Torrent Pharmaceuticals Limited (500420) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Torrent Pharmaceuticals Limited Q1 FY '22 Earnings Conference Call. We have with us today Mr. Sanjay Gupta, Executive Director, International Business; Mr. Sudhir Menon, Executive Director and Chief Financial Officer; and 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. Sudhir Menon. Thank you, and over to you, sir.

Thank you, and hi, good evening, everyone, and welcome to Torrent 1 -- Torrent quarter 1 FY '22 earnings call. At the outset, quarter 1 growth was backed by continued growth momentum in the branded generic market, mainly India and Brazil. The second wave of pandemic impacted the recovery trends across some of the key markets we operate. Very shortly, in terms of financial performance during the quarter, revenues were INR 2,134 crores, up by 4% on a year-on-year basis. EBITDA was INR 717 crores, up by 8%. Profit before tax was at INR 484 crores, up by 20%. Net profit after taxes was at INR 330 crores, up by 3%. The company will now start utilizing the MAT credit, which is grouped under deferred tax, as the normal tax will become applicable from this year before the company gets into the new tax regime of 25%. The tax cash outflow will continue to be 17% for stand-alone India. I shall now request Aman to provide insights on the India business performance.

Thanks, Sudhir. India business revenues at INR 1,093 crores, grew by 18% on a year-on-year basis. Growth was driven by strong momentum in top brands across all therapies and was complemented by new launches. As per the AIOCD dataset, the Torrent's Q1 growth was at 24% versus the market growth of 37%. The market growth includes high contribution from COVID treatments and a low base from last year. We have launched baricitinib during this quarter and are conducting clinical trials for molnupiravir. Both of these are licensed products for COVID. And we continue to look for more partnership opportunities to widen the portfolio. Torrent has launched its Trade Generics division during the quarter with a complementary portfolio to the Rx business. PCPM for the Rx business for the quarter was INR 10 lakhs with an MR strength of 3,600. Torrent continues to focus on brand building and specialty approach and has 16 brands in the top 500 of the IPM, with 11 brands more than INR 100 crore sales. I'll now hand over to Mr. Sanjay Gupta to take us through the International Business.

Thanks, Aman. Speaking first about Brazil, which is our largest branded generic market outside India. Brazil Q1 sales were at BRL 108 million, up by 14%. Growth was aided by strong performance in our generics segment, which now accounts for about 7.5% of our top line. Growth was also helped by new branded generics that were launched. There were 2 brands launched in 2021, which have contributed to the growth, as well as the recent price increases allowed by the authorities from April onwards. So as per IMS, Q1 FY '22 covered market growth was at 11.6%, but Torrent growth was at 9.4%. IMS expects Brazil pharma market to grow at about 10% in 2021. And we expect our growth to be superior to the market growth rate. Moving on to Germany. Germany sales were at EUR 29 million, flattish growth versus last year's same period. IMS for the last 3 months is showing an overall market degrowth of minus 1% as compared to minus 4% in 2021. IMS reflections on Torrent show a growth of 15% in the last 3 months. As the COVID situation improves, we expect the German generics market to return to its long-term growth rate of 3% to 4%, with Torrent growth returning to high single digits. On the U.S. side, U.S. sales were at $36 million, down by 24% on a year-on-year basis and down by 3% on a Q-on-Q basis. Growth continues to be impacted due to lack of new product launches, pending the reinspection of our facilities and price erosion in the base portfolio. As of June 30, 54 ANDAs were pending approval with the U.S. FDA and 7 tentative approvals were received. I would like to conclude by stating that the branded generic markets led by India and Brazil continue to drive growth, backed by our top brands and performance of new launches. We will continue to focus on returning our German and U.S. business back to growth and to further deepen our presence in all our core markets. Operator, we can open the call to questions, please.

[Operator Instructions] The first question is from the line of Sriraam Rathi from ICICI Securities.

Sir, firstly, on India business, I mean, if you can break it up into the price growth and volume growth and also some idea on the -- how the chronic and acute businesses are performed?

