SMS Pharmaceuticals Limited (SMSPHARMA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the SMS Pharmaceuticals Limited Q4 FY '24 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectation of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. Today, we have with us Mr. Vamsi Krishna Potluri, Executive Director; Mr. Lakshmi Narayana Tammineedi, Chief Financial Officer. I now hand the conference over to Mr. Vamsi Krishna Potluri, Executive Director. Thank you, and over to you, sir.

Good morning, everyone. Thank you for joining the earnings conference call to discuss the financial performance for the quarter and year ended 31st March 2024. I hope everyone must have got an opportunity to go through our financial results and the investor presentation, which has been uploaded on the stock exchange as well as our company website. I'm pleased to highlight that for Q4 FY '24, our revenue surged by 65% year-on-year to a record INR 246 crores. For the full year FY '24, revenue increased by 36% to INR 709 crores compared to INR 522 crores in FY '23. We observed strong growth on all our product segments, fueled by an increase in sales volume. Our product mix has improved due to strategic emphasis on high-margin products and therapeutic segments that are in high demand in the market. Our strategic focus on backward integration has enabled us to effectively manage raw material costs and mitigate price fluctuations. This has been a critical factor in maintaining stability in our product portfolio and gross margin. Our efforts in cost optimization and enhancing operational efficiencies have been instrumental in improving our EBITDA margins, which has increased by 601 basis points to 16.4 in FY '24. Q4 FY '24 PAT saw a remarkable increase of 178% year-on-year, reaching to INR 17 crores. For full year FY '24, PAT amounted to INR 50 crores, a significant turnaround from a loss of INR 7 crores in FY '23. The Board has recommended a final dividend of INR 0.4, 40% per equity share, a face value of INR 1 each for FY '24, reaffirming our commitment to delivering value to our shareholders. Some API segment highlights. Q4 and FY '24 revenue for the API segment stood at INR 242.1 crores and INR 698.1 crores, respectively. Q4 and FY '24 API segment contributed approximately 98.5% and 98.4% to the consolidated revenue. Within the API segment, 11% of the revenues came from the domestic market and 89% from the export market, including deemed exports for Q4 FY '24. Within the therapeutic area, ARVs, antiretrovirals contributed 16%, antidiabetic contributed to 29%, anti-migraine 14%, anti-ulcer 7% anti-epileptic 3%, anti-ED around 5% and anti-inflammatory around 19% and the rest contributed to around 8% to the total sales for Q4 FY '24. Now coming to segmental highlights. The ARV segment has contributed approximately 20% to our top line for the full year. We anticipate maintaining the ARV segment's contribution at pre-COVID levels in the coming years. The demand for ARV products remains stable, supported by our strong market presence and strategic partnerships. We've undertaken several initiatives to enhance our ARV product portfolio and improve our production capabilities. These efforts are aimed at ensuring that we can meet the ongoing demand for the ARV products and maintain our leadership position in the critical therapeutic area. The ibuprofen segment has demonstrated remarkable performance throughout the FY '24. Sales for ibuprofen in Q4 FY '24 nearly doubled compared to the previous quarter, driven by a widening customer base and increasing traction with existing customers, this product has consistently performed well in our portfolio, and we expect this trend to continue. Our focus on optimizing production process and maintaining stable raw material prices has been a key to sustainable growth in the ibuprofen segment. We are confident that our strategic efforts will enable us to further strengthen our position in the market and continue to deliver robust sales performance. And the antidiabetic segment has been a standout performer for our company in FY '24. Our strategic focus on high-demand therapeutic areas has led to rapid growth and strong market penetration in this segment. The sales volume from our antidiabetic products has shown a substantial increase, driven by both new product introductions and an expanding customer base. We are committed to further enhancing our presence in the antidiabetic market. Our pipeline includes several promising products that are currently under development, and we anticipate that introduction will continue to drive growth in the segment. Our goal is to meet the increasing market demand and to provide effective and innovative solutions for diabetic management. Now coming to the business outlook. Looking ahead, we are excited about our plans for FY '25, which include a CapEx of approximately INR 150 crores. This investment focuses on backward integration and new product lines, enhancing our production capabilities and introduction of high-margin products. The CapEx will be funded through a combination of internal accruals, term loans and a recent fund raise via convertible equity warrants amounting to INR 114.3 crores. These investments are aimed at driving future growth and ensuring we have capacity to meet market -- increasing market demand. Our R&D efforts also remain directed towards high-demand therapeutic areas, ensuring a robust pipeline that will drive future growth. We anticipate sustained growth in our key market segments, particularly in antidiabetic products and ibuprofen, supported by stable raw material prices and an expanding customer base. In conclusion, FY '24 has been a landmark year for SMS Pharmaceuticals Limited. Our robust financial performance, strategic focus and commitment to operational excellence positioned us well for continued growth and value creation for our stakeholders. Thank you.

