Syngene International Limited (SYNGENE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Syngene International Third Quarter Ended December 2021 Financial Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to [ Ms. Neha Shroff from EY ]. Thank you, and over to you, ma'am.

Thank you, Stephen, and good evening, everyone. Thank you for joining us on this call to discuss Syngene's Q3 FY '22 financial and business performance. From the management side, we have Mr. Jonathan Hunt, MD and Chief Executive Officer; Mr. Sibaji Biswas, Chief Financial Officer; and Dr. Mahesh Bhalgat, Chief Operating Officer. Post opening remarks from the management side, we will open the line for Q&A, and we'll 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 the business. The safe harbor clause indicated in the investor presentation also applies to this conference call. The replay of this call will be available for the next few days, and the transcript will be subsequently made available. With this, now I will hand over the call to Mr. Jonathan Hunt. Thank you, and over to you, sir.

Thank you for joining us on the call today to discuss Syngene's third quarter results. I'll keep my comments relatively brief because of Sibaji has got a lot to cover reviewing both the third quarter and the 9 months financial performance. So with that, let me start by giving the key points of our financial performance, I'll then follow that by the operational highlights of the quarter as well as make some remarks about expectations for the remainder of the year. Overall, the third quarter developed as we expected. Operations were largely uninterrupted by COVID, but we did see some lengthening of supply chains for raw materials, and this prompted us to increase forward orders and carry higher levels of stock ahead of the fourth quarter. Looking at revenue, the key growth drivers for the quarter were Discovery Services and Dedicated Centers, while Development Services and Manufacturing Services delivered more sustained performances. Revenue from operations grew 10% over the corresponding quarter last year, broadly in line with the shape of growth we expected through the year. So if we look around the world, we're seeing good market opportunities and barring any major impact from COVID here or in our client markets, we've seen the outlook as a positive one as we start to run into the end of the financial year. EBITDA for the quarter was up 12% to INR 216 crore, while profit after tax was up 2% to INR 104 crore over the corresponding quarter last year. The PAT performance reflects an anomaly in the effective tax rate that Sibaji will cover in more detail in his comments. But overall, I'm pleased with the development of the business through the third quarter, and I think it positions us well to have a strong end to the year. As you know, the fourth quarter is typically our biggest quarter and this year looks to be no exception. Looking back to over the third quarter. The key highlight was the renewal -- was the 5-year renewal of the long-standing contract with Amgen. And this comes on the heels of the 10-year contract extension signed with BMS last year. These contract extensions confirms stability of the relationship with both of these key clients, but also provide a very clear perspective on the future of our Dedicated Centers. The scope of the Amgen contract extension includes integrated drug discovery and development solutions and leverages a whole -- a broad range of technology and capabilities. While the SARC Center, the Syngene Amgen R&D center was established in 2016, actually, our collaboration goes back much longer than that, back to 2012. We're really committed to continuously work closely with Amgen's global scientific teams and look forward to start playing an increasingly important role in supporting Amgen's R&D activities and -- for the benefit of patients around the world. As part of the contract extension, we will be building a dedicated laboratory to provide additional capacity for o scaling up active pharmaceutical-grade ingredients. So the contract extensions with Amgen and BMS, the 2 biggest dedicated center clients, provide us with a really sound foundation for future planning and investment and also these multiyear contracts really give us predictable cash flow, which is always welcome. Turning now to the fourth quarter. We're conscious of the spread of the new variant of the coronavirus. We've put heightened -- safety measures have been implemented at all of our facilities. And we've made very good progress on our staff and family member's vaccination scheme with well over 90%-plus staff now fully vaccinated. In addition to our COVID-19 control measures, we're benefiting from the systematic investments we've made previously in digitization and automation, and they're really playing an important role in business continuity and helping us keep to high operational levels even in a pandemic context. And in terms of sort of coronavirus itself, some of the research things we do, we continue to work with clients and diagnostics, treatments and vaccines. And we're also, as you know, continuing to manufacture remdesivir to support the Indian government and provide supplies to Indian patients. Just changing track now. As we look ahead to the end of the year, we see a largely positive outlook. Positive that we're maintaining normal operational levels; positive that we can see clear signs of our clients, particularly in the U.S. and Europe, being able to sustain near-normal operations themselves despite the pandemic, and that's creating a stable demand environment, and I think the opportunity to -- for further growth in coming quarters; and positive, as I mentioned earlier, what was a busy quarter to the end of the year, and this positions us well for a stronger end of the year than the growth we've seen in the third quarter. Based on the development of the business in the year-to-date and in anticipation of a more robust fourth quarter, we're upgrading our full year revenue guidance for growth now from mid-teens, as we guided you in April, to high teens with PAT growth in single digits, and Sibaji will talk a little bit more about this in his remarks. So before I hand over to Sibaji and also to save his blushes, as this award was won by his team, a notable achievement in the third quarter was being awarded best governed company in the medium-sized listed segment by the Institute of Company Secretaries of India. As you know, the institute is recognized for the high standards they advocate to drive good governance in the corporate sector and the endorsement of such a prestigious body is always welcome recognition for the hard work that our company secretarial team do under Sibaji's leadership. So now let me summarize. So in conclusion, we delivered a sustained performance in the third quarter, in line with our expectations of phasing for the year. We're on track and fully prepared for a busy fourth quarter. Two key strategic client partnerships were extended and expanded. This brings additional predictability and stability for future cash flows from our dedicated centers. COVID-19, I think, remains a concern for everyone, but our safety protocols, combined with the immunity provided by high level with vaccination, meaning that our operations are as resilient as possible through the pandemic. And finally, and I think against a backdrop of positive performance for the first 3 quarters, we've raised our full year revenue growth guidance. So with that, let me hand over to Sibaji to give you more details on the financials.

