Neuland Laboratories Limited (524558) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Neuland Laboratories Limited Q4 and FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ravi Udeshi from Ernst & Young. Thank you, and over to you, sir.

Thank you, Maskan. Good morning, friends. We welcome you to the Q4 and FY '24 Earnings Conference Call of Neuland Laboratories Limited. To take us through the results and to answer your questions, we have with us today the top management from Neuland Laboratories, represented by Mr. Sucheth Davuluri, Vice Chairman and CEO; Mr. Saharsh Davuluri, Vice Chairman and Managing Director; Mr. Abhijit Majumdar, CFO; and Mr. Sajeev Emmanuel Medikonda, Head, Corporate Planning and Strategy. We will start the call with a brief overview of the financials by Mr. Abhijit Majumdar and then Saharsh will give you broad highlights of the business trends and what he is observing in the market. And post this, we will open up the call for the Q&A session. As usual, the standard safe harbor clause applies as we start the call. With that said, I now hand over the floor to Abhijit. Over to you, Abhijit.

Thank you very much, Ravi, and very good morning and a warm welcome to you all for joining our Q4 and FY '24 Earnings Call. I'll briefly talk about the financials now. The total income for FY '24 was INR 1,571.1 crores as against of INR 1,200.9 crores in FY '23. This has been driven by high growth in the CMS business and steady growth of the specialty GDS business, both of which were in line with our plans and expectations. Our EBITDA for FY '24 stands at INR 474.5 crores with a margin of 30.2%, an increase of 6.8% over FY '24. The total income of Q4 FY '24 was INR 390.4 crores as against INR 415.1 crores in Q4 of FY '23. Our EBITDA for Q4 FY '21 stands at INR 112.2 crores with a margin of 28.7%, a decrease of 2.02% over Q4 FY '23. I'd like to say that the overall operating environment continues to be unpredictable. However, we have made witnessed stability in terms of input costs. We also continue to be mindful of managing our operational costs, resulting in financial revenue. This also gives us the ability to grow without product cost sedation. Our set of dedication to operational efficiency and cost optimization and aiming and mainly as a cornerstone for the continued advancement of our organization. As we have consistently said in our previous earnings call, for each measure of performance over a 3- to 4-year horizon. As our revenues and EBITDA margin will fluctuate on a Q-on-Q basis or on a year-to-year basis based on those businesses, which is dependent on the order [indiscernible] project execution. Now coming to the [indiscernible], our gross margin was 15.8% of FY '24 as compared to 54.1% in Q4 of FY '23 and 69.8% in Q3 of FY '24. This gross margin presenting as always, includes direct drops pertaining to manufacturing and attribute to the product. The profit after tax was at INR 67.6 crores as compared to INR 84.5 crores in Q4 FY '23. This quarter EPS stands at INR 52.7 per share. We have been strategically optimizing operations and report publication. Gross internal cash flow and thereby, [indiscernible] in the phase of potential fluctuations. We generated a free cash flow for FY '24 of INR 116.4 crores. We have made partly utilized to reduce our debt by INR 39.4 crores. Consequently, our net debt position stands at negative INR 32.6 crores. We also reduced our working capital cycle to 122 billion at the end of March '24 compared to INR 1.1 million at the end of March last year quarter. We continue to invest in upgrading our facilities and have invested INR 142.7 crores in CapEx in FY '24. I'd like to add that we continue to be mindful of balancing growth in profitability by continuously -- by continued growth in optimizing costs and processes, which will also make us truly sustainable over the long term. We will continue to be on the result of opportunities that will generate [indiscernible] enable cash flows. We expect that FY '25 will be a year of normalized revenue and margin as we resume investment. We are fortunately optimistic that our businesses [indiscernible] continue momentum in the subsequent year based on the current visibility of our project and portfolio products. With that, I would like to hand over the call to Saharsh, once again thank you very much.

