Ladies and gentlemen, good day and welcome to Ajanta Pharma Limited Q3 FY 2023 Earnings Conference Call. As a reminder, all participants' lines will be in 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, please signal an operator by pressing star then 0 on your touch-tone phone. Just note this conference is being recorded. I'd now like to hand the conference over to Mr. Yogesh Agrawal, Managing Director of Ajanta Pharma Limited. Thank you and over to you, sir.
Thank you. Good evening and welcome to all of you. With me, I have Mr. Rajesh Agrawal, our Joint Managing Director, Mr. Arvind Agrawal, our CFO, Mr. Rajeev Agarwal, AVP Finance and Investor Relations. I hope that the results are already there with you now, and I'm happy to share that we have been able to achieve continued growth in the revenue for the current quarter as well. I and our Joint MD will take you through the business-wise performance for Q3 and nine months FY 2023, along with the comparison of previous year same period. It was yet another good quarter with continued revenue growth. The total revenue for Q3 stood at INR 972 crores and for nine months, INR 2,861 crores, posting growth of 16% for both Q3 and nine months.
The business is divided in three verticals: branded generic, US generics, and institution business in Africa. Let us first start with the branded generic business. During the nine-month period, 73% of the total sales came from the branded generics, which is spread across India, Asia and Africa. This business has surety, scalability, and sustainability for the long term. During Q3, branded generic sale was INR 666 crores against INR 621 crores, posting 7% growth. In 9 months, sale was INR 2,065 crores against INR 1,738 crores, posting healthy growth of 19%. This growth is in line with our expectations and the guidances. To begin with, I invite Mr. Rajesh Agrawal, Joint MD, to take you through India business. Thank you. Over to you, Rajesh.
Thank you. Good evening to all of you. Let me discuss some of the key highlights of the India business with you now. India business contributed 31% in total revenue during 9 months. In Q3, sales stood at INR 294 crores against INR 260 crores, posting a growth of 13%. In 9 months, sales stood at INR 888 crores against INR 737 crores, posting a healthy growth of 20%. We launched 21 new products in first 9 months with 6 first to market products. With consistent growth in business without any increase in MR strength, we have seen some continued improvement in MR productivity as well. Our performance has been satisfactory, which was on the back of new product launches, market share gain and price increase.
I'm delighted to mention that our overall growth was 2 times the IPM growth rate as per IQVIA MAC December 2022, with Ajanta's growth of 15% versus IPM growth of 7%. Even in all therapeutic segments that we are present in, our growth was much higher than the segment growth as you must have already seen in our press release and the presentation. In the covered market, we stood at 4th largest against 27th rank in the overall IPM. It will be heartening to note that in all therapeutic segments, our ranking in covered market is among top 10, with 2nd rank in ophthalmology and dermatology. As per IQVIA MAC December 2022, cardiology contributed 40%, ophthalmology contributed 31% and dermatology contributed 21% of our India business, with remaining 8% coming from pain management.
India business includes revenue from trade generic of INR 38 crores against INR 30 crores in Q3 and INR 109 crores against INR 87 crores in 9 months of FY 2023. Mr. Yogesh Agrawal, MD, will take you through the other business performances. Thank you and over to you, Mr. Yogesh Agrawal.
Let me now discuss some of the key highlights of the Branded Generics business in emerging markets. The Branded Generics business of Asia and Africa contributed 42% in total revenue during 9 months. Our exposure to these markets were INR 372 crore against INR 361 crore, a growth of 3% in Q3, and INR 1,177 crore against INR 1,002 crore, a growth of 18% in 9 months FY 2023. We launched 30 new products during 9 months in these territories. We continue to see mid to high teen growth in the Branded Generics business of emerging markets on back of our robust product pipeline, increased productivity and excellent execution of the strategy across various countries. In Asia, our business is spread over Middle East, Southeast Asia and Central Asia.
During Q3, sale was INR 227 crore against INR 194 crore, posting a healthy growth of 17%. In nine months, sale was INR 719 crore against INR 551 crore, posting healthy growth of 31%. Africa business is spread over West and East African countries. During Q3, our sale was INR 146 crore against INR 166 crore, posting 13% degrowth. The growth was adversely impacted by about 6% due to INR appreciation against EUR from previous year. In the month of December 2022, we have seen reversal of this trend, and we hope to see the growth in this market again going forward. In nine months FY 2023, sale was INR 458 crore against INR 451 crore, posting 2% growth.
