Neuland Laboratories Limited (524558) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Neuland Laboratories Limited Q2 FY '26 Earnings. 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. And to answer your questions, we have with us the top management from Neuland Laboratories, represented by Mr. Saharsh Davuluri, the 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 question-and-answer 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 a good evening and warm welcome to everyone joining our call. Our apologies that we kind of started 2 or 3 minutes late because of connectivity issues. Let me now dive in straight into the financials for quarter 2 FY '26. Our total income was INR 516 crores-odd crores, which is a 63.7% jump as compared to INR 315 crores in the same period. The commercial CMS projects contributed to a majority share of the revenue and were the primary drivers of growth this quarter. Even though the quarterly revenue is, I think, so the best quarter in terms of revenues, I'd like to reiterate our mantra regarding the inherent uneven nature of our overall business on a quarter-on-quarter. EBITDA stood at INR 15.9 crores at a margin of 30.4%. The growth in revenue has led to operating leverage with the business mix tilting to CMS, which are the factors which have contributed to the EBITDA margin. The gross margin for the quarter was 60.1% as compared to 56.3% in quarter 2 FY '25. This gross margin, as always, includes manufacturing and other costs directly attributable to the product. The profit after tax was INR 96.5 crores as compared to INR 32 crores in quarter 2 and the quarterly -- the previous quarter 2 FY '25 and the EPS for the quarter stands at INR 75.18 per share. Over the last 2 quarters, we have seen some deterioration in our working capital because of higher inventories as well as uneven order flow leading to higher receivables towards the end of the quarter. Optimal utilization of cash remains our top priority, and we are working towards inventory optimization, accelerated customer collections and aided by a more even delivery flow. The working capital for the quarter was at 155 days of sales. Free cash flow for the quarter is a negative INR 141 crores, and our net debt stands at negative 0 -- INR 7 crores. As part of our investments, there was an overall cash flow of INR 91 crores towards CapEx for the quarter and INR 170.7 crores for the full 6 months. We remain committed to balancing growth and profitability by continuously optimizing costs and processes to ensure long-term sustainability. Other investments, which have been announced in the last 12 to 18 months are going according to the original business plan. As a result of the opportunities which are opening and the rapid changes made possible by the acceleration in technology, we are continuously evaluating options to invest, which will enable long-term growth as well as differentiating Neuland in the competitive landscape in which we operate. To summarize, quarter 2 FY '26 was in line with our expectation, breaking away from the pattern of the past previous 4 quarters. As we have mentioned in the past, we expect FY '26 year where we see good growth and continue to be optimistic about the future given the potential that our business holds. As in the past, our presentation, which has been shared with the press contains more details. With that, I would like to hand over the call to Sarah for his remarks. Thank you very much.

