sir, my second question is on the scale-up of Capsules business, the HPMC line is ready and revenue is expected from the second half of FY '27, as you just mentioned, subject to the U.S. client approval. Now this implies that even if everything goes to plan, HPMC revenue contribution will only accrue for 2 quarters, that is half year, the second half of the year. So can you tell us what revenue contribution you are assuming for the HPMC line for FY '27 in your base case? And what happens to the profitability of the capsule business if that approval is delayed by another quarter or 2, just in case.

Yes. So looking at the uncertainty of U.S. market where the business of Nutra segment has completely slowed down as you are all aware that last year, post the tariff imposed by the U.S. government, the -- all the business has slowed down and especially our Nutra business, which is more of a wellness business where the impact was much more than the other businesses. So at this point of time, the demand is very slow in U.S., and we anticipate that this should improve in about 3 to 6 months down the line. During this current year, FY '27, we have, therefore, anticipated a very low expectation from the revenue from HPMC. We have anticipated -- last year, we did a revenue of about INR 8 crores from 1 line, so we -- and there, the U.S. exports were around INR 3 crores out of that. Now this year, keeping that in mind. But this is a new size of double zero, which we have added now and were exposed to other markets like Brazil, Mexico have improved. We are now anticipating a revenue of about INR 20 crores from HPMC.

Got it, sir. Also, sir, the steroidal API market has seen excess Chinese capacity, which has depressed the price over the last 2 years. in the Q4 FY '25 call you apology that the API segment faced industry-wide pressure on product realization due to significant Texas capacities in China. Has that situation improved, worsened or remained the same in FY '26. And at current Chinese export prices for steroidal APIs are your API products like price competitive on a full cost basis.

So Chinese capacities are, I would say, to a large extent, fungible because they keep changing the products within the steroidal portfolio. So many of the products when they become uneconomical, they discontinue some of the companies there. But having said that, there are large players, about 5 to 6 large players in steroidal API segment. The prices which they sell at special to the Indian market, you'll be surprised that they are much, much lower than what they sell in China and to a large extent, the rest of the world. And Indian prices are very, very significantly lower, I would say, and may not even cover their costs. I have done deep analysis of this pricing there in China. And even the Chinese manufacturers are a little under pressure because of this. So they are trying to make their strategies to improve the prices, but somehow there is also overcapacity there across all the API segment. So over a period of time, they take the price up, they come down because of the sales from the other smaller players. So having said that, now the API prices in the Indian market, India is a highly price-sensitive market. As you know, government's focus is on generic medicine, low-cost production and the price control. So most of the manufacturers are looking at cheaper APIs. And therefore, there is a especially the segment which is catering to these generic markets looks for cheaper APIs. So there, as I mentioned in my opening remarks that the margin for these generic API customers is very, very low. It is in single-digit low numbers, EBITDA margin, I would say. And whereas our attempt is to improve ourselves or take ourselves up to a higher ladder and reach the semi-regulated and regulated customer within India. I would want to say go to the customers who are exporting to semi-regulated markets and then go to the customers who are exporting to U.S., Europe. So there, probably these margins are much, much better, and that is our growth strategy to survive.

But considering these products are also in the PLI scheme. So will you be approaching the government for an import duty to be applied just to get the pricing parity.

Yes. I think you're quite right. Recently, government has granted a minimum import price, they have imposed in case of 4 products which are manufactured by 2 companies which are selected under PLI scheme. So here, the government's condition is that we should produce those products with a 90% domestic value addition, like we have got 3 products, prednisolone, dexamethasone and betamethasone. So I'm happy to inform the members who are present here. We have been successful in doing prednisolone and dexamethasone at a kilo level now, which are scaled up will be maybe around 10% lesser than the Chinese cost. So we are now hoping we have given the documentary evidence to the government for the 3 batches that have been produced. and we expect them to visit in about 3 to 4 months. The charted engineer visit is over, and their technical team will come and visit the plant to confirm that we have started commercial scale production. So once the commercial scale production of 1 or 2 products start, then we hope to get the minimum import price in position by government, and that would definitely be a big boost for us. And like in case of 2 companies, I would name them Kin 1, #1 company which has produced a potassium clavulanate and carbonatic acid. And in case of Aurobindo pharma they got this for PGAP and ACA. And they've been -- I mean, the price selling at the time was $18 per kg of 6 FNG. Now government has imposed $36 per kg. So government is being realistic, goes out of the way now to support the industry, especially for those whom the PLI scheme was given. So we are quite positive that if we are able to demonstrate in the next 3 to 4 months, but we have not taken any of those in our revenue projections. I'm hopeful that parallel teams are working to demonstrate the prednisolone and dexamethasone on 2 products, dexamethasone is slightly difficult, and we have kept the target of Q4 in the current year. please, we are keeping a target of Q2 and Q3 for commercial scale production and getting the PLI covered from the government, rather minimum import price covered from the government.

