SMS Pharmaceuticals Limited (SMSPHARMA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to SMS Pharmaceuticals Limited Q1 FY '25 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantee 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 Naryana Tammineedi, Chief Financial Officer; Mr. Tirumalesh Tumma, Company Secretary and Compliance Officer. I now hand the conference over to Mr. Vamsi Krishna Potluri, Executive Director. Thank you, and over to you, sir.

Good morning, ladies and gentlemen. Welcome to our first quarter FY '25 conference call. It's a great pleasure to have you all here and I hope you and your families and your loved ones are all in good health. 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 proud to report that SMS Pharma began the financial year on a strong footing, marked by a healthy demand for our products and growing market opportunities. We have capitalized on new opportunities to fuel growth and a diverse portfolio of high-volume and high-value products is performing well. With increased healthy demand for our products and off-patent opportunities in the short term, we anticipate multiple growth opportunities over the next 3 to 5 years. Regarding our financial performance in Q1 FY '25, I'm pleased to announce that our revenue from operations has increased by 22% year-on-year to reach INR 164 crores due to higher volume growth of our key APIs. Sequentially, revenue from operations was lower by 33% due to seasonality. Notably, our gross margins remained strong at 35%, up nearly and sequentially, which can be primarily attributed to lower raw material prices and improved product mix. This, coupled with operational efficiency, translated into an EBITDA margin of 20%, up by 104 bps from a year ago and 670 bps higher sequentially. This reaffirms the long-term strategy we have in place, and it is noteworthy that our margins have returned to pre-COVID levels. PAT for the quarter was INR 16.48 crores, up by 76% year-on-year, primarily due to higher EBITDA and lower financial costs, which resulted in a PAT margin improving to 10% in Q1 FY '25 versus 7% in Q1 FY '24. Now coming to our segmental highlights. Our revenue growth was led by robust growth in anti-diabetic and ibuprofen segments. Sales of ibuprofen have shown continuous growth, supported by stable raw material prices and expanding customer base, increasing traction with our existing customers and optimized production. Our anti-diabetic segment portfolio has positioned us as one of the largest suppliers of one of the anti-diabetic products in Europe with over 50% market share. We witnessed strong growth in our anti-epileptic and anti-ED products, which we expect to continue. Our other therapeutic categories continue to do well, characterized by our consistent influx of new customers. Our strategic focus on backward integration is progressing as planned. The company is poised to capitalize on the INR 150 crore CapEx plan announced in the last quarter. We are on track to complete the backward integration of key intermediates by first half FY '25 and increase the production capacity by end of Q4 FY '25. This will help us increase the production of existing and new products. Our R&D efforts also focus on high-growth therapeutic area, ensuring a robust pipeline to drive future growth. The Board of Directors has principally approved our decision to set up a subsidiary company in India for Contract Research, Organization, CRO, services for peptides, which we believe shows high growth potential. As we firm up our plans, we will provide an update on this new venture. We anticipate sustained growth in our key market segments, particularly in ARVs, anti-diabetic products and ibuprofen, supported by stable raw material prices and an expanding customer base for the rest of the year. Our current capacity utilization is within the range of 80% (sic) [ 70% ]. And by end of FY '25, we anticipate crossing utilization rate of around 80%. Looking ahead, SMS Pharma remains committed to enhancing its portfolio and meeting its customer evolving needs. The company reiterates its guidance on achieving revenue growth of 20% and an EBITDA margin of 20% in FY '25. Thank you. We are now ready to answer any questions from you.

[Operator Instructions] The first question is from the line of Pradeep Rawat from Yogya Capital.

So my first question is regarding the ibuprofen business, sir.

Can you please come a bit closer to the mic?

My question was regarding the ibuprofen business. So who are our major competitors and where are they located? And can you quantify as to how much cost competitive can we be against the competition?

So I mean, of course, thanks for your question. But I mean, I cannot take the names of other companies, but there are 2 major competitors operating out of India and one is from South India and another is from northern part of India. And in terms of competitiveness, definitely, I think we are improving our cost on our product, particular product. And we will be one of the most cost competitive products in the market in the next 1, 2 quarters.

Okay. And we are doing a INR 150-crore CapEx for backward integration. So can you quantify how much gain in EBITDA can we see from this CapEx?

Again, so our growth of EBITDA that we were anticipating the growth in EBITDA margin, right, by 20%. This is mostly attributed for this backward integration project itself. Because our sales prices are remaining stable. And once we reduce our raw materials, once we vertically integrate, this margin will be directly adding to our EBITDA, which will be around 20% than previous year.

Yes. So what was our sustainable margins earlier?

Last year, it was 17% EBITDA margins.

Okay. So 2 point -- like 3% percent margin increase would be primarily attributed to this CapEx.

Yes.

And how much CapEx are we doing for the CRO business, CRO subsidiary?

