Syngene International Limited (SYNGENE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Syngene International's Fourth Quarter and Full Year FY '20 Financial Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Miss [ Jahindra Bhat ] from EY. Thank you, and over to you.

Thank you, [ Montret ]. Good evening, everyone. Thank you for joining us on this call to discuss Syngene's Q4 and full year 2020 performance. To discuss the financial and business performance for the fourth quarter and full year, we have on this call today, Mr. Jonathan Hunt, Syngene's Managing Director and Chief Executive Officer; Sibaji Biswas, Chief Financial Officer; and Dr. Mahesh Bhalgat, [ Chief ] Operating Officer. After our opening remarks, we will be happy to answer any questions you may have. Before we begin, I would like to caution that comments made during this conference call today will contain certain forward-looking statements and must be viewed in relation to the risks pertaining to our business. The safe harbor clause indicated in our investor presentation also applies to this conference call. The replay of this call will be available for the next few days, immediately after this call. And the transcript will be made available in a week's time on the company's website. With this, I would now turn the call over to our Managing Director and CEO, Mr. Jonathan Hunt.

Thank you, [ Jill ], and thank you all for joining us on this call to discuss Syngene's fourth quarter and full year results. As usual, I'll first give an overview of the final quarter and full year financials, followed by an insight into the key highlights of the quarter. I'll also talk about the impact of COVID-19 on operations as well as the important work that we're doing in testing and research into this virus. And then I'm going to hand over to Sibaji to share more details on the financials for both the quarter and for the full year. So if you look at the fourth quarter, really it was a milestone quarter for Syngene with revenue crossing INR 600 crore for the first time. That's a 13% growth on a year-over-year basis. I think it's worth noting that we're reporting this growth against what was a particularly strong quarter last year, where we recorded 30% growth as a result of bringing some April projects forward into March a year ago. So this fourth quarter really was very strong. Continuing growth in our Discovery Services business and a strong performance in Development Services were really the key to the performance in the quarter. The strong business performance was also coupled with tight cost control on both operating costs and overheads, and that helped improve profitability for the quarter. EBITDA for the quarter grew 24%, took it to INR 225 crore. While PAT was also up, and that was up 20% to INR 120 crores. Looking at the full year, we're reporting, I think, what's a robust top line growth of 10%. And that translates into 10% growth in profit after tax and a small increase of 10 basis points in the PAT margin, taking the PAT margin to 17.5% for the full year, up from 17.4%. And Sibaji, I know, will share additional details in a moment. Looking then at operational highlights for the fourth quarter. During the quarter, we commissioned a new research facility within the Biocon Park campus in Bangalore. This facility is spread over 150,000 square foot on 5 floors, and it will have a multidisciplinary team of scientists that will support Discovery Research in areas like biology and microbiology. And it also incorporates the very latest thinking in office and lab design as well as safety and energy features. The construction activities in our API manufacturing facility in Mangalore has now been completed. And we've successfully executed the first batch from this plant. This is required -- as is required of all such facilities before commencing full-scale operations, we are now in the process of completing all of the qualification and validation activities. And I think that will take us through much of this financial year to complete those. With these new facilities going onstream, Syngene's total research and manufacturing footprint is now up to just short of 2 million square feet or 1.9 million square feet. I want to remind you that we're in the midst of a program of investment in facilities that will fuel our future growth. And like any investment, it will take time to fully utilize the new capacity in R&D and in manufacturing. And in the meantime, the depreciation will have a dampening effect on our profitability in the short term. And Sibaji will talk a little bit more about that in a moment. Now one of Syngene's strengths, I think, is our strong track record of regulatory compliance. And over the course of the last year, we've cleared audits not only by our clients, but also by regulators from across the globe, and that includes the U.S. FDA, the European EMEA (sic) [ EMA ], the Japanese PMDA and others. And this quarter, I'm pleased to report that we successfully cleared another U.S. FDA audit, this time of our small molecule bioanalytical laboratory, which is in our Clinical Development group. So before I hand over to Sibaji, let me take a moment to talk about the ongoing COVID-19 pandemic and the impact it's having on the operating environment and on our business. In light of the nationwide lockdown announced by the Union Government of India, we temporarily suspended all operations, except for a core team focused on ensuring all of our facilities continue to be held in a safe state of suspended operations. They also made sure that we are ready to return to operations quickly and, of course, safely. And we evoked our business continuity plans rapidly, implementing a number of measures to ensure the safety and well-being of all of our employees while protecting sites and critical operations. Now as you know, the union government took the decision to include pharmaceutical and research companies into their categorization as essential services, and that's allowed us to continue to operate, of course, as long as we put in place a comprehensive range of operating controls to protect our employees and limit the spread of the disease. So over the past few weeks, we've gradually resumed operations, having introduced strict protection measures across all of our sites. And we're currently running at about 70% of normal operations. And I think we're looking to return to as close as 100% as social distancing will allow by the end of May. In our facilities, we've increased physical distancing by introducing modified seating in laboratories and offices. We've increased our transport fleet to ensure that one person per double seat is the norm. And we've zoned each site to a strict movement on-site of employees and just reduced the number of contact points between employees. We've also introduced shift work in our research and development services to reduce the density of staff on-site at any given time, and of course, instituted things like mandatory temperature checks twice a day for all employees. And like other companies, we've been making extensive use of IT and other technology-enabled solutions to work from home during the lockdown. And while many of our staff in the enabling functions continue to work from home, we, of course, continue to remain connected using technology. Our supply management teams are working with our regular and also alternate vendors to ensure uninterrupted supply of raw materials and other necessary items as well as with our freight forward as to ensure seamless delivery. And we've also built up stocks of critical materials to avoid short-term interruptions of supply. So as we speak, we have successfully ramped up our supply chain and don't currently see any limitations on our ability to operate due to the supply chain. From a performance perspective, the pandemic had a relatively small but actually positive impact on the full quarter. We brought a few projects forward as clients accelerated their work ahead of their own lockdowns. And clearly, the first quarter is going to show some direct impact from the suspension of operations, a near-complete suspension of all operations for 3 weeks of the quarter and then a gradual return to near full-scale through the remainder of the quarter. So that gives you a good sense of how you can model that. In addition, the measures we put in place to ensure safe operations are adding to our day-to-day costs, and we'll need to both optimize these through the year as well as absorb them. I'm sure you're likely to have many questions about the impacts of the pandemic in the current quarter and beyond. And I'm sure you'll also understand that in such a dynamic situation, it's difficult for any of us to know with precision how the coming weeks and months will unfold. But with that said, I do want to summarize some key points. Syngene is a well-funded, financially secure business. And our current planning scenario gives us no concerns with regards to cash, cash flow or liquidity for the year ahead. Now of course, we will manage both OpEx and CapEx prudently and in a risk-managed way throughout the year. Secondly, as an essential service with an effective infection control program already in place, we are ready and able to operate at or close to normal operating levels. And we do expect to see a marked impact from COVID-19 during the first quarter, but it's too early to know precisely the extent of that impact. So we'll update you as we go through the year. We do have very good visibility on the order book for the second and third quarters, and this gives us confidence that any impact will be restricted to the first quarter. And we should see a clear return to more normal performance from the second quarter onwards. Now Syngene is also using its scientific expertise and world-class resources to support and contribute in the fight against COVID-19. As announced at the end of last month, we've repurposed one of our labs to set up an RT PCR-based COVID-19 testing laboratory. This facility has been approved by the ICMR. It's got a dedicated team of specially-trained scientists, and they are testing samples received from hospitals here in Bangalore as we speak. We've also entered into a partnership with Pune-based Mylab Discovery Solutions to supply reagents for use in their indigenously developed testing kits. Syngene, as you know, has got a large-scale oligonucleotide facility. And we've repurposed that to support manufacturing of these reagents. So with that, let me quickly summarize the quarter performance. Discovery and Development Services continued to show strong growth. Our new research facilities give us increased capacity in core scientific areas. The Mangalore API facility started now its qualification process and getting ready to commence commercial-scale operations towards the end of this year. And our robust quality and performance standards has once again been audited and found to be in good order by the U.S. FDA. For the full year, I think after a slow first quarter, we recovered quickly and gained momentum throughout the year and increasingly applied financial discipline to ensure that our cost levers were in good order, and that drove what I thought was a particularly good profit performance at the end of the year. So notwithstanding the disruption of the coronavirus, I do think we're well positioned for the year ahead. So with that, let me hand over to Sibaji to share more details on the financial performance.