Let us move to the US business. This is the second vertical of business and contributed 22% of the total revenue in nine months. In Q3, sale was INR 266 crore against INR 166 crore, posting 61% growth. In Q3, there were tailwinds due to high flu season which contributed incremental revenue during the quarter. The flu season is now almost over. We do not see this to continue in coming quarters. Price erosion has stabilized to the high mid-single digit to high single digit in our existing portfolio on the shares. In nine months, sale was INR 631 crore against INR 528 crore, posting 19% growth. At the end of nine months, we filed four ANDAs and also received one final and one tentative approval. We now have 22 ANDAs awaiting approval with USFDA.
I now move to Africa institution business. This is the third vertical of business comprised of anti-malarial product and contributed 5% in the total revenue. In Q3, sale was INR 31 crore against INR 36 crore, posting 15% degrowth. In 9 months, sale was INR 141 crore against INR 156 crore, posting 10% degrowth. As mentioned earlier, institution business remains unpredictable and depends on the procurement time, schedule, and funds availability with the agencies. With this, I will now hand over to Mr. Arvind Agrawal, CFO, to take you through the financial performance. Thank you. Over to you, Arvind.
Thank you. Good evening to all of you, and warm welcome to this earning call. I know that, you know, the time, the results were there with you was very short, so, you know, my apologies for that. I think I will take you through the entire thing, and then maybe you can ask the questions. For ease of discussion, we will look at the consolidated financials and provide year-on-year comparison. Let me take you through key financial highlights for Q3 and 9 months for the FY 2023. In Q3, total revenue stood at INR 972 crores against INR 838 crores, posting 16% growth. In 9 months, total revenue stood at INR 2,861 crores against INR 2,471 crores, posting growth of 16%.
The breakup of revenue has already been discussed by MD and JMD in their speech. Our COGS continued to be at 28% for both Q3 FY23 and 9 months FY23, in line with Q2 FY23. U.S. price erosion and INR appreciation against Euro have adversely impacted COGS to the extent of around 1% each. As the Euro INR exchange rate has come back to the earlier levels of INR 88 or in December 2022, we expect some relief in COGS in Q4 and expect it to be around 26%. Personnel cost has seen increase of 19% in Q3 and 17% in 9 months FY23. Out of this, about 10% was towards increments to existing team and balance towards increased team size across international field force, production and R&D.
As part of focus on branded generic business , we have scaled up our international emersion by 50% over previous year, which will yield dividends in years to come. Other expenses saw a sharp jump during the quarter on account of the following. For earlier 2 quarters, we had foreign exchange gain and it continues to be so in 9 months FY23. However, we incurred Forex derivative loss in Q3 of INR 37 crores and 9 months it is INR 43 crores due to sharp movement in USD and EUR. This loss is part of other expenses, whereas the gain are reflected in other income. That's why you must have seen I have given you adjusted EBITDA also in the results which we have given to you in the presentation.
Though the logistic cost is witnessing downward trend, but it still remains higher compared to pre-COVID levels. Further, the requirement of reefer containers in some of the markets continues to keep freight cost at a higher level. In U.S., the early arrival of full-blown flu season took everyone by surprise. To meet the market demand so that small babies and children get treated, we sent sizeable quantity by air, due to which we saw additional freight expenses of about INR 16 crore.
In Q3, as part of increased focus on branded generics business, the selling expenses were higher by about 100 basis points, which also yielded results of superior performance of branded generics business across India and emerging markets. R&D expenses were at INR 61 crores against INR 51 crores for the quarter, and it was INR 174 crores against INR 145 crores for the 9 months, an increase of 20% over previous year. R&D expenses continued to be at 6% of revenue. Higher R&D expenses were mainly towards branded generic verticals across India, Asia and Africa in the form of new product development and its registration fees. With the above impact on COGS and other expenses, EBITDA margins saw a dip during Q3 and stood at INR 170 crores or 17% of revenue from operations.
For nine months, EBITDA was at INR 588 crores or 21% of revenue from operations. Impact of COGS was 2%, unrealized hedge loss of 4% and incremental freight of 2% as explained above, which if excluded, take the EBITDA to 25%. As some of the impacts are one time in nature, we expect the EBITDA to improve as per last guidance of 25%+ in coming quarters. Other income was at INR 108 crores in nine months, mainly contributed by Forex gain of INR 88 crores without adjusting the unrealized hedge loss of INR 43 crores, which is taken further in the other expenses. There was a net gain in Forex transaction of INR 45 crores in nine months after adjusting unrealized loss. This reaffirms our prudent and robust hedge policy.
