Supriya Lifescience Limited (SUPRIYA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 and 9 Months 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. Thank you, and over to you, ma'am.

Thank you, and welcome to the Q3 and 9 Months FY '23 Earnings Conference Call of Supriya Lifescience Limited. Today on this call, we have Dr. Satish Wagh, Chairman and Managing Director of Supriya Lifescience Limited, along with senior management team. This conference call 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 investor presentation of the company, which has been uploaded on the stock exchange and company's website as well. With this, I now hand over the call to Dr. Satish Wagh for his opening remarks. Over to you, sir.

Good morning, and a warm welcome to all the participants. Thank you for joining us today to discuss the Q3 and 9M financial year '23 results of Supriya Lifescience Limited. To take us through the results and to answer your questions, we have with us the top management from Supriya represented by Dr. Saloni Wagh, Director; Mr. Krishna Raghunathan, the Chief Financial Officer of Supriya Lifescience Limited; and our Investor Relations partner, Orient Capital. I hope everyone got the opportunity to go through the financial results and investor presentation, which have been uploaded on the stock exchanges as well as the company website. Before we discuss the business performance, I would like to give you a few developments at Supriya Lifescience. I'm happy to report that the Board has appointed Mr. Krishna Raghunathan as Chief Financial Officer of the company. He is a dynamic professional and qualified chartered accountant, having more than 2 decades of the rich experience with an excellent track record in departments like finance, treasury and investor relations. Krishna has a demonstrated history of working in diverse industries, including pharmaceutical packaging and information technology. These seasoned pharma specialists in more than 2 decades of experience in the companies like Dr. Reddy's Laboratories Limited and Granules India Limited. His appointment is in line with the company's strategy to achieve accelerated growth in the years to come. We welcome him to Supriya Lifescience family and wish him all the success in his role. Let me now share some clear highlights for the quarter, 9 months ended financial year '23. As you all know, it has been a challenging quarter for the global economy and our industry has been no exception. Due to continued challenges caused by the lockdown in the major cities in China, the drop in demand of key products has led to pressure on top line and profitability for quarter under review. However, our endeavor is to navigate these challenges and focusing on taking adequate measures to minimize the impact on our business. Our primary focus remains on expanding our regulatory market presence with new emerging markets, backward integration and manufacturing capacity optimization. For 9 months ended financial year '23, our operating revenue was INR 319 crores as against INR 342 crores in 9 months financial year '22 with an EBITDA of margin 23.2% and PAT margin of 16.2%. Our operating revenue in Q3 financial year was INR 105 crores as against INR 117 crores in Q3 financial year '22, a degrowth of 10% on a year-on-year basis. With this, I now hand over to call Dr. Saloni Wagh to share the key highlights of our business performance. Over to you, Dr. Saloni.

Thank you, and good morning to all the participants. We welcome you to the Q3 FY '23 and 9 Months FY '23 Earnings Call of Supriya Lifescience Limited. I would like to share an update on developments and performance of the quarter under review. As informed by our CMD, Mr. Wagh, we have had a challenging quarter. We have a leadership position antihistamine range and for this, China is one of our largest markets. As this product range is a mature range for the company and already in regulated markets, the revenue and margin contribution of the same is high. There has been a severe outbreak of COVID in China for the past several months. We have been transparent about lockdown situation and have continuously communicated the supply challenges we have been facing. Due to the extended lockdowns and widespread use of masks and sanitizers, the demand for the antihistamine range of products has gone down significantly. We are facing demand and pricing pressure from this market. The situation in China remains grim as we anticipate a similar trend in the coming quarters before it starts to improve. Other markets and therapeutic categories continue to be stable. However, as we operate predominantly in export market and there are long holidays in December, the sales get pushed to the last quarter. Hence, for other therapies and regions, we have not seen any sales loss. Considering our current situation, we have already been working on the derisking strategy to mitigate the impact of our dependence on a particular product and/or all geographies. We have enhanced our capacity and initiated registration for other therapies such as decongestion, antihypertensives, anti-asthmatics, vitamins and anti-allergics. These therapies have good volume potential in regulated markets. We anticipate that these will start seeing a good traction in regulated markets in the next 2 quarters, which will help stabilize our portfolio even if the situation in China does not improve the way we are expecting. Additionally, we are in the advanced stages of discussions for 2 CMO opportunities and getting multiple inquiries, which we believe will start contributing to our top line and bottom line from Q3 of FY '24. We are also evaluating new products in our R&D pipeline to increase our product basket and therapy exposure. Furthermore, we are strengthening our senior management team to enhance our business development, manufacturing and R&D capabilities with the aim of creating a more robust business model. Talking about our facility upgradation work for capacity enhancement, our E block, which will add 350 KL capacity, work is going on, and we expect it to be operational by Q4 of FY '24. Our admin building at our Lote site with the new R&D center Q3 and finished goods warehouse will be operational by Q4 FY '23. R&D facilities with pilot plant expansion activity at Lote site and Ambernath is going well in time. Lastly, I would like to touch upon company's backward integration business model. The top 12 products which we produce contribute to 72% of our total revenue. We are extending the backward integration model to our newer products as well to stay competitive. By adding more products, geographies, increased penetration in regulated markets, expanding our customer base, adding more operating sites, we are completely derisking the business, a stepping stone to our success story. We are confident of our derisking strategy and other initiatives that will help us recover our top line and improve margin profile in the quarters to come. Overall company's growth strategy of doubling the top line by FY '26 remains the same with a healthy and sustainable margin. With this, I will now hand over this call to our CFO, Mr. Krishna Raghunathan. Over to you, Krishna.

