Neuland Laboratories Limited (524558) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Neuland Laboratories Limited Q4 FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Diwakar Pingle from Christensen IR. Thank you, and over to you, sir.

Thank you, Janice. Good afternoon, good evening friends. Welcome to the Q4 and full year FY '20 earnings call of Neuland Laboratories. To take you through the results and answer your questions today, we have with us the management team from Neuland Labs, represented by Sucheth Davuluri, Vice Chairman and CEO; Saharsh Davuluri, Joint Managing Director; and G. V. Bharadwaj, who's the DGM Finance. We've sent out the press release as well as the financials, and we also sent a small FAQ document, which kind of captures some of the standard questions that you don't need to ask on the Q&A session so that we'll save some time. When you get a chance, take a look at that. Before we start, I'd like to say that everything that is said on this call which 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 the website. With that said, I'll hand over the floor to Saharsh who will run through the business highlights of the year gone past and just delve a little into the financials before throwing open the floor to Q&A. Over to you, Saharsh.

Thank you, Diwakar. Good evening friends. Very warm welcome to all of you joining this call. I'll first touch upon the business highlights of the year that's gone past and some of the key highlights of the financials, after which we'll open it up for Q&A. This time, I'm not going to call out individual numbers for the quarter since we don't want to get into too much of a monologue. And in any case, you should find these numbers in the press release and on the website. Before I begin, I hope all of you are doing well, safe in the confines of your home. So on the business front, things have opened up gradually for us, and you would have seen the consistency in the performance at the top line and the margin levels over the last 3 quarters. This quarter was also relatively a strong quarter for us despite some headwinds due to the COVID-19-related lockdown, especially in the second half of March. While our plants were working with skeletal staff and production was on, the outbound logistics and supply chain were impacted, and this resulted in us not being able to deliver goods to our customers worth approximately about INR 15 crores. On a full year basis, we closed FY '20 with revenues of INR 766 crores as against INR 670 crores in FY '19. This represents a revenue increase of about 14.4%. The EBITDA margin also stood at 13.7%, which is roughly 450 basis points higher than the margins of the previous year. The margin movement is on the back of both actually growth in revenues as well as improvement in the business mix. And we are confident that our portfolio mix will continue to shift more towards value-added segments in the years to come, and we should be close to our aspiration margin profile. Coming to the CMS business, we are pleased with the way the business has performed in the year. We've always believed that CMS would drive both growth and profitability. The business grew 105% in FY '20 over FY '19. The number of CMS projects contributing to revenue in this particular quarter have also grown up to 25 compared to 12 a year ago. This includes both projects that are commercial as well as those under clinical or developmental stage. The overall pipeline of projects continues to increase, and we are now pursuing more advanced projects with closer cycle times to commercialization. We have also provided you with the CMS pipeline data, which we have for the past few years, and you can always check the data for our performance and progress over the quarters. Another important update that I would like to share is on the status of Unit 3. We're happy to state that Unit 3 is almost in a state of readiness. And for FY '21, we expect to have meaningful contribution from this unit. The other issue that I would like to share in the opening remarks is the tax treatment for this quarter. We have opted to be taxed at a concessional tax rate of 22% plus charge and cess under the recently promulgated ordinance. The reduced tax rates come with consequential surrender of specified deductions or incentives. So consequently, the opening deferred tax asset has been measured at a lower rate with a onetime corresponding charge of INR 23.25 crores to a statement of profit and loss. But for this charge, the PAT would have been higher by this amount. Our debt levels continue to be at a comfortable level. We will end the year with more or less similar debt levels as last year. The total debt of the company as on 31st March 2020, was INR 259.59 crores and the cash and bank balance was INR 45.69 crores. So with these updates, I'd like to open the floor up to Q&A. Thank you.

[Operator Instructions] We take the first question from the line of Sanjay Kapoor, Individual Investor.

Am I audible?

Yes.

So yes, congratulations on a strong operational performance and margin improvement. I have 2 questions. Number one, question on our custom synthesis business for innovator molecules. So you guys are mainly focusing on the areas where we have strong technical competence or things like deuteration, peptides, et cetera. So on the peptide pipeline, the last update was that there were about 9 to 10 molecules in the CDMO, and those are -- so -- and those were the ones that passed the clinical phase and some 2, 3 out of those 10 were in fairly advanced state as far as the commercialization is concerned. So is it fair to expect some sort of commercialization on the peptide's APIs in FY '21 or is it more like in FY '22?

So in terms of the progress we've been making, I think your analysis is very accurate. The number of molecules in our development and commercial pipeline have increased over the past year. And these are molecules, in these 2 specific categories, which are closest towards commercialization. And right now, as we've indicated, we've had a couple of molecules in comparison with our Q4 of FY '19 to now. We've actually had a couple of molecules go up from 13 to about 17 in the development phase and from 14 to about 15 in our commercial phase. Some of these molecules are what are generating part of the growth of our revenue, and some of the revenue growth is also coming from the increase in the number of projects itself. Some of these projects are peptides, but a large part of them are actually small molecules. And we do expect in the years to come that these will get commercialized. But at this point, because there are certain clinical uncertainties involved in the process, we cannot say for sure whether there will be a peptide or not in this basket.