Sure. So AIOCD data shows Torrent's growth at 24%. Out of that, 14% was volume, 6% was price and 4% was new products. And on a broad basis, I think chronic -- sorry, sub-chronic and acute definitely had much higher growth, firstly because of the low base last year. And also, there was a significantly higher demand from COVID prescriptions during the quarter.

Okay. Got it. Got it. So 6% is the price growth? And...

Yes.

And secondly, Sudhir sir, on the other expenses part, I mean, this quarter, we have seen that, I mean, it is lower even Y-o-Y also, even if you exclude the R&D. So what exactly has driven that? Is it because of the lockdown in the first 2 months of this quarter? And how should we look at this number going forward? Because I think from the last 4, 5 quarters now, more or less, it is in the range of INR 350 crores to INR 370 crores.

Marketing expenses were certainly, I would say, because of the second wave this time were lower than what we had planned. But I don't think there should be too much of an increase from here at the current rate. So this should be a pretty representative number in terms of marketing spends for the year. Sudhir, if you'd like to add anything?

No, no. Perfect. Perfect.

Okay. So we should work with this kind of number going forward also towards the increase in sales?

Plus, minus here and there, Sriraam.

Right. Okay. Got it. Got it. That's helpful. And just lastly, one thing, I mean, what should be the reported tax rate now, I mean, this year?

So Sriraam, just to give a background, so the government has come out with a new tax regime, right, about 25% for all the companies. And what is said in that course is that no exemptions would be available and 25% would be the tax rate for everyone, okay? And the government also gave an option to people that the people who had MAT credits in their book, they can still continue on the old regime so that they can utilize the MAT credit. And once that is done, they can transit into the new tax regime. So for us, it's started now. So the cash tax would continue to remain at 17%. And the MAT credit utilization will start for the balance. So the effective tax, including deferred tax, would be roughly 30%, 31%. But the cash tax would be roughly 17% because there will be a MAT credit utilization from the balance sheet coming into the P&L.

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

Sudhir, on the employee cost, given that we had rationalized our MRs during last year -- last quarter, the quarter-on-quarter increase is primarily because of increments? Or -- just wanted to get a sense there?

So largely increments, Neha. But quarter 4, if you recollect, I had also said there was a reversal on some provisions to the tune of INR 7 crores to INR 8 crores. Other than that, it's an increment impact which is there. So ideally, 341 should have been, let's say, 350.

Okay, understood.

Yes, that's the increment.

Okay. And Sanjay, on Brazil, the quarter-on-quarter decline on -- it is about BRL 140 million, close to BRL 110 million. Is this some inventory correction in the market? Or if you could give some color on that? And second, on Germany, now that our quality issues have resolved, we were expecting normalization of sales to happen, given most of Europe has pretty much opened up. Any reason why we are not being able to ramp it up to the EUR 30-plus million level that we were seeing before the quality issue?

Sure. So starting with Brazil now. So generally, traditionally, in Brazil, Q4 sales are always high. And the reason is that the distributors speculate on price increase which takes place on the 1st of April. So it works pretty much the same way every year. So there is usually on Q-on-Q, a precipitous drop in Q1 versus Q4, which is normal. So I don't see anything unusual here. We decide on the level of inventories we want to keep in the channel at the end of March. And we kind of -- and it does go up. And then by the end of June, it comes back to a normal level. So Neha, the appropriate comparison would be year-on-year, not quarter-on-quarter for Brazil because of this phenomenon. For Germany, there are a few things here. I would have liked to see a higher level of sales. So what is holding us back from that EUR 30-plus million level, firstly, it is the overall market. Last 3 months, we've seen the market go down by minus 1% again. And I was expecting it to return to growth, but the second wave kind of impacted it in March, April, May, and now we had a lower market dip. Secondly, what has happened is we have about 10% to 12% of our business in the OTC space, which has suffered disproportionately because the sales of this business has actually declined. So that has had an impact. What I can say is, going forward, our internal issues are resolved. And as the market, I would expect it to come back to the traditional 3% to 4% range and then for us to be in the high single digits, 7% to 9% range, this could be end of the year. So hopefully, in the next few quarters, we'll be able to show you numbers in that range.