Income tax stood at 20% for Q3 and 21% for 9 months. We expect it to remain at around the same level for full year for FY 2023. Profit after tax in Q3 was at INR 135 crores against INR 192 crores, 14% of revenue in nine months. It was INR 466 crores against INR 561 crores, 16% of revenue. We incurred CapEx of INR 115 crores in 9 months FY 2023. CapEx, including maintenance CapEx for FY 2023, is estimated to be at about INR 150 crores. With these highlights, I open the floor for the question and answer. Thank you.
Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on your touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets for asking a question. We will wait for a moment while the question queue assembles. To ask a question, please press star one now. We have a first question from the line of Nikhil Mathur with HDFC Mutual Fund. Please go ahead.
Yeah. Hi, sir. Good evening.
Good evening.
Just to understand the margin performance better in this particular quarter.
Yeah.
You mentioned that there is a INR 16 crore impact from additional freight cost for air shipment. There is 2 percentage points of negative impact on account of currencies and gross profit, right?
Yes.
Okay. Anything else apart from these 2 line items which are one-off in this quarter?
For the quarter, if you see that unrealized hedge loss which is there, that is almost about 4%.
That is fine. That is fine. That you have correctly mentioned. That is one of these 2 things, right?
Yes. Yes. Yes.
Okay.
Of the COGS impact is about 2%. US price erosion and Europe appreciation, that is 1% each. 2% is freight, 4% is unrealized hedge loss.
Sure.
all put together, you are talking about, almost 8% of the, things which are there in this.
Okay. Understood, sir. Second question tied to this is that you might have also benefited from positive operating leverage benefits in the U.S. because of the Q2 growth on account of flu. If let's say some $32 million of this quarter U.S. sales, this goes back to 2023, 2024, what you were doing in the previous two quarters, wouldn't there be an operating deleverage in incoming quarters and hence whatever margin benefits you're talking about that might get negated by this?
Not really. Actually because, as you said, you know, it is right that it was a one-off thing which was there for flu season. That will go away. But certainly that expenses of INR 16 crores and all that also will not be there. So to that extent, I think, we should be able to protect our EBITDA margin as such.
Sir, I mean, if I do all these adjustments, your current quarter EBITDA margin is at 25%, right? Unless, in the coming quarters, your gross margin moves up, it would be difficult to maintain 25%, right?
You're right. Absolutely right. That is what we expect that, you know, our gross margin should really improve. That's what I mentioned in my talk that, gross margin should improve definitely by 2% at least.
Okay. Okay. This 50% seat post addition, has it been done in Asia and Africa both? Or it is more to do with Asia, Asian markets?
Yes, both. Both. Both.
Can you remind me when this exercise commenced? When did the expansion started and when it ended?
Kept happening during the year. I mean, like significant, one we can say, but it kept on happening during the year.
Okay. All through 9 months this is. Expansion has happened.
Yeah, yeah, absolutely.
Got it. When was the last time when such kind of an expansion was done in the Asian market, branded Asian African market?
This is I think, in absolute number, this is the most aggressive expansion we have done. In the previous also, percentages may have been there, but the absolute number were not so significant. Here, I think, one of the most aggressive expansions we've done so far.
All right.
Yeah.
Typically these markets, how much time does it take for an MR to recover his or her cost? One year, two year, how much time then does it take?
Typically we see that second year is the time when they start performing, and third year is a year when we actually see the good benefits and they start to blossom. We have to give at least one year start becoming really productive.
Right. Okay. Fair to assume that there is significant of margin pressure, sitting in the PNL because of excess expansion as well, right?
Correct. As our CFO mentioned in his comments, the employee cost, which has also gone up. There was employee cost which got expanded because of all this addition of the people also, which currently it is sitting in the P&L, but we start to see the benefits of that in the second year from now.
Okay. Understood, sir. Thank you so much.
Yeah. Yeah.
Thank you. We have next question from the line of Rashmmi Shetty with Dolat Capital. Please go ahead.
Yeah, thank you for the opportunity. On this Africa branded business, you know, can you give the growth in people and, you know, how this whether we are seeing any lower growth in Franco Africa or in the English-speaking countries, you know, what kind of challenges are we seeing in those branded markets? Also if you can give that, you know, the field force, you know, how much have you added, so what is the total field force? Is the expansion completed or, you know, we are still doing it?