Thanks, Abhijit. Good evening, everyone, and welcome once again to the call. The numbers this quarter substantiate our earlier expectations regarding FY '26. And before I dwell a bit more on the quarter, I would like to once again paint a bigger picture of Neuland's business for our investors, both old and new. For over 4 decades, Neuland has been manufacturing complex APIs in a GMP environment, establishing our credentials in regulated markets, first with generic formulators and more recently with innovators. We have seen the business mix transition over a period of time to a level where now more than half of the revenues come from the CMS business or the CDMO business as it's called, this quarter. Given the natural unevenness of the CDMO business, the lumpiness of the business and the specialty GDS business, it is more meaningful to evaluate Neuland's trajectory in an annual basis or ideally in blocks of 3 years rather than a quarter-on-quarter basis. Customer interest in Neuland's capabilities continues to be on the rise as we have seen increased engagement with a diverse range of customers across geographies. Even though the macro environment seems a bit uncertain, Neuland's track record of enabling development and commercialization of complex molecules has meant that we are seeing good traction in terms of customer visits, RFPs, and conversions. Our reputation and track record as an agile partner is enabling not just new business but greater share of business from existing customers. While the space seems competitive, we believe that the canvas is large enough for a number of good players with focused strategy to succeed. That is substantiated by the fact that we are seeing customers come to us with specific needs, especially in the peptide space. Given the interest in our peptide capabilities, we are confident that our investments bode well for the long term. Even in the generic space, we continue to see customers keen to work with us given our portfolio of complex specialty molecules. Given the shifts we are seeing, I believe Neuland is well prepared to take advantage given all the steps we are taking internally to further strengthen the capabilities of our team. Coming to the quarter's performance, as Abhijit had stated earlier, the revenues this quarter are at an all-time high. The growth we have seen this quarter is primarily the result of our top 2 commercial CMS molecules doing well. We see this momentum continuing for the rest of this financial year. In terms of the GDS business, we've seen good contribution from products like Ezetimibe and mirtazapine. Ezetamib will continue to be a driver of growth for the GDS prime products. GDS Specialty this quarter was subdued with sterile products, paliperidone and apiprozole contributing. During the quarter, we have filed for 1 DMS. As I had mentioned earlier, the CMS business is seeing good traction with a range of customers across geographies. Our existing portfolio is doing well in terms of our relationships with customers. In line with our expectations, we should see the commercialization of another molecule this year. We're also seeing a lot of new business coming with deliveries expected to happen over the next 12 to 18 months. Our investment in the peptide facility is going according to plan, and we are able to engage with an exciting set of customers who are interested in our capabilities to meet their increasing requirements. Our peptide team is working not just on exciting customer projects, but also working on developing differentiated capabilities, further setting us apart as a peptide CDMO. We will continue to update you on progress we are making on this front, even as we expect the new peptide facility to be completed in the next financial year. Apart from this, we are continuing to evaluate avenues whereby Neuland is a more attractive partner for innovators as well as generic formulators. Even as things seem to be on track, I would like to remind you that there are a number of factors which could impact our business. We are constantly reminded of the high-risk nature of our customers' attempts to bring novel therapies for unmet medical needs, which do impact our projections. Apart from the performance of individual products, foreign exchange fluctuations, raw material cost volatility and now increasingly unforeseen geopolitical risks and other dynamics of the business could also significantly influence the performance of our business. We are aware of these challenges and continue to monitor these variables very closely and work towards mitigating the risks. So having said this, Ravi, I request you to open it up for Q&A.

Question comes from the line of from Amey from JM.

Congrats to the management on good set of numbers. The first question I have on the quarter a good growth. You said in the opening remarks, that it's led by, I believe, 2 commercial projects. Also wanted to check if there any new commercial win.

I'm sorry, we are not able to hear you clearly. Could you just speak a little slowly? There's a little bit of sharpness in the voice. Repeat the question.

Yes. What I was checking is you said in the opening remarks, there is -- there are 2 projects which have led to this growth. But apart from these 2 projects, is there any new commercial win, which is there anything to highlight? And also for next 2 quarters, whatever POs which we have in hand, is it possible to provide some visibility on the next -- in the second half of the year, which is typically stronger for CDMO.

So as I had mentioned, 2 molecules have driven the growth in the quarter, but we have another molecule which was long awaited and commercial shipments are expected to start soon. So that would obviously also add to the contributors. And in terms of the rest of the year, see, I think we've typically shied away from giving updates on how quarters pan out. But what I would just like to reiterate is that we had indicated that FY '26 will be a year of strong growth on a base of FY '24, not FY '25. So we stand by that. And I think maybe this quarter also is kind of an indicator that we are in that direction. But beyond that, we don't want to...

Have on the GLP one of pep side. So what kind of KPI capabilities we are building in terms of API volumes. Is it possible to give any number?

In terms of volume you're asking?

Yes. In terms of like there are Chinese players who are like with 4,000, 5,000 of API capacity on the GLP-1. So in terms of like what is the capacity we are targeting at present?