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Yug Modi from AP Capital.

Sir, I just had a couple of questions. Sir, as you mentioned the ibuprofen segment has shown remarkable growth. What are your expectations for this segment in the coming quarters?

Thank you for your question. So definitely, I think ibuprofen quarter-over-quarter, again, as we discussed in the last conference call, we are adding more customers. And every quarter, we are adding more geographic segments as well. So definitely, there is a very big potential on this product. That's why we have done a very big CapEx in the last year on this particular product. Definitely, I think there is a good possibility of increasing it by 30% to 40% in the coming quarter. And quarter-over-quarter, definitely, you will see a growth for this next financial year.

Sir, the ARV segment saw a temporary decline in Q4. What measures are we taking to stabilize and grow this segment in the FY '25?

So see, the contribution -- see the sales from that segment are -- I mean, it's not degrown by much. It's like a very minor degrowth. But when you see the contribution probably has decreased from the total revenue, that is because like we've increased the total revenue, and we've reduced the dependency on the ARV products. So probably that contribution on the total has probably reduced. But as such, this thing has probably -- maybe marginal reduction, but not much. And also one more thing is ARV segment, we do on sale mode and job work. One quarter, we might have job work where that will not be contributing to the sale. And maybe in another quarter, we might be having a sale. So, end of the day, the qualities that we are manufacturing is more or less similar across all the quarters.

Okay. Sir, can you provide more details on the INR 150 crore CapEx plan for FY '25 and what specific projects or expansions will this CapEx end in?

So it is for general, like we have plans on hydrogenation block and a warehouse and a few other backward integration on a few of the key products. And like that, I think it's not INR 150 crores immediately. It will be stretched for a period of 8 to 9 months in order to meet our capacity and margin share.

Sir, lastly, what will be the expected time line for these new projects to start contributing to revenue? And what could be the possible asset turnover and margin profile for the same?

So we are anticipating the contribution to come in from next financial year, FY '26.

[Operator Instructions] The next question is from the line of Aditya Sen from RoboCapital.

Sir, more on the INR 150 crores in CapEx that is backward integration CapEx, right?

I'm sorry, could you repeat it? You broke off in between. Can you please repeat your question?

The INR 150 crore CapEx that we are talking about, that is a backward integration CapEx, right?

So it is a combination of multiple things, not only backward -- some for backward integration. The other one is we are building a new block for hydrogenation, dedicated block for hydrogenation and a warehouse for expansion and storing of raw materials. We are running short of space. And multiple segments, not only -- obviously, I think 50 -- more than 50%, 60% is towards backward integration, but the remaining 40% is for some other activities.

Okay. All right. And this will be funded from internal accruals?

Yes. As I mentioned to you, right, I think this will be funded through convertible equity warrants that has been issued to the amount of INR 114 crores and through working capital and through term loan as well and some through internal accruals as well.

All right. And about ibuprofen, how much revenue came in from ibuprofen in FY '24?

So it contributed close to around 19%, as I was explaining in my this thing, out of INR 700 crores, it's contributed to close to 19%.

19%, all right. And how much growth do we see in FY '25 in this product?

Definitely, I think we are anticipating to touch close to 25% to 28% in the next financial year.

25% of total revenue?

Yes, 25% of total revenue.

Okay. All right. And total revenue growth and margin growth that we foresee for the coming 2, 3 years, aspirationally?

So we are anticipating for the next financial year, maybe 20% to 25% growth on top line. And even the revenue also growth will be probably around 25% conservatively.

[Operator Instructions] The next question is from the line of Payal Shah from Billion Securities.

I have a few questions. First, how are you managing potential fluctuations in raw material prices and supply chain disruptions?

So with respect to raw material prices in fluctuation, to be honest, I mean, like over the last 6 months, not major, we've not seen any major fluctuations in raw material prices. I think few solvent prices have been increasing here and there. But when we are looking at it in most of the products, we are mostly not importing it. It's mostly procured locally out of India or we are manufacturing most of the products. So I think there's a very handful of products that we are importing from other countries. And like in our -- we have already signed annual contracts also for some of the key products that we are importing, annual contracts. So we are sort of protecting ourselves from this price fluctuation.

