Good day, and welcome to Q4 FY22 earnings call of Torrent Pharmaceuticals Limited. As a reminder, all participant lines will be in the listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. 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.
Yeah. Thank you, Sadhu. Good evening and welcome everyone to quarter four FY 2022 earnings call. Quarter four witnessed strong growth in the branded generic markets aided by market share gains, performance of our top brands and new launches. The branded generic markets revenue constituted 70% of our total revenue in quarter four, which grew by around 15%. Financial highlights for the quarter are as follows. Revenues were INR 2,131 crores, up by 10% on YoY basis. The gross margins were at 71%, improved by 1% on sequential basis. The EBITDA was INR 612 crores, up by 1% on a YoY basis. The operating EBITDA margins are at 26.3%.
This quarter we have taken a difficult decision of discontinuation of our liquid business in the U.S., which we had acquired in 2018. The exceptional item of INR 485 crores in the income statement relates to the impairment provisions and costs related to discontinuation of liquid business in the U.S. The board of directors today have recommended a final dividend of INR 8 per equity share. Additionally, the company is completing 50 years this year of its incorporation. To commemorate the same, the board has additionally approved a special dividend of INR 15 per equity shares and a bonus issue of 1:1. I would now request Aman to share his insights on the India business performance.
Thanks, Sudhir. Yeah. Revenue at INR 1,034 crores grew by 12%. As per AIOCD data, Torrent's Q4 growth was 11% versus the IPM growth of 4%. Growth was aided by new launch momentum, a robust performance of top brands and continued market outperformance across our focus therapies, particularly in CNS, Gastro and VMN. We have expanded our field force during the quarter to 3,900 compared to 3,600 in Q3. We expect the India business to continue the above-market growth momentum as our April AIOCD numbers look encouraging, and we have a good new launch pipeline coming up in the next few quarters. I'll now hand over to Sanjay Gupta for the international business.
Let's start with Brazil. Brazil revenues were at INR 251 crores, up by 33%. Constant currency revenues were at BRL 172 million. As per secondary market data, in Q4, Torrent's growth was at 15.4% as compared to a market growth of 10.1%. The quarter witnessed good initial traction from launch of five new products since November 2021. These are memantine, rosuvastatin, rivaroxaban, beclomethasone and ticagrelor. With strong underlying growth of the market, we expect Brazil to continue growth momentum aided by the new launches, performance of our top brands and a new division in the CNS segment. Moving on to Germany. Germany revenues were INR 218 crore. They were down by 18%. Constant currency revenue were EUR 26 million.
Growth was impacted by loss of products in a recent tender and price erosion. We have already initiated cost measures to improve competitiveness and are confident to revive growth, in the coming quarters. For the U.S., U.S. revenue was at INR 282 crore, up by 5%. Constant currency revenue was $37 million. Revenue grew sequentially by 20% aided by the launch of Dapsone, a new derma product. We continue to await U.S. FDA re-inspection of our facilities. Torrent has decided to discontinue the liquid facility operation. The operational cost of this facility was INR 135 crores per annum. The decision was made by taking into account incremental investments required for bringing pipeline products into the market and the increased competition intensity in the liquid space. As of March 31, 2022, 57 ANDAs are pending approval with the U.S. FDA, and five tentative approvals were received. During the quarter, six ANDAs were filed and one ANDA was approved. To conclude, as branded generic markets, including India, remain on strong footing, we expect the current growth momentum in these markets to continue and are optimistic to revive growth trajectory for Germany in the coming quarters. The cost optimization measures initiated in the previous quarter shall lead to steady margin improvement in the coming months and quarters ahead. Thank you. Operator, we can open the call to questions now, please.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Reminder to the participants, anyone who wishes to ask a question may press star and one at this time. First question is from the line of Shriram Rathi from BNP Paribas. Please go ahead.
Yeah, thanks for the opportunity. One question, particularly on the growth margin, I mean, sequentially of course has improved because there was a certain run-off in this quarter. How is the raw material cost scenario now for Torrent Pharma? I mean, earlier we were expecting that in by Q1 it should be back to the normal level. Where do we stand now?
Shriram, did you say on the raw material prices, price increase?
Yeah, raw material price increase. Basically, I mean, is the impact still continuing for Torrent Pharma? Earlier we were expecting that by Q1 it should be back to the normal levels of gross margin. I mean, is that still stand true for us?
No, I think the thing which we spoke about on cost optimization to start in quarter one was more on the plant overheads, which I had said, right? I mean, for example, we were looking at optimizing our cost at the API facilities basically, which is part of the raw material cost, right? I mean, impacting the gross margin. That should start from quarter one, Shriram. That's something which has not come in in quarter four.
Right. Okay. Got it. In terms of raw material cost inflation which we have seen, I mean, what is your view on that? Because earlier we were doing gross margins of around 73%–74%.