Sanjay, just to add to what you said, the OTC impact is because of the lockdown, right? So quarter 2 should be better. Sanjay?

Yes, yes. Absolutely.

The next question is from the line of [ Angelo Bell ], an individual investor.

I just wanted to have a quick overview of the company that how is it with regards to the U.S. pricing? Is the pricing pressure returning? And if so, what are the steps or how does Torrent Pharma foresee it?

So on the U.S. side, the #1 cause of decline in sales has been the pricing pressure that we've been facing. And the pricing essentially we face for the last because we have a relatively mature portfolio. We have not had much launches in March of 2019 when the FDA issue started. So on the mature portfolio, how it works is that there are new competitors that emerge every few months, and then they make competitive bids to your customers and there is a pricing impact. So I would say that for Torrent, we've been seeing high single-digit pricing impact across our portfolio on an annualized basis.

All right. But are there any remediations, which you're looking forward that it doesn't impact as much moving forward? Are we looking for...

Generally, the way to counter the pricing impact is to have new product launches, which is like the oxygen of the U.S. generics market and of the players. Unfortunately, we seem to be a bit, let's say, jammed up on that front. So -- but last few years, we've continued to file. So in '18-'19, I think we filed about 20 ANDAs; in '19-'20, about 12; and '20-'21, about 12. So we've been continuing to make new filings in the U.S. And as soon as the facility issues are resolved, we expect to launch about 12 to 15 products a year. And that would more than compensate for the pricing decline in the base portfolio and lead to -- lead us back to growth.

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

Just missed on the opening remarks on the India outlook as well as gross margin and EBITDA margin outlook. I mean while India growth is very strong, but gross margins are a tad lower. If you could explain that and the outlook as well?

Yes. So I'll first take the gross margin question, Prakash. So basically, although the India contribution is higher, there are 2, 3 impacts which have happened this quarter versus quarter of last year. So one is the export benefit income not being there this quarter versus same quarter previous year. That impacted, I would say, 0.25 kind of a number. The other is the Sikkim benefits are over for us, right? So 2021 was the last year. So that's, again, impacting the gross margin by another, I would say, 0.25. So both put together, it's 0.5, I would say. The other thing what has happened is India -- although the India share is higher, I think there's a skewness towards the acute portfolio, which I think the concentration is a little higher compared to the quarter 4 or last year same quarter. And that has caused a drop in the gross margin, I would say. So it's basically the product mix, which is driving, which anyways should come back in the next quarter, I believe.

Okay. And the outlook on the India business, sir?

Yes. So if you look at the June data at 14%, that was practically with the lowest COVID cases across the country. So April, May had a high growth, and June was significantly lower. So depending on the footfall recovery as the country is opening up now, substantially pretty much earlier, apart from a few metros in a few states, our view is the double-digit growth for the market should continue even without the COVID drugs going ahead.

Okay. And do you think your entry now with the COVID drugs, molnupiravir and the first one and you were expecting to disclose one more. So is there any color to that? And do you think these products have a long runway of growth? Or these are like getting prepared for if at all there is a third wave? How to think about this pipeline that you are building?

Yes, it would be more for -- if at all the future wave, that would be where these products will be prescribed the most. It will not be a long-term prescription.

Okay. And for the long term, in terms of new introductions after Dapa, are there any new introductions around nutrition or preventive health care or any other segment, which will drive future growth?

The -- CNS, we've had a few launches. One from last quarter has done well so far, brivaracetam. So that market is picking up quite well. We've also launched perampanel, which is another antiepileptic. So CNS has seen a good traction, I would say, of new launches. Apart from that, baricitinib was already launched this quarter as well. So I think this Q1, we had about 4 new products. We are looking at a few nutritional extensions in the coming quarters as well. And then the next wave of launches will be after the patent expirations next year, large launches, I would say.

Okay. Understood. And on exports, I see that Brazil currency after long has reversed. We are still near industry growth. So would we -- when do we start seeing the higher growth in Brazil, given you just mentioned that 10% industry growth and we expect to outperform that, plus there will be the currency tailwind, which should start? Or that is unlikely?