Thanks, Jonathan, and a very good afternoon to you all. I'm happy to take you through our fourth quarter and full year 2020 earnings. I will begin with a briefing on the earnings for the quarter and follow it up with the full year numbers. We are currently going through unprecedented times. And while it's difficult to give precise guidance at this stage, I'll make some directional comments for financial year 2021. However, a word of caution, all such guidance should be seen in context of the volatile conditions around us, and we will update such guidance later based on the evolving situation. So now let me start with the quarter. The fourth quarter delivered steady year-on-year revenue growth. Revenues increased INR 628 crores as compared to INR 555 crores in the same period last year. Our sales also improved by 13% during the quarter, led by a continued strong performance in Discovery Services and a very healthy quarter 4 performance in Development Services. We suspended most of our operations with the exception of manufacturing services once the lockdown was announced on 24th of March by the government. This was done after consulting key stakeholders, including major clients, who were very supportive of our decision. Now during the quarter, raw material and power costs as a percentage of revenue stood at 25%. This is down 4 percentage points from last year, and this is due to a sale -- a change in sales mix in favor of Discovery Services. As you may know, Discovery Services tend to consume a lower level of raw materials than our Development and Manufacturing division. Power cost as a percentage of revenue also improved, and this is due to energy-saving initiatives and due to the buying -- and due to buying power from open market at better rates. So both our direct cost lines showed improvement during the quarter. As a result, the gross margin for the quarter stood at 49% compared to 47% for the same period last year. That's an improvement of 2% points. Let me now take a moment to explain other cost lines in the P&L. During the quarter, staff cost increased by 25% to INR 164 crores as compared to INR 131 crores in the same period last year. This was explained in our last call, and this is attributable to 3 main factors. The first is the ongoing employment cost which has grown around 12%. A further 4% of this growth came from addition of R&D facility at Hyderabad and the new research facility in Bangalore and also from opening of the Mangalore manufacturing plant. The third and the final factor were the additions we made to the senior and middle-level leadership to create an organization with the skills and experience to take company to the next phase of growth. As a percentage of total revenue, staff costs represent 26% compared to 24% in the same period last year. That's an increase of 2 percentage points. Now turning to other OpEx expenses, which comprises of selling expenses, IT costs and other general overheads, that's up by INR 8 crores to INR 82 crores as compared to INR 74 crores in the same period last year. This is on account of additional operating costs that we are incurring in the new research laboratories in Hyderabad and the newly opened research facility and the renovated research lab, both in Bangalore. As you can see, 11% growth rate is lower than the revenue growth there of 13%, which is a result of our ongoing efforts to optimize our cost base. Other expenses as a percentage of revenue reduced by 30 basis points. Coming to EBITDA. The EBITDA for the quarter was up 24% to INR 225 crores compared to INR 181 crores in the same period last year, while profit after tax was up 20% to INR 120 crores as compared to INR 100 crores in the same period last year. Depreciation stands at INR 62 crore. This is a 41% increase from INR 44 crores in the last year, and it's mainly coming because we made investments in the Hyderabad facility and the expansion at our main Bangalore facility and also because of commencement of the Mangalore commercial API plant. EBITDA and profit after-tax margin for the quarter are at 36% and 19%, respectively, compared to 33% and 18% in the same period last year. So both key measures of profit have shown a favorable improvement for the quarter. During the quarter, we recorded an interest income of INR 21 crores. And against this interest income, we recorded finance charges of INR 10 crores. This includes our INR 2 crores worth the facility lease as per the new standard. Associated with the interest income, we recorded a INR 7 crore in income tax. To help you see the underlying business, the adjusted EBITDA margin for the quarter, excluding interest income, is at 34%, and the adjusted profit after tax margin, excluding interest income and finance charges is at 19%. This compared to last year's fourth quarter, EBITDA was at 30% and adjusted profit after-tax margin was 18%, respectively. As many of you may know, Syngene follows the practice of hedging all foreign currency revenues. Currency movement during the quarter has been in line with the hedge rate, resulting in a nominal loss of INR 1 crore in the quarter. This reflects the difference between forward rates versus the prevailing spot rate. The hedge rate and the spot rate for the quarter were almost at the same level of INR 73 per USD 1 during that period. And if I compare that with the last year, same quarter, it was -- we booked a INR 8 crore hedging loss in that quarter. With that, I'll move to the full year performance for financial year 2020. During financial year '20, revenues grew by -- grew to INR 2,094 crore. This is up 10% compared to INR 1,901 crores in FY '19. If you recall, we recorded a onetime pass-through billing of INR 40 crores during the first quarter of fiscal year 2019. Excluding the impact of the onetime pass-through billing, the revenue for FY '20 grew at 13%. In FY '20, the dedicated centers constituted 31% of sales, Discovery at 32%, and the rest came from Development services and Manufacturing. In FY '19, dedicated centers was at 32% of sales. Discovery was at 29%, and