Torrent Pharmaceuticals Limited (500420) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Torrent Pharmaceuticals Limited Q2 FY 2021 Earnings Conference Call. We have with us today Mr. Sanjay Gupta, Executive Director, International Business; Mr. Sudhir Menon, Executive Director, Finance and Chief Financial Officer; and Mr. Aman Mehta, Chief Marketing Officer, India Business. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjay Gupta. Thank you, and over to you, sir.

Thank you. Good evening, everybody. Welcome to our Q2 FY '21 earnings call. I would like to begin by commenting on current market trends. We are seeing a strong recovery in our branded generic markets. In India, the field activities are back to 70% to 80% of normal levels. With doctors spending higher in-clinic time due to increase in patient footfall, Q2 IPM growth recovered to positive 1% from negative 6% in Q1. We continue to see strong growth in the chronic segment of the market and a recovery in the subchronic and acute segments. In Brazil also, 75% of the doctors have started working either through patient visits or telecommunications. As per IQVIA, Brazil BG market grew at 5.9% in Q2 versus 1% growth in Q1. Looking forward, we expect the IPM to grow at 3% to 6% in H2, while IQVIA now expects Brazil branded generic market to grow between 3% to 6% in calendar year 2020. In our 2 major generic markets, we saw divergent trends in the U.S. and in Germany. U.S. Q1 growth in the generics market was minus 6%, and we saw rates of minus 2% and 0% in July and August. In Germany, Q1 generic market degrowth was at minus 4%, and while July and August were, respectively, at minus 3% and minus 7%. Coming now to Torrent's performance during the quarter. Revenues were up to INR 2,017 crores, up by 1% on a year-on-year basis. India's contribution was 48%, U.S. contribution was at 16%, Germany at 13% and Brazil at 6%. EBITDA was at INR 641 crores, up by 12% on a year-on-year basis, while net profits were at INR 310 crores, up by 27% on a year-on-year basis. In our largest market, India, revenues were at INR 963 crores, up by 7% on a year-on-year basis. This compares to an IPM growth of 1%. Our growth drivers continued the concentration of chronic products in our portfolio, our continued focus on brand building and field force productivity. The share of chronic and subchronic product in H1 was at 77% versus 72% in FY '20. PCPM at Torrent now stands improved at INR 8 lakhs. Torrent has 16 brands in the top 500 brands of IPM with 10 brands doing more than INR 100 crores. New launches have also witnessed an uptick in Q2 with a total of new launches in H1. Torrent continues to gain market share in 4 high potential launches in the cardiovascular space. Brazil sales were at BRL 91 million, up by 5%. Torrent has been reducing focus on tender business. Adjusted for the tender business growth was at 10%. As per IQVIA, June to September growth for Torrent branded generics was at 6.4% versus a market growth of 5.9%. Again, as per IQVIA MAT August, Torrent has 8 brands with annual revenues higher than BRL 25 million, and we have gained market share in 7 of these 8 brands. We are also launching 2 new products in Q3, which should help in strengthening growth from Q4 onwards. In the U.S., Q2 FY '21 sales were at $43 million versus $52 million in Q2 FY '20 and $47.4 million in Q1 FY '21. U.S. growth was impacted due to a temporary discontinuation of our sartan products, absence of new launches and price erosion on the base portfolio. For Indrad and Dahej, while we have completed all the CAPAs and submitted the closure report, we continue to accelerate the guidance from the U.S. FDA on the next step. Our Levittown plant construction is complete, and we would be relaunching our first product in March of 2021. In Q2, 2 ANDA approvals were received, one was for erythromycin IR and nitrosamine PCA. And in the current month of October, we also received another ANDA approval for aprepitant. Erythromycin and aprepitant are products from our external collaboration, while nitrosamine PCA is from our Pithampur derma plant. In Germany, Q2 FY '21 sales were at $30 million. Sales are flat on a Q-on-Q basis and they're down 7% on a year-on-year basis. Resolution of quality control issues is on track. And by the end of Q2, 94% of product issues have been resolved. We have also recovered the market share that was lost since the quality issue started. In September 2019, our market share was at 7%. Latest IQVIA data for end of August shows that Torrent's market share in Germany is back to 6.9%. I would like to conclude by highlighting that there was visible recovery across all the markets, and we expect to continue to grow faster than the market in our BG countries, and to return to our historical growth rate in Germany by March of 2021. Operator, we can now open the call to questions, please.

[Operator Instructions] The first question is from the line of Anmol Ganjoo from JM Financial.

A couple of them to begin with. So one is that if you look at the domestic growth, how would you like to spread it in the usual variables, price, product and volume, new introductions?

So the Torrent growth for the quarter as per AIOCD is 1%. The breakup is volume is minus 7.8%, price is 7% and new products is 2%.

