Neuland Laboratories Limited (524558) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Neuland Laboratories Limited Q1 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Diwakar Pingle from Christensen IR. Thank you. And over to you, sir.

Thank you, Raymond. Good afternoon, friends. Welcome to the Q1 and FY '21 earnings call of Neuland Laboratories. To take us through the results and answer your questions today, we have with us the management team from Neuland, represented by Sucheth Davuluri, Vice Chairman and CEO; Saharsh Davuluri, Joint Managing Director; and [ G. V. ] Bharadwaj, DGM Finance. We have sent out the press release as well as a detailed presentation, and the same has been uploaded on the website as well as exchanges. You could take a look at that, or in case anyone of you wants it, we could mail it to you if you write to us. Before we start, I would 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 ruled in conjunction with the 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 the annual reports, which you can find on the website. With that said, I'll hand over the floor to Saharsh, who will basically give you highlights of the quarter gone past. And then we'll open the floor for the Q&A. Saharsh, are you there?

Diwakar, am I on?

Yes, yes, yes, you're on. Please go ahead.

Okay. Thank you. Good evening, friends. First of all, I would like to inform all of you that we're taking the call remotely, so Sucheth and I am in a different location than our team. So my apologies in advance, if there is some miscoordination or a delay in response, but we do have good lines that are connecting us. So I don't expect us to have any issues, but I just wanted to give that disclaimer upfront. But again, good evening. Warm welcome to all of you joining this call. Like always, I will first touch upon the business highlights of the quarter that has gone past and some of the key highlights of the financials, after which, we'll open the call for the Q&A session. I'm not going to call out the individual numbers for the quarter. Please note that a detailed presentation also has been sent to you and posted on our website and the exchanges. So this should give you a lot of color on the operating metrics and other data. Going forward, we plan to continue updating this with more data as required. But please do give us your feedback so that it will help us in being more transparent and make life simpler for you to analyze our business. Before I begin, well, while -- we think that all of us have become more familiar with the pandemic situation. There is a continued surge in numbers from across the country. So we do hope all of you are keeping safe and are observing all the practices to fight this pandemic. So coming to the numbers, I did give you a brief outlook in the last quarter call itself in response to a question, and we are glad that the quarter has panned out as expected. Despite challenging conditions, we turned out in revenue of about INR 206 crores, which was the highest ever by Neuland in a quarter in our history. This translated to a revenue growth of about 13.5% over the past last fiscal quarter and sequentially also, it's a 6.4% growth. And I'm pleased that the growth has been driven by all-around performance, both in the GDS as well as the CMS segments of our business. EBITDA at about INR 34.4 crores, has shown an improvement of over 80% compared to the first quarter of last financial year. In percentage terms, it was about 16.7%, which is also in line with our expectations. The efforts from our perspective is to move the portfolio mix towards value-added segments in the years to come. And CMS will continue to play an important role. I would like to highlight that the work being done by our teams on cost optimization, which is also contributing towards the improvement in margins across the business. Quick word on what's driving the business in each of the product segments. Prime growth has been largely driven by Mirtazapine and Labetalol while varied number of products has contributed well in the specialty segment. We believe that the focused attention that is being given to each product in our portfolio in GDS will help us continue to grow this business. On the CMS front, the key highlight was the dual growth from both existing products as well as products which are in the development stage. So now you would have seen that in Slide #9 of the presentation, we've started to show a split of commercial revenue versus project revenue. And we think it's a very simplistic way of giving you color of our CMS business. The very nature of this business is evident when you look at those charts, especially when you look at it over the past 8 quarters, so you can see that there is a quarter-on-quarter volatility. But when you look at it on an annualized basis, you're able to see a clear picture, and you're also able to see progress, which is something that we've been also alluding to in all our past conversations. I do urge you to go through the presentation with all other metrics, including the number of CMS projects, the split across different segments, et cetera, as mentioned, along with the balance sheet numbers and the ratios. So with this, I would like to throw the floor open to Q&A. Thank you.

[Operator Instructions] The first question is from the line of Sudhir Bheda from Right Time Consultancy.

Congratulations on a super set of numbers. Hello?

Yes, please go ahead, yes. You're audible.

Yes. Please, there are some questions, 2 questions on my part. One is how much growth is led...

I'm sorry [indiscernible] because we're not able to hear anything on this side.

Hello. Now am I audible? Hello?

Yes, sir, we can hear you. Mr. Saharsh, Mr. Sucheth, can you hear us?

Yes. Now we can hear you. Was there a question in between? Did we miss hearing it? Or was the line blank?

No, no, there was no question in between, Sucheth. That is the first question.

Yes. Sir, now Am I audible? So I'm asking this question. So sir, how much of this GDS business is led by a price increase due to China problem? And the second one, growth -- hello?

