Piramal Pharma Limited (PPLPHARMA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q3 FY '23 Earnings Conference Call of Piramal Pharma Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Gagan Borana, General Manager, Investor Relations and Sustainability from Piramal Pharma Limited. Thank you, and over to you, sir.

Thank you, Yashashri. Good evening, everyone. I welcome you all to our post results earnings conference call to discuss our Q3 and 9 months FY '23 results. Our results material has been uploaded on our website, and you may like to download and refer them during our discussion. On the call today with us, we have Ms. Nandini Piramal, Chairperson, Piramal Pharma Limited; Mr. Peter DeYoung, CEO, Global Pharma; and Mr. Vivek Valsaraj, CFO of the company. Before I proceed with the call, I would like to update everyone that the Board of Directors of the company has approved the recommendation to allot equity shares for an amount up to INR 1,050 crores, subject to receipt of requisite regulatory approvals, market conditions and other considerations. Given this event, we would have to abide by the statutory guidelines as issued by the regulator in regards to our disclosures and external communications. Hence, we would request or hence, we would not be able to answer any forward-looking statements nor disclose any further details on the proposed fund raise during a deal window period. Therefore, I request everyone on this call to restrict your today's discussion to Q3 FY '23 and 9 months FY'23 performance. Further, since last evening, post declaring our quarterly results, we have received several investor queries. In alignment with the regulated restrictions, we have drafted a response to these queries. We will share our responses to these queries first and then open up the floor for any other questions that you may have. With that -- with this, I would like to hand over the call to Ms. Nandini Piramal to share her thoughts.

Good evening, everyone, and thank you for joining our call for Q3 and 9 months FY '23. Starting with the performance of the company in Q3 and 9 months FY '23. During the quarter, we registered the year-on-year revenue growth of 11% with revenues of INR 1,716 crores. Our year-on-year revenue growth of 9 months was also 11% and with revenues of INR 4,918 crores. Our CDMO business grew by 14% and 12%, respectively, during the quarter and the 9 months, backed by a growth at our Turbhe, Grangemouth and North America facilities. Our Complex Hospital Generics grew by 6% during the quarter and 9 months for the financial year. Our Inhalation Anesthesia sales continued its healthy momentum in the U.S. with volume growth driving market share gains. Our India Consumer Healthcare businesses registered a growth of 37% for the quarter and 19% for the 9 months of the financial year, driven by our power brands. EBITDA margin during the quarter 9 months were 10%, impacted by higher operating margins, including raw material costs, energy prices, wage inflation and marketing costs. Also during the year, owing to the tight funding situation in the market, some of our CDMO customers delayed making payments against receivables due to us and as per policy, we have made provisions for the same. We maintained a high quality track record of zero OAIs as we successfully cleared 29 regulatory inspections, including the U.S. FDA and 155 customer audits for the 9 months. Moving on to business-specific highlights, starting with our CDMO business. In our CDMO business, we're seeing healthy RFPs, request for proposal inflows and increasing number of customer business and audits. However, the delay in decision-making at the customer's end continues given the macroeconomic environment and prioritization of R&D pipeline due to limited capital availability. We are also seeing some softer demand for our existing generic and API and vitamins portfolio while we are working on developing new products. We're seeing good demand in the niche areas of high-potent API peptides and antibody drug conjugates as we continue to invest to expand their capacities. Our growth CapEx plan over the next 12 to 18 months are well on track. Some of the important CapEx that have gone live in the last few months include a new in vitro lab at our Ahmedabad PDS site. Capacity expansion at our peptide facility at Turbhe and capacity addition at RW facility in the U.S. We have also had a successful quarter in terms of regulatory inspections with a successful U.S. FDA inspection at our Riverview facility in the U.S. At the Sellersville and Lexington facilities where the U.S. FDA inspection concluded in the month of January, we received a Form 483 with the VAI classification. We continue to maintain our zero OAI status across our sites in the last 12 years. Navigating the current inflationary environment on account of high raw material, energy prices and wage inflation is an important challenge for us in hand, and we're trying to offset that through judicious price increases and working out several cost optimization and operational excellence measures. Moving on to our complex hospital generics business. Our inhaled anesthesia portfolio continued its healthy performance in the U.S. market. In the non-U.S. market, we're seeing good demand from our products and accordingly increasing our capacities to service these markets. Our Intrathecal portfolio in the U.S. continues to command a leading market share. In the Injectable Pain Management segment, our performance was impacted by supply constraints at our CMO. We're working towards improving the supply of these products and have seen improved traction in production in the past few months. We continue our focus on building a pipeline of injectable products and have 34 SKUs currently in the pipeline. We also launched 2 new products during the quarter. Moving on to our India Consumer Healthcare business. Despite the high base of the previous year, we have delivered a healthy growth in quarter 3 and first 9 months of FY '23. High growth in our power brands has been a key contributor to the performance with 39% growth in the first 9 months of FY '23. Our power brands contributed 41% to total consumer health care sales in the first 9 months. Littles our top brand grew 66% Y-o-Y and Lacto Calamine grew 44% over the last year and the 9 months, powered by new launches and traction in e-commerce. In line with our stated strategy, we are reinvesting our profits in the consumer business to grow our power brands. We spent about 15% of our revenue in media and trade promotion which are yielding good results as reflected in the performance. Further, we launched 21 new products, 25 new SKUs during 9 months FY '23. New products launched over the last 2 years contributed about 17% of the consumer business sales. We have good reach in the general trade with access to over 2 lakh outlets. We're also strengthening our presence in alternate channels of distribution, including e-commerce, modern trade and our own website. E-commerce profits currently contributes about 14% of our total consumer business sales and has been growing well. To summarize, I'd like to say that basis our recent increase in customer engagement and continued flow of RFPs, we believe that demand for CDMO services, especially for our differentiated offerings remains strong. Inhalation Anesthesia portfolio is also seeing a healthy demand. Further, our Indian Consumer Healthcare business is delivering high growth driven by the power brands. Our team of over 6,500 multicultural employees, 17 manufacturing facilities worldwide and the global distribution network in over 100 countries gives us a solid platform to scale. We take pride in our quality track record and focus on our patient customer and consumer centricity. We believe in the potential of our businesses and in line with our aim to grow, the Board has approved a recommendation to allot equity shares for an amount not exceeding INR 1,050 crores, subject to requisite regulatory approval to market conditions and other considerations. Our focus over the next few months will be mainly on capturing demand, driving productivity through operational excellence and executing critical maintenance and planned growth CapEx. We also aim to execute our products and batches as customer demands. And finally, we're also conscious of our responsibility towards the planet, society and all stakeholders. And hence, ESG aspects will always remain a key part of our DNA. With this, I'd like to hand over the call to Vivek, our CFO, who will respond to the queries we've received since last evening. Post that, we will open the floor for any questions that you may have. Thank you.