Sure. And these peptides are -- you're still working with the liquid stage peptides, right, non-oncology?

Yes. We work across different therapeutic areas. Basically, what we do is solid phase, liquid phase and hybrid phase. We don't do any nonsynthetic peptides.

Okay. Okay. Understood. And secondly, the question is that countries across the globe are keen to reduce their high dependency on China, especially in light of this COVID scenario. And most governments across the globe, U.S., Europe, Japan and India have been vocal about domestic production of APIs. Now just playing devil's advocate here, is the various KSMs and intermediates are not being produced locally in a specific country, it could be U.S., could be Europe, could be India, how can the end-to-end supply chain be indigenous and derisk from dependence on China? Because you have to move the end-to-end from KSM to intermediates to API, everything has to be locally hosted to make that country self-reliant. And so what are your thoughts around this, please?

The way we're looking at the current situation is, I think it's a good opportunity for Neuland and other organizations to move their supply chains closer to their homes. So I think increasingly, as we think about our supply chains, we're not thinking more in terms of whether it's India, China, Europe or the U.S., but we are definitely looking at ways to shorten our supply chains, qualify additional sources which are much closer to our facilities, whether that be in India, in Eastern Europe, Europe or China. I think what's important to note here is that we are not saying that we need to completely mitigate the risk against China. What we are definitely saying is that for all our key starting materials as well as raw materials, we need to have multiple options so that our supply chain is not significantly impacted by a country or a particular geography. So we're taking a well-balanced approach. I think saying that we don't want to buy from China would be kind of a knee-jerk reaction. Countries and companies attempted the same thing when there was the SARS epidemic, but it really didn't work. At the end of the day, we have to balance what's best for our business while reducing our risk as well.

So you don't see any risk on Neuland because a large portion of our cash flows and revenues originate from Europe and U.S. as well. So you don't see that as a potential threat that those countries will start moving supply chain closer to home and that might impact Neuland's performance?

So I wouldn't say that we don't see any risk at all. I think the current situation is volatile, and we'll have to see how the situation develops. But pharmaceutical services and products being essential services, we do expect that the demand will continue, and the demand will continue to be strong from U.S., from Europe and other parts of the world. And for that reason, what we're doing is we're looking at every part of the business, reevaluating, given the current scenario, where the inherent risk could be and what steps Neuland can take to mitigate some of those risks.

We take the next question from the line of Abdul Puranwala from Anand Rathi.

Sir, my first question relates to the CMS order book. So sir, I mean, clearly, this year, we had a very good year on the CMS side. So going forward, how should we look at this particular segment? Would we be able to sustain the growth momentum for the next year?

Yes. So Abdul, we've seen, as I was mentioning in the opening remarks, over 100% growth in terms of CMS revenue in FY '20 versus FY '19. And this growth has been triggered both in terms of increase in the number of projects and also because of higher contribution from some of the more advanced projects. And the nature of the CMS business is such that the cycle is also very long. So our order visibility, et cetera, is also reasonably longer compared to our GDS business. So based on that, we feel pretty confident about achieving a decent growth in FY '21. But I would not really give any kind of a guidance of any sort in terms of what would be the growth or what is the value of the open order book. But we are pretty confident that the growth and the momentum in the CMS business will be sustained. It's not a onetime thing that we have seen in FY '20.

And as Saharsh was saying earlier, Abdul, that CMS is a very strategic focus for us. We've been saying in our consecutive investor calls, every quarter, that this is a big focus area. It will contribute to our growth, and we're taking a lot of tough investments in this area. Therefore, we continue to do that. We're seeing the business pick up, and there's no reason why we expect this to slow down.

Sure, sir. That's quite helpful. And my second question is related to the GDS segment. So I mean, last quarter, that is, third quarter and fourth quarter, we have seen a very good spike in certain API prices. So would this -- with the margin expansion in this quarter would be largely attributable to the spike in raw material -- in the prices of the key APIs what we supply?

See, I think if you look at the GDS business, Abdul, FY '19 was a little bit of a challenging year for us in terms of our margins. I think there has been some relief, especially in the second half of the FY '20 financial year, with we able to get slightly better pricing, have better control on our costs of raw materials through process improvement programs and initiatives as such. So yes, as you've recognized the improvement in GDS margin is there in FY '20. And I think even looking at the business today into the future, we feel that we are in a reasonable position. So it should hold on to where it is and maybe gradually also get better over time.

Yes. Just to build on that, Abdul, I think our margin expansion is not because we've increased our prices to customers. It's come more so because of a change in our business mix as well as our product [ recognition. ] As far as price increases are concerned, the only area where we've increased our prices is where we've seen a significant increase in cost from our suppliers or because of any significant restriction in our supply chain. But as you can imagine, it's also important for us to maintain the trust that customers have built in us, where we are not using this opportunity to give any artificial or inadvertent price increases. I think we're doing everything we can to protect our customers and keep the demand strong.

Sure, sir. Understood. And just last final question. So what would be a reliance on the imported Chinese raw materials for FY '20?

See, that's a tough question to answer, Abdul, because we break our procurement into direct procurement and indirect procurement, right? So we may not be directly buying from China. But the supplies that we are buying from India or Europe or the U.S., they could be buying the basic materials from China as well. So the focus that we have is to make sure that we are buying our materials from very reliable sources, whether that's from China or India or Europe or U.S. and also qualifying suppliers that will give us much more control over our supply chain closer to home. That is our focus for our supply chain.

