Neuland Laboratories Limited (524558) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to Neuland Laboratories Limited Q4 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ravi Udeshi from Christensen IR. Thank you and over to you, sir.

Thank you, Steve. Good evening, friends, and good morning to those who are joining us from the Western part of the world. Welcome to the Q4 and FY '21 Earnings Call of Neuland Laboratories Limited. To take us through the results and 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; Mr. Deepak Gupta, CFO; and Mr. Sajeev Emmanuel Medikonda, Head of Corporate Planning and Strategy. We have sent out the press release as well as the detailed presentation and the same has been uploaded on the website as well as the exchanges, you could take a look at that or in case anyone of you wants it. We could email the same to you. Before we start, I would like to remind you that everything that is being said in this call, which reflects any outlook for the future or which can be construed as a forward-looking statement must be viewed in conjunction to the risks and uncertainties that we face. These risks and uncertainties are included, but not limited to what we have mentioned in the prospectus and in the subsequent annual reports, which will find on the website. With that said, I will now hand over to floor to Mr. Saharsh who will give the highlights of the quarter and the year gone past. Over to you, Mr. Saharsh.

Thanks, Ravi. Good evening, friends. Thank you for joining the call. But before I start, I hope all of you are healthy and safe staying at home. So I think in terms of my opening remarks, I'd like to start off by saying that in line with the previous quarters l will share a few comments about the overall financial results as well as the drivers of the business. And then we'll open up the floor for Q&A. So I trust you've gone through the presentation that value investing towards was posted earlier today on our website. And I believe it's also been filed in June. As always, we would welcome any feedback on the material shared and we will try our best to incorporate them going forward. Our operations this quarter were at near-normal levels. However, raw material sourcing face logistical issues in the last couple of week of March on account of the lockdown again being enforced in several state and the related flight cancellations, et cetera. On the workplace safety and employee health front we have been taking the required preventive measures both at the office as well as at our facilities, and that has seen us managing well given the current environment. On the financial front, we recorded sales of INR 259 crores, which is a growth of more than a third compared to the corresponding quarter of the last year. The same was led by high growth in GDS and complemented by a stable growth in the CMS business. On a full year basis overall top line grew by almost a fourth to INR 953 crores with traction witness in both CMS and GBS. Our GBS business continues to see increasing volumes. This was led by the key molecules of [indiscernible]. Specialty had a diversified base with some of the important molecules being the [indiscernible]. Going forward, we expect the GDS to have increasing momentum both in the short term as well as the long-term. The CMS business has seen growth both from the baseline as well as the development projects which has performed in line with our expectation. In the immediate term, we are focusing on some key CMS projects which are approaching commercialization and in the long term, we continue to focus on CMS business origination across key geographies, so mostly North America and Europe. We'd also like to highlight that the CMS business may look lumpy on a quarterly basis, due to either seasonality or lumpiness in the orders that we receive, but it is expected to deliver growth on a yearly basis. The industry operations have gradually been commercialized, on a product wise basis and we expect it to show good growth over the next 3 years. With that, I'd now request Deepak to take us through the financials in brief. Deepak?

Yes. Thanks, Saharsh and good evening, friends, and very warm welcome to everyone for our Q4 FY '21 earnings call. I will briefly update you on the financials, after which we open this call for Q&A session. The total income for this quarter was INR 259.3 crores, which is a growth of roughly around 33% on a year-to-year basis and 5.6% on quarter-to-quarter. The EBITDA for this quarter has gone by up to INR 40 crores, which equates to EBITDA margins of 15.4%, which is a decrease of 100 basis point over the previous year's quarter and 360 basis points on a sequential quarter basis. This was due to the impact of INR 84 on account of entity that should be in statement orders for environmental restoration and onetime settlement charge that we have taken for the income tax department 5 years disputed income tax liability for INR 9.5 crores. Both the said liabilities are one-off immature and those are earlier declared in our annual reports as continuing liabilities, and now these have been displayed when we have taken a single charge for this. Some portion of the EBITDA was also impacted mainly due to the COVID-induced logistics issue we showed in the raw material sourcing. Profit after tax was deposited INR 17.2 crores as compared to the loss arrived in previous year quarters, and INR 26.7 crores in the immediately preceding quarter due to the results as stated above. This quarter's EPS is at INR 13.43 and the cash and cash equivalent as on the date of the balance sheet stood at INR 1.1 crores. For FY 2021, our total income was INR 953 crores, which is up by 24% as compared with the previous year's, due to the increase in the commercial operation. The EBITDA for total year is INR 152.5 crores, which is higher by 54% which is mainly because of the improvement in the business that we have seen. The EBITDA margin stood at 17.1% for FY '21 being higher by 340 basis points for the same period for the reasons stated above. But [indiscernible] INR 80.3 crore. And our gross margin is at INR 170 crores and our gearing ratio continue to decrease on a year-over-year basis. We have also undertaken CapEx of around INR 105 crores for FY '21. With this, I now request the moderator to open the line for Q&A session. Thank you very much.