Yeah.
now right now we are at 70%–71%.
Correct.
Any view on that?
Shriram, the greatest impact on the gross margin has been by the generic businesses, which are there, right? Which is essentially U.S. and Germany, right? And that's the reason why there is a dip in gross margin. Over the previous quarters which you're looking at, we used to be 73% kind of a number, right? What we also said during the last quarter is that come quarter one, since we'll be taking price increases in the branded generic segment, we should start seeing improvement in the gross margin coming. That's point number one.
Point number two, what we said is once the U.S. FDA re-inspection is happening next year, which anytime we are expecting now looking at the others having the re-inspection, U.S. FDA, the U.S. new product approvals should start coming in. What we had indicated was that should start happening somewhere in quarter four of this year. That should play out in a positive way to the overall margins. Probably, let's say quarter four of next year, you should start seeing those margins coming back is what is my understanding. Having said that, I think, let's wait for quarter one performance, which could give a better direction to the overall gross margin progression during the year.
Okay. Sure. That's helpful, sir. Thank you.
Yeah.
Just one question on the U.S. generics. I mean, of course, we have seen decent pickup, I mean, ramp-up in the sales in this quarter. This $37 million sales, I mean, from here on, how should we look at it? I mean, assuming that FDA inspection happens at its own time, but without that, can we expect that this revenue run rate to sustain and maybe improve from here on?
Shriram, on a quarter-on-quarter basis, our price decline is, I would say, low single digits. On a year-on-year basis, it is in mid-teens. That is what is happened. We are seeing some relief from, compared to the previous year in terms of pricing erosion. But my guess would be that we would see, modest trend in price erosion. Especially given the announcement by several companies that they are discontinuing products, I think our customers would be a little bit, careful about, asking for further price decreases. On that basis, I would say without the inspections and without new launches, then the chances of having fairly stable sales base are higher.
Okay, great. That's helpful. Thank you. I'll send that back to you.
Thank you. The next question is from the line of Anubhav Agarwal from Credit Suisse. Please go ahead.
Yes, thanks. Frank question for you. Just continuing with the previous question on U.S. market. Dapsone gel looks like from your comments that that was the largest contributor in terms of delta to this quarter. Quarterly sales of $5 million–$7 million per quarter looks very high from Dapsone gel. Would you say that this was just driven by some extra inventory filling which would normalize next quarter to a lower number?
Anubhav, I would not comment upon sales by product because you know, it's something which is sensitive information. We had good sales from Dapsone this quarter. We know there are other competitors on the horizon. I've not seen their product as yet, but you know, you don't know what is their supply chain connectivity looking like. But I would not go into venturing to make forecast for Dapsone for subsequent quarters. But we have a good customer mix. We have some anchor customers and some smaller distributor customers. We will do what we can to retain them. Pricing should be sustained as long as there are no new entrants that come to the market, right?
Because it is still there, it's still a three-player market, the originator, the one generic and us. It's a fairly, I would say, stable situation as of today. In the U.S. generic space, as you know, a new entrant can shuffle the cards. I will not tell you what it would be next quarter. It will only depend upon, you know, if there is a new entrant and how that plays out.
Sure. Second question is on the Brazil market. In this quarter, would it roughly help how much the new launches, like those five launches you have done, how much would they have contributed roughly as percentage of sales of this quarter?
Correct. We show the growth of about 21% there, and I would say, roughly about, 13%–14% of that is the contribution from new launches.
Oh, wow. A very substantial contribution. How are you expecting Brazil sales growth next year? Do you think double digits is doable in constant currency?
If you look at the Brazilian, starting with the GDP, right, this year, 2021, we had a GDP growth of about 4%–4.5%. Next year forecast is looking at less than 1%, especially with the elections happening in October. Generally, from our past 20-year experience in Brazil, we've seen the pharma market to be sustained, irrespective of these macroeconomic fluctuations. Assuming that the market grows at another like, 8%–10%, we should be well above that.
Okay. Just last clarity from Sudhir. This close down of this facility, the liquid facility in the U.S., would it help you reduce costs in subsequent quarters?
Yeah, Anubhav. The operating expenses on a full year basis is INR 135 crores. As part of the impairment, I mean, most of the activities have actually stopped there. As part of the impairment which we have taken on 31st March, we've also included the closure cost related to the closure. We should see those benefits coming from quarter one itself, Anubhav.
How should we see? Should we just divide INR 135 crore by four and just that will be the annualized quarterly savings that will just come through?
Logically, yes, Anubhav. I mean, 10%–15% year-on-year, therefore in the first quarter. Other than that, I don't think the numbers should change drastically.
Oh, it's a big number, huh? Yeah, this is like probably talking about almost like INR 30 crore–INR 35 crore, which is like 7%–8% of the EBITDA of the company.