So the currency tailwind is -- I mean from what we have seen on the economic forecasts done by various banks, et cetera, it seems to be unlikely. So the country seems to be fairly stable this year, forecasting a GDP growth of about 6%; and next year, same figures in the 3% range. So in terms of inflation also, things are pretty stable. So all in all, I don't expect the currency to devalue substantially. In terms of growth, I think you will see that growth will come from 3 or 4 things. One is we -- as we had discussed that we are investing in our generics business. So we hired -- since last year, we hired 7 additional people. We'll be hiring some more people this year to push the generics business. And that has grown quite handsomely, and that will continue to grow as we launch more products. Now the second thing is we benefited from the price increase that took place this year on time on April 1. So the price increase that was authorized for -- it's by category of products. But for the most competitive products, the government authorized a 10% price increase. So that will benefit us as many of our products fall into that category. And then thirdly, we have new launches, which are on the calendar. So last year, we had launched 2 new products. One was mirtazapine and the second was bisoprolol. Mirtazapine is already showing a double-digit share in prescriptions and volume. And bisoprolol is in mid-single digit, but the goal is to reach double digit soon. And then this fiscal year, we will launch about 5 products. Some of them are quite major products. And so they would help push that growth rate much above the market growth rate. So that is our expectation.

Okay. And one question on growth expectations. So we have seen India reviving quite a bit. We have seen Brazil reviving now. Germany, you had a couple of quarters back. So when do we start seeing double-digit growth? Because U.S. is something, which is pulling down our double-digit growth, both in terms of top line and EBITDA growth. So when do we see that coming through?

Unfortunately, Prakash, we have no position to give any guidance on the U.S. And the main problem there is the FDA. When do they start traveling to India, when do they inspect the plants and start approving our new products. We are, from our side, doing whatever we can in terms of filings and getting products from third parties, but that has a limited impact. So last year, we launched only 2 new products, which are both manufactured at third-parties. Coming year, if the plants don't get approved, we'll have lower -- single-digit number of launches.

Prakash, I'll give you 2 data points actually -- or rather 1 data point. So for this quarter, the U.S. impact on the overall growth is around 7%, right? I mean because last year, quarter 1 was roughly $47 million, and it came down to a base of $36 million in quarter 4 this year, right? And that's something which we are maintaining. So assuming, let's say, quarter 3 -- I mean from quarter 3, the 7% impact should not be there because we are continuing the same base of $36 million, $37 million right?

Okay. And assuming you have double-digit growth across the other 3 markets, you can achieve double-digit growth?

Correct. Correct.

Okay. Fair enough. And last question for you on cash flow generation for the quarter and any debt repaid?

Yes, we repaid around INR 350 crores approximately.

These are refinances or largely from cash flow from operations?

From cash flow.

The next question is from the line of Shyam Srinivasan from Goldman Sachs.

Just one on -- in the press release, it says you've launched a Trade Generics division during the quarter. What's the idea here? Is there any outlook that you want to share on this?

Yes. We launched the division in Q1. And so I think we would want the business to stabilize a bit first before sharing more details. But broadly speaking, it's a complementary portfolio focusing mainly on the acute segment, predominantly acute and some sub-chronic. There's barely any chronic share in the Trade Generics business. So while we would look at having organic launches in this basket, we would also look at shifting some of our prescription brands to the Trade Generics division at some point where there would be a higher growth potential. These would be in molecules or segments where there is a greater consumer recall and self-medication. So as of now, I would say it's a good start, but we would wait for maybe another quarter or 2 to comment more on the trajectory.

And if you were to look at the margin profile for this, would it be very different, you think? Or in a kind of an umbrella approach, it should kind of lead into through the entire India business? How should we look at and maybe the timing of why we started it now? Just curious.

The margin profile would be lower than the prescription business, for sure. The nature of the business is such that -- I mean you have to be at that price point, plus the channel margin is significantly higher. And in terms of the timing, I think this has been something that we've been discussing internally for quite a while. But because of COVID disruptions last year, it wasn't appropriate to launch. It requires a completely new supply chain, new set of distributors. So once that situation stabilized, we started working on this sometime around January, and we ended up launching it this quarter.