Sure. Sure. And sir, just last final question. Sir, would you like to guide us anything on the tax rate going forward? Would it be 25% or slightly below that?

Bharadwaj, do you want to...

It will be 25%, Abdul.

We'll take the next question from the line of [ AM Lodha from Sanmati Consultants. ]

Am I audible, sir?

Yes, you are Mr. AM Lodha.

Yes, sir. I have 2 questions, sir. Number one is regarding Unit #3, sir. Hello?

Yes. Go ahead, go ahead, we can hear you clearly.

Number one question is regarding Unit #3, sir. How much CapEx we have incurred in Unit 3, sir?

See I think we've not disclosed specific numbers for CapEx for Unit 3, Mr. Lodha. Just in terms of -- we've made the acquisition. And since the acquisition, we've made some investments to bring the plant into an operational status, but we have not given specific CapEx details. But adding -- yes. please go ahead.

Sir, when we can expect the completion of this CapEx in Unit 3, sir, time line?

So Mr. Lodha, what we are doing is that we've already scaled up 2 products in Unit 3 and another 2 products are going to be scaled up this year. So we expect complete commercialization of Unit 3 starting in August, September of this year.

As of September '21?

Yes, of the current financial year, you're right. FY '21.

Okay. [Foreign Language] My second question is, sir, I understand I was going through the -- this information filed with [indiscernible] the company was having a land at Nanakramguda in Hitech city in Hyderabad?

Yes.

That land has been given to some builders like Phoenix, something like builder to go how much of the land?

Yes.

So what is the status of that construction or when the project can be completed by the builder, sir?

So the project itself is a joint development project, and it was entered into with this real estate company called Phoenix, and it's a 5-acre property that was allocated to Neuland Labs, and Neuland Labs in turn entered into a joint development agreement with the builder. The builder has -- is currently constructing a commercial real estate building which will be completed in the near future. And as part of the development agreement, there is a specified share of the square footage which will be handed over to Neuland Labs, which Neuland Labs can monetize in different ways.

And whatever disclosures that need to be made, we've already made. It's all available in the public domain, Mr. Lodha.

Okay, sir. I just have one last question, regarding debt reduction in the company, sir. So any view on the debt reduction or current debt?

See, currently, our total debt in the company is about INR 259 crores, Mr. Lodha. Our working capital utilization is about ranging between 60% plus or minus. Our overall term loans are about INR 90 crores approximately, and we'll be paying back another approximately INR 25 crores, INR 26 crores this year. So we feel that our debt is significantly under control. Our liquidity is healthy. And therefore, we will continue to focus on growth of the organization right now.

[Operator Instructions] Next question is from the line of [ Ravi Sundaram from Sundaram Family Investment. ]

My first question is on CRAMs business, your CMS business. So was there any lumpiness in this quarter? And you had mentioned to the previous participant that this growth can be sustained. I know there has been a significant growth compared to FY '19. I think around close to 100% is what you mentioned. At what rate of growth can we expect? Would it be 30% from the space for CMS? Or would it be 40%? Any color on that, sir?

So as I was explaining to the gentleman earlier, our CMS business visibility is quite strong because the pipeline has evolved. And today, we have more attractive molecules in our advanced pipeline. And for many of these molecules, we also have order commitments, contracts, et cetera, in place. In terms of growth, as you know, we've had 100% growth over the previous year. But in terms of going forward, I would be cautious in giving any specific number as a guidance. But definitely, we expect growth to be strong and sustainable. And as we have mentioned in our past commentaries, also, we expect over time that CMS business will be about 1/3 of our overall business. So if you look at our overall growth and you look at that as a rough guidance, you can expect a decent consistent growth year-on-year. But I would be cautious in giving you more specific guidance on this because it's still a new business and it's evolving. So we don't want to, in any way, give a wrong direction.

Okay. That is helpful. Okay. My second question is on, if you see the current quarter, there was a good amount of price appreciation for APIs. My question is for the current quarter's good performance, how much of it would you attribute for the better price realization that you got from APIs? What I'm trying to understand here is, was it due to better prices that you got for your prime segment APIs? Or if that is the case, would it be sustainable in the subsequent quarters?

So I think the -- what we have seen and what you are referring to as price appreciation in Q4, Ravi, I think, generally, what I would say is that it's -- one is it's a representation for the year itself. I think baring the first quarter of the year, I think we've had a good run in terms of our contribution margins on the GDS business as well. And also, as Sucheth was responding to one of the earlier participants, the margin improvement has been actually more a factor of our cost-reduction initiatives across both the prime as well as the specialty segment, take products like -- even products which have been in our pipeline for a long time like levetiracetam or even some of the other products. We've -- actually, our teams have worked really hard in either backward integration, upscaling, process engineering, various initiatives of cost optimization to bring the cost down and therefore, protect our margins. There may be certain cases where prices have gone up. But definitely, I would not say that the flavor of the FY '20 has been price increase because generics is a competitive market and our sustenance is largely based on our ability to stay on par with competition on pricing.