INR 30 crores is 1.5%, no? I mean, INR 2,000 crores run rate on a quarter basis.
Yeah. Quarterly EBITDA is about INR 500–600 crore, right?
Uh-huh. Of the EBITDA, you're saying. Okay.
Yeah, of the EBITDA.
Yeah. Absolutely, yeah. I mean, it was a cash burn which was happening for the last 2–3 years. I think finally the call taken and they should start rolling up into the EBITDA.
Okay. Thank you.
Thank you. The next question is from the line of Damayanti Kerai from HSBC. Please go ahead.
Yeah. Hi. Good evening. Thank you for the opportunity. My question is on the Germany market. How should we look at sales in coming years? Because you mentioned like loss of one tender led to a quarter four performance. When will the next tenders open up there? Also can you specify what is the split between tender and retail market in Germany?
Essentially, in the current Q1 and Q2, we do not expect many new tenders to start. We would expect more tenders to come on stream, new tenders that we have either won or you know will start from September, October onwards. We will expect sales in second half to be better than the sales in the first half in terms of growth momentum. We also have 10-15 launches planned for this year, which would be bulk of it coming after September, October also. That should provide us with some growth momentum. In terms of tender, non-tender sales, the tender sales are roughly 60% of our business.
60% of sales. Sorry, 60, right?
Yeah.
Okay. My second question is on India business. How should we look at FY23 growth over FY22? If you can, split growth contribution coming from volume, price, and new launches.
Yeah. For Q4, our AIOCD reflection of growth was 11%. Breaking that up into new products is 3%, price is 8%, and volume is 0%. That's against the market volume of -3%. Additionally, maybe a 1%–1.5% upward adjustment on volume reflection because of this Q4's expansion. We've had a bit of reshuffling of some of our brands in our divisions. Volume is about 3%–4% above the market growth currently. I think in terms of the upcoming year, of course, last year base because of COVID would be much higher. On a quarterly basis, hard to say what the growth would look like.
On a CAGR basis, I think a double-digit growth should be doable for the market, and we should expect to grow above the market, as well.
CAGR you mean to say pre-COVID, right? Or CAGR over what period?
Over a two to three -year period. Roughly speaking, double-digit growth of the market without COVID should continue, where our base is predominantly chronic driven, so we would not have that impact in our base. We expect that double-digit growth should be possible for the year.
Okay. Just to clarify your India business, the price hike, which was allowed for NLEM portfolio, although it's a small part of your business, that's all included in your assumption?
No, that would not yet be included because that would have been effective from April.
Most likely after first quarter onwards, we can assume those prices to be incorporated.
That's right. Absolutely.
Okay. What about the non-NLEM part? That's the normal 7%–8% price hike, which you generally take on a regular basis, right?
The same price range that has been seen over the past few quarters has continued. This quarter was 8%.
Okay. Thank you. I will get back. Okay, bye.
Thank you. The next question is from the line of Neha Manpuria from Bank of America. Please go ahead.
Thank you for taking my question. Sanjay, on the field force addition, is all of our planned addition done, or do we expect some more in the coming quarters?
No, there would be some additional expansion happening by end of Q1, which is when we expect the entire exercise to be complete. This quarter ended at 3,900 and probably another 200–300 reps by the end of Q1.
Okay, got it. These were all for existing divisions or are we planning to add new divisions?
We have launched a new division in CVD, and there will be most of the field force for the new launches that are coming up in the coming year.
Okay, got it. Sudhir, on the margins, you know, I think Sanjay mentioned in his opening remark about steady margin improvement, but if I were to look at everything that has been discussed in terms of gross margin improvement, the overheads coming down, price increases, and the fact that we have cost saving from divestment, shouldn't there be a significant step up in margins from the first quarter itself?
We do expect it, Neha. I think from a-
It should be.
Yeah, yeah.
Sorry, go ahead.
26.3%, which is in quarter four, we should see at least 300 basis points upside starting from quarter one. Having said that, let's wait for the results to come. We are positive.
Okay, fair enough. Thank you so much.
Thank you. The next question is from the line of Bino Pathiparampil from Elara Capital. Please go ahead.
Hi. Just a follow-up question on the U.S. You mentioned that there are companies that are discontinuing products, et cetera. Could you please elaborate a little bit on this? What are you exactly seeing in the market?
We are seeing a lot of pressure on companies, especially for legacy older products. What we've seen is some companies are willing to give up products if the pricing goes below a certain threshold. I'm hoping that that reduces the level of competition for the older legacy products. Especially for oral solids, a lot of prices were becoming non-sustainable. I think it's a wise thing on behalf of generic companies to maintain some minimum profitability so that they can continue in business. That's what we are seeing.
Okay. Are you seeing this for the last, say, 30 days or two months, three months?
Yeah, it's a theme, right? Because during COVID, things were stable. After COVID, we started very severe price erosion. I would say for the last two– three months, especially since 2022 began, we see companies taking into account this market reality and adjusting their strategies.