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

Am I audible?

Yes.

Sure. So just a couple of questions. So first one is around our CNS molecule researchers here at the University of Liverpool and the King's College London are pointing towards certain long-term impacts induced by COVID 19 related to various CNS disorders and even the recent data published by IQVIA points towards a number of post COVID side effects related to Parkinson, insomnia, Alzheimer's, seizure, depression, anxiety and so on. I can see that in FY '21, many of our CNS molecules have done very well. But given England's long history of inter filings and domain expertise, how do you assess the emerging problem opportunity landscape?

Thanks for the question that Sajal, not sure if we are best qualified to answer that question, but I think this trauma CMOs perspective, I think as you rightly said, there is a lot of interest in post COVID medication, there has been a lot of research done then various areas in pulmonology ARDS for example is 1 area, where lot of companies are looking at discovering new drugs for addressing an issue like ARDS which I think is problem that patients who have recovered from COVID phase, again as a CMO, we work with a lot of biotech companies who are coming up with a lot of innovative drug and that's part of that effort, we are also fortunate to work with the few biotech companies who are looking at these area. However, I must say with caution that we still don't know what the outcome of that research is and what the outcome from a business perspective for someone like England would be. But yes, we do see a lot of activity in this area. There are few opportunities that we are working on and fingers crossed hopefully something might be big from that.

Sure sir. And secondly, we used to read in newspapers and media claims that China is ahead of Indian APIs but the CEB filings across many molecules doesn't support those media hypothesis. So for example, propofol has no CEB filing from China and despite the fact that there are very few players globally and the drug sales in short supply. And I mean, the question is why molecules like propofol are difficult to make and why do propofol kinds of molecules don't attract competition, despite being in short supply?

So couple of things, one, even though China was in the news a lot. It never really established itself for complex on specialty API that credible source to the pharmaceutical market, where China was able to make some penetration was for high value antibiotics or semi-synthetic APIs, but that's what they got limited to. Now coming back to molecule such as propofol, I think partly answered the question that you asked, is that they are complex, they're difficult to make and require a very high level of compliance to be able to make the product on consistent basis. But I think Indian manufacturers, I believe Indian manufacturers have established that with a lot more credibility than anybody else.

Sure. And finally, if I could just squeeze in one another question regarding our CDMO or CMS pipeline. So yes, there is a significant traction Y-o-Y 42% sales growth is really commendable, when I look at the commercial look out 6 in total. I know it's a very confidential business is NDAs. And we don't discuss you know who we are supplying what those innovators are, but would it be possible to at least add some color in terms of the therapeutic areas where this 6 APIs are currently positive. So I'm not interested in your customer name, just therapeutic areas for these 6 commercial APIs in the CDMO.

No, I understand your question Sajal, I think let us make a note of it and just think about if there is any way to provide more color. So maybe if you don't mind, we'll get back to you on that.

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

Sir, congratulation for annual good set of number. Sir, my question is on Unit 3. I think since long being long-term settlements, we are awaiting a really good commercial outcome from Unit 3. So if you can be little give details broadly on how things are shaping up, what type of high-value products are we going to produce any like as rightly, you mentioned in [ New York ]. This presentation also that by year-end, we are expecting a good pickup from that unit little bit more detail on that Unit and investments which we made in the current year like our all C4 since INR105 crore we invested. So what is the exact in which area, what type of investment do you make and how we are proceeding on further CapEx in current year?

