RPG Life Sciences Limited (RPGLIFE) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to the RPG Life Sciences Conference Call hosted by Dolat Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Candice Pereira from Dolat Capital. Please go ahead.

Thank you, Ryan. Good morning, everyone. I, Candice Pereira, on behalf of Dolat Capital, welcome you all to the conference call of RPG Life Sciences Limited for an update on the stock exchange announcement made on September 13, 2024. I would like to thank the management of RPG Life Sciences for giving us this opportunity to host the call. Please note that the management will only be addressing questions related to the stock exchange announcement at this time. Today, from the management team, we have with us Mr. Yugal Sikri, Managing Director; and Mr. Vishal Shah, CFO. I now hand over the call to the management for the opening remarks. Thank you, and over to you, sir.

Thanks, Ms. Pereira. Good morning. Thank you for being available today. You have read the outcome of the Board meeting held on September 13, 2024, where 2 decisions -- where Board had approved 2 decisions. One was the payment of transfer charges of INR 32.2 crores as per the order we received from MIDC under the ULC Act, against ULC exemption under Amnesty Scheme. And the second is with respect to execution of a binding agreement with M/s. KRSNA Dynasty for a consideration of INR 144.9 crores plus the applicable GST. You would have also read the mention there that financial impact emanating from the MIDC order on payment of transfer charges against ULC exemption is expected to be fully cushioned upon the successful consummation of the binding agreement. Now behind this outcome, behind these decisions, let me present to you the business context. Let me just start by refreshing that RPG Life sciences operates in 3 business segments: Domestic Formulations, International Formulations, and API contributing to 65%, 20% and 15% to our revenues. You would also remember that we had been mentioning that we, in the beginning, decided to focus on Domestic Formulation, which contributed to 2/3 of our business, where you would have seen that we have grown the business continuously faster than the market. This is our much talked about 5 pillar growth strategy. Now with Domestic Formulations on stream, we now turned our attention to other 2 segments, that is International Formulations and API, and you know well that API is largely export, and thereby, we now want to make International Formulations and API as our growth engine 2 and growth engine 3. And in this connection, we decided to have 2 [ priority ] projects. And since this is with respect to export, the 2 [ priority ] projects which we have talked about is, 1 is modernization of our plants, and the second is development of an R&D pipeline. Now today's discussion, since it is pertaining to the API and API transactions which happened with respect to API land, I would restrict myself to only API. Now in the modernization and capacity expansion exercise for the API plant, which is located at Navi Mumbai, we also realized one more opportunity. And the opportunity was consolidation. Consolidation of the plant operations in a way that we can free up a good part of the API land. A total of 34,483 square meters of the land is there where the API plant is currently located. We've worked out the whole modernization cum expansion plan of the API plant in a way that we were able to free up 15,015 square meters. This freed up 15,015 square meters part of the plant, we decided to monetize and we all know that this is located at a very strategic location in Navi Mumbai, which is quite high priced one, so we thought we will dispose of, we'll monetize that part. And whatever the proceeds we get out of monetization, that will add to our corpus and kitty, which is already available to us in the form of the cash surplus coming out of the good operations which have been happening in the organization for the last 4, 5 years. This proceed will further add to the kitty, which we will use for our growth opportunity, and particularly in the inorganic growth opportunity, which you all know we have been pursuing. And we have been pursuing -- as I mentioned earlier, we've been pursuing this inorganic growth opportunity both in case of Formulation and API. So that is the context. The first part of the announcement was with respect to payment of INR 32.2 crores as the order received from Maharashtra Industrial Development Corporation, MIDC. To explain this part, I would request Vishal Shah, our CFO. And also, I will request him to briefly cover up the binding agreement which we signed with the assignee and thereby monetizing the freed up land of 15,015 square meters. So over to you, Vishal, if you can briefly explain the 2 areas to all of us.

Sure. Thanks, sir. So as you know, as per the announcement, MIDC has leveled ULC transfer charges under the 50% Amnesty Scheme, and the amount is INR 32.2 crores. So the reason for this is that under the ULC Act, MIDC granted an exemption in respect of surplus vacant land subject to certain terms and conditions. In the past, RPGLS assigned a part of its land to an assignee, wherein MIDC was supposed to levy ULC transfer charges, but had not levied at that point of time. In fact, it did not levy on any leaseholder across the state. Now MIDC came out with 50% Amnesty Scheme. And under this scheme, they are wanting -- they have issued the demand order of INR 32.2 crores and this is what has come to us, which we have to pay for closing the transaction of the past. And what has triggered right now is that since we are going to MIDC for further assignment of our land to an assignee, MIDC is asking us to pay the ULC transfer charges. This is with regards to the ULC transfer charges. With regards to the portion of land which sir just mentioned that we are assigning to an assignee with the proceeds of INR 144.9 crores. So these are the 2 transactions what the Board has approved on 13th of September. I hope I have made this clear.

