SMS Pharmaceuticals Limited (SMSPHARMA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, good afternoon, and welcome to SMS Pharmaceuticals Limited Q2 and H1 FY '27 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 guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. Also today, we have with us Mr. Vamsi Krishna Potluri, Executive Director; Mr. Lakshmi Narayana Tammineedi, Chief Financial Officer; and Mr. Manohar Mallama, 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.

Hello. Good afternoon, everyone, and thank you for joining us today. detailed press release and investor presentations have been uploaded on the stock exchange and our website. We maintained our growth momentum in Q2 FY '27 and delivered a strong operational and financial performance. Revenue grew 30% year-on-year to INR 316 crores. This was driven by higher volumes, improved price realization and continued growth across our product portfolio. Backward integration gives us a structural cost advantage, not a temporary pricing benefit. -- and this quarter shows that clearly. It reflects 5 years of investments in backward integration and capacity building. And we will keep investing in backward integration across our core portfolios. Let me now take you through the key financial highlights. In Q2 FY '27, revenue from operations stood at INR 316 crores, a growth of 30% over Q2 FY '26 and 53% over Q1, driven by strong volumes and improving price realization. Gross profit, including manufacturing expenses rose 41% to INR 111 crores in and gross margin expanded to 35%. EBITDA stood at INR 68 crores, a growth of 40% with margins expanding 145 basis points to 21%, aided by operating leverage. PAT grew 57% to INR 39.6 crores, a PAT margin of approximately 13%. The trend over the last 3 quarters is clear. The gross margin has moved from 34% in Q4 FY '26 to 36% in Q1, and 35% this quarter. This was slightly below Q1, but well above the 32% a year ago, driven by backward integration. EBITDA margins have moved from 17% to 20% and now [ 20% ] driven by operating leverage. For H1 FY '27, revenue grew 19% to INR 523 crores. EBITDA grew 24% to INR 109 crores, a margin of 21%. PAT grew 36% to INR 59.8 crores including our share of KD profit, net profit grew 33% to INR 60.8 crores. Moving to our performance by therapeutic area. Our growth this half was broad-based. ERV and incrementally led the way in first half, ARVs grew 47% to INR 150 crores on market share gains. And anti-incrementary grew 25% to INR 110 crores on ibuprofen demand from regulated markets. Our other service areas also contributed. Anti-migraine grew 32% and the applied 44% and the NGL 45% and across the portfolio, high-value APIs continue to climb as a share of our revenue to 49% in the first half from 47% in FY '26. We are growing our market share in products where economies of scale and backward integration gives us a structural advantage. I will now share some key updates on our business. Starting with R&D. Our team has over 200 professionals and completed 19 DMS and CEP filings over the last 24 months. We continued that momentum into this quarter. So far, we have completed 6 filings, 4 in the first half and 2 more in October, well on track for our FY '27 target of 10. They cover anti-ulcer anti-migraine antidepressant antifungal anti-fibrotic Bs. As a result of these APIs, we now expect 6 to 8 new molecules to start commercial production in FY '28. As we scale up over the following 6 quarters, we expect them to be EBITDA accretive and to diversify our revenue. On [indiscernible], we expect to complete our remaining CapEx in the coming quarters. This will take our total capacity to 9,600 tonnes a year, and the volumes will ramp up gradually over the next few quarters. Turning to our CapEx program. We have deployed INR 160 crores of the INR 180 crore program so far, and the program remains on track for completion by FY '27. It adds capacity for a few of our existing molecules and for the 6 to 8 new molecules in our pipeline. Coming to peptides and CDMO, we have set up SMS peptides, Private Limited, a 99.9% own subsidiary to build a dedicated peptide business. Its peptides R&D facility is now fully operational to support its expansion, the Board recently approved a loan of INR 50 crores to the subsidiary. [ Talanscale ] production is targeted for Q4 FY '27, and we expect our first CRO revenue from it in Q2 FY '28. We have also set up SMS Kolab Private Limited, a wholly hole subsidiary as a dedicated CDMO platform for APIs and petites. Finally, let me turn to our outlook. For FY '27, guidance was revenue growth of 15% with an EBITDA margin of 20%, with pricing in our key APIs expected to remain stable in the near term. And on the back of a strong first half and the outlook for the rest of the year, we now expect to exceed both. Thank you. With this, I would request the moderator to open the lines for any Q&A.

[Operator Instructions] The first question is from the line of Nirali Shah from Ashika Investment Managers.

And firstly, congratulations on the great set of numbers. I have a couple of questions. Firstly, on the peptide side. What kind of customer engagement are we seeing at this stage? And what would need to happen for peptides to become a really meaningful revenue contributors over the next 2 to 3 years?

