Neuland Laboratories Limited (524558) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Neuland Laboratories Limited Q1 and FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Runjhun Jain from E&Y. Thank you, and over to you, ma'am.

Thank you. Good evening, everyone. We welcome you to the Q1 FY '27 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 represented by Mr. Saharsh Davuluri, CEO and Managing Director; Mr. Abhijit Majumdar, CFO; and Mr. Satish Medikonda, Head of Corporate Planning and Strategy. We will start the call with a brief overview of the financials by Mr. Abhijit Majumdar, and then Saha will give you the broad highlights of the business trends and what he is seeing in the market. Post that, we will open the call for 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 Mr. Abhijit. Over to you, sir.

Thank you very much, Runjhun, and a good evening and warm welcome to everyone joining our call. I will begin by taking you through the financial performance for the first quarter of FY '27, followed by a brief update on working capital, capital expenditure and a few observations of the operating environment before handing over the call to Saharsh. The financial performance for quarter 1 FY '27 is as follows. The total income for the quarter was INR 650.1 crores as compared to INR 300.6 crores in the corresponding quarter of the previous year, representing a growth of 16.3%. The commercial CMS projects contributed a majority share of the revenue and were the primary drivers of growth during the quarter. The quarter also witnessed healthy execution across our project portfolio and customer programs. Even though the quarterly revenue performance was broadly in line with our expectations, I'd like to reiterate our long-standing view regarding the inherent uneven nature of our business and the need to assess performance over a longer period rather than to a single quarter. EBITDA for the quarter stood at INR 231.1 crores with an EBITDA margin of 35.5%. The higher revenue base, operating leverage and the favorable customer mix contributed to the profitability profile during the quarter. The gross margin for the quarter was 61.2% as compared to 55.3% in quarter 1 FY '26, again, a function of our business mix during the quarter. This gross margin, as always, includes manufacturing expenses and other costs directly attributable to the product. Profit after tax for the quarter stood at INR 147.4 crores as compared to INR 13.7 crores in quarter 1 FY '26. Earnings per share for the quarter stood at INR 114.9 per share. One of the key highlights of the quarter was the improvement in working capital efficiency. Working capital days improved from 137 days at the end of FY '26 to 84 days in FY '27. Optimal utilization of cash remains a key priority for us, and we continue to focus on inventory optimization, disciplined execution and further strengthening cash conversion across the business. The improvement witnessed during the quarter reinforces our focus on balancing growth with prudent management of working capital. As part of our investment, there was a cash outflow of INR 121.6 crores towards capital expenditure during quarter 1 FY '27, which was primarily driven by new R&D and peptide facilities. During the quarter, we also approved capital investments of approximately INR 203 crores, of which INR 196 crores is earmarked for strategic growth initiatives, largely related to capacity expansion at our Unit 1. Against total approved CapEx of INR 1,460 crores over the last 13 quarters, we have spent INR 870 crores to date, with the balance committed towards projects under implementation. We continue to maintain a disciplined approach towards capital allocation while ensuring adequate investments towards building future capabilities. During the quarter, we continue to closely monitor the evolving geopolitical environment and broader global trade development. While we have not experienced any material impact on our operations, supply chain continuity of customer commitments thus far, we remain vigilant and continue to monitor developments closely. Our focus remains on ensuring business continuity, maintaining customer service levels and managing risks in a proactive manner. To summarize, the financials FY '27 again was broadly in line with our expectations. The performance reflects disciplined execution, operating leverage and a favorable mix during the quarter. We continue to believe FY '27 will be a year of growth for the company and remain focused on prudent financial management, operational excellence and creating long-term value for our stakeholders. As always, our presentation has been shared with the press release and contains more details on the quarter. Before I conclude and hand over to Saharsh, I want to make a clarification regarding the question posed during the quarter 4 call in terms of manipulation of the transcript. On the issue of manipulation, our earnings calls are recorded and we published the full unedited audio on our website. That audio is a complete record of everything on the call. The written transcript is prepared by an agency, which conducts the call and is slightly edited from a readability perspective. How in this case, our team missed out and editing a minor mistake. As we went back and checked the uploaded version and the version received from the agency, we found that there has been no change in this direction. With that, I would like to hand over the call to Saharsh for his remarks. Over to you.