Thank you, Jonathan, and a very good afternoon to you all. I'm happy to take you through our results for the third quarter, followed by the year-to-date ending 31st of December 2021. Let me start with summary comments on each of the divisions, and then I will walk you through the P&L giving line-by-line highlights and an update on guidance for the year. Revenue from operations for the third quarter grew by 10% versus the same quarter in the previous year. Performance of the business overall was consistent with our strategic plan and tracks the guidance given at the beginning of the year. It is worth noting that the third quarter last year was a relatively strong quarter as we regained momentum and caught up on project delivery following the slower pandemic-impacted first 2 quarters. This had the effect of compressing the third quarter growth rate this year. Now looking at the divisional performance. Discovery Services and Dedicated Centers grew in line with our expectations, and we continue to see strong demand for these services. In preparation for future growth, we will shortly be inaugurating phase 3 of our facility in Hyderabad. The building will have the capacity to accommodate an additional 250 scientists for Discovery Services. The CapEx for this facility is already built into the plan. In our Dedicated Centers, the key highlights of the quarter was the renewal for a further 5 years of a contract with Amgen. As part of the contract extension, we'll be building a dedicated laboratory to provide capacity for scaling up active pharmaceutical ingredients. This new facility is expected to go live in the next financial year and the CapEx for this has been already part of the current year's CapEx plan. In Development Services, growth in the third quarter was relatively muted, reflecting the impact of project timeline changes as clients moved their deliveries out. This, in addition to a relatively strong quarter 3 of the last year from Delivery of pent-up works from the first 2 quarters, reduced the year-on-year growth rate. We're expecting a strong fourth quarter from Development Services as we handle scheduled deliveries and catch up on projects moved over from third quarter to the fourth quarter. Finally, our Manufacturing Services business continues to show steady progress. We are in early stages of scaling up manufacturing of both small and large molecules. We are encouraged to see good demand, particularly for biologics manufacturing. And as a reminder, earlier this year, we added a new biologics micro PL platform and expanded capacity in the mammalian facility. I'll talk about our further plans for biologics in my next call with you. Regarding small molecules, there is nothing new to add. I have previously told you that Mangalore plant is an investment over the longer period. We are on track to see an FDA approval -- regulatory approval in the next couple of years, with a critical milestone in attracting clients to use these facilities. Looking at development and manufacturing revenue overall, let me help you with your modeling. We've seen strong demand for development and manufacturing services, especially in Biologics. However, due to the extended lease time for raw materials, project deliveries can change as we are seeing in the current quarter, where the projects have been pushed to the fourth quarter and beyond. In the current environment, it would make sense to look at this part of the business based on a 4-quarter rolling average to smoothen out the variations that arise for quarter-by-quarter throughout the year. Now turning to the P&L. EBITDA from operations for the quarter was higher by 15% as compared to the previous year, which is higher than the revenue growth of 10%, indicating good operating leverage. The EBITDA margin from operations for the period was 31.7% compared to 30.1% in Q3 last year, an increase of 160 basis points and well within our target rate. EBITDA performance for the quarter was impacted by 2 opposing factors: further increase in raw material cost and power cost put pressure on margins by about 180 basis points, which was more than offset by 340 basis points margin improvement from better cost performance in other lines and ForEx gains. Material costs for the third quarter increased from about 25.2% of revenue from operations in Q3 of last year to 26.8% of revenue from operations in Q3 this year, which is an increase of about 160 basis points. Apart from seeing price inflation in raw materials and logistics costs, which explains about 1/4 of the increase and also taking into account our deliberate stockpiling in anticipation of supply chain disruption, we are also doing more early-stage projects, which typically consume more raw materials. Although in the short term, this impacts the P&L, it is a positive lead indicator for the business in terms of new opportunities in the pipeline. The changing mix of projects, the price inflation on raw materials will continue to have an impact on overall raw material costs and hence, margins in the short term. The uncertainty around pandemic makes it difficult to say if these costs will be sustained in the medium term. However, I'll come back to this in future quarters when we are in a better position to judge the medium-term outlook. The other factor impacting EBITDA is power costs. Although it does not form a large proportion of our overall cost base and makes up only 2.7% of revenue this quarter as compared to 2.5% of revenue in quarter 3 last year. This increase is primarily driven by higher product power consumption due to additional flow space added in the last 12 months and running multiple shifts as a part of our pandemic response. Currently, around 80% of power consumed across organization and 90% at our Bangalore operations is from renewable sources. Despite increase in transmission cost per unit during the quarter, our ability to source cheaper power through captive renewable energy arrangements have helped us reduce the impact of increasing power costs. We expect a similar level of power costs to continue into the fourth quarter. Let me now take a moment to explain the movement in other cost lines in the P&L, which led to an improvement of about 340 basis points in EBITDA margins from operations. Firstly, during the quarter, staff cost increased by INR 13 crores, which is an increase of about 7% to INR 189 crores as compared to INR 176 crores in the same period last year, and this was driven by headcount additions and salary increments. At an underlying level, salary increments and headcount additions contributed to 12% increase. However, what will not be visible in the reported financials is that this increase was offset by a reward program for staff in quarter 3 of last year for their support during the pandemic. This created a higher baseline, thereby lowering the year-on-year increase in staff cost. Secondly, other expenses remain broadly at the same level, leading to margin improvement of 110 basis points during the quarter compared to the last year. Despite the continued pressure on expenses due to COVID protocols in health and safety, the continued digitization drive across our businesses and increased maintenance expenses on the expanded asset base, we have been able to manage discretionary spend effectively keeping overall operating costs under control. Again, for the part of the modeling, best to see this from a YTD perspective rather than 1 quarter. Let me also remind you that we benefited this quarter from a ForEx gain of INR 20 crores as compared to INR 9 crores last year, resulting in 160 basis points margin uplift. Our hedge rate for the quarter was INR 77 per U.S. dollar against a spot rate of INR 74.5 per U.S. dollar. Taking this all together, the EBITDA margin from operations reflects positive operating leverage despite pressure on a few cost items. Let me also share with you the gross asset block so that you can update your models. The gross assets as of third quarter this year stands at INR 3,725 crores, an increase of INR 415 crores over the third quarter last year. Depreciation for the quarter stands at INR 79 crores, which is a INR 9 crore increase from INR 70 crores in the same