Got it. I think that makes sense. The third question is on how -- I mean, the current quarter had a significant impact due to lockdown. Did it have a meaningful impact on your utilization in the first half of this quarter? And if yes, would it impact your performance in Q1?

See as I mentioned in the opening remarks, there was impact initially in terms of outbound logistics. And for Q4, we have been able to quantify it. And I did mention that it was an impact of about INR 15 crores that was actually due to be dispatched, but could not be dispatched. When it comes to Q1, the impact of the COVID-19 has continued, especially in the month of April, where we had challenges on staff, on outbound logistics, on supply chain, on various issues, implementing social distancing norms in our workplace, et cetera. So as a result, we've had to run our operations very carefully, especially in the month of April, and as a result of it, we were suboptimal in our execution. And we had to rationalize by prioritizing certain products, certain customers depending on the need of the patients in different markets, et cetera. So I would definitely say there has been some impact, but we are very proud of the way our teams have performed and we have bounced back. But I would stop short of trying to quantify anything with regards to Q1.

We take the next question from the line of Pritesh Vora from Mission Holdings.

Sir, can you highlight the pipeline of drugs which you are in the process at present? And what is the -- our capacity enhancement plan over the years, next 3 to 4 years?

Yes. So our pipeline for our drugs, I think we have 2 kinds of pipelines, right: one is on the generic side, the new generic molecules that we are developing; and on the other side, for the CMS, the customer projects that we have been working with. And right now, we have several molecules. The data has been provided in the press release as well. We have several candidates which are commercialized or near to commercialization. On the generic side as well, we have several molecules which we have published in our product list, which is also on our website. And while I cannot disclose the names of the products in our CMS pipeline because those are confidential, I can share that some of the exciting molecules on our GDS side are like paliperidone palmitate. We have other molecules like dorzolamide, brinzolamide, salmeterol, acetonide. So there are at least about 8 to 10 molecules, which are in our -- largely in our specialty category, and there are a few in the prime category as well, which are growing really well. And a big part of the growth we are seeing right now is driven by some of these molecules. Most of these molecules, the patents are either just expiring or they will expire in the next 1, 2 years. So we will see further growth from them over the next 2, 3 years as well. On the CMS side, as these drugs get commercial, which means the innovator launches them in the market, we will see increased volumes from those drugs as well. In terms of growth, both the segments are quite prospective for us. So we are excited about the pipeline. The capacities we have are very fungible capacity. So -- and Unit 3 is also giving us a lot of additional capacity. So we are carefully utilizing our capacities of not only Unit 1 and Unit 2, but Unit 3 to optimize this product mix and sustain the growth.

Right. And sir, can you highlight what is the capacity -- as I asked, what is the capacity enhancement plan? I mean, we have a lot of debt on the book. So do we have a plan to put more plants in order to bring those molecules into production? Or how do you fund with those expansion?

So I think Saharsh answered that question to a large extent. But between Unit 1, Unit 2, Unit 3, especially after our CapEx investment, we believe that we've created enough capacity for the next 2 to 3 years to ensure that we're able to manufacture molecules both on the GDS side as well as the CMS side. Obviously, the CapEx program will continue for upgradation and replacement activities. But with Unit 3 coming online, it gives us adequate capacity to launch our molecules and expand the existing molecules.

Right, sir. And sir, last question is, what happened in 2018 where the gross margin and the EBITDA margin fell during that period of time? Is there any product -- particular product liable for that fall during that period of time?

No, I think we had clarified that on previous calls. I think the year the margins fell is because our product mix had -- it had temporary roadblock. Second, we had some imbalance in capacities where we received more orders from one unit versus the other. So we've invested a lot in rationalizing those capacities, the impact we saw in FY '20, where -- both in FY '19 as well as FY '20 in terms of sales growth. We also saw lower growth in our CMS business that year, which impacted the margins, which you've seen that has come back to the normal levels in FY '20 as well. So we had mentioned in those calls that the pressure on margins was more temporary in nature and that the organization was taking the necessary steps in terms of cost reduction, product rationalization, focus on specialty APIs as well as CMS business, which you're seeing come back in FY '20.

We take the next question from the line of [indiscernible] from Investment Options.

So basically, I have 2 questions. So the first question is, what is the percentage of revenue addition that can we expect from Unit 3?

So we -- there won't be a direct quantification for that question. But the way we are seeing Unit 3 function is that as it gets operational, we are going to start scaling our products in Unit 3, which would, again, in turn, create capacity for us in Unit 1 and Unit 2 for other products. So in a way, we expect Unit 3 to get commercialized in FY '21. But we don't really have any specific guidance or revenue target for Unit 3. Ultimately, the goal is for us to meet all our customers' demand using Unit 1, Unit 2 and Unit 3.

Yes. And if you want to get a sense of how much Unit 3 can contribute, you can just do a rough calculation because the current revenues are coming primarily from Unit 1 as well as Unit 2, and Unit 3 has a similar capacity, if not more. So that's why we expect that the Unit 3 capacity should be adequate for the next couple of years.

Perfect. Got it. My second question is what is the hedging revenues that we can expect in Q1 of FY '21 due to COVID-19?

Could you say that again, what is the...

What is the hedge that we can face in revenues in Q1 of FY '21 due to COVID-19? Like do you have any particular idea, if you can give us?

