Poly Medicure Limited (531768) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Poly Medicure Q1 FY '25 Results Conference Call, hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Nisha [ Shetty ] from ICICI Securities. Thank you, and over to you, ma'am.

Thank you, Anjali. Good afternoon, everyone. On behalf of ICICI Securities, I would like to welcome you all on Q1 FY '25 Earnings Call of Poly Medicure Limited. Today, on this call, we have the senior management of the company, represented by Mr. Himanshu Baid, Managing Director; Mr. Naresh Vijayvergiya, CFO; and Mr. Avinash Chandra, Company Secretary. I would like to thank the management of Poly Medicure for giving us this opportunity to host this call. And with this, I will hand over the call to the management. Over to you, sir.

Thank you, Nisha. Really, thank you for hosting this call. And good afternoon, everybody. It's my pleasure to talk to you again about the progress of the company for the previous quarter. I will take you through the earnings of Q1 FY '25. The revenue of the company, when we compare from Q1 of FY '24 to FY '25, we increased from INR 320 crores to INR 385 crores, roughly, almost increase of 20%. EBITDA margin also increased from INR 87 crores to INR 104 crores, again, an increase of around 20%. And PAT margin increased from INR 62.7 crores to INR 74 crores, an increase of 18%. So we have actually progressed as per the guidance we had given earlier. And the company is on track to perform this year as per the guidance given earlier of 22% to 24% growth, and also improvement in the EBITDA margin of 100 to 150 bps. We have done our capacity expansion. Our first phase is over. And we have added new plant and machinery over the 4 plants where we have expanded in last 12 months -- 18 to 12 months. The capacity now has increased from 1.2 billion units to 1.5 billion units per year. And by end of the year, we will further increase the capacity to around 1.7 billion to 1.8 billion units for medical devices. So there's a rapid increase in capacity by over 50% over the year, because the infra is ready now, and mostly the capacity addition is happening through the plant and machinery which we're adding in each plant step by step. Of course, these are all special purpose machines. So it takes time to get these machines from the vendors, because delivery time is between 12 to 18 months. And as we are seeing the traction for each product line, we are building capacity and capability across those product segments. And basically, the more expansion that will happen in the transformational segment, which we had talked about earlier, renal, cardiology and critical care, these are 3 important segments we continue to expand faster than we were doing in the previous years. And more CapEx has been done for these 3 categories. Renal business in Q1 has increased by over 40%. So this is something very heartening to note. And we are on track to grow from INR 90 crores to INR 140 crores, INR 145 crores in the current financial year. So this business, which was lagging last year, we were able to bring back it on track. And of course, the regulation which was enacted on 1st October 2023, that has really helped us to ensure that only good quality devices are sold in the country. And whatever were parallel imports coming for nonregulated products, it has stopped now. And I think this is a good progress for us. And similarly, on the dialysis machine side, also we are seeing a good traction. We have now a good order book as we have told earlier in the year. This year we plan to sell close to 400 machines and maybe even go up to 500 depending on how this order book matures, but we have a good traction and we are on track for this kind of growth. We have added 40 plus sales associates in quarter 1, which is in line with our plan to add 100-plus people in the current financial year, and these 40 people have come across mainly in the new verticals of critical care and cardiology. And we continue to expand the team and the reach, so that we can reach out to more and more hospitals for these products. Our gamma sterilization plant is under construction right now and should be live by early next year. This we have done especially to ensure that we have full control on the sterilization process. And this is more safer process compared to the ETO gas which we use today. And knowing that the gas is a little hazardous, a gamma plant is more safer, as all safety safeguards are in place. Currently, we use third-party services. But once our own plant is ready, we'll be able to move most of our sterilization to this plant, which we outsource today to other vendors. On the export business side, we have grown in Q1 by over 25%. Domestic business has grown only 6% to 7%. And there's a reason for this. In FY '24, early Q1, we had some government orders for auto-disable syringes, which was for a vaccination program. That program is now almost over. So we have seen that drop in requirement from the government. But on the other side, the trade sales has grown by 25%. Government business is maybe overall around 20% of the total domestic business. So there was a drop of 50% there. But overall, trade business has grown by around 25%, which is the balance 80% of the business. So hopefully, by the end of this year, quarter 2, quarter 3, we have a good visibility on the domestic business and we should grow by around 20% plus in the next few quarters. Cardiology and critical care business has taken off well. We have launched 4 to 5 products in each category. And for the next few quarters, we'll be launching another 4 or 5 products to expand the range. Current focus in critical care is toward oncology field, which is mainly for cancer drug delivery. And we see a good traction here. We are using the technology from our Italian plant to grow this business. And also a lot of products have been locally developed to augment the whole range of products for drug delivery. Q1 CapEx was close to around INR 70 crores. This is in line with our annual plan of INR 250 crores, which we announced earlier in the year. And most of the CapEx, as I mentioned earlier, is happening in these 4 new plants, where we are adding new production line to expand the capacity. The company is also investing in AI-based tools for upgrading technical skills of salespeople. And these are some new tools which we have seen in the market. We have tested them, and actually, this will help to enhance the capability of the salesperson when he is going to a hospital or to meet clinicians. And we will also do a lot of training programs to our international clients, and also a training program for nurses and doctors through this AI-based tool. So we are already working on this. On the U.S. business update, the first sale of infusion products has started. We are ramping up production capacity by adding new equipment. We are very hopeful that this new equipment will be ready by end of the year. But meanwhile, we'll continue to manufacture with the pilot equipment which we have established earlier. We already have 4 FDA approvals, which have been obtained right now. And we