Neuland Laboratories Limited (524558) Earnings Call Transcript & Summary

Good evening, friends. Welcome to the Q2 FY '22 Earnings Conference Call of Neuland Laboratories Limited. Today, to discuss the results and answer your questions, we have the top management from Neuland, represented by Saharsh Davuluri, Vice Chairman and Managing Director; and Deepak Gupta, the CFO; Sundar Narsimhan, Senior Vice President, Supply Chain and Sajeev Medikonda, who is Head of Product Strategy. So we'll start the call with a brief overview of the financials by Deepak. Saharsh will give a broad highlight of the general business trends and what is observing the market, and then we kind of go open the Q&A. That's the standard safe harbor clause applies as we start this call. With that said, I'm handing it over to Deepak. Over to you, Deepak.

Good evening, and a very warm welcome to our Q2 FY '22 earnings call. I hope all of you are here and safe and healthy. I'm sure that you have seen the presentation, which Diwakar was mentioning. It was put on our website as well as it has been filed with both BSE and NSE [ Indiscernible ]. As always, any comments on the content that we have presented will be highly appreciated. And we will do our best to give it additional data points, which will be helpful for you to do analyze the future. And will be briefly updating on the financials. Total net income for this quarter was INR 258.1 crores as against INR 242 crores in Q2 FY '21. Our EBITDA for the quarter was INR 43.1 crores with EBITDA margins of 16.7%, which is a decrease of 40 basis points on a year-to-year basis and 310 basis points increase on a sequential basis. I would like to give some context on the EBITDA margins. There was an impact on rising raw material prices. We have incurred highly -- higher shipping costs in the logistics cost and supply chain [ Indiscernible ] have been observed in this quarter. Realizing this, we have stocked up some inventories to account for any likely disruptions, which can arise due to these things. Part of the impact was also on account of higher employee costs due to more recruitments have happened in Unit 3 as we continue to invest for the future as well as we expect more volumes to come from Unit 3 going forward. Profit after tax was INR 20.3 crores as compared to INR 21.3 crores last year, due to the reasons as stated above, as also higher depreciation coming from unit 3 commercialization. This quarter, EPS is at INR 15.8. On a half yearly basis, our total income stands at INR 461.1 crore, which is an increase of 2.9% from the same period last year. With regards to EBITDA, it is INR 70.7 crores as against INR 75.8 crores in H1 FY '21. The EBITDA margin came in at 15.3% as compared to 16.9% the year earlier for the reasons which we have already discussed just now and the consequence of the performance in Q1, The cash and cash equivalent as well as the date of the balance sheet stands at INR 32.4 crores. We continue to make investment in the business with a CapEx of around INR 57 crores, which has gone in H1 '22. our CapEx is on the track, and with more business opportunities coming in, we foresee CMS division doing good and which will also help us to improve the realizations going forward. I would like to mention that even though we have made substantial CapEx till date, our gearing ratio continues to be low. As of now, it stands at 0.23% on a year-to-year basis. With that, I would like to hand over the call to Saharsh for his remarks. Thank you.

Thanks, Deepak. Good evening, friends, and thank you for joining this call. On top of what Deepak said, I'll just add a few thoughts on the current performance, and then we can open up for the Q&A. In terms of the prime business, we had a slightly muted quarter, although we did have products like Mirtazapine, Labetalol and Levofloxacin performed well. There were 1 or 2 products that didn't perform to our expectations, which is largely owed to customers delaying their orders and hopefully, we'll be able to get those orders soon. On the specialty side, we did really well. Products like Paliperidone Palmitate as well as Dorzolamide and Donepezil have done well. Paliperidone Palmitate is a very exciting product for us because it's a very complex generic and we had completed validation for this product recently. It's still in development stage, so the Genericization of the product has not happened, but something that has still contributed significantly because of sale of development revenues. Going forward, depending on the patent landscape, we expect commercialization of this product. Coming to the CMS business. As we had alluded to in the previous quarter, there were some delays in the previous quarter, which resulted in projects getting delayed. But as we had indicated, those projects have completed and that has led to a sequential spurt. And you can see that in the CMS revenue split, you're seeing that the development revenues have actually gone up. And this is something that we expected, and it is reflected in the numbers. These projects that we talked about are close to commercialization, and our pipeline gives us further confidence that we will deliver in the coming quarters as well. However, given the nature of the CMS business and the fact that these molecules are still not commercialized we expect certain level of lumpiness on a quarter-to-quarter basis. But I think on an overall annual basis, we still expect to have good growth on the CMS business. Bring on the Unit 3 aspect, we are seeing a very healthy ramp up on a quarter-to-quarter basis. We have been hiring significant manpower, which also has contributed to part of the bump in the OE for this quarter. But this is what is needed for getting that facility up and running for our future business as well. And in terms of EBITDA margins, again, as you know, the EBITDA margins are a factor of both the business mix as well as input costs. The business mix is something that is a consequence of what kind of GDS and CMS business we are delivering in the quarter. The input costs, I think, besides higher operating expenses due to Unit 3 ramp-up of manpower other costs, we're also seeing certain signals driving up costs from our raw material perspective. So I'm also happy that our Head of Supply Chain, Sundar Narsimhan is on this call. And maybe as we open it up for Q&A, we can hear from Sundar also in terms of his thoughts on how we expect raw material prices to move and what kind of impact it will have for us in the coming quarters. So I think with that, maybe we can, Diwakar, open it up for Q&A?

