Supriya Lifescience Limited (SUPRIYA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '23 Earnings Conference Call of Supriya Lifescience Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Rasika Sawant from Orient Capital Investor Relations partner. Thank you, and over to you, Ms. Rasika.

Thank you, and welcome to the Q1 FY '23 Earnings Conference Call of Supriya Lifescience Limited. Today, on this call, we have Dr. Satish Wagh, Chairman and Managing Director, along with senior management team. This conference may contain forward-looking statements about the company, which are based on beliefs, opinions and expectations as of today. Actual results may differ materially. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. A detailed safe harbor statement is given on Page #2 of the company's investor presentation, which has been uploaded on the stock exchange and company's website as well. With this, I hand over the call to Dr. Satish Wagh for his opening remarks. Over to you, sir.

Good afternoon, and warm welcome to all the participants. Thank you for joining us today to discuss the Supriya Lifescience Limited Q1 Financial Year '23 Results. I'm joined by Dr. Shireesh Ambhaikar, the Chief Executive Officer; Mr. Ashish Nayak, the Chief Financial Officer of Supriya Lifescience; and our Investor Relations partner, Orient Capital. I hope everyone got the opportunity to go through our financial results and investor presentation, which have been uploaded on the stock exchange as well as the company's website. We started financial year '23 on a good note. Despite the ongoing crisis between Ukraine and Russia and the extremely unstable macroeconomic environment, we have been able to register an operating revenue growth of 32% over Q1 financial year '22, as well as a healthy EBITDA margin of 31% and PAT margin of 25%. Our focus has been to register new products in the regulated markets and further penetrate existing products in the regulated markets. To strengthen the portfolio, we are adding more products in the basket from existing and newer therapies. Other than the aforesaid mentioned, the important focused areas where we are experiencing excellent progress includes backward integration, increasing capacity for the future prospects and capitalizing on CMO/CDMO potential. We committed on improving infrastructure, which includes debottlenecking and the development of 2 new R&D centers and 2 manufacturing blocks. Our endeavor is to healthy revenue growth while maintaining healthy margins and upgrade to the evolving GMP and EHS standards. With this, I now hand over the call to Dr. Shireesh Ambhaikar, our CEO, to share the key highlights of our business performance. Over to you, Dr. Shireesh.

Thank you, Mr. Wagh. Hello, everyone. As mentioned earlier by Dr. Wagh, despite the volatility in the markets due to the Russia-Ukraine war and supply chain disruptions, we have been able to register a stable growth. Our measures to counter these challenges by building up inventory of raw materials to ensure smooth operations have worked well. Raw material supplies were well organized with no significant impact on capacities. Result is that we could deliver a decent top line while maintaining healthy EBITDA and PAT margins. We are working in R&D to add new products to our product basket and are expanding into newer geographies with existing products. Supriya Lifescience is committed to providing sustainable and reliable performance. Our strength is in large-scale chemicals manufacturing and we have the experience in handling hazardous complex chemistries. Significant progress is made in the CMO/CDMO space. Work is in progress with various companies ranging from big pharma to innovator companies to work as a partner for supplying products as per their needs. Work is now in advanced stages for the first commercial quantities to qualify Supriya Lifescience as a source for a couple of companies. Work is progressing on building and expanding capacities. A new warehouse facility for finished goods is now ready to be commissioned, and we are setting up 2 R&D facilities, one at Lote for product life cycle management and backward integration and the other one in Ambernath along with the pilot plant for new molecules and CMO/CDMO business. The lab at Lote will be operational in Q2 FY '23 and R&D labs at Ambernath along with the pilot plant are expected to be operational end of Q3 FY '23. Currently, Supriya facilities are running at full capacities. As records, manufacturing capacity expansion, we have started construction work on a new block called E Block, which is going to add 350 cubic meters or kiloliters of reactor capacity in Lote. Our new manufacturing block of 70 kiloliters capacity attached to the new R&D at Ambernath is also coming up. Along with that, we are currently debottlenecking our manufacturing capacities in existing blocks. In 2 blocks, namely A&B blocks, capacities are being increased and debottleneck for running products. We are seeing an increase in demand for some of our current mature products. Lastly, I would like to touch upon company's backward integration business model. Our top 12 products out of about 38, we are backward integrated, and these contribute 70% to our sales. We are extending the backward integration model to new products as well, so that we maintain the competitive edge. A large part of the growth and sustainability was driven and will be driven by these backward integrated products. With this, now I hand over the call to Mr. Ashish Nayak, our CFO, to share the key highlights of our financial performance. Over to you, Ashish.