Thank you for your question. So right now, peptides, we are evaluating 2 opportunities, 2 legs right now. So the first 1 would be generic peptides. So that -- so there are different type of peptides that we've selected, some range from GLPs too, we are looking at cosmetic peptides as well. So that is a more genericized field. And really, at the same time, we are looking for CRO and opportunities at peptide scale, starting off with IRC tire customers and then probably proceed the ladder for a tire customer, because this is the first 1 we are getting into CDMO activities that will be starting with that time. So it might take a little while for us to attract the real top names in the industry to come and work on CRO and CDMO with us. But definitely, I think in the next 2 to 3 years, we anticipate a meaningful revenue coming out from the peptides.

Okay. You mentioned the authentic peptide side. So if you could help me understand what kind of margins are available in this kind of price?

No, it's too early, to be honest with you right now because we've just started off our R&D maybe few months back. So it's too early for us to let you know what kind of margins would be there on the -- so typically, peptides have a decent margin with respect to, I think, 40% plus margins are available to.

Fair enough. Secondly on our ibuprofen business -- some more color on how the volume ramp-up is progressing and what is the current utilization level?

Right now, the utilization level is at 90% right now, 90% to 95%. So we are at full -- we're running at full capacity right now. Then at the same time, we are doing another continuing our existing CapEx to improve capacity for the 9,600 metric tons. So this is anticipated to be completed in the next coming few quarters. Once that is done, we'll be slowly ramping up the capacities. But we have enough customer orders and customer interest to take care of this existing capacity.

So sir, any time line on the volume scale up? And how should be the profitability profile of this business?

Again, it's a step up sort of -- it's an incremental growth that we'll be doing. Right now, we are currently doing almost 450 tonnes per month, 450 tonnes to 500 tonnes. But I think slowly in the span of 6 to 9 months, I think you will see a full utilization of 9,000 90% occupancy of 9,600 tonnes in the span of 6 months, 6 to 8 months.

The next question is from the line of Raj Agrawal from Naishi Asset Management.

Thank you so much for the opportunity, and congratulations on good side. I just wanted to understand on the ibuprofen side. So some of our peers are shutting down capacity and our focus is also moving towards U.S., European market. And also we are now doing some ibuprofen derivatives. Is there a scope for pricing to also improve and I hope.

Yes, definitely. I think definitely, if there is a possibility of a price improvement on ibuprofen. And typically, for these commodity products, it's always cyclical. There will be a time in a year when you can -- the margins will really go up. But the remaining time, the margins will be slightly lower. But it's a cyclical product and it goes through many predicate been since many years, the product in the market. So it goes through multiple phases. There'll be uptrade they be down phases. There'll be shortages, there'll be overcapacity. So definitely, I think we are seeing all these places, and definitely, we are equipped to handle all these sales at this point of time.

Sir, another question on basically, how would you now rate SMS cost structure in Abu compared to your peers since basically we have integrated plant, you have basically also alluded to a new process. So -- is there any scope to now even improve the process for the peers also added capacity. So how would you rate SMS cost structure in idugrofen compared to peers in India or global?

Thank you for that question. But see, to be honest, we don't know what the product and how would they are manufacturing. But 1 thing from our can tell you, we are 1 of the best -- from our point of view, we are 1 of the best manufacturing processes in the market for ibuprofen. And definitely, it's cost improvement process. As we go and we take out more batches, batch sizes are growing our batch size close to 10 tonnes right now. And we try to invent and try to see if there could be some reduction. So it's an ongoing process. There's no end to that process, which you keep trying to see if we can look at user costs on a product like this, especially.

And just 1 last question. I think you already basically answered a part of it, but basically, just wanted to understand on the peptide side if you can give some kind of sense on what are the number of scientists today, what would be that count 1 year down the line, in what geography do we want to do with that time business. Just want to get a sense how are we basically thinking about it? How would this business look 2 years down the line?

So definitely, I think from SMS's point of view, we are going to give a lot of emphasis on the peptide part. Right now, we have around 30 cash, most of them -- and technically, I think there is a recruiting process still onward because also considering the fact that we just started a R&D few months back. So the recruiting process is still ongoing. Again, it's heavily new. But again, we have a CEO for peptides dedicated CEO for peptides. And there is a different team and division that is working extracting we think the tide will be a good part of SMS revenue going forward. It will take 1 to 2 years, yes.

The next question is from the line of Maria from Nivesh.

So sir, just a follow-up on the previous question. But how much margins like we make in the adipokine business, and also, are we into like the standard hydropropine or we are also into derivatives because. I think the peers in the industry have been doing well in the derivatives as well and that's leading to good margins comparatively to the standard argiprofine. So if you can give a understanding on the margin side of hydroprop, that's my first question.

Yes. Thank you for your question. So with respect, we cannot disclose the exact profit margin on ibuprofen on a call like this, for sure. But definitely, I think our EBITDA margins are in the teens that much we can tell you on this particular product. And with respect to other products, we have a few other derivatives of ibuprofen. We have multiple sales of ibuprofen. Everything that's available in the market. We are currently already validated in CPS and DM has already filed. And definitely, margins on those are much, much higher compared to the regular input. And volumes of those products are much lower compared to the regular iduront.So they will sort of offset each other.