[Operator Instructions] The first question comes from the line of Rajat Srivastava.

Am I audible?

Yes. You're audible.

So my question is to Saharsh. So Saharsh, like we are seeing the entire industry battling through the raw material prices. And overall for -- especially for the VIP players, we have seen a huge impact, right? But some how you guys have managed to mitigate that price impact. In fact, your gross margins are up Y-o-Y. So can you throw some color like what you have done differently? Or is it just that you benefited from the inventory buildup and the impact will be more visible in the next quarter?

Thanks for the question, Rajat. with regards to the raw material costs, I think we've been following the commentary from other players. I think for us, the impact has not been really significant this quarter, and that's why our margins are more or less in line with our expectations. But this is something that we do anticipate going forward depending on the situation, and maybe I'll ask Sundar to add to my response over here. we do expect things to probably go unfavorably. And one thing that maybe part differentiates us is that given that most of our business comes from specialty and CMS, we are also in a position to pass on input cost increases to our customers. We are seeing indications like, for example, sovereign costs are going up because of various issues globally. And we have proactively started reaching out to our customers, letting them know that there is an increase in input costs. And where products where we are the only supplier or maybe we are 1 of the 2 suppliers or where we are the preferred supplier, we are trying to negotiate and try to get compensated for that. So that's what's going on. So it did impact us, but perhaps not as much. And to whatever extent we did also try to mitigate it by talking to our customers for price increases. But we don't think that we are on top of the problem. We think we need to handle it continuously. And maybe, Sundar, any quick comments from you?

Yes. Just a couple of lines from my side is I think like what Deepak said, we have had the benefit of some of the contracts that we had booked late last year, and even those have run -- helped us through 5 months -- last 5 months. And some of the contracts are all expiring. And also the manufacturers are now becoming -- it's becoming more difficult because of the huge volatility in the market, they are offering short-term contracts now. So we will see probably some of the impact coming in the future because, primarily driven by the contracts, the benefit of the contracts that we have done in the past. This is how we've been having the benefit of better costing for the first -- for the Q2.

All right. And secondly, sir, you've already mentioned that we have seen some spillover. We lost some revenue on the commercial CMS guidance in first quarter. So has the entire spillover been done, because earlier, you have said that the spillover will be throughout the year? So any thoughts on that?

Most of the spillover has been -- has, I think, completed. There might be a small part of it that might flow forward, but we were able to close the projects for most part.

Okay. And what happened on the development side. Revenues of INR 13 crores, I think we were trending around INR 21 crores in the previous 2 quarters.

Do you mean commercial side?

No, on the development side.

No. I think our development side, the revenues have gone up, Rajat, so -- and that's what's reflecting of the contestation. On the commercial side, we've actually had a dip because some of the commercial orders we expected did not come through, and those are orders which we are expecting in the subsequent quarter.

The next question comes from the line of Keshav Kumar.

Am I audible?

Yes.

So sir, we've onboarded more of development molecules in the past 2 years or so. So firstly, I wanted to know whether this would constitute molecules for which an NDA or equivalent is being filed or yet to be filed?

So some of the development molecules, the NDA has already been filed Keshav, but we are yet to be added to that filing. There are some development molecules where the NDA is not yet filed. So I think we have maybe half a dozen or so development molecules, which we closely track because they are so the high-value contributors for Neuland's future. Out of these half a dozen or so maybe I would think 2 of them, the NDAs have been filed and Neuland has been qualified. 1 of them, the NDA has been filed, but Neuland is yet to be qualified and 2 of them, the NDAs are not yet filed. This is just approximate information from the top of my head.