Thank you, Dr. Satish, and Dr. Shireesh. Thanks to the Orient Cap Team for being here and thanks to all of you guys for being here. I will now share the operational performance for the Q1 FY '23, that is the first quarter for FY '23. This first quarter was a good quarter for anesthetic therapy. Anesthetic, which was contributing about INR 113 million of operating revenue in Q1 FY '22 has now contributed INR 500 million in Q1 FY '23. That's almost 5x what we did in the same quarter last year. Our exports continue to be 83% of sales and share in the regulated markets has increased from 33% in Q1 FY '22 to 44% in Q1 FY '23, primarily driven by increased penetration in the European market. Talking about the quarterly performance, companies reported revenue from operations of INR 1,014 million in Q1 FY '23 as against INR 769 million in Q1 FY '22, delivering a growth of 32%. EBITDA stood at INR 312 million in Q1 FY '23 as against INR 154 million in Q1 FY '22, a jump of 102%. EBITDA margin stood at 31% in Q1 FY '23 as against 20% in the same period last year. Profit before tax increased 116% to INR 301 million for Q1 FY '23 as against INR 139 million in Q1 FY '22. Profit after tax stood at INR 252 million for Q1 FY '23. As a percentage, it was about 25% of the operating revenue. Value growth in regulated markets compared to last year same quarter was 106%. Despite of the volatility in the markets due to the war and lockdowns on account of COVID, we have been able to register strong growth. We ended Q1 FY '23 on a very strong mode. This is all from my side. We can now open the floor for questions and answers. Thanks to all of you.

[Operator Instructions] The first question is from the line of Dhaval Shah from Girik Capital.

Sir, a couple of questions from my side. First one, sir, in the reported quarter, how much of the revenue has come from the block 4, which went -- which had gone live in Q1 '22?

Yes. To reply to that, see, all these blocks that we have, 4 blocks, they are interconnected and integrated. So it would be impossible to identify as to how much sale is coming in from a particular block. Because all -- understand, given product, let us say, the initial stages may be through the first block and then the final stage may be through the fourth block. So it's a combination of all. It's very difficult to identify what's coming in, what's the revenue generated from particular block.

Okay. So the reason for asking me -- for asking this is that like in FY '21, we were operating at an optimal utilization of around 70% -- 71%, and that is the optimal as for the presentation. Now so -- and we did around INR 400 crores of annual revenue. Now Q1 '23, we are at INR 100 crores. So what is the increase in revenue? And now -- and this Q1 '23 will have a new added block as well. And with the -- and now the new block, as per the presentation, is operating at 70% utilization. So I just wanted to understand what is the revenue from the Q1 FY '21 when we were at a company level were operating at 70% and now also we are at 70%, while the quarterly run rate in INR 100 crores.

So if you look upon it, what I can tell you is there has been a phenomenal growth, and that's something that I said in my speech as well earlier, in the anesthetic category, okay? The anesthetic category, if you look upon it in terms of value, the sales has been almost 5x what we did in the same quarter last year, okay? So that itself gives you an idea that it's jumped from almost INR 11 crores to INR 50 crores, okay? So that itself gives you an idea as to -- as far as the overall increase in the value is concerned. Also try and to understand that we have also increased the inventory levels for the finished goods, okay, as compared to what we were at in Q1 FY '22, because obviously, the production has also -- one is the sales which has happened and the second part is it is lying in stock in terms of the orders that we have in hand.