Okay. That's helpful. Also, last quarter, you had characterized the growth that chronic, subchronic and acute segments had seen vis-à-vis our growth. If you could just quantify that too like the last quarter, that would be helpful.

So the chronic growth has more or less remained in the same range. The reflection for the quarter in AIOCD are showing a 5% chronic growth, minus 9% for acute and 6.3% for subchronic. But we would like to point out that there does seem to be some reflection issue in these datasets. So I think the more accurate dataset seems to be the September growth therapy-wise is showing more accurate numbers. So this may not give the perfect picture. But qualitatively, we can point out that internal sales have shown that quarter-on-quarter there is a pretty good recovery in acute and subchronic, whereas chronic has maintained its growth.

Okay. And my last question before I get in the queue. So basically, what we've seen is that we have grown faster than categories that we are present in during this whole of this COVID period. So it's come on the back of -- it would have come on the back of significant market share gains. As we move towards normalization of the trade channel, how much of these gains do you expect to hold on to? And this is directional. You don't need to share an explicit number. But obviously, you've been able to consolidate market share in individual therapies. So just wanted to get a sense that this lead, which you've gained, is it sustainable on a full year basis from a market share standpoint? Because when the market recovers, then do you continue to grow faster than the market?

Well, a good part of the above-market growth is owing to the chronic contribution. That would certainly have helped us continue the growth momentum. Incremental growth has come from some of the larger brands like Shelcal, Losar. Due to the high market share and reach, these are the brands that have benefited. So when brands at that scale are growing much, much faster than the market, that's adding to the incremental growth. So I think we should expect the brand-wise growth that we've seen in Q2 to continue as well for the next few quarters.

The next question is from the line of Vishal Biraia from Aviva Insurance.

Sir, a question on the U.S. base as to how is the -- I mean, with the price erosion on the base portfolio...

Sorry to interrupt. Vishal, your voice is breaking up.

Is it better now?

No, sir. It's still the same.

Just a second. Hello. Sorry for the inconvenience. Sir, a question on the base portfolio of the U.S. Could you elaborate a bit more on the price erosion piece as to how it's been? Is it more than what you saw in the last quarter? And what is your view on the coming ANDA in the upcoming quarters?

So the price erosion, unfortunately, we are impacted by it a lot because of lack of new products. So we're only commercializing our base portfolio in the U.S. So I would say that the price erosion was muted during the peak of the COVID time, so in the March, April, May time frame. But after May, supplies have normalized and the fear of supplier is kind of a little bit muted. As a result of which, we see what we would consider to be back to business as usual level of price erosion, which is mid- to high single digit on an annualized basis across the broad portfolio.

Okay. Fair enough. Sir, one question on the overhead expenses that we've reported of INR 465 crores for the quarter. So this is a decline sequentially also. So I mean, what is driving this saving? And what proportion of this would be sustainable? Some perspectives on this. Because, I mean, from one, we didn't expect a sequential decline, so, yes.

So I think the only thing which I can tell you here is, quarter 1 had some higher cost or 1 or 2 items which are nonrecurring in nature. For example, the freight expenses was very high in quarter 1. And quarter 2, we are seeing some moderation happening on the freight expenses. So that's something in terms of saving, which has come in quarter 2. The other was, if you remember, there was a ForEx loss of around INR 16 crores to INR 17 crores in other expenses in quarter 1, which is not there in quarter 2. And the third factor could be there was some donation contribution, which was made to PM CARES Fund for COVID in quarter 1, which is not there in quarter 2. So I would say quarter 2 expenses, which you see, should be the base going forward.

Okay. And just one last question. On the 3% growth in revenues from other countries, last quarter, this was very strong. So what would have -- I mean, what impacted this quarter, some views on this?

So I think last quarter, we had said because the growth was significant, right, and we had made a comment saying that there is some amount of pipeline filling, which we see happening in the ROW business, which would get moderated in quarter 2. So that's exactly what we saw.

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

Just on a follow-up on what was asked on the other expenses. So you said it's the base. So I think with the opening up and in Q3, Q4, it would further open up, traveling will increase. So the cost Q-on-Q is most likely to increase. Would that be fair to understand? Or you have some more cost savings stored in for you?

No. No. No, Prakash. I think your hypothesis is correct. Because quarter 2 with respect to promotional and field expenses, we saw some increase happening. So you are right. As the economy opens up and the working normalizes more, you will find these expenses going up in quarter 3 and quarter 4.

Okay. So because the question actually for EBITDA margin, so you had good cost savings here also. But your gross margin Q-on-Q has gone down a bit. So could that be due to the Brazil currency? Or there is cost inputs have gone up? Or how should we think about the gross margins for this quarter and going forward?