Thank you, Abhijit. Good morning, everyone. I'll add a few comments on top what Abhijit has said and then just open it up for Q&A. Given that we've completed another financial year, I'll share some of our thoughts on FY '24. Coming on top of FY '23, where we grew at 26%. We have been able to grow over 30% again this year. During the same period, our EBITDA margins have also grown. They were actually 15% in FY '22. They grew to 23% in FY '23. And then further that grown to 30%. As I mentioned in the past, this is in line with our long-term strategy as an initiative of the kind of business in the company that we want to build. Over many years, we've been consistently positioning Neuland as a top API service provider with broad complex capabilities, partnering with both innovative as well as generic pharmacy companies. As we stand to assess FY '24, there are a few things worth mentioning. We have, number one, we have seen the PMS business this year contributed close to 50% of our revenues, which already had grown 30% last year. Our CMS business saw its robust growth in FY '24 as some projects, as we mentioned before, are near launch, while key commercial products continue to scale. Number two, we have added a number of projects across the clinical Phase I and Phase II. In light of the improving biotech environment in the U.S., we see the new business environment continuing to look favorable. Number three, when it comes to the GDS business, we have seen some growth in specialty GDS business, driven by Paliperidone, and a few other molecules where there was a slight decline in Prime. This is actually in line with the composition of our product portfolio as different products go through different life cycle events at various stages. I expected that we are continuing to develop new products and seeing increasing traction for them even as CMS [indiscernible]. The past year has seen a reiteration of our regulatory track record as both Unit 3 and Unit 1 were inspected by the FDA. Also lastly, we are actively investing in long-term growth CapEx, which has been announced during the course of the year. We continue to remain conservative on identification of avenues for these investments. In terms of the quarter itself, while it was lower than some of the previous quarters, it's actually in line with our expectations and in line with our plans for FY '24. We have seen significant revenue from both commercial as well as development projects even as we continue to add new projects. Key molecules driving specialty GDS performance of Paliperidone and Dorzolamide while mirtazapine and escitalopram were key contributors to the Prime GDS business. As stated earlier, the business has seen increase in growth and profitability due to a favorable product mix as well as scale up of new molecules, and we expect this momentum to sustain bringing us healthy margins. Looking at the pipeline, we are excited on the long-term potential of the business, which will be led by commercialization of molecules as well as addition of new business. We continue to invest in creation of additional capacities as well as capabilities for reaching scale in new as well as existing molecules. In the short run, however, we expect moderation in revenue growth as well as normalization to some extent on margins due to the investments that we're making in the business and also input cost increases. We expect the business mix to remain steady and gradually improve. As always, we maintain that variables such as the usual product performance, product fluctuations, raw material cost volatility and other business variables can have a bearing on our outlook. We remain vigilant of all such challenges and remain focused to capitalize on the new opportunities. Ensuring that there is sustained growth and profitability over the specified time frame. Even flexibility and agility will be the key in responding effectively to the evolving business environment. Also, I'd like to say that our growing reputation and the macro environment are ensuring that exciting opportunities come our way even as we work towards building a further differentiated customer experience. We will continue to invest for the future by adding capacity and capabilities that I have already mentioned. By staying committed to our principles of customer centricity, agility and operational excellence, Neuland is well positioned to capitalize on opportunities and overcome challenges and well on the path of achieving its long-term objectives. So having said that, maybe, Ravi, I request you to open it up for Q&A.

[Operator Instructions] The first question is from the line of Hussain Kagzi from Ambit Asset Management.

My first question is on our product pipeline. So as I see there's a great jump in the Phase II molecule pipeline this year. So if you could share some color on that. And additionally, now if I zoom out and look at our pipeline data since FY '18, so the total number of projects or molecules have not grown much from FY '20 to '24, like the total number was 76% in '20. Now it's 88%. So compared to the rise that we saw in the preceding 2 years. Now I'm asking this in the context that as far as my limited understanding goes, the larger pipeline is important in terms of diversifying from a select molecules. And of course, chance of having many such high-value products in the commercialization phase. So if you could please throw some color on this?

Yes. Thank you for the question. I think with regards to the pipeline itself, I think the near-term pipeline, the molecules which have been contributing significantly, I think they have been continuing to do well. I think the emphasis on new projects is there. And I think we are also seeing a steady inflow of new projects coming in now, which is what I had highlighted in my comments. Your observation is absolutely right. I think the kind of increase we had 2 years ago versus the increase we've had in FY '24 is not the same. But having said that, I think we also went through that full biotech funding crunch and there was a little bit of a slowdown in terms of new project inflows about a year ago. At the moment, as it stands, we're seeing a steady increase in flow of new opportunities, new RFPs are coming our way. So I would expect -- I would guess that in the next 12 months, there should be an increase in the total number of projects. And also, one thing to bear in mind is that it's also important for us to track the quality of the profits coming in, right? So it's also important to make sure that we're getting good opportunities, which are high value and rather just focus on the number alone. So to have somewhere also the team is becoming more selective and careful in soliciting the kind of projects that we want. Do you want to add something Abhijit?

