Sudeep Pharma Limited (SUDEEPPHRM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Sudeep Pharma Limited Q2 and H1 FY '27 Earnings Conference Call hosted by 360 One Capital Markets Private Limited. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. Rohit. Thank you and over to you sir.

Thanks, aging. We thank Sudeep Pharma management for providing us the opportunity to host their 2Q FY '27 conference call. We have with us Mr. Shanil Bhayani, Whole Time Director; and Mr. Ketan Vyas, Chief Financial Officer from Sudeep Pharma. I would like to hand over the call now to Shanil for his opening remarks. Post which we'll have Q&A session. Thanks, and over to you, sir.

Thank you, Rohit, and thank you to the 361 team for hosting today's call. A warm welcome to everyone joining Sudeep Pharma's Q2 and H1 FY '27 Earnings Conference Call. I trust you have had the opportunity to review our results and investor presentation. I will begin with our operating performance, followed by updates on specialty ingredients, Pharma Food Nutrition and Battery Materials Business. We are pleased with our performance this quarter. Q2 marked our highest ever quarterly revenue and EBITDA, supported by strong growth in our core business and improvements in both gross margin and EBITDA margin. Revenue from operations reached INR 196 crores, growing 21% year-on-year and 24% sequentially. EBITDA stood at INR 73 crores, up 32% year-on-year. Gross margin improved to 64.7% compared with 62.5% a year ago, while EBITDA margin increased to 37.2%, an improvement of over 300 basis points. PAT stood at INR 51 crores, growing 11%, reflecting a higher effective blended tax rate together with lower other income. Ketan will explain this in more detail. These results reflect healthy customer demand and improving contribution from higher-value products and continued progress in manufacturing efficiencies. The principal operating challenge during the quarter was logistics, particularly elevated sea freight costs. Our selling and distribution expenditure was approximately INR 8 crores above the normal quarterly average, largely because of freight. We observed these costs without passing them on to our customers to honor our commitments and ensure on-time deliveries. Despite this additional expenditure, we were able to improve our operating margins. Let me now turn to Specialty Ingredients, where accelerating growth is a key priority for us. The revenue stood at INR 54 crores up 9% sequentially, although 25% lower year-on-year. Accelerating growth in this segment is a key priority, and our focus is on translating recent customer approvals and contracts into revenue and profitability. Two factors affected the segment's performance this quarter. First, the government of India's Fortified Drive program, which is a significant contributor to this segment has temporarily been posed. Procurement typically begins in August or September and contributed to Q2 revenue last year. That contribution was absent this quarter. And we currently do not have visibility on whether the program will restart during this financial year. Second, NSS had a softer quarter with lower revenue and earnings. Despite these factors, we have good visibility into Q3 and Q4 through customer contracts and new approvals. During Q2, we received approvals from large customers across infant nutrition dietary supplements and human nutrition with commercial revenue expected to begin in Q3. These approvals expand our presence with large customers and provide opportunities to build recurring volumes across multiple applications. As these contracts begin contributing, we expect Specialty Ingredients to return to positive year-on-year growth in Q3 and Q4 and make a stronger contribution to overall profitability. Importantly, this expectation is based on customer contracts and new business alone and does not assume a restart of the fibre program. At NSS, we continue to strengthen the project pipeline. NSS has secured 5 customer approvals and has approximately 12 customer projects at different stages of evaluation and development. we are broadening its customer reach beyond Ireland and ingredient sourcing from India where it improves competitiveness and operating flexibility. Our focus is on converting these projects into regular commercial business and the progress so far gives us confidence in a stronger FY '280 for MSS. Across specialty ingredients , the priority is clear: execute the contracts already secured, build the volumes with newly approved customers and improve the contribution of the business to consolidated growth and profitability. Turning to Pharma food nutrition. The business delivered an excellent quarter and demand continues to strengthen. Revenue grew 57% year-on-year to 142 crores, contributing approximately 13% of consociated revenue. Segment EBITDA margin increased to approximately 41% from 33% a year ago, while segment EBITDA nearly doubled. Growth was broad-based across India, Africa, APAC and Europe, supported by our phosphate portfolio, new customer additions and a growing contribution from higher-value ingredients. In India, demand from pharmaceutical customers remained healthy