Neuland Laboratories Limited (524558) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '21 Earnings Conference Call of Neuland Laboratories Limited. [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.

Thanks, Margaret. Good afternoon, and good evening friends. Welcome to the Q2 FY '21 Earnings Call of Neuland Laboratories Limited. To take us through the results and answer your questions today, we have with us top management from Neuland, Sir Sucheth Davuluri, Vice Chairman and CEO; Saharsh Davuluri, Vice Chairman and Managing Director; and Depak Gupta, the CFO. We have sent out the press release as well as a detailed presentation, and the same have been uploaded on the website as well as the exchanges. You could take a look at that, or in case anyone of you wants the mail sent to you. Before we start, I would like to remind you that everything that is said call, which reflects any outlook for the future or which can be constituted as a forward-looking statement, must be viewed in conjunction with the set of uncertainties that we face. These uncertainties and risks are included but not limited to what we've mentioned in the prospectus and in the subsequent posts, which you will find on the website. With that said, I will hand over the floor to Saharsh, who will give you the highlights of quarter gone past. Saharsh?

Can you hear me?

Yes. I can hear you.

Okay. Great. Thanks. Good evening, friends. Thank you for joining this call. Since we still seem to be in the midst of the pandemic, I do hope you and your family members are doing well and wish you the very best in coping with the current situation. As in the previous quarters, I will be speaking for a few minutes on the overall performance and touch upon the drivers of the business, post which we'll open the call for Q&A. We have shared the detailed presentation that Diwakar was referring to, and it contains all the individual numbers. And the same is also posted on our website and the exchanges. So let me give you a short summary of the quarterly performance. We're very pleased with the performance as we turned in another record quarter in terms of revenues at INR 242 crores, which amounts to 29.6% growth on an annual basis. The GDS and the CMS segments have both contributed to the growth this quarter, and we are confident that we will continue the momentum through the end of this fiscal. The long-term visibility for the growth from both the segments looks positive, and this has been further aided by the revenue generation from Unit III, which has been successfully commercialized at the end of second quarter 2021. EBITDA at INR 41.4 crores was again the highest ever, with margins improving to 17.1%. The increase in EBITDA margin is a combination of better operating leverage and improved business mix. The prime segment performed well this quarter, and we expect the trend to continue in the near term. The growth was led by levetiracetam, along with the continued growth of Mirtazapine and Labetalol. The CMS segment reported a quarterly revenue of INR 77 crores, which was in line with our expectations that CMS will be a key driver for growth. Our baseline projects in CMS continue to perform well, and we're seeing good progress from some of the projects under development, which we expect to commercialize over the short to midterm. I also want to remind everyone that CMS revenues tend to be lumpy, so it would be prudent to look at growth over the long term. As always, we have provided the table showing progression of CMS projects for your ready reference. I would also like to use this opportunity to welcome our new CFO, Mr. Deepak Gupta. Deepak brings with him over 22 years of experience with companies like Nestle, Coca-Cola and Indo Nissin Foods. With that, I request the moderator to open the floor for Q&A.

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

Congratulations on great set of numbers. Hello?

Yes. Please go ahead. Thank you.

Yes. Am I audible?

Yes.

Yes. Sir, congrats on a great set of numbers. My question is on CapEx side. I think in 6 months, we have incurred a CapEx of INR 57 crores. And as you are saying that 3Q is fully operational. So I think -- what would be the further CapEx going forward? Have you done with the CapEx? That is the number one question. And two, sir, in the CMS business, we have seen that your margin is improving because, overall, your percentage of revenue from CMS is increasing. So have we converted this small, small business or maybe it was referring to some INR 5 crores, INR 10 crores of business to INR 40, INR 50 crores. So that is -- this percentage increase is led by those kind of things? That is my second question.

So thanks for the question, Sudhir. So we had indicated in our previous conversations that we expect the CapEx for this year to be approximately INR 90 crores. So far, as you have said, INR 57 crores or so has been deployed. We expect our CapEx plans to be more or less in that line. But considering the opportunities with regards to the growing business, there may be need for additional CapEx. But at the moment, we don't have any further updates to what we have said previously. With regards to the CMS business, as I had mentioned in my opening remarks, the growth of the CMS business has been driven both by new projects, which are those small projects, which you mentioned, as well as the commercial projects, which have been part of our baseline. Going forward, we expect some of these new projects to become commercial and, therefore, give more sustainable long-term growth. And we expect the baseline projects to continue to do well. So it's a combination of both the new projects as well as the existing projects that will drive the future growth of the CMS business.