No, I think [indiscernible].

Your voice is not audible. Can you speak a little louder, sir?

Yes. I think one thing we need to keep in mind is the fact that we are looking at the number of active projects. So this is not a cumulative number of costs. So even as we are adding profit we find that there is attributable projects in Phase I patients [indiscernible] which is therefore the number is at 90. So at least for 89. We keep an active [indiscernible] the variety of these projects in [indiscernible].

That's very helpful. And just in continuation to this. It's interesting that you mentioned that about biotech funding and all. So you have said that FY '25 will be a year in terms of normalized revenue. But if I see our exceptional performance in FY '23 as well as '24, this was in light of severe biotech funding pressure, which, of course, forms a major part of our client cohort. Now that is kind of picking up at least over the last 3 months from publicly-available data. That plus the noise around the biosecurity bill, so early stage projects would be much easier to shift. And the third point is our new -- one of our CSM product received a label extension. So don't you think all these increase from these would be able to kind of add to the revenue for FY '25 and kind of shorted much further?

See, I think our estimates for FY '25 and the kind of indication is given is based on what we are seeing as concrete, in terms of order book in terms of visibility, production plans, et cetera. What comes out in terms of new business, we call it blue sky, it's something that we cannot really model or predict in to our revenues. There's always an estimate of how much new business will come each year. If you see the growth that we have achieved in FY '23 and '24 was actually a lot of -- as a result of the new projects we added in FY '19 and FY '20. So therefore, we would appreciate that there's always going to be a lag between the performance of the year versus the effort of getting a new business. So if we see all the new projects in the next 12 months because of this whole biotech funding, I think it will probably add more significantly to the business 2, 3 years down the line, given the kind of projects that we will pursue. It may not necessarily add significantly for FY '25 itself. So we kind of stand by what kind of indications we had given because those indications are based on the order book and the firmness of the more commercialized molecules we have.

The next question is from the line of Ankeet Pandya from Inked Asset Management. Yes, Ankeet, please go with the question. As there is no response from the participant, we'll move onto the next. Next question is from the line of Sudarshan Padmanabhan from JM Financial.

My question is to understand the revenue segment. So we have seen a very favorable movement with the high-margin business increasing and the low-margin business coming down. One is, as you have alluded, the order book is getting stronger. So even from here, I mean, where do we see the mix between, say, a high-margin prime vis-a-vis somewhat a low margin -- I mean, low margin prime, high-margin specialty. The second is when I'm actually coming to the working capital. So it was quite good to see the working capital also improving on a year-on-year basis. I mean, where do we see -- should we also continue to see the improvement in the working cap?

Yes, I think there has been a steady increase in the contribution of specialty vis-a-vis prime. And I think that's something that we expect to happen. I think it's hard for us to put a finger on whether this will continue to increase further or it will stabilize at the current level because it really also depends on how our prime products will do. For example, this year, I think mitigating is really when it grew a lot. And if some of the prime products continue to grow that well hand in hand with the specialty products then maybe the proportions will remain the same. With regards to the working capital, I'll give you, do you want to answer?

So at the end of March, [indiscernible] working capital [indiscernible] it is still at around 122 days [indiscernible].

Sorry sir, your voice is not audible. Do you want me to reconnect you, sir? We can't hear you, sir.

Okay. So I can shout -- so at the end of March, we were at 122 days and we do a re-calculate working capital days internally, and we give it out also as part of our debt. Okay. So we have been striving to kind of. Were -- can you want the brief answer you on this just tell me maybe okay -- so we strive to was 120 days. So our target is 120 in terms of working cap, and we are very confident that we can get there. I think there's been a little bit of a drop in this quarter. But that's also probably connected with the quarter itself. So that's it. Yes. So maybe we can move on to the next question.