Yes. Thanks for the question about Unit 3, so Sunil as we had indicated in our last quarter's earnings, we have just operationalized commercialized Unit 3 and as of now, we have 2 APIs that we have commercialized from that unit and that we had also indicated in our previous commentary. Unit 3 is the newest manufacturing site and that is where we intend to create more and more API capacity for the future business. Now in terms of our intention for Unit 3, as we are scaling up new molecules, both our CMS side as well as the GDS side, we are looking at either creating capacity for them in our existing facilities, which is unique or not in Unit 2 or in the case it's not suitable for Unit 1 or Unit 2, we are creating capacity for those products in Unit 3. So in many ways, the way our investments are going on Unit 1, Unit 2 will only see a minimal increase of capacity for new products. There will be de-bottlenecking, there will be modernization related CapEx. But Unit 3 will be where a large part of the investment will happen and that's where a lot of volume increase will happen and that's why we had indicated that by the end of this financial year FY'22 we expect a reasonable level of commercialization for Unit 3. So the way we visualize it is Unit 3 is where a lot of additional production drops and new APIs will get skilled up. Unit 1, Unit 3, we will continue to streamline the bottleneck modern and in terms of business divisions both CMS and GDS molecules will be going into both. Ad whatever CapEx indications we had given previously also that CapEx also will go into these facilities, based on the specific project requirements.

So Unit 3 must be contributing very minimal currently and it can grow substantial part of our revenue, over a period.

Yes.

Okay. And sir, my second question, such a very near-term view on quarter-on-quarter number, manufacturing cost has gone up, our employee cost has gone up. I'm not talking about exceptional expenses, which we debited but employee cost, manufacturing cost, both has gone up, and our top line so just broadly, any of your thought process on cost structure, how it is changing, or it should now stabilize at this level in terms of fixed cost, some thoughts on that.

So Sunil, I'll just tie it up what Saharsh was saying earlier, is that as we ramp up Unit 3 as well, we are also recruiting a lot of employees in Unit 3, so that we are making it ready for commercialization of multiple products. So we will see this where, there will be an increase in employee cost as well as manufacturing cost, and then we will start to incur the revenue. So there will be this period of a little bit of a mismatch. But I think as far as we are concerned, it is business as usual. We are not expecting any exceptional increase in overall cost and this trend should continue.

Mr. Kothari, sorry to interrupt but for any follow up, may be request you to rejoin the queue, please. The next question is from the line of Sheersh Jain from Apex Capital.

I wanted to understand about the pricing power that you would have in some of the molecules where you dictate the market share. So I wanted to understand are you able to dictate the prices in such molecules and quickly passed on any rises or generally you are into long-term supply contracts in such molecules, where you have the majority of the market share?

Yes, thanks for the question. So typically when it comes to the GDS business. We don't have any long-term pricing contracts usually on a year-to-year basis. And even within the GDS business, I think if you have to try to look at it segment wise, perhaps on the price side, the prices are more market driven, although new given our track record and our ability to provide high quality API. We tend to have a small premium in terms of what the market prices are. When it comes to the specialty products, there is not as much of the strong pricing reference as it is for prime; so therefore they tends to be a little bit more variability in terms of pricing. And a lot of this is also dependent on the other aspects, the geographies, what kind of competitors are there, what kind of specifications we are able to provide for the API, et cetera. Most of our products are in a non-commodity type of category and therefore we are not too much driven by spot prices and things like that. On the CMS business, our prices are largely covered by long-term pricing contracts which we have. But again they tend to be reasonable. So if we have exceptionally high cost if there are unforeseen expenses that need to be passed through. We typically have the leader in the customer to renegotiate the prices as well. And it also again ties up with the environment that the industry as a whole is facing. So if you look at the situation in the US for the generics 2 or 3 years ago there was an enormous pricing pressure. So perhaps at that time negotiating for a small price increase are passing through certain cost would have been a little bit more challenging. But how the situation plays a little bit it's a slightly dynamic environment where GDS prices are a little bit more referenced to competition and CMS pricing is based on what we have contract.

Okay. And one last question I have is how different would be the margins in the specialty API segment and CMS segment given the challenges that both of these segments have. So I'm not looking for a specific number. I'm just happy to learn about the industry standard. So given the complexity of both the processes, how different would be the margins in both the specialty API and the CMS?

So I think they would largely be comparable. I would say, Sheersh, we have seen. So again in CMS, we have molecules where we are second source. And then the margins tend to be slightly on the lower side, some of the newer molecules that we're working on the other primary source the set to be slightly higher. Similarly for specialty as well in fact, if we have to put them, next to each other I would say the margins are quite comparable and obviously these are better than the prime molecules.