across our core mines ingredients across our core mineral ingredients. Africa and APAC benefited from new customers and opportunities across pharmaceutical applications and food fortification. In Europe, our direct commercial presence in helping convert customer approvals into regular orders and deepened relationships with existing accounts. With our current facilities operating close to optimal utilization, additional capacity is an important next step. It gives us the ability to respond to demand, increased volumes with existing customers and participate in larger supply opportunities. This is where our greenfield facility at an andesite becomes particularly important. During the quarter, the facility received FDA approval marking a significant milestone. With annual capacity of 51,000 tonnes, it provides substantial headroom across our existing PFN portfolio and newer product categories, including lysinates, gluconate, citrate and phosphates. The approval strengthens our ability to pursue a larger share of business from major customers who already know our products and capabilities. For these customers, having additional approved capacity gives us the opportunity to bid for larger volumes and take a greater share of the requirements. Customer qualifications are underway, and we expect commercial supplies to begin in H2 FY '27 with utilization building as these qualifications convert into orders. Within [indiscernible] magnesium glycinate is a product category we are particularly encouraged by. Our absorbing range continues to grow strongly. As we mentioned on the previous call, Q1 sales have already exceeded sales for the whole of FY '26 and the momentum continued in Q2. We see scope for significant sequential growth at customizations and approvals translate into commercial volumes. Magnesium with [indiscernible] builds directly on our expertise in mineral chemistry and our relationships with pharmaceutical diet supplement and nutrition customers. It also supports a higher-value product mix with average realization more than 3x the average of our PFI portfolio. We plan to introduce a dedicated brand, [ MagZobis, ] to strengthen the product visibility with supplement and nutrition customers. The greenfield facility includes dedicated glycine capacity, giving us the manufacturing base to support this opportunity. With growing customer interest, progress in approvals and additional capacity becoming available, we are optimistic that magnesium bisglycinate can become one of the top 3 revenue contributors within BFN over the next 2 to 3 years. Our focus will be on building that position through consistent quality, customer relationships and reliable supply. Finally, let me turn to Sudeep Advance [indiscernible] , our Battery Materials business. The [indiscernible] project continues to progress, and we remain confident of commencing commercial operations in April 2027. Phase 1 will have an annual capacity of 25,000 tonnes of battery-grade iron phosphate, a key precursor in the LFP battery value chain. Our immediate focus remains on project execution, product qualification and customer readiness, so that commissioning is followed by a steady buildup of commercial supply. Customer engagements and contract discussions continue to advance. We see strong demand to support the first 100,000 tonnes annual capacity and we expect to provide a more concrete update on firm binding of the contracts in Q4. In parallel, customer discussions for the next phase are progressing faster than expected giving us increasing confidence in our planned expansion towards 200,000 tonnes of annual capacity. The pace of investment will remain aligned with firm customer commitments and progress in the initial phase. We are developing these relationships across the U.S., Korea, Europe and India. Our customer base across multiple geographies is an important part of our approach as we build long-term partnerships and establish the business. Disciplined capital allocation remains central to this project. We will assess each stage of investment against demand visibility, execution requirements and the returns we expect to generate. Our objective is to build a business that uses capital efficiently and deliver attractive returns as it scales. We will keep all our stakeholders updated as commissioning progresses and customer agreements reach firm milestones. To conclude, this has been a strong quarter for Sudeep Pharma with record revenue and EBITDA and improved margins. CFM continues to see strengthening demand new customer contracts give us visibility for a better second half in Specialty Ingredients. And under facility provides capacity to deepen customer relationships and scale high-value products while our battery materials project continues to move towards commercial operations. We remain confident in our business plan and focused on delivering against these opportunities with discipline. Thank you for your continued trust and support. We look forward to sustaining growth and creating long-term value for our shareholders. And with that, I will hand over to our CFO, Mr. Ketan Vyas o take you through the financial performance in more detail.