Okay. Sure, sir. Sir, I wanted to understand that what would be the reasons to onboard a CDMO at the clients end at such a late stage like would we be a secondary, tertiary supplier. I mean it's absolutely terrific for us, but trying to understand from the client's perspective, what would be the reasons to go for such for a late stage tech transfer and all that extra regulatory stuff that comes with it?

See, we work with a lot of small- to mid-sized companies, Keshav, And these are usually biotech companies. And when they start their genital journey in Phase I, they typically start with the CDMO who they find easy to work with or probably someone that's closer to home for them. And as they're going through Phase II, Phase III and they see clinical success and they're gearing up for commercialization, there they get business development folks on board, they get salespeople on board who actually start forecasting quantities prices start simulating the cost of the tablets and things like that. That's when companies actually formulate a strategy of what kind of an API partner they need, what kind of batch sizes they need, what kind of annual output of API they need. And in many cases, when they have that strategy, they'll realize that their first source is not up to the task for doing that. And that's why usually they go for the right kind of a CMO. So in many of these cases, it's a great opportunity for us, as you said, -- But it's also because a lot of these drug discovery companies don't know whether they will get commercialized. So they don't really qualify someone who is suitable partner for them for commercialization. They go with someone who suitable for them for their Phase I and Phase II.

Okay. Sure, sir. Sir, in your experience in [ long watch, ] have you seen you to COVID on novel CDMO space. Like after the 2009 crash, there was a shift in quality over quantity at the innovator end and then more was spent on less number of molecules. And I read a report recently that though the clinical activity has remained high during the last one year, but the development productivity has been historically low due to increasing product and regulatory complexity. So could you give some insight on this?

See again, Keshav, none of us are experts in looking at that landscape. And I think whatever information that we understand from conferences and what our customers tell us is that because of the pandemic, there has been a drastic slowdown in clinical trials because hospital beds, doctors, investigators were not available. As a result of that, there has been a major slowdown. And therefore, there has been a certain change in the pace in which projects have been coming. There's a comment that I had made in one of our previous calls, and I'm happy to repeat that again. The number of new projects we have added in the CMS business in the last 12 months is lesser than the number of new projects we added in the previous 12 months. So we are actually seeing a reduction in the number of new projects coming our way. But we are also in a stage of evolution where we are focused more on the quality of the projects than the quantity of projects. So what we do and as a CMO focused in trying to attract these kind of projects is we focus on certain therapeutic areas. We focus on building relationships with innovators who are still developing drugs in the clinic despite the pandemic. So one of the things that we have realized is that we have a very good recognition among CNS -- in the CNS space, not because there is a specific chemistry, but for some reason, historically, our CMS portfolio has had a lot of CNS molecules. So we tend to focus in that area, and we try to use our relationships with existing CNS companies to build new relationships. In terms of capabilities, what we've been trying to do is focus a little bit more on modern chemistry, green chemistry and try to understand what the pipeline of the newer drugs are looking like. So we see that a lot of new drugs under development are peptides. We also see [ detonate ] molecules coming up. So those are areas where we try to focus on. And that's kind of what we are going through as a journey.

[Operator Instructions] Next question comes from the line of Mr. Sunil Kothari.

Can you hear my voice, sir?

Yes.

Thanks a lot for the detailed qualitative answers and clarifications. I'm following this company since last 2, 3 years. [ Indiscernible ] Basically, my question is generally, I would like to understand is during last 2, 3 years, we invested roughly between INR 200 crores and INR 250 crores, and current first half also cash outflow seems to be INR 50-plus crores. And we are not yet able to, I mean, generate the revenue matching with the investment we made. And I understand it takes time would like to understand from you that beyond investing is said, we are adding employees or employee costs in this first half compared to last year first half has gone up also substantially. So when do you think the matching revenue generation should start? And what is the existing capability of revenues in the generation -- So if you can a little bit talk some numbers about capability of in capability to generate margin may not be during any time line. But by when you feel this investment will start reflecting in numbers?