period last year. This increase on a year-on-year basis are attributable to the assets capitalized in the last 12 months. Other income. This decreased by 25% year-over-year from INR 17 crores to INR 13 crores due to lower yields on deposits. Funds are invested in investment opportunities by prioritizing safety of investment, ensuring liquidity and then returns, in that sequence. Profit before tax grew 10% to INR 128 crores from INR 116 crores in the same quarter last year. The change is in this line -- the change over here is in line with the growth in top line. However, you would have noticed that profit after tax grew by only 2% in the quarter. The key driver here was a change in the effective tax rate, where we saw a 7 percentage point increase in the effective tax rate for the quarter. As these are a couple of moving parts, let me take a moment to walk you through the key items. The effective tax rate for this quarter was 19% compared to 12% in the third quarter last year. You may recall that last year, we benefited from accelerated depreciation from Mangalore API plant and other new units that have gone live in Bangalore and Hyderabad. In addition to a one-time positive impact arising out of devaluation of a tax position based on a favorable legal decision from a High Court order for a different entity. We reported this in the quarterly earnings last year. We expect the tax rate to remain at the current level for the year and then gradually start to go over [ 3 years ] as some of our assets come out of the associate benefit period. I'll revisit this topic at the full year, but I think there's enough of a fear in my comments today for you to understand the claims for the remainder of the year. This completes the coverage of quarterly results, which I believe was a strong performance reflecting the delivery strategic plan and tracking the guidance for the full year that we gave at the beginning of the year. Now coming to 9 months YTD results of the year. Moving on to the results. For year-to-date, revenue from operations for the period ended 31st December increased by 21% to INR 1,846 crores as compared to INR 1,526 crores during the same period in the previous year. This was driven by growth across all businesses and the added benefit of remdesivir sales, especially in the first quarter of the year. Over the same period, EBITDA from operations was up 20% to INR 546 crores, a reflection of the improved operating performance in the business. The EBITDA margin from operations was around 30%, similar to last year and in line with our guidance for the year. You have seen in the P&L, a 500 basis point increase in cost of raw materials as a percentage of revenue from operations for the 9 months. Apart from the elements explained earlier, such as the impact of -- this is the impact of price increase in certain materials, logistics and supply chain pressure and the mix of business, the other aspect was remdesivir, which had a high raw material content, close to 60% of revenue, as explained in our previous call. The increase in raw material costs as a percentage of revenue from operations was offset by other cost elements, which increased less than the revenue growth. Staff cost increased by 14% year-over-year for the 9 months, driven by the increase in headcount, annual increments and recruitment of specialist resources as brought in our scientific and commercial functions. Other expenses increased by 12% year-on-year for the 3 quarters, despite continued pressure on expenses due to COVID protocols, the continued digitization drive across our businesses, increased maintenance expenses on expanded asset base. We have been able to manage discretionary spend effectively keeping overall operating costs under control. In the first 3 quarters, hedge gains were at INR 46 crores compared to INR 12 crores in the previous year. Our hedge rate for the 9 month was INR 77 per U.S. dollar against a spot rate of INR 74.5 per U.S. dollar. Reported EBITDA margin was at 31%, 100 basis points lower compared to the same period last year due to the lower other income as a result of lower interest rates. Operating EBITDA margin for that period stood at around 30% in line with the last year. As you know, we continue to identify compelling opportunities to invest in business. Consequently, the increase in fixed assets has resulted in a 12% increase in depreciation expenses from INR 205 crores last year to INR 229 crores this year. Overall, profit before tax increased 21% year-on-year and profit after tax before the exceptional item due to reversal of export incentive increased 12% year-on-year during the same period to INR 273 crores. As I explained a moment ago, the gap between growth in PBT and PAT is due to the artificially lower effective tax rate last year due to tax reversal as well as due to the year 1 tax benefit arising from the commissioning of Mangalore plant in March 2020. Let me now turn to CapEx. Our CapEx investments for the first 9 months stood at INR 352 crores. Investments were across discovery services and dedicated centers to increase capacity of our research labs, capacity addition in biologics manufacturing facility and other assets in development and manufacturing services and in corporate. With this capital expenditure, our fixed assets currently stands at INR 3,905 crores, and this includes the capital working progress and excludes lease assets. I'll give you the breakdown of assets at the year-end as usual. Our CapEx guidance for this financial year was in the range of INR 750 crores to INR 900 crores, including about INR 250 crores rolled over from the last year. In the first 9 months, we have invested around INR 352 crores, and we've already committed close to another INR 300 crores for execution. So we are broadly on track on our CapEx program, and there is no change in our CapEx execution plan. However, at this stage in the year, it is clear that some of the planned CapEx will spill over to the next year. Now coming to the guidance for the full year. Turning now to the expectations for the quarter ahead and for the full year, based on the revenue performance to date and what is shaping up to be a very strong quarter 4, we now expect to deliver high-teens growth in revenue from operations for the full year. Quarter 4 is expected to be a high-activity quarter for our development services and manufacturing businesses. And as some of the projects in the pipeline have high raw metal costs attached to them. So while the revenue line will grow, we expect that margins in the fourth quarter to be a notch lower than in the third quarter. As said, the full year EBITDA margin is expected to be slightly above 30% mark, upside of our earlier guidance of EBITDA margins of around 30%. We expect profit before tax to grow at mid-teens year-over-year. We believe that this is a more helpful measure of profitability growth for this year in view of the low effective tax rate applied last year, which I've already mentioned. With a high effective tax rate in view we will not change the PAT guidance of single-digit growth at this stage. Normalized for the low effective tax rate of last year, the underlying PAT growth should be in double digits. We now expect CapEx in the year to be between INR 500 crores and INR 600 crores and the remainder to be executed in the next year. This CapEx will be for the projects, which are now at the right stage and commencing execution in quarter 4 in both research and manufacturing divisions of our business. The rollover CapEx will be added to the next year's CapEx guidance. Now before I conclude, let me say a few words about COVID-19. As Jonathan said, with the high percentage of employees now fully vaccinated. We are hopeful that we will be able to navigate the challenges posed by wave 3 of the pandemic and this is a basis of raised guidance here today. So to conclude, the business is on track. It has shown considerable resilience in the face of the pandemic to date, which gives us a level of confidence for the quarter to come. With people, materials and plan in place, we are set to deliver a strong set of financials for the full year. Thank you, and we can open for questions now.