So currently, we have not quantified that because we are doing everything we can to make sure that we are able to deliver the orders in Q1. For FY '20, Saharsh has mentioned that it was about INR 15 crores for the whole year. If there is an impact in Q1, we'll let you know. But right now, we have not calculated that because we are doing everything we can to deliver our orders.

Sure, sir. Got it. And the last question is like, have we got any government boost or support on the API and pharma thing?

Did we get a boost or support?

Yes.

Not yet because whatever schemes have been announced by the government are more to encourage investment for chemical manufacturing. They have not really announced any schemes that will directly benefit pharma or APIs, but we are keeping a close watch on all the circulars which are coming out, and we will ensure that we take that into consideration. Of course, in the meantime, if you come across anything, please be so kind to let us know as well.

We take the next question from the line of Rohit Balakrishnan from VRDDHI Capital.

Hello. Am I audible?

Yes.

So sir, if I look at your CMS business over the last few quarters or a couple of years actually, so our total number of -- I mean, total number of projects has almost doubled, if I look at from FY '18 levels to currently. However, the accretion -- the largest accretion has been on the preclinical side. So I have actually 2 questions. So 1 is, I mean, you've been alluding to this point that this business is still in the nascent space. So 1 question is in terms of how you see this business in terms of projects? What is the critical mass for you to sort of say that this business is now -- you have enough projects which can sort of unlike what happened in FY '18 where the revenue sort of declined because the base was lower, what kind of levels do you see in terms of project size, you now say that this is stabilized or is there more to go there? That's one. And secondly, sir, if I look at the breakup, a large part is still on the preclinical side. In one of the questions to the earlier participant, you mentioned that many of the projects are now moving towards development or commercial space. So if you could just share a bit more on that. These were the 2 questions.

So I think as you rightly recognized the total pipeline has increased a lot over the last couple of years. I agree with you that a big part of this increase, almost doubling of the numbers, large part of it has happened from preclinical. However, what I would like to point is that if you see approximately 2 years ago, the number of projects we had in development were 5. Today, the number of projects we have in development are 17 and the number of projects we had in commercial 2 years ago were 10. Today, we have 15 projects in commercial. Numerically, these numbers may -- it may seem small, but these numbers are what are going to drive the growth of the CMS business. You are absolutely right, that increasing the preclinical numbers is not really going to give us a lot of growth in terms of numbers. But at the end of the day, when we are building relationships with clients, we are building relationships for projects across the spectrum. What we are excited about when we talk about the CMS business is the numbers that are increasing on the development and commercial side. And definitely, it's a good growth. In terms of the total, if you just take the total of the 2, the number was 15, 2 years ago. That number is 32 today. Those 2 columns, and that is the doubling of the number. So we are quite excited about that. And these are the projects which will give us the revenue growth. And I think you also asked a very important question. Ultimately, if these molecules become successful, and we hope they become blockbusters, they will give us a better stronger growth for CMS. But at the end of the day, unless we go through that cycle with our customers, we also cannot say for sure how exactly the growth will be. But the share increase in the number give us the confidence that the business is scaling up. And we feel that now we are slowly getting to a comfortable level that we can say that CMS has a critical mass.

Got it. Got it. So sir, just 1 -- 2 follow-ups actually on this. So you're saying, so these -- so around 30-odd number between development and commercial that you think is closer to the critical mass. Is that -- so should I take that as a statement from you?

Yes. And see, ultimately, I think why I say this is FY '19, we had a big year compared to FY '18 on CMS. But FY '20, we had a resounding growth of 100%. Now today, when we look at the pipeline with these 32 projects and we look at what our customers are thinking about the future expectations of these molecules, we feel reasonably confident that we will not be subject to those kind of cycles with this kind of size of molecules. So please also understand that it's our interpretation that it is a base. But ultimately, we can't guarantee that statement.

Sir, just another follow-up on this was that even if we -- so I wanted to understand like, for example, in Q4 also, we had a decent number of -- decent amount in both development and commercial, which was 28, but the revenue traction was not much in that year. So I mean, just wanted to understand how does the overall traction or buildup in the revenue happen, what is the cycle? I'm not getting into specifics here, but just wanted to understand the ramp-up that happens typically in this business? Is it that it takes -- even after you -- even after these projects are in development or commercial, it takes still some more time for the revenue to ramp up? Or is it like you have a few projects and then one of them will take off?

I appreciate the keenness of your question. I think it's -- the way we do it, and it's difficult to track these kind of opportunities. Whenever we get a project and we get a PO for that project, it gets tracked in the number part. So that's why you would have seen -- if you see a bump up in the number, it means that a new project has started at Neuland. But many times, the project starts with only a INR 50 lakh or a INR 20 lakh kind of a purchase order. And inevitably, over 6 months or a year or 2 years, it becomes a slightly larger project. So the number may not have a direct correlation with the revenue that we are doing in that quarter or even in the quarter that comes afterwards because every project has different kind of cycle. Sometimes, we start off with a very high-value project itself, especially for late-stage molecules. So I would use these numbers more for getting a medium-term sense of -- yes, medium- to long-term sense of the health of the CMS business, but not as a way to predict whether our subsequent quarter is going to be stronger or not because I've been spending so much time, we don't find any correlation in terms of near-term performance. Only medium term to long term, there's a good correlation.