So is it fair to believe that still percentage of CMS business will go up going forward in overall business?

So as I also indicated, we -- from a long-term perspective, we expect that the CMS business will grow and contribute to a greater share of the revenues. However, there could be volatility in -- because the business itself is lumpy, so it may not manifest in consistent quarter-on-quarter growth. But if you can see this time over INR 240 crore revenue, INR 77 crores has come from CMS, which is almost 30% of the business. So we think this is a reasonable benchmark, but it may not necessarily be exactly the same going forward.

[Operator Instructions] The next question is from the line of Sajal Kapoor from Unseen Risk Advisor.

Yes. So my question is related to the nature of the CDMO or the clients industry. We have both large and micro-sized players. So on one hand, there are giants like Thermo Fisher and Lonza, and on the other side, we have a large crowd of smaller players. So given this fragmented industry, how is Neuland positioned for future growth? So I mean in India, we do have capital and labor cost arbitrage, but what about the technical competence and some of the other capabilities that we need to compete globally in this large industry?

Yes. Thank you for the question, Sajal. So in the CMS business, your question is what makes Neuland unique, and how do we compare ourselves with some of the other players? I think maybe 2 things I would say in response to that. One, we do have a lot of technical capabilities, which differentiate us from a lot of other players in this field. We tend to focus on those technical capabilities. It could be deuterated compounds, peptides, chiral chemistry, et cetera. And there's a long list, and I don't want to go into all the details. But we tend to focus on working with clients who find the need for such capabilities. That's the first point. Second, we find ourselves to be working more successfully when we work with biotech companies. That has been a model that has proven to be successful for Neuland, which means that our sweet spot is working with small- to midsized companies, who require an end-to-end solution from the CMO, rather than working with big pharma, who essentially look at CMOs more as task owners. And therefore, over time, we've built a very strong set of relationships with a lot of small- to midsized biotechs, whether they're in U.S., Europe or Japan, and we've built our relationships based on them. But what's been unique about Neuland is that we provide an end-to-end solution, which means that when they are filing their new drug applications, they can rely on Neuland not supplying just the API but the complete technical package, which is needed for a successful NDA.

That's helpful, sir. So maybe just secondly, it's a related question, but it's a different one. So when we sort of compare Y-o-Y over the last few years for our CDMO, or the customer manufacturing performance, both revenues and the pipeline of molecules have grown steadily, which is always a healthy indicator, but would request some qualitative input from your side. So for example, how innovators and clients from Japan, all the way to the U.S., view Neuland's capability today versus, let's say, 5 to 6 years back?

We definitely like to provide more qualitative information, Sajal. I think the data we provide, which is the number of molecules in different stages of clinical development, is a quantitative way that shows how our pipeline has been evolving. Besides that, we try to think of other qualitative ways to give you insight, but maybe a short off-the-cuff response would be that we tend to work a lot with U.S. biotechs. We also work a lot with Japanese innovator companies. We do work with big pharma, but that's perhaps not our core competence or not really the sweet spot, as I mentioned earlier. But we take your feedback, and we think about other qualitative ways to define the CMS business so that investors could better understand the business.

[Operator Instructions] The next question is from the line of Sunil Kothari from Unique Investments.

Yes. My hearty congratulations to team at Neuland for a steady and sustainable and growing business. Sir, I have only one question that is over next maybe a year or 3, top management, what the priority and focus area where you want to give your personal time, your core team, your R&D team? What exactly our major strategy focus area where you -- we want to maybe improve or want to maintain or create an organization which will be sustainable -- growing sustainably for maybe next 5, 10 years? So if you can just qualitatively talk about something there.