Thank you, Shanil, and good afternoon to everyone. Sodi Pharma delivered a strong performance in Q2 FY '27 with our highest ever quarterly revenue and EBITDA. Let me start with Q2 FY '27 highlights. Revenue from operations grew 21% year-on-year to INR 196.7 crores compared with INR 162.7 crores in Q2 FY '26. Sequentially, revenue grew 24% from INR 18.3 crores in Q1 FY '27. EBITDA grew 32% year-on-year to INR 73.2 crores compared with INR 555 crores in Q2 FY '26 and 33% sequentially from INR 54.9 crores in Q1 FY '27. EBITDA margin was 37.2% compared with 31 -- 34.1% in Q2 FY '26 and 34.7% in Q1 FY '27. The supply chain cost at an maintained remains elevated in Q2 FY '27 above the normal levels. Our new greenfield plant is capitalized in the current quarter and put to use with that being operative, expense related to plant are now getting charged to the P&L. Similarly, certain expenditures on [indiscernible] are also part of the P&L. Profit after tax was INR 51.8 crores compared with INR 46.8 crores in Q2 FY '26 and up 28% sequentially from INR 406 crores in Q1 FY '27. That margin was 26.3%. Year-on-year, PAT growth was lower than EBITDA growth, mainly because of other income, which was lower by INR 6 crores. And against INR 10.2 crores in Q2 FY '26, and our effective tax rate was at 27% compared to about 21% last year. This was really due to depreciation increase because of the new assets getting capitalized, and the revenue mix contributed from PFM, which has a higher tax rate of 28% on an average of 8%. By geography, export accounted for about 65% of revenue and domestic sales at 35%. Exports grew 24% year-on-year. Moving on to the half yearly financial performance. Revenue from operations for H1 FY '27 grew 23% year-on-year to INR 355 crores compared with INR 28.6 crores in H1 FY '26. EBITDA grew 29% year-on-year to INR 128.1 crores compared with INR 99.3 crore in H1 FY '26 with an EBITDA margin of 36.1% compared with 34.5% in H1 FY '26. [indiscernible] grew 18% year-on-year line, INR 924 crores compared with INR 78 crores in H1 FY '26. H1 FY '27 delivered tax margin of 25.2%. At the end of H1 FY '27, at consol level, cash flow from operations was INR 43.5 crores, up by INR 26 crores on a year-on-year basis, driven by higher profitability and stable working capital. On the [indiscernible] , we remain focused on the working capital discipline and net working capital days remained at 214 days as on 30th September 2026, similar to the level of March '26. Considering the geopolitical situation, we strategically up the raw materials of key raw material like verified phosphatic acid to ensure our finished good demands are met to enough supply of raw materials. The inventory also includes a bit of inventory buildup on the battery project materials. We remain committed to bringing down our working capital cycle down to about 170 to 180 days, excluding the battery material inventory and to about 150 days over a longer period of time. Capital expenditure in FY '27 was about INR 77 crores, mainly towards the battery material project at Bajaj and the completion of the greenfield facility. Net debt was INR 72.5 crores as of 30th September 2026 with net debt-to-equity ratio of about 0.5x compared with INR 33.6 crores and 0.004x as of March 26. Even as we invest in our growth projects, our balance sheet remains conservatively leveraged and gives us flexibility to fund the next phase of growth. Our returns on annualized basis, ROCE for H1 FY '27 was 22.4%, and ROE on annualized basis was 19%. This returns up because our other numbers are because we have deployed the capacity our capital to the greenfield facility and SAM, which are not yet which will start generating revenues in the coming period of time. As this project commence operations and scale up, we expect ROCE to move to improve. To conclude, we have delivered a strong half first half with healthy growth in revenue and our focus on high-value product pricing discipline and operational efficiency positions us well to meet our growth objective for FY '27. With this, I would like to conclude the presentation and open the floor for questions. Thank you.

[Operator Instructions] The first question is from the line of Sanjesh Jain from ICICI Securities.

I got a few questions. First, on the Specialty Chemicals, apart from Fortify, how was the like-to-like growth if we adjust for the fortified rights program, which got passed? If we remove that, what was the underlying growth? And number two, now that we don't have a visibility for even next couple of quarters for this to come back, what was the contribution of this segment in the second half? And how much of it will be able to compensate from the new order? So what is the growth we are looking in the specialty for the second half? That's the first question. Second question on the margin, the specialty, overall margin looks very, very strong and healthy. But if I look at segmental margin the specialty margin was 28%, which is significantly lower than last year. The margin in the PFM has gone up very sharply. So why was there so much of divergence in the margin in the 2 segments? This was my first set of questions.