Got it. And second question just is on the updates of the U.S. from the Levittown facility about some of the oral liquids. Have we done anything yet? Or is it not material enough product to see in the numbers? I remember we had a 12 million annual target to kind of get back. So I'm just curious what's happening there.

So far, we've not started commercializing products. In the start, actually, we had a couple of months of delay. So we started selling some products in October. But you won't see the impact in the numbers. At least in the initial few months, it won't be material enough to move the needle.

So you are saying it should be a more fiscal '23, where we will likely see the impact of all these oral liquid launches, okay?

Correct.

Okay. And the last question is on sartans. Are we now back -- sorry, I missed -- may have missed the update. But just what's happening on the sartan side?

Sure. So we've launched 2 sartans on the market. The third one would be launched in this quarter. The top line, you will see some impact. But the margin profile on sartan is not what it used to be. So we will get our fair share on a couple of sartans, and those numbers should start coming in the top line from this quarter onwards.

You mean Q2, you mean, right?

Yes.

Got it. Lastly, on R&D, I think slightly slower than the run rate you've had, say, I'm just looking Q-on-Q. But is it the same, like 6% to 7%? And where are we -- what are we kind of filing? Where is it being directed to? Are we doing anything incrementally in terms of either complex filings, if you can just share some gentle outlook on the R&D side?

So -- I mean Sudhir can comment on the expenditure level. But in terms of filings, because of the filing remains in the 4 core markets. And to the extent possible, we try to have common products, so do common developments across all our geographies and particularly in expensive areas like oncology or -- it changes the risk profile of the portfolio, right, if you can leverage your R&D investments across multiple geographies. So our focus is on that. For the U.S., we do products with, I would say, generally complex products. So we stopped doing now. We do a very low single-digit number of simple vanilla oral solids. And generally, we are doing products which require a little bit higher level of investment, a higher level of risk. And overall, the number of ANDAs would be in the 10 to 12 range. So in the past, we've done up till 20. But going forward, it will be more in the 10 to 12 range with some single-digit simple generics, but majority of the products having -- so a good example would be Dapsone. So in April of 2021, we got a tentative approval from the FDA for Dapsone, which is an acne product for which we conducted clinical trial in patients in the U.S. So the level of investment was higher than what historically we've been used to doing. And the tentative approval speaks well to the fact that we would get approval on that product. So you would see more of those kinds. And we're also building a large onco portfolio for all our markets. So onco products are very expensive to develop, given the cost of the R&D as well as the cost of the API. So we have a new facility outside of Ahmedabad where we would be developing these products across all geographies. So those are the kind of investments we are making right now.

Got it. And the last question is on EBITDA. I think EBITDA, excluding other income, is 32%. This has been higher than what we had talked in the past where we thought there was going to be a trade in terms of margin once things normalize. How should we look at this EBITDA percentage?

Okay, Shyam, number one, as a policy, we don't give guidance. But if something was possible to be talked about in a scientific way, we could have done that. But now people are already talking about the third wave, right? So I would still wait for one more quarter to see where the full year can settle. So give me one more quarter, please.

The next question is from the line of Nitin Agarwal from DAM Capital.

Aman, just coming back to the Trade Generics business that we initiated, I mean, it's in contrast to our general philosophy of high growth margin businesses. So what is the landscape prompter to you, or has been prompting you in the past to look at this piece of business going forward in the year?

No. I think earlier, we had -- I mean a lot going on, I would say, over the last 5 years in terms of integration of businesses and mergers for portfolios. So I think we consciously stayed away from entering this segment. And it's also reached, I would say, a level where it can add meaningfully to our portfolio now. The size is, I would say, much greater than it was probably 5 years back. So -- and anyway, our acute portfolio in the Rx business is not very significant. So this gives us an opportunity to partake in the acute segment as well. So that's -- the idea is to expand our overall market-sharing portfolio across TGx, Trade Generics, plus branded generics.