[Operator Instructions] The first question is from the line of Harith Ahamed from Spark Capital Advisors.

Sir, my first question is on Mangalore facility. Sibaji commented that we are on track to achieve the U.S. FDA approval for this facility in the next 2 years. So I'm trying to understand what are the key milestones from now to receiving approval from the U.S. FDA, what are the key developments that we should be tracking related to Mangalore? And then what exactly would trigger an inspection by the FDA? Would it be a filing by one of our customers? Any clarity on this?

Yes. Yes, I will take that. No, I think your question gives the answer, actually, which is the thing that triggers it is a filing by a customer to bring a product through for FDA approval. So it's not in our get it always sits with your clients. What we're signaling to you is that we've got a pathway. We have a molecule that we're working with the client on that we think probably results in triggering an FDA inspection. Sibaji, remind me of the time scales that we've guided the market on?

We've set around 24 months, about 2 quarters back. So it's been around 18 months from now on, we should be able to run through this process.

Okay. So I don't think there's anything else that you can track externally. We just have to wait for that to happen. Once it triggers the FDA inspection. I'm sure we'd tell you about that at the time and then tell you the outcome. And I think that then starts to reposition that facility. As you know, one of the things that customers look for is not just great infrastructure and capability, but also regulatory approved -- prior regulatory approved facility. That has a lot of value in the marketplace that then becomes a potential inflection point for building more business for. So it will be steady as she goes between now and then. I don't think there's anything else you can track. We'll update you at the point we do or don't reach FDA approval. Does that make sense?