Thank you, Nandini, and good evening to all. Thank you to those who have already shared your questions. We have tried to provide responses for all of those. However, in case any of your questions have not been responded, please feel free to ask them after I finish. The first question has been, why has the management decided to raise money? We believe in the potential of all our businesses. As Nandini mentioned, basis our recent increase in customer engagements and continued inflows of request for proposals, we believe that the demand for CDMO services, especially for our differentiated offerings, remain strong. Also in our hospital generics business, we are witnessing a steady demand for inhalation anesthesia products and growth opportunities in our injectable pipeline. Our Consumer Healthcare business is also delivering consistent growth backed by our power brands. So in line with our aim to grow, the Board has approved the recommendation to allot equity shares for an amount of INR 1,050 crores subject to receipt of requisite regulatory approvals, market conditions and other considerations. The next question was, we have mentioned about certain CapEx coming on stream at our peptide facility in Turbhe, high-potent API facility at Riverview and our Discovery Services facility at Ahmedabad. Can you please help provide some details on this? With respect to our PDS facility, this is largely addition of a new lab with a new capability for in-vitro testing. Our high potent API facility at Riverview, we have done an expansion of a bay with a 3 KL and a 4 KL reactor. This will meaningfully increase the capacity. And incidentally, we yesterday initiated our first batch for our customer. Our peptide facility at Turbhe, we have added a new 45-centimeter column which will meaningfully increase capacity. The next question has been, what were the reasons for slower growth in our CDMO business? So firstly, we believe the underlying demand for CDMO business, especially for our differentiated offering remains strong. As we have mentioned, we are seeing improved traction in customer engagement and our RFP inflows remain stable. Also, some of the growth CapEx back by customer demand have also come on stream, as I just mentioned, which will help drive growth going forward. However, during this period, our growth was impacted largely because of continued delay in decision-making by customers due to macroeconomic environment and pipeline prioritization based on the limited availability of capital. We have also seen a softer demand for generic API and the vitamins portfolio. A similar question was what were the reasons for slower growth in the consumer healthcare -- consumer hospital generics business in quarter 3 FY '23. In our Inhalation Anesthesia portfolio, the market demand outpaced supplies. We are addressing the current supply constraints through debottlenecking exercises and investing in new capacities. In our injectable pain management portfolio, we have scale up challenges at our new CMOs as we transition post acquisition. This has now largely been addressed, and we are seeing good ramp-up in our production. The next question has been, what is the reason for sharp decline in EBITDA margins in the quarter and year-to-date? The primary reason for lower margin is lower revenues, which led to suboptimal absorption of our fixed overheads. Historically, you will see that as revenues go up, our margins have increased quarter-on-quarter. We've had higher sales promotion expenses in our Consumer Products business, higher operating expenses in terms of energy cost, wage inflation and raw material cost. And the tight funding situation in the market meant that CDMO customers delayed making payments against receivables. We have, as per policy made provisions for the same. What are some of the remediation measures the company is taking to address the muted growth and profitability? So firstly, on the demand front, we are focused on increasing productive selling capacity of our business development team, increasing the number of proposals, velocity and win rate, targeting new customers, new markets in both our CDMO and CHG business, capacity expansion to address the supply constraints in CDMO in some of the sites and in our hospital generics business, both in the injectable pain and inhalation anesthesia portfolios. We are also focusing on improving costs, process optimization through operational excellence. So a question on what are the top 5 strategic priorities for the company right now. As some of these have already been mentioned, we are focused on capturing demand, executing as per customer expectation, driving productivity through operational excellence, executing on critical maintenance and strategic growth CapEx and continued compliance on quality and safety. There have been certain question on cost. One of them has been, why has your other expenses as seen in the P&L moved up in the sequential quarter and year-on-year? So firstly, on the sequential quarter, quarterly other expenses include the onetime provision for an accounts receivable pertaining to a biotech customer who had a funding challenge. While the customer is in the process of seeking ordinate funding options, we have, as per our policy made provision for the receivables that were due. This quarter also saw an increased FX impact due to weakening of the INR against major currencies and also increase in the spend for sales promotion and marketing activities. This expense is not therefore a representative of the quarter. On a year-to-date basis, on a comparable basis and excluding the impact of ForEx, the accounts receivable provision -- the increase in other expenses is 15%. This was largely driven by higher sales promotion expenses in our consumer products business and marketing spend in our CDMO. Excluding this, the growth in other expenses is 11%. There was also a question on why employee expenses are up both sequential and year-on-year quarter. So in the sequential quarter, the increase was largely on account of FX because of the weakening of the INR versus key currencies. It also included an impact of higher average headcount recruited at our Riverview facility where expansion has now gone live, as I mentioned, and at our Grangemouth facility where capacity expansion is going to come on stream later during this calendar year. On a year-to-date basis, when we compare on the like-for-like, excluding the impact of ForEx, the year-on-year increase in employee costs for the 9-month period is about 15%, and this largely includes impact of increments, annualization of positions which were recruited midway through the previous year and positions which were recruited for training in advance of commercialization of our capital expenditure projects. There was a question on what is the current net debt in the books. The current net debt is about INR 4,800 crores. We also had a question on the quantum of CapEx spend during the 9-month period, it's about $100 million. So with this, we will open the floor for questions.