This in brief was we wanted to clarify. And if you have any questions, pertaining to this, to the extent we can, we would like to answer.

[Operator Instructions] Our first question comes from the line of [ Ankur Kumar with Alpha Capital ].

Sir, I wanted to understand, in the announcement to exchanges, we have said that this amount will likely have an impact on Q2. So is it like this INR 32.2 crores, we will be booking as onetime loss in Q2? And then the INR 144.9 crores will be onetime gain in the Q2?

I think what you heard is correct. Vishal, would you like to explain?

Yes, yes. So in the quarter 2, you correctly mentioned that INR 32.2 crores will come as a onetime extraordinary expense in our P&L of the company. And as and when, in the quarter 3, because this new transaction of assignment will be subject to MIDC's approval for subdivision and transfer, so hopefully, it will consummate in quarter 3 of the FY '25. So at that point of time, the income will come in the books of accounts of the company.

[Operator Instructions] Our next question is from the line of Amish Kanani with JM Financial.

Sir, if you can just remind us of the proceeds, how are we planning to use? Is it predominantly more future CapEx that we'll be funding with the cash that we have plus the receipts of these income from the land of sale that we'll have. Also, there was a probable -- we always say that we look at some strategic M&A if and when we get an interesting opportunity. Is there any thought on these lines? Are we using cash more for expansion and/or M&A, or are we just keeping this cash on the book, because it is affecting the -- we are a very high ROE company, but this cash is affecting our ROE little bit. So just if you can give us some thoughts there, that will be really helpful.

Thanks, Amish. I think your question covers the answer. Just to add to what you just mentioned, yes, we are building up cash surplus, thanks to the operations over the last 3, 4 years, after we paid up the debt. We have close to over INR 120 crores cash in our books now, and we will be adding another crores coming to us through this transaction. The purpose, as I mentioned in my opening remarks, is to grow the business. As I have explained every time that we are very, very keenly looking at the inorganic opportunities, be those opportunities in the formulation space or in the API space, we are very actively looking at. As I mentioned, we've seen close to about 18 proposals. Right now also, there are proposals on our table to be evaluated, which we are evaluating. And therefore, our intent is to make use of this cash, which is now augmented cash, which we will have post this transaction, for the purpose of growth or business expansion. As I mentioned earlier, we had restricted only to formulations, inorganic opportunity. Now we have opened up even for API acquisitions. So this corpus is expected to be used in for growth and largely in the M&A.

Sure, sir. And if you can just quickly remind us of our CapEx program, sir, this year and also next year, if possible?

Yes. As we elaborated earlier that we have spent over INR 140 crores on both the plants, modernization cum expansion, and that modernization-cum-expansion plan is coming to its final leg now. In case of the API plant, it is almost through. And in case of the formulation plant, it will be through by the end of this financial year. And we have got -- the regulator already came and visited our plant, API plant, and approved it. And we are calling EU regulator to come and approve our plant in quarter 3 this year. So therefore, the major chunk of our modernization CapEx, that's completed now. Going forward, our CapEx would be used on growth, which is developing new products, that's 1 area. Second, we've been in the generic business. We get certain topical opportunities and those opportunities entail some amount of customized expansion in the plants. Like the way we had a business which we got from a very reputed customer from Australia. And we actually did expansion or customized expansion in our Ankleshwar plant, and actually we are supplying the product today from that expanded facility from Ankleshwar plant. Some such similar opportunities which we are also pursuing will entail some amount of CapEx. This debt we will use, plus the maintenance CapEx which we see every year. I would ask Vishal to give some approximation of the numbers, both for the -- or for the total CapEx for the plants. Vishal?

Yes. So as we briefly mentioned that some portion of the INR 140 crore CapEx will also be coming in this financial year, along with the growth CapEx. So we expect around INR 30 crores to INR 35 crores of our CapEx coming this year.

The next question is from the line of Aditya Khemka with InCred PMS.

Sir, I joined the call a little late. Did you guys talk about the nature of the transaction. If I understand the press release correctly, this is a land that we own and we are sort of leasing it out or selling it to another entity. And before we are able to do the transaction, we have to pay some sort of a tax or levy to the MIDC. Am I reading the transaction correct? Or is there something I'm missing?