Okay. And sir, now secondly, given the kind of expansions which are going on, which is giving us a visibility of around 810 KL in capacity. So is it safe to assume that we should be around INR 1,000 crores sales by FY '25 on 810 KL capacity?

Okay. I will answer it in a different way. I will put it -- see, currently, if you look at my asset turnover run rates, okay, FY '21 was at 4, where we were sitting on a gross block of INR 100-odd crores, and my revenue was around INR 390-odd crores. So the run rate was about 3.9 to 4 asset turnover. FY '22, we did -- we were 2.85, okay? But that was, as I said earlier, since the new fourth block had just got operational in that year, and it takes about 1 year, 1.5 years for any block to get to -- to reach its peak. As I see going ahead because that are -- let us understand that revenue is a factor of 2 things. One is which regulated market am I -- how much of that percentage is going into regulated markets, okay? Because in regulated market because of the highest average selling price, value would be higher. That's one. And the second thing is the additional capacity. And so to that effect, if you look upon it going ahead, we would be around asset turnover about 3. That's what I'm looking at, because of the new capacities which are going to come up. I am sitting on a gross block of INR 200 crores as on date. And in addition to that, over the next 1.5 years, we are adding another INR 230-odd crores. So INR 430 crores -- INR 440 crores is what we are looking at gross block. So you can very well imagine 3. But understand that would be once these blocks start reaching their peak capacity. Once they start reaching their peak capacity, and it takes about 1, 1.5 years for any block to reach it's peak. Also understand that the new products that are being rolled out, they will be first rolled out in the semi-regulated market and it takes about 2.5 to 3 years for any product to enter into the regulated markets. So you have to give us that much time at least -- yes, to '26 -- I would say, '26, '27 is when I'm looking at that kind of a top line.

So Q2, so this -- what 2 expansions which we are undergoing right now. So one is that -- one is on the adjoining plot of land, which is around 12,500 square meter and the other is 20 kilometers away of 25,000 square meter, 24,600.

Let me -- this is Shireesh Ambhaikar. Let me answer that. A new block of 350 cubic meters capacity, the work has just started at Lote site. The construction has started. And typically, during monsoon, the construction is slow, but it will pick up speed but we have taken care of the basic, I would say, construction requirements and work is progressing. Typically, it takes 12 to 15 months for a block of this size to get ready. So somewhere next year, next financial year, Q1 or Q2, we will start commissioning this. And as Ashish mentioned, it typically takes 1, 1.5 years to do the process validations of the products that are targeted, thereafter, the regulatory approvals. So the capacity utilization will happen in phases starting, let's say, 18 months from today, I would say, with the new capacity. The second block is coming up in Ambernath where we have an existing site and we are setting up our main R&D center there to cater to CMO/CDMO projects and this would need scale up facilities. So it will have a pilot plant along with semi-commercial capacity plant of 70 cubic meters capacity, which will be multipurpose in nature.

Got it. Got it. Correct. And this Isambe plant is for the growth beyond this 810 KL, correct?

That's right, sir.

Got it, sir. And the last question now it's a short-term visibility question now, last year, second quarter, we had a very fantastic show of, you did around INR 150 crores top line with around 50% of -- 53% of EBITDA margin. So do you think you'll be able to show growth over this in the second quarter?

Let me not commit on any quarterly targets. But what I can tell you is for the full year, we would be doing very good, and the margins would also be at a very healthy rate.

[Operator Instructions] The next question is from the line of Keshav Kumar from RakSan Investors.

As far as I understand, ketamine has been generic for a long time for anesthetic and analgesic purposes. So in the U.S., ketamine used there as a racemic mixture of S and R enantiomers in UN, Lat Am, it's esketamine, but esketamine is being repurposed for depression and treatment-resistant depression, so on and so forth. For example, FDA approval for Spravato in 2019 as well as a few other clinical trials are underway. So the chemistry is pretty much out there, but I'm trying to understand if there's been a favorable shift in pricing for esketamine because of this maybe due to some demand supply gap. Like for example, sizable difference in cost for Ketalar versus Spravato. So what used to be off-label is now getting formalized. So could it be we are getting this benefit of mental disorder repurposing leading to shortage of esketamine market and that in turn leading to pricing benefits?