Thanks for that question Sunil. It's a very valid question. I think from the management's perspective, we've been very prudent in deploying capital into our business, not just in Unit 3, but whether it's for R&D or any other purposes. And as we are deploying capital, what we have been very careful in doing is trying to make sure that we are visualizing the business that will utilize that capacities. So whatever production areas we have built in Unit 3, which has actually taken up a lot of this capital has gone into very specific molecules, either on the CMS side or on the GDS side. Now to answer your question on how -- when will we start seeing a utilization of all this infrastructure and when will we see that optimum margins and growth in business, it's hard to put a time line to it, but we are starting to see it. So for example, even if you look at Unit 3, our utilization of Unit 3 in the a year ago was almost 0 versus the utilization a quarter ago versus the utilization today. I think it's ramping up. we are validating new products in Unit 3 for which we had created those capacities. But as you know, our business and the kind of -- both on the GDS side and the CMS side and the fact that there are a lot of regulatory restrictions, and there's also the customer uptick of volumes. Those become very important factors. What we have seen typically, and you may have seen these in other API businesses. It could take anywhere from 1 year to 2, 2.5 years for you to fully utilize an asset. What we would like to assure you is that whatever assets we have created, we have created with a clear product in mind. And we have also made sure that there are backups for each of those products so that no plant that we create will actually be idle because our product did not take up. So that's the philosophy behind it. I think for us, the utilization reflected in better margins is something that I think it's a matter of time. We don't expect it to take too long, but it's very hard to give us an indication. So even if you look at this quarter's performance, I had mentioned in my opening remarks, that there were 1 or 2 GDS prime products where we didn't get orders. And because we didn't get orders, we actually -- had we got those orders, we would have probably done well. And if we had done -- we got those orders and we had the capacity for it. We probably would have had a couple of percentage points of higher EBITDA. But it's -- it kind of -- it's the journey of a growing business where we need to keep validating these products, commercializing them and create a portfolio of products, which is diverse enough that base keeps getting stronger. And so that's kind of a slightly longish response to your question, but we won't be -- obviously be able to give you a time line saying that by this time, we will be at this percentage EBITDA margin or this is when we will see the assets being fully utilized.

My second question is, sir, what is the area where you feel you are satisfied with the performance from inside the company and where you feel you are lacking somewhere and you would like to either invest or you would like to utilize or you would like to change. If you can say some thoughts -- This is my last question.

So I think maybe just from top of my mind, I think not saying it just because Sundar is sitting here, but I think the way we have managed our supply chain has been really very effective. I think as we had indicated, having those contracts with the right vendors, not just for specialized but even like commodity-type products. I think it gave us one [ Indiscernible ] of supply. It also took care of controlling costs. So I think we are very happy with the way we've been managing our supply chain. The way we've been deploying our CapEx, we are very satisfied with that. We know it's actually very stressful to go through that cycle of putting INR 1,500 crores in a plant and then waiting for that plant to get utilized. But I think the way we've deployed that is very good. And I think our connect with our customers, both on the CMS side and the GDS side, I think, has been really good. Despite the pandemic and 1.5 years of no face-to-face meetings, we have not lost any customers. We've been able to manage difficult negotiations on price increases, delays and things like that. So I think these are the 3 areas where I think we've done well. I think the 1 area where we can do a lot better, and I think that's something that I did indicate even in the last quarter call is I think our ability to work together in cross-functional teams and deliver projects. I think that's a capability that we are still building. And we've gotten a lot better than where we were, say, 2 years ago. But to become a project-focused company from a product-focused company requires a change in mindset requires a need for strong project management systems and a need for different departments to work in a matrix environment, which is difficult for us traditionally because we are a 37-year-old company that has a more traditional way of running departments. So that's a journey that we are going through and that is something that both Sucheth and I have been taking a keen level of interest in.

The next question comes from the line of Rakesh Kumar.

Hello. Am I audible?

Yes, please.

My question is, over our CMS journey, have we built deeper relationships with some clients and onboarded more molecules, maybe become a preferred partner? And has our clientele more banked towards big pharma or the small or midsized innovators also?

[indiscernible] will answer that question.

So Rakesh, in terms of the customers that we have had over the years. I think we have seen that we have built very good relationships. But I think as we have mentioned in the past, a lot of our relationships, a lot of the customers that we have targeted and built a base around mostly customers in the venture bank biotech companies who usually have just 1 or 2 molecules. And where -- what we have actually seen on the front is the depth of our relationships that we [ sounded ] when he was mentioning about the fact that we have good traction among CMS companies. It is the fact that people move companies and they continue to refer Neuland as a partner of choice. And I think that is where is not just about the companies that we are working with currently, but it's also the people that we are working with the credibility that we have in our relationships with them. So even though we may not have a big pharma, which can give us 5, 10 projects a year, but still our model is quite sustainable in terms of ensuring that we continue to attract new customers who give us new molecules.

Okay. Understood. Please elaborate somewhat from the point of view of overall health of our facilities. Do you foresee any significant outlook apart from current maintenance CapEx run rate for meeting the technological as required to stay competitive in the business? Whether we'll need to set up or convert more to low occupational exposure limit facilities? I mean do we have high potency API capability. So to future-proof ourselves, would we have to go through another upgradation, creation spell or something?