So this is largely going to be around the acute portfolio or acute segment, Trade Generics business?

Yes, yes. There's barely any chronic sales in this segment because substitution is not very high or even retail recommendation for chronic products is not very high. So this is most conducive for acute and sub-chronic.

Okay. And at what scales do you see it becoming meaningful for our overall India business?

I would say probably after the first year of launch, so maybe 4 quarters -- 3, 4 quarters from now, within the near term. So right now, we've launched with the first phase of the portfolio. That's about 50, 60 SKUs. But that's, I mean, a long way to go for us to add more products here. So anything between about 3% to 4% of our total India business contribution is what we can look at as a reasonable target in the near term. And then at some point later, we can see how it's progressing. But I would say that would be an immediate target to have.

Got it. And secondly, on the U.S. business, so, I mean, whenever the U.S. business sort of starts on again in sense of the new product launches coming through, we have about $150 million run rate give or take right now on the business. And the dynamic in the U.S. business, especially rural side have changed very meaningfully over the last 3, 4 years, I mean. So realistically speaking, where do we see this business really heading to in terms of size over a period of time, say, next 3 to 4 to 5 years for investment that we're making and what you see in the market?

So in terms of the business rate, we are very small in the U.S. So essentially, I would say that our business is now doing about $35 million, $36 million a quarter. From these levels, I don't expect further declines. I mean it's -- I would expect it to be more or less around these numbers in the quarters ahead. And then new launches would contribute meaningfully to moving the needle upstairs. Medium term, I mean given that it's a $50 billion market, to do $500 million in U.S. revenue, it's not something which is outside the realm of possibility, and it's something that we are planning for. And then we continue to work in terms of [indiscernible]. So after we get through this FDA barrier that we are currently struck in, we should be able to return to growth with around 10 to 15 ANDAs and new approvals and launches in each year.

Got it. And secondly, in the annual report, there is a fair bit of mention of our evolution of R&D efforts. So these efforts are largely for -- targeted towards domestic launches or there is some possibility of some meaningful launches in the export market also from those places?

So in the U.S., we're building a small portfolio of 505(b)(2)s. Currently, we have 3 and we aim to add 1 to 2 every year. So that's where we are going. So eventually, at some point in time, we will have a small promotional activity in the U.S. We are doing this in partnership, which have a lot more experience in marketing branded products in the U.S. So that's the approach. And for India, Aman is doing incremental innovation also. And I think there are a few products on the market. So Aman, you might like to speak about it.

For the MBBS, you mean?

Yes, yes, yes.

Yes, that's our tapentadol nasal spray, which has been launched a few months back. And essentially, this is the first-of-its-kind nasal spray for severe pain, whether it's a postoperative pain where there's no other alternate. So right now, it's only for use in hospitalized cases. So the market itself is not very large, but the product is, I mean, received very well so far. So we hope to capitalize on this launch.

And this will be the last one. Sudhir, this MAT credit utilization, over what period do we see our credit getting utilized and then going back to the 25% tax rates in the domestic business?

Nitin, I think between 4 to 5 years.

So for the next 4 to 5 years, it will be at the 30% to 31% reported tax rate?

Yes, including the deferred tax. But as I said, cash tax is only going to be 17%.

Yes. But on a reported basis, 31% for the next 4 to 5 years?

Yes.

Okay. And -- okay, because the bulk of our profits are all sitting out of the Indian subsidiary itself.

Yes.

The next question is from the line of Abdulkader Puranwala from Anand Rathi.

Just one question from my end. So what you mentioned to the earlier participant that the U.S. business would have -- would not go below the $35 million, $36 million quarterly run rate. So currently, if you look from that point, what would be the quantum of the fixed asset, which would be dedicated towards the U.S. and which would be not generating any top line for us? And how do we see the ramp-up to happen once the plant gets approval in the near term?

Sudhir, you want to answer that, please?