Okay, great. Just a question on Revlimid. Do you still maintain that you would be able to launch with the next wave of generic entry?
No, we are much later actually. Without giving you a precise date, we are not in the initial two phases of launch.
Oh, got it. Thank you.
Thank you. The next question is from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.
Hi, good evening, and thank you for taking my question. Just first on capital allocation, there has been some press speculation around M&A for you. So just want to get some clarity around what are some of the therapy areas. Like you said, you're doing probably INR 2,000 crores–INR 2,500 crores of EBITDA. So just the usage of this, maybe if you want to use it before R&D also, you can add, but just the capital allocation priorities. That's my first question.
Shyam, frankly, I didn't get your question. If you can just
Yeah.
There is something brand or something. What was that?
No, no. Let me slowly repeat. Capital allocation, what are the priorities for Torrent Pharma?
Yeah.
There is the press speculation around M&A where you are in the advanced stages of one of the assets.
Oh, okay. Understood.
Yeah. Yeah.
Okay, Shyam. Okay. Let's come straight to the point, right? I mean, M&A happens when it has to happen, that's what I personally believe. I mean, given that, we keep on looking at all the assets which are there in the market, right? I mean, all the deals which have happened, we have looked at, right? Having said that, yes, I mean, there are few other assets which we have been looking at. I think from a capital allocation perspective, it's quite simple for us to think that, you know, over the next two years, I think most of my existing debt would be repaid, right? I mean, which is basically outstanding from the Unichem Laboratories acquisition.
From the third year onwards, the kind of cash flow generation which will happen with U.S. and Germany also coming back on track, hopefully, I think there's good amount of capital allocation which is possible for any acquisition which we are doing. Basically, if there's a good asset which we find today advancing that by one year or two years does not really change the needle because as I said, two years down the line I think most of our debts would be repaid.
Got it. If I were to probe further, so what will be the likely order or rank order of what assets you're looking for? Maybe it's over a two to three-year timeframe as well. You don't need to be near term. Is this going to be India? Are you looking at assets elsewhere in the world? Which therapy areas? Will it be complementary? How should we look at that?
Currently, Shyam, it's only in India we are looking at. I'm in U.S., I think in the near term, we don't think so. Germany, we're already number 5 in the market, right? There's still enough room to expand into the 50% branded generic market where we are not present. I think the growth story for Germany should be good over a long term. Whether something immediately is happening in Germany, the answer is no. Brazil, we've not seen any assets coming for the last so many years. Definitely it would be India compared to the other geographies.
Got it. Last question is on the field force. I think you said another quarter of field force addition. So if you can just help us understand, you know, just I think you gave some details last quarter, but just what are these people specifically doing? You talked about a new department as well. If you can just give color on what are the new field force, which therapy areas. Again, just refresh us please, on where are the new areas, what is the field force productivity at this point of time, and where can this go?
Yeah. The expansion is essentially to help us mainly cater to the new launches as the existing divisions would not have the space remaining, so we had to expand the divisions as well. Given that, there are important launches coming up in the next 1–2 years, that's where the need for this was established. In terms of PCPM, roughly speaking, since our top line has remained the same and 10% field force has been added from that INR 9.5–10 lakh level, it would have come down by 10%. But that will, with next year's growth, that should get back up to the same level. We think that range of INR 9–10 lakhs of PCPM should continue.
Essentially keeping in mind the new launches that are coming up in high- size markets, particularly in CVD, that's where the majority of the new expansion should cater to.
Got it. Last question, just an extension of this. How, where do you think the PCPM go before you again need to start thinking about expansion of the field? This is like a 2–3-year window, so PCPM can go beyond this 10 lakhs. How should we think about that? Shyam.
It can, but that's not the objective. I think INR 10 lakhs would be a reasonable number and, as the pipeline keeps on increasing in, you know, new launches, we have to expand to a certain level. I think, you know, INR 10 lakhs is something that we are quite comfortable with and not looking at increasing beyond that, especially given that we have to be aggressive, and competitive in the new launches in the next two, three years.
Got it. Thank you. Thank you, and all the best.
Thank you. The next question is from the line of Nitin Agarwal from DAM Capital Advisors. Please go ahead.
Hi. Thanks. Sudhir, just on the other expenses for the quarter. The sequential increase is just Q4 impact or is there something, anything else you read in that?
No, there's some bunching of expenses which have happened in quarter four. I mean, just to name one or two of them. Most of the U.S. filings have happened in quarter four, right? I mean, we filed five ANDAs and I think one or two DMFs also. There's a filing which happened in quarter four. There's a lump in terms of the U.S. filing fees which has come in, which ideally should have gotten distributed over the quarters. The second item is there's a big lump which has come in terms of key donations, actually. It's almost INR 18 crores which we paid in quarter four, which could have been paid in previous quarters, but we need crores in quarter four.