Thank you, Abhijit. Good evening, everyone, and thank you for joining us today. As Abhijit discussed, Q1 FY '27 is broadly in line with our expectations and represents a good start to the year. I will use my remarks to provide some perspective on the business performance during the quarter, the opportunities we are seeing across our business and how we are positioning AN for the future. Starting with this quarter, we were encouraged by the performance across both our GDS and CMS businesses. Within GDS, the quarter was supported by a number of products that performed well and contributed meaningfully to the business. Products such as ezetimibe, Bilastine, acetlonide and elpiprazole were among the key contributors during the quarter and reflect the strength of the portfolio that we have been building over time. More importantly, the underlying strategic direction of the GDS business continues to evolve. We remain focused on expanding our portfolio of differentiated products even as we also increase our presence in key markets like Brazil, Japan, South Korea and Turkey. We have also initiated pursuing life cycle management opportunities with innovators where our process chemistry, development experience and manufacturing capabilities can create long-term value. Coming to the CMS business this quarter, we have most of the revenues coming from our top commercial products. Having said that, the order book from pipeline molecules is quite encouraging, and we will see that panning out over the course of the next few quarters. We continue to see healthy engagement across both the development and commercial programs. The depth of customer conversations today is significantly stronger than it was a few years ago, and we are increasingly engaging on broader capability-led discussions rather than individual projects alone. While building relationships with large pharmaceutical companies is naturally a gradual process, we believe we are making meaningful progress. The investments we have made in capabilities, infrastructure and talent, combined with evolving geopolitical and macroeconomic dynamics that continue to drive supply chain diversification are creating opportunities for us to engage with customers in a much more strategic manner. One of the themes we discussed extensively as we brainstorm regarding the CMS business was of increasing importance of becoming a long-term strategic partner to customers rather than being viewed as a provider for individual projects. We continue to see customer interest across existing and emerging areas and the nature of discussion is increasingly centered around capabilities, supply assurance, technical expertise and long-term collaboration. We believe this positions us well in the industry as we continue to evolve. A second theme that I would like to highlight is the increased velocity of investments across Neuland. Over the last 3 years and continuing into FY '27, we have been investing at a pace and scale that is meaningfully higher than in the past, whether it is manufacturing infrastructure, R&D capabilities, peptides, sterile APIs or future capacity expansion, these investments are being made with a long-term perspective. Our objective is to ensure that Neuland remains relevant and competitive as customer requirements evolve and market opportunities emerge. Peptides are perhaps the clearest example of this philosophy. We had built peptide process development capabilities for over 15 years and around 2 years ago, decided to invest in commercial scale manufacturing of peptides. At that point, the investment was based on our conviction regarding long-term attractiveness of the segment. Today, we are beginning to see external validation of that thesis. Even before the peptide manufacturing asset is fully ramped up, customer interest continues to grow. Discussions have expanded, and we have started seeing encouraging conversion of opportunities that provide greater visibility around Mule 1 utilization. These developments reinforce our confidence that investments we have made are aligned with where the market is headed. At the same time, these opportunities also place a greater emphasis on execution. Our focus is now on ensuring that we deliver consistently with customer confidence and establish the foundation for long-term participation in this segment. Another important development regarding which you would have seen our press release is our strategic collaboration with Gland Pharma. We believe this partnership creates differentiated platform in sterile APIs by combining complementary strengths of both organizations. Beyond the immediate opportunity, it also demonstrates our commitment to the specialty GDS business and our strategy of building niche capabilities in areas where technical complexity creates meaningful differentiation. We believe these types of capabilities will increasingly define competitive advantage in our industry over the coming years. At the same time, it is important to recognize that our business operates in an environment that continues to be dynamic. geopolitical developments, regulatory time lines, customer ordering patterns and broader economic -- macroeconomic conditions can influence the timing and shape of growth from quarter-to-quarter. As we consistently stated in the past, variability remains an inherent characteristic of our business and quarterly performance should be viewed in that context. Having said that, when we look beyond individual quarters, our outlook as we consider FY '27 and FY 2028 period remains in line with our long-term ambitions. The customer interest we are seeing, the opportunities under discussion, the capabilities we are bringing online and the investments we have made across the businesses all reinforce our confidence in the medium-term trajectory of the company. Our focus remains on execution, customer service, operational excellence and creating sustainable long-term value for all stakeholders. To conclude, we believe Neuland is entering an important phase of its evolution. Many of the investments we made over the last several years are beginning to create new opportunities across the business. While there will inevitably be periods of unevenness along the way, we remain confident in the direction of the company, the opportunities ahead of us and our ability to create long-term value. With that, we would be happy to take your questions.