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

Congratulations to the management on a great set of numbers. I just wanted to ask the management, how is the allocation when it comes to the Unit 3 facility and is the INR 105 crores CapEx and before the planned CapEx is the management to throw some light on the allocation to it peptide molecule and some clarity on what are the kind of projects that we are doing that are in the pipeline for the peptides division.

Thank you for the question. So I think when it comes to peptides we indicated in the past, I think most of our peptide molecules, the part of our CMS portfolio. And today, I think we have almost a dozen or so out of the 78 CMS projects that we have today. These projects are all in various stages of scale up and whenever we do scale up that tight. Actually, it does not happen in Unit 3 it actually happens in our Unit 1 because that's where we have a peptide facility and that's where we intend to further augment that state manufacturing capacity in the next year also. So today we have maybe about 2 peptides in CMS, we really close to commercialization. But they have not yet in commercialization and also we have 2 peptides which we are developing for generics, which is by the GDS new product portfolio and as and when these molecules get scale up the scaling them up in Unit 1 and coming to answer your question as the scale off the FX goes beyond the capacity we have a Unit 1 will possibly create more capacity for them in Unit 3, but that's not in the immediate future.

Okay. And I just wanted to note that last quarter, you have had mentioned that slowly gradually, we've reduced our dependence on the import of the starting materials from China and now it is less than 20%. However, due to the sporadic rise in the cost of CPIs that the whole industry as a whole is facing, can you give me like a short-term or medium-term outlook on how we will be able tackle our input cost quarter-on-quarter? Or maybe not even quarter-on-quarter or a yearly basis that since we have been procuring more and more starting materials from domestically or some other partners; is there any light that you can throw on how the cost effectiveness would be achieved?

Jay, just to clarify, even in the last call, overall objective for procurement and supply chain management is to shorten the supply chain and also build multiple option. Our goal was never and is not the foreseeable future to completely stop sourcing from China. All we want to make sure is that we have alternate equally viable option, so that we're not completely dependent on a specific geography for our supply chain. Now, notwithstanding that you know, there will be -- we're already seeing some cost escalations. Given the situation, we are collaborating with our customers to see how we share the implications of these increased costs, but you can be rest assured that our goal is to decrease the supply chain and it is not only because of cost.

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

Really good to see the CMS pipeline evolve the way it has, especially the sign and development on molecules in the development stage have gone up from 12 to 14 now. Any guidance on that we can expect next commercialization of the CMS molecule's time line?

So I think we -- you can't be able to really provide any guidance on the commercialization and then it will happen, but I think what we can say Sahil is that these are fairly late-stage molecules, we have many of them which are actually in Phase 3. Some of them completed Phase 3 and actually are commercial and we are kind of in the midst of validations etcetera. But given the fact that these are for highly regulated markets and their new application process, I think it would be better to look at a slightly medium-term horizon. Maybe 2 to 3 years' time for a lot of these molecules to get commercialized. Also keeping in mind that there is a portfolio effect as well, right, because we can have several molecules but we are also mindful that not every molecule may be commercially successful. So I think a 2 to 3-year time frame is a good time frame to look at the CMS pipeline that we currently have, getting reasonably well-commercialized.

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

Sir, my first question is a recent disclosure to the exchange regarding downward revision of some land agreement area that we were supposed to receive. So if you can just focus on [indiscernible] sold some 120,000 square feet this quarter, which you have mentioned in the disclosure. Some complete picture on what is happening there?

Sure. The background of [Technical Difficulty] Neuland has a piece of land in Hyderabad, which we had determined that we will not build our own facility there and we had decided to entering towards joint development agreement with a real estate company. As a result of that partnership, the real estate company actually created a large piece of commercial real estate in which Neuland was entitled to some square footage of the building and that as per the agreement that we had with the builder, that square footage was in the form of what is defined and real estate world as cool [ shell ]. Now that cool shell meant that the building would need to incur certain investments from us to convert it into a warm shell, which would be for working involving false ceiling, ducting, piping etcetera, etcetera. And a part of our agreement we had to pay or reimburse the builder certain amount for these cool shell to warm shell expenses, which the Board felt was better by actually selling a part of the square footage of that building and giving the proceeds of that sale to the builder so that we would not have to pull funds out of Neuland's core business and that decision has resulted in us having to reduce our square footage from the original building and by deduction what we did is that reduced amount of that square footage is actually sold back to the builder at the current market price and the consideration that we received for that was what we reimbursed the builder for converting the cool shell into the warm shell. So I think as a result of this process which was disclosed on the stock exchanges, now whatever remaining square footage is there about 1,70,000 square foot or so is long shell method ready to be occupied? And it's going to be in position for the company for either a long-term lease or any other kind of [Technical Difficulty]. And the expectation of the Board and the management is to use the proceeds from such long-term lease or anything for again investing into our core operation. So that's the background, very broadly. I hope it answered your question.