Got it. Also, sir, in Q1 FY '26, you had guided for the API facility to reach cash breakeven by the end of Q4 FY '26. But then we saw commercial sales only commenced in Q4 FY '26. So there have been multiple instances starting FY '24 to FY '26 where time lines on earnings call were not met. So how do you suggest we take the current guidance? Have you tapered down the current guidance? Is it aggressive according to you? How should we be looking at the guidance that you're giving right now?

The current guidance has been -- we have given a conservative guidance, one, Secondly, we have not considered major revenue -- any revenue from these PLI based products where last year we slipped up. Thirdly, the guidance on the API front, especially has been given based on my Q4 numbers. Q4 what we achieved about INR 9 crores of revenue from API based on that and a gradual increase from there, we have assumed the numbers. So in the current year, we have giving a guidance of from gelatin capsules about INR 170 crores, HPMC about INR 20 crores. API business in domestic market, about INR 70 crores and from Fermbox contract about INR 14 crores. So there, we have not considered any of these kind of PLI-based benefit and those product sales. The last year reason for slip-up are very clear, as I mentioned already, and let me capture them again that there was a delay in the PLI products where we could not achieve the yield. There was a very big gap in the commercial level. And despite the PLI incentive we could not have done the breakeven. So therefore, we were to -- we will keep on pushing around for alternative route of synthesis, and we were also trying for some sort of a technology support from Chinese companies, which unfortunately did not come though they promised. Ultimately, our internal teams only have been successful in achieving the completion of 2 products at kilo level now. Now the other major reason for not achieving the guidance for API business was the fluctuations in these intermediate prices from China so high. Actually, we decided that if we are not able to get this PLI revenue, we'll also start importing intermediates from China and do the 2-stage or 3-stage derivative manufacturing and sell deminimia. During last year, in Q1, we took the decision. Q2 Q3, there were disruptions in prices. But still, we started importing in Q3 and Q3 end and Q4 from December of last year until March, we were able to start manufacturing from intermediates and therefore, the revenue came only in the last 4 months. So I would think that these 2 are the major reasons in our API business. As far as capsule business is concerned, I think we had given a guidance of about INR 196 crores, which had considered -- I think was included INR 25 crores of revenue from HPMC and INR 171 crores from gelatin. So in the current year, we did achieve about INR 163 crores from -- in last year, we achieved -- actually achieved INR 163 crores from Gelatin, which is almost achieved INR 170 crores because INR 6 crores of loss due to shutdown in Puducherry plant. There is HPMC, we could not achieve the targeted revenue of INR 25 crores, and we achieved only around INR 8 crores. That was mainly due to stoppage of exports to U.S. So I think in the current year, our guidelines are pretty much conservative, and we hope to achieve those numbers.

So sir, with the guidance like you gave in terms of especially the API segment, but roughly, I think, INR 80 crores, INR 85 crores worth of top line that you are clearly looking at conservatively. Can you further elaborate in terms of the operational breakeven that you would be achieving? I just need to understand this so that our assumptions can be correct if we are looking at the worst behind us now. or we can still look at negative numbers in the coming quarters?

As far as API guidelines concerned, the next year what I told, API from domestic sale is about roughly INR 70 crores. There, we are expecting a margin of about 2%, 3% at the say, gross level, I would say, lower single-digit numbers from the gross raw material level. At EBITDA level, it could still be in a negative side. But we are -- as we grow further and improve our customer base, this should be in a lower single-digit EBITDA also. Now as far as Fermbox contract business is concerned, we are -- we have considered about 20% EBITDA based on the cost sheet agreed with them and the amount of work committed by them. So our -- but I would say the consol level in the current year also, we might face challenges and probably we would end up with a very low consolidated net margin.

Next question is from the line of Yash Gandhi from Molecule Ventures.

In the past call, you mentioned the investor in natural Biogenics the clawback clause linked to the FY '27 target and they have been formally agreed to extend it by a year. What is the current form status of that clawback clause, has the return expansion will agree and what are the financial consequences to the promoters if the FY '27 targets are not meant?

No, the clawback clause is referring to FY '29 figures. And that also is -- this is already mentioned in our shareholders' agreement, and this is for FY '29. So as far as it is concerned, at this point in time, there's no discussion on that.

Okay. And under the consolidated basis, can you please help us break down how you're looking at FY '27 from the revenue and profitability standpoint. A detailed breakdown would be helpful in terms of capsules, we can give -- if you could give a breakdown between Gelatin and HPMC and if you could also throw some light on the scale up of API.