The volumes are not there yet of esketamine in the U.S. as a competition to Spravato, some generic companies are working with us, but it is too early to say about how the pricing will evolve on that. We are working with some companies in the development phase.

Okay. So sir, just to invert this question from 2016, '17 to now and also from last year to this year we've seen sizable jump in our revenues, what's been the change in per kg prices or for...

They're stable. As of now, these are stable over the last few years.

Okay. So the growth has come largely because of volumes?

Yes.

[Operator Instructions] The next question is from the line of [ Nishant Sabnis from Sabnis Finances ].

I just had a quick question on the margin profile of the company. I mean, the raw material prices have subsided a bit. So what's your view on the margin profile going forward, sir, if you can give some guidance or any information directionally also, that will be really helpful?

Yes. See, we have been stating this earlier, and that's something which Dr. Shireesh has stated in his speech, is almost 70% of the revenue which has been generated is for products which are backward integrated, okay, which means that we start with the basic key starting material. So if you look at -- and we have been having a very close eye on the pricing for our raw materials. So as far as the key starting materials are concerned, we are not seeing any major jump in the prices, okay? Yes, the prices for solvents have gone up, thanks to the war, but again, they have come down now. And as such, if you look upon it, the pricing for the solvents, the impact on the final costing for the product is not much. So as such, there has not been any major impact on my costing for the products. And so -- even our dip in the solvent cost won't have major impact. And as far the key starting materials are concerned, as I stated earlier, they have been almost constant, nothing major. No major changes.

The next question is from the line of Yogesh Tiwari from Arihant Capital.

So sir, actually, I had a question on the regional revenue. So it looks like that the proportion of revenue from Asia has declined. So just wanted to understand if you can share if it is related to the lockdown in China and how do you actually export to that country if you can share on that?

Okay. It is a factor of the product mix, okay? Some of the products -- and this is a cyclical thing, it's a seasonal thing. Some of the products do exceedingly well in some quarters, okay? And well, those quarters -- this particular year, we have done exceedingly well in the European, the Lat Am as well as in the American markets, North America, okay? But yes, Asia, if you look upon it, there has been a marginal decline. That has been a decline of almost 24%. So yes, that is there.

So sir, this is related to the China lockdown, just want to understand that.

Some aspect of it is on account of the China lockdown, yes, but not the entire impact is because of China.

Okay. And sir, just to understand, do you -- it's like do you export through the Shanghai port and how do you -- what were the steps taken by the company in a lockdown in China...

In a lockdown, if you look upon it, since there is -- the ports have been shut down, we have not been able to export much, okay? Whatever we have been able to export our small consignments and nothing major as of now. But we are expecting the ports to open up and things are slowly getting back to normal. That's the information that we have got. So going back, we expect things to normalize. And in any case, any consignment if we have not been able to ship them in this particular quarter, they spill over in the next quarter. So as far as the financial year is concerned, we are well on track in terms of what our position is there.

Sure, sir. And lastly, on the Europe and this U.S. revenue mix. So it looks like that the contribution of Europe on a percentage basis has come down while that of North America has increased. So if you can share any product introduced or...

I am looking at Q1 FY '22 versus Q1 FY '23. Q1 FY '22 contribution from Europe was 10%, which has gone up to 20% on a higher top line. So definitely, Europe has, in fact -- in terms of absolute value, the turnover has almost gone up by 5x. We did about INR 11 crores in Q1 FY '22 as against INR 50 crores in this quarter, okay? So there has been an increase. And as far as North America is concerned, again, we have been doing -- we have been able to penetrate and do higher sales over there. Some of the products which are there, I mean you know all the therapies that we are into anesthesia, and these are products which have been doing good. So yes, so we have been able to increase the contribution from these geographies.