[Operator Instructions] We have a first question from the line of Prakash Agarwal from Axis Capital.

Thanks for the Q&A and explanation. So first one was on the raise, et cetera. You said it's largely for growth CapEx, but your debt is sitting at INR 4,800 crores, and that is net debt, not even gross. So is there no thought with respect to reducing the debt?

So as you're aware that the entire fund raise process has now commenced. And obviously, the focus for us is to look at reducing the net debt as well.

Yes. And we had a call in November, and I think there was a statement made that we are looking -- second half is usually stronger and margins are at least mid-teens between November to December. I mean, we see that you talked about cost being higher, some of the costs have come because of higher capacity, but capacity maybe has not been productive as of now. So between November to December, what has really gone wrong in terms of guidance?

So Prakash, the guidance has largely been for the second half and not specifically for a quarter. Secondly, having said that, as we mentioned that there has been a continued delay in decision-making in our CDMO business customers due to which some of the orders did not transpire as expected, and we also saw a weakening or softer demand for our API generics and vitamins portfolio. Likewise, in our CAG business, as I earlier alluded to, in our injectable pain portfolio, there were some sluggish receipts of products from the CMOs where the products were recently transitioned. All of this, of course, is being addressed through various initiatives across the organization.

Okay. So you mentioned it was second half, so Q3 is gone. So is there any revision in guidance?

Prakash, as you are aware, we are in a deal window period. So it may not be appropriate to make a forward-looking statement now.

Okay. And just a clarification. You mentioned that some of the costs related to capacity addition has been made. So I understand you can only charge it in the P&L once the revenue also starts. So has the corresponding revenue kick started? And if so, understand that the revenue portion would be much smaller versus the cost? And when does it start reversing?

So Prakash, this is not with respect to the capital expenditure. This is with respect to the workforce who have been hired, who will be the operators running the plant when it goes live. They are in the process of being trained for the eventual commercialization that will happen in the near future or has recently happened.

Yes. I understand that, but I'm trying to understand that when do they start covering the -- the top line starts covering the costs and actually be EBITDA positive for the same, the new capacity that you said.

The commercialization has started. The revenues will start flowing in once the batches are released and eventually invoicing happens. The production for Riverview facility, as I mentioned, has commenced yesterday.

