OneSource Specialty Pharma Limited (ONESOURCE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q2 and FY '27 Earnings Conference Call of OneSource Specialty Pharma Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Singhal. Thank you, and over to you, sir.

Thank you, Danish, and thank you all for joining us today for the earnings conference call of OneSource Specialty Pharma Limited for the second quarter and half year ended September 30, 2026. We have with us Neeraj, CEO and MD; and Anurag, CFO of the company, who will walk you through the key business and financial highlights of the quarter and for the first half of the financial year. I trust you have the opportunity to review our results release and investor presentation, both of which are available on the company's website as well as on the stock exchange website. The transcript for this call will be posted on the company's website within the next week. Please note that today's discussion may contain forward-looking statements, which should be viewed in the context of the risk inherent in our business. Should you have any further questions after this call, our Investor Relations team will be happy to assist you. I now hand over the call to Neeraj for his opening remarks.

Thank you, Abhishek, and a very warm welcome to everyone joining this late evening for our Q2 results. Q2 was a strong quarter for us. In fact, it was our third consecutive quarter of sequential growth and in line with the trajectory which we had outlined in our previous calls. So if you saw that revenue increased 37% year-on-year, 15% sequentially. And in the quarter, we actually delivered more than INR 5 billion revenue. In fact, more hearteningly, EBITDA grew 53% year-on-year, 32% sequentially. And the margin expanded more than 400 basis points quarter-on-quarter, reaching 32% for the quarter. And the very fact that the pace of EBITDA actually was higher -- EBITDA growth was higher than the revenue growth. It really demonstrates the operating leverage, which is inherent in our business model. And in fact, if you look at the first half, it's -- put together both the quarters, it's been a 47% year-on-year growth of EBITDA. So the growth both in this quarter as well as for the first half has actually been driven by the additional DDC capacity, which has come online in the last quarter, which is quarter 2. And which helped us both commercial as well as MSA revenue coming in, thanks to that execution. And really staying with our DDC line expansion, many of you saw our second cartridge line is now running commercial batches, even though the geopolitics actually impacted its start by almost 6 months. But the fact is that today, the line already since September, it is operational, and it has immediately doubled our total sterile production days. So the additional capacity, as we had said last time, the additional capacity really supports both the new launches which are coming in and provide us a significant ramp-up of the commercial volumes, which we are expecting during the second half. I'm also happy to share with you that even our third line has successfully completed its factory acceptance test in Germany and is now at our site as we speak, ready for qualification. I mean this line also -- the arrival was longer than anticipated, obviously, due to the extended transit times because of what's happening in the Gulf. But as you also know that these are very bespoke lines, and I think I explained in my previous calls and interactions with many of you that these are lines built for much larger batch sizes and therefore, they require quite rigorous qualification involving multiple European vendors. So keeping that in mind, while we are making every effort for it to start in Q4, but the commercialization might get pushed to the start of FY '28. However, I just want to reiterate here that we'll have all three lines fully operational and available for FY '28. And this is not just the filling capacity. I think that's what is important to highlight here and what really differentiates OneSource from every other CDMO is that every one of our lines are backed by full end-to-end capabilities, whether it is not only cartridge filling, but assembly, labeling, packaging and so on, including cold chain, all under one roof. And this differentiates us not only in India, but even globally. Our semaglutide footprint continued to grow during the quarter, and our partner, Hikma, launched the first generic semaglutide in Saudi Arabia, which really expands our presence in a very important market, which is off patent. Also, more hearteningly, the Dr. Reddy's API has start -- has commenced, I think which they also spoke about in their earnings call. And this would really help relaunch in Canada as well as launch across multiple other markets where they already have an approval. And apart from Dr. Reddy's, also the supply ramp-up from our other Canadian customers is also on track for the quarter 3. Now moving on to our second strong leg of our business, which is very emerging very fast, which is biologics. It's increasingly becoming a very key growth pillar for us. And during the quarter, we had multiple new project wins, which is both from new customers who we onboarded as well as existing customers. We have onboarded 2 projects from -- for end-to-end development to commercialization projects from a U.S. biotech. We secured additional new program for one of our -- one of the top global animal health companies and our existing customer. And this, as you know, came -- comes back to back from the previous quarter where we had EU customer wins. Now these wins, whether the U.S. or Europe, these really reflect the really integrated offering which we have, which we call from gene to device in biologics, which again, very few CDMOs offer. And the fact that India's growing position as a trusted hub of global biologics biosimilar development as well as manufacturing. Now same is reflected in our biologics RFP funnel, which is at highest ever with multiple projects in advanced stages. And all this is really going to be driving the growth beyond FY '28 for us. As far as our base business, especially the injectables, we discussed last quarter, we are adding new capabilities, including prefilled syringes and new lyophilization capacity. And the planned shutdown, which is -- of the site is, in fact, currently underway. It started at the back end of quarter 2, but the new capacity will be available from next quarter onwards. And both at the same time, both our injectable and soft gel business grew last quarter with multiple launches actually happening in several markets during the quarter. Another thing which we're always proud of our compliance track record, where during the quarter, we successfully completed multiple regulatory and customer audits. And also as the new capacity comes online, it's -- this track record is really -- maintaining the track record is really what the whole team is focused on. Just to conclude with the Line 2 already commercial, Line 3 progressing, new launches coming through and coming -- more coming in the next coming quarters, a very strong biologics funnel and momentum across the business. We are really set for our next phase of growth. We expect second half to be stronger than the first. And basis that, we are also reaffirming our FY '28 outlook, which we have given of $400 million revenue and $160 million EBITDA. And also really important as we build the capabilities, capacities and the customer relationships, this, we believe, will really sustain the growth beyond the current year and beyond our guidance period. Finally, I really want to thank our teams for their commitment and our customers for the trust they continue to place in us. And I really want to thank everyone here and would be happy to take questions along with Anurag, our CFO.

