Neuland Laboratories Limited (524558) Earnings Call Transcript & Summary

Thank you, Margaret. Good afternoon, friends. Welcome to the Q3 FY '20 Earnings Call of Neuland Laboratories. To take you through the results and answer your questions today, we have the management team from Neuland Labs, represented by Sucheth Davuluri, Vice Chairman and CEO; Saharsh Davuluri, Joint Managing Director; and Amit Agarwal, CFO. At the outside, let us -- we'd like to apology for delay in sending the results to you. 2 reasons: the Board meeting extended much more than we expected to; and number two, I think there were some technical issues on the exchanges' website. So we really had to confirm that the results had been uploaded before they actually send it out. It's being uploaded right now. And we'll also be sending the press release to you shortly as the call goes on. You'll see it hitting your mailbox. Again, apologies for this, something we could not totally forecast. Before we start, I'd like to say that everything that is said in this call that reflects any outlook for the future or which can be construed as a forward-looking statement must be viewed in conjunction with risks and uncertainties that we face. These uncertainties and risks are included, but not limited to what we mentioned in the prospectus and subsequently in annual reports, which you can find on our website. With that said, I'll hand over the floor to Amit Agarwal to make the opening comments, which will be followed by Saharsh, and then we'll go into Q&A. Amit, over to you.

Thanks, Diwakar. Good evening, friends. Very warm welcome to all of you joining this call. I will first touch upon the financials, followed by Saharsh taking you through the business highlights. After which, we will open this call for the Q&A session. On the quarterly financials, the total revenue was INR 204.6 crores for Q3 FY '20 as compared to INR 171.8 crores in the same period last year, registering a growth of 19%. EBITDA stood at INR 29 crores versus INR 16.3 crores last year. This translates to EBITDA margin improvement of about 4.7 percentage points. Net profit stood at INR 11 crores as compared to INR 4.6 crores in the corresponding quarter and EPS stood at INR 8.6 as against INR 3.59. The financials for 9 months ended December 31, 2020, also show a similar trend. The total revenue was up INR 572.9 crores as compared to INR 496 crores, an increase of 15.4%. EBITDA also was up at 440 -- about 4.4 percentage points, and net profit saw a growth of about 168% to finish at INR 25 crores as opposed to INR 9.4 crores at corresponding 9 months of last year. Q3 FY '20 was driven by strong growth in CMS segment, which was about 25% of the total pie as opposed to 16% in the corresponding quarter of FY '19. Along with this, the cost optimizing initiatives in the GDS prime category products has led to continuous improvement in the margins of the company. As mentioned in the last conference call, our debt levels continue to be comfortable, and we will end the year with almost similar debt levels as we're seeing now. So we should be about -- currently, we are at about INR 211 crores. We should end the year anywhere between INR 220 crores to INR 225 crores, and our current cash balance is about INR 26 crores. I will now hand over the call to Saharsh to give the highlights of the business.

Thanks, Amit. Good evening, everyone. We've done another quarter of reasonable revenue growth driven primarily by our CMS business, which is showing good momentum now. The growth in the CMS revenues is primarily driven by projects in the pipeline, which actually augurs well for our future growth. The GDS business is stable, and it's in line with our plans for the year. We see our Specialty business, which is again part of our GDS business, as growing and margins have improved with better product and segment mix and cost structure, and this is across the GDS business. On the CMS side, while the overall pipeline of projects is increasing, which you will see in the table that is provided in the press release, we are also now seeing a trend of getting more advanced projects with closer cycle times to commercialization. So over the past few quarters, we've added many projects, of which 3 APIs, which are either in Phase III or development stages, which could contribute significantly to our revenue in the medium term. So overall, we are excited by the prospects of all our businesses as we see evolution of the product mix even within the segments. On the China front, as it stands, we do not have any issues for Q4 supplies. However, we will be monitoring the situation very closely for the next fiscal to make sure that our suppliers are secure. The backward integration at Unit 3 is going on as plan, and we will have scaled up 2 products this year. Unit 3 is slowly but steadily being readied for capacity planning for the future years. We do believe that our decision of investing in this facility, which is the largest of our 3 units, will definitely yield us good returns. We have also provided you, as I mentioned earlier, the pipeline data for the CMS projects so you can monitor the progress. And if you have any questions about any of this information, please let us know. I think now we can move to Q&A.

[Operator Instructions] The first question is from the line of Shlok Dave from Seraphic Capital.

I'm just looking at the gross margin number that has come on. And also, the split that you have given in terms of prime niche in CMS. So there has been a de-growth in niche. Am I reading this right or am I mistaken, quarter-on-quarter and also Y-o-Y?

Yes. So see, quarter-on-quarter, you're right. There is about, I think, 1%, 1.5% de-growth in the gross margin, right? But that's okay. That will always happen because we prefer looking at on a either full year basis how it's moving because there are a lot of factors in terms of how much of inventory we sold during the quarter, what has been a specific product mix. So yes, what you're seeing on a gross margin basis, quarter-on-quarter, there has been a marginal decline.

But in the segments, in the individual segments, there has been no de-growth, right? It's just that the mix has changed a bit.

Yes.

Right. And what's your -- any commentary you can give on the niche segment. How do we expect Q4 and then first half of next year to pan out?

I think the niche segment, the one thing that we are observing is that it's getting more and more diversified. I think there are a lot of products like Deferasirox, Dorzolamide, many other products which are actually now ramping up in terms of volume. So we are seeing even molecules like Ezetimibe, which are kind of contributing in the last couple of quarters. So we see the diversification will continue to happen. So growth will continue to be there. But as Amit said, the caveat is quarter-to-quarter there could be some volatility. But in general, it would be hard for us to give a guidance, per se. But I think if you look at the kind of performance we've had over the last year, I think it's a good base for us going forward.