I think -- see, the capacity of peptides that's being talked about, it's slightly difficult to answer, and I'll just try to elaborate it as simplistically as possible. We are building a 4 module large-scale peptide facility. In that 4 module facility by next financial year, we will have module 1 completely ready and operational. And this module, along with this module, we will have another module for which the civil work will be ready, but it will not be equipped. Modules 3 and 4 would be built later depending on how the business is tracking. For the module 1, we will have an array of equipment, solid-phase reactors, which would be as big as 2,000 liters and smaller ones. And then we would have columns, we would have lyophilizers. These are all, again, proportionate to the 2,000-liter SPPS reactors. Now how many kilos of peptide we can make in that module 1, which is the question that you're asking, is really dependent on what is the process that we would follow for making the peptide. If the peptide requires extensive purifications, extensive lyophilizations, if it requires very high level of dilution, then you can, in that kind of a module, probably make only a few hundred kilos of peptide. But if the process is very evolved, doesn't require too many purifications, does not require a lot of dilution for lyophilization, then you could potentially make even a tonne or maybe even more than a tonne of peptide. So it is very difficult. And even I have heard this narrative in the industry about a facility that makes 2 tonnes of peptide, 3 tonnes of peptide, but it is really a factor of the process. And the process is something that Neuland is developing, and it really is product specific. So unfortunately, I think it's very difficult to answer what the capacity of this facility would be in terms of kilos or tonnes of peptide. But the largest reactor we plan to have is 2,000 liter SPP.

Got it. So the product portfolio you're looking at is GLP-1 as well as non-GLP...

We are looking at a wide range.

[Operator Instructions] The next question comes from the line of Sajal Kapoor from Anti Fragile Thinking.

Congratulations for maintaining a solid track record of volatility and lumpiness in performance. I've got 2 questions. First is, despite a noticeable slowdown in the CDMO development pipeline, Neuland has added 25 new scientists. So 360 to 385 is the new count. Could you explain the rationale behind increasing headcount when the development pipeline is at historic lows, if I look at the trend over the last 4 quarters, I'm looking at the presentation.

Yes. Thanks, Sajal. You almost make it sound like we are intentionally being volatile or lumpy, but you know that's not the case. No, no, no. I think this quarter, if you see the development revenues have not been very high. We've had more of commercial shipments. But as I had also indicated in the commentary, the pipeline of new business is still very strong. We have several new projects that have entered the system in the last 6 to 8 months. But many of these projects are still in process development, in scale up, and they have not been shipped or built, so to speak. Therefore, you're not seeing them in the count of the table. But over the next 12 to 18 months, you will see an increase in the number of projects across these tables, which would kind of satisfy the question that you're asking. However, whether these numbers would be substantive, I'm not very sure, but they would be high-quality projects that we would be adding through. So yes, the numbers would increase. I think in terms of headcount, yes, there is a slight increase, again, because we are seeing an increased load in terms of projects. But we also don't want to increase headcount proportionately because we are also working on modernizing our trying to use modern equipment, modern approaches like parallel synthizes, et cetera, so that we are able to recruit more skilled scientists who have a more mechanistic approach towards R&D and will try to accomplish process design, maybe doing fewer reactions, maybe in a parallel reactor setup. So yes, you will see recruitment of scientists, but it may not be in proportion to the increase in new business. And the increase in new business will be visible in the table with regards to projects, but it will -- you will see that over maybe a 3-, 4-, 5-quarter period, not straight away.

Certainly. No, that's helpful, sir. And my second and last question is, how does Neuland ensure that its people strategy and governance framework stay aligned with the long-term innovation and sustainability goals while fostering empathy and ethical conduct under high-performance pressure in the kind of R&D work that we do and the kind of scale-up chemistry that we undertake.