Go ahead, sir, you're audible.

And the growth in the CMS business is somewhat tepid.

Diwakar, are you there?

Hello? Hello sir, if you can answer my first question, what is -- how much growth is led by a price increase because of China problem? In -- as far as GDS is concerned?

Raymond, can you just check whether the management line is -- got disconnected?

No, Diwakar, we are here. There is -- there seems to be a lag in between. We can hear you now, but it was completely blank in between.

Yes. So now, am I audible? Hello? I think there is some problem with the management line.

We are here.

So can I ask a question now?

Yes, please go ahead. We can hear you.

Sir, as far as growth in GDS is concerned, how much it is led by an increase in the price because of China import problem and problem with the China import? So that is my first question. So please...

Saharsh, Sucheth, are you there?

Yes, Diwakar, now we can hear you. Why don't you just try it one more time? I'll just ask the office to connect us on the cell phone as a backup option. So even if we're not able to answer this way, in 2, 3 minutes, we'll try to connect through a cellphone. But...

Sir, I think the question, I think that the participant is trying to ask is on the GDS business, how much of the business has seen any kind of price advantage due to the China situation, if I heard him right.

So -- yes. Yes. That is my first question.

Hello? I think you just guys need to wait. I think, first, Sucheth, we just can't hear anything from your side.

There is some problem in connectivity, I believe.

Just hang on, there. Just hang on, sir, 1 second. We're just connecting them to a cell phone. I mean, this is on a landline. The landline is giving trouble. I'm hoping that the cellphone works fine. Please, sir.

Yes. I'm just holding on.

Thank you for patiently holding your lines. We have connected the line on a different line. You may go ahead, sir.

Sir now am I audible?

Yes, yes.

Sir, so my first question is -- sir.

Please go ahead.

How much of your growth is led by increase in the price due to China import restriction? That is our first question.

Okay. Can you ask the other questions as well?

And sir, is that margin, what you have reported in Q1, is it sustainable? And can you throw some longer-term outlook in your CDS business -- CMS business?

Good. I think thank you for your questions. In terms of our overall sales, revenues as well as our margins, they've been largely unaffected by the China situation. So for us, the primary situation that we face from China is managing the logistical issues and maintaining continuity of supply of raw materials, but we haven't had any issue in terms of any significant price changes either on the consumption side or on the sales side. As far as the margins for Q1, they do reflect our business as usual. And notwithstanding any significant unexpected changes, we do expect the margins to be sustainable.

The next question is from the line of Sajal Kapoor from Unseen Risk Advisor.

Congratulations on this robust performance and a very detailed investor presentation, along with a very positive management commentary. So thank you for that. I have a few questions. So regarding this recent addition and qualification of a third-party CMO for our sterile APIs, which is indeed a very strategic move for sure. So is this supporting our CMS pipeline or specialty GDS? And when do we expect to go commercial using this third-party CMO?

Actually, when we qualified this third-party CMO, it was not done specifically with an intent only for GDS or the CMS business. It was done with the intention of making sterile APIs. However, currently, the APIs that we are making at the third-party CMO are for the generic space. And 1 API, we're already seeing commercial orders come through.

It's for the specialty segment.

Yes. No, I got that. Yes. So thanks for that update. So basically, we have qualified this CMO using immediately for our specialty APIs on the GDS front, but the same facility can be used if and when required for our innovator synthesis pipeline, right?

That's correct.

Yes. Okay. And the second question is, so over the years, Neuland has had a very immaculate regulatory compliance track record starting 1997. But now that we are developing and manufacturing more -- some very complex chemistry like the sterile APIs and other complex APIs and the peptides as well. What are we doing to ensure that we sort of stay ahead of the curve as far as the U.S. FDA, PMDA or any other regulatory audits are concerned because in recent days, what we have seen is some of the API manufacturing units have been under U.S. FDA scanner. So now that the complexity of our business has increased manifold, what incremental steps are we taking to just stay ahead of the curve and not be sort of challenged by any of these stringent regulatory audits?

Well, I think it's a valid question. Alluding to what you just said, I think one of the reasons why we've had a good track record with the FDAs because we've always put the culture of quality and compliance as our #1 priority. I think as we added products and as the facilities became more multiproduct in nature, we ensured that these procedures, the overall culture of compliance, the training and development, updating those regulations and incorporating them into our quality management system were always done in a way which was very proactive, so that we could continue the track record. So we continue to do the same thing. And we've been regularly inspected by the FDA almost since about 2002, 1997 and then in '99, 2002. And since then, we've pretty much had an inspection every year and sometimes it's been more frequent. So we believe that we'll need to keep that high level of awareness, keeping ourselves updated and ensuring that our culture of compliance doesn't get compromised at any time. So it's an ongoing effort. I don't think we can ever sit back and say that everything is hunky dory and we're in a strong position. I think we will continue to have that healthy level of paranoia.