Commenced yesterday? Okay. Any other capacity commencement happening during this quarter?

So as I alluded, Discovery Services in vitro labs have gone live. Our peptide Turbhe facility has also gone live in quarter 3 of FY '23.

We have our next question from the line of Vivek Ramakrishnan from DSP Investment Managers.

My question was on the net debt-to-EBITDA covenant on the bonds that you just recently released. Is there any scope -- I mean I understand that this business in transition, and there are pressures. But is there any scope to decrease the net debt through working capital or delaying CapEx or creditors and so on, so that you can meet the net debt to EBITDA guideline of 4.5? That's my only question.

Vivek, we are looking at all measures to ensure that the net debt situation is taken care of and our measures are underway.

[Operator Instructions] We have our next question from the line of Rahul Jain from IIFL Wealth.

My question is regarding the loss-making plants which are in the U.S. and U.K. I mean, our U.S. plants are continuously making loss like Lexington or maybe in U.K. Morpeth. I mean at the standalone level we have net profit, which is 0.84, but at the consolidated level, the losses are increasing continuously. What is the management's focus to bring these plants profitable? And is there any plan to dispose of these plants? Or what's the long-term vision?

So Rahul, firstly, as we've always been saying that it's a game of scale when every site and especially sites in the overseas where the costs tend to be relatively higher, fixed cost tend to be, as they get scale, they'll start making profits. The current challenge has obviously been a subdued demand in our CDMO facilities, which is why the margins currently have been under pressure. And as the demand comes back on track and revenue start improving, the margins will automatically start increasing. As of now, we are not looking at -- in terms of any disposing of any of the sites right now, the belief in the potential of what every site has to offer, and we are working towards improving the demand situation.

Also can I get at the plant level also -- are there any India plants losing continuously currently? At the plant level?

No.

We have our next question from the line of Subrata Sarkar from Mount Intra Finance Private Limited.

So Madam this is for a little bit like a longer time period perspective, so whoever has said your company or aspiring pharmacists this particularly CDMO space, we are seeing an unprecedented kind of a situation. We understand you -- majority of your facility based out of Europe must be -- is in a special situation. But if you see the other players also, they are also seeing some pressure both in terms of like margin and in terms of top line. So as per whatever my little understanding, this is an unprecedented situation. So in this context, can you throw some light on, from the historical perspective, like generally, we all know in this kind of a business we do upfront investment and then return comes back, but still given all those stats, like is this normal? Or is this once-in-a-decade kind of a situation?

I think we believe in the medium-term potential because the underlying demand is there. There is R&D innovation happening and I think customers will still outsource. So overall, I think the overall potential is there. I do think that, I mean, the next 6 months will be tough for everybody in the industry.

I'm not even talking from a 6-month perspective. The CDMO is like as madam you commented. CDMO is something which we have observed like if you see the last decade also, so there is a steady growth, like there can be ups and downs, but this is one of the irreversible trend for the big players, like big pharma players. So I'm talking from that perspective madam. So is this -- what -- my only simple point is like what situation we are facing. Like is this once-in-a-decade kind of a situation or this kind of situation do arise frequently in CDMO space although I don't think so, so from that perspective madam I am talking about.

I think, I mean, there is a cycle. So it is a cyclical industry to some extent. But overall, I think -- I mean, as I said, the underlying demand is still strong. So I think it will recover. The overall trend is up.

Perfect. And madam from -- again, from a business perspective, madam, is it -- I'm not asking for very specific figures. But what I mean to say madam is there like a 8 percentage of reduction in our margin, what I see is apart from the fixed cost component also, what I mean to say, madam, are we facing more of a pricing pressure from the -- like our partners? Or like is it because of the elevated cost structure that's creating more like reduction in the -- from a margin perspective?

I think one of the things is that we have seen over the past few months has been inflation in input. So -- and solvents as well as energy prices due to the Russia, Ukraine and other supply chain problems. So there, that's also been part of the pressure and general inflation.

Yes. That's on the cost side. But are we facing any pricing pressure? Contracts, in terms of contracts, are we facing some reduction?

No, our win rate is the same as before.

We have a next question from the line of [ Venkat ] from SBI.

So my question is sort of the debt situation in the balance sheet around INR 4,800 crores. So what is the -- when we can expect to become 0, madam? So what's the future plan?

Venkat, could you please repeat? I heard about you asking the quantum of debt on the balance sheet and then what is the next part?

Yes, yes. So we are asking for debt now. So what is the future measure? Yes, when we can expect to reduce the debt? And what is the plan to...

So as I said, the initiatives have already begun. It has got its own time frame. And as soon as the procedures for this entire activity is completed, we will move towards reducing the debt. So it will take us some time. We have to complete the entire process as per regulatory guidelines.

Yes, yes. So -- but how often it will take? What's the time line to any future at all?