Danish, we're good to go. Can you please take the Q&A?

[Operator Instructions] Our first question comes from the line of Rupesh Tatia with Long Equity Partners.

Sir, am I audible?

Yes, Rupesh. Go ahead.

Congratulations, Neeraj, on fantastic set of results. First question is on capacity across all our businesses. So softgel, what is the capacity utilization? SteriScience, I think we had a planned shutdown. So if you can quantify about what kind of revenue loss we saw in Q2? And is that capacity going to be available in Q3 or it's going to take a bit of time? On DDC, is it -- is the new line 500-liter batch size line? Or are we still on the 200-liter batch size? And when do we expect this capacity to reach optimum utilization, Line 2 DDC? So first question is on capacity across all our business.

Yes, Rupesh, thanks for asking. I think as we've been maintaining -- I'll start because I spoke about the DDC capacity. I'll answer that in that order. So the new line, which is there, we mentioned it last time also is actually going to be increasing the output simply because it can work with a much larger batch sizes. So -- and this is the line which will run 500-liter batches for us. And this is what is -- when we say doubling our sterile capacity there, that's what it is really doing. So it's already the 500-liter batch size, which will happen on this line. In fact, all the new lines which are getting added are able to handle significantly larger batch size. And that's why I mentioned with the increase -- because these are fairly bespoke lines, the qualification period takes much longer, and that's what you saw with the second line, which come in. So it will all be 500 liters and even larger -- in fact, these lines can handle even larger batches. As far as injectables, as I mentioned, the site where we took a shutdown, in fact, the shutdown started only at the back end of the quarter ending September. And it will -- the shutdown will last this current quarter. And then starting January, the lines will be available. These will add our -- these will significantly increase our lyophilization capacity and capability, which you know there is a big gap in supply and demand as far as lyophilization capacity and globally. In fact, most of the shortages, if you see in Europe or in U.S., if you see FDA's shortage list, 70%, 75% is contributed by injectables and lyophilization is a big contributor to that. So we are looking at really improving that -- those supplies for these markets. And finally, on softgel, I think if we continue -- the traction continues. We have had multiple launches, which happened. The capacity utilization continues to increase. But you also remember, we had said that in our current site, there is no possibility for us to expand further. That's the reason we are going in for a greenfield site as far as soft gels are concerned, which would not only add significant new capacity, but also provide us opportunity to get into completely new area of containment and high potent softgel, which is again a demand -- significant demand coming in from customers. So I hope it answers.