Yes. That's reassuring, Sucheth. And lastly, our margins have been steadily recovering over the quarters. And given our strong focus on complex APIs and custom synthesis for innovator molecules, which are higher entry barriers, higher-margin play, what could be an aspirational operating margin over medium term of, let's say, 3 to 5 years? Any broad brush guideline because now that we are into more complex APIs and custom synthesis for innovators, the margin should increase from here on. So we have been recovering, but what is the sort of aspirational target over the 3 to 5 years?

Yes. So this is Saharsh. I think the -- as you rightly indicated, as the business mix improves, we have more CMS coming in, specialty APIs improve. And even on the prime segment as we continue to make cost improvements, we will see improvements happening first at a gross margin level and then later at an EBITDA level. That's something that has already started to happen. And as we've seen over the years, we've also had ups and downs in our quarterly performance, largely determined by the kind of mix we've had in that specific quarter. Two things we could say over here. One is we expect the business mix to continue to improve, largely driven by CMS as well as specialty. But also very strategic growth coming from prime products where we're going to not add products which are not going to be profitable, but products which really utilize the capacities, et cetera, really well. So as a result of that, the first thing is our operating leverage is going to go up. We're going to be getting more contribution out of our existing plants that should help EBITDA margin improve. Second of all, we should also see through other measures like backward integration as well as strengthening our control on the manufacturing, we should see overall improvements in margins as well. The last thing I can quickly say is we've maintained in the past that our aspirational number has been 20% of EBITDA. But that's been a number that is largely going to be determined by how the business pans out. So we are steadily seeing a progress in that extent. And I think as growth comes through different businesses, we could see a certain level of variation on that. But beyond that, we think it's difficult for us to give more specific guidance.

[Operator Instructions] We take the next question from the line of [ Raj Rishi ], who is an individual investor.

What's the capacity utilization presently?

Capacity utilization. So I mean, on an average, we would say for the whole organization, we would be around about 70% to 75%. But this varies from site-to-site as well as production blocks to production blocks. So right now, Unit 3 is the lowest in terms of capacity utilization. Unit 1 is probably on top and Unit 2 is in the middle.

Okay. And any comments on U.S. FDA status regard Unit 3?

Well, it's a continuous process. So we are continuing to file Unit 3 as an additional manufacturing site across our DMFs, and we don't anticipate any issue in terms of Unit 3 being able to supply to U.S. or Europe or any of the other markets that we already supply to.

The next question is from the line of Sunil Kothari from Unique Asset Management.

Sir, my question is basically, currently, API purchaser is getting some extra advantage of demand locally and internationally. So we being a purely API player mainly other than CMS. So are we getting any advantage of those extra opportunity or not? And if not, then what is our strategy? That is my first question. And second is we have very low ROC. Sir, what is our historical ROC? Those are my 2 questions.

So maybe just try to give a brief response, and then I'll ask Sucheth also to share his perspective. I think with regards to the Chinese business, you're absolutely right because of the trade situation with China, there has been, I think, at least from the feedback I've been getting from customers -- we've been hearing from various fronts, both on CMS and GDS -- there has been a greater focus on India. And consequently, there's also been a lot of interest in Neuland because we tend to be one of the few pure-play established players with a very strong track record. However, that has not yet resulted in material improvements in our business. We continue to see a steady growth in our business. But we believe that over the long term, this should help us. It will help us, obviously, in the specific products or the technologies we are strong in. But as we keep making investments and we keep adding the right kind of products, it should help us grow faster as well. But it's not very clear at this time. I'll just pause here, let Sucheth also respond, and then we'll also answer your second question. I think the only thing we would add to it is that there's definitely a trust deficit for companies that were buying out of China. And it's very clear to them that companies out of India -- as long as they can supply and meet that demand on time with a more reliable partner long term. So we're definitely seeing the evidence of that in our business. It's also one of the reasons where in spite of being hit with the pandemic and the uncertainty because of the COVID situation, we never slowed down on our capital deployment to increase our capacity -- so that they're prepared to take on the opportunities. So we're definitely seeing that in the numbers and the consistent growth demonstrated by the organization, and we will continue to do so. And on the ROC, I think we're mindful of the fact that the last 2 years, the ROC numbers have been low. But I think back in '15, 16, it was around 18%, 18.5%, 16%, 17%, if I recall it was around 16%. Going forward, we expect to see a good improvement in our ROCE because of the reasons that we've been talking about, better performance, better operating leverage. And as a result, we being able to deliver more from our plants, being able to better utilize our assets. So while it may have been historic like a recent maybe a challenge in the last 2 years perspective, we believe going forward, it should be something that will -- our business will yield attractive ROCE.