One final question before I joined the queue is I just taking to you from the earlier participant. I mean when I'm looking at the CMS revenue, I mean, there has been a very sharp jump on the commercial and development side. We also know that some of the products, which have just hit commercial and typically is expected to gather momentum. So in that aspect, are you being a little bit more cautious? Or do you think that with whatever the visibility that is in hand, probably, you still believe that there will be -- whatever that is being built for we'd see a more visible or a sharper jump to say 2 years down the line.

No. I think, Sudarshan, whenever the commentary we are making, we don't necessarily look at it as being conservative or aggressive. I think we just kind of giving our outlook the way it is. I think maybe every management or every company has a different degree of tolerance. So I think maybe I would just say if you want to understand what we are indicating, if you just look back at our last 2, 3 years commentary versus -- and then trying to take it with the performance, you will see that there is consistency whether it is conservative or not is something I leave it to you. I think everything we are making in terms of commentary about FY '25 and the year beyond, is we are being very realistic. We don't necessarily intend to downplay anything.

The next question is from the line of Ankeet Pandya tone from InCred Asset Management.

Congratulation on a great set of number. Sir, two questions. So firstly, on the -- for the quarterly result, so that expenses have increased by almost 21% on a year-on-year and even sequentially by 23%. So is there any one-off over here? Or is it because of the investments that we are doing as a result of that? Hello.

Can you hear me?

Yes. Now, we can hear you.

Thank you. So actually, our operating expenses has gone as per our plans as per our plan. But having said that, our operating expenses has gone up by around 18% because the rest of it is variable. And that is predominantly because of manpower costs, right, and other expenses, which is on account of professional fees, right, and some amount because of manufacturing expenses. But I must tell you, Ankeet, that this is as per our plan. So it's not something that we were not aware of based on actuals.

Fair enough. And sir, another thing on the last quarter con call, you had mentioned that we have purchased an additional land next to the Unit 1. So any update on that? How are we looking at or will we start investing for that right now? Or as and when we get more clarity on new projects coming in?

So I think the largest primary is secure to make way for the future expansion for the product that's been made in those facilities. So we have a 5-year plan was and looking at the needs of the plan, we are adding improve capacity and integrating it in line with the protections and that's pretty much it.

Okay. And what can -- what would be the CapEx guidance for FY '24 and FY '25 -- FY '25 and '26.

So our CapEx guidance continues to be the same as we have guided earlier. The baseline would be always INR 100-plus crores but we will be opportunistic. If we find something, which meets those plan. We would apprise back to you and obviously have to inform the stoping change.

The next question is from the line of Shyam Srinivasan from Goldman Sachs.

Just the first one is on the outlook as we look forward, right? You've talked about fiscal '25 being like a consolidation year. I remember in your earlier calls, you talked about like a medium-term growth target of 20% and look us not at quarterly, but more at a more medium-term level. So I just want to get some of the key milestones that we need to keep in mind in fiscal '25 and '26. I'm just calling out a few things. I'm not sure whether I'm capturing everything like, for example, the corona molecules. Do we have to look at the PDUFA dates coming up for the bempedoic asset label expansion. So if you could help us qualitative sense on some of the products that are in the public domain in terms of what are the things we need to look forward to? Take the point that there could be consolidation. But I just want to understand what are some of the catalysts that we can see in the next 12, 18 months?

Yes. Thanks for the question. I think -- try to answer that as best as possible. I think what we have always indicated is that over a 4-, 5-year period, we will be able to target a 20% kind of growth. And I think that's something that we are comfortable. And our plans are all kind of built around that. Again, having said that, the growth is not going to be linear even on a year-on-year basis. So that is also something that we are seeing kind of play out. With regards to the milestones that one should look out for. I think we have to just kind of qualitatively visualize this for you. We talked about FY '25 being more of a modest growth and a growth in '26 and '27 being far better. And I think the reason why we have also kind of given this kind of outlook is just based on how we see the current pipeline of products and their projections as we layer them out. A lot of the 3-year outlook that we have talked about is based on all the molecules that are already in the bank, so to speak. So these are not based on any assumptions of some new molecule, some Phase III molecule getting commercialized, et cetera. I think anything that happens at that level will perhaps enhance the business, but that is unlikely to happen in the next one year. It could happen beyond the 1-year time frame. Unfortunately, as we have mentioned in the past, we won't comment on specific molecules in the CMS portfolio because of the confidential nature of the business. But I think whatever molecules we are kind of commercialized already, I think we're seeing a sustained growth for those molecules. I think the molecules, which are perhaps stepped away from commercialization in the launch phase. I think we're seeing good traction with that also. So I think, yes, that's kind of what I -- do you want to add something?