We take the next question from the line of [ Sejal Kapoor, Individual Investor. ]

So the question is on the unit economics as well as the synthesis of prime APIs like Acepro are very different from complex chemistry molecules like our dorzolamide or even a salmeterol, sugammadex and so on. And my guess is, and again, I need some sort of clarification if possible, but my guess is that Unit 3 would mainly be for prime APIs intermediates and KSMs and not for a specialty or custom synthesis at this stage, near term, because we haven't qualified that unit with U.S. FDA, et cetera, so we cannot start serving our custom synthesis customers or even specialty APIs from Unit 3.

I mean I wouldn't make such a hypothesis because I think even if you look at Unit 1 and Unit 2, the way we manufacture our products is we find either existing suitable equipment or we modify an existing line or build a new line that would be more suitable for that specific molecule. And that's what we've done over the years, and that's what will happen in Unit 3 as well. Because our every product, the technology that we employ is unique, and we modify that particular production line to suit that product. Within Neuland, as part of a manufacturing strategy, we've never really earmarked any specific manufacturing unit saying that this is for specialty and this is for prime. What we do is we earmark each production line, whether that's for a prime molecule or a specialty molecule. So there is no such thing. Therefore, we can expect a similar product mix in Unit 3 as we have from Unit 2 as well as Unit 1. That's our strategy going forward.

Sure. And is there any spare land on this Unit 3 for brownfield CapEx because I understand that once this Nanakramguda joint development agreement is ready, maybe your corporate functions, et cetera or maybe the lab itself could move there and some capacity would be created for a brownfield on Unit 1 and Unit 2 as well. So what is the future growth optionality as far as the available land bank is concerned?

Yes, there is available land bank in Unit 3 for further expansion. However, we don't intend to move any corporate functions there, but there is a land bank available. Thank you.

But corporate could move to Nanakramguda project, no, because once that is ready in few years?

We haven't really commented on that and...

Nanakramguda is more of a joint development agreement for a real estate venture. So the way the company is looking at that property that it's a real estate property for the organization. So we may monetize it in many ways. But we've not really considered moving into it for office premises because we have an office premise in place.

Yes, we'll take that call much closer to the actual event. Right now, it's too early to comment.

We take the next question from the line of Deepak Poddar from Sapphire Capital.

Hello?

Please go ahead with your question, sir.

Yes. Sir, in your opening remarks, you mentioned that because of your product mix improvement and as well as cost-reduction initiatives, we are looking at improvement in our EBITDA margin and expect to reach our aspirational level. I just wanted to understand what is our aspiration in terms of margin?

See, we've mentioned in the past that over time, we would like to get to 20% EBITDA for the overall business. So I guess that is something you would consider to be aspirational, although we would always continue to try to exceed that number as well. But yes, that's what we have in mind.

And what's the time line we're looking at?

Nothing specific. I think for us, our margins are also very dynamic based on the business circumstances and things like that. So we wouldn't want to give any specific time line.

We take the next question from the line of Akshat Jain, Individual Investor.

So the CMS division is attractive in multiple ways. So it gives us chemistry skill, and lets us use our chemistry skill, it gives us access to clients from whom we'll produce commercial scale molecules. And it could be a good competitive advantage when compared to the very competitive GDS segment. So my question is, can you guide us on the working capital cycle for the CMS segment? Since we are making -- custom-making products for our clients and we have a low-cost set up in India, and we have the required chemistry skill. Are we able to demand better working capital term, such as maybe advanced payments or, let's say, receivables compared to the GDS segment?

See, broadly speaking, we've not seen a remarkable difference between the working capital cycle of our CMS and GDS only because in the CMS business we do get advances and we do execute the projects and then we are able to recognize revenue. The credit terms of our CMS customers are also almost similar to what we see on the GDS side because most of our customers are blue-chip and our generic customers also we command a good payment credit terms. The other thing about CMS business is that we also end up having slightly longer inventories. We hold inventory for slightly longer time because we buy raw materials ahead of time. We sometimes hold them for a slightly longer periods while we are taking campaigns and things like that. So we've not seen a significant difference. There might be a marginal difference. Anything, Bharadwaj, you want to comment on that?

No, no.

You mean, that's fine.

Yes.

So -- and the whole industry also operates, CRAMs or CMS industry also operates in similar lines, is it?

I think we'll have to -- every company...

We'll have to check with them.

Because see, the definition of CRAMs is also very wide, right? So our business is mostly with U.S., Japanese midsized biotech companies. Some companies define CRAMs very differently, so...

Okay. Okay. Okay. And my second question is, I remember that this was addressed once earlier, and I think a couple of 3 conference calls back. But can you guide us on the competitive nature of the CMS segment currently? Are there other API makers from India who could probably -- or from China who could probably be a threat to us? And what advantage do you think we have over them?

See, I think it's a very vast space. It's almost, in reports, it's say it's a $60 billion industry. And our experience has been that since it's such a big space, we don't end up meeting the same competitors with our customers. So for example, if I'm competing for a project in Japan, I end up seeing different CMOs that we are competing with. If we are competing for a European project, we see a different set of CMOs. Typically, CMOs would be Indian, some European and few Chinese. And ultimately, Neuland's strength and Neuland's strategy is to work on complex APIs, which are in the mid-to-advanced clinical stages, and we typically work with small- to mid-sized biotech companies. So that narrows down our target market. And we've not found 1 or 2 names consistently. So I'm not really able to recall any specific names.