The next question is from the line of [ Viraj Mahadevia ], who is an individual investor.

Congrats to the management, encouraging set of results. Also I had a question. On Page 21 of your presentation, you referred to the commentary saying "adding capacities for backward integration and new business." Can you elaborate a little bit on this backward integration? Are you -- how much of your overall product suite is already fully backward integrated? And are we now going to 100% where we completely are backward integrated in all products and cutoff dependence on China? And secondly, can we expect margin expansion -- gross margin expansion as a consequence?

So I think on this question, I think it's very important. I think backward integration is something that we are looking at very carefully. I think, especially since the China situation erupted a few years ago, and we had one financial year and specifically where we got stocked out on Levetiracetam and we had a huge financial impact. I think since then, the organization has made a strategic move on derisking ourselves. And as part of the derisking strategy, backward integration has been a key part of that strategy. So even I can share like the broad numbers and maybe Sucheth can throw more color on this. But compared to three, 4 years ago, where we were buying maybe 45%, 50% of our raw materials from China, today, we are maybe at about 20%, 25% of raw materials from China. And not all of that has happened because of backward integration. But some of it has happened because of our ability to find local sources to be able to do technology transfers, to be able to integrate them right into our supply chain. But yes, in certain cases, especially where the products are very important, and the starting materials are complex. For example, SABAM for Levetiracetam or some of the other starting materials for our CMS projects, we have intentionally used our Unit 3 for backward integration. And we will continue to use that strategy where it makes sense. What we don't want to do is blindly backward integrate on all our products because that is something necessarily may not generate more value or more margin going forward, especially when you have -- we are seeing a surge in good, reliable, Indian intermediate and starting material suppliers.

Understood. Fully appreciate that. So I think it's an important make versus buy decision. And if you can buy it at a reasonable price, then no need to invest and integrate. But would you say your RM that you referred to 25% sourcing from China will come down to somewhere in single digits over the next year or 2 as you backward integrate more and more products and consequently expand gross margins?

Yes, that's our target, actually. So as you were saying earlier, our strategy is not to completely backward integrate, but actually integrate good, reliable partners. And as long as we're able to ensure that, we feel like we've achieved the objective. So our goal over the next 12 to 18 months is really go down to less than 15% in terms of the materials that we procure from China, not that we don't want to have sources out of China, but also have an equally robust source outside of China.

Understood. Can I ask another question regarding peptides? What if -- or should I get back in the queue.

We would -- yes, it's better to get back in the queue because I think they're saying that we have a long queue. You can -- we'll come back to you again.

The next question is from the line of [ HR Gala ] from Finvest Advisors.

Sir, congratulations for reasonably good set of numbers. I have got 2 questions. One question is, as far as your TAM is concerned, each opportunity is probably -- I mean, of approximately what size in terms of the value that you can fetch over a period of the lifetime of the project? That is first question. And second question is, if we look at our last 5 years performance, our revenue and profit have grown at CAGR of just 10%. So next 5 years, can you give us approximate indication of what kind of growth do we expect? As you have always said that your 13%, 14% type of EBITDA margin will grow to roughly, say, 20% in next couple of years because of change in the product mix. So how do you see this equation working for the next 5 years?

Yes, on the CMS business, we have, as we provided the information in our slide, we have a wide number of projects, which as they become commercial, they give us annual revenues. Today, we are seeing projects which give us as little as INR 5 crores per year on a stable commercial -- a stable commercial revenue of INR 5 crores per year, 2 molecules which are giving us maybe INR 50 crores, INR 60 crores, INR 70 crores a year. We do expect some molecules to be bigger blockbusters, so maybe they could potentially give us maybe INR 100 crores or maybe more. But they will be -- there will continue to be a wide variety of products in this portfolio. I think overall, what we've said and what we've maintained, and this is to maybe answer your second question also. We've said this in the past is that we expect this business over time to grow at about 20%. It could be give or take -- they could be quarter-on-quarter, there could be year-on-year volatility as well. But that's the expectation we have going forward. We feel a lot more confident about the business today than, say, 4 or 5 years ago because we are at a bigger base. Today, we are at INR 200 crores a quarter, we are at an INR 800 crore base versus maybe 3 years ago, we were a INR 500 crore company. So I think we do have a stronger base. We do feel that over time, as I also answered the gentleman earlier, maybe aspirationally trying to get to a 20% EBITDA and having a growth rate of 20% is something that we could share, but this is not really guidance, and these numbers are just more to give you a broad sense of our outlook. And I would probably just leave it at that.

The next question is from the line of Vikrant Kashyap from Kedia Securities.