Yes. I think I have already given that, once again, for your benefit, I'll repeat that. Our revenue forecast for sales from gelatin capsule is about INR 170 crores, from HPMC capsule about INR 20 crores, from API mainly which is domestic API about INR 70 crores. Our forecast from Fermbox production CMO contract about INR 14 crores. So we are talking about a consol level INR 274 crores.

Next question is from the line of Madhu Rathi from Counter Cyclical Investments.

What kind of margins do you expect from the Capsule division for FY '27 with HPMC scale up?

From HPMC, we have assumed 18% as our EBITDA margin and from Gelatin around 13%, which is what -- we expect it to improve better now since there is a devaluation of the dollar, rupee and the recoveries are better, we can expect better EBITDA margin, but we have assumed a similar number as of our Q4 number.

Got it. Sir, did we receive any PLI during FY '26? And what is the PLI expectation for FY 27?

No, we did not receive anything in FY '26. We do hope to get something, but in forecast, we have not included in anything in it. As I already mentioned that we might be able to present the government our conclusive evidence of getting 2 products on commercial scale level maybe in Q3 or so and Q4, respectively, 1 after the other. and there could be some revenue from PLI. But at this point of time, since there is uncertainty of timing on that, we have resisted from giving a forecast.

What I understood was we have already achieved kilobatches for dexamethasone and the prednisolone. Yes. So -- and you mentioned like right now we will commercialize in Q3 or Q4 of FY '27.

Yes.

Okay. So okay. Got it. Sir, if you could help us understand what is the arrangement with Fermbox for what kind of products? And do we expect some kind of capability development for our fermentation and now with this -- if you could help us understand how does this fit strategically for our business and the fermentation API business going forward?

Fermbox business is a win-win situation for NBPL and NCL because Fermbox what the contract is of 2 basic principles that the payer fermentation capacity. Now the question is why did fermentation capacity becomes fair is because in the prednisolone and dexamethasone, originally, we had put up the capacity with the idea that we would require all the capacity for which we have applied for. Later last year, Government of India, Department of Pharmaceutic gave a clarification that you need not produce what is applied capacity, you have to produce only sanctioned capacity. So that freed up almost I would say in dexamethasone, betamethasone, our committed capacity of 27, allotted was 8, So 19 metric tons of finished API and added to that, our second stage fermentation -- now we have been successful in using enzymatic crude, where the need for fermentation at large scale has been reduced. Therefore, at least about 40% of our capacity becomes fair in fermentation. So therefore, this agreement with the Fermbox, whereby Fermbox will -- because the Fermbox products are front. They have East-based, enzyme-based and other kind of products where the downstream processing equipment are totally different. So the agreement says that unbox will be investing close to amount of INR 60 crores in various , which will be placed on our side will be owned by them on their books. And the is also free to use those products in case they choose to by giving them the -- whatever the charge is applicable. So as you mentioned that whether it will improve our capabilities, yes. And we are also to bring in our CMO contracts of similar products. Of course, with -- there is no complete clause with the Fermbox. We can't bring such products, whatever is to be done with the consent, we have to do it. But definitely, it will improve our total, I would say, capabilities and repertoire of this knowledge about the fermentation techniques.

So the portional manufacturing, these formented products because if I'm looking at the home book website. So these products will be manufactured by Natural actual personal or employees or these will be manufactured by home boxes employees only.

No 1 box will provide total supervision. since all these decision-making regarding operational parameters will be under their control, where people will be there to take the distie, our people will be only operating the equipment. And because the products belong to them, they are responsible for the success of the batch, it will be totally under their control.

Got it. And sir, how is this -- how big can this contract become maybe over the next 2 to 3 years time, can this become INR 50 crore revenue contract for natural capsules?

Yes, it can. Because right now, we are talking of only part of the year, the current year forecast and that with 1 product which they have or confirmed order from government of India. So that product alone, we have given an anticipation of a revenue forecast of INR 14 crores. They have multiple products from Europe, U.S. and there, the revenue buildup and the profit share will be better. And therefore, we anticipate that this revenue could be much larger.

Got it. Sir, just a final question from me, sir. On the API business, how should we see this business over the next 2 to 3 years down the line because the main product that you were expected to manufacture the realizations have gone down and it is not viable. Our capacity scale up as the -- capacity scale-up issues have been there. And we have moved towards a contract manufacturing. So how should I look sir, what is your vision for the segment for the company maybe over the next 2 to 3 years down the line?

