Neuland Laboratories Limited (524558) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Neuland Laboratories Limited Q1 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would like to hand the conference over to Mr. Ravi Udeshi from Ernst & Young. Thank you, and over to you, sir. Ravi, sir? Hello?

Hello, can you hear me?

Please go ahead. Yes, sir, now we can hear you. Please go ahead.

Thank you, Shruti. Good evening, friends. We welcome you to the Q1 FY '26 earnings conference call of Neuland Laboratories Limited. To take us through the results and to answer your questions, 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. 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 seeing in the market. And post that, we will open up the call for the Q&A session. As usual, the standard safe harbor clause applies as we start with the call. With that said, I now hand over the floor to Abhijit. Over to you, Abhijit, sir.

Thank you very much, Ravi, and a very good evening and warm welcome to everyone joining our call. The financials are as follows for quarter 1. Total income is INR 300.6 crores, which is a decrease of 32.4% year-on-year as compared to INR 444 crores in the same period last year. The commercial CMS projects and the GDS Prime segment were the main contributors to revenue this quarter. As we have mentioned several times in the past, the inherent nature of our overall business is uneven on a quarter-on-quarter basis. EBITDA stood at INR 42.1 crores at a margin of 14.4%. The decreased revenue has led to impact on margins as a result of deleverage and there has been no other significant factor impacting the profit and loss account. The gross margin for the quarter was 55.3% as compared to 56.1% in FY '25. This margins, as always, include manufacturing expenses and other costs that are directly attributed to the product. The profit after tax was INR 13.7 crores as compared to INR 98.3 crores in quarter 1, and our quarterly EPS stands at INR 10.7 per share. While our focus on optimal utilization of cash remains a top priority, we have seen a deterioration in working capital this quarter as we have higher inventory due to the uneven nature of order flow. Working capital stood at 145 days of sales for the quarter, and our free cash flow for the quarter was negative INR 66 crores. Our net debt stands at negative INR 165 crores. As part of our investment, there was a cash outflow of INR 79 crores towards CapEx for this quarter. We are committed to balancing growth and profitability by continuously optimizing cost and processes to ensure long-term sustainability. As we mentioned in the previous quarter, the additional production block in Q3 has been capitalized, and we expect commercial production to start later in this fiscal year. Other investments, which have been announced in the last 12 months, are going as per plan. Given the rapidly changing environment, we continue to evaluate opportunities, which will drive long-term growth even as we focus on cost optimization opportunities across products and processes, which enable us to further strengthen our position. While FY '25 was a year of consolidation and Q1 has been a continuation of that, our customer pipeline gives us good visibility. Hence, we are confident with the commercialization of Unit 3 production block, it will give the business greater revenue momentum from the latter half of FY '26. Overall, we continue to be optimistic about our future and the potential that our business holds. As in the past, our presentation, which has been shared with the press release, contains more details. With that, I would like to hand over the call to Saharsh for his remarks. Thank you very much.