Congratulations on a very good set of numbers. Sir, I have just 1 question. Can we consider this performance as a base performance? And do we expect to improve upon from here? And if yes, then what will drive the future growth?

Yes. I think Vikrant, it's definitely the performance was in line with our expectations. And I think as it stands today, despite the challenges of COVID, we think that we are in a good fortunate situation. So we think it is a reasonable base only because there are no exceptional items that have contributed to the business of this quarter, but I do expect quarter-on-quarter volatility, so there could be some ups and downs as well. And I'm sorry, what was your second question?

And if you improve upon from here, what will drive future growth, which segment, where do you see potential?

I think a lot of the growth will come across the 3 segments. And not just saying this to be politically right, but we do have products and growth coming from the prime segment, products like Levetiracetam, Labetalol, Mirtazapine, they continue to do well. So on the prime segment, they will do well. On the specialty side, there are exciting products like the [indiscernible] that Sucheth was talking about, other new products that we are adding. And of course, the CMS, we've talked a lot about CMS because we are also expecting a lot of projects to get commercialized in the next 2 years in the CMS front. And some of these projects could be really big. However, we also stay guarded because until the projects do become -- the drugs do become commercially successful, it may not necessarily translate into an API business for us. But I think that's what's going to drive the business. And whatever business we are purchasing right now, these are all likely to improve our margins. We've been focusing on improving our margins even for prime through cost reductions. So therefore, I think going forward, the base that you've seen in this quarter and last quarter, I think, will be a decent base to benchmark, and I think growth will come on top of this.

The next question is from the line of Pritesh Vora from Mission Holdings.

Congratulations for a good set of numbers. Can you tell me how the growth will materialize? You highlighted GDS as well as the CMS. Where do you think which business will, over the next 3 to 5 years, where the growth will materialize from?

Yes. I think Saharsh was elaborating on this earlier, but as we've mentioned in previous calls, there's not 1 segment versus the other that we are emphasizing. We believe that our prime API segment continues to grow. Our strategy, of course, is different across the segments. For the prime API business segment, our strategy is to add new customers for the market penetration, increase Neuland's market shares across the global market. For the specialty API segment, it's always been -- the focus has been on technology, patents, supplying sterile API, complex APIs, where we don't expect too much competition. And obviously, on the contract manufacturing side is where we also see the huge opportunity. And we've spent the last several years, building capabilities to be able to consolidate our position in this market as well. So as we see it, we expect to continue to maintain focus on all of these segments, and we expect all of them to grow and contribute to the top as well as bottom line.

Our aspiration for 20% EBITDA margin because currently, our margin is somewhere around 13%, 14%. So how do you see -- how do you bridge that 20% EBITDA margin aspiration? Which are the products which will give you that kind of margin?

So yes, our margins recently have been at about 16.5%. So what we've done in Q1, that's what we've done -- we did in Q4 of last year. So I think going from 16.5% to 20% will happen as the CMS business as well as the specialty business continues to grow because those are 2 business segments which have a higher profit margin. And cost reduction has been a big focus for us, especially in the last 12 to 18 months. So that should also help us sustain and grow on these markets going forward.

The next question is from the line of [ Sandeep Shah ], who is an individual investor.

Congratulations, sir, for a wonderful set of numbers. I have 2 questions. First is how many work days did you lose in the quarter gone by? So were they substantial? Or were they insignificant? And my second question is taking a cue from the slide which shows the business growth strategy looking forward. And you mentioned here that you want to augment capacity and also leverage your long-standing relationships with leading generic and innovator companies. So could you throw some light on this?

Yes. I think in terms of working days, we would have lost, I would say, about 15 days in total in Q1. This was like a complete loss of work. Obviously, because of the different manpower and the staggered increase in manpower it would spread over a much longer time. However, it would not be fair to connect that to the performance in this quarter because in several places, they're able to recover from the loss in those working days. In some places, they will probably recover it over Q2 as well as Q3. And in terms of the overall strategy, I think our strategy has always been clear. We are a pure play API company with -- had an impeccable record with the U.S. FDA. I was just mentioning earlier that, that will continue to be a focus area. And we do that by being always paranoid that anything could go wrong. And therefore, we keep a very high level of awareness. So our goal going forward is to continue to grow the prime API segment by getting more customers, increasing our market share. Continue to add capabilities on the specialty API side, as well as a huge focus on the contract manufacturing side. That is our strategy going forward.

Before we take the next question, we would like Mr. Pingle to make an announcement.

Yes. Good evening, friends, I think there are still about 25 people in the queue. We just like everyone to ask a question. So we're just listing it to 1 per participant. So please ask your most important question, then come back in queue again, please. Yes. I think, please can you cooperate because there are 30, 25 people in the conference and 25 people still waiting in the queue, and we don't want anyone to go without asking a question. So just restrict to 1 question. I mean, don't ask 3 questions in one. Just 1 question and then come back in the queue again.