My next question is how has the focus on backward integration helped in managing raw material costs? And what further steps are planned in this direction?

Definitely, I think majority of our R&D budget is -- at least almost 40% of our R&D budget is being catered to try and see on cost optimization, process improvements, backward integration to make sure that we improve the margins. As you can see since last year, I think our margins have improved drastically because of our focus on this particular area.

Okay. Sir, my next question is, can you provide more insight into the increase in employee expenses and other costs in Q4? And how do you plan to manage these costs going forward?

So the employee expenses increased in the last quarter is the year-end provisions and some the managerial remuneration also.

Okay. And should we expect them to be at the similar levels going forward?

No.

No, no, no. You've only the onetime cost only. The only [Technical Difficulty] fourth quarter only, it can come.

Okay. And lastly, sir, could you elaborate on the growth drivers for the antidiabetic segment and the plans for new product introductions in this area?

Again, so we have -- with our existing product, we have a good market share in some of the regulatory markets. And going forward, I think a few more regulatory markets are opening up from the patent opportunity. So definitely, we will be launching this product once the patent has expired in those countries and definitely will be a good opportunity for us to increase our revenues.

[Operator Instructions] The next question is from the line of Ankur Agrawal from RC Wealth Solutions Private Limited.

[Foreign Language]

Can you repeat your question, please? We didn't get your question.

[Foreign Language]

No, we will go back to the 20-plus percentage as it was previously there. So EBITDA margins will definitely improve going forward.

And the volume will be increased also in the next financial year.

Yes. 100%. Definitely, I think if we are looking at an EBITDA of 20% plus this next coming financial year.

And last quarter INR 250 crores [Foreign Language].

Yes. So it is quarter-on-quarter, it changes, right? So first quarter is typically a little slow quarter. Second quarter picks up, third quarter picks up more as an incremental quarter-to-quarter. Definitely, those -- that fluctuation will be there. But yes, we are anticipating good revenues coming quarters as well.

Any dividend policy [Foreign Language].

So as I was mentioning in my conference call, I think we've announced 0.4 dividend. This is the highest that we've ever announced actually. So 40% dividend has already been announced.

And CapEx [Foreign Language] INR 150 crores or something like that [Foreign Language].

So our current asset turnover ratio is close to -- will be around 66% actually. Our current asset turnover ratio is around 66%.

Means INR 150 crores CapEx asset turnover [Foreign Language].

No. The incremental CapEx will be given to the more revenue as compared to the existing because it's a value addition to the existing revenues.

Okay. The margin will also increase?

Yes.

[Operator Instructions] The next question is from the line of Parag Someshwar from Equicorp India.

I have 2 questions. First, in Q4, your gross margin and resultantly, the EBITDA margin has come down substantially. So what are the reasons for the same?

Yes. So particularly in Q4, right? So the raw material prices have increased. Yes, yes. So raw material prices have increased a little. And also the employee expenditure also has increased a little.

No. I'm first talking about the gross margin before employee expenditures. The gross margin has gone to 26% against 32% almost...

It is purely because of raw materials solvent, sir.

Okay. So how do you plan to tackle this? And will you come back to 16% or 18% in Q1 itself?

Yes, we are anticipating that. But again, the market is very volatile because of the elections and all. I think the market is a little volatile right now. So we will not be able to -- it will probably settle maybe in the next 1, 2 months. But I think first quarter also, I think you will probably see that up and down in the market based on the solvent prices. But going forward, we are anticipating it to consolidate.

Just to reconfirm, you said for current year, that is FY '25, you are aiming for 20% to 25% sales growth. And PAT growth also similar, you aim to maintain this EBITDA margin of 16% that you registered for the full year or you will do more than 16% or less than 16%/?

EBITDA, we are anticipating it to be above 20%. We are planning to increase the EBITDA margin.

20% EBITDA margin, I'm talking.

Correct. Correct. EBITDA margin.

It will go up by 400 basis points in current year.

Correct. That's the target, yes.

And sales will go by 20%, 25%.

25%, yes.

Then your profit should go up substantially, not 20%, 25%, more than maybe 50%, even more than that.

Correct. We are giving projecting conservative numbers, but yes.

Okay. Second is, what is your current utilization overall?

It is close to around 65%, capacity utilization is around 65%.

Okay. So once you fully utilize the current capacity and after this CapEx is implemented, INR 150 crores CapEx, maybe after 3 years, what is the revenue sales that you can generate from the current capacity and the new capacity? And what could be the EBITDA margin at that point of time? So today, you are at INR 700 crores. Can you double in 3 or 4 years?