Yes. Good afternoon, Sanjayji. I think to answer both the questions, the first on specialty. So broadly speaking, let's say, for the full year, the revenue contribution from the RISE program was approximately, say to around 20% to 25% of our Specialty Ingredients revenue, right? So if I look at overall performance of last year, roughly INR 40 crores to INR 50 crores. This is -- and that was also at a higher realization. I think you do not have volume data. But if I were to break up the segment for you, Specialty Ingredients, even actually has grown in volume, but has not grown or has degrown in the -- from a value perspective. Because the product mix is our capacity utilization, everything continued to improve in other areas, including [indiscernible] encapsulation. Premix business, specifically is the one that were impacted. However, as I mentioned, we have very good visibility for non-fortified drive demand for specifically the premix business for Q3 and Q4 which will largely offset or I would say, almost entirely offset the loss of revenue in -- due to [indiscernible] but also additionally contribute to growing this category. So we still remain -- we will remain comfortably confident that Q3, Q4, we should see positive growth contribution from specialty. But second question on the margin profile. So I think, again, it was primarily to do with operating leverage. I think our premix, which was a large contributor, generated limited revenue, plus would have that impact, along with the drag from NSS is what kind of depress the margins in specialty. I would say the business that will have come in Q3 and Q4 and the contracts that we have done will probably have a better margin profile than the fortified RISE business that we used to do. So all in all, Q3, Q4, you also see margin improvement, at least was going back to the Q2 levels basically or maybe if you look at the last couple of financial years, we should be able to go back to those levels from a margin standpoint.

That's quite helpful. On the PFN side, the growth is very strong. I think FDA approval, we got very recently. Was this growth largely from the old plant? And how much was it pricing? And how much was it volume led?

As you readily mentioned, the FDA approval for the greenfield only came last week. So there is 0 contribution from the new site. What we basically have done is we have a lot of -- I would say, phosphates, which is the largest product category has grown significantly, I think closer to 70%, 80%, if not higher. And we have I think because we have consumable capacity, we have allocated higher capacity to certain product categories. So phosphate was one. Second was the buyside category, specifically mention whatever was the maximum possible capacity we could allocate to [indiscernible] is in our existing setup with is what we have produced and that is both these product categories have supported the growth in the PFS segment. We are -- and we are -- with the FDA approval, that would only kind of help aid the growth for the PFC not just for the coming 2 quarters, but on a more mid- to long-term basis as well. So PFN should continue strengthen because demand side continues to remain very strong. And I would say volume growth also actually -- again, if I were to give you margin data, I would say around 35% is what around 30%, 35% is what the PFN has also grown from a volume perspective.

Because I thought the discretion at had a much higher realization. If that has started contributing, that means a lot more realization gains should have come, right? And then there is a pass-through for [indiscernible] Was there an adverse mix in the base category beyond this for entire growth to come from the volume side because on a Y-o-Y basis, our revenue has only grown 35%, right? We are telling that entire growth has come in from the volume.

Sorry, I was talking about revenue growth for the quarter or the volume growth for the quarter, not on H1 basis, I think -- on H1 basis, also, I would say the volume growth is approximately 19%.

I was talking for the quarter only, not for the H1. FN revenue growth for this quarter is 31%, right? Y-o-Y? We were INR 90 crores last year, we are INR 142 crores this year, correct? So when we say that's like 31% kind of a revenue growth, if you say 35%

Sorry. I think there's a -- so PFN has grown 57% for the quarter.

Okay. Let me, I think there is some problem with my modeling in that case. And let me reconcile. But how is this is limit now? The reception -- is this more like a commercial supply we have started? Or it's still an approval stage we are in displacing it.

I would say commercial supplies have started to select customers because of this lack of capacity. But I would say, let's say, I would not really account for Q3, but starting Q4, we should start seeing a lot more sizable volumes being supplied to buyside customers in India as well as globally.

And we have all the approvals. Now how many -- we said we had 2 approvals in U.S. Has it increased, the number has gone up?

That has gone up. I would say U.S. alone, I think we have maybe 8 or 9 approvals. I would say globally, if I were to include India, Europe, I would say close to maybe 30, 35 approvals is what we have.

That's good. Last question on battery chemical. Any more progress we said we added to more final approval. Last quarter, we were at 80%. Any improvement in that number as well?