Yes. Just one clarification and second question I'll ask. So what is the capacity utilization in softgel? I mean is it 60%, 70%? Or is it optimum? I mean, if you can quantify? And this new line, because it's a capacity is 500 liter, which is 2.5x the existing line. So it will take 2, 3 quarters to go to optimum utilization or will go to optimum utilization really fast? So those are the clarifications. And then the second question is, I mean $400 million revenue for FY '28. So Q4 exit run rate will be, let's say, $90 million, 38% or 36% margin, will we be within striking distance of that as a Q4 exit run rate? Generally, we give this exit run rate across our company. So that is the second question.

Yes, Rupesh. So as far as -- on the cartridge line, it's a fairly quick ramp-up. There is because we have significant demand, as you're aware, both from existing customers, existing markets and the markets which are opening. So that -- the ramp-up to optimum capacity is fairly quick as far as the cartridge line is concerned. For softgel, it's because there is a key requirement from customers who are moving from other -- the CDMO part who are moving from other manufacturing sites to us. So that -- it takes a finite time. So it's ramping up. We started adding capacity last year, and we increased almost 3x that capacity. Now a significant part of it is already covered. And we already have a visibility of -- as I said, visibility of 80% plus from a capacity utilization point of view. That's why because we can't increase the capacity at this site, we are going in for a new greenfield. As far as your -- the question on the FY '28, as I said, right, I said we've reiterated our guidance for the full year, and we will have our lines -- all three lines available for FY '28. It is just the fact that because it's a bespoke line, the qualification takes longer. So whether it will be available for full quarter 4 or a part or not, that's something which I mentioned earlier. So to answer your question, FY '28 lines available, and that's why we are reiterating our guidance.

Okay. Okay. Just one quickly. In biosimilar, will we be part of KEYTRUDA across all our partnerships? Because I think Formycon is almost like a first to file is my understanding. So just if you can answer that question, and then I'll...

I understand, of course, we -- Formycon is a key customer. But I will not be able to talk on specific molecules. Having said that, I can tell you that with all our customers, we have some of the largest products in the biosimilar space.

[Operator Instructions] Our next question comes from the line of Abdulkader Puranwala with ICICI Securities.

Sir, my first question is with regards to the supplies for Dr. Reddy's. So any indication you can provide as to how the ramp-up is happening in terms of the revised APIs, what you would have got? And how are you looking forward for the next 6 months in terms of the capacity reservation for this client?

Yes, Abdul, thank you for your question. So I think it is very much in line with what commentary they already made on their earnings call. The supply of API has, as I mentioned already, has already commenced. And by -- within this current ongoing quarter, we expect the supplies to start. Supplies to start first, obviously, to the Canadian market and then also multiple other markets where they already have approvals in emerging markets, India and multiple markets. And in fact, there are markets where the approvals are going to be coming in over the next 2 quarters. So we see that the numbers which they have given in their earnings commentary, we see those -- we don't see any reasons to not follow exactly those what they have said.

Got it, very helpful. And sir, I am referring to your presentation, Slide 9, where you talk about six new order wins, which includes two biologic products. So sir, you would help us understand what are those balance about, whether it's in the DTC segment or apart from it also you're pursuing something?

So these are -- when we talk about multiple wins, these are across. So there are -- the wins are in biologics, there are wins in DTC and there are wins in base business. That's how we actually operate and see. So it's across. So we -- as I mentioned earlier, the momentum is across our businesses. And the wins are both from a new launches perspective as well as existing. So...

Sure, sure. My next question is to Anurag, sir. Sir, if I go through the cash flow statement, the trade receivables for the first half of fiscal '27 has gone up a bit. So anything to read about or it's just about the shipments, which would have happened towards the later part of the quarter?