It might be Q2 of FY '24.

Okay. By Q2 FY '24. So one more thing we have in the Phase III, we have around 36 molecules to commercial. So what's the plan? When we can expect the commercialization? In how many molecules -- out of 36 how many molecules we can expect to commercialize in the near future?

Historical trend of Phase III is typically 50% success rate, and that's what it is. So as and when it happens, it will happen. But definitely, our focus is to ensure that we capture more of the Phase III pipeline, which will ensure stickiness of commercial revenues for the future.

So in the next 2 quarters, is there any possibility to come to the -- how many molecules we can commercialize?

So we can't give forward guidance as to the specific commercialization time lines of our clients' clinical programs. But we do expect that most of our clients typically would contract us with at least one of the major markets. And so we would expect that or whatever we're describing in our Phase III program, these would be meaningful.

We have our next question from the line of Tushar Manudhane from Motilal Oswal Financial Services.

So with respect to the commercialization of peptide facility and Riverview facility, what sort of employee cost increase can be expected and even the other expenses? That's my first question.

So Tushar, that's like a forward-looking statement. We would refrain from making a specific guidance on future.

Okay. What's the current capacity utilization, excluding these 2 new facilities?

So for -- today we had reached peak capacity utilization, which is why this entire 45-centimeter column was put in, and that will meaningfully expand capacity for the site. Likewise, for Riverview as well, we have reached peak capacity utilization, and we expect a meaningful release of capacity with the new block, which has just gone live.

I meant to ask the overall capacity utilization, including all the facilities.

So that's very difficult to give one number, Tushar, because every facility, every line is different that we have got formulations, KPIs, development, commercial. To give one number of capacity utilization is practically not correct.

Okay. And what kind of asset turn can be expected for these -- the new facilities for peptide as well as the new Riverview facility?

Eventually, it could go up to 2, 2.5.

Got it. And lastly, if you could just break down CDMO business into generics and -- generic API, vitamins and the business for innovator?

It's about 1/3 for big pharma, 1/3 for biotech and 1/3 for generics -- generic pharma customers.

We have our next question from the line of Chintan Shah from JM Financial.

With high opportunities, so I have a couple of questions. So in your opening remarks, you mentioned that we have initiated various cost-saving measures. If you can just highlight what exactly those measures are? And what impact do you foresee from them?

Is this cost-saving measures?

Yes. That's right.

I think we're looking at a lot of operational improvement across the sites as well as procurement and even energy saving measures, things like that.

Okay. And in terms of employees, I just wanted to understand the increase is broadly on that and as it is at the -- is that fully reflected in the current quarter numbers? Or could we see more impact from the same?

So it's fairly represented here in terms of the overall increase here, Chintan.

Okay. Sure. And just 1 last question from my side. So in the presentation, if I see, you mentioned that we're looking at inorganic opportunities. So looking at the current debt scenario, et cetera, I just wanted to understand the thought process. Are we actively looking? Or is it just more from a long-term target basically?

I think as a company, we've always -- we've historically looked at acquisitions. But obviously, in the last few months, valuations have been very, very expensive. So I would say in the next few months, our focus would be more on what I talked about earlier on the strategic priorities, which is capturing demand and executing on our current plans.

Okay. So what debt levels would be comfortable for you to pursue an inorganic opportunity?

I think we'll have to see.

Yes. That's again forward-looking, Chintan.

I'm not asking what number would be. I'm just saying any strategy, what you would be comfortable with to actually pursue those opportunity.

I think it's a mix of things, but right now, I think the focus is on executing what we have.

We have our next question from the line of Alok Dalal from Jefferies India Private Limited.

Yes. Is the price increases and cost optimization measures have already been undertaken or that will be undertaken now?

It's a mix, and we're doing both.

So when do you expect that these two flow through?

I think it'll -- some things have started and some things will take a while. It's sort of -- but we should see it over the next year.

Okay. And what is the mix of generics and non-generics to revenue for CDMO for the quarter and 9 months?

It's predominantly generic actually. Non-generic is relatively a smaller portion.

Okay. In the past, the mix for CDMO used to be 60-40 in favor of generics. Vivek, what will be the mix this quarter and 9 months?

It will be rather same.

Similar lines.

We have our next question from the line of [ Suresh ], an Individual Investor.

In consolidated financial results, I have seen that in expenses, purchase of stock in trade, that was 150% increase in year-on-year. Can you give some color on that? That's the only question I have, sir.

Sorry, Suresh, could you please repeat your question?

Yes, in expenses as in purchase of stock in trade that from year-on-year, I have seen 150% or so. Last Q3 2021, we have INR 135 crores something, and this month, this quarter, we have INR 331 crores.