No. So I think this quarter, the inventory provisioning is higher, because what we did is we looked at what could be sold, I mean, as far as the current inventory is concerned and what could not be sold based on our understanding how the demand is going to pick up. So there's a higher provisioning, which has been taken this quarter. So whether that's going to continue in quarter 3, quarter 4, the answer is no.

What -- but where is Brazil currency impacts hitting?

Not really, Prakash, because I think what we are saying is Brazil is contributing to only 6% of the total business, right, in quarter 2. So I wouldn't say that's the major factor for gross margin going down. Gross margin has gone down because there's an additional inventory provisioning, which we have taken.

Got it. Fair enough. And secondly, on the gross debt and net debt and there's a new item, which has come up, current investments. If you could just explain what is the reduction and what has led to this reduction?

So on a net debt-to-EBITDA, we are at 1.7x, I would say.

Net debt is how much, sir?

Net debts would be close to INR 4,200 crores kind of a number.

Okay. But there is a sharp drop, right? So from...

No. No. Absolutely, absolutely. So I think the net debt number was close to INR 5,000 crores, which has come down to INR 4,200 crores kind of a number.

And any color you'd like to give. What has led to this -- so free cash flow is the improvement in working capital? Or is it just the operating improvement?

No. So 2 reasons, right? So one is INR 440 crores of repayments, which have happened in H1. And there's a good amount of free cash flows, which has got generated in H1, right? And H2, we are looking at higher repayments. And therefore, some part of these free cash flows, which are generated and sitting in investments and cash and bank balances would be utilized towards repayment. So net-in-net, if you look at a net debt/EBITDA number, standing at -- standing on 30 September 2020, it's 1.7. And I think for the full year, we should be lower than that, I would say. So we are on track as far as deleveraging is concerned.

Okay. And what was the current investments, INR 560 crores?

Yes, that's what I said, right? I mean cash generation and surplus cash we invest in short-term investment opportunities, right? So these are basically mutual -- the funds which are parked in liquid funds, yes.

Liquid funds. Okay. Fair enough. And one more, if I may. On the resolution, I missed your point. So Levittown, you're saying expecting by March '21, but what about Indrad and Dahej? The resolution is complete. The last time we said we're expecting desktop inspection. Is there any update?

No. What I had said last time was that we had not heard back. So we've asked the FDA if it is possible to do desktop inspection. And so we are waiting for the response, and there is no update on that.

But from our side, we are done with the CAPA?

Yes, yes, yes. Long time. So the last closure report was sent in June.

The next question is from the line of [ Shanti Patel from SK Investment ].

My question is, where we -- who are the main competitors for us? And secondly, where we stand in the various segments in which we are. Hello?

Sir, are you referring to the Indian market or...

Are you getting my voice, please?

Yes, sir. We are able to hear you.

Which market are you referring to?

Yes. I will repeat the question if you want. Who are the main competitors? And secondly, where we stand in the various segments in which we are as far as the Indian territory is concerned, not export, only local?

Okay. That's a pretty broad question, but I'll try to answer it as best I can. So as per the AIOCD Dataset, Torrent is ranked eighth out of all the pharma companies in India. We are 77% only contribution portfolio, and we have had 9 launches this year, and we plan to have about 4 to 5 more launches this year, which we expect to be our future growth drivers. So historically, we have been growing a few percentage points above the market growth, and we expect to continue to do the same. That's our current standing.

Sir, who are the main competitors in the line in which we are -- I mean, the products which we are manufacturing?

There are many companies in the space that we are.

Can you name a few, first 3?

Top 3 in terms of market share, I guess, would be Sun Pharma, Cipla, Abbott. They are the -- among the top 5 companies.

Who are competitors of our process?

Yes. Yes. Yes.

The next question is from the line of Damayanti Kerai from HSBC.

Sir, my question is firstly on the U.S. business. So since we are waiting for the FDA to revert back, till the time we hear back from them and then we get approval, should we take second quarter as a kind of base?

So, I mean, essentially, we are commercializing a series of product portfolio, which is from 2019 and it is -- base business in the U.S. is intrinsically a price deflationary business. So year-on-year, there's usually a price erosion of, say, anywhere close to 5% to 8%. So we will -- and the price erosion comes from the arrival of new competitors. So for example, on many of our key products during our Q1 and Q2, during H1, we saw new companies receive ANDA approval and submit competing bids to our customers. So I would say that treating Q2 as a base business is fine, provided the competition scenario remains constant. I'm not able to predict as to how many more competitors will come on our key products. But for now, this is what we have to sell, plus the portfolio that we are now getting approvals from our external R&D project. So as I mentioned in the opening remarks, we've got 2 interesting approvals recently. And then going forward from March onwards, we will have the liquids business, which would start to get commercialized.