Yes, that's helpful. And my second question is on remdesivir. We've seen some upsides from the industry supply, especially in the first quarter. Now given the Omicron wave that you see in the country currently. Should we expect more supplies in the fourth quarter? And then I'm also trying to understand if this was a material contributor in the third quarter?

Yes. No, that's a reasonable question. Gosh, I'm not sure anybody is in a position to predict, prognosticate around how the pandemic evolves from here. I think it is safe to say that we'd expect more contribution in the fourth quarter, and that's one of many, many factors in the guidance upgrade that we gave today, increasing our guidance for revenue growth for the full year. Is it a material contributor? No, I wouldn't really say it's a strategically material part of our business, the pandemic. It's a response I think, actually to moral obligation if you've got capability that helps country, society, patients in a pandemic, it's the right thing to do. So we're very happy to be part of the global response that Gilead has put around their product, remdesivir, to be a voluntary license holder. I think it's a set of work and it's a business that we will be in well with pandemic ends, but there's no reason to think we'll be doing it post the pandemic. I mean it's a voluntary license arrangement that's linked to that. But more broadly, being a manufacturing-capable business is strategically one of the things that we are reshaping Syngene around. So that over the years, we've grown from being principally a chemistry-focused discovery organization to now being a fully integrated drug discovery organization, a development capable organization and a manufacturing capable small molecules and large molecules. And that's really the strategic pathway for the company. So I think we'll be in manufacturing for the long term, and I think we'll be in remdesivir for as long as the pandemic endures. It does contribute to the business, but it's not a material driver to our strategy.

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

Sir, my first question is on the SynVent, the integrated drug discovery platform, so which possibly has supported us in adding new customers. So how is it different from the traditional business model that we have been having for the drug discovery and all?

Okay. That's a good question. Well, I think as the whole CRO industry has matured over the 20, 30 years of its existence in the discovery space, you started out with stand-alone siloed services. So particular bits of chemistry that were outsourced, but most of the chemistry remained would decline, particularly a bit of biology particular bits of safety, toxicology and so forth. Plus, the typical customer at the beginning of the industry would have been a large multinational, mega cap biopharma company, probably a pharma company with all of the infrastructure around outsourcing, procurement management, and they were looking to buy component parts of services that fitted into their own value chain. Absolutely nothing wrong with it. The industry still does that fantastically well. We do it very well. We offer great value and service to our customers. We do that today, we'll still be doing that 10 years and 20 years from today. So that doesn't go away. But what's also happened is as we go up the value chain, we start integrating those. And as you know, scientific discovery comes not just from the work that you do, but the interpretation of the work that you do. How do you plot a course through innovation, solve problems, find solutions and move a molecule through discovery into development and ultimately to the patients? And that takes integration, that takes cross-functional working and SynVent is our platform/brand name for those type of services. And the marginal customer there tends to be these emerging biopharma companies, startup companies, private equity or venture backed, often highly innovative. And their business model is not to build large organizations themselves. It's to partner with companies like us when they need that scale and sophistication. But they do at the margin have slightly different requirements. They don't just want the work doing, but they want a thought partner and they want somebody to advise them on their discovery development strategy. So you become a copartner, you to codrive the projects. And I think that's all we're signaling. When we talk about SynVent being an important step forward for us, it really reflects the level of sophistication that wasn't the norm a decade ago, and it's something that I think Syngene now can do. But the other bit of the business doesn't go away. So it's both. It's not either or. Does that get to the essence of your question?

Yes, yes. So this is -- that was helpful, sir. And whether you have also covering this manufacturing angle to this?

Yes. I mean it should do. That would be a natural progression, which is that if you're partnering deeply with your clients to discover and then develop a molecule, the speed is of the essence in the life sciences industry. As you know, one of the fundamentals of the economic returns is around patent life. People are patenting their innovation. Patent lives on -- in general are about 20 years around the world. So the faster you can get through discovery into development to manufacturing to regulatory approval and to the patient, the faster you can do that, the more of the patent life you preserve for commercialization, and that has an enormous swing factor on the value creation for our client partners. So speed is really important. You need quality and you need innovation. But if you've got quality and innovation, you want to do it as fast as you can. And by having all of those capabilities in 1 company, you can drive speed because you reduce the number of handover points. And you build up a body of knowledge. So if our research teams discover -- codiscover with a client, a molecule, they're more likely to know the challenges that the next phase development is going to have and more likely to be able to help with the solutions. So you can often get there quicker.

Okay. Okay. My second question is on the -- this CMO projects, again. So we have expanded -- extended as well as expanded our relationship with the new partners like BMS, Amgen and all for a multiple of years. And now we are having even manufacturing capability. Whether you have -- means, whether this extended relationships it is also for manufacturing? Why because we have not possibly found anything.