Yes. So if you're comparing the overall stock in trade, you have to actually combine all the 3 items of COG, which is cost of materials, purchase and changes in inventory for a meaningful comparison. And if you're comparing it versus the December quarter, it may not fully be comparable because we had certain transactions that time, as we had mentioned in the earlier investor call with PEL on account of the certain government tenders as well as the CFA network. If you actually compare it with the sequential quarter, you will find that the overall material cost as a percentage of sales is actually nearly the same or in fact slightly lower.

We have a next question from the line of Yasser Lakdawala from M3 Investments.

My first question was regarding the commercial products on the patent that we sort of supply, and I think our revenue is about 56 million last year. Are we the primary source of supply? Or are we the second source of supply in those 19, 18-odd 5products? If you could give us an idea there?

It's a mix. I think it's a set of products and some of which we are one of multiple sources and in others where we are the only source. And I would -- that's all we can probably say at that level.

And among those 18-odd products that we have commercialized, could you give us a better understanding of do these involve newer modalities like PDCs or are there more traditional small molecules?

We haven't historically given a technology or a therapeutic area cut to this. We have described how that pipeline in the past across the different dimensions has grown, and that's been our explanation as to the future is to look at the past trend. And so I would just continue to look at that overall trajectory in the past.

And just continuing on the CDMO itself, so as you said that 50% of early Phase III tend to go towards commercialization like, what is sort of the feedback you got of customers? Are those 50% about 17 molecules, is there -- are they -- have they evinced any interest of pursuing potential commercialization with us? Or will we just be partners in there with them during the discovery and development phase?

So our understanding of the business model is that as someone decides to pursue the clinical work for registration with us, their intention and our intention is to be their commercial partner on successful approval and launch. The costs involved for a customer to qualify a company for development and registration and then not later make an order after that would be a very poor investment decision for them because they would have invested a lot of money to qualify us as a CDMO and then not to use it would be a rare, if not almost improbable, outcome. So the most likely course of a general contract of which we've had many in the past is that we do the registration work with them, they get the approval and then we provide the supplies for that. That's the most frequent for not just us, but the overall industry.

I think in the last call, there was some directional guidance given that we are -- as a consolidated entity, we're looking at achieving EBITDA margins of 24% to 26% in the next 3 to 5 years. Considering the fact that I think in the generics base of our CDMO probably margins are a lot, lot lower than some of the large-scale peers in India. How do you see a mix of the innovator entity like CDMO and Generics business changing? Because that will have to have a meaningful change over the next 3 to 5 years for us to achieve our margin guidance, right? If you could help me understand.

So we're somewhat restricted in the forward-looking comments. What we could probably maybe point to is that in many of our communications, we've discussed a lot of effort to try and onboard an innovative portfolio and progress that pipeline along with our clients and then lead that to commercialization. I think that is probably the past actions you can look to guide for the future direction in terms of the mix.

And what are CapEx...

[Operator Instructions]

Sorry, it's just the last question, just to add up. I just wanted to say the direction of our CapEx will be more towards supporting the innovator-led initiatives versus being in the traditional generics space.

If you look at the locations where the significant CapEx has been deployed or we've made public commitments for the CapEx, it would be places like Aurora, Riverview, Grangemouth. These are all places that have received or are receiving significant CapEx. These are also locations that are operating near or at capacity before the CapEx went in, and these are all facilities that predominantly serve on patent clients, whether it be development or later commercial. So these would be -- these are all facilities that we would describe as being in the differentiated category. These are all facilities that are generally capacity constrained and these are specifics that generally serve on patent client work.

[Operator Instructions] We have a question from the line of [ Sumit Khemani ] from [ Subij Enterprise ].

My question is more or less related to the macro levels. Is it the wrong time when we demerge the company? And my second question is why Mr. Ajay Piramal and Dr. Swati Piramal are not on the Board of Piramal Pharma, who grow the company right from the 98th rank to the 4th rank in the Indian pharmaceutical industry and that mentors are not with us. So is it the wrong time when we demerge the company. The market finds the company in a way that it erase all the values that we create.

I'll say that I think they're very much with us, and they're quite as shareholders, active shareholders and do drive the strategy of the company. And unfortunately, we can't control the markets, and we will leave it at that.

When we split -- demerge the company entity and I am the investor since it was the Sumitra Pharmaceuticals as you see. And later on, it's Piramal Enterprise, I mean, say, Nicholas Piramal then Piramal Pharma. I don't understand what was the purpose behind demerging the company. I mean the pharmaceutical, which has immense value over there. And after the demerging, which just vanished all the values, even the performance of the company is diminishing quarter-on-quarter.

Well, I hope you can keep faith with us. I think we believe in the potential of the company.

Yes. It is our -- from the investor community at large fraternity humble request to bring them back on the Board.

Okay.

We have our next question from the line of Vinod Jain from WF Advisors.