So the only other point [indiscernible] irrespective of the news that we see in the market will be expect molecules in the margin. It's very difficult to [indiscernible] or the 2 kinds of projections because sometimes we [indiscernible] that our customers are not [indiscernible] molecule slightly had we have realities possible to take that into the future. And one of the [indiscernible].

Can your voice is little [indiscernible] . Can you come closer to the mic, sir?

No. That's all from me.

Okay. Just the second question is on the generics side of things, right? Was there any -- any comments on either pricing or volume trends for the quarter? Again, we're not looking quarter-to-quarter, but just trying to understand because that's where, say, prime was like down 16% Y-o-Y. So just trying to understand, is this some form of pricing pressure? Or do you think this is just phasing of supplies? Any color there will be helpful.

I think Prime, although by nature has that kind of challenges, we've not really had any kind of issue.

And also, Shyam, is that Prime products because of the nature of housing. There's a lot of market share volatility that happened as well, especially in light of the new [indiscernible] regulation and other guidelines that we've seen. We've seen some of the Prime products being affected by based on how our customers are choosing to handle them. Therefore, we don't see any significant long-term impact of that, but there are short to medium-term corrections. But the business segment is as we said earlier, whether it's Prime, specialty or CMS, they continue to be...

And I think there's no particular challenges on pricing also in this regard.

The next question is from the line of Sajal Kapoor, from Individual Investor.

Before I ask my question, I want to make a small comment on our balance sheet. Actually, I've been very lucky with Neuland Lab. From a debt-heavy balance sheet into 2010, to net cash on books with the Nanakramgu transaction is still pending. It has been an amazing journey of transformation and solid execution. And coming to my question, over the next 4 years, we will likely generate an additional INR 2,000 crores of cumulative operating cash. So can you scratch out the capital allocation and dividend payout policy for the next 4 years because we are hardly paying any dividend today, which means that we are conserving cash and we have some capacity strong capability plans. That's my first question. And my second question is there was a recent news article in Financial Times that U.S. FDA has been denied access to several Chinese sites in recent years, and a large number of auditors from Germany are refusing to visit China for this year of error. And we can add Biosecure bill that has been tabled in the U.S. standard to this mix, and this becomes a very potent combo for an alternative supply chain. You would imagine, no?

So a couple of things, Sasan, on the CapEx side, as Abhijit was saying on the baseline CapEx is going to be in the vicinity of INR 100 crores. And on top of that, we have a program for specialty or growth CapEx. So based on specific projects in the need for those projects and opportunities and the operating cash that we are generating, we allocate whatever CapEx is required, so that we don't lose out on the opportunity without taking on to next risk. So that's the overall policy that we have on the CapEx. We also try to maintain an internal benchmark where we don't want to allocate more than 60% of our operating cash to CapEx. But we're willing to breach this benchmark based on the opportunities that come available to us as well. Now as far as the dividend policy is concerned, a couple of years ago, we had actually benchmarked against other growing companies in the market to see how much is repeat dividend to be paid out for growth in the over-rented company, and companies which have a similar financial help as we do and growth plans will we do. Apart from that, we've also taken input from advisers and consultants on what should be a healthy dividend policy. Today, we use those guidelines, and we debate in the Board meeting every year based on the profitability and in line with our dividend policy to declare that dividend for a specific care and this practice will continue. I think the last comment about the Biosecure Act and what we are seeing in China and the impact of that, I think we're taking things as we come because there's 2 things. One, there is this overall in about the Biosecure Act, which hasn't been passed yet. The second thing is about how that will actually get operationalized and the impact of that we will see for India and other countries. Therefore, right now, what we're doing is what we consume, which is to be intact with our existing customers, potential customers. We're also doing business with China and other countries, matching our capabilities to their needs and seeing how we can put our best foot forward because that is what we can control as new and other things are beyond our control. And I think how the future plays out is something that we will wait and see. Notwithstanding that, as you've noticed, we are taking aggressive bets on investing in technology, buying the plan, adding this capacity so that we are ready to take care of the opportunities in the future. That's how as an organization is thinking about it right now.

The next question is from the line of [indiscernible] from Clock wine Capital.