Yes, yes. So I think it's a difficult question because all the manufacturing facilities, which we have, is fungible law and the way plant is basically looking at the volumes over the next 3 to 5 years on a global business. So I don't know how to respond to that as to what percentage of capital is -- manufacturing capital is assigned to U.S. I mean there can be some thumb rules of looking at it, right? I mean for example, what is your per pill CapEx, which you'd spend in putting up the manufacturing facility? And based on that, what are the volumes, which are getting manufactured for the U.S.? And then see what extent of the capital can be allocated to the U.S. That could be too theoretical, I would say.

Sure, sir. Understood. And my next question is on the India business. So India, we had a fantastic quarter. But -- I mean as we stand today, could you provide some outlook as how the group is planning now that the COVID cases are going down and the market is really stabilizing? So what is your stand point now?

Yes. So June data is the most recent that we can look at, the 14% growth of the market. And that may have some element of some COVID drugs, part of the growth, but not very much. So I think going ahead, if you recall, even last year, the base started normalizing month-on-month. So our view is that 10% growth within that range should be doable going ahead. And of course, a lot of it will depend on whether or not there is a future wave. But as of now, this is what the situation looks like, in our view, particularly as most markets have opened up significantly.

The next question is from the line of Nimish Mehta from Reserves Delta Advisors.

My question is more about the strategy. I mean now that we want to focus on Trade Generics, is that because we believe that the market is likely to shift in that manner or it's more opportunistic? Like I'm just trying to understand how we see the market because we are trying to focus on a segment, which is not as high margin as we used to otherwise focus on?

No, absolutely not. In fact, our view has always been that both segments have their own space to grow. The branded segment will grow and the Trade Generics will grow without eating into each other's share. It's just a matter of us getting into -- rather expanding our portfolio reach for some of the acute segments, which we haven't really focused on that much and which gives us a pretty good opportunity to enter. So it's not in any way going to affect the branded segment at all for us. And in fact, entering in this also, we've seen how difficult it is to really get products substituted, especially in the chronic space. So this even gives us more confidence that the branded business is not really at any risk from this.

So is this more like an expansion into new therapies? Or -- again, what I'm trying to understand is more Torrent-specific strategy? Or you think the market is likely to shift?

No, this is more specific to Torrent because I think we were probably one of the last companies to enter this segment. Most of the other peers are already present in this segment.

Okay. Got it. And the other -- actually, the reverse of that is what I understand you're likely to do with U.S. You're trying to focus on 505(b)(2), which is more like branded so far, otherwise U.S. is a generic market. So again the same question, is it more Torrent-specific or you think there's more opportunity in the 505(b)(2) space when it comes to U.S. market than the normal generic space?

It's a different profile of business, right? So it's good to have a -- so it's not that you're going to place all your eggs into 505. So if we do 12 to 15 ANDAs a year, we're going to do 1 to 2 505(b)(2), like moving up the learning curve. And these products generally can enjoy some 3 years of exclusivity. But the skill set required to succeed is a little different than what we do in our core generics business. So it's -- I would say it's an evolution of the company towards the branded space, but it's not as if that's the only activity that you would be focused on. It's a complementary activity.

Got it. So will we be also developing a sales force for 505(b)(2)s that we might be targeting...

Initial products, we partnered with a company that has a sales force, leveraging the partner's field force.

The next question is from the line of Bharat Celly from Equirus.

Sir, just wanted to clarify on the tax part. So are you saying that the tax rate is going to be around 30%, 31% and cash tax will be around 17%? Is it the right understanding?

That's right, yes.

And sir, just on the margin perspective. So given that we are saying that our OpEx or the other expenses are going to stay at the current level. So directionally, how do you see margins to be going forward in the same quarter? Is it going to be something similar to what we had this quarter? Or there could be some skewness towards downward or upward trend? So just from a trend perspective, I understand your [indiscernible] absolute margins average.

So I think that's what I answered in one of the questions earlier, saying that I would like to wait for one more quarter before I start looking at it directionally how the margin will settle for this year.

Right. But in any case if, let's say, there is no COVID wave or if -- hypothetically, if we put it both the way if you could give that?

See, if there was no COVID, the margins would improve by 1% every year.

