Neuland Laboratories Limited (524558) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Neuland Laboratories Limited Q3 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Ravi Udeshi from Christensen IR. Thank you, and over to you, sir.

Thank you, Janice. Good evening, friends, and good morning to those who are joining from the Western part of the world. Welcome to the Q3 FY '21 Earnings conference call of Neuland Laboratories Limited. To take us through the results and to answer your questions today, we have with us the top management from Neuland, represented by Mr. Sucheth Davuluri, Vice Chairman and CEO; Mr. Saharsh Davuluri, Vice Chairman and Managing Director; and Mr. Deepak Gupta, CFO. We have sent out a press release as well as the detailed presentation, and the same has been uploaded on the website as well as to the exchanges. You could take a look at that, or in case any one of you wants it we could e-mail the same to you. Before we start, I would like to remind you that everything that is said on this call, which reflects any outlook for the future or which can constitute as a forward-looking statement, must be viewed in conjunction of the risks and uncertainties that we face. These uncertainties and risks are included, but not limited to what we have already mentioned in the prospectus and into subsequent annual reports, which you will find on our website. With that said, I will now hand over the floor to Mr. Saharsh Davuluri, who will now give the highlights of the quarter gone past. So, Mr. Saharsh.

Thanks, Ravi. Good evening, friends. Thank you for joining this call. As in the previous quarters, I'll be speaking for a few minutes on the overall financial performance and also touch upon the drivers of the business, post which we'll open the call for Q&A. I hope you have had a chance to go through our [ new-look ] presentation that we had shared earlier today, and we've also filed these -- this presentation with the exchanges. The idea of this presentation was to ensure that investors get to understand the business in greater granularity. We would certainly appreciate your feedback on the slide deck, and we'll be happy to incorporate any inputs that you believe will make the disclosures more informative. Let me turn my attention to the quarterly performance. So after 2 quarters of headwinds due to COVID-related issues where we faced multiple challenges on various fronts, we believe that the operations have started to stabilize though we continue to remain cautious. We're taking adequate precautions at our workplaces and factories to ensure safe working conditions for all concerned. The quarter's performance revenues of INR 245.6 crores was almost a 20% growth over the corresponding quarter in the last fiscal, and the driver of this growth was good traction, both from GDS as well as CMS segments. We're confident of sustaining this momentum in the medium- to long-term as well. The EBITDA margins at 19% showed an improvement of 480 basis points over the corresponding period. This improvement is something that we alluded to in the past, and we are quite satisfied with the trajectory that the margins have taken over the last few quarters. We hope to sustain the margins with better business mix, operational efficiencies and overall growth in the business. On the GDS segment, we have seen Levetiracetam as well as Mirtazapine as the key drivers for the Prime segment while Dorzolamide and Deferasirox have done well in the specialty space. CMS business continues to move along with good momentum, and this quarter saw a greater contribution from development projects that are close to commercialization. We believe our CMS portfolio has built some scale now, and we are definitely seeing positive momentum going forward. Focus on key CMS projects continues to be a top priority for the company and will be critical for ensuring the current momentum and performance. Unit III has started commercial operations, as mentioned in the last call, and we've started shipping 2 APIs from this facility to our clients. While it has taken time for Unit III to get fully functional, we now believe that the base for future growth of the business has been established, and we see Unit III driving growth as more products start getting approved for production from this facility. I would now request Deepak to take us over the financials in brief.

Yes. Thanks, Saharsh. Good evening, friends, and a very warm welcome to everyone for our Q3 FY '21 earnings call. I will touch upon the financials, after which we'll open this call for Q&A session. Total income for the quarter was INR 245.6 crores, which was a growth of 20% on year-on-year basis and 1.5% on quarter-to-quarter basis. EBITDA was INR 46.7 crores. This translates to EBITDA margin of roughly around 19%, which was 480 basis point improvement over the corresponding quarter and 190 bps on a sequential quarter basis. Profit after tax stands at INR 26.7 crores, which shows improvement of 141.5% on year-to-year basis and 25% on quarter-to-quarter basis. PAT margin for this quarter was almost 11%. EPS for this quarter stands at 20.79%. The cash and cash equivalents in our books are INR 32 crores as of today. The debt for our books, including working capital, stands roughly around INR 199 crores, which includes term loan of INR 115 crores, and our debt margin continues to be at a comfortable level. We had a CapEx of INR 78 crores during this financial year, for 9 months till date. With this, I will request the moderator to open the lines for the Q&A session. Thank you.