Yes, 3, 4 years, that's the target to reach around INR 1,200 crores to INR 1,300 crores. That is the target in the next 3 to 4 years. So yes, definitely -- yes, accordingly, I think EBITDA margins will be around 20%.

So INR 1,200 crores to INR 1,400 crores sales and 20% EBITDA margin. So this is what 3 to 4 years.

Definitely, that depends on the -- see, margin, EBITDA margin depends on the product mix. We are helping some commodity products where margins...

ARV will have a lower margin.

Yes, single digits. So again, it depends on some of our other products coming in, new products coming in, how they take off the market. So there's a lot of variability. But yes, 4 years is a big number to predict. But yes, that's the target to be there for us.

Maybe that in Q4 also that ARV would have played some part in reduction...

Definitely, definitely.

So the product mix would have affected the margin in Q4.

See, ARV is, again, as I repeated in my previous this thing. So for ARVs, we have 2 types of this thing. One is sale mode and one is contract manufacturing mode. So when we do -- when we export -- I mean, when we sell the product on contract manufacturing, it only adds to our bottom line. We do not get sales from that. So there, you will probably see some differences quarter-over-quarter, but the quantities are remaining intact. That's the...

So once -- maybe some tender sales come in, you will have a lower margin. When you do contract manufacturing, you will have a higher margin.

Yes.

Okay. And a couple of years back, you implemented a large ibuprofen project. Any other major thing on the drawing board?

As of now, we want to consolidate ibuprofen as of now. Maybe 6 months down the line, we can -- once we consolidate ibuprofen, we have -- we are looking at a few other projects that we'll let you know shortly.

Okay. So say 3, 4 years, INR 1,300 crores sales, 20% margins, almost INR 260 crores of EBITDA, we can assume?

Yes.

[Operator Instructions] The next follow-up question is from the line of Ankur Agrawal from RC Wealth Solutions Private Limited.

[Foreign Language]

[Foreign Language] But we are able to compete. We are able to get good market share even at those prices.

[Foreign Language]

Sorry?

[Foreign Language]

Yes, yes. Stabilized now. It's -- the prices are quite stable right now.

And is priced profitable?

Definitely, we sell products that are profitable, this thing only. Definitely, it's profitable even at this time of phase.

[Operator Instructions] The next follow-up question is from the line of Aditya Sen from RoboCapital.

Sir, what is the utilization of the ibuprofen capacity as of now, FY '24?

It's close to around -- entire year will be less because when you calculate the year in the year beginning, we hardly used it. So it will be a little on the lower side. But quarter-on-quarter, we've improved it. If you calculate average for the entire year, it will be around 25%, not more than that. Entire year because almost first half of the year, we've hardly commercialized the product.

And for Q4, if you can share?

Q4 will be around 40%.

All right. And in FY '25, where will it go, around 60%, fair to say that?

Yes, yes. Yes. We will definitely hit 65%. 70% is the target. But yes, I think conservatively, we can take 65% as a target.

[Operator Instructions] The next question is from the line of Raj Mehta from Wisdom Advisors.

Sir, a couple of questions. So how do you see the competitive landscape evolving in your key product segment? And what steps are you taking to maintain your market position?

See, I think some of the key products, for example, ibuprofen like we were one of the last entrants into this market...

The participant got disconnected. The next question is from the line of Ankur Agrawal from RC Wealth Solutions.

[Foreign Language]

So it is 36.5%.

Amount wise?

Amount wise, 45% -- around INR 45 crores.

[Foreign Language]

Sorry, I didn't get the question.

[Foreign Language]

So right now, it is around INR 96 crores, top line.

The next question is from the line of Ravi Shah from Opal Securities.

I have a few questions. The first would be, can you provide a little more detail on the factors that contributed to the significant revenue growth that we witnessed in FY '24? That's my first question.

Sure. So definitely, I think one major product, as I was highlighting in my con call speech is ibuprofen. I think we have increased quarter-on-quarter, month-on-month, the sales of ibuprofen have drastically increased. So that's definitely one major contributor where we've invested significant CapEx last year. So that's coming into play this year. So that's one point. And again, some of the tenders for the ERVs are back to the pre-COVID level. So that's one more important point that is there. And obviously, our antidiabetic segment doing quite well in some of the markets, that's stabilized, and that's been doing quite well. So that is also one of the major reasons. And our regular products definitely are doing quite well and niche products doing quite well. And in terms of volumes, we've almost increased, almost all products, we've actually sold more product in terms of quantity this year than the previous years. So all these are good growth drivers for our existing portfolio.