Yes. No, it's not. But to some extent, it's sort of in the name. So the Amgen Center is the Syngene Amgen Research Center. So the scope of that relationship is very clearly centered in the research discovery phase. Very hopeful and we'd love to have a conversation with either of those clients around manufacturing, but it's not the essence of the deals that we signed over the last year and extended they are research focused.

[Operator Instructions] The next question is from the line of [ Rohan Vohra from Tunarta Investment Advisors ].

My question pertains to the CapEx for FY '22. What will be the bifurcation of CapEx between CRO and manufacturing? The CapEx that you are going to do for the FY '22.

Okay. So you'd like guidance for the year ahead?

No. The CapEx for 2021-'22. The current year, the CapEx of INR 600 crores. So what would be the bifurcation between CRO and manufacturing?

Okay. Sure. Around half of that is in the Discovery Services, I think during this year. About 1/3 of that would be in development, manufacturing. And if you can add up the remainder, there's probably 10%, 20% are going into other things. The biggest chunk of that others would be digitization efforts across the whole company. But Sibaji, anything you want to build on that, say a little bit more about the progression of CapEx during the year and where we expect to end the year?

Sure. So you are right, Jonathan. We -- almost half of it is Discovery Services, as we have expanded in Hyderabad, we kind of commissioned Phase 2 in Hyderabad in the earlier part of the year. Now in this quarter, we are commissioning phase 3, which is, as I said, an additional 250 scientists. We have also expanded our facilities in Bangalore. So that has kind of consumed 50% of it. We also spent some around 10%, close to 5% to 10% in expansion of Dedicated Centers because the BMS contract that we signed had expansion plans attached to it. The rest, you have already said, Jonathan. The rest is development manufacturing around close to 10% is other CapEx, including digitization. So that's broadly the lay of the land.

Okay. Okay. And a follow-up question. The gross block as on December of this year, December 2021, would you be able to give a breakup of the gross block as well of INR 3,725 crores that you mentioned?

Yes. So you want the breakup of that gross block, right?

Right.

Really, what we do is we give that breakup at the end of the year. But for -- if you want it for modeling inputs, you can get in touch with us outside. But typically, we have already given it last year, and you can add this what we -- I just said and we'll get it for cumulative YTD.

Yes, I think that's probably the best way to go, Sibaji. So please talk to the IR team, they'll give you an update of what we said at the beginning of the year. If you take Sibaji's comments, you can back into it reasonably easily.

Yes.

Sure, sure.

The next question is from the line of Charulata Gaidhani, an investor.

Yes. My question pertains to the dedicated center that you will be setting up for Amgen. The entire 250 additional people will be for this center? And how much CapEx will go in for the Amgen center?

Okay. So maybe we've miscommunicated or you've misinterpreted what we were saying. There's not a new center for Amgen. The relationship with Amgen is over a decade old. And we've been running a dedicated center for them for most of that decade. What we announced this quarter was the renewal of that contract. So it's not a new infrastructure. It's just a renewal of the contract and that's for a further 5 years. So the current center with the current staff will now have certainty that we'll continue in that relationship for another 5 years. I think the 250 people that we're talking about, that's in Hyderabad, not in Bangalore, and that's a new building that's coming up at our campus in Hyderabad, which should be up and operational, I think, towards the end of this year into the beginning of next year. And we're just flagging up that, that has the capacity to accommodate a further 250 scientists. And hopefully, the difference between those 2 you can now see. Does that make sense to you?

Yes. Yes.

The next question is from the line of from [ Shreya from Roha ].

Congratulations on a good set of numbers. I wanted to ask you the capital expenditure that we've been postponing in FY '21 and FY '22. So I think about INR 150-odd crores in FY '21 and about INR 250 crores in FY '22. What does that pertain to?

It's largely the same categories as before. The only thing I would object to the word postponing, I don't think we said we were postponing anything, quite the opposite. I think the CapEx investment plan, we see good reasons to invest in the business I think the upgrade in revenue guidance towards the end of the year is a healthy indicator that we're seeing a decent demand environment and therefore, no change in our willingness to invest in the business, no postponement. But we are in a pandemic. CapEx is often building work, buildings, get delivered early, but sometimes run a little bit slower. And I think that's probably the key explanation for why the CapEx numbers, the amount of investment 9 months to date is a little bit lower than we thought it would be. But it's no change in strategy, no change in willingness to invest.

Yes. And just to add to that, whatever we rolled over from last year has -- was included in our guidance this year and the same has already been executed. So it's a matter of phasing out and it's not matter of postponement, as Jonathan pointed out.

And just to clarify, does that mean it's part of Discovery Services or is it part of some other segment?

No, no. The comment we gave you was that the CapEx is being applied across all elements of the business. We're investing in discovery services, development services and also in manufacturing and dedicated centers. The broad shape of it year-to-date, and I think this will probably be true for the full year, about half of the CapEx has gone into Discovery Services, about 1/3 of it has gone into Development and Manufacturing. And then the remainder, which mathematically should be somewhere between 10% and 20%, has gone into a range of things including a big chunk in digital.