It absolute does. And sir, my second and final question is on that CapEx and R&D side. But if we can in the presentation itself we can mention what kind of R&D spend that we do during the year or quarter, what kind of filings that we have done, that is decentralization but until then, if you can just throw some light on what kind of spend do we do on the R&D side? How many molecules do we file? What kind of areas do we focus on? And also the INR 100 crores of CapEx that we have done, clearly, they are not increased capacity for that. So what was this regarding?

Deepak, would you like to answer the questions?

Yes, so R&D spend, there are 2 kinds of expenditures that we incur for R&D. One is the capital expenditures that we use to build R&D capability. And that secondly, the expenses that we incur in terms of operating expenses. So typically in our business, R&D spends are at least for the CapEx investment, we do allocate to be around 5% to 7% of our total CapEx spend for R&D for that, so that we can upgrade our R&D facilities in terms of new molecules that come into the picture. The operating expenses for the CMS business. So what we do is the recovery from the customers and we build it to the customer and recognize their revenue for our business. So that is not a charge to the P&L process and for our own development for the GDS molecules, that is the in-built cost that is basically absorbed in our product costing and we eventually charge it to the dealer customers. So I can say that overall, the R&D, CapEx is roughly in the 5% to 7% range and operating expenses are more or less recovered by way of revenue from the customers.

Okay. And on the CapEx side? Hello?

Hello.

Yes. On the CapEx side, sir. [ INR 100 crores ] that have spent this year?

CapEx? Okay. We have roughly invested in CapEx of around INR 105 crores and this has gone majorly. Can you hear me?

Yes, sir, we can hear you. Please proceed.

But this has gone majorly for capacity enhancement, as well as for the facility upgradation; so these are the 2 areas where we have invested in CapEx for roughly around INR 75 crores in this current year.

Some of that capacity is same. Right? Year-on-year, what it was last year versus this year?

Capacity is, we are building in Unit 3; so that's where the new business is coming in. So Unit 1 and Unit 2 is optimally utilized as of now. So the capacity building at mostly in that Unit 3.

Okay. So we are further expanding our capacity from the 200...

Mr. Gupta?

No, no. Just to add to what Deepak said, capacity is not the same. In fact we're enhancing our capacity, quarter-on-quarter. So as we clarify, majority of the CapEx has gone for capacity expansion for the present, as well as future, as well as overall upgradation of the securities including R&D.

The next question is from the line of Samir Desai from P.H. Capital Limited.

A couple of questions. First is, what is the currently CMO percentage sale, then CDMO percentage sale? And what are mix? And what is -- what will be after 3 years of going forward; any guidance on that? As we know, CMO margins are high and CDMO margins are thin. So can you just throw light on that? And secondly, what is the total investment done in Unit 3 and what is scale to be spent on that? And then last question regarding your EBITDA margin. EBITDA margin has been as you see quarter-to-quarter has been reduced. But because of some raw material prices has gone up or finished good pricing has come down. Can you throw light on this question, please?

Yes, Samir. So I presume when it's a CDMO versus CMO, you're referring to GDS versus CMS?

Yes.

Okay. So I think our CMS versus GDS, I think this year the mix is about 65% to 35% in terms of revenues. Going forward, we have not been able to give any kind of a guidance. We haven't done, and it's hard for us to estimate because it really depends on how the CMS business scales up and how the GDS molecules do as well. But we expect that it should be no direct current levels or it should improve. But it's difficult for us to say and it's not intentionally given any guidance on that. The question with regards to the variability in the EBITDA margin, I think as CFO, Deepak had indicated in his opening remarks, there were these onetime expenses which had an impact on our margins this quarter but notwithstanding that, we believe there has been a steady improvement in EBITDA margin, especially if you look at things over an 8 to 10 quarters' perspective. You would see a steady improvement in EBITDA margins and what we have maintained in the past is also that we expect the EBITDA margins to continue to improve. One other things that we've also seen happening in FY 2021 throughout the year, is that the operating leverage of the business has also increased. So as we've grown from a INR 700 crores company to a INR 950 crores company, we've seen better operating leverage and an overall improvement in EBITDA margin that we expect that trajectory to continue.