Thank you, Dr. Saloni. At the outset, I would like to thank Dr. Wagh for the introduction, and I'm excited to join Supriya Lifescience Limited and be a part of such a talented and dedicated team. I'm looking forward to contributing to the growth and success of the company and to being a part of the exciting future that lies ahead. Let me share the highlights of our financial performance for the 9 months and Q3 FY '23 and following which, we will open the floor for questions and answers. Company reported revenue from operations of INR 105 crores in Q3 FY '23 as against INR 117 crores in Q3 FY '22 and INR 319 crores in 9 months FY '23 as against INR 342 crores in 9 months FY '22. EBITDA in Q3 FY '23 stood at INR 14 crores as against INR 38 crores in Q3 FY '22 and INR 74 crores in 9 months ended FY '23 as against INR 132 crores in 9 months FY '22. EBITDA margin stood at 13.4% in Q3 FY '23 as against 33% in the same period last year and 23.2% in 9 months FY '23 as against 38.6% in 9 months FY '22. Profit before tax was at INR 12.6 crores for Q3 FY '23 and INR 17.2 crores for 9 months FY '23. PAT stood at INR 9.5 crores for Q3 FY '23 and INR 52 crores for 9 months FY '23. Operating revenue has remained similar in the 9 months FY '22 and '23, despite muted customer response in our key market, which is China. However, since this market is a key margin generator, there has been a dip in our margin. Also, we have not seen any major cost pressure on raw materials. Logistics challenges, which we had faced in the earlier quarters has eased out. On the expense front, there has been an increase in certain expenses like power, employee benefits and certain increase in repairs and maintenance, which are in line with our business strategy. And this is all from my side. We can now open the floor for question and answers. Thanks to all of you.

[Operator Instructions] The first question is from the line of Aashish Upganlawar from InvesQ Investment Advisors.

So if we go through the past 4, 5 quarters that Supriya has been listed and basically, amid these calls that we've been interacting with you, so the entire commentary that has been there from the management, if I recall, it used to be INR 750 crores of top line in the target 2, 3 years and then sustainable margin of 30%, 35% and all those things. And if I have to look at it going back in past 12 months, everything has kind of deteriorated to an extent where the commentary does not stand anything basically, whatever has been told to the investors. So the entire management team has changed. Don't know for what reason there's a CEO change, there's a CFO change and there's a -- then all these numbers. I mean, last quarter, you were saying that in China, logistical challenges were there. Now you're saying that there is more demand. So I mean as investors, how are we supposed to join all these dots? I mean, being in business for 2, 3 decades, I mean, these cycles typically tend to be known to the management, how sustainable are the margins and stuff. So your comments on that will be helpful and we'll need some bit of doing on your part to ensure that we keep trust in whatever is told to us basically. So your comments on this will be helpful.