the rest was from Development Services and manufacturing. As you can clearly see, Discovery Services increased its share of revenues due to a strong growth during the year. EBITDA for the year was at INR 700 crores. This is up 14% compared to INR 612 crores in FY '19. Profit after tax, excluding the exceptional gain of INR 46 crores related to the insurance claim in quarter 2 was up by 10% to INR 366 crores compared to INR 332 crores INR in FY '19. EBITDA and PAT margins for the full year, excluding the exceptional gain, were at 33% and 17.5%, respectively. The effective tax rate decreased to 18% in FY '20 as compared to 20% in FY '19. The decline in the effective tax rate is mainly due to the incremental depreciation impact in the tax books coming from the new units that have gone live during the year. Now I'll move to the balance sheet. The cash generated from operating activities was largely used to fund the ongoing CapEx program, resulting in a cash position -- a net cash position of INR 362 crores as of March 31, 2020. This is as compared to INR 304 crores as of March 31, 2019. So we effectively self-funded our CapEx program during the year and increased our net cash balance in the process. During FY '20, we invested approximately $108 million in ongoing CapEx program. Of this, USD 43 million pertains to the commercial API manufacturing facility. Another USD 28 million was invested in Discovery Services, USD 12 million in biologics manufacturing facility and a balance of USD 25 million in the dedicated and development services. With this capital infusion, our fixed assets currently stand at USD 451 million, and this includes an asset under construction of USD 33 million. Overall, we are on track to take our total asset base to USD 550 million by the end of this quarter. This is exactly as per the guidance given in the last few quarters. We are pleased that our commercial API manufacturing plant at Mangalore completed the build phase of the program and commenced operations from March 2020. Total amount that has been invested in Mangalore plant is around USD 75 million, and this asset will be depreciated over an average life of 18 years. As pointed out earlier, the Mangalore API manufacturing plant will need to go through a process of further qualification, validation and gaining regulatory approvals before starting large scale manufacturing. We are very happy with the progress of the API plant execution so far and expect it to begin commercial operations from Q4 2021 and then build up to full capacity utilization anywhere between 3 to 5 years' time from there. We will be in a position to give clearer guidance on the revenue projections closer to the date of commencement of the large-scale operations. Before I end, let me give you some directions about our business in the current financial year. As outlined earlier, we continue to invest in future growth, which comes from a mid- to long-term ramp-up period. We believe that we are making the right investment to support our anticipated growth trajectory in the coming years. Our investing rationale from our core businesses of the dedicated centers, Discovery Services and Development Services remain the same as before. We expect to deliver an asset turnover of at least 1x from our investments over the lifetime of the asset, with the revenue buildup by the end of second year of the investment. Our investments are calibrated towards this goal, and we'll continue to invest for growth in our core businesses in the future. Second businesses like API manufacturing and biologics, the revenue buildup period is likely to be longer than our core businesses. However, these businesses, once fully occupied, are expected to generate strong returns on investment. As you know, any investment in new facilities create some depreciation load on the P&L during the early phase of the asset life cycle. That is until the facility reaches an optimum utilization or occupancy level. You may take note of that in your modeling. With some impact coming from partial shutdown in the month of April, we believe our Q1 revenues will be broadly at the same level as Q1 of last year. We will exercise our cost levers to control our discretionary expenditures during the year to soften the impact of flat revenues in quarter 1. Our tariff cost, which is around 40% of our operating expense is expected to follow the revenue during the year and is by nature control level. Due to travel restrictions around the world, we expect travel costs to be lower, and we'll also proactively control and reduce overheads in our business. Having said that, safety measures undertaken as a part of our COVID-19 response will put some additional burden on our costs as we spend more on transportation, personal protective equipment and in supporting multiple shifts to have less density in our laboratories and other facilities. As a result, we do expect around 25% drop in quarter 1 FY '21 profit versus last year. Assuming the business comes back to the normal levels by end of quarter 1, based on our current visibility of the order book, on a full year basis, we expect double-digit growth in revenues. We expect the PAT for full year FY '21 to be a similar level to FY '20. As I mentioned earlier, this guidance should be seen in context of what are clearly volatile conditions and if required, we'll update the guidance during the year based on the evolving situation. With a strong balance sheet, we are well placed to tide through the difficulties that come with the continuing COVID-19 crisis. Our cash position is strong. And we'll follow a gated approach in our spending and investments to ensure that we always maintain the required liquidity in the business during the year. The underlying business fundamentals remain very strong. And it is our firm belief that we'll return back to normal business performance as soon as the situation stabilizes in India and in our key markets of U.S., Europe and Japan. That completes my commentary on the results. [ Jill ] we can now open the floor for questions.