I would say that future is bright in 2 to 3 years down the line, both our API as well as the form of CMO contract will do well in 2 to 3 years, maybe as we start getting the actuations, like a GMP in the current year. EU GMP and U.S. FDA in the coming years, our business to these regulated markets should improve and a significant portion of the revenue should come from these kind of businesses, which will improve EBITDA margin. In addition to our portfolio of products in SteridPIfield, Fermbox is going to be in a completely incremental business, which should also contribute significantly.

And sir, has there been any impact of anti-evolution drive on the shareholder APIs coming out of China because you mentioned that the pricing in Indian market is lower than what it is in the Chinese market. And we are only 10% lower than the Chinese. So has that affected us or the competitors from China?

Yes, it is affecting us because that is how we could not launch the products about 6 months back, we could have done that, had prices been not so competitive or -- so it was like taking addition where you could have lost much more. So we chose not to launch those products at that point of time and still started working further and got to a situation where this gap is now around 10%. So we are confident that this 10% could be covered by the PLIC incentive. which is our assumption now. Now as I also mentioned, these prices in India are the lowest across the world and Chinese are a kind of a specific or a special kind of a pricing strategy for Indian market because I believe as far as my study says that steroidal API forms by volume, 40% of the total Chinese production, whereas India population is at about 16% of the world population. So balance, I presume, is going out of India in form of derivatives either in form of API or in form of finished formulations.

Yes, sir, partly as the export rebate removal, the export rebate, whatever the Chinese were getting, has that affected this particular API segment or not?

Yes. So export rebate has been reduced. I believe is not completely removed. There is a reduction in the rebate and -- but to that extent, government is also giving them the benefit of -- they have also depreciated their local currency, Johan. So to that extent, the Chinese also had a disadvantage at the moment. But having said that, they are also not too happy to sell it at such low prices to India. But I think they are under pressure to sell this because of overcapacity in Chinese market. So there, there is no regulated way of controlling capacities, even though they control the pricing within China by a licensing mechanism, whereby for any particular product, they don't give license to more than 3 manufacturers or a product or to sales within. So through such mechanisms, they control the pricing within China. And maybe then they are free to sell everywhere across the world. And therefore, they are able to some of the products that are lower pricing in India.

Got it. And sir, only 5 to 6 major manufacturers control this market. So anyone going under or anyone going bankrupt or closing their capacity should be a trigger for us? Is it a fair assumption?

No, I would put it this way, the COVID has taught a lesson to most of the countries there has to be alternative supply chains, especially in the matter of safety, the drug safety. So I think most of the countries are looking for alternative source. probably we are the only company outside China to manufacture end-to-end from base raw material to -- these products. So I would say instead of thinking that way, we would take it in a positive manner that the world is looking at alternative. We are talking to companies in U.S. and Japan. All of them are easier to tie up with us provided we are able to fulfill the regulatory requirements. There are opportunities out there. In China, of course, out of these 4, 5 companies, 2 or 3 are government-owned companies or largely government backed companies. So chance of their failure going down are very less.

Next question is from of line of Ishan Thakkar from Fort Capital Investments.

So for the full year, we need INR 8 crores of HPMC sales, right? So how much came from the domestic market and how much from the export?

Yes. Out of INR 8 crores of HPMC sales, we got about INR 3 crores from U.S. market and that too, it was only somewhere around till July of last year. Post July, the sales are abruptly stopped. So that is why we -- our forecast also went wrong.

Okay. Okay. Got it. And we are currently behind FY '26, target of utilizing 25% of API manufacturing capacity and around INR 90 crores of sales. So what challenges are you facing currently? And why are we unable to capture domestic demand during the initial phase itself especially when there was a clear opportunity for import substitution.

As I just mentioned to the previous question that domestic market is a highly price-sensitive market. We decided in the Q1 of last year itself to focus despite our -- we got the clarity that there was a big gap in our field level where we could have made a reasonable margin or a survival margin. So we decided to focus on domestic marketing with the intermediate from China. But then the margins were so thin and the prices are so volatile that we also took some time to understand that in a couple of quarters went by. And therefore, when we started somewhere in December, so the results what clearly we got to the sales of last year was practically for only 4 months of sales.

Okay. And 1 more question I have. During the last call, you mentioned that the API division will achieve a turnover of INR 240 crores. However, based on the current instrument capacity and prevailing realization, APIs that we're unlikely to exceed around INR 120 crores. So could you please elaborate on the assumptions behind the INR 240 crores to INR 250 crores revenue target and expect how management expects to bridge this gap.