So [indiscernible] coming to Battery Materials, I would say a number of customer approvals continue to increase. I think for us, because we have limited capacity coming live in Phase 1 and then even the K200. What we are largely focused on is how we can scale the partnership with, say, 5 or 7 customers, large customers the large Korean customer in Korea, Europe and the U.S. and allocating capacity with them. So while number of customer approval continues to increase, we may not be able to allocate too much of capacity to those new approvals, just because the offtakes or the contracts will be for the current 100,000 tonnes, but they give us visibility beyond 100, close to 200,000 tonnes.

Next question is from the line of Manat from Dama Capital.

And congrats on building up the [indiscernible] business to such a scale so fast. My question is regarding how you as a management think about the discussant business, especially as far as GTM is concerned? How much of the market can we service with our [indiscernible] capacity at full util. And how do you, as a management think about how do you want the customer base to look like? Are we looking at a concentrated customer base picking up most of our capacities? Or are we looking at a much diversified customer base where nobody has a large share how sticky is the customer base? So if you could throw some light on these aspects.

So on this at or bisglycinate I would say it will be a combination of some customers who will drive significant volume because we also hold significant market share in the respite regions. For example, in the U.S., I mentioned in my last call that globally, the opportunity for the magnesium [indiscernible] in ingredient is close to $1 billion. 40% to 45%, so roughly $400 million to $450 million is from the U.S. alone. Within that, you have 4, 5 very large tooling contract manufacturing companies which produce from most of the customers and they will probably have 50% of the U.S. demand. So we have approvals with 2 of those 2 of those very large -- or the 2 of the largest customers in the U.S. So when we start allocating volumes to them, they would probably take up a fair share of the demand, but I would say we will not run a highly consolidated book just from a derisking perspective. So I would say maybe 50% demand would come -- 50% of the volume would go to larger customers globally as well as in India. And then the remaining 50% would be kind of diversified with mid to smaller companies.

And how much of the -- sorry, how much of a visa capacity are you compatible allocating to [indiscernible] ?

So currently, 40% of our capacity is allocated to other products, which includes will gluconate inside. If the capacity is fairly fungible. Today, we expect out of that 40% majority, at least closer to 7% to 80%, we'll go to glycinate at purely just because of the demand and the kind of approvals that we are seeing. So a large part, and which is why I mentioned that in the next 2 or 3 years, we see the -- not even the larger businesses, but specifically magnesium [indiscernible] business in is becoming a top 3 revenue contributor to the PFN segment, right? And for us, when I say to 3 typically, it would be north of INR 100 crores as an ingredient alone. So we see a lot of potential in this category.

Got it. And one last question is higher in percentage terms, are we expecting our realizations to be on deglicinates citrate and gluconate portfolio when compared to the current CSN blended realization that we are achieving?

So I would say, again, it's a combination of how we added the capacity. But if 70%, 80% is [indiscernible] then as I mentioned, it's typically anywhere between 2 to 3x the average utilization, higher average realization compared to our current PFN category. However, within PFN also, the remaining 60% capacity in the greenfield will be from large phosphates, which also have a higher realization than our other carbonates oxide category. So hard to give you a specific number. But in general, we would expect the Manesar side to operate at a higher realization than our -- compared to our existing site just because of how the product mix that we are planning to see from this side.

Got it. And if -- can we use the remaining 60% capacity at Landesarifar basically it rates glucamide as well? Or is that capacity not fungible.

No. That capacity is currently not fungible. Let's say, there is 50% of the processes, which remains the same, there would have to be certain CapEx, not significant, but certain capital that we have made if you want to allocate more compact base.

The next question is from the line of [indiscernible] from Shiga Investment Managers.

A couple of questions. The first one is, in Q2 to this quarter, our EBITDA margins are in close plus -- just to know, with the poor asset prices increase being passed on? How much of that improvement is Sete?And could we expect any further benefit from that?