So sir, any new product or any new launches in North America because the contribution has increased, so I just wanted to understand that?

No, it's higher penetration of the same existing products into the American markets.

The next question is from the line of Siddharth Purohit from InvesQ Investment Advisors.

Sir, our other cost has been relatively like on a higher side. And if I look at even on quarter-on-quarter, in absolute term it's same. So how should we look at it? Would it be a function of the absolute amount of top line that we do? Or was there any one-off or maybe regulatory costs involved in this also?

Other expenses, you're referring to other expenses in the P&L, right?

Yes.

So if I compare it with Q1 FY '22, where we had a total of INR 135 million in Q1 FY '22, it has gone up to INR 224 million, okay? But if I compare it with Q4 FY '22, we did about INR 223 million. So it's almost at par with what we did in Q4 FY '22. But if you are comparing it with Q1 FY '22, keep in mind that, that was the quarter in which the fourth manufacturing block was operational, okay? So that was one. Plus, we have also increased by debottlenecking the capacity for our existing blocks as well. So yes, with that, some of the other expenses mainly contributed by power, I would say. So the power costs have gone up, obviously, because the new block has got operational, and it's a much bigger block as compared to the earlier 3 blocks. So yes, that's the main reason, I mean. But going ahead, we do not see any major spike until the next 2 blocks start getting operation.

So in a steady-state basis, so what should be the normal run rate, sir, and as a question to sales? There will be a multiple like overheads, I believe, but except the one-off costs that you said, what will be the...

It would be at par with what you're seeing in this quarter because in the last 2 quarters, the other expenses has remained constant in absolute terms.

Okay. So there was no regulatory filing costs and all involved in that producing like one-off cost.

These are routine recurring costs, which keep on happening. So if there was something in the last quarter, it could be there in this quarter as well. So we are -- like lab expenses, power expenses. Power has been the major contributor, but other expenses are there which have gone up with the fourth block getting operation, but nothing one-off or major amount in this.

The next question is from the line of [ Rajdeep Singh from ASK Investment Managers ].

Sir, I just wanted to understand, you said the growth in Europe was higher in terms of absolute also and in terms of percentage share as well. Just wanted to know in terms of demand, are you seeing increased demand from your end customers who are looking to take you as an alternate source of supply because of the China lockdown or maybe Russia-Ukraine crisis? What is the sense there?

If you look upon it, we have been in the European market for the last almost 4 to 5 years, okay? And with every year, we have been able to penetrate and become the first source for some of our customers, okay? So with that, we have been able to get a much larger share from our competitors who are there. So that's the main reason.

Okay. But this is as usual business, nothing...

This is usual business, and I hope it continues the way it is.

I hope for the good. Sir, and lastly, if you can help me corroborate your capacity expansion because you say the 810 KL will come by Q1 FY '24. Today, your capacity is 547 KL, correct?

Yes. Yes.

Correct. So the difference is 263 KL, right? And you're saying block E is 350 KL and 70 KL is Ambernath. How do you correlate this?

Okay. Okay. So the block E is being constructed to move activities from an older block, which would later be decommissioned, which is approximately 150 cubic meters.

Okay. And that is why you say this 340 KL will replace an old block of 145 KL?

Correct.

Okay. Okay. So this is one. 70 KL is over and above this, right?

That is over and above. It's at the site in Ambernath. It is going to be a manufacturing block attached to the new R&D center for scale-ups and commercialization.

Okay. And by Q2 FY '23, the block, which will be available is for backward integration, correct?

Q2 FY '23, no new block will be available. That is the R&D building with new labs for quality, warehouse, the 3 activities mainly, quality control labs, quality assurance, R&D and finished goods warehouses. That's going to get operational in this quarter.