Yes, INR 250 crore target is still there in front of us. We probably need about 2 or 3 years. Only thing is some capacity -- on the technical manufacturing side is available on the clean room, that is the final finished API side, probably we need to add up a few more clean rooms for which basic infra has been made. Only thing is we need to finish them and do that. I think achieving a target of INR 250 crores is achievable from this plant with the additional investment to make ready the balancing more clean rooms.

Okay. So how many additional expense to be required?

I can think about INR 25 crores to INR 30 crores of expenses could be required to put up these 2 clean rooms.

[Operator Instructions] Next question is from the line of Sanjit sub from Robo Capital.

Most of my questions have been answered. Just 1 thing. Can you get an idea of what our debt levels would look like in FY '27 and FY '28?

Yes, Raj, will you answer?

Debt levels will remain in consolidated, which is around INR 100 crores to INR 110 crores in FY '27. And FY '28 maybe further -- will be same level, some reduction will be there or some other additional funding -- CapEx funding year. So I see around INR 100 crores to INR 110 crores, total debt consolidated basis.

But annual repayments are in the range of about INR 10 crore to INR 12 crores and in case required over 2 years, if we borrow additionally INR 20 crores, the total debt will remain around INR 110 crores.

Next question is from the line of Aniket, Individual Investor.

I just wanted to ask like what utilization level for the API business would be EBITDA breakeven?

So EBITDA here is -- more than the plant utilization, as I mentioned, is to -- towards the type of customers to whom we are catering, plant utilization at this point of time is roughly around 25% to 30%. And even at the current customer base, if I use 100% of capacity, probably we may not break even. So ultimately, it boils down to the fact that we get on to a better quality of customers or better market geographies like we get on to after WGP to customers who supply to regulated markets like Cipla, Lupin, Mankind, these kind of companies or exposed to Europe, U.S. and Japan. Then our definitely at a breakeven or EBITDA bottom line will come up.

And for us to explore such markets, do we require some certifications? And do we have it? Or it will be brought in the current year or in future?

Yes. So these are the certifications still in the pipeline in working. Right now, we are now having WMP target to happen next quarter. then followed by our CEP filing and inspection under WH GMP in about Q2 of next year and U.S. FDA about Q3 or Q4 of next year. So once these are achieved, then the business to those markets can start.

And sir, regarding the INR 84 crore API guidance is given, what would be the net EBITDA? Would it be negative or would be like breakeven or something like that?

It will be, I would say, negligible and maybe low single digit.

And sir, the form of selling men, if I got it right, is it a combination of contract manufacturing plus revenue sharing minus the tech transfer.

Yes. So it's a combination of contract manufacturing with revenue share. That is the type of contract. Tech transfer only to the extent of operational. So their team will be there on the site. All the proprietary information, which will be under their control, like the strains and all that processes and all that. So as far as we are concerned, we will have revenue share in most of the products.

And sir suppose if there ability to scale up goes up, do we have fund space to provide them so that they can manage the more?

Yes, why not, probably maybe not in this particular site, but if there is a -- because Fermbox is a forward-looking company an asset-light platform where they don't intend to own any facility of their own, but they have a lot of contacts and a lot of technologies. Their R&D is the major strength. They have put up a large R&D facility in Bangalore, so as per my understanding, they may be intending us to manufacture more. So maybe we can add on more fermentation capacity going forward.

And does this require some cases or the existing facility would be okay with handling this type of revenue of CapEx production required?

No, no. As far as the INR 250 crore target that we have given ourselves for the next 2 to 3 years in FY '29. So definitely, it doesn't require any new facility to be set up, but if form of feels that they need us to add on more capacity on fermentation. We will be more than willing to do that. going forward. For that, there would be a separate facility to be created, new CapEx to be done.

And sir, what's the annual fixed cost burden from the fermentation facility.

Could you repeat your question, please?

What's annual fixed costs for the -- from the API facility?

Annual fixed cost is in the range of, I think, about INR 1 crore a month -- INR 1.25 crores, about roughly around INR 15 crores per annum.

And sir, lastly, I just wonder as what's the capacity for the HPMC line versus the traditional Gelatin capsule?

So HPMC capsules 1 line capacity, 750 million capsules per annum, whereas gelatin capsules line capacity is about 1.8 billion capsules per annum. We have 2 lines of HPMC -- 2 lines of HPMC make it about 1.5 billion capsules capacity.

And what kind of utilization we are looking for this year?

This year with -- so out of the 1.5 billion, we have assumed utilization -- we have assumed a very conservative if I go for the utilization of capacity, it will be less than 50%. But this has been assumed based on subject to develop because of the U.S. uncertainties, we have assumed like that. Whereas our fact is that gelatin capsules have been running at more than 93% capacity for last many years.