So thank you for your question. See, in terms of the last couple of quarters' performance, since this year, financial year began, the major issues we have seen in the last 3 quarters. And we have actually been very transparent throughout all our interactions with investors, earnings calls, that we are facing logistics issues in China because of the continued lockdown. So this is something we have been very transparent about. Now what has happened is that because of the continued lockdown and because of the widespread use of hand sanitizers, masks, people are not going out of their homes. The demand itself for antihistamine range has dropped down significantly. So this is a result of the continued lockdown which has been going on for over 3 months. So that is one of the major impacts that we have faced. And this is why in this quarter, we are saying that, yes, we are now facing a demand drop because of this continued lockdown situation in China. And what I would like to also highlight is in the past also, we have said that the company has a leadership position in 3 molecules out of the 38-molecule portfolio that we have. These 3 molecules have moved into the regulated market space. They are very mature molecules of the company and their contribution to our top line as well as our bottom line is very significant. Unfortunately, for us, because of the situation in China, one of our key markets and key products has been widely impacted, if you look at the other therapies, they have performed well. The growth in those therapies is quite stable. But because currently, the dependence on this particular therapy and market of the company is high, the impact on the top line and the bottom line is visibly quite significant. I don't think even now the strategy for the company has changed. We still maintain that the company will continue to show good growth in the next couple of quarters. For this, what we have done is we have already identified a group of 5, 6 products, which we have now fast tracked into the regulated market space. These molecules have very good volume potential, so they can add quite significantly to our top line and give us a decent margin as well. So once these molecules start maturing into the regulated markets in the span of next 2 to 3 quarters, you will see that the portfolio would have been significantly derisked. So whatever comment we have made in the past that we are looking at doubling the top line in the next 3 years, we still stand by those comments. We also have a lot of CMO opportunities which are at advanced stages. In fact, 2 of them have gone through the signing stage, and we expect to see some revenue generation from the quarter 3 of next year. So yes, we have identified the risk at our side, and it is a risk which all the -- we have been very vocal about with all the investors and everyone in the past as well. And now we are putting our best efforts to try to mitigate that. So we are committed to showing growth in the next couple of quarters. And as far as the senior management team getting changed is concerned, we have also addressed this in the past, but I would still like to take this opportunity to address this. The CEO, due to some personal reasons, family reasons, he had to step down. He still continues to be with the company very much. He is our technical lead. It is not like he has left and taken some other job opportunity. So he is still very much a part of Supriya. And now with Krishna joining us, in fact, we have strengthened our finance side. He has a much wider experience and exposure to the pharmaceutical sector for over 20 years, and he has been part of listed companies. So in fact, I would say that on the finance part, we have strengthened our team. And we continue to strengthen our team further. We have identified areas like R&D, manufacturing and technical areas where we would like to further strengthen our team. So you will hear from us very soon on that front as well.

So what is the outlook on margins? And related to that is how much China position is there on the top line and margin front? If you can be a bit more clear on that, it will help us understand how the numbers can shape up from here. And what's your outlook on the margin actually? That will help us.

See, at this point, we are not doing any sort of commentary on margins and also we are not giving any sort of a guidance for future. But we believe that we will be in a steady state from now on. I think that is something which I can always say. But we would like to, what do you call, perform for the next couple of quarters before giving any sort of guidance at this stage. Okay? We are not guiding anything at this stage. We'll be waiting and watching for the next couple of quarters. I think we will let the performance speak, sir.

But what the tables say, 13% margin that you reported this quarter or 20%, 25%, 30% that has been coming in the last...

It would be around what you call late or early 30s, I would say. But please don't take this as a guidance. We are working on improving all of this further also. But at this point in time, you can say that around 30-ish would be a steady state in future.

So this is -- we're talking about the next 2, 3 quarters? Or we're talking maybe 2 years down the line or 1 year down the line?

No, it will be for the next couple of quarters, but we can always -- see, there is always a scope for improvement further. As of now, whatever we are seeing, looking at the Chinese situation, this is what we believe would be the number at this stage. But we expect a quarter-on-quarter improvement going forward.

The other part I asked was the China proportion to sales and margin.

I'm sorry to interrupt you, sir. May I request you...

Ma'am, this is very -- well, this is very important because we have been investors and there are many people who have kind of had a bad experience 'til now. So I think rather than a time limit, it would be better if you could answer on those questions.

Sir, may I request that you rejoin the queue because we have participants waiting for their turn?

Sure. Okay.

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

Sir, my first question is, are you seeing any pricing drop in CPM? And would be quantum approximately? Single digit, double digit?

So while we'll not be able to share this information on the quantum, but yes, we are seeing because see, what has happened is because like I mentioned in my speech as well because of the continued lockdown, the demand has dropped. And when the demand drops, there is definitely a pressure on the pricing as well. So we are seeing price and demand pressure from Chinese market on CPM.

And what would be the seasonality for CPM? Like which are the main quarters for this product?