We take the next question from the line of Mr. [ Mukesh Prajapati ], who is an individual investor.

Congratulations, sir, for wonderful set of numbers. Firstly, I just want to understand about the peptide commercialization, which we are expecting, I think, by end of September. Can you throw some light on that, sir?

We have peptide projects in our pipeline as part of the 76 projects that we've shown in our table. Right now, we don't have any commercialized peptides. But in the future, we may have peptides. But at this point, we don't have enough clarity and as -- we would not be in a position to give any specific guidance on what will get commercialized when. I do also want to mention that we have 3 peptides which are under development for the generics business on the GDS side. Those peptides we anticipate to file DMFs in the next 2 years. So as we do that, that is the -- those products would be commercially available. So that's kind of what I would share on the peptide front.

The next question is from the line of [ Keva Rashar ] from Investment Options.

I'd like to ask a question that -- what are the CapEx plans over the next few years that we have.

So as we mentioned in the earlier call, the CapEx for the year would be generally around INR 45 crores towards maintenance CapEx. And for the year as a whole, we expect it to be around INR 70 crores to INR 80 crores.

The next question is from the line of [ Rakesh Kumar ], who is an individual investor.

First of all, congratulations for your robust set of numbers. I have 1 very simple question. Is this EBITDA margin sustainable for the remaining quarters of this financial year?

Thanks for your question, [ Rakesh ]. As we were mentioning earlier, this quarter has been business as usual for us, except for there's about 15 working days that we lost because of the pandemic and the disruption of operations. However, Neuland's team, our employees have been great through this whole period, they've been very committed and continue to be committed and therefore, notwithstanding any significant disruption, we do expect that these margins are sustainable.

The next question is from the line of Jay Shah from Navrang Enterprises.

Congratulations to the management on a great set of numbers. I wanted to ask actually going ahead with the API chain for the peptide molecules. Since a lot of it is based on amine, has the company or the management thought of try and procure it locally because the amines industry is a very critical industry and based on how we are focusing the entire product chain on the peptide molecules going ahead, have we thought of doing backward integration in that similar field? Or how to procure the products domestically rather than importing them?

Yes. So I think what you are alluding to is amino acids, which form the base ingredient of peptides. I think today, amino acids are naturally occurring as well as synthetic. And there are very established companies in China and Japan, some in India as well, which specialize in making amino acids. And today, we source many of these amino acids from these companies. Sometimes, if there's a complex amino acid, we'll make it in-house. But it's not really our strategy to backward integrate and make those because that's a very different infrastructure and knowledge base needed for that business.

The next question is from the line of Nikhil Upadhyay from Securities Investment Management.

Saharsh, I just wanted to understand this -- the PLI scheme, which the government has launched. How do you guys read it and because we are a pure API player and because of the production linked incentives do -- do you see any merit in this scheme for any of the products we could be looking at? And secondly, post the -- players who are opting for PLI, do they actually become competitive versus Chinese or the pricing-wise, the competitiveness is still we are uncompetitive to China?

Yes. Thanks for your question. I think that about -- there are about 53 APIs on -- listed on this PLI scheme. And out of those APIs, we have about 4 APIs that we manufacture. However, where we found the possibility of applying this scheme is if you are undertaking any new capital expenditure to make these APIs for the domestic market consumption, then the government would give back rebates to the tune of 10% to 20% of the money spent by the organization. So we've done a thorough evaluation. And right now, it's possible that one, at the most, maybe 2 APIs could possibly benefit. Not clear how much volume we could actually sell in the domestic market versus how much would be exported. So the benefits on the PLI scheme is not very clear at this point. We're still waiting for further clarifications from the government.

The next question is from the line of [ Rahul ], who is an individual investor. There seems to be no response from the line of [ Rahul ]. The next question is from Palak Agarwal from The Tycoon Mindset.

I really wanted to ask like looking at our annual net cash number, which is around less than INR 20 crores. And coupling with the promoter stake, how are you planning to fund our further CapEx and what -- how would it impact our debt-to-equity?

[ Sucheth ], you want to answer that?

Palak, can you please repeat the question, sorry?

Yes. So looking at our annual net cash number. And coupling with the promoter stake, how we are planning our funding of CapEx further, along with the impact of it on debt to equity?

Palak, I think, see -- what we are looking at considering regular maintenance CapEx, we do have -- maintained with our own internal accrual. But if there are any CapEx, which we are putting on a capacity expansion, with -- obviously, I have payback period, we have our own criteria of payback period of about 36 months to 48 months. So in all these scenarios, wherever possible, we use the debt equity mix to make sure that our ratios are intact and in line with the overall requirements. And we don't see much degradation in terms of debt-to-equity ratios.

