ZIM Laboratories Limited (541400) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. I'm Akash, moderator for the conference call. Welcome to ZIM Laboratories Limited Q1 FY '27 Earnings Conference Call hosted by Go India Advisors. [Operator Instructions] Please note, this conference is being recorded. I would now like to hand over the floor to Ms. Priya Sen from Go India Advisors. Thank you, and over to you, ma'am.

Thank you, Akash. Good afternoon, everyone, and welcome to the Q1 FY '27 Earnings Call of ZIM Laboratories Limited. We have on the call Mr. Zulfiquar Kamal, Director, Finance; Mr. Shyam Mohan Patro, Chief Financial Officer; Mr. Zain Daud, Investor Relations; and Mr. Piyush Nikhade, Company Secretary. We must remind you that the discussion on today's call may include certain forward-looking statements and must be, therefore, viewed in conjunction with the risks that the company faces. May I now request the management to take us through the financials and the business outlook, subsequent to which we will open the floor for question-and-answers. Thank you, and over to you, sir.

Thank you, Priya. Good afternoon, everyone. This is Zulfiquar Kamal. Speaking on behalf of the management team, I would like to warmly welcome you all to ZIM Laboratories Limited earnings conference call for the first quarter FY '27. I trust you have the opportunity to review our financial results and the investor presentation, both of which have been made available on the stock exchanges. Before I discuss our business performance for the quarter, let me begin with an update on EU GMP remediation process, which continues to remain one of our highest strategic priorities. As you are aware, our manufacturing facilities underwent EU GMP reinspection conducted by German and Portuguese regulatory authorities during May '26. The inspection has now been completed, and we are currently awaiting the final inspection report from the authorities. Based on the draft observations shared during the inspection process, we have already prepared a comprehensive corrective and prevention action, CAPA plan and are ready to submit it immediately upon receipt of the final report. Over the past year, we have made significant investments to strengthen our quality systems, manufacturing processes and compliance framework. While the regulatory process is now in the hands of the authorities, we remain confident that the extensive work undertaken over the past several months has been positioned us well for a successful outcome. With the inspection now completed, we believe the company has entered the final stage of its EU GMP remediation journey. Subject to the regulatory review process and the time lines, the successful completion of this exercise is expected to significantly strengthen our position in regulated markets and unlock meaningful growth opportunities for our innovation-led portfolio. Turning to our business performance. The first quarter reflected healthy revenue growth, supported by continued strength in our core pharmaceutical business. Our export business remained resilient despite ongoing geopolitical uncertainties in certain regions, with export contributing approximately 84% of our total operating income during the quarter. Our EBITDA margins for the quarter were impacted by planned investments in the business. These included higher employee costs following the strengthening of our senior leadership team, increased utility, fuel and power expenses, consulting costs associated with final phase of our EU GMP remediation program. I am also pleased to share that our new innovative product portfolio and oral thin films business returned to a normalized level of contribution during the quarter, accounting for approximately 18% of our revenue. We remain confident that this platform represents our most significant long-term growth opportunity, and our aspiration remains to increase the contribution of NIP and OTF product portfolio revenue over the coming years. Looking ahead, our priorities remain clear. We are focused on successful completing of our EU GMP regulatory processes, expanding our innovation-led portfolio, strengthening our global customer base and delivering substantial profitable growth. FY '27 represents an important transition year of ZIM Laboratories. With our compliance investment substantially behind us, strengthening leadership team in place and our innovation pipeline ready for commercialization, we believe the company is well positioned to enter the next phase of substantial growth. With that, I would now like to hand over the call to our Chief Financial Officer, Mr. Shyam Patro, who will take you through the financial performance for the quarter in greater detail. Over to Shyam. Thank you.

Thank you, Mr. Kamal. Good afternoon, everyone. Let me now take you to the financial highlights for the first quarter ended 30th June. The earnings presentation has been uploaded on the stock exchanges, and I would like to request investors to refer to it alongside my remarks. For the first quarter FY '27, the company reported total operating income of approximately INR 942 million, representing 31.2% year-on-year growth. EBITDA for the period -- for the quarter stood at INR 34 million, translating into an EBITDA margin of 3.7%. Profit after tax for the quarter stood at minus INR 40 million compared to minus INR 19 million in the corresponding quarter of the previous year. Exports continued to account for approximately 84% of our total income. The NIP, that is noble (sic) [ new ] innovative products and OTF, oral thin films portfolio contributed approximately 18% of the total operating income. The total debt stood at approximately INR 145.2 crores as on 30th June 2026. We remain focused on improving operating cash flow, optimizing working capital and managing leverage. The company invested INR 82 million towards R&D during the quarter. Overall, the first quarter reflects an organization investing for long-term growth and maintaining healthy business momentum. With that, I would like to open the floor for questions. Thank you.