Usually quarter 2 and quarter 4 are typically the highest sales in terms of CPM, but because of the lockdown which was there in China during quarter 2, we did not see that kind of impact. But if you look at the revenue generation and if you look at the region-wide contribution, you will see that in terms of volume, we have been able to sell CPM into the other markets like Southeast Asian markets, like Indonesia, Malaysia, Vietnam. So there, we have seen good volume pickup. So in terms of volume, you might not see a large drop. But because one particular market has been impacted and that market volume and price typically contribute very largely to the revenue and bottom line, that's why you're able to see the hit in the P&L as well.

Madam, regarding the gross margin, so it has been all over the place, like from 60% to now we are like approximately 51%. So if we take a base of FY '26 where we double the revenue, what would be the range for the gross margin, the target range for the company? If we can get a range for FY2026?

At this point, it is too premature to talk about margins in FY '26. I think let us cross this financial year and in future, I think when we believe that we could give some sort of a guidance, we will certainly guide the market. We are not shutting away from anything. But since you know these are all, what do you call, one-off sort of issues which have happened, which the company hadn't seen in the earlier instance, so please also understand that we don't want to guide such a long term. But it would be a very, very healthy margin. That is something which the entire senior management is working upon, sir.

Sir, last because your -- sir, what will be the margins for -- do you believe the margins have bottomed out for this -- in this quarter?

Sir, we don't want to give any sort of a guidance. But yes, I would certainly say that this would be one of the lowest performances yet. I don't think it should be anything going way below this is what we also believe in.

I'd also like to reiterate what Krishna said. I think this is the lowest what has happened, and we don't see it dipping from this anywhere.

Sure. May I ask one more question, if possible?

Please go ahead, sir.

Yes, sir. What is the demand scenario for ketamine in Europe? Are we seeing any strong traction there?

Yes.

Sir, we don't comment on product-specific stuff, sir, because these are all our important product side. I think it would be very, very improper for us to guide about a single molecule in a call. I think if something is -- you can always call me personally, I think we can have a chat on this. It will be a bit inappropriate for us to talk about individual product margins at this stage, sir, because these are all our confidential and important molecules. And we would not like to share the demand as well as the margins in an open forum, please.

Sure, sir. Sure. Sure, sir. And sir, lastly, like what was the -- wasn't there a sharp spike in other expenses. So what would be the component leading to that increase in other expenses for the quarter?

See, basically, what has happened is, of course, one is on a very good side, the CPHI has started. So the last quarter, we had some expenditure on CPHI, so that is on the marketing side. Of course, a bit of power and fuel, and we had to maintain a couple of reactors on the plant side. So these were some of the expenditures which have gone up. Of course, employee benefits also have gone up a bit, which, of course, we have already said in our speech, due to all the new personnel joining in. So these are some of the areas where we had seen. But we do expect a bit of a reduction on the repairs and maintenance going forward. But nothing significant is going to reduce, sir.

The next question is from the line of Naresh Vaswani from Sameeksha Capital.

So first question is on the China market. Can you hear me?

Yes.

So first question is on the China update. So while you mentioned that because downstream has gone down, but what we saw in India as well, post the reopening, the demand came back much stronger. And now since, we are hearing China has opened up, why are we not seeing our demand recovering in the China for the CPM?

So like I have said in my speech as well as I explained before, what has happened is that because of the extended lockdown and widespread use of masks and sanitizers and there was a very strict lockdown, so people were not leaving their houses. There was no flu, like the common flu, cough, cold, had gone down significantly. So of course, when a scenario like this happens, it will have an impact on the demand. So that is why once things have opened up, what we are understanding from our contacts in the market is that because of this extended lockdown situation, the demand for the product itself has gone down. It's not a permanent situation. But what we understand from them is that this situation will persist at least for the next couple of quarters. For a market to recover, it will not be very immediate. It will take a couple of quarters for the demand to stabilize back to what it was earlier.

All right. So that means there is some stocking still there in the market, which would get utilized and post that, you might see recovery in the demand. Right?

Yes. Yes. We anticipate at least in the next 2, 3 quarters, similar situation would be there. But it will keep stabilizing. Post that is when we actually think that the market would be in a position to recover.

Right. And you mentioned that there are 4 to 5 products which will start to go into regulated markets and that will start to contribute in the next 2, 3 quarters. So can you help us understand which are these products? And what would be the contribution of these products in next, let's say, 2, 3 quarters?