The next question is from the line of [ Deepak Mehta ], who is an individual investor.

And wonderful numbers. So my question is that as most -- more and more companies, especially biotechnology companies are focusing on corona. So there is possibility their budget might get cut down and indirectly might hamper our company because we have some of the biotechnology, midsized company as a client. Any insights you can give on this, sir?

So far we haven't really seen any significant change in the demand from our customers. You're right, there are a lot of companies that are focusing on research related to the COVID pandemic but these are new companies and companies that already had capabilities in these areas. We're really not seeing any biotech or drug discovery and development companies change their focus, let's say, from a [ CNS ] area to the COVID situation because that's the need of the hour. And our demand and interest from those kind of companies continues to be stable.

The next question is from the line of Srihari C. from PCS Securities.

If I have to restrict myself to 1 question, then it would be pertaining to your workforce. Ex of your scientists, I think it's around 700. So can you please give a breakdown in terms of how many are permanent employees or what is the temp force? And has there been any impact as far as the temp force is concerned because of the pandemic and is there any possibility for a restructuring here?

Yes. So our full-time workforce is actually closer to 1,260 and then we have contract workmen on top of that. So as a result of the disruption of the COVID situation or the pandemic, we haven't had any layoffs. In fact, we -- given that this has brought out a lot of uncertainty, even for employees, this is the time where we felt the need to step up and take care of their needs and make sure that we are not causing them any more uncertainty or anxiety than what is already being experienced. So on top of that, as mentioning earlier, there's been tremendous commitment from all the employees of Neuland during the extremely difficult situation. They've shown up to work even when the company was not able to provide transportation, they've used other modes of transportation, just so that they could be here and help continue the operations of the organization.

The next question is from [ Gagandeep Singh ], who is an individual investor.

I was wondering if you could throw some light on the pipeline of peptide and also wondering if you're counting on any particular peptide for the DMF submission.

Yes. So as I was answering to gentleman earlier, we do have several peptide projects in our CMS portfolio. Many of them are still under development. Right now, there is no peptide, which is under the commercialized category for CMS. However, on the GDS side, we do have 3 peptides which are under development, for which we expect to file DMF in the next 2 years, I can share those names, they are public information. It's Linaclotide, Liraglutide, and Semaglutide. And they are very exciting, and we do expect to see a good part of our growth in the future coming from peptide. But at this point, we're not being very specific about it because we don't see anything very near term.

The next question is from the line of Pratik Kothari from Unique Asset Management.

So if you compare our other expenses, manufacturing expenses quarter-on-quarter, in absolute terms or also as a percentage of revenue, it has come down substantially. So anything you would like to call out on that? Is this sustainable -- mainly on the manufacturing and other expenses?

So if I understood your question, what you're asking us is that you've seen that the expenses have come down or remained stable. And if we believe that, that sort of the thing is sustainable. Is that your question?

Yes. Because if you compare quarter-on-quarter from quarter 4 FY '20 to quarter 1 of FY '21, our revenues have gone up, but our other expenses and our manufacturing expenses came down substantially. In absolute terms, about 15% and as a percentage of revenue, significantly. So is there any one-off, anything you would like to call out on that?

Not really. I think we do expect -- you also have to keep in mind that Unit 3 is also ramping up as well, and that is -- that will start to add to the revenue stream. On top of that, we're also tracking our expenses very, very closely, expenses which are related to the pandemic as well. And as a result of this whole COVID situation, there were expenses that we would otherwise incur, which we haven't incurred such as conferences, travel, sales and marketing expenses, without really eroding any revenues. On top of that, we've also seen a better product mix. Therefore, our expenses did not increase proportional to the revenues as well. So all of this has contributed to a better margin, and that's why we expect that it would be sustainable.

The next question is from the line of [ Raj Rishi ], who is an individual investor.

Hello. Hello. Can you hear me?

Yes, we can hear you.

Hello. Can you hear? Yes. What's the sort of asset turnover ratio we should look at for incremental CapEx? Hello. Am I audible?

Yes. So your question was what is your asset turnover ratio? Current asset turnover ratio?

Incremental CapEx. Yes, that's right.

Saharsh, you want to answer that question?

Yes. Sorry. The current asset turnout ratio is about 2.48. And going forward, it would be more in line with the same expectation, the ratio would be intact.

Okay. And any fundraising plans, QIP, et cetera, because the market is giving you a valuation better than earlier. So any comments on that?

No plans as of now.

The next question is from the line of Sajal Kapoor from Unseen Risk Advisor.

Hello, am I audible?

Yes, please go ahead.