My question again relates to the operating expenses, which have increased very significantly over the quarter. But the turnover has not increased commensurately. It has just increased by 11%. Now does it mean that the higher replacement cost of employees due to attrition is one of the components? Or what is the real reason for the increases being so significantly higher than the profitability of the company has diminished so significantly, sir?

So Mr. Jain, as I responded in my question earlier, if you look at the other expenses, on a YTD basis, it had a onetime impact of certain receivables that was provided as per company policy. It also has an impact of a very volatile ForEx with INR weakening against key currencies. And of course, the numbers are not strictly comparable because post demerger, some of the prior period items are not aligned with the way currently the accounting for the same is being done. Having said that, if we were to exclude these and make the numbers on a like-for-like basis, our overall expenses increased by 15%. And this I see there to exclude the impact of the higher sales promotion and the marketing expenses, our increase in expense was 11%, in line with the top line growth. So that's how it is. I understand that the statements to read as they are right now is challenging, and therefore, probably it can mislead if you see on the face of it.

Very well. My next question relates to the pricing of the rights issue. Whether any comments can be made as to what could be the discount? Or what could be the pricing you're looking at in this difficult times to go ahead with the rights issue?

Not yet, Mr. Vinod. As you can imagine, certain procedures need to be followed. At appropriate time, all of those will be disclosed.

We have our next question from the line of [ Ranvir Singh ] from Nuvama.

Sir, just few things I wanted to understand. Basically in historical perspective and now what we see for the last few quarters, so especially in the CDMO side, what exactly -- where we are -- why we are struggling here in terms of margin? And basically, what I wanted to understand that 157 million, we are going to invest. The current asset -- fixed asset turnover is less than 1%, 0.7x something. So I wanted to understand that whether the utilization even for newer CapEx also the same asset turnover ratio is likely to happen? Or why it could not have been done that in an existing facility, the better value products would have been substituted. Or is there any disconnect in my understanding that you have some dedicated blocks there, which you cannot change? So what is actually happening in CDMO side? And why we are not able to improve the asset turnover ratio? Because I compare with peer players, they all have much, much better turnover ratio there. So just if you could highlight something here.

Sure, Mr. Singh. So firstly, the question with respect to the CDMO business and margin. The current reason why the margins -- overall margins for Piramal Pharma have been suppressed is basically because of a lower scale of turnover. And as we have alluded in CDMO business because customers are taking time to make decisions and issue orders and slowdown in the generic and the vitamins portfolio is where we are seeing slowdown in terms of order inflow for the business per se. There was also an impact of increase in cost, inflationary impact, as you're aware, increase in the price of raw materials, the utilities, which led to margin compression. As far as site-specific asset turnover ratios are concerned, as you are aware, we are present across 15 sites globally. Each of this site has its own distinct capabilities and offerings for the customer, and they are not necessarily fungible. So while there can be a small amount of fungibility that may happen within an API, within a formulation side. Predominantly, these are dedicated sites serving dedicated needs of customers and having very differentiated capabilities. And therefore, you cannot pile up all the incoming demand into one particular site and optimize the revenues from that site. Every site has got its own level of operating cost and its own level of turnover to be able to enhance margins. So I hope that helps answer your question.

Yes. So I think in the last call, we mentioned that there was some inventory buildup also from customer side. That was also the reason. But I think it's now quite a few quarters now. Because these reasons, we can understand for 2, 3 quarters or 4 quarters. I can understand that last year or during COVID period, everybody was struggling. Then I think for 2 or 3 quarters, there are some inventory built up with the customers. Gradually, that got liquidated and people have started showing some improvement there. So my question is that even if we have a dedicated block and if our block is giving a turnover ratio much, much lower rate of 0.5 or 0.7, isn't it possible to have a better value products there or substitute the customer there? Or it is a long-term contractor we are constrained here?

This actually gets back to the question from one of the earlier callers where one of our strategies has been and continues to be to add innovative products to our offerings and have clients place their innovative business at our locations. And this relates to the point that was made earlier about some of the slowdown in decision-making and the subsequent prioritization of those clients of new projects that would use up the capacity as you described, not fully used. And so our big push has been and is to execute on the innovative business growth so that we can utilize the capacity in the best way possible. And those do take time to develop and also transfer in, and that is a major focus of our customer acquisition strategy. And we believe that as that executes, the elements you described will obviously become more favorable for us.

Okay. Okay. Okay, fine. And the last one, I see that inventory turnover has increased significantly on Q-on-Q basis. This is also -- so last quarter is 181 days. From there, it has increased to 205 days. Last year, it was 151 days. So that inventory is something -- is it in a finished side product inventory or this is raw material side inventory?

So inventories is both the semifinished goods as well as the raw material inventory predominantly. And you would have historically seen that our quarter 4 tends to be higher in terms of revenues, which is why the inventory as of the end of quarter 3 is normally higher to be able to cater to the demand for quarter 4.