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

Congratulations on a very robust set of numbers again. So first question is regarding our customers...

Excuse me, sir. I'm so sorry to interrupt, but your audio is not clearly audible, sir. Could you please speak a bit louder and use the handset mode?

Is it better now? Hello?

Yes, sir. You may go ahead.

Sure. Okay. So first question is regarding our peptides business. So global [ manufacturers ] are projecting significant growth in the peptide molecules with respect to the chronic diseases like diabetes and some peptides like Liraglutide and Semaglutide are [indiscernible] further opportunities, which are also disclosed in our latest pipeline of molecules. So in fact, the forecast for Semaglutide is well over $8 billion projected to reach there by 2026. So given our decade-long focus on peptides, chemistry and the surging global diabetic population, the generic opportunity in peptides should be quite meaningful when these big molecules that we have disclosed in our pipeline they go off patent?

Yes. Thanks for the question, Sajal. Just to be clear, the question was about opportunities in peptides. I think given the fact that peptides are being developed for more broader indications like metabolic diseases, like diabetes, et cetera. And the question is specifically about, is there anything Neuland is doing on the generic side of peptides. I think just to respond to that question, as all of you know, we've been working on peptides for several years now. Initially, the work -- the focus is more on making peptide building blocks. But more so the last several years, we've been making new chemical entity peptide APIs as well. And as a result of that, Neuland has been involved in a lot of CMS projects which are peptides. Over the last couple of years, we've also consciously looked at the generic peptide opportunities. And given the fact that Neuland has a strong GDS business, we believe that peptide -- generic peptide APIs could actually add a lot of value, both to our clients as well as to the company as well. We've started developing a few peptide APIs internally, we've already developed peptides like Linaclotide. We are working on peptides like Liraglutide and Semaglutide. And these are peptides, as you have also recognized, have huge commercial value going forward. However, these peptides being fairly complex in nature, the time line for development, filing a DMF are longer. Typically, small molecule takes anywhere from 3 to 9 months to file a DMF, whereas a complex peptide like Liraglutide or Semaglutide could take 2 to 2.5 years. But given that the opportunity is fairly large, and we are excited about these molecules. And hopefully, we will have a few interesting partnerships on the generic peptide side as well. And we continue to keep the focus on the CMS business for peptides as well.

Sure. And secondly, when it comes to novel molecule for the NCE, we have seen much faster approval coming from the U.S. FDA around the areas of the rare diseases or the orphan diseases, and majority of these molecules in pipelines are generated by small and virtual biotechs, which is -- which has been the core focus for Neuland's custom synthesis business. So how do you see our CDMO business scaling up from here? I see we have done 54% Y-o-Y growth here. But how do you see the medium-term future? And can this become 40%, 50% of our overall business in the medium term?

See, as you said, Sajal, the NCE business, obviously, the cycle times for approvals of orphan drugs is much shorter. And depending on the indication, some drugs take longer time, they require along with clinical trials. Neuland at the core of it is an API company, and we are agnostic to therapeutic areas as well as the concepts of orphan disease versus conventional disease. So our portfolio of CMS projects has a fair mix of orphan drugs as well as conventional drugs. And where we've had orphan drugs, we've seen that the time lines for approval has been fairly shorter. I think today, if you look at our pipeline, we are fairly confident -- as I had mentioned in the opening remarks also, we are seeing that a lot of late clinical molecules, already commercial molecules are getting scaled up today. And these are molecules which will add to the commercial revenue of our CMS in the future years. It's difficult to give a clear guidance on what will be the revenue contribution of CMS on the total business because it really depends on how these drugs will perform end market wise and what kind of API revenues it will generate for Neuland. But our estimate this year, our CMS business is about 1/3 of the total business. And it was last year, maybe it was 25%. So we expect that the proportion of CMS business to the overall business will increase. But whether it will be 40%, whether it will be 45% or 35% is something that really depends on how these molecules scale up and become commercially successful.