[Operator Instructions] The next question is from the line of Jyotivardhan Jaipuria from Valentis Advisors.

Saharsh, I had a couple of questions on this China issue. So one is, are you still getting supplies from China? Or have they all stopped totally?

So Jyoti, I think, as I have mentioned, for now, the China situation seems to be unclear for us. For Q4, we have our supply secure. There is also this Chinese New Year that happened towards the end of Jan. So typically, most organizations, including Neuland, stock up for inventories for the month of Feb and March in anticipation of the Chinese New Year. The only thing that we know for sure is that the Chinese government had extended the Chinese New Year holidays by about a week to deal with the virus outbreak. And -- so China has really come back from holidays only as of yesterday. So it's still very early for us to figure out what's the situation. And the short answer to your question is that we have not planned to receive many shipments from China in the last couple of weeks. So it's hard for us to know for sure if there's been a real impact or not.

How much of raw materials comes from China today? How dependent are we?

So our direct imports are about 30%, Jyoti. Rest of it is bought from India and Europe as well. But indirectly, obviously, the number could be much larger, but we don't have a handle on that number. But based on our initial assessment of the situation, we only have about 2 suppliers or 2 approved vendors from the provinces that have been mostly hit because of this coronavirus situation. Most of the other vendors belong to other areas, which have not been severely hit, but we still continue to monitor the situation. As of now, for Q4, we don't see a significant impact, but we'll have to continue monitoring and see how the situation develops.

Okay. And like -- our Unit 3, I guess, is not equipped to take care of some of the supply in case we don't get it, let's say, for Q1 of next year?

Not immediately, Jyoti. Obviously, since you know, most of our -- all of our sales are to the organized market. For us to actually get Unit 3 up and running and get it qualified as an alternate side, we're looking at a 3 to 6-month kind of a lead time. So Unit 3 will not help us for any immediate impact, more for long term. Notwithstanding that, as we've mentioned on previous calls, couple of our very key regulatory starting materials, we've already qualified Unit 3, and that continues to supply for our commercial APIs. And that is continuing to work for us.

Okay. So at least for Q4, the earlier guidance, we think we are comfortable, and then we'll have to figure in the next few weeks what happens to the China, I guess. Would that be a fair assessment?

Yes. For Q4, most of our raw materials are already in our possession. So we feel secure for Q4, but I think Q1, we'll have to monitor closely. And as and when we have any updates, we will let you know.

Okay. Just another question. Amit is, I believe, leaving, right? So have you found a replacement? Or we are going to start looking?

We will start the process immediately, Jyoti. Obviously, it's -- Amit has been a good solid number of the team. He has contributed significantly to the organization. He's got a lot of value to his position and the organization as well. I think all of us recognize that. It's sad to see him go, and we will immediately start the process to find a suitable replacement while wishing him all the luck.

[Operator Instructions] The next question is from the line of Diwakar Pingle from Christensen IR.

I thought I'll just slip in a question. Primarily, the growth in CMS, how do you kind of see this panning out for the -- maybe the next financial year and going forward? Is that what's going to drive growth for the company in the next 2 years?

So I think the -- obviously, the current year has given us a lot of satisfaction in terms of results. There is a lot of traction on the CMS new projects as well as good growth in the baseline of the CMS business, which is the traditional old CMS we've had for several years. I think our outlook remains positive, especially because the 2 markets that we are focusing on, Japan and North America, the pipeline of opportunities look quite strong. The level of confidence that our current customers are exhibiting on Neuland's capabilities are also very encouraging to us. The biotech funding, which is a very important factor that drives our business, is also looking quite optimistic, thanks to the U.S. economy and the cycle of -- the investment cycles that are happening over there. So I think all in all, just putting this together, we feel that the outlook for new business going forward also should be positive. As I had also mentioned in my opening remarks, the pipeline of projects that have entered the system recently, particularly in the last 3 to 6 months are quite advanced in nature, like Phase III molecules. Molecules about to get into commercial. These are opportunities which have a shorter cycle for commercialization. So unlike, say, 4, 5 years ago, where we were mostly engaged in Phase I, Phase II projects and they would go through a natural attrition and the long cycle, these molecules have very little attrition because from Phase III to commercialization, the rate of failure is very low. And also, the chances of commercialization are high. The cycle time for commercialization is high. We see that the opportunities entering the system recently, kind of help us look at a strong growth. But having said all this, we would refrain from giving any specific guidance in terms of any kind of growth moving forward.

So just to add to that, Diwakar, just to reinforce what I've said. We're seeing a lot of momentum from projects or molecules, which are in their late stage of development, either at the verge of application being filed or where the application is already filed and our customers are looking for a reliable long term source. So I think Neuland is definitely being recognized as one of those organizations that is able to help company commercialize their molecules and manage their life cycle. We're seeing a lot of traction there. So when you look at some of our lag indicators such as RFPs, the RFP conversion, the number of customers in the pipeline, the number of projects that we're executing compared to the previous quarters, all of those lag indicators have shown improvement, which is reflective of the overall market dynamics and the growth in business.

[Operator Instructions] The next question is from the line of Vikrant Kashyap from Kedia Securities.

Congrats on a good set of number. You just mentioned in the opening commentary that CMS is contributing 25% of the total pie. Am I correct?

Yes.

And what was it in the last year?

It was 16%.

16%. So where do you see it in next 2 to 3 years? How is it shaping up?

See, now since the base is higher, so I don't see it growing at a similar level by about 9 percentage point something of that kind. But it is -- you will see a gradual growth to, let's say -- our target is, we should see this business from today 25% to anywhere between 30% to 35% over the next 2 to 3 years because the overall size of the pie also is going to grow. So yes.