[Operator Instructions] The first question comes from the line of Mr. Mahesh Tolani from Goquarter. As there is no response from Mr. Mahesh, we are taking the next question from Mr. Rohit Balakrishnan from ithoughtPMS.

So just a few questions. So I think this quarter, when I compare this quarter versus, let's say, many of the last Q1s, let's say, from FY '21, '22, this is probably one of the highest. So in terms of the business momentum, how do you see, sir, for the coming quarters for this financial year? And second question was in terms of expenses, I see like the other expenses now settling in at about INR 34 crores, INR 33 crores a quarter, and we also saw like expansion in employee expenses. So is this the normal base now? Or was there some any one-offs in this quarter? This was a couple of questions. And then I have just 1, 2 more. So yes.

Yes. So I think on the first question. Yes, you're right. This was a good quarter for us, one of the better Q1s over the past few years. This is just a result of the increased business that we have gotten from the formulations business piece also now. As we have said, we have the team in place, and now we are reaching out to more relationships and further filings that are happening. We were also quite happy with the performance of the innovative product portfolio, which contributed a lot compared to previous quarters in this time. So I think with both, I feel like going forward, it will depend on the EU situation of how the quarters go. But we do expect that the base business and other business -- the innovative product business keep on continuing to grow. So over the quarters, I believe the base business should also grow with the innovative product portfolio also growing. But on a total level, it will depend a lot on whether the EU GMP comes and when it comes. It's just about timing now. So hopefully, that will come soon enough and then we can start getting revenues from EU. On the expense side, I'll let Mr. Zulfiquar Kamal take that.

Yes. On the expenses side, what you have rightly mentioned, it has more or less settled, except for there is some onetime expenditure of the Q1 -- in Q1 also. I think I'll let Mr. Patro give the details of the Q1 expenses, which are only onetime. Over to Mr. Patro.

Specifically, onetime expenses are in the form of TGA audit that is Australia -- around INR 30 lakhs, consultant engaged for this European audit, some repair and maintenance has been taken off for a smooth EU GMP audit and some MIDC services that comes to near about INR 191.9 crores. So that has given more like a run rate increase for this overall business onetime expenses. This will not be repeated in the next quarter. So we can have a better result in next quarter.

Yes. So to answer your question, the quarterly expenses, all other expenses are now -- are fixed in the same nature, and it will not be increased going further.

Right, sir. And sir, from the perspective of the EU GMP, I think we were expecting somewhere in July or first week of August, I think. I mean we are pretty much on that time line now. So anything that you can share, like any communication that you've got from the regulator?

Yes, Rohit. So we've received the draft inspection report from the regulator, which gives us an insight into what the final report will be like. But the final report is yet to come. We are in communication with the authorities constantly and have been informed that the report should come any time now. So we are hoping that this should come in a week or 2 weeks, the final report should be in our hands.

Got it. And sir, last question was, sir, if you see the gross margin, I think this was pretty high, 58.1%. We've done maybe this once in a quarter types in the last 4, 5 years. So is there some one-off here? Or is it now more a trend because we've been around 55%, 56% on a regular basis. But 58% seems to be on the higher side. Is it driven by the formulation push or more product mix or anything you would like to call out? And is it like the more normalized gross margin now as we push towards EU and more NIP?

Yes. So you are right. It will be around 55% to 58% because of the product mix in the first quarter. But going forward, the increase in the NIP business will make this transition more attractive going private.

The next question comes from the line of Mr. Deepesh from Maanya Finance.

Am I audible?

Yes, sir, you are.

Yes. My first question was, can you comment on the company's debt levels and plans of deleveraging?

Mr. Patro?

The term loan we have taken for CapEx. CC limit has also been utilized. The total borrowing stood at INR 145 crores at the moment as on 30th July -- 30th June.

Okay. And what is the cost of capital?

It's like -- that is like were in similar to earlier quarters, below 10%.

Below 10%?

Yes.

Okay. So how do you plan to improve your operating cash flow and working capital?

Yes. So our -- going forward, our -- we are mostly dependent on the next year's revenue projections and doing quarterly revenue projections, which are going to come in the current year. That will give us leverage [indiscernible].