That's perfectly understandable, Saharsh. And lastly, in the post-COVID world, we have seen a surge in depression and anxiety cases worldwide. Neuland, as we know the global leader in molecules like Levetiracetam and Mirtazapine and our sales have been growing in these molecules as well in recent quarters, also something like Dorzolamide catches my attention because in a world where everything is getting online and Zoom-enabled as well as the aging population, which is, again, linked to cases of -- rising cases of glaucoma and myopia, these 3, 4 molecules, I think, are very well positioned given our backward integration, of course. And so even on the GDS side, these specialty molecules like Dorzolamide and maybe Levetiracetam and Mirtazapine, et cetera, they should continue to see some traction as we have been reporting in recent quarters. So what are your thoughts around this, please?

So Sajal, going back to your earlier comment. The reason why we're seeing and, I think, Harsh mentioned, Mirtazapine is one of the key growth drivers on the GDS side. And that's happening not essentially because the market for Mirtazapine itself is growing, it's also because of a conscious choice of strategy for Neuland saying that whatever molecule we will get into we'll continue to invest in that molecule in terms of cost, capacity, customers, so that we become the market leaders over the long run. And that's why you're seeing all the molecules such as Mirtazapine, Levetiracetam as key growth drivers because we continue to invest in those molecules to become market leaders. Similarly, as you know, one of our key focus areas has been to develop our capabilities in specialty APIs, whether it is Dorzolamide, Salmeterol, Indacaterol, so on and so forth. So we're seeing a lot of traction from those. So our overall strategy doesn't change, whether it's a Prime molecule or whether it's a specialty API. We will continue to focus on it and continue to gain market share. So you've kind of answered your question yourself that the market opportunity is there, and our focus will continue to establish ourselves as market leaders.

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

Yes. Really, congratulations for a great set of numbers. Just 2 things, sir, I wanted to know. Is there any element of seasonality that our Prime and Specialty both have degrown in value terms in Q3? That is my first question. And second question is, from this budget which was announced yesterday, are there any major positives or negatives for companies like us?

Could you repeat the first question?

Yes. My first question was that there is a degrowth in revenue in rupee terms in the Prime segment and Specialty segment. So is there any element of seasonality in that? That was my first question. And second question was budget related. Are there any positives or negatives for company like us in different areas?

So in terms of the absolute numbers, there hasn't been a degrowth. I would just like to clarify that.

It was Q-o-Q, sir. Q3 over Q2. Q3 over Q2, there has been a minor, small degrowth of 7% and 8.5%.

Correct. So I think between Q3 and Q2, there has been a minor dip, as you've rightly said, I think Prime is at INR 106 crores and niche is -- Specialty is about INR 46 crores. As -- I think a lot of this is a factor of what gets shipped out in which quarter has, and it's not necessarily characterized by any trend per se. I think it just happened that whatever shipments that happened in Q3 those were the numbers. But after that, there's no discerning trend or concern or anything whatsoever. I think I would probably look at a larger horizon like a YTD number of this year versus last year to get a better clarification. And I think on an overall [ sense ] basis also, we are quite happy with the growth not just at the GDS level but even within GDS, Prime and Specialty have been charting their own growth. But for example, if you take a molecule like a Paliperidone it was -- the sales of Paliperidone in Q3 were not as much because there are no shipments scheduled. But when that happens, that number would go up. So I think it's a matter of just how the shipments have gone out, but there's nothing more particular I would add to that.

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

So maybe just a quick response on the budget question previously from Deepak?

Yes. So maybe budget, what we have done, we have evaluated the changes in the budget which may impact our business. So one thing which we picked up is regarding the goodwill. We do carry goodwill in our books, and the tax department has come up with a provision wherein the goodwill -- debt allowability has been reversed from the previous year, which means the current year. So currently, we are taking benefits of goodwill in tax liability. So that benefit will go away from us. So that is a very small portion of the total tax liability that we have. But that is the only impact which we can foresee as of now because of the recent changes in the budget, which has come up.

Mr. Kothari, does that answer your question?

Yes.

The next question is from the line of Keval Ashar, individual investor.

Yes. Congratulations, sir, for the great set of numbers, especially on the scale-up in the CMS segment. What I'd like to ask is to know if we see a sustainable growth in our Specialty segment as revenues in the segment have been flattish over the last 4 quarters, if you see. So can you throw some light on this? And what are the key molecules that you see driving the segment ahead?