[Operator Instructions] The first question is from the line of Nitin Gosar from Invesco.

First question is pertaining to current investment in the books, right now stands at around INR 738 crores. Could you please help us understand which are the avenue the money would be passed into?

So indeed, this was -- I couldn't hear the last bit of the question. You're asking about the investment in the books. What was the last part of that question?

Yes. So the investment or the current investment, which looks around INR 738 crores right now in the balance sheet. I wanted to understand which are the avenues where the money would be parked? Is it corporate deposit? Is it mutual fund or liquid schemes?

Okay. Well, Sibaji, that's clearly a question for you.

Yes. Yes. So you are talking about the deposits that we have and which are basically showing up in the balance sheet. So they are all put in a [ portfolio ] of deposits in bank and NBFCs and all of the institutions where your put money are all AAA rated. So they're in very safe places.

Okay. Anywhere we may not feel -- we may not come under pressure in terms of redemption or anything? You don't see anything?

We don't expect that. They are very high-quality securities, and we don't expect that, but we always, as a practice and discipline, keep very close watch on that.

The next question is from the line of Prakash Agarwal from Axis Capital.

Congratulations on good numbers. Sir, just wanted to understand the dollar term growth both for the quarter and for the year.

Okay. Sibaji, do you have that number to hand? I'm sure you could back calculate that fairly quickly if you just apply the operating exchange rates for the quarter, but Sibaji.