Yes, Ali. Good afternoon. So I would say, as Kevan mentioned, phosphoric acid has seen a significant upswing in cycle. When we maybe last spoke in Q1, it was up anywhere between -- it was up maybe 40% compared to Q4 levels. Currently, it strengthened further, right? So we have done our pass-through keeping in mind the contracts we've -- and because we had visibility that the market will further strengthen, we basically build up a lot of inventory in Q1, which has catered the business in Q2 and it will kind of also support the business in quarter of October, also November. I think -- so I would not say the margin we're not expecting much to further strengthen at this level. We would have to still look at the new contracting cycle before we look at margin improvement.

Understood. And the second one, if you could help us understand what references to reach in postpaid at the product level, how it compares with what other manufacturers are producing and what makes customers to be over [indiscernible]

You mean for battery?

Yes, yes.

So Ali, as I alluded to in the past, today, China produced 100% of battery-grade iron phosphate is produced in China, right, which is close to 5 million tonnes. We are the first and only company today to produce at scale battery iron phosphate. We have an indigenous tech, which is proprietary. It is green demistry is very comparable on OpEx as very good and also delivering at par product performance. So I would say having a extend supply chain, certain regulatory requirements in what are driving the change. And us being the fourth in the industry is what is driving the development of the optics. I currently -- we do not see anyone close to producing battery in phosphate at a commercial level. So we would have an 18- to 24-month head start to anyone else that would start working on this now.

Yes. So if I'm not wrong, we are the only non-Chinese here, right? But if the -- so what I'm trying to understand is the IM portion that we are doing. And the other companies that are working on the sodium portion of it. So what is the differential, which one is better in and quality purpose.

I think you are comparing LFP, which is lithium ion phosphate with sodium ion batteries. So demand, I would say, newer to LFP, it is only being stuck. It's only being put to use a scale recently in China, CIL announce on plans. I am a firm believer that LFP will continue to grow over the next 5-, 7-year period, especially for energy storage. However, the silver lining for us is even in sodium iron, they will still need iron phosphate as a precursor. So the chemistry for us, the market becomes even bigger if in both the chemistries continue to grow.

Next question is from the line of Tanmay from interest Capital.

I have one question regarding on the infield facility. How do we expect the capacity utilization to ramp up across this financial year FY '28 and at maturity, once we reach at maturity levels. So what kind of asset turnover can we expect from this facility?

So I would say, typically, in the PFN category, you would expect not a significant ramp-up in year 1. Typically, it will a lot of -- it takes 6 to 12 months, as I mentioned before. for customers to approve this facility. Some approvals are already in place. So we would start to see revenue contribution from this side largely -- and then I would say FY '28 we would typically target, I don't know, maybe closer to a 15%, 20% utilization. And then over a 3-year period, a 3- to 4-year period is when we would see the significant ramp up where we would be at the 75% optimal utilization level. At that level, we would typical you can expect a close to 3x asset.

Okay. And sir, for our battery business, you have already indicated that we have a number of customers who have progressed to commercial validation, and we are in discussions with binding uptake agreements -- could you help me distinguish between the volumes that is suddenly covered by the binding commitment? And then the volumes that are under negotiation. Just trying to understand what proportion of our Phase 1 capacity do we have secured under the uptake agreements?

Yes. I think that may, I will -- so I think, let's say, I will refrain from giving out too many details today in the next 2 months or maybe in our next call, we would be at a point where we can very openly share with everyone how our binding -- for what volume of binding agreements are secured. But I would say, let's say, our Phase I with 25%, but beyond that, we have very, very strong visibility for Phase 1, but also to our 100 ktpa capacities that we are looking to build, and then also from 100 to 200. So when we talk maybe in the next call, we will be able to break it out by customer and what kind of offtake we have up to 100 and then beyond 100.

Fair enough. Sir, one last question on our biased portfolio. So if you can give some color on what was the contribution to the total revenue of PSP revenue?

I think maybe product-specific because we don't typically share. But maybe what I can tell you is, let's say, even today, the contribution in PSN would be insignificant because of this very limited volume availability, what we will start to see is maybe from Q4 and then Q1 onwards is when you will start to see, I would say, a much larger 10%, 15%, 20% contribution from this category. Once we are able to start producing this at the new greenfield in [indiscernible]

Next question is from the line of Nirali from unique PMS.

Congratulations on a good set of results. My question is on battery grade iron phosphate. So as you mentioned that you are the only non-Chinese player, how would the pricing go for us? Will we get a premium or there will be a pricing pressure because of this Chinese competition, some light on that side.