Yes. So I just wanted to know. So how do you see the industry structure unfolding for the Indian players, as the world is aiming to sort of derisk their sourcing requirements away from a single supplier and the potential revival of API manufacturing in the western world? So what we hear today is that there are many API companies, good quality API companies in Europe and U.S. as well. And they are going for capacity expansion using a much superior technology relative to some of the Chinese as well as the Indian players. So is -- how will that change the dynamics of the API manufacturing over the medium to long term?

I think it's a very big question. So maybe I think Sucheth and I will try to give our perspectives on it. I think the way we look at it, the API business, I think, especially from Neuland's perspective, the way we see it is we produce 75 APIs commercially today, both for CMS and GDS. Today, if you go to Europe and you try to identify how many European CMOS produce 75 APIs on an ongoing basis, you will probably not even get a handful of them. So I think when it comes to the depth of experience in producing APIs, I think companies like Neuland, we've really gone through a lot. And I believe that, that knowledge is invaluable going forward. You're absolutely right that supply chain derisking is going to be the way forward. People -- pharmaceutical companies don't want to be single sourced, especially if that source is in China. And I think that will help in many ways for Indian companies, pure-play API players like Neuland to consolidate our position and grow. Definitely, modernization and usage of technology can play an active role in making our efficiency go up. And I think that is something as a company, we are looking as well. So for example, and so using traditional vacuum tray drivers, we are moving towards modern drying equipment. We're doing this in a phased manner across all our facilities. That kind of modernization is something that any leading company will have to do, whether you're in India or in Europe. And I think that's something we'll do. Obviously, I think as you probably know, Europe will still continue to be a strong player for APIs. They've traditionally been very strong. And if they invest in capacity, then definitely, that could be an alternative to China. And I do believe that the market is large enough, that even if there is a threat from the European resurgence, it will not necessarily be decremental to Neuland or the Indian API industry. Sucheth, do you want to share any thoughts on that?

No, I think very similar, really. I think even historically, we've always -- and we always say this to our customers is that we never position ourselves as an Indian API company with a lower cost base, trying to penetrate the market share. We've always competed based on our chemistry as well as our technology. And that has nothing to be -- that has nothing to do with being based out of India, and having lower labor costs or the cost of capital. So our focus continues to be the same as it's in contract manufacturing, specialty APIs as well as our prime APIs is that we continue to focus on adding capabilities, focus on technology so that we can do APIs better than -- in the products that we manufacture better than others.

[Operator Instructions] We take the last question from the line of [ HR Gala ] from Finvest Advisors.

Yes, I was cut short. My question is you have guided for about, say, INR 70 crore to INR 80 crore per type of Capex. But say, in case some opportunities come up in CMS space, will you have to spend something more on that?

I think the number that Bharadwaj had given you is the kind of CapEx we need for the business that we are seeing in front of us in terms of either order book or contract or confirmations from the customer. But as an aspiring company that is [ developing ] new projects, there will be certain project -- projects that would need CapEx. So for example, there might be a sustained project that might come tomorrow that would require a project-specific Capex. In those case, what we would have to do is we...

I couldn't hear you. Sir, your line got cut. Hello?

Can you hear me now?

Now I can hear you. You said about project CapEx.

Yes. So what I said is the CapEx that my colleague had referred to was the CapEx for the business that is already visible for us in terms of contracts, purchase orders, confirmations, et cetera. Not -- other than that, if there are new projects that are coming up, say like a peptide project or something that's very specific, there would be a project-specific CapEx that would be incurred, and we would make sure that we make those investments in line with the guidance that we have for our finance department in terms of the kind of returns, et cetera, that we have. And also when it comes to very specific project-specific CapEx, we would also probably negotiate for advances from our customers to make sure that we are not having to fund the entire CapEx by ourselves.

Okay. Okay. What could be the approximate size of those CapEx plans, project Capex -- approximate?

Could be INR 5 crores, could be INR 20 crores, it could be even like INR 50 crores. So it could be a wide range of CapEx. Small CapEx, we would not typically ask customers for advances. But if it's a really specialized project, then we would ask for an advance.

We'll have to take that as the last question. I would now like to hand the conference back to the management team for closing comments.

Again, good evening, everyone. Thanks a lot for all your questions and interest in Neuland. Thanks for being here on this call and for all the questions. It definitely helps us look at our business from your point of view as well, and that's very helpful. I would also take this opportunity to thank the entire Neuland team that has really worked relentlessly with an amazing level of commitment through this disruption, through this uncertainty of the pandemic. And what you see today in terms of our results and ongoing performance is a direct outcome of the commitment of all our employees. So thank you, again, for the continued interest. I hope we've answered all your questions. And if you have any further questions, you can reach out to us at any point and we'll be more than happy to take and clarify whatever questions you might have. Thanks, again, and have a good evening.

Thanks.

Thank you very much. On behalf of Neuland Laboratories, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.