Okay. And sir, you mentioned sartan which we have discontinued. So are we planning to enter that market? Or what is your plan there?

So we took a call that we need to reconfigure a little bit our manufacturing facilities in order to become a bigger player in the sartan. So we are in the process of doing that. So yes, in the -- not in the coming months, but in the medium term, we would be back in sartan business, but it will not have an impact this fiscal year.

Okay. And my last question is if you can slightly elaborate on your thoughts about Brazil market, that would be helpful. Like say 3, 4 quarters down the line or I think near term, 1 to 2 quarters, how do you see business moving up there?

So I mean, Brazil, I think I don't see a problem in the market in terms of Brazilian reais. So the Brazil market has intrinsically been a double-digit growth market. So if -- I was just seeing that the market actually has grown on an overall basis and more than 10% for the last 4 years. So overall ethical market growth rate in '17 was 13%; in '18 was 9.6%, 10%; in '19 was 10%. And even MAT September 2020 is at close to 10% on an overall ethical market perspective. So the market -- but unfortunately, all this growth in dollar terms boils down to zero. Because what has been gained in the market locally is lost in the currency devaluation. So that performing is a big problem. I don't see the market trend changing. It is a little bit of a similar market to India. And because of the need just so high, the population is large and as the economy grows, pharma market is a durable, double-digit growth market. But unfortunately, due to currency impact, the dollar value of the market remains constant to -- I mean almost stable.

Okay. That's helpful. And sir, one final question, if I may. On the India part, price has played imported role in the COVID part. So I think last 2 to 3 quarters, we are seeing price contribution of around 7%, 8%. So this should sustain, right? Or if you can comment anything on the pricing part of new business.

Yes. We maintain that our pricing is well in range in the next 2 to 3 quarter, and we expect price growth should continue.

The next question is from the line Kunal Mehta from Vallum Capital.

Sir, the first question I have is on the India business. So we're now doing a PCPM of around INR 8 lakhs, which is a very good figure, probably one of the top 5 in industry. So just, sir, from the next -- I would say, for the next 2 years, sir, where do you address on that? I mean -- I'm sure it's a function of how the portfolio does and what happens once things start recurring. But I'm sure you also control [ variable and equation ] by adding new MRs. So any plans to add new MRs? I'm talking from 2- to 3-year perspective. And so where would you peg this number at?

No, there is no immediate plan to add MRs as of now. We are quite confident of achieving our PCPM of INR 10 lakhs in the near future. And that would be driven by portfolio growth and productivity enhancements. We do undertake a portfolio restructuring on an annual basis. And we focus on the high-growth markets and we defocus the low growth markets. So that would be an annual exercise.

Understood. Understood. And the second thing I wanted to understand was that the -- I think the major near-term event, which we are facing right now, is the equation of this price control list. So firstly is just any thoughts on this would be very helpful. And secondly, when I was studying -- I'm studying -- if I look at the last year's -- I mean the list 5 -- which was revised 5 years back, I can see that the majority of the names on the list are single active ingredients. So -- and for us, the majority of the revenue comes from combinations, especially in the top 20 brands. So would it be fine to say that if the same trend continues going ahead, even for this cycle of price revisions, whereby only single active ingredient products are brought into the purview of pricing control, then we would be able to get through -- get out of this -- I mean, we would be able to get through this relatively unaffected? Or is it the case that if in a combination to both the active ingredients separately in the price control list and the combination by design is also under the price control? Would you help me understand this?

Yes. So historically, what we have seen is that whenever there are new additions to the NLEM list, the definition of essentiality means that it has to be, I mean, an essential list. So it can't have multiple products in the same class of drugs. So if something goes in, usually something else may come out. So overall, there might be some impact, but it won't be anything significant. So we don't expect any major impact of this broad portfolio.

Sure. Sure. Because if -- because we have a lot of high-value brands where revenues are north of INR 100 crores. And these brands, in line with the market, they are enjoying good volumes and good pricing because -- essentially because they are chronic and they are well placed. So you're confident that this pricing on a net basis would be -- would not harm us to the extent when you see 2, 3 years down the line as this drifts south? So is that the judgment?

In the current regulatory framework, we expect no significant impact. Yes, that's correct.

The current you mean the [Technical Difficulty] in the next few quarters?

Sorry, I missed that.

I mean by current you mean you expect in this new things...

Sorry, Mr. Mehta. Sir, your voice is breaking up.

Sure. By the current you mean the bigger stretch which was announced in 2015, right. I mean the [Technical Difficulty] is something we will have to wait and watch, right?

Yes, that's correct.