Thanks, Abhijit. Good evening, everyone, and welcome once again to the call. As you can all surmise from the numbers, the performance has been below par for this quarter. And through my commentary, I do wish to assure you that we are well on track for achieving both our short-term and long-term goals. We had previously indicated that we expect our FY '26 growth trajectory to resume on the FY '24 base. And despite a weak start, we remain confident of achieving this objective. Before dwelling on the details of the quarter, I will reiterate a few points which have been made in the past, but are still important for investors, both old and new, to keep in mind. Over the years, Neuland has firmly established itself as a dedicated API solution provider with deep expertise in various complex capabilities. We collaborate with both innovators and generic formulators to create a healthier world. Due to the inherent characteristics of the CDMO business and the specialty GDS business, which focuses on small volume products, our business can be uneven. Therefore, evaluating Neuland's trajectory on a 3-year block basis is likely to be more accurate than comparing a Q-on-Q or a Y-on-Y basis. There may also be occasional years where the trajectory is unclear due to the specific mix or how the products are taking off. However, the completion of the manufacturing facilities with -- coupled with scaling of commercial molecules on the CMS side, give us a great deal of confidence in achieving our objectives in FY '26 and beyond. We continue to see increased interest in customers wanting to partner with Neuland as they look to bring in their innovative medicines to patients. I believe this can be attributed to 3 main factors. Firstly, our reputation has been growing steadily due to the work we've done over the past couple of decades, particularly in the CDMO business. Secondly, our business development teams are increasingly focused on finding opportunities that align with our long-term strategy, making us more selective and decisive about our partnerships. The third factor being the macroeconomic environment being favorable. Of course, this is a rapidly changing scenario, which also has worked in our favor. We are excited by the range of customers expressing interest working with us, which gives us great enthusiasm for the future of our business. Coming to the quarter's performance, which has been below par in terms of our performance over the last few years because of the flow of customer orders. However, this is in line with our earlier stated expectations on the increase in revenue to pick up during the course of the financial year. And I guess the quarter itself has -- the orders were planned in a way that the quarter itself was always set to perform in the way it has. This quarter doesn't change our earlier stated expectations for the financial year as well as the following years. Revenues this quarter primarily came from commercial products in the CMS as well as prime GDS products like mirtazapine and ezetimibe. The specialty GDS business was also subdued this quarter with only dorzolamide contributing significantly. However, this is not indicative of the potential of the GDS portfolio and the growth we expect to see. We remain focused on innovative -- innovating new specialty products while optimizing processes and expanding market share for key commercial APIs. Our dual strategy of focusing on high-margin specialty business as well as increasing volumes for the prime API business will ensure growth of the GDS business, both in the short and medium-term. On the CMS front, we see short and medium-term growth coming from molecules which have been commercialized in the recent past. As indicated in previous calls, we also expect the commercialization of another molecule this year. We are also seeing significant growth in terms of new business coming from both existing as well as new customers, which should fructify in the numbers over the course of this and next financial year. We are also excited by the range of customers expressing interest in our services and placing first-time orders. Apart from commercial projects and the new business, we are also seeing some of our customers' assets in the pipeline make progress. We expect buoyancy in the CMS business to continue going forward and drive the growth over the short, medium, and long-term. As stated in the past 2 quarters, our peptide investment plan is on track. We continue to garner more projects in this space, which further validates our excitement about the opportunities that the segment holds. Even our peptide scientific team is working on exciting projects. At the same time, they are also developing capabilities that will help Neuland further differentiate itself as a peptide API manufacturer. We will continue to update you on the progress we are making on this front, even as we expect the new facility for peptides to be completed in the next financial year. Another reminder from our previous interactions, we continue to maintain that there are a variety of factors that could influence the projections. These included performance of individual products, foreign exchange fluctuations, raw material cost volatilities, and other dynamics of the business. We are aware of these challenges and continue to monitor these variables very closely. Regarding capacity building, the new production block in Unit 3 has seen the validations happening as per schedule, and we expect fulfilling orders in FY '26. We also continue to work on expanding our Unit 1 by acquiring land, which gives us the leeway to add capacity faster than a greenfield expansion or a facility acquisition. Agility and innovation are crucial for effectively responding to the business environment, and we continue to invest in our capabilities and people to ensure we are enhancing our customer experience, which we believe distinguishes us as a CDMO. I would like to conclude that Neuland is well positioned to capitalize on long-term opportunities, and we are also positive regarding the outlook for the year. So having said this, Ravi, I request you to open it up for Q&A.

[Operator Instructions] Our first question is from the line of [ Arun Shanmugam of Speciale Invest ].

So considering the revenue composition, the CMS business contributed around 44% of the revenue in the current quarter. Considering the high-margin business that business CMS is, why is the margin fall so very significant in this quarter?

I guess it's basically the fact that we've had low revenues this quarter, the overall -- there has been a deleverage in terms of our operating expenses, et cetera. If you look at the gross margins, the business is still indicative of how it was earlier. But obviously, because the numbers have been suppressed, there has been a hit, and it's only for this quarter.

And previously, you had indicated that this financial year, we'll see a commercialization of another molecule in addition to a molecule which was already commercialized in the previous year. So is that guidance to be continued? Or do you see any other molecule being commercialized in the current quarter?

As I had just explained in the opening remarks, we expect another molecule to be commercialized in the course of this year. It has not yet happened, but it will be happening this year.

Our next question is from the line of [ Dheeraj ] from AlphaSqr.

Hello, Saharsh. So one of my question is, across the industry, many players today are talking about peptides, right? I mean if I see any con call from any CDMO manufacturer, they are now talking about peptides. How should we think about like someone who can build credibility in the space and someone who can really have -- who have capability to build an INR 500 crores or INR 1,000 crore revenue out of peptides in the next 3 to 5 years? How do you suggest the -- I mean, the investors in terms of which players do have that capability? And how should we cut the noise?