So the dollar term growth for the year is close to 10% -- for the quarter, close to 10% and for the year is close to 8%.

Okay. And 1 more follow-up on the top line only, as you clearly mentioned about the top line going forward directionally, asset turnover, 1x going forward. Just on the CapEx trend, what was the CapEx as at fiscal '19 start of the year? And what is the addition over the last 12 months, if you could just rehash that?

So we ended the year at $451 million, and we spent $108 million during the year. So if you back-calculate, you would know what...

Yes, yes. And so you said that the 1x asset turnover with the revenue buildup from second year onwards. Would that be -- so, you would...

Yes. As I said it's on the core businesses of Discovery Services, Development Services and dedicated centers. 1x asset turnover for the lifetime of the asset, but after a revenue buildup phase up to 2 years.

Okay. This includes Mangalore API?

No, no, no. Mangalore is a manufacturing business. I think Sibaji's comment was quite specific around the current core business of Discovery Services, Development Services. The manufacturing you can get to that sort of asset turn in those time frames, but they tend to be a little bit longer-term buildup.

Understood. Okay. No, I was asking for $108 million. What is the share for the Mangalore API CapEx?

It says that, I think, in the state.

So Mangalore...

[ $43 ] million out of $108 million in the year.

Mangalore is $43 million out of the $108 million.

The next question is from the line of Ashish Shankar from Motilal Oswal.

So for your CMO business, given the kind of CapEx that we are incurring in our business, would we rely more on our own DMFs or those DMFs are being licensed?

Sir, we're going to be -- we are a service provider to innovative companies. So the assets that we would develop and manufacture would be on behalf of somebody else. It's not a generics plan.

Okay. So just a follow-up on a similar line. So to that extent, if I compare your research services, your CMO business, would the return ratios be drastically different?

You broke up. With the returns, the prospective returns in terms of return against cost of capital. Is that the question?

No, between your research business and your CMO business, would your IRR or return on capital employed would be significantly different?

Yes. I mean I'll invite Sibaji to make a comment. I think the way we look at it is that we see the CMO business as being strategically complementary. It sits well alongside our other businesses. And over time, we can integrate those so that we have an end-to-end continuum of service that we can offer to clients. So from research and discovery into development, into manufacturing, so they fit strategically well together. I don't see the CMO business as being dilutive. I think it has a similar sort of prospective set of returns that we get within our existing businesses today, research services and development services. And I'd point to the fact our margin performance compared to our peer group is certainly above-average, sits round about the upper quartile on a global basis. So we see it as a high-quality prospective business.

The next question is from the line of Chirag Dagli from HDFC Mutual Fund.

Am I audible?

Yes, you are.

If I look at your scientific -- scientist strength addition, we've typically added between 450 to 500 people on an annual basis over the last 5 years. Now FY '20, we added about 240 to 250 people. Is there anything specific going on there you want to call out? And what is the outlook on this addition, say, over the next 3, 4 years?

Yes. No, I don't think there is anything we would call out. For many of our businesses, the addition of 1 scientist is 1 unit of growth. So I'd expect to see over the long run, the addition of scientists to track exactly with the sort of revenue performance of those very people-centric businesses. So our business today in research services is an intellectual capital business. If you think about it, it's less CapEx and more brainpower is the driver of it. So they should be growing in proportion. The manufacturing business, as we evolve that over the next 5 years, of course, is more of an operating scale CapEx business. You build a plant and then you leverage off that. You don't need more people to leverage -- to operate the plant over time. So it gives you a different shape to it. But there's nothing I'd call out in particular. Sibaji very helpfully gave you, I think, some quite clear direction on guidance for the year on how to model. He gave you an expectation for the first quarter at the revenue in the PAT line and then revenue and PAT for the full year. I think if you interpolate between those, you're going to be there or thereabouts in understanding the movement of the lines between revenue and profit. And from that, you can derive the sort of expectations on headcount growth. So our current view on that is that the impact of COVID-19 will be largely contained for us in the first quarter and will reflect the fact that we suspended all operations for almost a month of the quarter. We're now back at work, at least at a 70% level. By the end of May, I hope that we're -- or expect that we'll be back almost at 100%. And then the second and third quarter, providing nothing materially changes in the pandemic and the situation in India, should play out that we're pretty much back at normal operations. So that gives you a good sense of how you're thinking about the year.

The next question is from the line of [ Rajesh Katara ] from [ Mediaset ].

Couple of clarifications. So in your opening comments, you mentioned that in the Q4, we saw some of the clients actually accelerating their work. So did I hear that correctly? And that led to a positive impact on the quarter?