Okay. And sir, what -- in the presentation, it was mentioned that some U.S. customer approvals are pending. So what kind of approvals are pending for the HPMC line?

These are basically suitability, machine suitability approvals, like we have to -- our new machine HPMC came and got installed in March. Now it is under validation stage, and we have sent out capsules to various customers in U.S. And after their machine trial suitability, they do their stability listing at their end, which takes about 2 to 3 months. And this is what we are waiting for.

[Operator Instructions] The next question is from the line of Al Gawker from Fort Capital.

I wanted to know if you can give us the data for FY '26 import data for dexamethasone, betamethasone and it is on Butantan predator both in value terms and volume terms which you used to give in the presentation.

I think the exact FY '26 data, I have not got because in last quarter data still not got published. I believe now Government of India has blocked all publication of export data, okay? So I have data until about 9 months in December and as per this, the Takata zone, betamethasone diesel on all 3 are in line with the imports which is happening year after year. That nasal is getting imported around 40 metric tons with a value of roughly around average of over $230 and average cost is about USD 230. Dexamethasone is getting imported in the range of about 30 metric tons with an average price of about $350 per kg. And bicamicazone is in the range of about 25 metric tons with an average price of about USD 580 per kg. And these import volumes are more or less consistent for last many years.

Sir, I also wanted to know like why you are taking so long for the API land to get a regulatory approval. And when can we expect -- can you provide us a time line, when can we expect the regulatory approval for the API plant?

See regulatory approvals are a kind of a process. First, we have to get the validation qualification of all our facility equipment, processes. Then we have to take the batches, put it into stability, 6 months gotten that, then you have to file with the local -- our local body, Indian drug controller. And then they will come and do the validation study and verify all the claims, and then they'll give the GMP certicate. Then there will be additional certain more audits, which will qualify as we age. Now either we have a choice to go with the same data to U.S. and Europe, but their requirements are much more in detail. They want us to audit our vendors. They want us to validate in very great detail, at least 3 or 4 stages of manufacturing before the final API for which we are doing the filings. Suppose I'm doing prednisolone as my product, which I need to file the BMS in U.S., I need to go for at least minus 3 stage of last 3 steps of manufacturing. I'll have to do complete detailed validation of all that and put into stability. So that is a much bigger requirement and much more time-consuming and cost consuming. Each DMF cost -- will take at least about 8 to 9 months to prepare and it will take about INR 75 lakhs to INR 1 crore cost to prepare 1 dossier. So regulatory bodies, demand that we have to file such detaile drug master files and then the review takes time. Say, if I had to file my debt of 6 months, I'll require 9 months to 5, then they will take about 6 months to review. Then post that, they granted the number then we have to tie up with the customer in U.S. or say, in Europe. Once we tie up with a customer in the U.S., he will trigger the audit, then the U.S. FDA comes in and audits the plant. So therefore, this process is longer and it takes time.

Okay, sir. Sir, I have 1 more question, like how much raw material increase in the EPS segment. Like we -- in the last call, you mentioned 25% of the raw material for the API business has been sourced from China. So what is the update on that like you give an update? Like how much it has been increased?

No. The recent past increases have been basically due to the latest Iran U.S. war, which has led to petroleum prices going up, causing disruption in supplies, so which is affected petrochemical industry, affected the pharmaceutical API industry also. So some of the products in China market has become short and their prices have gone up. So yes, as you have been reading in the newspaper, the prices of many such APIs have gone up and government has also given a increase -- accepted increase in the formulation of many study trucks.

Okay. I have 1 more -- last question from my side. I wanted to know in quarter 2 FY '26 call, you mentioned you were in talks with some Chinese consultant to improve your 60 KL need, so any update, any success on that?

Not really. That did not fructify, we could not get Visa for the Chinese consultant to come to India.

Next question is from the line of Tarun Kumar, individual investor.

I've 1 question regarding if you could give us some color on your R&D pipeline, what kind of molecules that we are doing.

Tarun, we are not in the business of new molecules. That's a completely different ball game, and that's a huge cash gala. New molecule is a very long -- okay. We -- our R&D pipeline consists of those APIs, which are in the public domain, but which are off patent. and which we bring them to manufacture over the coming next couple of years, and then we put them in our R&D pipeline.

Okay, sir, 1 more question, like the FY '22 and '23 our capital margins are really high. I mean is there -- in a mid to near term, 2 to 3 years? Do we see our EBITDA margin going up.

During '21 to '23, there was an after effect of COVID, I would say, during...

Sorry, can you mute your line from your side, please?

Okay.