Yes. It's a very good question, Dheeraj. Neuland has been dabbling with peptides for almost 17, 18 years now. We've had a small group, mostly working in small scale and then in pilot scale. And now with this new investment, we wish to embark on large-scale commercial manufacturing of peptides. The hypothesis for us has always been that, look, we are present in peptides. We understand the chemistry and the techniques of peptide chemistry. However, we never had the large-scale infrastructure. What has happened over the last several years, thanks to the GLP-1s, is that peptides have become more prominent in the drug development landscape and peptides are being increasingly used as a vehicle for delivering new therapies. As a result, what used to be a $1 billion or $1.5 billion market space is now a $5 billion or $6 billion market space, and it's growing very rapidly because more and more drugs are coming out into the market, which are peptides. As a result of this market expansion, a lot of players, not just globally, but in India also are showing that enthusiasm and they're making investments in this space and they wish to participate in this opportunity. And I think it's a fairly large market. And therefore, I think there is room for several players. Having said that, I think what makes Neuland a strong player in the peptide space is the 15-plus years of experience we've had in peptide chemistry. If you look at the IP landscape, the number of patents filed by Neuland scientists over the years, the kind of work we've been doing, not just in terms of peptide APIs, but in peptide fragments, et cetera, et cetera, I think that creates layers of depth of expertise that I believe Neuland uniquely has, at least, from [indiscernible]. In the space of peptides, techniques become that much more important than just knowledge of chemistry because when it comes to executing peptide projects, there are a lot of techniques, whether it is purification, lyophilization, precipitation or [indiscernible], which are very difficult to achieve and apply to projects. Companies that have years of experience, especially even on the large scale, they tend to do well. And we believe that's what gives us the advantage. What was a limitation for Neuland, frankly speaking, was that we never had the large-scale capacity. Even before 4 or 5 years ago, we had been approached by biotech companies for making commercial peptides, but we could not fulfill those projects because we never had that scale. But now with the creation of this capacity, we are very confident that our business will grow. But I also do believe that there is enough space for multiple players to do well. But you do need strong R&D capabilities in peptides. Just having infrastructure may not be enough. I hope that answers your question.

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

Just the first one, just reading through the press release and the commentary around the outlook remaining the same from a growth perspective for fiscal '26. So Saharsh something, just anything qualitative? I know you're not giving anything quantitative in terms of what the growth outlook is. But if we were to look at Q2, then Q3, then Q4, what are some of the key milestones we need to kind of look forward to? So you talked about the validation at the Unit 3 new production block. But say, if you could kind of help us break it down on a quarterly basis, just a qualitative sense of what will help drive a recovery in the revenues please?

Yes. Shyam, I think we kind of carefully crafted the opening remarks to give as much detail and as much guidance to investors about how we see FY '26 unfolding. And we've kind of tried to lay everything out there. So I think you've kind of caught most of the points that were said. We really don't wish to break things down at a quarterly level because that's something that we've avoided doing in the past, and we do not want to set a new precedent in terms of trying to break things down, but we do remain very clear and confident that you will have that growth that we had indicated in FY '26. Yes, the validation of our Unit 3 facility for the CMS molecule is complete. And therefore, anticipation of commercial supplies is one milestone, as you have clearly acknowledged. I think the launch of the new CMS molecule, which was awaited for about a year or so is another milestone, which we have indicated. And there's been another CNS drug, which was approved last year, which we are also scaling up. I think these are some of the critical milestones. There are a few on the GDS side. But we would unfortunately not be able to give you a timing indication. You should be able to see progress during the course of the year.

If you were to look at in terms of -- you also made the comment around the acquisition of land for Unit 1, I couldn't get which unit. And this is outside of the peptide one which you have -- we are planning, right? So sorry, what is this for? And you said it's better to do this than do a greenfield. So if you could just double-click on this, please.

Yes. So it's part of our future expansion plans, Shyam. The peptide facility is also being built on an acquired piece of land next to Unit 1. That has been already integrated and some expansion is going on there. But even beyond that, certain additional pieces of land are also being acquired. The idea is to have an integrated large site rather than have a Unit 4, Unit 5, et cetera, which might again be operationally challenging and even from a regulatory compliance point of view. So the idea is to try to expand the sites we have rather than try to create new sites. That was the idea. The greenfield can be also challenging because acquiring a piece of land, building infrastructure and then seeking approval, since mostly our business is in the regulated market, we believe could take us anywhere up to 5 years. But being able to acquire land, integrate it into your existing FDA-approved site, creating additional facilities is a much shorter time frame. So that's the advantage that we were talking about.