Yes, a tiny impact. But I thought it was worth calling out just because most people across the industry are reporting the fourth quarter of the year was a little bit down because of the leading edge of the sort of lockdown in India. Remember, of course, we're a very globalized business. Most of our clients are not Indian and not in India. They are distributed around the world, including the U.S. and Europe. And as you've seen, if you track the news, the impact of COVID-19 was just visible so much sooner, particularly in Europe. And therefore, many of our clients were experiencing their version of lockdown at a much earlier point than India was. India thankfully has sort of seen cases of COVID-19 a little bit later, and that's given the nation a bit more time to react and plan and take action. So there's nothing more than that. I wouldn't over-interpret the comment.

Understood. And the second clarification that I wanted was on the full year outlook. Did -- you mentioned that even after the decline that -- or flattish growth that we'll see on the top line for Q1, we still close the year with a double-digit growth on the top line. This is what you're...

Yes. Correct, that's the current planning assumption. But as you know, I don't think there's a business in the world that wouldn't put the same caveat outlook on that, which is, that's if the current situation continues through the year. But we're in the middle of a global pandemic, and therefore, everybody needs to be very clear, the planning assumptions change very rapidly. I'm sure, you, along with many of our staff have seen a massive change to your working environment over the last 6 weeks from a pre-COVID world to a lockdown to mass work from home. So it's a highly fluid situation. But what we're trying to indicate to you is that on the assumption that we're back at work and operating, which is where we are today, and we can continue to do that. Then the order book for the second, third quarter, we've got pretty good visibility. The fourth quarter we've got reasonable visibility. But of course, we're always looking to do -- our sales and commercial operations now are always the determinant of the fourth quarter. What you do in the first quarter tends to seed the fourth one. So we've got more to do for that. But if you add all of that up, relatively sort of impacted first quarter because we suspended operations, then back to a more normal trend. And the add up of those 2 should mean that we do at least as well on top line revenue in FY '21 as we did in FY '20, maybe a little bit ahead of that, so double-digit growth.

And did we give up PAT guidance is it for the year?

Yes. I think PAT for the full year should come in level with where we were in FY '20. So no decline, but we should be pretty much at the same level of profit generated during the course of this year.

Yes. Sir, final one, if I may. So this API plant, where we are doing the validation studies at this point of time. For the FDA approval or the regulatory approval because of this pandemic, do we expect any delays on that front?

I don't think we have enough clarity on how that's going to evolve with global regulators, not just the FDA to know whether or not a delay is possible or likely. So it's -- that, I think, isn't clear. We've seen, for example, some audits, some client audits, some regulatory audits have switched seamlessly to virtual auditing, doing it through an off-line assessment and also almost video tools. We had 1 this week. We've done a ISO qualification and validation in the last few weeks, and they did that rather effectively through an off -- the combination of off-line and video auditing. But we need to see how that evolves. I don't think I know at this point whether or not we're likely to be impacted or not. But that's true, I think, for all companies. That said, of course, the regulators have also got an obligation or an incentive. The world needs new manufacturing capacity. It needs science to be done. You're seeing an enormous effort globally with regulators and governments moving very, very quickly to address the pandemic. So I'm sure that they'll be equally looking at that and thinking, how can we continue to operate effectively in a world that's got COVID-19. So it's not as if that's asymmetrical. All parties will be looking for an effective solution.

The next question is from the line of [ Milan Panjabi ] from [ Propitiatory Ventures ].

Congratulations to the management for a good quarter. First, could you please throw some light on your hedging policy? This is in context of the loss in other comprehensive income being reflected in your current quarter and FY '20. So could you please give some color on that?

Yes. So Sibaji, over to you.

Sure. Thanks, Jonathan. Yes, I will. We generally are very conservative about our hedging policy. So we hedge 100% 1 year out and for all long-term contracts, so we hedge for the full contract period. For the second, third year, we hedge partially. So that's broadly how we progress on that. So we do have a big hedge book, and that's disclosed in annual report and other financial statements. Right now, the hedge book is $550 million.

Okay. And this practice is consistent? You all have been doing this since -- in the past as well and you intend to do it in the future as well?

Yes, absolutely consistent, and we are very disciplined about it. Our revenues are, hence, very predictable as long as the order book is sustained. Sometimes, it does lead to MTM gain. Sometimes it does lead to market -- MTM losses. But at the end of the day, they are all OCI, they go onto the balance sheet, but we have a high level of predictability as far as the future years' revenues are concerned.

Yes. And Sibaji, just take a moment, if you sort of step back, what you're seeing in this quarter is no change. Our hedging policy has been as it is for many, many years.

Correct.

And therefore, there's no -- for us, no area of concern, no reason to change given the current sort of COVID environment. If that was the premise of the question, if you were looking and saying is this a different way of operating. It's been a consistent policy for a number of years. It's proven to be very prudent and I think, quite conservative.

The next question is from the line of Harith Mohammed from Spark Capital.

Congrats on the set of numbers. I was looking at the year of capital work in progress, which has declined roughly INR 260 crores when I compare with the December quarter. So is this all coming because of the commercialization of the Mangalore facility? So trying to understand if the Mangalore CapEx has moved from CWIP to gross block? Or if the decline is not coming from Mangalore, can you help us understand where the decline is coming from?