Plus, the freight expenses have gone up little bit more than quarter three, so around INR 8 crores of that. All the three put together is around INR 40 crore. I would say it's bunching of expenses which have happened in quarter four, which otherwise could have been evenly spread out.
Right. For me, if you were to sort of look through the year, there's nothing, not much one-off in those numbers per se, if you were to analyze. I mean.
Yeah, yeah. Absolutely. Yeah. For the year, there's not much.
Okay. Likewise for the employee expenses, there is a sharpish reduction on QoQ basis. Anything specific there?
Yeah. Two things basically. One is the reworking of annual incentives. There was a reversal of provisions which had happened which were taken in the previous quarters and got reversed in quarter four. Plus, this time, you know, the Chairman Emeritus commission was forgone by the Chairman Emeritus. There's a reversal of his commission in this as well.
Sudhir, on the India business, you know, so there has been in your comments through the call a lot of talk about new product launches, and you're sort of saying, making the business prepared for higher intensity of new product launches. Can you give us a little more color on, you know, how things are changing on this front versus what they've been over the last three– four years?
Yeah. I mean, this is more driven by the patent expiration pipeline. If you recall, not last year, but the year before, there was a big wave of launches in cardiac, in diabetes, to name a few examples, dapagliflozin, vildagliptin. Again, this year onwards and possibly next year, a similar intensity of launches is anticipated, where we are preparing for. We have to create the portfolio, which is kind of future-ready as well. Hence, ensuring that we do the absolute best we can in these new launches. In terms of competitive intensity, I think, there probably is a slight increase in the chronic space, compared to maybe two years ago.
We remain confident of maintaining or even gaining our market share as we have been compared to last year as well. For example, at a company level, our market share has increased from 3.2%– 3.5% at an overall level. We remain confident of consistently gaining market share.
If I were to just sort of break up the, you know, look at your growth, in terms of new product launches, pricing and volumes for in the existing portfolio. Clearly there is this component of new product growth which is going to increase hopefully, should increase going forward with the new launches. How should we look at the other two components? They should largely remain in line with what they've been, or you're seeing changes on those accounts also?
It'll predominantly depend on the market growth trajectory. Assuming that the similar range of market growth continues, we think the delta between the market growth and our growth in volumes in particular is around 3 odd percent. We think that should continue. The performance of new launches should add maybe another % to that. As we mentioned, the price growth range is within this 7%–8%. Hard to really anticipate exactly what is likely to be each breakup, but that's the kind of broad direction that we believe should be good as well.
No, that's very helpful. Thank you.
Thank you. The next question is from the line of Rajesh Kothari from AlfAccurate Advisors. Please go ahead. The current participant has left the question queue. We'll move on to the next question from the line of Rajesh Kothari from AlfAccurate Advisors. Please go ahead.
Yeah. I just wanted to confirm about this write-off that you have taken in the U.S. business. It's the write-off, what, INR 439 crores plus the expenses. From what I recall, please correct me if I'm wrong here, you have already taken the write-off of about half of that investment in some prior year. This amount seems much larger than that. What am I missing here?
Yeah, Rajesh, you are right, actually. I think 2018, we made the acquisition, and I think the acquisition was around INR 70 million odd, right? 2019, when we had to take a temporary closure, we had taken an impairment of, I think roughly, INR 25–26 million. The whole focus was to upgrade the facility, right? The last two years we've spent money on upgrading the facility. There's a lot of construction costs and new plant and machinery, which has come into the plant. Essentially the CapEx was much higher, I would say, for the upgradation which we had taken over the last two years. All put together, this is an impairment of assets which have happened.
Because intangibles, most of the intangibles we had written off, as you rightly said, in 2019. This impairment, there's a major share of the tangible assets which was spent, as part of the upgradation, process.
We spent money on upgradation and now we have decided that it's actually not worth doing that business, so we are shutting it down.
Yeah. I mean, the entire building was brought down and a new construction was undertaken.
Okay. I'm a bit surprised that we spent money and now we have suddenly figured that it's actually not worth spending all that additional money behind this.
Yeah. That's a hard call which we've taken, Rajesh. I mean, looking through the fixed costs which this facility has been incurring, and this facility being in U.S., the fixed cost was really high. I mean, we got delayed in putting this facility together because of COVID also, right? I mean, because we saw a lot of delays happening in terms of the whole upgradation process. Today as we stand, when we look at the potential of the pipeline products, because there's a lot of new competition which has really walked into the market. The market itself is very small, right?
When we look at the loss of exclusivities in this space, it doesn't make sense, actually, large funding for the next three years with some incremental investments and without seeing any major incremental economic benefits flowing out of this investment. We thought it prudent, basically, to take this call and shut it down.