And my last question is just on the GDS segment. I know there was a reclassification from specialty prime for writing ezetimibe, if I remember right. Even with that, we have seen a decline for the quarter. So I'm a little confused there. So just is there something specific? Or is it again just phasing of supplies or you ramp up GDS supplies later in the year? Sorry, if you could help us because that's a little bit ongoing business, right? That's not -- that's maybe less lumpy, less lumpy. So if you could help us guide, yes?

Yes, it's the right observation, Shyam. I think ezetimibe was classified from specialty to prime. And I think for us, the quarter itself, irrespective of that classification, I think we've had products like paliperidone, et cetera, which have been contributing to the growth of the specialty segment. It just so happens that we've not planned for dispatches of this product in this quarter, along with some other changes. And that's the reason why. But I think for the year itself, we don't see any concerns with regards to specialty. And ezetimibe is a prime product, and we expect to see good growth in ezetimibe also going forward. So I think overall, we have no concerns. But yes, I think specialty has degrown for Q1. And it's -- I think it's just how things have stacked up for us.

Yes. Shyam, I think to add to what Saharsh has said and also what he indicated even during his opening remarks, the fact is that a lot of our GDS Specialty products are relatively small volume products. So they are not necessarily regularly produced and regularly shipped. So there's always that variability even when it comes to our GDS specialty products, which we have seen this quarter.

[Operator Instructions] The next question is from the line of Ishmohit from SOIC LLP.

I just had 2 questions. First one is, are we also looking at CMS opportunities in the peptide landscape over the next 3 to 4 years?

Yes. I think the portfolio of projects for us will be GDS as well as peptides, and we have several projects which are likely candidates for the peptides business.

So basically, are we looking at the contract manufacturing opportunities in the CDMO space for peptides?

So we have several CMS molecules, some as late as Phase III and several in earlier stages, which are peptides, and they are part of our portfolio, and they are also part of that table that we keep disclosing every quarter in CMS.

And sir, second question is just overall broad direction over next 2 to 3 years, do we see that our CMS business will start moving towards like that 65 to 70 percentage mark towards the overall sales contribution? Not like I'm not holding you to a quarter because that is anyway not the nature of our business. But anyway over like next 2, 3, 4 years basically direction.

I think, yes, we don't want to give the classification, but I think definitely, this year, next year, I think the CMS growth will be quite strong. And therefore, we expect it to increasingly contribute to the total revenues. I think the GDS also has -- is poised for growth. But I think being a more mature established business, I think growth will come more on the specialty side, maybe a little less on the prime side. So we'll have to watch. But it's slightly more difficult to ascertain. But overall, you can expect the CMS contribution as an overall sales to increase compared to the past years, but we don't want to really specify how much.

The next question is from the line of Naveen Baid from Nuvama Asset Management.

Am I audible?

Yes, sir, you're audible now.

Yes. So in the molecules table that you provide, so I see one of the molecules dropping from 9 to 8 in the pre-registration phase. Is this a dropout? Or have you reclassified this?

So I think, Naveen, in terms of the -- it is a product which I think it was an intermediate, which we've seen that the customer is not really looking to move forward because it hasn't picked up the volume that they expected even as they had done work with us in the R&D. So since we no longer see that possibility, we have kind of dropped the product, but that doesn't really impact anything much in the overall scheme of things.

If you can just kind of give some sense in terms of what kind of revenue was it doing? Like was it like sub 2%, 3% for you?

No, it was a very -- I think it was a very small molecule, which used to probably contribute only once in 2, 3 years. But again, it isn't doing much so, yes.

Our next question is from the line of [ Neil Shah ] from Purnartha Investment Advisors Private Limited.

Am I audible?

Yes, sir, you're audible.

So you did mention in your introduction that we should consider FY '24 as a base and not focus only on quarterly variations. So that's fair. But can you guide on the growth in the top line for FY '26, even if it's like over FY '24?

Unfortunately, I think we're just using words as guidance. So I think what's the word we've used, Sajeev? Healthy growth, strong growth?

Healthy growth, yes.

Strong growth is the word that we are leaving you with. So please forgive us for not being more specific than that.

I mean that's fair, but strong growth implies something about 10%, 15%. Can you give a certain range maybe?