Okay. Okay. And just a observation on the balance sheet. I was just wondering that was -- so when I look at your -- the finance costs which we have, and when I compare it to our peers playing with -- even just like I would say, Dr. Reddy's and all. So I mean, the finance cost which you have is on the [Technical Difficulty] than what our peers are having? And we also have an element of [Technical Difficulty] denominated and NCE backed. And other peers, you also have a U.S. business of $200 million where we are -- we have ForEx entity on that part of the business. So any plans to refinance this debt at a cheaper rate? And any foreign currency, which will build a natural hedge and solve both problems? And if I'm not wrong, cost is more expensive as compared to other peers?

So, I think I'll answer this question in 2 parts. So one is you said the cost of financing looks very high compared to some of our competition, right? So the only clarification from that perspective is while the competition will have a lot of foreign currency loans, we don't have much of foreign currency loan. It's all INR-denominated loans. And what we understand in terms of our financing costs, it's quite competitive, I would say. It's not very high compared to the competition. The other part of the question is, why don't we look at the refinancing of -- in terms of taking foreign currency loans, right, and think about certain natural hedging thing, which can be worked out. So 2 things here. So one is, we have a policy of hedging 100% on the receivables side. So there is a natural premium, which we get when we hedge the receivables, right? In terms of natural hedge, what happens is, you have to give away this premium, assuming that it will set off against any depreciation which can happen. So while you see the competition, you will see only the cost in terms of foreign currently walking in the finance cost. But as far as we are concerned, there is the premium which we accrue as part of the ForEx gain loss. So both put together, it would be more or less similar, I would say, in terms of foreign currency loans. And we would continue the same way, because our Board approved policy is to hedge 100% on the receivables side and also 100% on the foreign currency loan, if it is there for the entire tenure. And because our foreign currency loans are not very high, it's only in terms of the premium gains, which we see on the receivables side. So both put together, you'll see the cost possibly better than competition, I would say.

The next question is from the line of Neha Manpuria from JPMorgan.

My first question is on the India business. If you can give us some color in terms of how...

Sorry to interrupt. Neha, your voice is breaking up.

Is it better?

No ma'am. It's still breaking up.

If so, I will get beck in the queue.

The next question is from the line of Nitin Agarwal from IDFC Securities.

Sudhir, on the other expenses, we were at 27%, 28% of revenues till about last year. At the current date, we're at about 23% or so of revenues. So is there anything to structurally change in the business with the way probably we're doing things now in the new environment, which has sort of brought the other expenses down to this level? Because you are -- our newly hedges is like more of a sustainable number going forward?

No, Nitin, I would not say that because the only thing what we are saying is that 55% of my business is branded generic business. That's point number one. Point number two, what we are saying is that the activity level in quarter 2 is still at 75% to 80%, which was not the case in quarter 1, right? So there's -- in terms of promotional expenses and field expenses, I mean, I would say it's lower than the normal, which should happen. And what we have said is as the economy opens up, as the working gets normalized, let's say, over quarter 3 and quarter 4 and we reach that 100% normalization level, you'll see those expenses coming back. So there's no structural change, I would say. It's only related to the level of activity, which has happened in quarter 1 and quarter 2.

But usually -- I guess, to, sort of, push the point because it's a very sharp reduction we're talking about here. But I mean, you don't see any sustainable sales coming out on the various aspects of other expenses. The way you are doing things now is just -- you're seeing just disappointing this match at this point of time. And we'll still probably go back to 24%, 28% of revenues?

Absolutely. I would think so, Nitin. If not in quarter 3, not in quarter 4, at least, quarter 1 of next year, we will see the economy really opening up and the second wave not coming and things normalizing in a major way, it should come back to that level.

Okay. And secondly a associated point, our staff expense growth also has been on the lower side. Obviously, we're not adding field force in the domestic market. Is there -- so how should one look at that sort of cost aspect from a modeling perspective?

Yes. That's compared to quarter 1, you're talking, right?

As in the whole -- as a Y-o-Y number I'm saying, on a Y-o-Y basis?

So Y-o-Y 358 is becoming 363, right? So there are 2 or 3 things here, Nitin. So one is the currency translation, which plays a very important role. For example, if you see, in case of Brazil, the employee benefits are very high is what we keep on saying, right? I mean it's 10x of what we see in India. So when you convert that into INR, so that expenses will reduce, right? Because the conversion multiple is down because of the BRL USD depreciation, which has happened. So that's one factor which is there. Otherwise, I think in terms of normal increments, we are there with the average increment, which we have been doing in the previous year, a little lower this year, I would say. Additionally, quarter 1, there has been a onetime incentives, which have been given at the manufacturing facilities because we had to keep it running, right? And therefore, there were some incentive schemes which were floated for all the employees who were there in the manufacturing facilities. So yes, I mean, 363 is something I think going forward you'll see a similar number.