So we do have 3 manufacturing units, Unit 1, 2 and 3, unit 3 being the newest one in our portfolio. So Unit 1 and 2, we are upgrading those facilities on a regular basis. So there is no significant CapEx other than the replacement CapEx that we foresee for the next couple of years from now. Unit 3 is where we are building a new facilities, new blocks based on the customer, new projects, which are coming in, and we are evaluating that. So the most of the investment which is going is into building the Unit 3 facilities and also some maintenance or replacement CapEx, which are just kind of routine maintenance CapEx for the other 2 units. So we are well protected in terms of well maintaining our -- both the old units -- And I don't see any significant CapEx requirements coming in from the Unit 1 and Unit 2. So Unit 3 is based on the project-to-project basis that will spend of CapEx going forward.

And our business plan, we really haven't made plans of going into high potency and onco products, Rakesh, because I think the visibility we are getting doesn't really make a business case for it, but it's something that we will keep reviewing time and again.

The next question comes from the line of [ Vanish Jain ]

So first questions is how has been the CMS pipeline evolving? And what kind of traction are we seeing in this segment?

I think the traction continues to go well. I think I would probably respond to that question in 2 tiers. I think one is the progress we are making with our existing CMS customers whom we have some projects with. I think in that front, we've seen actually, molecules advancing into the clinic, getting into commercialization phase. We're also seeing customers come back and increase their engagement with Neuland. So we've seen, for example, in this quarter, customer whom we've been working on 1 molecule, which is a NDA molecule. They have come back to us with 2 new molecules that they had recently in-licensed from another American company. So these are good examples of building traction with existing customers, either for existing projects or for new projects. In terms of new project engagement for us, we are seeing good traction on the U.S. front. We are still not seeing the desired level of traction from Japan and Europe. But it's not a major concern as of now. I think it's just because of the way the markets are operating over there. We think it will take a few more months for us to start seeing these markets open up and see new CMS opportunities coming from there.

Okay. Secondly, how do you see the demand scenario going forward for specialty and GDS segment?

It's -- I think it depends on a product-to-product basis, Vanish, I think like -- Some of the key products we talked about this -- like this quarter on the specialty side, I think these were long awaited. So Paliperidone contributing this quarter is actually a good indicator, and it's a major milestone for us within the organization that we were able to ship out decent quantities of products. But I think their -- from prime products point of view, I think we are seeing very good traction on Mirtazapine, Labetalol, Levofloxacin. We think some of the other products like Levetiracetam maybe we are -- we are strong in the markets that we are in. But again, we are not seeing a very strong spurt over there. But these are also the cycles that you have for these products. So I think on an overall basis, we've maintained in the past that I think collectively, we expect the GDS business to have a healthy growth rate, but it's going to be a combination of individual product performances.

The next question comes from the line of [ Rupesh Katia ]

Can you hear me?

Yes.

Okay. So I am looking at FY '21 CMS revenue. And I see INR 136 crores which is from commercial and then in that 5 to 7 commercial molecules, So roughly, it is like an INR 8 crore for a molecule on an average. So would it be fair to say that 3, 4 molecules really constitute majority of this commercial revenue and rest of the molecules are not like very high value at our customers and subsequently, they are not a big molecule for us? Would that be a fair understanding?

Thanks, Rupesh. I think your assessment on that front is basically, I think we have mentioned also in the past that when it comes to the commercial revenue from the CMS business is basically consists of 3 significant projects, which contribute to most of the revenue on a consistent basis, especially on an annual basis. There are other molecules too, but they are not very significant in terms of that impact.

So then as a strategy, I mean in CNS, we are strong in CNS on 1 or 2 more therapies. So what kind of we can do? Do you go after -- move this inflow in such a way that 2, 3 blockbuster molecules, we can get a very decent [ portend ] then that changes the trajectory of the CMS business for us over, let's say, next 3 to 5 years.