are in the process to get 8 to 10 new approvals in the next 12 months or so. So with this, almost 12 to 14 products will be FDA approved, and that will give us a good visibility for the U.S. market and U.S. business, which we are very hopeful that it will grow as we have projected earlier between $15 million to $20 million in the next 3 years' time. PLI, there's not much update, as the current scheme was not favorable. Even in the current budget, the outlay for PLI is only INR 85 crores for existing companies which have taken PLI. So more or less, the scheme has not worked well for medtech industry, medical device industry. And we have been pushing the government that if they can come out with a new scheme which is more favorable to the industry and which really supports Make in India. So there's a constant work in that direction, but we haven't heard anything on the current budget. On the new product development side, we are already on track to launch 10 to 12 new products every year. But the most important thing is that we continue to expand our R&D base, expand our product lines across all verticals, not only focusing on those 3 transformative verticals, but we are also focusing on transfusion and vascular, where we will keep on adding more and more products just to address the whole basket, the whole therapy in that segment. In the budget, nothing important has come for the medtech industry. Only positive news that government will rationalize duty structures across GST and custom duty platform over the next 6 months. Currently, we have varied GST rates of 5%, 12% and 18%, and probably, in some cases, we have inverted duty structure. So I think what we heard as an announcement that government may look at those issues and maybe rationalize this rate. On the yearly outlook, we continue to guide, as I said earlier, 22% to 24% revenue growth for FY '25 and 100 bps to 200 bps margin improvement over this current financial year. This is based on the current traction we see in both domestic and export business. And even when we look at the new transformative business, renal, cardiology, and critical care, which are ramping up right now, these are also businesses which will add more margin to what we have now. So they are probably -- when you look at critical care and cardiology, they are higher-margin businesses for us. And as we ramp up, I think we will see some improvement in the margin profile of the company. On the export front, I think I will look at the total growth of the company. Last year, exports were around 2/3 exports, 1/3 domestic market, almost 67% and 33% ratio. But in first quarter, the ratio has changed. We have 70% exports and almost 30% domestic sales. So because of the high growth in exports, we were able to improve that ratio to a certain extent. And probably in the current year, this ratio would probably remain in the range of plus/minus 1% or 2% or 70% and 30%. Europe continues to outperform for us. We have grown over 30% in quarter 1 as compared to the previous year. And this is pretty heartening, because in spite of all the global challenges and headwinds in the global supply chain and the sea freights kind of increasing again, there's a huge shortage of containers, which is impacting actually the business in the short term. So still, we have grown the export business. And as we hear from industry sources that this container shortage or export freight rates will only come down by October, November. So next 2, 3 months, it's challenging. But we are very hopeful that we will be able to mitigate this risk and continue with the good growth here so far in the export business. Company also received the Export Excellence Award for FY '22 and '23 as the largest exporter of consumable medical devices from India from PLEXCONCIL. I'm also proud to say that from last 10 years, the company is a leader in this category. We were also recognized by Economic Times as one of the best health care brands for 2024. So these are some of the accolades the company has received in the past few months. We are also eagerly waiting for the new Drugs and Medical Device Act 2024, which will reshape the regulatory pathway for medical devices sector and segregate largely the medical devices from drugs. This is very important, because currently all the drugs regulations apply on medical devices. And sometimes we get caught up with the issues which are there in the pharma industry, which are not related to us. So I think it's important that we have this new regulation or act enacted soon, so that the whole sector can be carved out of pharma and drugs. There are also a lot of other government initiatives like supply chain establishment for manufacturing, expanding scope of PPO orders, so that more Make in India products are procured by the government. So a lot of initiatives are happening parallelly, especially to support Make In India. I'll just take you through the other aspect of the fund raise which we have recently announced. The Board recently gave approval to raise up to INR 1,000 crores through QIP process, which was done through a board meeting end of June. And most part of the funds will be used for CapEx. We plan to build 3, 4 new facilities in the next 24 months to expand manufacturing capability, as we see a good traction and some new projects we are working on. Probably, this will help us to scale up faster. We also plan to deploy part of the funds into an organic opportunity for technology enhancement and also to shorten the product development cycle. Currently, it takes 3 to 5 years to launch a new product after a proper clinical trial and regulatory approval across global markets. So I think to shorten this cycle, to add products much faster in the whole basket, we will have to look at certain inorganic opportunities. We are not sure what it is right now, but as soon as we know, we will definitely reach out to you and explain you the rationale for doing those inorganic, let's say, technology transfers or where we are going to invest money in the long run. We are seeing a keen interest from foreign domestic funds in the medtech space in last 2, 3 years, which is a great sign for the industry. Pre-COVID, this industry was capital-starved and probably very few people knew about the medtech industry. But now with proper recognition, capital flow has eased out a lot in the industry. So this is what we see in the long run. Industry is getting recognition. More and more companies are expanding faster and more capital is available for the industry to grow, which is a good sign. Our overseas subsidiaries and JV company remain profitable. They continue to expand operations in Egypt and Italy. China plant, we have not added anything new. And as I've explained earlier, due to cost structure reasons, in maybe next few years, we may curtail the operation or even maybe completely shut it down. But again, that decision will depend on global external factors. This is all from my side. I'll be happy to answer any questions from people on the call who have joined. And thank you for your time once again, and thank you again for your participation and support.