We have a next question from the line of Nitin Gandhi from KIFS Trade Capital Private Limited.

Yes. I have 2 questions. The plants which have gone live operational, what were the CapEx on that? And when do you see the optimal capacity utilization happening? I understand you said 2.5 potential of this asset turnover. And the second question is related to the fundraising. When do you think whether we should be able to finish the rights issue in 3 -- 1 or 2 quarters? Or do you think it could be a little more?

Overall investments across the 3 CapExes that have gone live is roughly about 42 million. I won't comment on in terms of when they go live because that's forward-looking statement. And as far as the rights is concerned, as we mentioned, based on the time lines that we expect, and it all depends upon regulatory approvals coming in place. It could be somewhere around quarter 2 of FY '24.

Sorry to continue. I have asked for the capacities which has gone live, not the one which are yet to come out of 42 million.

Correct. Yes. So the capacity I was referring to the same, the capacities which have gone live, the revenues for those have started. But when they'll reach peak, I cannot give a specific period for that at this point in time because of the deal.

Okay. And any breakeven possibility, not if the peak?

I guess the only point is that we only are putting CapEx on the growth side at locations where they were capacity constrained before with the assumption that there is demand for those. That's why we put the CapEx in.

Yes. So that's why we are seeking based on the time when you planned and the current scenario, do you think that breakeven could be deferred by another year or so? Or whether it will be same like what you initially planned and it could be within 18 months?

I think right now, we -- some of these are growth CapExes, so we'll expect this and they're on track right now for expectations, but we can't allude expectations.

We have our next question from the line of [ Shashi Ranjan ], an individual investor.

Can you please help me with the past acquisitions that has been done like Hemmo Pharmaceutical, CCPL and few more? How this is going to synergize into or complement the existing operations and the products that we have?

So CCPL was a JV where we were making a critical input into one of our lead products for the complex hospital generics business. And the places one can get that input from the market are limited. And by taking control of that JV, we can backwardly integrate and assure supply to allow us to meet the growing demand. And so that one is that the synergies about margin enhancement and also revenue surety in a place where we're growing volumes. In the case of the Turbhe facility or in the Hemmo Pharmaceuticals, this is an area that is considered more attractive than traditional small molecules. There are limited people who can provide it. It is a high-margin business with significant historical growth. I can't make forward-looking comments about growth, but we obviously made assumptions in that area. And also, we see synergies with our current customers who we were approaching with other business, and they would be interested to say, well, can you also offer us peptides? And I think finally, one can fill a peptide in an injectable facility, and we have actually a situation where even at the time of the diligence, we had a customer that was getting the peptide made in filling it at our Kentucky facility. And so there are integrated project synergies you see there. And I think your last question was on the Sellersville acquisition, I believe. And in that case, we have a number of customers who increasingly post the pandemic would like to have an onshore offering for drug products, particularly for innovative business. You see a significant demand for that offering. And the absence of that demand meant that we would be providing them with drug substance work at one of our North American facilities, and we would be handing off to a competitor the drug product work and now by being able to offer an integrated package, we don't have to introduce a competitor into our point relationship and we can provide either standalone or integrated services in a geography where there's currently a very high interest for that offering. So I think those are the 3 I think you asked about and the rationales behind each of them.

Just a follow up on that. In case we are going for any further acquisition, will you be moving to CDMO space, Complex Hospital Generics or India Consumer on demand?

I think that will depend on the opportunities. I think we take each opportunity as it comes. But I think the near-term focus is on maximizing our current assets.

We'll take the last question from the line of [ Avinash Kumar ], an individual investor.

This is Avinash. Congratulations for revenue growth. But there is 2 questions from my side. One is what is planned CapEx? I'm searching, but it is not concrete given anywhere total planned CapEx for FY '24 or -- how much?

So Avinash, we can't make a forward statement in terms of what will be the spends in the future. The past -- for this particular financial year, our CapEx has been about $100 million.

$100 million?

Yes.

Yes. Okay. And second question is out of this CapEx done -- already done, how much visibility -- revenue visibility is there?

So each of our growth CapEx has obviously been done in anticipation of potential demand that we see in the areas in which we have invested in. And as we have mentioned, we have invested in high-growth areas in the differentiated offerings that we have, whether it's in high potent API, whether it's in peptides or whether it is at our Discovery Services facilities, all of which have gone live now. So there is a good visibility that each of these facilities have.

Expected growth, percentage -- in percentage term, can you?

That's a forward-looking statement, again, Avinash. We won't be able to...

I now hand the conference over to Mr. Gagan Borana for closing comments. Over to you, sir.

Thank you, everyone. In case you have any follow-up questions, please feel free to reach out to me. Thank you once again. Have a good day.

On behalf of Piramal Pharma Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.