I think that's something that is a very important thought, Rupesh, I think it's at the core of our desire as well, right? So to be able to make molecules, which would be those billion blockbuster molecules. And a lot of companies kind of grow on the back of 1 or 2 such products. For us, we do believe that, although not in the past, but in the current -- and in the future, we do have molecules which have that capability. And therefore, as we see these molecules where we have belief that we'll get commercialized, we think there is a realistic possibility that we will have a very, very healthy growth. We tend to be very careful in either characterizing those molecules, identifying those molecules or talking too much about those molecules because you don't know a blockbuster unit actually becomes one. So I had in my earlier comments, I also mentioned that we have other than the molecules we have already commercialized in CMS, we have half a dozen-or-so molecules which are likely to get commercialized in the next 2 years. Now we believe that some of those candidates in that half a dozen do have the potential to be blockbuster. But we're also being very careful and almost paranoid not to talk too much in terms of what value they could bring in because if they do happen, then you will see that in our performance. And if they don't happen, at least there's no disappointment because we've not set those expectations. So I think that's the way we are looking at these opportunities. But also, I will add that we believe that as we keep our head down and execute on the CMS business, we are also finding ourselves attracting those opportunities. So for example, in the last 2 years, the kind of high-value molecules in terms of potential that we have received, we have probably not received in the 7 years before that. So somewhere there is a snowball effect in terms of our ability to attract these right opportunities. But the opportunity will become reality only when we actually get those orders and deliver those material. And until that time, we want to be careful in terms of how we give outlook about our business.

Okay. That is good to know, sir. And then the second question is we -- I mean the Unit 3, we have this INR 1,500 crore kind of revenue potential [indiscernible]. Specialty chemicals or specialty API looks like a good margin, good ROCE business. So do you see that business kind of going to INR 400 crores, INR 500 crores kind of run rate in next 2, 3 years? And what are the key levers for that happening? Some molecules or therapies or customers? If you can talk about it.

Again, I just give a very guarded outlook. I think in terms of -- Is there a potential for hitting a run rate like that? I think we did about INR 270 crores of CMS business last year. That INR 270 crores includes commercial products of about INR 130 crores and maybe development products about INR 140 crores. Now there is indeed potential for the development products as they become commercial to contribute more and more. And yes, we expect that to INR 270 crores to grow significantly over the years to come. So maybe in the near future, getting to INR 500 crores or above is possible when and how is something you're asking about. And I think if you want to know what could be the factors that could drive that growth. I think the most important factor is the molecules which are moving from development to commercial. One, how successfully the -- will these drugs be in the end market? I think that's one factor. Second is how well is Neuland executing these projects. And that's why one of the comments I made earlier is the need for Neuland to be able to execute these projects well, scale them up without any issues and deliver them in the right quality. Now that is something that we are very strong at and we are good at because we understand operationally understand quality. But the factor that's not in our hands is how well the drug does. And I think that is definitely one of the key points to do. And if we have a couple of blockbusters in that development pipeline, then we should see a good growth in the CMS business.

Next question comes from the line of [ Rishab ]

Hello. Can you hear me?

Yes. There's some background noise, but I can hear you.

I have 2 questions. First one. So within the CMS, is the revenue of the development segment is recurring? Or does it include upfront payment for the project we have gained in this quarter?

So it doesn't include any upfront payment. So those are advanced payments for the orders, which are not considered as the revenue unless and until we invoice those projects or material to the customers.

So is it recurring? Like can we expect reoccurrence in every quarter?

No, I think just to clarify, what we said is that the development revenues you saw are project-based revenues, which means that we would have made validation quantities and we may have shipped out those validation qualities, and that is what we call as development revenues. Or we would have done some R&D work and we would have built it as an R&D service, and that's what you would have seen as development revenues. What Deepak was clarifying is that sometimes we get advances for buying raw materials for a future shipment. That's not included in the development revenues is what Deepak was saying. With regards to your follow-up question of, are these development revenues recurring, it really depends. And a lot of times, you will have maybe 2 or 3 orders over a year or 2 years. And then the drug either fails and it doesn't come back or the drug becomes commercial. So it's either or. But there is never for a development business, a set recurring pattern. You may get 1 or 2 orders or 3 orders and then you will wait for the drug to become commercial, and then you will get commercial orders, and then we classify it as commercial revenue or, you will not get orders and the project is over.

Okay. Understood. And the second question is, as you mentioned earlier that the few of the contracts have become in short term -- become short term in nature basically.So in that perspective, are we facing any competition? Or can you just elaborate more on the competitive landscape to be volatile environment we are in right now?

So Rishab, just to clarify your question, you're saying the competitive landscape in terms of the subline itself because I think -- the contract situation, short-term contract situation was with the reference to the contracts we have with our suppliers.

Okay. Okay. So are we facing the same challenge in terms of customer or like our contracts are well established in terms of -- we have long term contracts with our customers?

So when it comes to the GDS business, Rishab, most of our customers in the regulated market have us on -- has 1 of the -- 1 or 2 main suppliers on their filings. So more often than not it is not necessarily a contract, but we are bound on an annual basis. Customers have to come back unless they have qualified someone else, which usually takes 12 to 18 months in the regulated market. So from that perspective, I don't see that, that is a very big concern. What could possibly be an issue, and I think we referred to, is the fact that they may experience certain delays when it comes to their logistics or inventory buildup at their end or some market dynamics at their end. But from a competition perspective, I don't see that being very significant for our business.