[Operator Instructions] The first question is from the line of Jaiveer Shekhawat from Ambit Capital.

Mr. Baid, first question on the domestic business. You alluded to the fact that there were certain onetime orders from the government that you lost during the quarter since the last year. What was contribution of that for the rest of the year, 9 months FY '24, the remaining 9 months?

So it was for a very special product, which was for vaccination programs, some auto disable syringes. So we have already discontinued the product after the end of last quarter -- first quarter of last year.

Understood. So there is no other reliance for the remaining part of the year?

Yes, yes, yes. Because this was mainly for the auto disable syringes. And we had started this business only because of government's insistence, because there was a huge shortage of supply at that time.

Understood, sir. Yes. On the U.S. business, given that you've already announced tie-up with a couple of GPOs there. So what kind of access does that provide to the medical institutions that are there in the U.S. market for you?

See, basically, they will be placing the product directly into the market, and they have their own sales teams to do that. So our job is limited to manufacturing in India and maintaining those quality standards and regulatory requirements and training those people initially on this product line. But beyond that, I think mostly the business will be managed by them locally.

And sir, do you believe that -- given that those GPOs sort of provide to tens of thousands of medical institutions in the U.S., do you get access to all of those with respect to your products, or are there specific institutions where your product is supplied?

They will be probably starting with a few institutions to begin with and then they scale up basically. The scale-up will happen maybe in few years. And already, there will be existing contracts with existing suppliers and manufacturers. So it's not going to change overnight. But that's the reason we are saying that there's a ramp-up period and maybe in the next 3 years, we'll see that ramp-up. That's what we have been calling out.

And sir, similar to Europe, wherein you have more of your direct presence in the hospitals, are you looking to sort of build a similar thing in the U.S. as well over a period of time, so that you get direct feedback from your customers and possibly...

We already have a team out there. We have a couple of people in U.S. right now. But as time progresses, we will also maybe build some clinical resources, so that we have a direct access to the market and information what's happening out there.