All right. Okay. Thank you.
Thank you. The next question is from the line of Sayan Mukherjee from Nomura. Please go ahead.
Yeah. Hi, thanks. Sanjay, on the US, you know, can you like share what is your strategy now? Because we have seen a lot of issues over the last two, three years. There are market issues, there are plant issues. You have not taken a decision to close down liquid facility. So what are your longer-term plans here? I mean, how do you intend to sort of differentiate? It's a very substitute business at the moment. Do you think it makes sense to sort of sustain this business? What are your sort of three, five -year thoughts on the US business? And how are you, like, making the decisions on investments in U.S. now incrementally given whatever is happening in the market?
Roughly, at some point the market has to stabilize, but and it's still the largest generic market in the world. We have, I would say a smallish presence in this market. From this small base, I would say that it's easier for us to grow. We need to do a few things right. Some of the steps we have taken today in terms of reducing our cost base on the U.S., we've also taken steps to reduce the number of products that we are developing only for the U.S. Most of our pipeline now we are developing across the globe, and we plan to leverage the R&D expenditures around all our geographies. We've also taken steps to reduce the overheads in the plant.
You know, as Sudhir mentioned, we have allocated capacity that we are using for the U.S. business. We generally would not be doing business below a certain margin threshold. I would say that while top-line growth is important, we are more focused on making sure that the growth we have is profitable. The investments in capital are not required. Our plants are all new plants. We have enough spare capacity, so we don't see any investment in infrastructure. Our focus is in optimizing our R&D investment, keeping our costs low, and generally improving the productivity of our research.
Because I would say that, there are some areas of improvement, in terms of what bang for the buck we are getting for the dollars we are putting into R&D. Once we get our quality piece right, that should start us on the growth momentum. From $35 million a quarter, I don't see any downside. If we invest wisely, as I mentioned in R&D, and CapEx, we should be on a sustained growth trajectory from this low base.
At the current level of operation, how profitable is the U.S. business after you sort of factor in, you know, R&D expense, and other overheads that you carry?
We don't discuss profitability by geography. You know, generally in the U.S. business, if you have gross margins in the 25%-50% range on any product, that is general range. I'm just giving you a broad range as to what happens on a per product basis.
Okay, understood. Just one question on India. On India, you know, in terms of new launches, I mean, can you just throw some light, any partnerships with MNCs or with other companies that you have done or you will, you know. Is that something which you focus on to launch some patented drugs like some of the other peers, you know, larger peers do in India?
The near-term pipeline is mostly the patent expiration launches. We are in talks for certain licensing deals in our core therapies. Early to say how they'll pan out, but that's an important part of our growth strategy going ahead as well in licensing for us.
Okay. Okay, thank you.
Thank you. The next question is from the line of Rajesh Kothari from AlfAccurate Advisors. Please go ahead.
Hey, hi. Thanks for the opportunity. Actually, I missed one of your comment whereby you said that margins can move up by 300 basis points from 26% to 29%. That you are talking about for which entity? Consolidated, standalone, which entity?
No, conso.
Okay.
Yeah.
This, the margin improvement of 300 basis points is primarily would be driven by price increase which has been taken recently?
There are two or three factors, right? One is the fixed cost of the liquid facility would roll back to EBITDA, right? I think during the call, we said the impact is roughly 1.5%. There's an improvement already coming in by 1.5% because of the fixed cost of the liquid business going away. That's point number one. Point number two, also what we had said in quarter three is that there's some cost optimization which we are carrying out at all our facilities. Basically, trying to maximize the manufacturing volumes at one particular facility and bringing down the shift working in the other manufacturing facility, including the formulation and API facilities. That we had guided that it should start.
We should start seeing that coming in from quarter one, because already the steps have been taken. That's point number two. Point number 3, what we said is the price increases in all the branded generic markets should start from quarter one. That should typically help us in getting a margin improvement by at least 75-100 basis points on a per annum basis. Add to that, the operating leverage should start playing out with better growth coming in. The fourth is there was one factor in quarter three, which we had said that the freight expenses have impacted the margins almost by 1.2–1.3%. In quarter four, we are seeing that the cost has further gone up. We personally believe that maybe in two quarters time it should start normalizing.
These are the levers, which are there for margin improvement for the next year. Therefore, I said at least, quarter one, we should see minimum 300 basis points improvement, of which 50% is because of the fixed expenses of liquid business going away.
Sir, you know, sorry, I'm not having presentation in front of me. What is your fourth quarter EBITDA margin and your FY 2022 EBITDA margin before other income?
If quarter four is 26.3%, full year should be around 28.3%. Yeah.
You are saying on full year basis, if I look at it, then from 28.3%, you are saying maybe about 29%–30%, that's what basically you are targeting on full year basis.
Correct. Correct.
Am I right, no? Because you are saying on fourth quarter basis it will go up by 300 basis points, from 26%–29%.