The next question comes from the line of Pratik Kothari.

So my one question again. This year, we had guided that we'll be doing some INR 100 crores of CapEx. We've already spent about INR 50 crores, INR 60 crores. So this is largely to increase the machinery in Unit 3 and maintenance?

So we have done INR 57 crores of CapEx in this half year. And this is mostly for building up the Unit 3. So in the -- I can say just roughly half the CapEx has gone for Unit 3 ramp-up. So apart from that, there are certain maintenance CapEx that we have undertaken in this half year. Anything specific you have in mind, you want to ask?

No. So basically, after this year's CapEx, I believe we would have invested about, what, INR 300-odd crores in Unit 3, I mean in start acquisition?

So far, roughly, we have invested close to INR 260 crores, INR 270 crores of CapEx in Unit 3, including the initial acquisition cost.

So basically, just to clarify. What you were getting this year in Unit 3 is not for capacity addition right just to replace the older machine because this is an old plant.

No, we are building a new block. So for that, we are investing fresh CapEx in Unit 3.

There's not a lot of investment going in for replacement in Unit 3, because Unit 3 is technically not an old plant. It was a small unused plant, and we are creating additional production areas in that unit. So a lot of the capacity is actually only going for creating production capacities or for creating other ancillary capacities like waste management, infrastructure and things like that, which were nonexistent in that facility earlier.

Okay. So where would our capacity go to from 860 as of last year?

From what? I'm sorry?

From 860 kiloliters last year, where would our capacity go to at the end of this year?

So Pratik, I think we will just get back on the exact number of what it will be. But I think as and when those -- our facilities are initiated, I think we will be adding it even our presentations, and you will get to know.

We'll take the next question from the line of Suresh Branchetti. Suresh, are you there? Suresh, do you have a question? I don't hear from line of Suresh. So I'm going to take the next question from the line of Aman Vij.

My name is Aman Vij from Astute Investments.

Aman, we can't hear you. Can you speak louder, please?

Is it better now?

Yes it's better.

Yes. My name is Aman. I am from Astute Investment Management. Sir, my first question is on the Unit 3 utilization level for quarter 2 as well as quarter 3 and quarter 4, what are we targeting? And at what utilization levels in Unit 3 will that plant achieve same kind of margins like company level. This is the first question.

So for this quarter, the unit utilization is somewhere around 15%, 20% to 30%. And since it's a new investment, we hope to ramp it up further in the second half of the year.

And sir, at what utilization in Unit 3 can we achieve similar kind of margin as we have for our company level?

Yes, because I think the business mix of unit 3 will be similar to the business mix of the other units. So we think that it will be in line. And what we'll add on is, as unit 3 gets commercialized and fully operationalized, we will also see more operating leverage kick in. So it will also be more favorable in terms of EBITDA margins and things like that, as Unit 3 goes towards higher utilization.

So you had talked about 50% kind of exit utilization level for the year. So are we on track of achieving that?

Sorry, what utilization? Couldn't hear you.

50% at the end of quarter 4, utilization levels at the end of quarter 4, are we on track of achieving that?

I think, we had broadly mentioned that we expect to have 40% to 50% kind of utilization by the end of this year. I think we are more or less on track for that, but -- where we are fully on track is that the capacities have been installed and created. I think our ability to deliver those orders [ Indiscernible ] clearances, things like that. I think as of now, we think it's possible. But as and when every quarter, we will give you an update.

The next question comes from the line of [ Indiscernible ]

Congratulations for bouncing on a relatively difficult quarter or 2 earlier. So my question is that, one, are you still sticking to your overall expectation that annually, you will continue to grow somewhere between 15% to 20% without assuming strong benefit of some new products getting blockbuster product getting successful?

Yes. I think what we have mentioned is on 4- to 5-year horizon, an average growth of 15% to 20% is realistic, not assuming that we will have a blockbuster carriers. So what you've said is absolutely right. I think what we've done is using all the different products that we are commercializing or we expect to commercialize. We've taken conservative estimates based on probabilities as such and look at our growth, and that's the number that we have. Obviously, the numbers don't pan out on a year-to-year basis. So for example, last year, we grew more than 20%. It doesn't mean that every year, we will grow at that percentage. So we have to take that into consideration. But I think your hypothesis is accurate from our perspective.