Understood. And you recently had your Vision 2030 [ shared ]. So could you talk about some of the targets that you have set for yourselves and the vision that you have?

See, I can't talk about future numbers so much. But yes, I think the opportunity size -- and I think Vision 2030 is mainly focusing on Indian market, that what is happening in India and how we can actually outsmart the growth, which is 12% to 15%. And can we do around, let's say, 22% to 25% growth in India. And I think with all the ideas we have got from our team, I think we're pretty sure, because these new 2 verticals will do well in India, because there's a lot of gap between imports and local manufacturing. So that is where we are trying to focus. Renal seems to be very promising. And overall, the opportunity size is too big, because market is growing at 12% to 15%. We are still not present in every hospital. We still have only 40% coverage. And we also have to go deeper in each account where we are operating today. So when we look at this leverage, I think the opportunity is quite big actually. I can't give you the numbers, but it's quite big.

Totally understand. Sir, lastly, on your capacity expansion, the new 3 facilities, as and when they come up, what kind of overall capacity increase does that lead to? And then what do you think would be the peak revenue potential from all the 15 capacities that you have...

Jaiveer, you're asking the same question in another way. But again, the idea is, with these 3 or 4 new plants which we established between '23 and '24, we were able to increase almost capacity by 50%, from 1.2 million almost to 1.8 million by the end of this year. Similarly, with these 2 new plants which we'll establish -- sorry, next 4 plants, we're looking at expansion. And this expansion is more focused towards, I think, cardio or critical care. So there the numbers may not increase, but the value would increase. So again, increasing it by another 40%, 50%, that's the plan.

Right. Because my question is in terms of continuing to reinvest in your capacities. I mean, does that leave you with a lot of capacities, which can possibly give you a 20% plus growth for the next 5 years without much capacity investment?

No, no, we have to keep on investing. I think this industry needs a tactical investment every year, and I think that is what we need to do. Because there's a lot of technology. This is something which is not static, that you start something -- it's not like a steel plant that you invest once and then you are done. Here, every year you are adding new technology in the existing product also. So you have to keep on investing to upgrade and look at new areas. So that will continue.

Sure. And sir, with respect to the inorganic opportunity, it's my last question, are you also looking to get into any related medical equipment as well?

I can't answer that, sorry.

The next question is from the line of Harshi from Bees' Capital.

Sir, congrats on the great numbers. I just wanted to understand this point you made on how PLI has not worked very well for medical devices in India. So just wanted to know the road blocks that are coming in.

See, what has happened is, government called out 4 categories of products in PLI. But they equated everything on the same parameters, equipment, implants, consumables on the same parameters where you need to do incremental revenue of INR 60 crores every year, starting from 0 and from first year onwards, do incremental revenue of INR 60 crores every year. And I think in certain industries, it's not possible. Even the equipment industry is struggling today. So every year, you can't almost double your business or increase by 60%, 70% in that category, because it takes time to establish the product. And especially when you are supplying to government, you need 3 years of market standing. So that was not well thought of. And even government department is asking for certifications which are like CE, U.S. FDA certifications on machines. So that takes 2 to 3 years to actually get one regulatory certificate like that. So from day 1, you can't get. So most of the companies are not able to comply with that incremental revenue. And because of that, there's no incentives even being distributed. So this year, if you read the budget fine print, only INR 85 crores have been allocated to medical device sector for PLI. The whole scheme was for INR 3,420 crores. Year 3 would have been the peak year, which is the year 3 this year, FY '24-'25. And in the peak year, which is third year, we were looking at INR 1,000 crores of incentives to be given to companies, but the only incentive paid will be INR 85 lakhs (sic) [ crores ], which is budgeted in government's document. So even that budget will be there or not, nobody knows.

The next question is from the line of Zain from Dolat.

So want to know that infusion sales contribution in domestic business is how much?

Infusion products, though we don't call out separately, but it should be close to around 60% to 65%.

Okay, sir. And what about the gross margin? As the contribution from export is high, so do you maintain the guidance of what you've given for the full year?

Yes. Again, in the beginning of the call, I already said that we are maintaining that guidance which we have given of a revenue growth of 20% to 24%. And even the margin, we have spoken that there will be an improvement by 100 to 150 bps in the current financial year when you look at the year as a whole.