Got it. But will it be more than what we are doing at the consol level, the margins which we are doing at control level, ibuprofen margins are higher than that. Am I right?

Sorry, could you repeat that?

I think that Leo is it higher than what we are doing at a consol level, the margins which we make at control level. Does the IV growing margins are higher than that?

No. It will be more or less similar to the 1 or more or less similar in that range because, yes, that's a big enough product that contributes, right? So I think it's a similar range.

Got it. And also, sir, like because in the last few calls, you mentioned that we are like because of the backward integration, we would be able to see the like benefit on the margin side on the because of the backward integration in the ibuprofen. So by what time we will be able to see that benefit and how much it will be if you can say on the portended, like how much impact did you create on our margin side for the icing.

So definitely, see, before the backward integration was below 10% margin. So definitely, I think all the backward integration, part of the backward integration work is already done -- and see more important than the margins the stability on the product. So now we are not dependent on anyone else right now because if the current situation in global scenarios, the prices have escalated so much. If we were not backward integrated, we would have been caught napping, and we wouldn't have we wouldn't actually have the product to the intermediate to actually manufacture ibuprofen. Fortunately, since it's backward integrated and we have the control on the intermediates, now we are able to successfully deliver ibuprofen and okay, putting the profit aside, which all definitely going to improve. But the stability on the product and the control on the product that we currently have is a big advantage for SMS at this point of time.

Got it. And just, sir, second question I have on the peptide side. Basically, you mentioned that we are doing centric peptide, including GLP and cosmetic, that, right? Like just wanted to understand that initially are we targeting the domestic players and all the -- like on the export market and also because mostly, we are at the R&D play, so we must have sinusamples to our customers like the potential customers. So what are the feedbacks which are we are receiving from them? And what time line like from the feedback and from the industry understanding that how much like time line, we can assume for the ramp-up of this peptide business.

Yes. Again, as I mentioned, right, we just started the R&D a couple of months back. So definitely, we'll not sent out any samples as of now because the developments will take time, right? So again, as indicated in my presentation, I think we will be ready with pilot level samples only by Q4 FY '27. So we still have some time. So we've not sent any samples as such to any of the customers yet. But definitely, we'll be targeting domestic and international both the customers. And definitely, there's a lot of interest from the U.S. customers also coming in based on some of our trade shows that we attended.

Got it. But even on the CMO side or CDMO side, we are not having any customer on board like or any negotiation or any conversations going on with any customer?

Again, as of now, we've not set up the facility yet, right? So without the facility or the R&D, there will probably not be any discussions as of now, yes.

The next question is from the line of Vignesh from Sequent Investments.

So my question is what is what is the total amount of CapEx that we have already done in the first half? And what is the amount that we are going to spend in the second half?

Yes. So the total CapEx is for INR 280 crores, and we've already deployed around INR 160 crores as of now. So another INR 120 crores will be deployed before end of this financial year.

Okay. Sir, would it be fair to assume that provides debt level by the end of FY '27,

Repeated in slowly because we might be to hear.

So I was saying continuing the price of APIs are also increasing, and the need for working capital like ad and also continuing the CapEx, would it be -- can you give a number of what our peak debt would look like by end of the year?

I'm sorry.

Peak level of debt that you will reach by end of the year considering we have a CapEx plan as well as higher working capital requirement.

So both put together will be around INR 400 crores by end of this year.

you're talking about, right?

This is long term and short term both.

The next question is from the line of Nirali Shah from Ashika Investment Managers.

Thank you for the opportunity again. Sir, 1 question is on our partnership with chemo. Can you elaborate more on that?

I think this has been in the paint been ongoing it's almost 10 years from now. So we developed a lot of products under the JV partnership. -- all the scales and the frozen and a few other products are developed on this partnership. And there's a profit share between both the companies that happened. So joint development in the joint marketing in.

Okay. And lastly, -- if you were to identify our biggest growth driver for SMS over the next 3 years beyond the opportunities that are already visible today. So what would that be? Where do you think the I can ask that the I think -- sir, opportunities beyond the ones that are visible today, what would be the biggest growth driver for SMS over the next 3 years?

So definitely, every once we are consolidating our existing business. And I think 1 very strong growth driver that we're still entering is I think that peptides is 1 big area that we would like to focus and try and see if we can get some good opportunity and good customers there. Because we have a very strong team on peptides, and we believe that we have a good advantage on that side. And it's fairly early. I know a lot of people are working on teeth competitively, we're fairly early into the peptides market at this point of time. So we have a good strong team that's working on some of our peptides. So we fairly understand that's a good growth for us.

Sir, I believe in FY '29, there is this page coming also in tepid -- that is -- that could also be a very huge opportunity for us, right?