And prior to the disturbances on your supply and cost, you had steadily delivered about 20% of margin. Of course, there is a sequential recovery here in this current quarter, but is still well below the 20% kind of margin. So when do you think you will be able to go back to that kind of a number?

I think the answer to that question is, again, 2 factors, right? I think the business mix, so I had mentioned that we did fewer lesser business on the prime side than what we expected to do. Input costs, I think we did mention we have some challenges, which were unexpected. Now hypothetically, if we didn't have those 2 challenges, we were perhaps -- we would have been better than what we had in the past. So I think the question of bouncing back is also how these factors play in. And -- but notwithstanding these factors play in, we think our business is naturally growing because more products are getting scaled up and commercialized. So a difficult question to answer, Sanjay, but we think it will happen in the future. We just have to be careful in giving you a concrete estimate just because there are factors here that we may not be able to foresee.

The next question comes from the line of Ramesh Parik.

Yes. My question to you is, what are the significant risks you see on the CMS development side, which will -- which will derail or something like that? Any significant risk that comes to your mind as a top of the mind record.

I think one important risk could be that we work with a finite number of customers from where we have significant business expectations. And if those customers don't do well, their drugs don't do well or they get a black box warning or something adverse happens, then that could be a significant risk for us. I think that's the one top risk that comes to my mind. Anything else you want to add to that, Sucheth?

I think when it comes to the CMS business, I think in line with what Saharsh has mentioned, I think -- We work with a limited set of customers. And also, we are not completely in control of what happens in the end market the time that it takes for a product to actually be successful. And the execution capabilities on the marketing side of some of our customers, those could be possible risk, especially because we work with the venture bank by biotech companies which probably are not as strong when it comes to commercialization as some of the big pharma. So that could be a risk even though the molecules that we have in our portfolio actually are quite exciting in terms of their potential.

We'll take the next question from the line of [indiscernible]

I have a simple question. Where do you see our company even in the next 5 years?

I think we see ourselves as a very large API player who is very widely recognized, who will be a preferred source for all the specialized generic APIs as well as CMS projects. We see ourselves having very strong EBITDA margins, well above 20% and possibly in one of the top 3, or top 5 CMOs worldwide, that's kind of a vision, if you have to just say it.

We'll take the last question from the line of [indiscernible]

So the question generally is regarding [indiscernible] is really playing out, how are you seeing the quantum of it?

Could you repeat the question? It was not very audible.

Sir, the China presence is playing in the chemicals industry. But API space, the China placement takes time. That's what my understanding is. Is the strategy really playing out. How much is the ship.

Can I ask a clarification question? When you say China plus 1 you are saying if you have a source of a meter or an intermediate in China, you are developing an alternate source out of China. Is that what you're referring to as China presence strategy?

This is [indiscernible]. I know this API space takes time. [indiscernible].

Yes. So I think, Silas, to answer your question, I think as we have mentioned in the past, most of our customers are based in the regulated markets and the products that we have mostly been working on most of our competition even in the past has mostly been Indian and European API suppliers. So we haven't directly seen an impact of this China plus 1 strategy in terms of the APIs that we are working on. So I think that probably answers your question, hopefully.

Thank you. At this point, I'd like to kind of hand over the presentation...

Yes, yes, Diwakar?

Yes, your final closing comments, please. And...

So thank you, everyone, for joining this call, and really thanks to Diwakar Pingle and Ravi and the Christensen team for organizing it. From an outlook perspective, we continue to be highly optimistic about our business. We do keep seeing challenges in terms of project deliveries, input cost increase, things like that, maybe delays in receiving the right kind of orders. But despite having those challenges, we felt like it was a good quarter. We performed reasonably well. If things were more favorable, it would have been perhaps a much better quarter. But going forward, our goal as management is to keep adding layers of strong businesses to -- under our fold. So, that even if we face headwinds, we'll still be able to come out with good performances. And even if we have to reflect back compared to several years ago to today, we feel that we are a far more resilient as a company. We've been able to withstand the pandemic both the first wave, the second wave. We've been able to manage complex raw material sourcing, overcome logistics issues, execution of projects despite a lot of these uncertainties. We've been able to build and strengthen our relationships with our customers despite not being to meet them or have them comfort and we expect brighter things to come. So thank you, everyone, and I look forward to talking to you again in the future.

Thank you so much Saharsh, and the company management team from Neuland. Wishing all the participants a happy festive season. And well, in case there are any further questions or you want to set up a meeting with the team, write to Ravi or I, and we'll be happy to kind of set up a call for you post to the festive season. With that said, have a good evening, and have a nice weekend. Bye, guys.