[Operator Instructions] Thank you. First question comes from the line of Amey with JM Financial.

Congrats on the good numbers. First question I have on the quarterly and yearly performance. I understand the CDMO business typically is volatile on a quarterly basis. But we have a strong start for the year. And generally, we do have good visibility on 6 months order book as a CDMO company. So what kind of growth should we expect for full year of FY '27? Also on the other side, should we be wary of any risk from the destocking perspective for any of our commercial contracts.

Thanks for the question, Amey. With regards to the visibility of the year, you're absolutely right. The SS business, especially has a fairly deep visibility in terms of order book. I think for us, we've always been reluctant to fully reveal what the order book is or what the exact year's performance is expected to be. But I would just go back to the comment I had made in the opening remarks. I think we've always aspired to grow at about 20%, and we expect that '27%,'28 also we expect to grow that way. I think beyond that, talking specifically about '27, I think it might again kind of come across like we are guiding towards a particular growth rate. But we have also cautioned in the past that we expect a particular year to be a flat year. Like we had indicated that FY '25 would be a flattish year, and that's what it happened. We are not giving such indications right now. But at the same time, we would be cautious not to say, okay, it's going to grow at a certain percentage. So that's with regards to question one. What was the question... About any risks in terms of destocking? Not really, Amey. I think because the order visibility is consistent with the commentary, I would say destocking or stocking is factored into that. We don't expect something to hit us abruptly. So those are conversations that might play out over beyond FY '27. But for now, I think we don't see any surprises coming out of destocking.

Sure. That's helpful. Second question I have on the products where we had increased capacity last year. What is the current utilization there on the increased capacity? And is it fair to understand this block will be used throughout the year? And do you expect similar quantities to be produced every year from this block? Or how will that work?

Our next question comes from the line of Shyam Srinivasan with Goldman Sachs.

Just the first one on your development revenues. And I remember you saying at least fiscal '27 could likely see better development revenues. And I think you alluded to it in the opening remarks as well that the pipeline on development is looking good. So if you could highlight how that could likely -- should I repeat my question because I completed my first question.

Yes. I think, yes, your first question, Shyam, sorry, we were having some trouble unmuting the line is about the development rent. So Shyam, sorry, please go ahead and ask your question again one more time. Yes, yes. So I was saying, Saharsh, development revenues, I thought we had a better outlook than last year, fiscal '26 on development revenues. And I think you alluded to it in your opening remarks. So just wanted qualitative additional color on development revenues for this year.

Yes, definitely very -- a lot more exciting start to the year, Shyam. I think in FY '27, we've seen at least 2 new projects come in. I would not say these are commercial, but these are fairly advanced in the clinic. And I think you're muted again. Are we muted again?

We can hear you.

Yes. So we are seeing a couple of new projects come in. And obviously, we'll be careful in painting a picture around these projects because they're still under development and you never know what could happen. But that kind of visibility and the potential of these molecules, I think, is very exciting for us. And we will deliver on development quantities this year, but I think they definitely pave the way for larger volumes in the future. And I think some of these projects are also peptide projects, which were not visualized a year ago. So there is definitely a lot of enthusiasm and excitement in the system. It may not be very helpful or it may be premature to kind of quantify that revenue for this year.