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

Just one clarity on this Trade Generics initiative. What kind of -- can you just talk about what kind of investments this would require roughly? I'm not looking for the exact number, but if you can just walk me through. And the reason I'm asking this question in context that there is always an overhang on this segment because the channel margins are so high and the government can clamp down on the margins at any point of time. So that's the context I'm asking that what resources are you devoting when you're starting this business. And have you taken a call that specific clamp downs from government is not going to come in and that's why now is the right time to start it?

So the initial investment while entering this business, so there are 2 ways one can enter. One is by having a large field force attending to retailers, ensuring distribution. And the second is just going to the distributor who then manage the last-mile delivery. So that's what we have gone for right now. So we don't really have a large field force to begin with. We've got about 20, 25 reps across India who are responsible for this business. So if the business reaches a size large enough to handle a larger field force at some point, that's when probably there could be some synergy benefit of having our own field force so that the distribution margin can be cut down. But as of now, that's not the case, and we think this is sustainable for at least the next 1 or 2 years. And then we can see later on how to take it up forward.

And the products, are you manufacturing it? Or these are mostly contract manufactured products?

I would think mostly contract manufactured.

[Operator Instructions] The next question is from the line of Sriraam Rathi from ICICI Securities.

Just one thing. I mean I think on the balance sheet, the deferred tax is around INR 421 crores. So does that mean that until that is being utilized, I mean, after that only, it will be 25% tax rate from the...

Sriraam, if you look at the breakup of the deferred tax, because when we show it as a deferred tax, it's netted up against deferred tax liabilities as well specific to a country. So if you look at the breakup, you will find MAT credit at INR 975 crores, which needs to be utilized.

The next question is from the line of Prashant Kothari from Pictet.

1 This is Prashant from Pictet. My question is again on Trade Generics. Do you see this kind of happening across companies now where each company, wherever they are not present, you'd try to launch through the Trade Generics segments in order to capture that market? And the outcome of that would be that there is a generic kind of a price depletion, which happens in the industry as your kind of companies try to grow their Trade Generics business, and obviously, some of our focus mostly on the branded part?

So I would not be able to comment on what competition is looking into. But broadly speaking, this is a completely contrasting portfolio. So there is no real overlap that this situation can happen where pricing can be under pressure for the branded business or branded products. The whole distribution channel is also completely separate for Trade Generics. So there's practically no scope of conflict on that front. So -- and that's how this seems to be an opportunity for us to launch these new products, especially in the acute space, where we felt there was a significant gap in our portfolio. And that's how we'll continue to build on this as well.

Okay. Okay. And it is just like the overlap might not be we would react focally, but will surely be overlapping with other companies' portfolio and as customers move from branded to your trade generics, there is a price fluctuation, which happens for the customers. And if everybody starts doing the same what you are doing and there is an overall price fluctuation in the market, overall kind of revenues will come down?

Yes, yes. Sorry, just to clarify on that. There is a very specific segment of therapies where Trade Generics has a higher share. Most therapies, Trade Generics is not significant in terms of market share. So it should not affect the overall market, even if more people enter this space, more brands enter this space. That segment has always been this competitive in the Trade Generics segment. And most of the other, particularly chronic segment, should not see any impact from this.

Okay. And secondly, maybe a bit unrelated to the earnings here. But what are your thoughts on the consolidation of the distribution channel? Is it something which could be meaningful, eventful in the years to come by?

Consolidation of distribution channel in India, you're referring or...

India only, yes.

If you could be a bit more specific about anything...

There are companies like PharmEasy who are trying to consolidate on the distributor side. Is it something which is already meaningful or could become meaningful? Like are there other kind of players out there who could be doing the same and thereby kind of reducing the bargaining power of pharma companies like yourself?

No. As of now, we've not seen any impact, and we don't really have any direct selling to new pharmacies. So that impact should not be there, in our view.

[Operator Instructions] As there are no further questions from the participants, I would now like to hand the conference over to Mr. Sanjay Gupta for closing comments.

Yes. I think we can conclude the call here. Thank you for participating, and we remain available to answer any further questions. Thank you and good night. Bye-bye.

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