Kamal sir, I'm sorry to interrupt you. Your voice was not audible, sir.

Yes. So what we expect is once the revenue start growing, we'll be able to generate enough cash flows, which will be required for the coming quarters, number one. And if you have observed from the current year. In the current quarter, the debtors and inventory limits were a little bit higher side. So we are now improving our cash flows by increasing our collection in debtors, which is from around more than -- it's around 100 days. We are targeting to reduce it to around 80 days. So some collection will come from the debtors and also we'll be having enough control on our inventory level. So this will give us a sufficient cash flow going forward. And these are the 2 measures which we are taking for improving our cash flows and working capital.

Okay. So what -- and as seen previously in the previous quarters, what do you think are the key risks that investors should monitor over the coming quarters?

So as of now, the key risk only remains the EU GMP, which is going -- which we are expecting in this quarter to come. Rest, everything is in place. As we have already mentioned earlier in the call, our product portfolio are nearing completion. MAs are -- we are receiving all our MA queries. So market authorization from Europe are also there. Our marketing team is also being placed. So as such, except for this EU GMP, nothing remains, which will be anything to worry about.

We see a lot of -- I mean, changes in the operating margins. What should be the operating margins going forward, which investors should expect from the company?

So it will be more on the similar line going on the positive side with the increase of the NIP and the oral thin film products.

Because this quarter, the margins were around 2.6%, whereas last year, it was about 6% and even last quarter, we saw around 6% and 7%.

Yes. So see, this is -- I think you're talking about EBITDA margins.

Yes.

This basically is an impact of the top line, like we have shown the expenses that increase. So there are some expenses -- we have increased our expenditure, and this is something that will be settled now. So as we cross a higher revenue, margins will improve.

Because point one, what happens is when the margins actually lower down, even if you find the sales growth also because right now, we're not finding a sales growth, but if we find the sales growth also, some of the ROE is just too low. I mean, for a 2% ROE, even historically, we've always been below -- I mean, below 5%. It's very concerning for the investors. So how do you plan to improve that on the ROE level, especially? Because we're ticking a debt of around -- see, our cost of capital is around 10%. And if we are not able to do even 5% as ROE, I mean, then I would rather keep my money in the fixed deposit. I mean, just...

No, I understand your point because we are on the level where we are expecting our EU GMP and the growth coming from the EU GMP [Technical Difficulty].

Kamal sir, sorry to interrupt, your voice is not so clear, sir.

Yes. So what I'm trying to say, this is the baseline growth as of today of the revenue. Once we get the EU GMP certification, our revenue and contribution of oral thin film and NIP to the regulated market will grow. This will increase our top line, thereby increasing our EBITDA margins. We have already said earlier, the EBITDA margin, what we are projecting will be in upper teens in the -- previous call, which we have -- earlier, we have mentioned. So the main point is only we are waiting that the revenue should grow post receipt of our EU GMP certificate.

So that will be the inflection point, right, for the company?

Yes.

So just want to understand, once that comes in, in how much time would we actually see the sales growth coming? I mean, after the certificate also coming, immediately the sales will start or there will be a lag effect of about a month or maybe a quarter?

I think it's about 2 quarters that will be the lag. We expect -- if it comes in August, we expect some supplies to start going in the last quarter, Q4. And then so on, there will be a continuous supply.

So assuming that we get -- everything falls in place by the grace of God, if everything falls in place, what will be your FY '28 expectations?

I think we would grow at 30% to 40% if we get EU GMP and if supplies start. That will be the full year for FY '28 would be about 30% to 35% growth easily.

30% to 35% growth that will be a?

Top line.

Top line. So that will be what, approximately INR 500 crores?

Yes, you could say that, but it will be more conducive to give this once we have the EU GMP. It's an intricate kind of process that happens once the supply starts. So we'll keep you updated as the quarters go by.

Perfect. So if I get things right, if we get the EU GMP and everything falls in place, we should see 30% growth and mid-teens EBITDA margin. Am I getting that right?

Yes.

Great. All the very best guys. And we've been long-term investors. So we are hoping that things fall in place.

The next question comes from the line of Mr. Vishal, an individual investor.

Am I audible?

Yes, you're audible.

Sir, first question would be on the EU GMP approval only. So whether any remediation or CAPA needs to be further submitted by us against the observation what we have received or we have already submitted and now we are waiting for the final approvals. My first question is that.