Got it. So what I'm gathering is it's not 1 particular investment which has been phased away, it's a mix of all put together. So that's what I'm gathering?

Yes, that's that exactly. It's quite a broad CapEx plan. All of it, all 4 of our divisions have got good reasons to think that there's opportunities for growth, and therefore, all 4 of them are willing to invest more capital.

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

My question is on the thought process in terms of building capacities. So what we hear from global companies is that the build capacities go out of proportion in terms of doing CapEx and then the order flows in. Just wanted to understand our thought process. When we build capacities, are the order book already visible and we have firm orders on that or we take some buffer and build accordingly?

No, I think it's a mixture, and I think it tends to have a slightly different tonality to it in each one of the divisions. So if I give you an example, think about our Dedicated Centers business: very, very long-term relationships, high-touch relationships with clients where you are strategically very much connected and aligned. In reality, the CapEx that goes into the dedicated centers although we're funding it, it's almost a co-investment type decision. So you're not building capacity in the anticipation of future demand you're building capacity because you've got a client who's sitting in a meeting room with you, actually saying this is what we want to do next. Let's agree to do it. Let's make sure that we put that CapEx in. So the degree of certainty of execution, return and demand in the dedicated centers is almost instant because you're making a decision jointly with your client to put the CapEx in and you know that the demand is there for. I think the Discovery Services has that an element of that quite often. We'll be putting in CapEx in response to the clear customer statement of demand, maybe an RFP request where they say this is what we would want and we invest ahead of that. So the clarity is quite good. Moving more into the development and manufacturing businesses, then they look more like the description you gave you have to take a judgment call on what you think the medium and long-term demand for those services will be or for the capacity will be then you have to build it and then you have to hope you get it right. So for those of you that are old enough to remember Kevin Costner movie the Fields of Dreams build it and they will come. So you have to think about that on manufacturing and development.

Understood. And secondly, on -- we've been hearing globally that there is some disruption among the large CRO players. Are you able to see some trickle-down benefit? Are you seeing increase in queries? And how is the all book looking for fiscal '23, please?

Yes. Say a title bit more. You say you're hearing globally with the CROs, which CROs, what context?

No. I mean some of the Chinese CRO [indiscernible] they are having some scaling issue or quality issues in large part. So I mean, have you seen some increased inquires because of that and see some business coming in or how do we look at it?

No, I'm not -- disaggregate my answers. I think my comments were reasonably positive about saying, look, as we've all learned to live with the pandemic vaccination programs around the world, particularly in Europe and the U.S. are making good progress. Those are our key markets where the demand comes from, as they're getting to a more normalized way of operating, and I think we're seeing positive demand signs across all 4 of our business segments. As for is that caused by disruptions in CROs in China? No, I don't -- I'm not aware of that. I haven't seen that. I just -- I would put it down to more just healthy demand on the client side.

Okay. And any color on the order book, how it's looking to the next year? I mean the kind of business we've done this year, high double-digit growth is visible is what given the past CapEx, the Hyderabad CapEx and this momentum in manufacturing?

No, I don't have a comment to give today beyond what I've just given you, which is, I think it's a healthy demand environment. And having just upgraded our outlook for the year-end, I think I've directionally pointed you at least what I think for the rest of this year. Next year, I'm sure you get the opportunity to ask that question if we haven't given a decent answer when we get to the full year results.

The next question is from the line of Amit Kadam from Canara Robeco.

So my first question is that even though the last year, the annual number, what you put for the client addition you added almost 40 clients, which is a decent number, like 10%, 12% of that pace. But we have been adding any major clients, I guess, from the IPO days your top 4 anchor customers remains there. We haven't any seen in the last 6 years or 5 years or such a major big client addition. What is the reason that we are able to add this 40-odd clients, which may be the small start-ups and biotech companies, but not a major ones like we had in the initial days? And then maybe because when I see the historical growth, that's why maybe we may have not able to clock the similar growth what we used to once clock at a 20-odd percent? This quarter growth also is roughly at 8%, 9%. So can you explain what is it? Is it strategic or a conscious move of not targeting a big firms and just do hang on with the small firms centers?

No, it's an interesting question. I mean the first thing is we tend to update those numbers annually. But [ we can't ] over interpret which is what is not a lot of data. We've got 18 of the top 25 largest companies in the world, our clients. So one of the reasons you can't add more large clients is because they are already customers. So we already have a very good connect with the very biggest companies in the world. Second thing, and I think your question actually as it was insightful, it gave most of the answer. And also a lot of the -- increasingly, a lot of the work and the innovation in the client industry is happening at medium-sized and small-sized firms. There are -- there's more firm formation, there's more of the R&D dollars as a share of dollar in the industry is going to those. And sure enough, we're adding many more clients. But they tend to be smaller firms with 1 or 2 assets that we work on rather than 1 big firm with 10 assets. You can do the math, you have to add more connections, but don't think they don't go on to become important clients and important drivers. Unfortunately, there's an asymmetry. We don't publish perfectly sensible, competitive reasons the full list of all of our clients and the sort of work we would do. I'm sure all of my competitors would love to have a list of who my clients are and the type of work that we do for them. So there's good reasons why we don't disclose it. But I think it's a misnomer to think that we haven't built big client relationships it also that are other than those landmark clients that we have in the dedicated centers. In fact, some of our biggest clients are not in the Dedicated Centers, but in Discovery Services and Development Services. We have clients every big as those relationships. But they're not that visible, and that's partly for competitive reasons. So a general sense, in the industry and also for Syngene, we're doing well with having connections with the very biggest firms. I think the growth area for us has been better connections with medium-sized and small firms, and we're seeing good growth and good future growth prospects on all 3 of those segments.