So I think in terms of the specialty segment, I think, as I mentioned in the opening remarks, products like Dorzolamide, Deferasirox have been fairly important drivers of the business recently. But I think other than that, we've had products like Salmaterol, Paliperidone as well as products like Entacapone, Ezetimibe, which also have played a key role in the growth. In terms of the last 12 months or the recent period, I think the growth in the Specialty has been relatively lower, but it still has been decent, maybe around 15%, 16%. I think going forward, the growth will come in spurts because as we expect products to scale up, we expect that the volume growth will come and we should see healthy volumes. So for example, we expect volumes from Ezetimibe, Paliperidone, some of the other products to pick up in the next 1 or 2 years, and that should probably drive the growth of the Specialty segment. And a lot of the new products that the company has been developing also are in the Specialty segment. So I think over time, Specialty segments will, along with Prime, drive the overall GDS business.

The next question is from the line...

Janice, before you move on, I think the previous person, Vishal Kothari, he didn't get to ask his question. So Deepak was actually answering Harsh's question, and he got removed from the queue. So if there's any questions that he might have had, you might want to just check with him. I just thought I'd let you know.

Please allow me a minute, sir.

But in the meantime, we can move on. Because I think it was important to answer his questions.

The next question is from the line of Sahil Sharma, individual investor.

Congratulations on wonderful set of numbers, especially the way the CMS segment has performed. One thing we see is that the total number of projects has only increased by 2 from, I think, 74 to 76 in the last 1 year. Just wondering if you can give some direction on how that will pan out and whether that slowdown in growth is something structural or what is the reason there?

Thanks for the question. I think it's important. And I think at the outset for us, the table that we provide is just to show the current health of the projects. And again, in terms of our business itself, it's important to look at these numbers on a broader horizon rather than a quarter-to-quarter horizon. So I think as I was making this point, even on the last conference call, this number of 76 that we have was probably around 36 or 38, 2 years ago. So over time, it has gradually increased. And what's important is that the quality of the projects has increased. We've seen more projects coming in into Phase II, Phase III and development. And that has given us a very strong basis for good performance in CMS in this financial year as well as the previous financial year. Now coming to the specific question of 78 falling to 76, it's something that we think is part of how our pipeline evolves. There will be periods where we may have even a reduction in the number of projects because we've come to know that Phase II molecule has failed, so we would remove it from our pipeline as part of our diligence. And as we get new projects, we would continue to add them. On an overall basis, I would also like to share that our business -- new business momentum has continued to remain strong. In FY '21, this current financial year, we've added more new business than in the previous financial year. And Neuland has also started to establish a lot of business through the referral network. So which means that we are getting a lot of business through our -- the reputation and the kind of track record we have established for ourselves. And therefore, we are less reliant on marketing for new projects. But nonetheless, we believe that over time this number will keep increasing. But I think what we are more keen on looking at is the quality of these molecules, you'd rather get a molecule that contributes INR 50 crores of profit than 10 molecules which don't give us that much. That way, we are -- we continue to be very happy with this pipeline.

Right. The next question I have for you, the second one is that if you look at the different segments, there is Prime, there is Specialty and then there is CMS and my understanding is that the Prime segment would have the lowest margin as compared to the CMS segment. And what we see is that even the last couple of years, we have been filing Prime segment, DMF -- DMF for APIs in the Prime segment. My primary question is, do we have any kind of competitive advantages there because of which we keep filing APIs in this segment where the margins are overall much lower than maybe your CMS segment.

No. I think it's a good question. I wouldn't say -- I mean, I wouldn't look at all the molecules in the Prime segment with the same lens because even in the Prime segment we have certain molecules which have very good margins. And at the core of our strategy is to actually look at each and every molecule individually and identify where the margins are under pressure and what we can do as an organization to unlock some of those margins. I think the name of the game for the Prime segment is sustainability. That means that we have to stay with that molecule and long enough so that we can gain a leadership position and the margins as we've seen based on our track record continue to be healthy. Therefore, even in the past, in repeated calls, we have said that our focus is never to deemphasize the Prime segment, but continue to make investments in Prime, Specialty as well as CMS, because it's not for the Prime segment which contributes to a significant part of the profitability though the margins may not be as high as a Specialty and CMS, it's still a very important part of the business.

We'll take the next question again from the line of Mr. Sunil Kothari from Unique PMS.