So while I can't give out specific product names, but the therapeutic category, yes. So we have some products from antihypertensive range, in the anesthetic range itself. We have another product where we are seeing good traction in North American market. And the asthmatic vitamins, also, we are working on some large CMO opportunity with the innovator where we can see a very large volume scale-up. Then decongestant is another category of products wherein we are completing the registrations in U.S. and in Europe. We are expecting to get the U.S. DMF number in quarter 2 of next year. So these are some of the therapies wherein for the product, the volume demand is quite large. And the margin profile is also quite decent. So once these products and these regulatory approvals start coming in, like I said from quarter 3 of FY '24, we should be able to start seeing good revenue generation from these products. But the specific number on how much revenue and which products, unfortunately, I will not be able to discuss in this forum. But these are just some of the therapies that we have already identified and we have been working in the last couple of years.

Okay. But what I was trying to understand is, will this take a longer time to materialize? Or you already have the registrations in place and you have -- you are starting to get some orders on these products? So like will it be like a 1 year down the line thing? Or do you foresee it faster?

It could be faster because for some of these products, some registrations have already started coming through. We are working on some specific projects with certain customers wherein the customers have already bought the validation volumes. So we are waiting for them to come back to us on the commercial requirements. So it would definitely be faster than 1 year.

And your guidance on doubling the revenue was on the base of effort by '26?

By '27.

Yes. So the doubling of revenue was on the base of FY '22's revenues?

FY '23 revenues.

Okay. And one last question. So on this 2 CMO projects where you are close to finalizing the terms, what would be the size of these projects if you can comment on that? And which therapies will this belong to?

So while I can't talk about the size of the project, but definitely, these would be diversifying our portfolio further. This would be more on the advanced intermediate side of the product. It would not be API-centric. So definitely, it will further make our portfolio more robust and make it more derisked, I would say. But in the next coming few months itself, you can wait for some positive announcements from our side on this front.

The next question is from the line of Avnish Khara from VT Capital.

So my first question is on the China market. So I just wanted to get a sense of what is the right to win in the China market. Is it better compliance or some sort of technical excellence that we have in the work that we manufacture for them because I think it's a core market for us, and it's a large, high-margin market as well. So if you can just give us some color on that.

Mr. Avnish, I'm sorry to interrupt, but your voice is sounding muffled, sir. We are unable to hear you clearly. Can you please repeat your question?

I was able to hear his question, if I can answer.

Certainly. Go ahead.

So yes, in terms of the China market, we have both on the price side as well as on the quality side. In terms of compliance, we are the only registered foreign source with NMPA, which is the Chinese regulatory authority for this product. We are also the only manufacturer to have the NMPA site approval. We are audited and approved by them. There is a very positive quality of material that we produce for the China market. They don't follow the normal monographs. They have their own Chinese monographs wherein the impurity levels are far more stringent as compared to any other monograph. They also have very specific requirement when it comes to the infrastructure, when it comes to the GMP compliance at intermediate level also, for which we have invested in our site and we have created that infrastructure. Because of all these things, we have been able to get a premium price in that market, and that will continue once the situation stabilizes in that market. So it is both a combination of the quality we supply to that market as well as the regulatory compliance that we have.

Got it. Got it. Also on the -- I think if I look at your geographical numbers, then I mean, U.S. has become -- slowly, I can see a slight uptick over there. So you're talking about future growth. So I mean, is it safe to assume that U.S. will be a key focus market for you going forward? And if you could also help us understand what are the other markets you will be focusing on where the growth for your new products will come from.

Yes. Like you very rightly mentioned, we have seen some increase in the North American market, and this is because we are getting good traction for some of our existing products there. When we talk about growth in the existing market, [indiscernible] market will contributed largely to this growth because some of the other therapeutic category molecules, which I discussed previously, we see a very large market in North America. So definitely, as the next couple of quarters progress, you will see more contribution from North American markets. Europe still continues to be one of our largest regulated markets. Even if you look at the numbers of quarter 3, the only impact which has happened is because of the long holidays, which happen in December month and we are unable to ship during this entire month. So whatever sales we were not able to do has been put back [indiscernible] so, as such, we have not seen any sales loss for the Europe market as well. The situation there also is stable. And going forward, one of these other therapies, regulatory approvals start coming, Europe, North American markets, Latin American markets would be the larger contributors in regulated market space.

Right. And I just have one last question. There was some sort of a -- I think there was a debottlenecking done in blocks A and B. So how much of improvement did that lead to? And what current utilization levels are you at on a consolidated basis?

So on a consolidated basis, the current capacity utilization is about 72%. The debottlenecking we have done [indiscernible]...

I'm sorry to cut you, Ms. Wagh, but your voice is breaking up.

I think the other participants muted themselves because there is a lot of background noise, which is there. Are you able to hear me now?