Yes. So yes, we capitalized the Mangalore plant towards the end of the quarter. So most of the decrease in the CWIP is coming from capitalization of Mangalore plant. There are other plants, other facilities, but not significant enough to manage.

Okay. So the Mangalore CapEx, the total CapEx of around $75 million, now it's moved entirely out of CWIP, and it's now part of the gross block?

Yes, most of it. A little bit is less because a plant takes a -- has a period, always. There are some construction activities here and there going on. But most of the $75 million is in capitalized book now.

The next question is from the line of Mohnish Dave from Temasek Holdings.

Jonathan, Sibaji, you've mentioned that revenue for FY '21 was double-digit growth. PAT would be nearly flat. While we understand some of the Q1 impact because of negative operating leverage, but if you could elaborate a bit further. How much of this is because of, let's say, weak mix? How much of this is maybe because we are spending higher on the newly commissioned facilities? And also what you mentioned about higher PPE spend, transportation spend, operating multiple shifts, if you could just elaborate a little bit more on the margin compression expected in FY '21?

Yes. Sure. I'll make a couple of comments and then hand over to Sibaji. I would say, though, as you know, as a company, we tend -- we have a policy of not giving specific earnings guidance. I'm doing this purely to be helpful in what is a pandemic situation. So it's a deviation from our normal practice. I look forward to when we go back to our normal practice because that will mean we'll have come out of pandemic. So we're trying to be helpful by giving you guidance, both for the quarter and also for the full year. Forgive me, if I don't break open the rest of the P&L to every line item. But with that said, I think your question captured some of the drivers. There are some increases in operating costs. We've moved to shift systems over the last month. We've effectively started our own transport company to get staff into work given that most public transport throughout the country has been suspended. So we're running a fleet of buses. We're doing that in a socially distanced way. So it's 1 person per 2 seats. That means you need just mathematically twice as many buses as you thought you needed and so on. We can't really break those over into line by items. But Sibaji, I wonder if there are any other comments or -- color comments that you would give that would help people think about it.

Jonathan, you have covered it all on COVID-19 related expenses. I think the question also included Mangalore plant. And on that, we already gave you some understanding of how much will be the depreciation impact. On top of depreciation impact, there will be also some operating expenses. And as we have guided that our commercial production will really start in quarter 4, so there will be some operating expenditures during the next 3 quarters, which will have a relatively small margin impact on our EBITDA and PAT during the year.

The next question is from the line of Dheeresh Pathak from Goldman Sachs.

In the -- just my basic question for my understanding, in the Discovery and Dedicated Services, which is a human, person-heavy business, there, what percentage of the work or what kind of work can be done from work from home? And what kind of work needs access to laboratory equipments or certain high-end computers, which a person might not be able to have access when he works from home?

Good question. I think the simplest way to think about it, those are scientists doing research in labs. So there are elements of that job, the planning, the thinking, the strategizing, the writing of reports, you could do on a work from home basis, and we're very happy to enable that for our staff. But the core experiments you need massively sophisticated equipment, and you need to be in a lab to run the experiment. That said, I think Syngene as a company, I'm suspecting here as a whole, has in the last 3 or 4 weeks, gone through the fastest, biggest adoption of work-from-home that anybody could ever have imagined. Certainly, we've moved very, very quickly. I would credit our IT department by having very good systems in place, the ability to operate seamlessly from home with cloud-based systems in a secure way. And we went from effectively 4 weeks ago, nobody in the company worked from home to finding the vast majority of the staff set up and working from home. And I think some of that's going to be enduring, and that may well be a good thing for employee -- being an employee in India and in Syngene. It will be a fantastic thing if we can make it work at a national level. India has more than enough challenges with traffic and commuting. For those of you that know Bangalore well, Bangalore traffic can be a thing a joy and great challenge. And if we can shift some people working from home -- not all day, not every day and not full time. But I think we'll probably end up with a mix, with some people working from home on 1 day and coming into the office the next as their work depends. So a bit more flexibility, good things for work-life balance. Everything we can see about it means that people can be highly productive, providing you get the technology right, and we've done a pretty good job on that. So a little bit more of a comment around the topic than your question.

That was helpful, but just to get some sense in terms of quantification. So let's say, if you're billing your clients for a certain hours in a month for 1 particular scientist, what percentage of those hours does he spend on the lab equipment, which cannot be even done as work from home? And what percentage is...?