Yes. So during initial phase of COVID, there was a huge disruption in the supply chain. So most of the pharma industry wanted to keep their supply chain secured. So they stock a lot of material. So which led to kind of a price surge in the capsule prices like any other API also. So that period saw the margins boost up almost to the level of 20%, 21%, 22% but post that from '23 and that Q1 of FY '24 onwards when this industry started descaling and kind of a supply chain slowed down margins were gradually coming down. So they had come down to as low as 11%. Now we are around 12%, 13%. So probably as our volume of sales of HPMC grows up, our more higher-capacity machines are added in future probably as and when we do it, our margins are definitely going to go up. I hope I have answered your question.

Yes, sir. Sir, 1 more question. Could you please quantify what kind of incremental margins that could come in could get less 200 basis points.

I think if our HPMC capsules -- between HPMC and gelatin, there is definitely about 5% GAAP delta. HPMC gives around EBITDA margin of 18%, whereas gelatine is in the range of 12% to 13%. And as our volume of HPMC grows up definitely our weighted average EBITDA margin will grow. So we could expect -- if our HPMC full capacity is utilized, we should do a top line volume of at least about 1.5 billion, about INR 45 crores from HPMC capsules and that should give at least a 200 basis point increase in EBITDA margins.

Next question is from Pravin Sharma, individual Investor.

My first question is, last May, there was a circular from USTR as to imposing anti-dumping duty on HPMC capsule.

Yes.

So after July, what happened is apart from the 50% additional tariff of Trump that we could not sell much of HPMC there apart from that 50%? And how is the situation right now? Is that tariff still applicable? And if we were not supplying where were the U.S. customers buying from?

You are very right that last day, there was a USTR notification, 1 of the courts had approved in antidumping duty, which was, in fact, favoring the Indians. There was a duty of around 18% on the Indian products, whereas it was imposed as high as 88% on certain Chinese companies, which are the major seller there. What had happened was apart from these antidumping duties, the Trump specific duty of -- India specific duty of 50%. So that was the 1 which completely stopped our business. So this kind of high tariff, most of these importers were not able to sustain. And whatever the Chinese could foresee because of the antidumping duty, they had dumped their material to a large extent. and Chinese companies were able to circumvent some of these antidumping duties by routing it through some third countries like Colombia and all that. So that made the Chinese supplies were going on for some more time. the Indian supply is completely stopped. Even the large Indian companies like ACG Group or Health Caps, their supplies are completely slowed down. So as of now also, what our judgment is that the neutral business in U.S. has got severely impacted because of various kinds of duties on India and China, where most of the ingredients were coming from these 2 countries. And now the industry is a little very slow position. And probably next 3 to 4 months, we expect that things could be better as the U.S. economy comes out of slumber and the duty, there is a clarity that the rate of duty is around 10%, probably in about 3 to 4 months, 6 months, we could see improvement in growth exports to U.S.

But I thought that U.S. economy is doing very well with all these AI boost and all people will be requiring more nutrition?

Yes. But unfortunately, Nutra industry is more of a choice business, not an essential business, so the sales of Nutra industry has gone down there. and inflation is pretty high in U.S. So therefore, it is 1 of the first products to get affected is what our understanding is. So there, the industry who are contact points there in U.S., they're saying that their businesses are very slow.

People have stopped eating vitamin.

Yes.

Wasn't it possible for us to be without -- in third country because you saying Chinese were able to do that?

No, no. That was kind of a thing we didn't want to do that. We did not attempt doing that, yes, yes.

But I heard that 1 chinese company -- is planning to put up a plant there in U.S.

Yes, both of them had announced $200 million investment, ACG had announced $100 million investment. All of them are now in the cold, they are in the cold shelf.

Our INR 25 crores, which we have guidance for this year for HPMC, the majority will be exported to U.S. or it will be for domestic?

No, we have anticipated a very low margin -- low revenue from U.S. that too in the last quarter or so, 4 months. Our major sales are to other countries like Mexico, through Brazil and other countries. We intend to start Europe business this year. We have recently got some clearances of -- on the veterinary control side, the registration of gelatin capsule there, of course, for the HPMC capsule Also, there is an opportunity now that we have got organic certification there. So probably exposed to Europe should start in the current year.

And my last question is on the API side. With this Indian GMP certification followed by WHO GMP certification, which appears to be relatively easy and fast, not relatively -- and it's a relative easy because in U.S., what you told and the strive seems a distant possibility -- I don't know how many years will it take, so based on these 2 registrations, how much of the revenue can we generate, how much can we sell? How much revenue from the business? And what kind of margins after these 2 certifications can be realistically at?