We take the next question from the line of Saravanan Vishwanathan from Unifi Capital.

I want to understand the working capital situation currently. And I mean, I'm assuming that COVID will have some impact. But for FY '21, as a whole, how do you expect it to pan out?

See, as we had explained in the -- as a response to a gentleman's question earlier, because of this whole lockdown being implemented, et cetera, we've had some impact on our operations. And specifically in the month of April, we had to run our facilities with skeletal staff. We had to also face disruptions, supply chain, outbound logistics, manpower movement, et cetera. And also, we had to take proper time-outs for social distancing implementation and things like that. So as a result, yes, there has been impact. And as a result of that impact, we've had to do some rationalization in determining which products to manufacture, et cetera, based on customer priorities and all that. But having said that, being part of the essential services industry, we've also kept up with our responsibilities. Our teams also have really worked hard to make sure that they are out there. So I would say that we've had impact, and that impact has been largely in the month of April, but we do continue to face that impact. And I think going forward also, we tend to be cautious. And there's also always a risk of specific employees in our sites contracting COVID-19, et cetera. So we operate in this realm of new uncertainties. So it would be very difficult for us to quantify what kind of impact we will have in FY '21. But the silver lining is that our demand from -- for our products from our customers remains strong. And hopefully, we will be able to recoup and deliver. So we're not too concerned, but we are obviously very, very cautious at this time.

Okay. So second question is on the margins trend. So okay -- keeping -- leaving aside Q1 FY '21, where there would be some obvious impact. But the Q4 margins that you have delivered, does it represent a sort of new normal? Or do you expect some band there also?

I think the margins for FY '20 would be more representative because as we've said in calls earlier, we always see a quarter-to-quarter variation. In sort of business like ours, a quarter is too short to make any judgment on margins or any growth or decline. So I would say that looking at a full year, it more represent -- it's more representative of the overall performance of the business.

Yes.

Okay. Okay. So -- and then the CMS business becoming 1/3 of your product mix, would that coincide with your aspirational margin -- I mean, margin target of 20%?

Yes. See, when we -- if we were to do a very hypothetical simulation, then when CMS is at 1/3 of our total business and the product mix is also optimal, then we should be reasonably close to that 20%. But again, say it with a sense of caution because CMS also has various projects. Each Project has a different kind of a margin profile. So things would have a certain level of uncertainty.

Next question is from the line of [indiscernible] Mukesh, Individual Investor.

Sir, what is the CapEx plan for the current year? Hello?

Mukesh, I think -- see in our earlier calls also we have given our guidance specifically to be in line with, in general, of INR 20 crores, INR 30 crores of regular maintenance CapEx, but overall, tend to be like INR 75 crores to INR 80 crores in the current year.

Okay. Okay. And sir, as you were talking earlier that we might have got a hit on the business in the month of April. So is it like we have lost that business? Or we can make up for that business in the coming months?

So far, Mukesh, there's no business that has been lost, like we were saying earlier. I think because of the whole situation, we saw a slight postponement in the fulfillment of the demand, but we expect the business to be intact.

Next question is from the line of [ Kunal from Max Capital. ]

Sure. Question on the customer profile, I guess, the client profile in our case. So I think in a couple of 2 or 3 calls ago, you mentioned you're primarily catering to U.S., Japanese and so on and so forth, small-to-midsize biotech firms, correct? Now are we seeing any sort of change in terms of inquiries or anything from this for the customer base? And second, before you do that, can you give us a broad sense on the customer profile that you guys are targeting, right? So if you can quantify, for example, by geography, are we looking at primarily 80% U.S. and 20% Japanese with a sprinkle here and there of European in terms of size? Are we looking at $100 million kind of a company? Or are we looking at a $500 million kind of a company and then so on and so forth? Just want to paint a picture of your customer actually.

See, I think in a nutshell, we work with -- in Japan, most of -- we work with almost all the companies in the top 20 categories. So there's no focus on midsize or small companies when it comes to Japan. When it comes to U.S., the focus is more on small to mid-size. And what we typically mean by small to midsize is that companies with 50 to 500 employees, companies which may be listed, but have -- are not really in the big pharma category. And in terms of the spread or mix of our business, it kind of evolves and every year is going to be different because it depends on which projects contributed more in that particular year. But I would say our largest market is the U.S., and followed by Japan and Europe, which is also fairly close. So that's kind of the mix right now, but we expect that it could evolve depending on how the different molecules perform.

Okay. And if you were to translate the product mix, if so, let's say, hypothetically, let's just say U.S. is 2/3 and the rest of the 1/3 is equally split between Japan and Europe. Is -- are the numbers that you project in your pipeline are sort of in proportion to that or are they different? That's sort of one of that question? And second is -- if you may, just let me complete the question. If you may just help correlate -- I know you said it's easier to correlate in the medium to long term in response to your questions you were asked before. But in terms of the numbers of pipelines that you have -- molecules in the pipeline that you have, is there an average minimum that you look at? Or how do you help somebody, who is outside this business like me, quantify this because even in the medium to long term, you might have 1 blockbuster molecule and that takes care of everything here, correct? Versus if you may have 5 average molecules that may also take care of everything. So if you have a disaster in all 30, then it's all worthless. So I'm just trying to get a sense on how do you, as a business owner, take this call?