Yes. No, I get the premise of the question. I don't think we can break it down to that forensic level because it would depend week by week, month by month, employee by employee. So to give you a comprehensive answer, I'd have to give you the work schedules of between 4,000 and 6,000 staff. But hopefully, there's enough in my answer to give you a direction, which is we don't see that as an issue. Many of our relationships with our clients, so the dedicated centers business and actually quite a lot of it goes on Discovery Services, is on an FTE basis. It's not an hourly charged model. It's a full person per month, per quarter, per year model. And therefore, those staff whether they're working in a lab, working from home, actually working as we've now done because we've put fully enabled digital WiFi in various open spaces in the campus. If you want to grab a cup of coffee and go and sit out on a bench in what is a beautiful working environment on our campus, you can still do it. So it's billable if it's productive, and people can be productive independent of place. That's really what I'm trying to lead you to. Does that make sense?

Yes, it makes sense. And 1 more question. The depreciation for the API plant will start from next quarter or only when you commercialize -- do commercial sales, which is the fourth quarter of FY '20?

Yes, it actually started towards end of March. So there's a very small -- but there is a depreciation also in the last year's financials. And it will start its full quarter impact from quarter 1 2021. Yes. And the guidance that we gave actually incorporated the depreciation impact that's coming out of that.

Yes. So Sibaji. Just one last one on that. I'm very conscious that we're up against a time deadline, so we'll take 1 more question after this one. But just on that, simple way for everybody to think about the API plant. We finished the building phase this year. Just about all of this year will be built -- will be about building its regulatory track record, building its qualification track record. So we'll see appreciation charge, which will be a net drag on profitability through the year. In terms of it being a revenue driver, we'll see some positive revenue this year, but not enough that it's meaningful at a whole company level. I would be looking to model that revenue from next year and the year beyond. And that's in line with the comment Sibaji made around how long it takes to build momentum in something like a manufacturing asset. It's a little bit longer than you see in a lab-based business. But then it has different dynamics to it. We still think it's a good investment to make. It will create value over the life cycle of the asset. But that's how I'd be thinking about it from a modeling point of view. So with that, if we could take the last question, please.

The next question is from the line of Surya Patra from PhillipCapital.

Congrats on the good numbers. Sir, just on -- again, on the CapEx number. So you have mentioned $75 million is the kind of spend so far on the Mangalore. I believe the earlier indicated number was around $100 million. So is it fair to believe that $25 million balance would be done this year? And also, if you can share what is the kind of money that had already been investment invested in the Biologics side, both in the research facility as well as manufacturing one?

Sibaji, if you want to maybe make some comments. But as you're thinking about that, let's just summarize where we're up to, USD 550 million program that was spread over multiple years. So the last year of that is FY '21. We expect to be fully invested with all 550 by the end of this year. By the end of FY '20, that was at $451 million. So you've got about $100 million of runway in this year to go in FY '21. During the last 12 months, so FY '20, we added $108 million of that CapEx. That gives you the preceding year's balance, if you were to back-calculate, take out the previous -- I'll give you all the numbers. And then the API is $43 million in the last 12 months; Discovery Services $28 million; Biologics $12 million. The remainder was spread across others. Would you give -- make any other comments, Sibaji, on the programs?

Yes. I think the $100 million comment from the past was the total money we estimated for the fully expanded plan. The $75 million corresponds to the current level of execution that we have targeted for -- by FY '21. But there are plans in a later stage to expand it further. So $75 million holds. Nothing has changed on that.

Okay. And in the Biologics one on the -- both the research facility as well as the manufacturing one. What is the money so far that has been invested?

We actually don't disclose at that level, but I can tell you, cumulatively, it's almost 10% to 15% of the money that we have spent in the current year.

No, sir, it's cumulatively, I was asking. So so far, what is the...

So if you look at our gross block, close to 10% of that has been spent in Biologics.

Okay. And secondly, Jonathan, if you can help me understand. So you have just mentioned that in your presentation that there are several projects that are going on, both in the Discovery, Biologics Services side and few of it was on the development of activities on the biologic front. So these are like on or for kind of clients like the efforts to build capability or it is based on setting customer request that you are currently working on?

I'm sorry, I didn't get the question. Could you restate it?

Yes. So in your presentation or press release that you have already mentioned that, there are various or several projects, which are currently going on, on the Discovery, Biologics front. And there are validation of new biological targets that are currently happening by the client. And also, you mentioned that, that is relating to the CAR-T therapy. So if you can help me understand that, okay, these are like based on some customer's request or it is a capability-building kind of initiative?

Okay. Sorry. I understand. Well, it's a bit of both. But remember, we're a pure-play services business. So we don't do any work other than for clients. So always, if we're doing a project, we're doing it with somebody else, for somebody else. And therefore, they will have commissioned that work. So we are doing that for clients. It's not that we're building our own pipeline.

Thank you. Ladies and gentlemen, due to time constraints, that was the last question. I now hand the conference over to Miss [ Jahindra Bhat ] for closing comments.

Thank you, everyone, for joining today's call. Hope we answered all your queries satisfactorily. If questions [ remain ] please do get in touch with me. Have a good day and stay safe.

Thank you.

Thank you. On behalf of Syngene International, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.