And what about the Unit 3 investments? Can you use this total CapEx in inventory?

So I think as we had earlier indicated, we have CapEx plans of about INR 100 crores or so and as I had indicated, a lot of these investments would be going into Unit 3. Besides going into Unit 3, there would also be some going into Unit 1, Unit 2 for modernization, debottlenecking et cetera. And of course for R&D. But for Unit 3 itself for standalone, we don't have the numbers right away.

The next question is from the line of [ Darshan Mehta ] from [ DM Stocks. ]

Yes. One thing is, if you look at your quarter-on-quarter basis, the revenues are pretty much flat. I'm not including the other income, which was INR 15 crores. You have said that raw material sources sourcing was one of the key reasons, which impacted sales and on the EBITDA front, there were 2 one-off that came in. How much of an impact this cancellation of orders or raw material you have? If this was not there, how much probably would the sales have been for this quarter?

Saharsh, can I answer that question?

Yes. Go ahead.

Yes. So there are one-off items as we saw there. So if we exclude the one-off items including the base that we relied on sale of the property, our current EBITDA margin would have been in the range of roughly around 17% or which is as of now 15.4%. So there is the 1.1%, 1.5% or 1.5%, 1.6% increased increment opportunities in the EBITDA margin which could have been there. If so, these one-off items exclude for the time being.

No, you didn't answer about the revenue from operations. You said that our raw material sourcing also seeing also impacted the sales. So if you can tell me how much lower were the sales because of this raw material sourcing and secondly, if you can say because EBITDA margins still is lower from the past few quarters, because we've been clocking margins up to the June of 19% in the last quarter. So for the next 3, 4 quarters, where do you see margins? And if you can just answer on how much lower the revenues were because of order cancellation and for raw material issues.

I'll clarify the initial part. We did not have any order cancellations in Q4, because if we have any significant impact on the overall sales, because of raw material costs. However, as Deepak and I were clarifying earlier, we had certain onetime expenses, which came up in Q4, which impacted the overall cost, and therefore the margins. But because of raw materials specifically, we did not have any significant impact in Q4.

Right.

And you didn't answer the part where, how do you see the next year in terms of margins and revenues?

So I think we never give guidance specially in terms of how the business grows, but I think if you look at the trajectory of the past 2 years and you see the steady improvement in the margins, we believe that the momentum continues to be strong because both for the CMS molecules and the GDS molecules, the prospects look fairly good. We probably would not be able to quantify what kind of margins of growth, or what kind of target EBITDA margins is going to have. But we expect that the trajectory will be fairly steady and you should see consistent performance from us going into FY 2022 as well. And as a general comment to our investors and shareholders, I think what Saharsh said is absolutely right. I think we expect the business to continue. We haven't seen any indications from our customers in terms of their expected off-take, but at the same time we all know that the current situation with COVID has brought in a lot of uncertainty and nobody knows how the situation is going to pan out. So we are keeping a close watch. We are managing it on a day-to-day basis, but only time will tell us to how the current situation will impact us.

The next question is from the line of [ Yogesh Bhatia ] from [ Sequent Investments. ]

Actually, I had a question on the EBITDA margin but then you just answered previously. I would actually want to note that what is the CapEx for Unit 3 in which INR 100 crore has been done? But what is the total CapEx done until now on [ formulatory ]? That's all.

Deepak, you would like to answer that.

Yes. So if I talk right from the beginning like we acquired this Unit 3; this is a down-treated plant. So there was an initial acquisition cost, after that we spend some CapEx for building the facilities. So roughly till date, I can say that we are -- we have invested overall in this Unit 3 roughly in the range of INR 200 crores to INR 220 crores of CapEx investment.

Okay. And then, one follow-up question. Our usual asset turnover is 2.5 times; should we expect something similar from Unit 3 over the period of next 1 to 2 years till we reach optimum utilization?

Harsh, you want to answer that?

No, Deepak. Please go ahead.

Okay. So see Unit 3 is ramping up, so we started commercial production in Unit 3. We are also looking to export to from Unit 3 to Europe as well as to US subject to approval from the US authorities. So currently Unit 3 is in the development stage. We won't be able to comment whether initially will be able to get 2.4, 2.5 turns from Unit 3, but gradually it will pick up.