So thank you, Abdul. I want to actually give you the big macro picture. If you really look at the developments over the last couple of quarters in terms of the overall shipping lines and the lead times in terms of supply, getting the access to the containers and everything, there is multiple impacts that we are seeing as a result of all this geopolitical development. People that I talk to, people that I meet up, at least as a CFO community, I see everybody is experiencing about 2 to 3 percentage points impact on the P&L. When I look back in terms of comparing it to our results, I see that since most of our raw material is actually passed through, we don't have any significant impact at least as far as the P&L is concerned. We've got implication on fuel, freight costs, shipping lines availability. But at least we've seen significant control as far as the P&L is concerned. But we do see some implication of these delays in terms of the overall cycle times when it comes to our working capital. The delayed deliveries to the customer does impact at least 45 to 60 days in terms of the overall cycle time. I do believe that it is not structural. It is temporary, and it is only a timing impact. Hopefully, within a quarter or 2, we should start seeing this getting normalized. Of course, there is implication as a result of the significant higher volumes in the last couple of quarters, which also shows up into the overall receivables. But clearly, there is no quality issue on the receivables.

Our next question comes from the line of Girish Bakru with OrbiMed.

Congrats on great numbers. Neeraj sir, can you comment on how many sterile days Line 2 was available in Q2? And how much did it run?

So I think I mentioned that this was -- September was the month when we started the line getting active. But the fact remains that, as I said. On an annualized basis, it doubles our trial days. And that's what is, I think, the key metric you should be looking at. And thanks to this line, the ramp-up of our -- not only the commercial sales, which we are going to do for Canada and other markets, but also gives us the ability to do MSAs, both for existing customers, which have been pending as well as add new customers, which also, as you know, we have not been able to do for the last 1 year, thanks to the capacity constraint, which we had. Now with this, immediately, we have got multiple options and multiple opportunities available to onboard customers and meet the demand of existing customers, especially when now Dr. Reddy's coming back on track.

Understood. And in the past, you have commented I mean, of course, numbers from Line 1, something around 60,000 pens per day. If I were to just -- I mean, compare the bad size related factor, I mean one should assume that this 60,000 will basically grow by 2.5x, right, by Line 2?

It's like-to-like. So I think if you look at the yields and so on, it's basically roughly 50,000 to 55,000 on the first line. And if it goes to 500, it is -- it comes to about anywhere between 120,000 to 130,000 because yield varies from product to product, from customer to customer. But yes, more or less, that's the math.

Understood. And I mean, of course, not really wanting the pricing number. But when we, let's say, look into FY '28, can you give some broad comment on blended realization, which we can see? Will it stay largely same or reduce while the volumes will increase with the new line and more markets in the emerging markets, including Brazil, Turkey all opening up. So how should we look at the realization?

I think our realizations are -- there is not a major shift we are seeing in realization. As we've always said that our pricing to the customers has always been volume-based and not market-based, whether it's emerging markets or Canada or anywhere else. And we don't see that changing. We have also said that the very fact that when there is an increase in batch sizes in a sterile business, the cost of manufacturing per unit comes down, and we are happy to share the savings there with our customers. So it's a fairly win-win. The customers who are efficient enough and able to allow us to go to larger batch sizes, that efficiency benefit they get because we also get and we share that efficiency with them.

Got it. And just last one, if I can squeeze. I know FY '28 is still firming up, but how much do we see can we forecast FY '23 guidance of 400 million sales, Ballpark, is it 50% or much higher?

I can only tell you that the very fact that I mentioned that our three lines, we are eagerly awaiting the third one to add and -- so are our customers. So it will be -- DDC will be a strong contributor to our FY '28. It will be like it will be a contributor to our second half. It will remain a very strong contributor to our FY '28 numbers.

[Operator Instructions] Our next question comes from the line of Chirag Shah with White Pine Investment Management Private Limited.