Helpful. Just my second question is on the peptide. Since you talked about module 1 utilization or expansion of scope with some of the discussions you have had. Can you add some more additional color? Is there potentially a commercial project that could likely come this year? So just some color around peptides and where our plant is, I think the plant is now ready, right, or whatever the module is ready?

Yes, Shyam. So the plant itself is going to be commissioned next month, and then it will be ready for manufacturing qualification will be done by then. We have multiple projects lined up [Technical Difficulty]

Next question comes from the line of Sajal Kapoor with Antifragile Sing.

I'm not too sure if I'm audible or not. On a lighter note, this Zoom Infra is still awaiting GMP validation. That's for sure. If you guys can hear me, I've got 2 questions. First is commercial CMS has scaled very strongly without much change in the number of commercial programs as far as I could see. So is that growth becoming more evenly spread across molecules and customers? Or are a few large programs still doing most of the heavy lifting? That's my first question.

Operator, I think it's better to reschedule this earnings call. I mean it's no point trying and failing.

I don't think he's able to hear us. are you able to hear us?

I can hear you now, Saharsh, but not in the last 60 seconds if you are talking.

Would you mind repeating the question one more time?

Yes, sure. So my question, Saharsh, is that Yes, sure. So this -- we are just following on from Q4 execution as far as the commercial CMS is concerned. And again, Q1 has done pretty well on that front. The question really is, is the growth coming -- is the growth more diversified spread across molecules and customers? Or are we experiencing a few large programs doing majority of the heavy lifting, Q4 as well as in Q1 this time?

Sajal, if you see, I think a big part of our growth is coming from CMS commercial and CMS commercial is being driven by a handful of molecules. There's not too many of them, I would say, maybe about 3 of them that really drive our business. And these molecules are fairly active. As we produce them every quarter, and we see a fairly healthy future for them over the next 5 to 6 years. Yes, there will be certain lumpiness in how they perform, like maybe we will not have orders every quarter, et cetera, but there is nothing which is like a one-off performance from the commercial CMS pipeline that we have. But the reality is that there are only a handful of these molecules. And to be frank, we're glad that it's a handful and it's not just one. But I think that will be how our next 2 to 3 years commercial growth will be driven by them. But we are also quickly adding a lot of projects, which are also picking up. As I had mentioned in the past, we expect to have one more commercialization this year, probably have 1 or maybe even 2 next year. And therefore, you will see a greater diversity in these molecules. But yes, so I think short answer, yes, there are only a handful driving this. But -- they're not like a lot of one-offs. There will be lumpiness, but it's not like we see something that's exceptional that is contributing to the revenue.

Sure. And on the development side, even last year, I think in Q3, I asked about the development pipeline keeping pace or how is it keeping pace with the commercial growth? So year on, how comfortable are you that the quality and the maturity of today's development pipeline can replenish the commercial basket 3 to 5 years out when these handful of commercial molecules may start kind of receding on a higher base because we got to replenish them with fresh infusion of better size because our base would have grown 3 to 5 years out. So the development pipeline today must be strong and robust enough to build on top of that higher base 3, 4, 5 years out.

I think it's a great question, Sajal, and I think it's very appropriate. I would say that it's a relative degree of comfort. I'm feeling a lot better today than what I was feeling perhaps a year ago or definitely what I was feeling 2 years ago. And if you even go back, I think, when we wrote down the opening remarks, we talked about how we don't want to be project focused, but more relationship focused, account focused. And we believe that our future will be about working with companies on a set of programs, almost work like a platform partner for large innovator companies so that we can do a handful of molecules for them. As we take up this approach and as we see validation for this approach in the development projects that we are seeing, I feel fairly confident that 3, 4, 5 years from now, we will have a healthy set of new molecules that will start to almost overtake or even kind of make insignificant -- some of the other molecules that are currently contributing. So definitely, we see as the company's base is growing, we see an increasingly healthy pipeline of projects. Obviously, we should be careful not to sound overconfident because many of these projects are still in clinical development and a lot of these relationships are relatively new for us. But going by the confidence we have in our execution and the likelihood of the success of these molecules because they are in advanced clinic, I think in 3 to 5 years, we would have very healthy pipeline of new molecules that would completely overshadow the current pipeline.