All right. Okay. That should be over a period of next 2 years?

Maybe 2, 3 years down the line, yes.

The next question is from the line of Jatin [indiscernible] from [ Alpha Capital. ]

So my first question would be on the pricing side of the API. Are we seeing any price jumps or things like that in the Q4 as well as in the current quarter?

Nothing I think in a short-term basis. [Technical Difficulty]

Sir, in this presentation we have talked about this raw material sourcing issues; since this time you are saying that it has not affected Q4. So is it affecting right now or do we expect it to affect in the coming months or because you have mentioned in the PPT but you're saying it hasn't affected much in Q4 numbers?

Where it has affected is inward logistics, outward logistics, delays in production planning; those are the impacts that we've had on that. I think as a result we've had to reorient our operations, the production planning etcetera to try to cope up with the situation. The impact materially on Q4 was minimal and that's what Sucheth has clarified. On Q1 also we are hoping, and we're still not at the end of Q1 but we are hoping that our planning will mitigate any of the uncertainties that we are facing with regards to these raw material issues. But I think out of -- I think just to be very transparent we wanted to let investors know that logistics or our material and our goods logistics are a constant source of tension for us in managing our operations.

Sure, sir.

[Technical Difficulty] these is any predictability, especially when the situation is so uncertain. But as I said, we're doing everything we can to ensure that there is continuity including re-planning costs simply to make sure that we're dealing with the situation.

Sure, sir. And sir last would be on the CMS side-wise, molecules have been pretty much stable Q-on-Q but revenues have gone down. So is there some deferment out there in CMS side?

In particular, Jatin, I think when you look at the CMS business, I would look at -- I would not look at it on a quarter-to-quarter basis because you know, there would be certain products for which we would not have orders in some quarters, and therefore there could be certain volatility. I think if you look at Q4, in particular, our commercial orders were low and that's because we didn't have orders in that quarters, we perhaps delivered that in Q3 or we will deliver them in the upcoming quarter. But I think in terms of our development revenues, I think we had a fairly good quarter. So I think on CMS, I would look at things on an annualized basis and they look very promising. I think what you have seen in Q4 is not necessarily in our predicted for what's going to happen. I think when you look at the overall last 3 to 4 quarters, I think that's a good reflection of what there is.

So current growth rate do we expect to continue in coming years?

Yes. I think [Technical Difficulty] grew to INR 280 crores in 2021 and we expect that growth has happened because not just the commercial products have done well but we've been also able to add new projects. And as I was mentioning in the earlier comments, as new molecules get scaled up and commercialized, we expect this growth to grow further. How much it will grow, what kind of guidance is something that we are stopping short of giving.

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

Yes. I have 2 simple questions. As you said -- sir, can you hear me? Hello?

We can hear you.

Can you hear me?

Yes, sir. We can hear you.

Yes, okay. Fine, fine. Typically, you did explain very well that one should not look at the -- what has happened in Q4 because of one-time expenses etcetera. But look at an annual basis, so would it be fair to see the cost structure as it stands in Q4 as a basis for us to make our financial modeling into what is likely to happen? Like you said that, you know, 17% margin -- we have about 16.7 without considering any other income. And also removing that INR 9.55 crore which you have included in the other expenses. So eliminating that I think the margin is 16.17%. So can we measure any increase that will happen in future because of better product picks and things like that on that 16.7%, 17% range?

So I'll give a brief response and maybe I'll request Deepak to add his perspective as well. So I think in terms of modeling, I -- you know, obviously I will not be able to comment. But yes, Q4 is perhaps not the best quarter to model expenses because of these one-time expenses. I think going forward we expect 2 things to happen; we expect the business mix which has already improved significantly over the last 3 year to continue improving and that should result in better margins. How much, what is something depends on the success we achieved with the individual molecule. I think at an upper level, as Sucheth and I had indicated that we expect to capitalize Unit 3 further, we expect to add more manpower, we expect to invest more in R&D, and we expect to keep investing; so there would be certain expenses that we expect to incur going forward as well. [Technical Difficulty] to be able to own it. So I would say on the big picture, the 3 manufacturing sites and the R&D facility that we have; I think together -- 2 years ago, we had revenues of over INR 700 crores, actually less than that; one year ago, we did INR 700 crores, this year we did about INR 950 crores. We expect operating leverage to play a role in the business going forward as well, and that should also along with the better business mix help us have good margins. The quantification of it is something that we leave to you. I will still ask Deepak to add his comments and see if there is anything else that he can provide at inputs.