Sir, my next question is, given we had such a great performance for FY '24, what would be our revenue and profitability guidance for FY '25?

Again, for FY '25, we will -- we are targeting to achieve around 20% to 25% growth on the top line and definitely on the gross margins as well, anticipating more as well, 25%.

So you are saying there can be a gross margin improvement from here?

100%, yes.

And sir, last question would be, how are we managing the potential fluctuations in RM costs and given there are supply chain disruptions happening, et cetera. So how are we managing that, sir?

So with respect to raw materials, we are not importing majority of the products. So most of the products are bought locally or manufactured in-house. So for the products that we're importing, we have annual agreements with vendors. So -- I mean, we are not seeing drastic fluctuations, but some solvent prices, some raw material prices coming out of India, definitely, there is fluctuation because of the market -- current market scenario. But I think when we are factoring in the cost sales price, I think we are already factoring in some of these stuffs and we are quoting accordingly. So that's sort of insulated right now.

The next question is from the line of Raj Mehta from Wisdom Advisors.

So how do you see the competitive landscape evolving in your key product segments? And what steps are you taking to maintain your market position?

Again, so these are some of -- I've already explained in the previous question. I think some of the key products, I think, are some old products where we've established good market positions because of our relationship, because of our -- I mean, we are a 35-year-old company. So people know for regulated market, the quality is quite good and the quality of our products are quite good. So with that, we were able to crack a few customers, and we were able to get good market share in some of our newly launched products as well. So that's typically the way we are trying to keep up with the competition. Definitely, we launch at a very cost competitive price in the current market because most of the products, we are vertically integrated and our dependency is less outside. So we have a good -- and always, as I mentioned, 50% or 40% of our R&D work is on cost optimization, increasing the yields, batch sizes and things like that. So we try and see if, with the current pricing, how we can improve the margin. So that's what we are trying to do here.

And are there any specific markets or regions where you see significant growth opportunities in the near future?

Definitely, ROW is one market we are trying to target because that's U.S., Europe, we've been present since many years, but ROW markets have been coming up quite well going forward. So there is a lot of opportunity there. So we are trying to penetrate into more lower ROW markets in African regions and LatAm regions where we lacked a little presence. So that's our target focus area for this year.

And sir, one more last question. So can you provide an update on your R&D efforts and any new products in the pipeline? So how do you prioritize your R&D investments?

So again, as I was saying, 40% of our major focus will be on cost reduction, cost optimization, vertical integration, developing of backward integrated products for our existing products to make sure we achieve those. So 40% of our R&D work is dedicated towards that. And the other 60% is on new products and niche products. So we have a combination of both niche products and commodity products. So we sort of -- based on patent expiries and customer inquiries, we sort of prioritize the products accordingly.

[Operator Instructions] The next question is from the line of [ Raj from HM Financial ].

So I had 2 questions. So the first is what therapeutic areas are you focusing on for the future product development?

Yes. Mostly, I think, will be the existing therapeutic areas is what we are focusing on to add more products, newer generation products in the existing therapeutic areas because we have good market share and good presence in some of these therapeutic categories. So our main focus will be the existing ones. But we -- I mean, if there is some particular therapeutic area that comes up, that's like being an API manufacturer, right? So we don't majorly focus on therapeutic areas.

Got it, sir. And sir, another question was, what are the key risks you foresee in the coming year for the business? And how are you preparing to mitigate them?

Definitely, I think the pricing will be a key issue going forward always because market is becoming competitive day by day. Each quarter, the prices are coming down. So in order to meet that itself, we are looking at the various -- taking various steps to retain our market position, like backward integration, cost optimization. We are spending a significant portion of our R&D revenue on these aspects to keep our market position intact in at least the key products of ours. So there's no -- like in the last 2, 3 years, there's no product where we lost market share because of the price. We were able to keep this up because of our R&D efforts.

Thank you very much. Ladies and gentlemen, that was the last question for the day. I would now like to hand the conference over to Mr. Vamsi Krishna Potluri for closing comments. Over to you, sir.

Thank you, everyone, for joining this call. We are thrilled with our record-breaking performance this year, which highlights our strategic focus and operational excellence. As we look ahead to FY '25, we are excited about the opportunities that lie ahead. Our commitment to product innovation and operational efficiency and market expansion will continue to drive our growth. We remain dedicated to delivering value to our shareholders. Please reach out to our IR consultants, SGA, or us directly should you have any further queries. Thank you again for your time today. Thank you.

Thank you very much, ladies and gentlemen. On behalf of SMS Pharmaceuticals Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.