See, I think what we've said is a couple of things. One, we should look at a 3-year perspective. Second is we've also mentioned in the past that over 3 to 5 years, 20% CAGR is a reasonable number to look at for a company like Neuland in the kind of phase that we are. But yes, I don't want to connect the words with the number. But yes, we expect to see a strong growth in FY '26 as well.

And do you expect any recovery in the margin in FY '26?

See, I think we see margins also recovering because the margins have been suppressed because of the poor sales.

Our next question is from the line of Chirag Shah from White Pine Investment Management.

Two questions. First is actually a different question from this quarterly stuff. So I wanted to understand what is required for a higher conversion for us from Phase III to commercial, especially in big pharma? Because it appears that we have not been able to participate on the commercial side with big pharma in a way in which we would like. So what is required or what changes you are making to be a part of the supply chain when it becomes the commercial product?

It's an interesting question. I think to work with big pharma, whether it is for early stage or late stage, I think building those relationships are -- require time and they require certain kind of infrastructure capabilities, et cetera. I think as we have always mentioned, Neuland has traditionally worked a lot with biotech companies. Even today, most of our pipeline comes from biotech companies, not a lot comes from big pharma. I think big pharma work is either coming through peptides or when a biotech company is getting acquired by big pharma. So frankly speaking, we don't have a lot of experience to speak about what it takes to convert Phase III projects from big pharma. But our approach has been to kind of keep investing in capabilities, infrastructure, which we have been doing and engaging with big pharma for unique technologies. So for example, Neuland is in contact with several big pharma for areas of peptides or deuterated molecules because these are capabilities that big pharma does not find from their traditional API suppliers. And in that pursuit, we are looking at some early-stage projects. We are occasionally also finding opportunities on the late stage, but it's really too early for us to comment on whether they will fructify into business or not. But yes, I think big pharma is a very important target segment for us. And there is a lot of effort for the medium to long term to build large businesses with big pharma, and I believe we are making good progress.

Is capacity in advance a constraint for you because even when you work with biotech and when they are taken by big pharma, is capacity upfront being available is a constraint? And how should we look at it?

Yes, I think it's an interesting question. I think capacity is not -- I would say directly, it's not because even in Neuland, if you see, we have been investing in capacities ahead of the curve. We have been creating 1 or 2 production blocks ahead of a demand surge. Even today in Unit 3, we are creating additional production block, which will be available in August or September for production, but we have not really mapped any products over there. So we are creating capacities. And if a big pharma or any other client were to have a project, I think they would find capacity in Neuland. So I don't think that is directly a concern as of today. But yes, perhaps 2 years ago, 3 years ago, maybe we would not have that. But what we also see mostly is whenever you engage with any biotech or big pharma, unless it is a late life cycle opportunity where there is an old molecule, which is nearing patent expiry, a big pharma is not really looking for huge capacity straight away to be available. We have seen some opportunities slip from us because some large big companies have looked for large volume APIs, which are nearing patent expiry for which they needed some ready capacity. And I believe we have lost 1 or 2 of those opportunities. But again, we also feel from a scale chemistry point of view, those are not really great fits for us. The way we have been building our business is to start partnering with molecules which are late in the clinic or in the middle of the clinic or maybe early commercial. And for those kind of opportunities, you really don't need to showcase so much capacity ahead of time. You need to show your ability and bandwidth as a company to create appropriate capacity in time for the scale-up of the molecule. But more importantly, you need to show the technical capabilities for handling the process and designing the process, which we have. So it's a very finite approach where we need to find the right kind of projects. And I think Neuland as a company, although we want to work with big pharma, we're also very careful not to approach big pharma for the wrong kind of projects because then we would end up competing on capabilities which we are not very strong at. So we are very careful in that approach.

Second question is a lot of Indian companies…

Sorry sir, could you please follow the queue for further questions?

This is the second question I had actually. It's a small one, if I can.

Management if they allow you, then you may.

Okay, yes. Sir, can I ask one more question if it's fine?

Yes, go ahead.

It's a very basic question that a lot of Indian pharma companies looking to enter into the GLP generic space. Are we engaged with them in any way either in small or a meaningful way apart from the trend that we are kind of aware of because there are a lot of companies we're looking at and a good amount of capacity being created in that sense? This is my question.

It's not coming out clearly. We're not able to hear it. If you don't mind, let's just get back into the queue because we have a long queue today. Maybe we'll take the question later. Sorry about that.

The next question is from the line of Keshaav Bagri from Manyavar Family Office.

Am I audible?