I think that's a good question, Sunil. I think, primarily, I would say it's 3 areas. I think there are a lot more areas that we focus on, but if I could talk about the top 3, I think 1 is definitely ramping up our generic product pipeline as well in terms of the number of products that we are scaling up and the DMFs which are coming out. That's definitely a focus area for us. The other focus area really is to get our manufacturing strategy right, because as Harsh was saying in his comments, there's a lot of trust, a lot of business and growth in the CMS business. As you already know, for our GDS portfolio, we're already a market leader on several of those molecules, and we're gaining market share in the remaining of them. So for us, it's important as to where these products are manufactured, what will be the capacity, how efficiently are we manufacturing them, so that we protect the margin, gain market share and consolidate our position. The other area would be purely in terms of people because the performance that you see today is a direct reflection of the hard work, which is being done by the entire Neuland team, just not the leaders but the people in various departments in terms of collaboration. Looking at where the problems are and figuring out ways to work together to solve those problems is a direct reflection of our financial performance today. And finally, we're also looking very closely at digitization as to how we embrace technology so that we can make faster decisions, more data science, more analytics, so that we become a much more agile and nimble organization. Because as the top management, as the Board, we feel that the future belongs to organizations which can be extremely responsive and agile in their decision-making as well as our execution. So those would be the top 3 or 4 areas that we will be spending most of the time.

The next question is from the line of Suhrith [indiscernible] from Paladin Capital Management.

I have two questions. My first question is could you please help us understand what is the split between price and volume growth on the GDS side of the business, and how that's contributed to revenue and profit growth?

Sure. What's the other question, [ Suhrith ]?

The second question is related to Unit III. I Wanted to understand what is the capital employed in that unit, and what is the revenue potential?

Okay. So let me answer the first question first. Basically, in terms of price versus volume growth, we would largely say, and we've made this comment in the last quarter also, we've seen a slight easing of pricing when it comes to general API pricing across the board. But that doesn't really translate to anything significant, maybe somewhere in the low percentage points, maybe 3, 4 percentage or so. But importantly, we see that as a sustainable increase in pricing. But that's something that we'll also have to see depending on how the circumstances, given the U.S. elections, the trade conflicts, et cetera, might pan out. But what's important is -- the volume growth is what's really driven the business. Products like levetiracetam, Mirtazapine, Labetalol that I mentioned have really driven volumes, and that's how the overall business has been moving up as well. Maybe I'll just ask Sucheth if he can just add some thoughts. And also maybe, Sucheth, you can respond to the second question?

Sure. So I think -- like Harsh was saying, I think our generic drug business has been a combination of volume as well as value, especially our baseline business. So as you know, we break up our GDS business into what we call the specialty business as well as our prime API. So we've seen that our growth in the prime APIs has exceeded the budget by about 12% or 15%, which means that we've gained the market share and we've seen an increase in volume. At the same time, we've also seen that our specialty business has performed as per the budget, and therefore, that's -- and it's become -- so between prime and specialty, they're really contributing to about 50% of the overall revenues, which is a clear indicator that the margin of the GDS business is growing as well. Right now, in terms of the capital employed in Unit III, I would say we're in the range of about INR 175 crore to INR 180 crores. But obviously, that number changes continuously because we continue to invest in that unit. As Harsh was saying, we've commercialized -- we've made the commercial shipment for the first time in this quarter from that unit, and we will continue to ramp that unit up. In terms of the projected revenues, we're just in the process of finalizing our budget for next year. So we don't have a clear breakup of what will be the revenue projection from Unit III, but it will be a sizable revenue. Thank you.

Sorry, can I just clarify? I don't -- I meant what is your maximum revenue potential from that unit? If you could quantify that in terms of -- in asset terms, if that's possible to do?

Not at this point. It's definitely a number that we are constantly working on. So we do have projections, but that will also change based on the product mix and how we allocate the CapEx in line with my earlier comment about our manufacturing strategy for each and every product.

[Operator Instructions] The next question is from the line of Deepak Poddar from Sapphire Capital.

So you spoke about a lot of areas where we are kind of focusing on and plus this Unit III as well, which has commenced and which will contribute to your revenue. So what sort of -- any sort of growth outlook that you can share there?

Yes. Deepak, as we mentioned previously, we don't give any specific guidance for the business. We've maintained in the past, and we've said that, on a long-term basis, we think that this business, we should expect a 15% to 20% growth. But that's something that you -- may not be possible on a quarter-on-quarter or a year-on-year basis. So I would just kind of reiterate that same comment.

The next question from the line of [ Keval Ashar ] from -- an individual investor.

Yes. Congratulations, sir, for a great set of numbers. So I have two questions. The first is, right now, we have 3 molecules in Phase III, 10 in developmental stage and 6 in commercialization stage. So how many molecules can we expect in commercial stage over next 2 years?