So the Indian GMP certificate is a basic requirement for any factory under the current guidelines in India. Without Indian GMP that is called the new -- any new facility requires that GMP. Now in addition to that, GMP, we have to do the product stability and produce the data, the central drug control authorities come and audit and they provide WHO GMP. So this kind of data is required by certain companies, which are like middle to large corporate Indian pharma companies which they sell in the Indian market their branded products or export to ROW market. So these are companies like, I would say, are not top of the notch companies like top 100 or top 50 companies. whose major businesses are coming from Europe, U.S. But say for a company like Cipla, they would say they would prefer to buy a WHO GMP certified product from myself, my company, if it is meant for Indian market. But suppose same Cipla has to sell the product in U.S., they would want us to give the product with the U.S. certification. That product will be different. That dossier will be different, will be different. So our judgment is that with this Indian GMP and WHO GMP? Yes. In the current year, you're expecting WHO GMP certificate to come in Q2. Hopefully, we can onboard some of these companies with some products and our margins could improve. So at this point of time, since we are not able to make a clear estimate of how much business we could generate we have made the forecast based on the sales to purely generic customers.

But of course, after these 2 certifications, the top line will improve and the margins will also improve, correct?

Top line to some extent and margins to some -- more extent. I would say margins could be improving to higher single digits.

Let me ask last question now that you said that a lot of these steroidal APIs, which are imported from China by Indian companies, Indian consumption is around 16 metric tonne or something and the rest, you feel that it goes out of India in form of finishes goods? Correct?

Yes.

So does it go to ROW exports or does it go to U.S. and Europe or regulated world? I mean it's -- this means that Chinese specialities are FDA approved, correct?

Yes. So to answer your question, see, the data while I was speaking, there is a broad macro level data, which showed that total steroidal export to India from China was around 40% of their production in China okay? Whereas on a thumb rule basis, the Indian population is 16% of the world, assuming they consume this sign level of consumption that about half of it is going for domestic consumption. Half of it is going for exports. Now your next question was that are these products being sold to U.S. market, Yes, most of the companies have these large brands either being sold by themselves under generic or they do manufacture on behalf of certain large MNC corporates. Like, for example, Strides does a product for Pfizer, who is the innovative of these drugs. And say product like prednisolone strides, manufacture and exports this drug almost -- they buy 8 metric tons of prednisolone, they import and supply to U.S. to Pfizer alone. Similarly, I would say, Dr. Reddy's, they have a product called Abiraterone acetate, and it's a prostate cancer drug. So this right now manufacturing in Mexico, now they intend to start in India. They are bringing the basic intermediate to India or n -1 to India. They manufacture the API in India. and they export to Mexico. Ultimately, it is meant for the innovator or the patent holder in U.S. So there are large volume molecules which are getting manufactured in India and going to for these regulated markets.

Actually, I was trying to understand, once you get these 2 WHO and Indian GMP then can we -- what kind of market we can end up? What is the total addressable...

Okay. So the idea was that -- So WHO GMP would enable us to get into some of our ROW markets like African markets, some of the markets in Southeast Asia.

And South America?

Maybe some in Central America whereas certain countries like large countries like Brazil on wants their own fermentation, ANVISA. Mexico requires Copper is their own certification. Europe requires their own certication in form of new GMP or CAP. And U.S. require an USAP, Japan requires their own certification. Whereas we can route it through Korea, that is our attempt right now. We are working on that. So the WHO GMP would enable us to supply to -- as I told you to companies like Cipla or Lupin for their Indian market applies. Cipla will not buy...

Which itself will be big market, isn't it?

Which will be for domestic market, mainly but the prices will be better than what prices I get for the same product by selling it to another Indian generic company.

Just right now is to both nearer to INR 240 crores sales in -- gap with whatever product -- margin in. So that the API division doesn't make the capital profit toward in -- on a consolidated basis.

Our aim is to go up the ladder on the regulatory side? Definitely, that will improve the bottom line margins. Number one, utilize maximum capacity and increase our percentage of share to exports and also utilize the Fermbox contract to maximize the utilization of fermentation plan. So these things will definitely help us to control the cash strain that we are experiencing at this point in time.

Only thing is if we can compress that time line from 4 years to say 1.5, 2 years. It's already many years of...

Yes. So our time line at this point of time is not 4 years. It is around -- roughly around 24 months.

Including U.S. and Europe?

Yes, yes, U.S. roughly is in 24 months.

Ladies and gentlemen, we'll take that as a last question. I'll now hand the conference over to Mr. Sunil Mundra for closing comments.

Thanks, Neerav. Thank you all for joining us today and for your continued trust in Natural Capsules. We remain committed to executing our strategy in delivering value in the years to come. Thank you.

Thank you very much, sir. On behalf of TIL Advisors, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.

Thanks. Bye.

Thank you, sir.