Yeah, minimum 300 basis points it should go up. That's what we believe.
Understood.
Therefore, what I said is, let's wait for quarter one results.
Sure.
That should be a clear direction for the full year.
I understand. Just one follow-up question on U.S. business. You know, whereby you said that, you know, in last particularly 1–2 months, you mentioned that on generic side, players are, you know, maintaining price discipline because prices have gone down so much. I didn't get that point. Can you clarify on that?
I think I was just talking in general about what we are seeing in the marketplace is that, if you recall, I'd mentioned that quarter-over-quarter, the price erosion is low single digits. While you compare year-over-year, it is in the mid-teens. Obviously the pricing pressure in the recent months has been a lot lower than it has been over a twelve-month period of time. That is coming from, I would say, more rational behavior from suppliers as well as, to some extent from buyers. That is what I was referring to.
Okay. From here on, how do you see the, you know, the pricing behavior? Do you expect the pressure to continue, or do you expect it to stabilize from here on? You know, what is your internal guess?
I would say that especially for older legacy products, it would probably slow down because there is nothing left to squeeze without squeezing the manufacturers out of the market.
Okay. Perfect. You are right, sir. Thank you, sir. Wish you all the best.
Thank you.
Thank you. The next question is from the line of Nitin Agarwal from DAM Capital Advisors. Please go ahead.
Sudhir, what is the, I think, data sheet net debt number?
Sorry to interrupt you. The audio is breaking from your line.
Hello. Is it better?
Yes, sir.
Sudhir, what will be the closing net debt number for us?
Net debt to EBITDA should be 1.3x. Net debt should be roughly, I think, INR 3,400.
Okay.
Hello?
Yeah, I can hear you. I got that. On hedging, you know, given the fact that the currency has depreciated a bit, during the quarter or during the last few days, in the past you used to follow policy of hedging, the entire almost like one year forward, earnings. I mean, do we still continue with that?
Yes. Yes, Nitin.
That should play out, you know, in one way or another, for us, in these forthcoming quarters now.
Oh, yeah. Absolutely.
Okay. Last bit on the gross margins. You know, you said the incremental addition of the U.S. business, you know, with the expected approval for the plant trial coming through, will it have any impact on the mix for the gross margins?
No, no. Absolutely, Nitin. I think the new product launches happening will push up the margin, right? So far U.S. has been quite negative on the gross margins, overall gross margins. I think that should stop, and at least it should start pushing up the gross margin or U.S. should start contributing to the upside of gross margin, I would say.
Okay. Thank you.
Thank you. The next question is from the line of Bharat Celly from Equirus. Please go ahead.
Yeah, hi. Thanks for the opportunity. Sir, just wanted to understand on the cost optimization part. You said that 300 basis points will be realized in the next quarter. Just wanted to understand, will it be the most optimization or we can further realize in the upcoming quarters as well? What will be the avenues after looking at the plants? Where will be the optimization? After the plant optimization, where will these benefits come?
After the plant optimization?
you said that 300 basis points benefit will be there in the first quarter. Are we going to realize even after first quarter, or is it going to be just
Yeah, yeah.
Initial peak?
No. I mean, it's something which we are doing it, right? I mean, which is already done as of March 31. Basically, you know, optimizing the capacities which we have in all our facilities, right? If you're bringing down the shift, it means that it cannot be brought up immediately back again, right? So that that's already initiated and should happen in quarter one, I said. Therefore, that benefit should continue throughout the year. I mean, there's no going back on the costs later.
Because the plan-
So I-
Yeah.
Could we scale up these benefits? I mean, could this benefit scale up to 400 basis points or 500 basis points in the outlook in our upcoming quarters also, like from second quarter onwards?
No, no, no. That's not the way to look.
that is the maximum benefit which we can realize by just having this.
Yeah. From the cost optimization I think.
Okay. Are there any other avenues also to optimize the cost which you are looking at?
No, it's a continuous process. The only thing what we said is, given the way the U.S. business is behaving for us with no new product launches coming in, we thought of optimizing the cost to a certain extent, right? That benefit should flow in 2022, 2023. Now if you ask me whether further plant optimization is possible, the answer is no. We are not looking at it at least for 2022, 2023.
Sure. Sir, in the last couple of quarters you mentioned that you are getting into trade generic. How can you talk a bit how that business is behaving, whether we have got some traction there, and what sort of spike we have achieved so far?
Yeah. It remains within that kind of 1.5-2% contribution range to the overall India business as of Q4 as well. We expect that our second wave of SKU launches should happen maybe around the end of Q1 or Q2, and that should help the contribution increase from here.
Right. Sir, last one from my side. Just wanted to understand what are the timelines for Revlimid launch, whether we are going to be among the second wave of launch or it will be following after that.
I think I already said that we will not be in the second wave, so we'll be launching much later.