Okay. And sir, you have guided for 20% to 24% of export growth...

Total growth. Total growth. Not export. Total revenue growth of the company.

And any guidance for domestic growth? Do you maintain that growth or no changes?

Domestic growth, as I said earlier, we are looking at between 20% and 22% overall growth for domestic business in the current financial year. But export will be slightly higher. So then the blended growth will be 22% to 24%.

The next question is from the line of [indiscernible] from Elara Capital.

Just a question on CapEx. What's the CapEx plan? How much are you going to spend on CapEx this year?

This year, we have already given a guidance of INR 250 crores, which we have already spent around close to INR 70 crores in the first quarter. And for the rest of the year, we'll be spending around close to INR 180 crores or something in that range.

Okay. And that is going to substantially go up in the next couple of years?

Yes, it will go up because, first of all, we are going to set up 4 new plants. So that is something which we are already working on right now. And this current CapEx is happening in the existing plants, which we set up in last couple of years.

Understood. So if I roughly put your capital raise plans and this together, roughly INR 250 crores, INR 300 crores of maintenance CapEx plus another INR 300 crores, INR 330 crores of new plants, so roughly INR 600 crores roughly per year CapEx for the next 3 years is something of a rough back of the envelope calculation?

No, no. The maintenance CapEx will end by, let's say, middle of next year. Because these plants will be saturated, and then we will not be putting any new investment other than minor, but there is no major, because these plants will get saturated. But the new CapEx that we're planning would be a run rate of INR 300 crores to INR 350 crores. That is what we are seeing. And then maybe another INR 100 crores to INR 150 crores of maintenance CapEx. So you will see something between INR 400 crores and INR 500 crores of CapEx happening in the next couple of years of further accelerated growth.

[Operator Instructions] The next question is from the line of Harshi from Bees' Capital.

Sir, I just wanted to know how is the dialysis business coming along? Like we are on a target of INR 500 crores for the year. So if you could share how is the Q1 then?

Yes. So Q1, we have seen a 40% plus growth in revenue. The target for the whole year is between INR 140 crores to INR 150 crores. We have already ended over INR 30 crores in the first quarter. And the traction is quite strong, because as we have localized production for the machine, we have also expanded -- expanding capacity for our dialyzer production and other products. So we're pretty hopeful that for the year, we should be in between INR 140 crores and INR 150 crores, which probably will give us around a 50% growth over the previous year.

The next question is from the line of Girish Jain from KJMC FinServ Group.

Himanshu ji, Congratulations on a good set of numbers. Just a couple of bookkeeping questions. Could you give us some idea about the current debt of the company and the inventory the company is carrying given that last year we were facing some logistic issues.

So Girish ji, typically, we carry 2 months of raw material inventory in the company because of the current supply chain crisis, because a lot of raw material is imported. Almost 60% to 65% raw material is imported, coming from different suppliers across the world. We have almost 250 suppliers for different kind of raw materials, parts, components, which are used in critical manufacturing. On the finished goods side, we don't maintain any inventory on the export front, which is 70% of our business, because all is made to order. And for the domestic business, we carry probably 1 month of finished goods inventory. So that is the current cycle. On the debt side, the long-term debt in the company is, at this moment, close to around INR 7.5 crores, which is going to be over by end of October. That's the final tranche of payment. It's an ECB which we had taken a few years ago. And working capital, that would be around INR 150 crores to INR 160 crores.

Okay. And if I have time, I'd like to add one more question. On the CapEx plan, we had 4 new plants which have now become operational. And in the further fund raise, which the company is planning, the entire money of INR 350 crores, which will be put in these 4 plants or some new locations are being envisaged?

No. So what we are doing is in the current plants, whatever CapEx we are doing right now, in the current financial year, and partially in the next financial year, is being funded from internal accruals already. And whatever new fund raise we are doing, these are 4 completely brand new locations. And I'll also call out these locations. So there's a new location, which is outside of Faridabad, and one in Haridwar, and one in Jaipur. Of course, it is in close proximity to existing plants, but not really attached to the existing plants. And then maybe a fourth location we are scouting right now. Maybe we'll get into one of the medical device parks which are being set up either in UP or in MP. We are already looking at some properties in that area and the existing medical device parks.

And the balance, remaining out of the fund raise could probably be used for working capital and/or inorganic opportunity?