Congrats on the good set of results. Neeraj, my first question is more on the batch sizes that you indicated. So if I have to break between Line 1 and Line 2, Line 1 is we can assume is the optimal batch size, right, 6 days a week, et cetera. Line 2, where we would be? And how should we think about the flow-through to EBITDA level because of that?

Chirag, thank you for your question. Although your question wasn't -- your voice wasn't very clear. But whatever I understood from you that your -- the earlier line, the first line had a max bet size what we could do in that line was 200 liter, and that was what all our customers had moved to. Remember, we started on the same line with 30 liters and ramped up to 200 liters. On the new line, that's how basis the demand. Currently, the capability of the line is to go up to 750 liters. But the customers right now are ramping up to 500 liter. I think that's what the case is. And the very fact that there is very strong demand, which is there, both from existing customers, existing markets as well as new markets which are going to be getting approvals -- customers are going to be getting approvals and the new customers which are coming on board. So there is, as I said, robust demand, and that's the reason we have said that we are also very excited with the fact that the third line is already at our site. It's exciting development for us. And the fact that I already mentioned we have a very strong OpEx leverage in our business because the cost is more -- the incremental cost is very limited compared to the incremental revenue. And you will see that's how you already see the EBITDA margins improving for us quarter-on-quarter, again, thanks to the OpEx leverage. And that's the reason of us giving the guidance what we have given.

Okay. Let me rephrase it. I think, sir, you missed out my question. What I was trying to understand is in terms of efficiency level in terms of number of batches that we run per week and obviously, the size of the batch, Line 1 is at optimal level, right? So efficiency gains coming from Line 1 is limited operating leverage gain. Where are we in Line 2? You indicated that customers have gone up to 500, but not all customers would have been, right? So the current results that we have, what element of, what you call, excessive costs are still line which -- and how should we think about it as you increase the revenue size from Line 2?

See, so in terms of efficiency, yes, you're right that the Line 1 is running at optimal efficiency. Line 2 has given us the opportunity to do MSAs. So obviously, the utilization in an MSA is different from utilization in commercial, and it's going to be a ramp-up. Remember, it's -- as we start -- the market volumes are ramping up and accordingly, our line will also be ramping up because there is a mix of MSA and CSA, a typical steady-state picture is that in any line, it should be 75-25, 75% commercial, 25% MSAs. And that's how we expect steady state for the second line also to be.

Okay. And second housekeeping question for -- So one, what is the consumables that we see as a line item in raw material? Because it varies a lot. So is it linked to any specific business? Or what exactly is what we classify as consumables? And second, Employee cost, there has been steady increase since last 5, 6 quarters now. So are we still in hiring phase? How long we need to hire, when that will stabilize for us?

Yes. Chirag, thank you for those questions. Chirag, consumables is a variable. It will depend upon the activity level. Every time we take a fresh batch, every time we take an engineering batch, every time there is a significant ramp-up in volumes around any of those things. It will vary in those particular quarters. I mean, those are clearly a function of the level of manufacturing activity. And as we had said in the past, I mean, we are in line with our guidance in terms of ramping up our overall capability within the organization and building up the employee base in our Unit 2, which is our flagship site, which is ramping up capacity 2x to 3x within this year, it clearly was a function of what we wanted to be. And we are on track with that. Clearly, there is nothing that surprises us in terms of the employee cost increase. The way you should look at our business is these are elements of fixed costs that we will have to enable the manufacturing lines with because these are specialized capabilities. These are capabilities that require high level of quality observations. And for building all of that, it's a conscious focused effort towards building that capability and which we are working towards.

[Operator Instructions] Our next question comes from the line of Harshal Patil with ASK Wealth Advisors.

Congratulations for a good set of numbers. Sir, just one question to start with. The ETR that's the expected tax rate, I believe you've got a lot of deferred tax also into it. So just wanted to know how should we look at this expected tax rate for '27, '28 going ahead? And how long would the deferred tax benefit be available to us?

Sorry, I missed the name who asked the question. Very quickly, this is Anurag. At this moment, we anticipate that we should assume through the current level of ETRs will continue through till FY '28, at least till the third quarter of FY '28.