So yes, we'll have to submit a CAPA based on the final inspection report. Like we said, we have received the draft report. And based on that, we are ready with the CAPA. So as soon as the final inspection report comes, we will submit the CAPA.

Okay. So any major or any adverse observation in the draft report?

No, there are no adverse observations. There is no critical observations, which is what is important. There are only some major observations which will be handled and there should not be any...

Major or minor observation, sir?

There are both, some major and some minor observations. But no critical observations.

Since we had engaged third-party agencies, and we had taken a lot of due diligence and still its major observations are being reflected. So I mean, what would be the take of the management in that regard?

See, I think major observations is a common thing in reports. It is very rarely that you get only minor observations or 0 observations. The important part is you not get any critical observations because that is what can hamper your EU GMP certification. So even every time we have been recertified, we had major observations, but it was not something that cannot be rectified and does not affect product quality.

So the -- I mean, whatever compliance we submit, that will not entail a further audit from the authority, right, sir?

No, it will not. And one more thing...

So it's just a matter of...

Normally they combine 4 or 5 minor observation to major. So effectively, if you drill down the major, it is minor ones.

Okay. So I mean, our remediations is CAPA submission would suffice to get the approval rather than a reinspection by the auditors, right?

Yes, correct. The CAPA will be enough. Once accepted, we should get the recertification.

Okay. And my second question was on the, sir, our NIP and OTC pipeline, so which has been given in, I think, Slide #15 and 16. The product, sir, there has been -- I mean, almost remained stagnant for last 3 to 4 quarters in terms of new filings for NIP and OTF. So any outlook or color you can give on that? I mean how that will progress over a period of next, say, 12 to 18 months?

So see, we have filed most of the products in Europe. When the EU GMP went under remediation, they stopped giving us the MAs, but the procedure was ongoing for some of these products, and we are near the end for most products that have been filed. Once we get the EU GMP, we'll start getting the MAs.

But sir, I mean, you have categorized the products under various phases like market review, formulation development, validation, BE study. So I mean, this -- I think these are -- all these things have to be done at in-house. So were there not any development in any of the new products because this has not been updated for last many quarters, what I have seen. I mean, the same product, 12 products in NIP.

Yes. So the major development time which is needed for the products is for these prefiling stages only, which is basically the validation batches, the stability studies, et cetera. So that took about 1.5 to 2 years, and we got those done. So the filing process itself takes about 210 days if there are no questions from the authorities. But usually, there are some clarifications that are needed by the authorities and they ask for clarification when the clock stops. So that process also becomes a bit lengthier. So this has -- you're right, this has not been updated for the past year or so because we are in that regulatory filing stage. But now what we are saying is we are towards the end of the regulatory filing stage, and we have submitted most of the queries that the auditors had. And we are now expecting MAs to come through once the EU GMP comes. So we will have the registrations as soon as EU GMP comes through.

Okay. So how do we see this product pipeline, sir, I mean, the next 12 to 18 months, I mean, from 12 products [ availability ] significantly, how much we can expect I mean, new products coming...

8 to 10 products -- we will have MAs for about 8 to 10 products once EU GMP comes.

Hello?

Hello, can you hear us?

Yes, you are audible.

So we'll have approvals for 8 to 10 products once EU GMP comes through, and we'll try to commercialize as much of these as we can.

In anticipatory, I mean, inventory you are building up, sir, in anticipation of this approval coming in, have we already started building up the inventory or we would like to have the approval first and then...

Yes. See, we are building up inventory on API for some of the key products where we estimate that time lines would be longer. It's product to product mainly. It's not a general inventory buildup. It is more on which products APIs are scarce and it takes time for them to be available. For those, we are building up inventory. For others, we are going to be basically just in time. And when the orders come, we are going to build inventory according to that.

Thank you for all the communication you are maintaining with the investors and the transparency that is being maintained by the company. And we expect that this will continue in future also.

[Operator Instructions] The next question comes from the line of [ Mr. Nikhil Gupta from Vayu Capital ].

My first question is on our Australia market. I think we have received an MA for a particular benzoate. When we can expect the revenues start flowing from that product?

Yes. So as you saw in the presentation, we also underwent the TGA audit from Australia in the month of April. So I'll just give an update to investors on that. We have received the report, final report, and we submitted the CAPA. Now the assessors are reviewing the CAPA. So we expect the TGA certification also to come through in the coming months. We have received an order for one of the products from Australia, and we are going to start supplies, I think, in the next 2 to 3 months.