So the molecules which are currently in the commercialization stage, those are the molecules which are imminent and likely to get into the commercial stage. Typically, these are molecules which have -- we'll have to go through maybe an FDA approval or maybe alternate site qualification process. I would say it's hard to be very precise on the time lines because those time lines are not in our control. But I would say, maybe in the next 2 years, we would expect at least 3 molecules to get into the commercial pipeline, but that number could vary depending on a lot of circumstances from the FDA perspective, all the regulatory agencies.

Great, sir. And the second question is if you can give us idea of average revenue per molecule in the developmental stage and the commercialization stage?

It's very difficult to answer that question because there's a very wide range. You can see from our table, we have over 15 molecules. I can tell you that there are some molecules which only contribute INR 8 crores per year. There are some molecules which contribute maybe INR 50 crores, INR 60 crores per year. And we expect some molecules to maybe in the future contribute even much higher than that. So there's a very wide range. And I think we are hopeful that the growth will be better than what we expect. But we don't want to give any sort of guidance or even -- we don't want to give you any sort of an assumption at this time because the range is just too wide.

The next question is from the line of Hasmukh Gala from Finvest Advisors.

Sir, congratulations for a really good set of numbers. We have been tracking Neuland for quite some time and the structural changes that have been made in the last few years is really noticeable and appreciable. Sir, we just wanted to know on the macro perspective, what is basically driving the demand for API intermediates and CMS business? And how are we going to modify or tune our strategies to meet those emerging requirements? Like one of them was that people shifting away from China, and Europe is also going to do a lot of things on that. That is the first question. And second question was on the peptides. In the last quarter call, you had said that there are a few molecules which could be -- you will -- I mean they will reach the stage of filing DNF in probably 1 or 2 years. So what is the development on that side?

It's a good question, Hasmukh. I think, like I mentioned, there are a couple of different factors driving this. One is especially what's happened in the last 2 or 3 years with China is increasingly seen as a partner that cannot be trusted. And nowadays, the term that trade without trust has become a very common sentence, which is attributed to China. I think that's one development. People have also realized that API is at the heart of the pharmaceutical industry, but at the same time, not everybody can succeed in the API game because, at the end of the day, it is a complex industry. It is complex in terms of process development, scale up, large-scale commercial manufacturing. As Harsh was alluding to one of the questions earlier, Neuland's place in the pharmaceutical industry is able to take a technology which is underdeveloped, I would say, which is nascent, and help take that technology through the clinical pipeline all the way to commercial manufacturing, including the product life cycle and past the generic launch as well. And that's why Neuland has been increasingly successful, and that's why our customers trust us in terms of being able to take a molecule, which is in early stages of development, all the way to commercial launch and beyond so that they have a partner that they can trust with. So the other thing I would also like to add is that Neuland has never really competed only based on cost. Though there might be a cost arbitrage for certain molecules being manufactured in India, we've always focused on technology and our technical capabilities for the molecules and the projects that we bid on. So I think our strategy, going forward, is to make sure that we have a good manufacturing strategy that will give us the right capacity, right cost structure, have a supply chain strategy, which brings our supply chain much closer to home where the supply chain is much shorter. Even now less than 25% of our supplies come from China. By the end of this year, we expect that less than 10% will come from, let's say, China. So we are completely insulated. And we are actually spending most of our rupees and dollars here in India and other parts of the world. We will continue to invest in manufacturing as well as technology so that we continue to be more efficient and continue to build on those relationships that we have with our generic customers in terms of the number of molecules that they buy from us as well as the contract manufacturing customers so that they can come to us with their future projects as well as increase the share of product that they buy from us. So that's kind of what Neuland is trying to do in a nutshell.

Correct. Sir, as our majority of the revenue is coming from Europe right now, when Europe is going to scale up the API manufacturing percentage for some of the APIs, so how is that going to affect our business in future?

Well, Europe has been trying to scale up its API for the last 20 years, Hasmukh. I've heard this story line again and again. Europe has been having conferences at least 3 or 4 times a year with its API manufacturers as to how they can gain their position that they had in the '70s and '80s in terms of API suppliers. So I would not undermine Europe's effort. What I would say is that not every company can manufacture every molecule. I think Europe could become a leader in certain molecules based on where they invest their dollars and where they focus. But I feel that Indian API players, such as Neuland, are very strong. And API players, such as us, who've been around for a while, who have the depth to understand what it takes to manufacture an API reliably in compliance with a good track record with the FDA and a good cost structure and a future clear manufacturing strategy will succeed. And that will happen independent of whether you're in Europe, India or China.

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