So it's not envisaged yet. It will be a smaller one. It's not going be a major investment upfront. It will be a smaller this thing, but due details will be given in later course of time. It's at a very, very preliminary stage right now. So more details will be given subsequently.

The next question is a follow-up from Pradeep Rawat from Yogya Capital.

I have one question. So we have an associate company as VKT Pharma, and we sell API to them for making formulation, right?

Correct.

Sir, any plan to merge this associate company with our company?

No, there are no plans of merging.

The next question is from the line of Surbhi from NV Alpha.

I wanted to know what is our ibuprofen and non-ibuprofen mix in the Vizag facility. If I'm not wrong, we have around 4,000 kiloliters, of which around 1,000, 1,500 would be ibuprofen?

Yes, that's right. Approximately around 1,500 yes.

Sir, then from the non-ibuprofen mix, what is the key therapy areas that we do in the Vizag facility?

Anti-diabetic is one of our key therapeutic areas, a part from ibuprofen, and anti-ARV products, anti-retroviral products, are key areas.

And what is the margin differential between, say ibuprofen versus an anti-diabetic [indiscernible]?

You cannot compare margins because they are 2 different therapeutic categories, right? Within the therapeutic category, probably it will be a better indicator. But definitely ibuprofen margins will be on the very low side because this being a commoditized product, right? So it'd be definitely much lower. And again, even anti-retroviral also is the CMO, it's not -- so it's CMO based. So margins there also will be quite thin.

So will it be like mid-teen margins in like some of the key anti-diabetic APIs?

Yes, I think you can say a mid or lower teens actually.

And secondly, I had a question in terms of the current CapEx that we are doing, it is going towards, sorry, I think, I missed that?

The current CapEx is towards capacity expansion and backward integration of some of our key products.

Okay. And what percentage was U.S. from the regulated market in this quarter?

I'm sorry, what is the?

In the geographical diversification, what percentage was U.S. from the regulated markets, because I think we've shifted from U.S. to Europe in terms of the regulated market? Like in '21, '22, we had 57%, 60% coming from the U.S. regulated markets, which I think now is going largely towards Europe, if I'm correct?

Correct. Yes. Yes. This quarter, the majority of our sales were in anti-diabetic and yes, it's mostly being dominated by Europe because we are one of the largest in anti-diabetic in Europe. So major sales have come from that segment this quarter.

So do we expect it to go back to U.S. or like we are comfortable with Europe regulated market?

It will be a combination of both. See for us, both U.S. and Europe, both are regulated markets. So we don't categorize U.S. separately or Europe separately. Both U.S. and Europe are regulated markets for us. But yes, it will be -- one quarter probably U.S. will be higher. It depends on the demand that's coming in.

Okay. And one last question. How many of our products are backward integrated to the key KSM level? Say I think we have around 35 products. How many of these products are backward integrated to the KSM stage?

Around 5 to 6 products.

The next question is from the line of P. Srihari from PCS Securities.

So my first question for ibuprofen, if you can indicate the volume shift sequentially. And for your backward integration projects, while on I presume is IBP, can you please talk about the other projects on the backword integration front?

So can you please repeat your first part of the question, you were not very audible.

Yes, ibuprofen volume. I mean, what is the volume shift from Q4?

So Q4, I think we are right now doing close to 350 tons per month as on date.

Yes. I mean, what is the delta? I mean, was there a growth or a degrowth?

I think delta we were doing [ 150 to 200 ] range before. So we almost increased 100 tons a month.

Okay. That answers it. And on the backward integration project, which are the other projects apart from IBP?

So our other projects are mostly related to sitagliptin and tenofovir.

Okay. TDF?

Yes.

The next question is from the line of Karan from Invexa Capital.

Sir, in one of the slides, Slide #15, where you have mentioned that you aim to add around 8 to 10 products in the next 12 to 18 months. So can you give a brief about what sort of therapeutic areas these product would be?

So we'll let you know. It's a little confidential information because we don't put out the names of the products before it's developed, right, because of confidentiality. On these calls, we don't give out the names of the products that we have on the pipeline or under discussion. But you will probably know shortly once we commercialize them.

Sir, but would those products be in the same existing therapies which we are or it would be in the new therapies?

No, no. Existing therapies, most of them are existing therapies, yes.

Okay. And sir, with these new products which we would add in, say, next 1 to 2 years, so with all these products getting commercialized over a period of time, can we say in next 3 years, we can double our top line from the INR 700 crores to almost INR 1,400 crores or near about there?

Again, it depends, right? Because all these products, patents might not expire by that time because we typically work on products where patent expires 10 years down the line or 7, 8 years down the line. So you cannot attribute all the growth to this. But definitely, I think, year-on-year, our target is to improve at least a minimum of 20% to 25%. So that's what we've done last year to this year, and I think going forward that's our target, at least grow by 20% year-on-year, a minimum of 20%.