And one thing on -- lastly on the business -- on the India business. How should we look at this new product launch engine going forward? And what kind of revenue -- from a growth contribution perspective, how should we see this asset segment playing out over the next, say, couple of years?

If you look at the contribution so far, it's around 2% that the new products have added to the growth. As the markets are opening up now, we are seeing that these brands are in pretty large, fast-growing markets. So the contribution should increase. And these would be the future growth drivers for us in cardiac, in diabetes, in gastro. So the current 2 percentage may increase maybe by 1%, 1.5% in the coming quarters. That's what we hope.

And lastly, Sanjay, on the U.S. business, how are we looking at -- how -- rather given where the -- how the -- way the construct with the FDA is, how should we look at incremental growth in the U.S. from the current quarter?

So as of present, I would say that with a few launches, 1s and 2s here and there from either our derma plant or from an external portfolio, at best, I would say, we can hope for a relative stability to a very low level of decline.

Nitin, before you go off, I just wanted to highlight one more thing in terms of the salary cost. So last year, October, there was a rationalization also which happened. So that is also adding to that growth number.

The next question is from the line of Anubhav Aggarwal from Crédit Suisse.

Sudhir, sir, one question on the balance sheet. The last 2, 3 quarters, your inventory days have been pretty high. Now one could think of this maybe the reason of security that's been on -- everybody was unsure about the supply, and therefore, you were keeping higher inventory. With things getting more normal, what is -- so first, what is the right reason for inventory days increasing over the last 2 or 3 quarters? And what is the stance now? Is it now the time to normalize the inventory days? And additionally, when you answer, payable days also have been very high. So is it that payable days were -- payable terms were good, and that's why you were keeping higher inventory? Some clarity will be useful.

No, absolutely. It's a combination of both, I would say, Anubhav. So there was a conscious call taken to increase the API inventory, let's say, from a 6 to 7 months level to almost 12 months level for all the critical APIs. So that's a call which we had taken. And there is an increase because of that in inventory days. And also -- I mean, most of this, I would say, has happened in quarter 2. And that's exactly the reason why you see the payables also going up because, yes, I mean, to a certain extent, some favorable credit terms were received for these inventory, which has gone up.

When do you see this normalizing?

So I think we'll have to wait for a couple of quarters more, Anubhav, because we don't know. Because people are already talking about the second wave coming in, right, by November, December. So I think till December, at least, we'll continue with the same strategy of having a 12 months kind of an API for all the critical goods -- I mean products we have. Post that, if we see that situation is normalizing, then yes, we'll start derisking the inventory from that time.

Sure. That's helpful. Second question was on what Nitin asked on other expenses. So can we say safely that if sales force was not 75%, 80%, but it was 100%, roughly, very ballpark, other expenses would have been higher by INR 35 crores, INR 40 crores in this quarter? Would that be a number to key forward? Or, let's say, it would be like INR 15 crores, INR 20 crores or INR 60 crores, INR 70 crores? Some ballpark will be useful.

No. I think it's very difficult for me to give you a ballpark. But I really don't know. Because the moment I'll start talking about, in terms of percentage number, you'll be able to gauge what kind of expenses we incur on promotional, right, promotional and field expenses. And it's something which I would not like to share as a policy of the company. But surely, I think these expenses would capture 75% to 80% level of working, which is already seen in quarter 2. So yes, I mean, to a certain extent, it will start going up, if situation is normalizing beyond the 75% to 80% in quarter 3 and quarter 4.

And what is the rate that you're seeing right now in October? Is it still the same? Or has it improved?

Aman, you want to answer that?

Are we talking about rate of marketing expenses?

Yes. So 75% to 80% ratio of field activity. Was it at -- because we are almost end of October right now?

So September was more than 90%.

And Aman, how is it in October now?

We're pretty similar, maybe a few 1% or 2% more. So close to 95% is what we probably expect in Q2 -- Q3, sorry.

Q3. Okay. Sir, then -- okay. So then Q4 should be maybe very likely if nothing happens, should be a normal quarter for us. But one last question for Sanjay sir. On Brazil market, you mentioned that lower focus on tender business. What's the reason for that? Has the margin gone down incrementally because capacity-wise we guys don't have issues? So is the EBITDA so low that we don't want to do this business?

That's what -- yes, Sanjay, go ahead.