Okay. Because, sir, was to understand that in one of your slides, you are saying your capacity utilization is 70%, which was 47% in FY '22, on increased capacity. And in the subsequent slides, you are saying that it is running at full capacity. So is 70% the optimum capacity? So for incremental volume growth, when is your capacity expected to come online? Just connecting the dots.

70% is the maximum utilization. It depends on how you calculate. We don't calculate the -- in between cleaning hours. The facilities are mainly multipurpose in nature. So there is cleaning happening between campaigns. So 70% is the optimum.

I was just reading from your presentation slides, where you're saying 70% and then in subsequent slide, you're saying it is currently being fully utilized.

70% is full capacity. That's what I would say.

70% is full capacity utilization because this is a multiproduct facility. If I manufacturer a given product, I can reach 100%, okay. If I manufacture only a single product. But since there are multiple products which keep on happening and as Dr. Shireesh said, we run campaigns where in the given campaign, we run, let's say, X number of licensed product, depending upon the orders in hand, okay? And once the campaign is completed, we move over and switch over to the next product. Now this switchover takes time because the equipment has to be cleaned up and only after that, we can start the next product, okay? So because of this switch over, there is a time which is lost. So as a result of that, we consider that 70% is somewhere around reaching the peak capacity, with a few maybe tweaking, we can increase it maximum up to 3% to 4% points. But beyond that, we won't be able to manufacture because it's multi product.

Okay. So incremental volume growth in subsequent quarters will be through debottlenecking. Is that a fair understanding?

Yes. There is a lot of debottlenecking currently going on at the site. So that is also going to increase the volumes.

Fair. And sir, you say -- you're saying that out of your 1,200-plus customers, how much would you be supplying to distributors and how much would be through end client? Because customers in previous quarter, it was 1,300 plus, so just again....

So that keeps on changing quarter-on-quarter depending upon the product and depending upon geography these products get into. But I would -- for distributors versus direct sales, I would say, is somewhere around 46% to 48% will be through distributors and the balance amount is direct sales.

Okay. And one last question for Ashish sir, how is the working capital behaved this quarter since there is so much of disruption on the supply side, inventory stocking?

So we have continued to increase the inventory levels, okay? So the working capital is high at this point of time as well. We are just keeping our ears and eyes open. As things normalize, war situation comes under control, okay, and whichever geographies there is a lockdown, once those start opening up slowly, will normalize the stock level. But yes, as things stand today, we are at a higher working capital and inventory levels as well. The receivables have come down very well, okay? But the inventory levels are still on a higher side, but that's a conscious call that we have taken. I mean had it not been so, then we would not have been able to increase our top line, 35% last full financial year, and almost same rate even in this year. We would not have been able to reach that 32% in this year, so this quarter I'm saying. I mean that's a call which we have taken consciously, considering the volatility and the turbulent times that we're living in.

[Operator Instructions] The next question is from the line of Naresh Vaswani from Sameeksha Capital.

Was there any revenue which got deferred in the Q2? And if yes, what would be the quantum of that?

You meant Q4 or Q1, what is it?

No, no. From Q1 to Q2.

FY '23, you're saying?

Yes. Yes. In this quarter, I'm asking was there any shipment which has got deferred and would come into Q2?

There have been a few shipments which we had planned towards the last week of June which have got deferred and we have been able to make your shipments in this quarter.

Okay. And in terms of your opening remarks regarding the progress in the CMO/CDMO molecules, wanted to understand what is the nature of these molecules. Are these patented or generic? And also what is the value addition which we are providing to the customers? Or I mean why would the customers come to Supriya Lifescience for these molecules?

Okay. These are generic molecules. And of course, there are newer applications of generic molecules that are also coming up. To answer your question why the customers are coming to Supriya, in one specific case, it is because of our capability to do those kinds of processes that has worked well, and we are at a stage with that customer where we are likely to get orders for commercial quantities, I would say. So it's a mix of, I would say, old generic and some new applications of the generics at the moment. In the future, the mix could change.

Sure. Sure. And we had got the CEP for salbutamol. So have we started the supplies in Europe for that?

It's in progress.