So the 2 questions that you asked, the first question was when we look at our pipeline for different phases, would that pipeline also be in the ratio that I just mentioned, where majority being U.S., followed by Japan and Europe. I think the answer would be, broadly, yes. A big part of our clinical and commercial pipeline in terms of numbers would be from U.S. company and then followed by Japan and Europe as well. With regards to the quantification part, I think it's a difficult question to answer because I can only just give a range. The smallest molecule in terms of our commercial pipeline could be maybe $2 million and the largest could be in excess of $20 million. So there's a whole range of opportunities out there. And because these are new drugs, these are truly new drugs, unless we see how they perform, we can't be sure. They could be anywhere in that range or go beyond this range also.

And in terms of -- if you have done any sort of past analysis on linking this to your client profile, have you seen like whether clients with fewer drugs basically, fewer bigger that kind of clients, do they have better odds of success? Or is it just -- it doesn't matter, like, for example, in Japan, if you're working across a spectrum of sizes, the larger ones have better of success or so on and so forth. How do we make a call on? What are you just doing for INR 50 lakhs, but eventually the potential may be X, like how do we do that?

So there's really no such thing, Kunal, because the way we look at it that molecules that go from Phase I, Phase II, Phase III to commercialization, there's always a percentage and it's always a statistic. Now no company knows whether their molecule will go through or not because it's dependent on a lot of factors. So the way we look at it is we try to maximize the number of programs we have in Phase I, Phase II, Phase III molecules because we know that the more number of programs we have from U.S., Japan or Europe, the higher the number of programs that will click and contribute to the growth. So we dispassionately look at maximizing the quality of our clients, the quality of our programs and then just make sure that we have enough projects to ensure our future growth. But we are not in a position to look at a specific customer or a specific molecule and try to make a determination whether one will be more successful than the other.

Next question is from the line Ravi Sundaram from Sundaram Family Investment.

I just have 1 clarification. Sir, we had some tax provision about of Q4. I understand through your opening remarks. Is there any other provision that we should expect part of tax for FY '21?

Ravi, I think there's nothing which we can expect to have in FY '21. So this is one. Unless until the government comes up with some kind of new provision or new tax law which we can evaluate.

Next question is from the line of [indiscernible] from Investment Options.

Yes, sir. So my question was, many companies are moving away from China. So the China substitution theme, so will it benefit our API segment or not?

So you want to know whether the China sentiment will benefit Neuland or not?

Yes, sir. So for the API segment.

So I think at the macro level, we would believe so because if the industry acts on the sentiment, then it would mean that they would look at Indian companies as more suitable partners for API. And it does happen that a lot of our competitors are from China, and they would kind of be out of the mix for future business. It's too early for us to say whether the industry is acting on this sentiment or not. But if it does, then definitely, it's a good opportunity for Indian companies and Neuland as well.

We'll take the last question from the line of Sejal Kapoor, Individual Investor.

The question is on the R&D investments for FY '20 and FY '21, both on the capital and the revenue. So FY '19 was INR 21.5 crores. What have we done for FY '20? And if you could just give some sort of ballpark for FY '21 as well, please?

You want to answer about that?

Sejal, I think, for FY '20, I think we have around INR 17.5 crores towards salary expenditure on the revenue side and around INR 3.5 crores on the CapEx side.

And for FY '21, as a percentage of sales, we intend to keep it at similar levels because as an organization, we are still focusing on R&D because R&D is what's really going to drive our future growth. In terms of capital expenditure, we don't have the earmarked number for R&D CapEx, but we check and see if we can get back to you later on that.

Sure. And how many scientists have we got currently? Is it still ballpark 270-odd?

Yes, that's ballpark the number we have.

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

So thanks, everyone, for being on the call. I think a lot of good questions today about our peptide, the strategy, when will the CMS business contribute to 1/3 of our revenues, questions around the CapEx plan as well as all the molecules in our pipeline, whether that's preclinical Phase I, Phase II or Phase III as well as a lot of questions around when we'll operationalize Unit 3. So I think good questions overall. I hope we were able to answer all of them to your satisfaction. If you still have your questions, which you feel have not been answered completely, you can always get in touch with us, and we'll be happy to provide those answers. I think I would like to reiterate Neuland's strategy as a pure-play API supplier focused on specialty APIs, prime APIs as well as the contract manufacturing business. I think at any point, we don't intend to deemphasize any of these 3 segments. And I think our growth, our strategy is to grow all of these 3 segments with a heavy focus on our contract manufacturing business to drive our future growth. I think our customers have recognized that. I think our relationships, the growth in the top line business as well as the margins reflect and validate our strategy and the tremendous amount of trust that our customers place in us. I think thanks for all the trust that you've placed in us as well. And with that, I want to thank Diwakar, the organizers and everyone that has made this call happen. Thank you.

Thank you very much. On behalf of Neuland Laboratories Limited, we conclude today's conference. Thank you for joining. You may now disconnect your lines.