No, actually so the underlying core problem was that the Brazil government -- so it's basically tender businesses for 3 types of hospitals: municipal hospitals, state hospitals and federal hospitals. So a couple of years ago, there was a severe budget crunch. So we manufactured the goods to supply the government, but the government did not buy, so last 2 years. And if we don't supply we have penalties. So we have to be prepared to supply 100%, but there's no obligation on the government to purchase. So whenever they have budgetary issues, they cut down on their purchases. And as a result of which, we have important write-offs to our inventory. So net-net, the gross margin that we make from this government tender business is not sufficient to compensate for the kind of shocks that we go through in this business. The volumes are very large. The margins are not as big as in the branded generic business. Plus, we have these unexpected costs from this inventory write-offs due to the vastitudes in the government policy. As a result of everything put together, we decided that it was not worth our while to allocate precious -- not only manufacturing capacity, we need warehousing capacity in Brazil. And we also need to release these products in Brazil from our quality control lab. So all in all, there's a lot of infrastructure that gets blocked for this tender business. Hence, the decision to decrease and progressively phase it out.

And how -- this is my last question. How large was this business for you, guys? I mean, this was tail end of Brazil sales?

No, no. At its peak, it was about 6% and today down to 2%.

The next question is from the line of [ Hiten Boricha from Sequent Investments ].

Sir, my first question is on the margin side. Maybe I have missed in your opening remarks. So like there is a very good improvement in the margin in quarter 2. So what are the expectation of the margins in H2 of this year? And maybe you can throw some light on the revenue guidance for FY '21 and '22?

So I think as a policy of the company, we don't comment on any guidance for future.

So sir, any like ballpark ad based margins, sustainable at least for H2 -- second half of this year?

We really don't know how the normalization is going to happen in quarter 3 and quarter 4. So we'll have to wait and see, yes.

The next question is from the line of Tushar Manudhane from Motilal Oswal.

Just on the Germany business, now that 94% of the resolution is being done and we are, any which case, at the peak levels in terms of the quarterly run rate. Given that we have, any which case, grown at a single digit, even in the past -- pre this issue. So any outlook you would like to throw up on for this business?

So the problem started in November of 2019. So obviously, we had an impact on Q3, Q4 sales in the last fiscal year. As a result of which, you would see, I would say, unusual growth rates in Q3 and Q4 of this year. But on a full year basis, we would be on the positive zone in FY '21, I would say somewhere in the single-digit positive growth zone. Historically, I mean, we feel confident about our German business in terms of a high single-digit or almost a double-digit growth rate. So our objective for the next fiscal year would be to get back to our historical trends.

Got it. And just if you could repeat the reason for this discontinuation of sartan for the U.S. market?

Yes. Yes. Yes. So a call has been made by our technical team that we need to reconsider our manufacturing tool in order to kind of have a dedicated line. I don't know if you guys followed it, but there was another impurity discovered in the sartans in the last few months. And so the issue is becoming -- I would say, it's not getting simplified in our view. So what we decided is to play in this market, we would like to have a kind of a dedicated line to manufacture sartan to minimize or to eliminate the risk of any potential cross-contamination of the nitrosamine. And we are in the process of doing that. It will just take a few months. So we would -- we expect to be back. I can't give you a firm time line, hence, this discontinuation.

So this is not like a part of a remediation measure. It's more of the new imperative, which has led to this planing of the new line in your plant?

Yes, it's overall risk mitigation plan to avoid this nitrosamine issue coming back again and to -- so -- and since we had already kind of stopped a lot of the sartan business, what we had remaining, it was worthwhile to stop that also and to kind of reconfigure and to operate in a new way in this market. So that was, I would say, a risk-benefit call that our management took.

Thirdly, while you have alluded for the debt repayment continuing for the remaining part of the year, but what level would you be comfortable? And then so the reason to ask is the cash flow from operations is definitely much more sustaining. And then maybe 2 quarters down the line, there will be further cash available. So what do we intend to do with that?

No, no, absolutely. So what we said is, as at 30th September, the net debt-to-EBITDA is 1.7, right? And we...

Which is already in a very comfortable zone?

Yes. Yes. So by 31st March, 2020, we should be lower than that is what is the expectation.

Okay. And just lastly, the number of MRs. And have you increased or it's more or less steady?

Number of MRs in India is the same at 4,000.

The next question is from the line of Neha Manpuria; from JPMorgan.

Am I audible now?

Yes, Neha. Better.

Yes. Yes.

Okay. Okay. Perfect. So Sanjay, on business, in your opening comment, did you mention that the growth rate of business is expected to be 3% to 6% in the second half? Or did I hear that incorrectly?

No. What I mentioned was that IQVIA now expect the Brazil branded generic market to grow between 3% to 6% in the calendar year 2020.

Understood. Okay. But our growth should [Technical Difficulty] from what we have seen in the second quarter, right, as the activity level in the branded market picks up?

Right. We would expect to be higher than the market growth rate, yes.

Okay. My second question is on the tender business discontinuation. Was that gradually over the last 2 quarters -- which if you look at the second half sales, that BRL 110 million, BRL 120 million, so what we are doing now, is it fair to assume that, that discontinuation started in the early part of this year rather than in this quarter?