Aditya, thanks for joining. We gave the context in the beginning, but just to mention again, it's a leasehold land. This plant is on leasehold land, and we have 34,483 square meters of the land there. As part of the modernization-cum-expansion plan, we also saw the opportunity of consolidation, and thereby we did the consolidation, and thereby freeing up 15,015 square meters. And this 15,015 square meters is what is being now assigned to an assignee for a consideration of over INR 140 crores. So that's the context.

Got it. And so this INR 140 crores is -- so this is a lease payment that he is making you for the next 30, 50, 100 years. Is that the arrangement? Or is he buying the leasehold?

Yes, of course, arrangement of leasing for the remaining period. That's right.

Okay. And the INR 32-odd crores that you are paying to MIDC, what is the nature of that payment?

That's in lieu of the ULC, Urban Land Ceiling, Act related charges, which the MIDC charges. This ULC charge was applicable to any transaction which happened before 23rd June 2021. After 2021, this ULC charges have been waived off, have been removed. Government has removed those charges for everybody. But any transaction which happened before this date of June 2021, the ULC related charges are being levied. We had a transaction in 2013. And this charge is with respect to that transaction. Now it so happened that this charge was not charged to anybody in the state for any transaction. Now since we are assigning this land now, this charge has got activated. In order to complete this transaction, we have to pay this charge to the MIDC. Now MIDC came up in March 2024 with an Amnesty Scheme. 50% Amnesty Scheme, which was valid till June 2024, which extended to September 2024 or 15th September 2024. We have made use of that Amnesty Scheme and this INR 32 crores -- INR 32.2 crores charge is coming against that.

Understood, sir. So basically, we had extra land which we are leasing out, and we are getting money in consideration, and obviously, the ULC charges apply. So I get that. So once we receive this cash in third quarter, what would be our expected cash balance, Vishal, around that time. Would it be INR 250 crores plus or thereabouts?

It would be difficult at this point of time to comment on that. But specifically to this transaction, we expect around INR 90 crores net cash in hand in our hand. And that way, from the operations, right now, as sir mentioned, we're around like INR 100 crores plus type of cash surplus. But depending on the performance going ahead, the net cash will improve that way.

Got it. One last question. So Yugal sir, you mentioned that you'll likely use the cash as a war chest for acquisitions, either on the branded side or on the API side. So branded business, I can understand, obviously, that's something we have done pretty well. On the API side, what kind of an acquisition would you look at? And I'm not talking about scale, I'm talking about what kind of capability would be really evolved on the API side.

Yes. Actually, our strategy in terms of the kind of the portfolio which we are building up, whether in the International Formulation business or the API business, is centered down 2 or 3 points. One is we are focusing more on immunosuppressants. Okay? That's our 1 portfolio. And when I'm saying immunosuppressants, we have azathioprine already there. We are talking about mycophenolate, and we're also looking at tacrolimus. The second is -- actually, on the chemical side, it will be only azathioprine and mycophenolate. The second is, we are looking at the molecules which have low competitive intensity and the DMF filings are lower in number. It might not be a big size molecule, which will address the attention of the big players in the field, but the ones which are quite good, but not as big that the biggies have the attention. Those are the second categories of the products which we are looking at. So these are the broad considerations we have at the back of our minds. Further, it depends upon the kind of the opportunity which we get going forward. And we are looking at opportunities, frankly speaking. We are trying to see that our criteria is met, but it all depends upon the kind of the opportunity comes in our way.

Sorry, sir, just one follow-up on that. I just want to understand the management's priorities at this point in time. So if you have a branded acquisition, which will obviously be slightly more expensive when you compare it to an API acquisition, given the nature of the businesses and the ROEs that this business can potentially generate, what would be your preference between the two?

Yes. I hope the -- it's a seller's market now. And we also have very clearly defined framework which we have mentioned earlier. But then we realize that we need to be a little more flexible. So though our intent is very clear that we will have sustainable profitable growth in the business, that's what would be the guiding principles for us, but it depends upon what kind of opportunities we get. Yes, formulation business definitely would be important while it comes to us at valuations which we feel are okay. We have opened up to API also. Of course, when we are looking at API, we will definitely consider the margins for that API business going forward. This is a limited comment I can make at this stage, Aditya.

[Operator Instructions] As there are no further questions, I now hand the conference over to the management for closing comments.

So thank you so much for being here to listen to the details of the Board announcements. And I just want to indicate that this transaction or these Board announcements are effectively in line with the announced growth strategy of the organization. And this will help us to enhance our kitty to pursue our growth ambitions more rigorously, largely inorganic, and if it is organic, I'm sure this corpus will come handy, but largely inorganic. So thank you so much for sparing your time and being here in the morning. Thank you.

Thank you. On behalf of Dolat Capital, that concludes this conference. Thank you for joining us. You may now disconnect your lines.