Yes. It's a very loaded question, but it's a very important question, Sajal. I'll try to see how effectively I can answer it. See, I think ultimately, our business model is very focused. We are a process development company. We don't do different kinds of R&D. We only do process development, process optimization and scale up. In that regard, our long-term vision from a technology and a sustainability point of view would be to delve into more and more complex chemistry rather than just make small molecules get into peptides, get into maybe oligonucleotides, more and more complex chemistries. So that would be the direction technologically that we are going into. But again, in the area of process development and scale up. From a sustainability point of view, if you look at it, and you look at it from a sustainability lens, the idea is to develop processes which are more green, more sustainable. If you're getting into peptides, then one of the challenges in peptides is that we use too much solvents. And solvent is not a green technology. So how can you make peptides which consume less solvents, so contextualizing sustainability in the area of our business is very important, which we have done. And if you see Neuland has started publishing integrated annual reports for the last couple of years. And this is the reason why we have started to do that because we want to weave in our goals and align them with our people and make sure that their goals, their individual goals are also factoring in this pathway. And I think in terms of governance around this, I think basically, what we are working towards, and this is still work in progress, is ensure that the goals of everyone, starting from Seth and me to our leaders and then people working with them, we have integrated goals where areas like innovation, sustainability are woven into our metrics long-term incentives of our staff have sustainability goals as a critical weightage in how we pay long-term incentives for our employees. So these are some of the ways in which we are trying to bring in governance and accountability. But it is something that will take us some more time to take it down to an operating layer. Right now, I would say it happens to maybe the first top 3 layers of the organization or 4 layers of the organization. But if we are able to do it successfully all the way down, then I think we would have successfully accomplished what you are trying to understand.

The next question comes from the line of Shyam Srinivasan from Goldman Saches.

Two questions from me. First, on the new block that we had actually put for one of the molecules, which is largely for that INR 128 crores. Has that been completely -- I believe we did some early commercialization in quarter 1, but in quarter 2, we should assume that many of that -- this new block is being used. Would that be fair?

Yes, Shyam, it's a fair assumption. The block is commissioned, and we expect to start shipping product from it going forward.

Harsh, we have gone from 50 metric tons, if I remember right, to 150. So is there some measure of what the utilization is? And is there a way for us to see how much can likely come through in the path forward?

No, Shyam, I think that level of detail we are not able to provide. So I think it's going to be challenging for us to give any qualitative indication. But I think maybe just to reiterate, this product is being manufactured in Unit 2. There was a capacity constraint. The client needed us to manufacture more. So we brought this new facility online. Now it's available. And the idea is to use both Unit 2 as well as Unit 3 to basically service the client needs. But how will we utilize this, both these lines and what would be the capacity and how much of that capacity would we execute? These are questions that we cannot explicitly answer.

Perfect. Okay. My second question is on yes, just on the cash flow, I'll be brief, no worry. Is just on the cash flow statement. Abhijit, you mentioned about some of the challenges of unlevered order flow at the start. But when I look at like last September to this September, I think even receivables, we have seen like a big change. So is there anything we need to be worried about? Is the terms change with some of the customers? You talked about inventory optimization, but I was looking at some of the other line items in working capital, which have also become adverse. So just your thoughts there.

Sam, so if you really look at it -- just look at it from the beginning of April to the end of September, you have inventories which have gone up broadly, I think, so INR 155 crores, INR 160 crores, right? As -- And as we had alluded to that we see a better performance -- growth performance. We have been kind of putting inventory in both in the form of raw materials, key starting materials, intermediates, right? So that's one of the reasons why we see that sharp rise in inventory between the beginning of April and the end of September. What we are saying also is that -- we have another 6 months to go. And we will look at how to optimize our inventory, right, and bring in a natural flow because what happens when you have a step-up of sales, typically, what happens is you kind of load inventory upfront, right? And then it kind of becomes even. So that's a step that we will look at over the next 6 months or now it's I guess next 5 months. As far as receivables are concerned, you would have also observed that, that's also gone up. It's a natural skew that has happened a quarter at 3 months. And we are looking at how we can kind of even that over 3 months, right? So what typically happens is that when you produce there are stages of production, right? It could be Stage 1 to Stage 6, Stage 1 to Stage 4, et cetera. And the moment you complete those stages is when you get the final API. And so then the orders get kind of get sold or attended to in the last month of the quarter. What we are attempting to do is that we want to kind of even the production and then try to kind of look at selling it somewhat evenly over the 3 months. But that will take some effort and time because that's the nature of our business. You start production in month 1 and you complete production in month 4. So that's the nature of our business, but we'll see how to even it up. And still with the steps that we have already started taking, hopefully, by the end of March, we would have kind of seen a better performance on working capital days.

The next question comes from the line of Ritika Agarwal from ValueQuest.