So maybe just to explain this question and trying to understand because during the IPO days or reading through your RHPs, the outsourcing CRO industry was highlighted to be like growing at 11.8% to 12%, has the dynamics of that industry change, which is like -- and because that time when the industry was growing at -- was shown has to be growing at 12%, we're growing at high-teens, has the dynamics changed which is like leading us to now grow at like 12%, 13% or mid-teens? So the industry growth itself has come down?

I mean in the quarter, we grew at 10%, but I just guided you that we're going to grow in the high-teens for the full year. So the revenue growth over the course of this year is high-teens, which is exactly the number you quoted as back at the IPO, albeit that predates me. I mean you're going back 7, 8 years or so there. So I don't think the industry dynamics have changed. I just -- tariff freight replay back to you the numbers you gave me. The outsourcing growth in the industry is in high single, low double digits, 9%, 10%, 11%, 12% per annum. True a decade ago, largely true still today. Our growth, high-teens, that tells you we are gaining market share, outperforming the rate of growth of our industry, true 7 or 8 years ago, true today.

Okay. Can I ask 1 more? Can I go ahead?

Yes.

So 1 more thing on this. Sir, does our Mangalore API plant had a -- or has a tax benefit?

If you are asking whether it under SEZ facility? The answer is yes, it's our SEZ facility. So it has some tax benefit attached to it, yes.

Okay. So that benefit has already started? Because it is something which I understand is that once you commission then it's like a time buckets where you will be like getting maybe 100% or 50%, that's how it trickles down. So because of our commissioning and not fully utilizing it, are we losing out on that particular time benefit or the tax benefit because of the delay in the -- or maybe not delay, but late approvals of that facility from U.S. FDA?

So it is in the natural course of events over here. So yes, there is a 5-year 100% tax holiday, then another 5-year, 50% tax holiday. SEZ has a sunset in March, we were fortunate to get the plant up and running before that. So we enjoy SEZ facility, but the first few years would go into validation, qualification and regulatory approval is a part of the natural process. But overall, SEZ benefit 100% or 50% expense for 10 years, and we understand that we'll be able to kind of be in a position to enjoy a lot of it once we get manufacturing up and running.

So of that first 5 year, first year, is that already because we have commissioned it last year?

Yes.

Yes, yes. Yes, that's exactly. So we made the deadline so we got the benefit at all. If we have brought the facility online at a much later date, we wouldn't have got the benefit in the first place. So we made the deadline at the minute you operate rebound tax benefit, that seems a perfectly reasonable way to go about it from a government taxation strategy point of view. And we're benefiting from that every day. We look forward to benefiting it more as we grow that business.

Okay. So -- but if you bring more top line to it, I guess the tax benefit will be much more we will be able to cash or take that opportunity much at a larger level. So if like U.S. may take time for like -- or may trigger through only product inspection, is there some other alternatives like maybe European regulators are much faster or Canadian regulator are much faster. So is it possible to fill that capacity by targeting the developed market -- developed market customers, but not over-relying on U.S. FDA because we don't know how things will play out from their side?

Yes. Yes. No, no, that's an absolutely fair comment, and that's, in fact, what we do every day is as part of the operating business strategy. The significance only of the FDA is that it tends to be -- one is, it's still the largest pharma market in the world, the U.S. And therefore, it seems -- it's often the market of choice for our customers. When they're looking where do they want to launch their product, they often prioritize launching it in the U.S., high on their wish-list. So there is some significance to that. Europe, just as good, again, love to have a pathway through to European approval, but exactly it's the same dynamic. The act, the triggers, the regulatory inspection is the filing of a product by our customer, not by us. So we can't trigger it, they have to trigger it. And you can see that that's why we're trying to push on all of those fronts. But yes, your question is right. We're not limiting our activities to just the FDA. We're also trying to find clients that want to take a molecule through to Europe, Japan, Canada, Brazil, you name them, any of the major regulators around the world.

Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference over to [ Ms. Neha ] for her closing comments. Over to you, ma'am.

Thank you, everyone, for joining today's call. Hope we have answered your questions. If there are any further queries, please do get in touch with our team, and we will be happy to get back to you. Have a good day, and thank you once again.

Thank you.

Thank you. Ladies and gentlemen, on behalf of Syngene International, that concludes this conference call. Thank you all for joining us, and you may now disconnect lines.