The next question comes from the line of Rain Nandu with Edelweiss.

There have been a few participants who have not been able to ask questions. So maybe you can take them as well because it just creates the confusion, right, like last quarter on the inventory side of things, right? But my question is on the opening remarks that you made, right, in terms of the conversation that you are having on the -- with the customers. while you have partially answered it, right, in some of the previous -- in the answers to the previous question, but how should one think about monetization of these relationships, right? While they might be slow. But as you said, right, the -- maybe on the peptide platform, the conversation is already moving towards our intended direction. So how should one think about the more and more platforms getting added? Or will we have much more deeper conversations in the peptide platform? And because we have a decent track record, right, in the last 5 years, are these conversations becoming much more easier than they were in the past? So just some qualitative color on your -- the statement that you have made in the opening remarks would help.

Yes, I think it's definitely a very important question. And don't mean to sound too confident in terms of the path. But the way we've seen this CMS business grow over the last at least 8 to 10 years, the kind of pipeline we have, the list of RFPs, the list of customers, the kind of conversations we have, we get a very clear sense of what the overall portfolio of business is likely to be. Of course, there is a conversion ratio, there is a probability of achievement and there is -- there are a lot of variables at play. But as we get into accounts which are more known to Neuland, companies we've been working for 3 years, 5 years, who are now talking about increasing their total business to Neuland or increasing their total exposure to Neuland. I think that starts giving us a very clear qualitative input on, okay, yes, there is some business that we are going to get from here. Second, when we have technologies like peptides, which places us in a very unique position, a lot of these peptide relationships that we are talking about, which may have kind of -- may seem like new conversations, but we are not unknown to these customers. We've been working with them for 5, 10 years. We've been doing small-scale work. We've been doing maybe peptide starting materials. And now the relationships have matured into something more advanced. So a lot of this confidence comes from qualitative substantiated conversations. And if we look at the value of these opportunities, they are far larger than what we used to see. And I think ultimately, that's what gives us the confidence that we will see more business. I mean if I have to just kind of illustrate it, 5 years ago, the largest molecule that we could visualize was maybe a INR 50 crore per year kind of a molecule. Today, we can visualize INR 500 crores per year or even INR 1,000 crores per year molecule. It doesn't mean that every opportunity we engage with is a INR 500 crores or INR 1,000 crore opportunity. But when you look at it in totality, you're seeing the aggregate value of the business is increasing just in terms of prospects. So that gives us a certain sense. That is also a very useful input for us in the kind of investment journey we have to go through over the next 2, 3 years, which is something also I had alluded to in the opening remarks is that we need to -- I think based on the quality of the conversations we have, based on the relationships that we are now beginning to form, we are also looking at making more bold moves in terms of our CapEx cycles and the kind of investments we have to make. So I know it's not a very pointed answer, but we do feel pretty good in terms of where we are today. And I think we definitely feel the interest from companies as being like one of these top-tier partners out of India.

Sure. So that confidence is quite encouraging. The second question is on the point that you only touched upon, right, in terms of CapEx, right, or the next phase of investment. Now when you talk about the next phase of investment would look very different and you need to make some bold moves. Is it just the quantum of the investments -- or do you think that the qualitative aspects of this investment will also be very different in terms of the capabilities, in terms of the plant qualities. So could you -- I mean, is it just the quantum that you're talking about or the quality of the investment would also be very different? And if yes, then how different it would be versus what we have done on CapEx and expansion in the past?