First question is you mentioned this year, we expect commercialization of a new molecule. And you said that we have already shipped that, and we expect to see that in the next -- from the next quarter.

I think what we may have implied is that we had validated this product some time back, and now we are expecting to ship it in the course of this year. That's what we would have implied.

Sure. And secondly, on this new block in Unit 3 for one of the molecules that we've recently commissioned, should we expect good utilization? I'm not asking the number, but a fair good utilization would have happened in this quarter itself?

No. Actually, we only validated the product this quarter. So I don't think we have utilized that block in -- like in Q2, there was not -- no commercial shipments from that block. It just got capitalized because -- and we validated the product. So commercial shipments would start later.

Sure. And last question was if I see the CMS pipeline, I see one new molecule being added in Phase III intermediate. Could you talk briefly about that? And secondly, we see 2 molecules moving out from Phase III in API, from commercial in API as well as intermediate. So could you briefly explain what happened this new molecule in Phase III as well as reducing in terms of commercial space, both for API and intermediate?

So I think, Ritika, I think as we have mentioned in the past also, the final net number that you see is a result of both additions as well as deletions. So we would have added, I think as we get to know how our customers' products are doing in the clinical trials, and we know that some of them have not done well, we remove. And in the case of, say, you may be seeing that there is an addition of one intermediate, say in Phase III, that actually may be a result of certain 2, 3 molecules actually being added, some of them for a Phase III molecule, which is with an innovator who is working on novel therapy, say, in oncology space, but we are doing the intermediates for them. At the same time, one of the molecules which was removed from the commercial space was for a molecule which has been generic for some time now, which we have taken long back. And we know clearly that we are not going to get any more or we haven't really done anything with that product, and we also see going forward also that we are not going to do anything with that product, which is why that product dropped. So I think that is probably the top summary of the table and the question that you have asked.

The next question comes from the line of Aditya Chheda from InCred Asset Management.

So my question is on the comment made on the GDS segment, the specialty business being subdued. Can you throw some more light about what is happening in that segment, whether it is competitive intensity, et cetera? And there was an element where some of the products were shifted into prime. If you can talk about the segment as a whole and also on specialty, how should we think about growth directionally in GDS?

So again, Aditya, I didn't get the last part of your question, if you could -- it was not that clear. Yes. So when you were talking about some of the certain products, if you could just repeat that bit?

Move from prime time ago [indiscernible] exist there is competitive pressure or lack of the GDS segment...

Sure. I think if you look at the range of molecules that we have, even in the GDS business, even if we were to look at our prime segment, for most of our products, we do not have as many competitors. So if I consider a molecule like mirtazapine or even if I look even at a larger scale volume products, say, levofloxin for the regulated markets, we do not have as many competitors. But you're also right that this is a segment where there is a lot of -- I mean, I think there is an element of -- even at the end market level, there's a lot of change even in the market share which different formulators have. So I think that at times also is leading to unevenness in the certain -- for certain prime products. When it comes to the specialty segment, we have a lot of small volume products where I think most of them are in a few hundreds of kgs or in certain cases, even tens of kgs. So the volumes for them are more likely to be lumpy. And in certain cases, in the specialty segment, we also have molecules which have only been commercial in only a few markets. They are yet to be fully commercialized across all markets. So because of that reason, we have certain quarters or in certain cases, even some years where it may seem that there's nothing happening. And also, as you had mentioned, compared to the past, we have also moved out ezetimibe, which was a strong contributor in the past to specialty and even now is the leading top 2 contributor to the prime. And that is a product which is doing well and will continue to do well and probably will drive the growth of the Prime business. So to summarize, yes, the space is more competitive. But at the same time, for most of our products, we do not see that much competition with some of our older products. But when it comes to the specialty products, it's just the fact that they are small volume and it is a bit uneven. So I think we still are pretty optimistic about the growth of the GDS business, but it is something which will also pan out slowly over, say, if not this financial year, the next financial year.

Okay. Last question is on the -- is it a right inference that the products that are now commercial contributed to a reasonable part of the development revenues in the last 12 to 18 months and the base would slightly be relatively subdued versus what it was in the last 18 months in the near term?