Sir, very hearty congratulations to Mr. Sucheth and Mr. Saharsh for very well and very detailed transparent explanation to every question to the investors. I mean it is enhancing our comfort and confidence. So please continue this practice. Sir, my question is you have -- you will have some objective and some vision for the company. Other than revenue and profit and all this targets, what basically your focus area -- where you want to see yourself over the next 3, 5 years? Any type of qualitative reply will be very helpful.

I think -- thanks, Sunil, for the question, and I really appreciate your kind words. I think we're very passionate about trying to make Neuland a world-class contract manufacturing organization, a destination for APIs. And we want to be seen perceived by the pharmaceutical industry as a reliable partner when it comes to APIs. And I think when it comes to the API space between contract manufacturing of NCEs as well as manufacturing of generic APIs, we see this to be a very large market, probably $35 billion to $40 billion in terms of market size. So we see a huge headroom in terms of possibilities of growth. We, obviously, want to do that meaningfully through a mix of Prime, Specialty as well as CMS. And we want to do it in a sustainable way. And obviously, we want to do it by investing in the right kind of technologies that give us a certain unique value proposition and ensure us sustainable growth. In terms of financial guidance, I think we've been very cautious in terms of giving guidance per se because in the past we've always maintained that from a 3- to 5-year horizon perspective, we at least expect to have a 15% to 20% kind of revenue growth. And in terms of margins, we aspire to be closer to 20% EBITDA margins. But again, this is subjective to how exactly the business unfolds and a lot of the macroeconomic movements.

Correct. And sir, related to this reply, I just would like to understand from you, which are the major area of the weakness or may not be weakness, but where you feel you would be giving your personal, major time where you see you're required to overcome some hurdles or some challenges for attaining or achieving these objectives?

I mean we could -- I mean, it's a good question, Sunil. We could call them weaknesses, we could call them threats as well. And I won't necessarily differentiate them. I think one of the areas is in some of the molecules, there's always a constant pressure on margins as well as supply chain. One of the things that we've done over the last several years, even much, prior to being hit by COVID, we actually derisked a significant part of the supply chain and brought it closer to home. So there was a point where almost 60% of our raw materials were coming from China. By June of this current calendar year, less than 10% of all our raw materials will come from China. And that too, even for that 10%, we're not dependent on China. We're just buying from China because it makes us much more competitive. In the past, Chinese have been good partners for us. They helped us stay competitive. So we're taking a very conscious call of maintaining that. I think apart from that, we always have the dollar versus rupee appreciation versus depreciation, nobody knows where this is going to go. People think it's going to depreciate. There's an equal number of people that think that is going to appreciate, but it's anybody's call as you would know. So that's definitely a risk that we face. There's always a risk of regulatory action. There's always a risk of government coming up with policies to protect their local economies. Sometimes the expense of countries from which they're actually importing, that's another significant risk. There's always risk of quality, or some of the molecules being cannibalized by new launches of other molecules. So long story short, we have a very robust system within the organization to look at these kind of risks or weaknesses and constantly discuss them so that we are aware of what could go wrong. It doesn't mean that we'll be able to anticipate everything that comes our way as the whole world has seen with COVID. But at least we're in the right state of mind so that we can be agile and redeploy our resources, the same way we did in this current financial year so that we are able to perform to our potential.

The next question is from the line of Yachna Bhatia, individual investor.

Congratulations on a good set of numbers. My question was, how many years do you think it is going to take for a full-scale up of Unit III? And accordingly, what are your next CapEx plans? Which segment and what kind of amounts do you see in CapEx over the next 2 to 3 years?

So thanks for the question, Yachna. I think in terms of scalability of Unit III, I think it's very Unit III is geographically, our largest site. And today, it's -- as we mentioned it's fairly underutilized because only a few production blocks are operational over there. Our plan over the next 2 to 3 years is to continue making specific investments to create specific production areas within Unit III in order to meet the needs of the CMS as well as the GDS business. So in many ways, as I mentioned in my opening remarks, a lot of the growth in the next 2, 3 years will be driven by the capacities that exist in Unit III as well as the capacities that we will be creating in Unit III. How long before we will have to expand beyond Unit III also largely depends on how our business grows over the next 3 to 4 years. We would expect, depending on how quickly the business grows, perhaps the need for a fourth facility. But at the moment, there are no plans for that because Unit III has a lot of headroom. In terms of investments, Deepak, you want to give a quick response?