It has been -- so essentially, Neha, we have been defocusing on it for about 4 quarters now. But look -- and the contract is for a 2-year period. So when you sign a deal with the government, it's for a 2-year period. So how we discontinue it is that for new tenders we raise the minimum gross margin threshold, which any new tender has to meet in order for us to take that. So this is how it has been receiving. So the pace of decline is actually linked to the expiry of the existing tenders.

Okay. Sir, are these tenders continue to roll over -- we will see impact for a couple of more quarters. That is a fair assumption?

Correct. My current assumption is that by September of 2021, I'll be able to bring it back to down to 0.

Okay. Perfect. And my second question is on the India business. I think you mentioned that India, we're back to about 95% activity. Therefore, when you look at, let's say, more second half probably over the next 1 or 2 years, in the last few years, Torrent has been supported by growth, improvement in productivity in MR. How -- what will be the growth drivers for Torrent over the next 2 years to go ahead of the market? Would it still be dependent on pricing?

No. We definitely have seen a good increase in volume trends. In many of the top brands, we expect that once the market situation improves, which is near the pre-COVID levels, that's where the volume growth for the Torrent portfolio should also be significantly higher than what we have seen. But as of now, it's unclear when that level would be really seen. We expect that at least for Q3, September data is a fairly accurate picture. September AIOCD data shows a growth of 4% in -- for the market. Against that Torrent is at 8%. So as this trend continues, we expect to continue the higher than market growth rates.

The next question is from the line of Girish Bakhru from Bank of America.

First one, again, on the branded promotion activity that you said is resumed by 80% to 85%. Sorry to ask general, is that even relevant for the industry overall?

I would not be able to comment on that, but I think generally clinics and hospitals have seen a greater increase in activity of medical reps overall. So that's definitely the case in this quarter.

And by that logic, you would also say patient footfalls have also resumed to that extent?

Yes. Patient footfalls have gone up compared to Q1 as well. I would say that maybe patient footfall could be roughly speaking at about 75% to 80% of pre-COVID levels.

Right. And in case still second wave, then, of course, we would probably also see another similar trend, what we have seen in first half, where promotion activity declined. That's a possibility, right?

If lockdowns do happen again, then yes.

No. I mean, I'm saying, let's say, if the lockdowns don't happen, but there are, of course, second waves like seen in many other countries that are happening, winter wave attacks, then in that case, one can expect similar level of decline in promotional activity?

In that case, obviously, safety of employees would come first. So it would depend on how severe the situation is.

Sure. And just related question on India market. Have you launched Dapagliflozin?

That's still an ongoing case. So we'll have to wait and watch.

So is there any time line on when the companies play here on the case?

We expect sometime this quarter that there should be some kind of an order on that.

Okay. And just last one, on the U.S. side. Sanjay, I mean, you guys have been saying that there is a possibility of desktop auditing. Probably FDA is taking its own sweet time. Is there any game plan should that not happen, let's say, for another 2, 3 quarters, I mean, are we seeing more options in terms of contracting opportunities or things like that?

So I think I'll just correct one thing that we have been saying that we don't have visibility here. So we are not getting -- we have made our request, but we have no visibility. And I think we are not alone in this boat. A lot of -- quite a few of our fellow companies from India are in the similar situation. In terms of game plan, so in the best of circumstances to change manufacturing sites for approved product is a lengthy process that requires a bit of investment. But to change manufacturing sites for products which are not approved is even more, I would say, onerous and time-consuming as well as resource consuming. So it's a call not to be made lightly. It's an option that we have studied and we continue to study. But quite honestly, before this COVID, it did not make sense. But now given what is going on and the uncertainty, it is certainly something that is back on the table.

But is there an optionality like -- I mean, while, let's say, next, suppose, 6 months go like this, and there are no material desktop audits, then can we utilize these assets significantly higher for other markets or things like that?

No. No, without a doubt. So these products are already being declined to other markets -- I mean are being used. Because the way our R&D works is initially the products are developed for the U.S. market, but subsequently the same adaptations are made for Europe or for Latin America or for rest of the world. So the R&D operates in a normal situation like that. So that process is ongoing. But I was specifically referring to the investment that was made to develop the ANDA for the U.S. market. So it's quite a kind of hard spot to be in. And -- because the investments required to, let's say, to commercialize these products without having your facilities approved is very high as well as the time frame.

Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Sanjay Gupta for his closing comments.

Thanks, everyone, for joining in today. I hope we answered questions to your satisfaction. And if there are any further questions, please don't hesitate to call us. Thank you. Bye-bye. Have a good day.

Thank you. Ladies and gentlemen, on behalf of Torrent Pharmaceuticals Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.