Sure, sir. Thanks a lot.
Thank you. The next question is from the line of Sayan Mukherjee from Nomura. Please go ahead.
Yeah, thanks for the follow-up. I'm just following up on trade generics question. I mean, when you sort of come with the entire basket that you planned, first like what's the timeline and, how much will this contribute eventually in your view, you know, whatever timeframe you want to share from current 2% currently?
It could be identical to the first wave of launches that we did last year. The idea is that these new SKUs should double our base. What we have mentioned earlier also is that we don't anticipate this to be more than kind of 3%–4% of the total India business in the near term. Long term, we'll have to see how the overall trajectory and profitability turns out. Near term, I think 3%–4% contribution is something that we would be okay with.
Aman, do you see, trade generics in general sort of cannibalizing the prescription business for the industry? Because we have seen some good growth, you know, from some of your peers.
No, not really because trade generics is mainly in the acute segment, and rather very little chronic contribution. Also the regional skew is quite significant. Wherever there is an overlap between the branded and trade generics, there's minimal kind of substitution that we're seeing. Of course, it does happen, but it doesn't really impact the trajectory of branded business that much. Particularly in our case, our portfolio is completely complementary, so the branded business and trade generics don't have any overlap whatsoever, so there's no chance of cannibalization happening there at all.
Okay. Just one last one, on field force addition. Now we are seeing many companies sort of adding people for new launches and, you know, for expansion. Is that having an issue in terms of wage cost inflation and attrition, which has historically been quite low for Torrent? Are you seeing any challenges with respect to attrition and wage inflation there?
No, as of now, not really. Our attrition and cost structure remains fairly kind of identical to how it has been. Not really expecting it to change much from here in this financial year.
Okay. Thank you.
Thank you. Ladies and gentlemen, we'll take the last question from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.
Yeah. Yeah, thanks for the opportunity. Just from the US generic business per se, strategically, this piece has not kind of given the required economic benefit, maybe in terms of the liquid facility or even in terms of the injectable generic facility. Subsequent to this, discontinuation of liquid facility at a strategic level, not maybe on the plant optimization, but at a strategic level, what further can be expected?
Essentially, we are not, by any stretch of imagination, quitting the U.S. business or anything like that. We are adjusting our investments. We would continue. Actually, if you look backwards, every year we filed close to 10 ANDAs. Unfortunately, those ANDAs have not brought us much benefit because of the facility quality issues. Once the quality issues are resolved, we will continue with about 8-12 filings per year. Usually, the number of filings will become less important as we are moving towards more complex filings. Again, these products would be in common with our other key geographies. We are not looking at any further industrial investments for the U.S. market.
All in all, I would say, you know, making R&D investments and hoping to grow the U.S. business from its current low base is what our strategy is going to be. You would see more products like Dapsone, right? Dapsone is an expensive product to develop. It required a clinical trial in acne patients, and it has become big, bringing good fruits. In the future, you should see similar products to that rather than, I would say, white pills.
Understood. Got you. Any products which are under, like, kind of shortage, which have been filed or which are already filed, which can, you know, trigger faster or prioritize your?
We have a few CGT exclusivities already in hand, and we have a portfolio of products for which we hope to get the competitive generic therapy designation from the FDA. Usually you get that if you are the first generic for a non-patented product. Yes, we're making efforts to get that designation. We already have received it for a couple of products, so we will see more of that. These are limited competition first generic for a non-patented product that is launched by a generic company.
Got you. Okay. Just lastly, if you could help us with the effective tax rate for FY 2023, 2024.
Sorry, I didn't get the question.
Effective tax rate for FY 2023-2024.
Yeah, it should be around 32, 33, Tushar.
Got you. Just this one last bit. Good reduction in the trade payables as well. Any specific to highlight there?
Yeah. The Germany business is coming down, no? If you see sequentially, there has been a degrowth in German business, right? That's a major chunk of the trade payables actually, Tushar. As the business come down, the trade payables also keep on coming down. It correlates to each other.
Got you, sir. Thanks a lot for the response.
Okay.
Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Sanjay Gupta for closing comments.
Thank you. I'd just like to conclude by saying that, you know, we are seeing good traction in our branded generics portfolio. These countries currently account for 70% of our top line. We are doing our best to remediate the U.S. business, and we are optimistic that post the quality inspections from the FDA, we would be on a growth path in the U.S. For Germany, again, after Q2, in the second half of this year, we expect there to be positive momentum from new tender wins as well as new launches. Hopefully, you know, we'll be able to show good results at the end of this fiscal year. Thank you very much for your interest in Torrent, and our team of investor relations is available for any further questions.
Thank you and bye-bye.
Thank you. Ladies and gentlemen, on behalf of Torrent Pharma Limited, that concludes this conference call. Thank you for joining us and you may now disconnect your lines.