Yes. I think Saharsh you gave a very good perspective. I will also try and mention that since -- apparently we should look at the full year performance. And the full year is actually not a true reflection of what is going to happen in the future because future is also dependent on how Unit 3 revenues will be generated, what will be the kind of product mix and all. So it's very difficult to say as of now that whether this is true reflection of the picture, EBITDA margins as well now for the full year basis. But I see that once the Unit 3 becomes ramped up, then probably we can have a better visibility about the future margin. But as of now it is too early to say Unit 3 still [ wanting up ]; so maybe we'll have to wait for a couple of quarters to see how we -- the picture turn out to be.

CapEx requirement will be around INR 100 crores per annum or will it grow?

You said CapEx requirement?

Yes, yes. Annual CapEx requirement.

So we are suggesting similar kind of CapEx investment for the next year; that is also dependent on the projects which will come up, we'll be evaluating those projects. And after that evaluation only, we will see whether we are getting good ROIs on those projects, accordingly we'll take a call. So currently we are suggesting in that -- currently we have -- based on the current year's CapEx investment, similar kind of investments going forward but total evaluation.

Okay. And sir, last question, what will be the effective tax rate we should consider?

Sorry, I didn't get the question.

Yes. Effective tax rate.

Effective?

Tax rate, income tax rate.

Okay. So we have basically opted for a 25% interest rate. So I don't see any changes that is going to happen in the tech space, but however it is subject to the next year's budget.

Yes, that's fine, that's fine. So as of now you have opted for 25%?

Yes. We have opted for 25%, correct.

Ladies and gentlemen, we take the last question from the line of [indiscernible], an individual investor.

I wanted to have some idea on CMS segment as over the past few years we scaled up and at present it is 28% of our total revenues. Now, we are also focusing on late-stage molecules as it is our strategy now onwards. So how much percentage of total revenue do we expect?

Could you repeat the question.

Yes, yes. Am I audible now?

Yes, yes. If you could just speak a little slower.

Sure, sure. So basically over the past few years we have successfully scaled up our CMS segment, and at present it is 28% of our total revenues. Now, as our strategy is to focus on late-stage molecules from the clients as well; how much percentage of total revenues do we expect from CMS segment over the medium to long-term as we cannot see it on quarterly basis.

So thanks for the question. I think CMS has been steadily increasing as a percentage of overall business. Going forward, I think how much of the total business it would be really determined on what kind of scale-ups will happen in the CMS new molecules business. As we know that the baseline business is steady and predictable, it's probably growing at 8% to 10% per year. What makes it difficult to model for us is the new molecules which we have in the CMS pipeline, we don't know how many of them are going to be successful and to what extent. And somewhere that determines the proportion of the CMS business in the context of the overall business. At the same time, we also have a lot of volume increase in our GDS molecules as well; so somewhere it's a very dynamic situation where we have a bunch of CMS molecule scaling up and getting commercialized which we are not able to predict; second, we also have a lot of GDS molecules which are doing well as well. And in this kind of an environment we do have our internal estimates, etcetera, but we are not in a position to give any sort of guidance on what will be the proportion going forward. I think the current ratio of the business, which is approximately 30% is a good base to look at. And I think going forward, this CMS business has been a smaller business and is growing at a higher rate, we can expect it to have a higher contribution. But to what extent and how much time is something that we would not be able to provide any inputs for.

Thank you. I would now like to hand the conference over to Mr. Saharsh Davuluri for closing comments. Over to you, sir.

Once again, thanks everyone, this is Sucheth here, for all your questions and interest in Neuland; I think your questions about Unit 3, the overall CapEx, good margins, what the expectations are, why there was a fluctuation, the current situation with COVID, the supply situation from China as well as raw material. I think very pertinent questions; I think as much as we enjoy answering them, it also ensures that we think about all these issues in reflection to your questions. So thanks for your interest in Neuland. Thanks again for your questions. If you have further questions, please feel free to write to either Sajeev or Diwakar and we'll be more than happy to schedule time so that we can get all your questions answered. Once again, thanks for being here. And we will see you next time.

Thank you. Ladies and gentlemen, on behalf of Neuland Laboratories Limited, that concludes this conference. We thank you all for joining us. And you may now disconnect your lines.