And sir, on this INR 150 crores CapEx which you have said that is mix of backward integration plus new capacities getting added. So can you give a breakup between how much is for new capacities and how much is for backward integration?

So that we cannot give a finer this thing. Probably percentage-wise, I think maybe 70% will be for backward integration and I think around 30% for capacity expansion for the existing products.

Okay. And sir in one of the slides, again, which I think Slide #13, you have said that under antidiabetic category, you plan to commercialize new production under the JV with Chemo. So is this the same 30% which is getting utilized there?

I'm sorry, could you repeat it again?

In one of the slides, Slide #13, you've said that you plan to commercialize a new production block under JV, which is with Chemo.

Correct.

So this 30%, which you said, will go into existing products, but new capacities. So does that correlate with the same Chemo JV?

Yes. It's part of that only.

Okay. And sir, one last final question. So we have incorporated a new CRO subsidiary, and we already do CMO for ARV products. So over the next 2 to 3 years, are there any plans of the company to enter into the CDMO segment where we get fully integrated from CRO to CDMO?

Yes, this is the eventual plan, but I know CDMO and CRO are a very fancy terms that a lot of companies are throwing it out, but definitely that's even into our consideration. But at this point of time, we want to take it slow and maybe in future, yes, definitely. If the opportunity arises, definitely we will be there. But that is not a very active interest for now. But for sure, definitely, we'll keep an eye open and if definitely some projects come in, we'll definitely look into those,

The next question is from the line of RVG Krishna from Sri Venkateshwara Enterprises.

Can you just explain about the primary drivers of the revenue growth which are about to happen next quarter. And also, how do you plan to manage the rising cost and improve your profit margins going forward?

So, again, the major revenue drivers currently are with respect to our existing products like anti-diabetic segment has grown significantly for us and anti-ARV products also have grown and also ibuprofen, we've added more customers in different, different geographic areas, we are adding more customers, new registrations are being done as we speak. Many more registrations are happening and slowly one by one, month-on-month, we add new customers to those. So the growth is definitely our existing products where we are adding more customers accordingly. And coming to the margins, as we mentioned, I think of INR 150 crores of CapEx, INR 70 crores is being done on backward integration. So we are trying to see where we reduce our dependency on some Chinese customers, and we want to bring these products to India. And apart from captive consumption, we have plans to offer some of these KSMs also to Indian manufacturers, API manufacturers. So this way, we want to increase the EBITDA margins going forward.

[Operator Instructions] The next question is a follow-up from the line of P. Srihari from PCS Securities.

In regards to sitagliptin and TDF backward integration, [indiscernible] please share how many steps in fact what you're integrating? And if you could quantify the commercial benefit from these 2 ventures?

Can you please repeat it, please? Can you please repeat your question?

Yes. How many steps backward are you integrating for the 2 products? And what is the commercial benefit?

Again, as I mentioned, right, I think in the past, we were only doing maybe 2 stages. Right now, we are planning to do around 8 stages in-house for sitagliptin. So definitely, there will be -- I mean, I cannot give you a number of what is the benefit we will be getting. But definitely, I think going forward, that will sort of help us to grow our EBITDA margins.

So basically you're backward integrating by 6 steps in sitagliptin?

Yes.

And what is the case with the TDF?

I'm sorry.

TDF, tenofovir.

So tenofovir also I think 1 or 2 stages, we would like to backward integrate. Mostly, see, it's apart from EBITDA increase, again, we are looking at opportunity where we reduce our dependency on China and other countries where we are doing some of these -- bringing in some of these intermediates. And we want to put them in-house because of the geopolitical situation and a few other aspects.

Okay. When I said commercial benefit, I mean, if you can just give an example, I hear some from that?

See, I cannot put out numbers with respect to commercial benefit. I cannot tell you numbers, this or that, we will be able to make, so and so money, I mean, quantum. I cannot quantumize this number.

No. I mean, let's say from the market price point of view, the intermediate #2 and intermediate #8, you can tell the price differential between the 2.

So definitely, there will be a price differential because largely -- see it's make versus buy, right? So when we're obviously making it in-house rather than buying it from outside, definitely, there is an improvement in the margins. For sure, there will be an addition in margins, I think, which we are anticipating an EBITDA growth of 20% going forward. See when my selling price remains same and even might depreciate a little also based on the current scenario, but still we are able to achieve those margins, trying to see what best we can do by backward integrating.

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 on this call. As we continue to focus on delivering value to our customers and driving innovation, we are confident that our strategic approach will continue to yield positive outcome and contribute overall success of our company and ensuring that we deliver superior value to our stakeholders while upholding our commitment to sustainability. Please reach out to our IR consultants, EQSPONENT Partners LLP or us directly should you have any further queries. Thank you again for your time today. Thank you.

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