As we mentioned that the growth for the nine months is around 1%-2%. That is primarily because of the 6% impact on the currency. If you add that, then the growth goes up to around 9% odd in the constant currency basis. Which we feel that going forward, now since the EUR has bounced back to the levels of EUR 88, assuming it stays there, we are looking at, I think, that growth to come back again. The growths are there in both the markets, Franco and Anglo. Of course, Franco is the bigger piece of the business, and Anglo is the smaller. For the field force expansion, unfortunately we'll not be able to give you the market-wise breakup.
There has been aggressive expansion in both the geographies actually.
And in Af-
Africa.
In Africa branded business we are performing the market growth rate?
Yes, yes. If you see the IQVIA data, we are outperforming the market.
both.
Sorry.
In both Asia and Africa, branded business, you know, this expansion will take what time period?
No, as we said, this expansion kept on happening during the year. We believe that we are towards the tail end of the expansion process. This expansion was also done on back of lot of product release, new product which we launched. As I mentioned in my opening comments, we launched around 30 new products across different geographies. Naturally, the existing teams could not absorb those products. It's natural that then you create new teams, and that was the entire strategy to begin with. Both put together, I think that is where we have seen the expansion. I think a good part of the expansion has... We are towards the tail of it now.
Okay. Sir, my second question is that, you know, on EBITDA margin, as you all have guided that, you know, in the quarter four, you know, we should do 25%. We should come back to the 25% EBITDA margin. So now what is the outlook on FY 2024, where, you know, the cost is also normalizing, you know, most of the expansion is also done, so your investment will also come down. Your, what you call, your costs and everything would also improve. Rate cost will also come down. So now how do we see in FY 2024?
See, this, what I mentioned was about FY 2024 only, not about Q4. The Q4 also it will be little soft only, because the effects are going to take some time to give the positive benefit there. For FY 2024 we have mentioned that we should be somewhere around 25%.
In quarter four, if you're expecting a soft, then are we downgrading our overall FY 2023 guidance, you know, from earlier 24%-25% to now, you know, at a much lower level?
Yeah. Almost about 21, 22, you can say.
Okay. Finally, on the U.S., you know, since now the Dahej we have already received the EIR, are we expecting any launch in the quarter four?
Yeah. We are going to launch, have 1 launch in the Q4. All going well, we should be able to launch around 4-5 products, next year.
Okay. Sir, finally, lastly, on price erosion, you know, how much is the price erosion, whether it is in very high double digit currently or, you know, it has normalized now and re-getting reduced? If you can comment on that.
No, it has definitely cooled off now. It is quite in control. Definitely not in double digit. It is in the single digit. The mid to high single digit is the price erosion which we are seeing now.
Okay. Okay, sir. Thank you. That's it from my side.
Sure. Yeah. Mm-hmm.
Thank you. We have next question from the line of Kunal Randeria with Nuvama. Please go ahead.
Hi. good evening. sir, on the U.S. front, any benefit, when these are products from import alerts or serious formality that some of your competitors have got?
No, not really. We scanned the companies which got the import alert, but we have very few product overlaps actually. We can get significant tailwinds because of that.
Sure. Sure. I think a lot of questions have been asked on the margin front, but, you know, if I ever say to look at the other expenses, right? This quarter, excluding the Forex loss and excluding the R&D, you it's somewhere around INR 240 crores of other expenses. Prior to COVID, I have seen that this other expenses grown at almost like a 20% CAGR, right? While this field force expansion and all I understand, I just want to get some sense on in the next 2 to 3 years, how will these other expenses will grow? I think this is something that is dragging your margin down.
See, in fact, the other expenses, if you remove the effect of the this quarter for the hedge loss of INR 37 crores and that extra freight of, you know, INR 16 crores to the US, I think, then it is absolutely normal. About INR 280 to INR 285 range or INR 280 to INR 290 range is something which is quite quarterly. That should be the run rate which we are talking about. Of course, normal inflation, whatever are there next year, that will be there in any case.
Okay. Okay. Now, I mean, okay, let me put it to you this way then. On a base of INR 280 crores, growing at maybe 8%-9% a year, is that a fair way to look at things?
Absolutely. Absolutely.
Okay. Fair enough.
Yeah.
Just one more from my side. I mean, Asia branded is obviously a big chunk of your business. Now you also are present in CIS markets, but I believe Philippines, Iraq would be the major chunk of your business. Since you have been in top five in Iraq and maybe top 15 in Philippines, should we sort of assume that to grow faster in the market will be difficult and the next leg of growth has to come from CIS markets? Or is there enough space to grow in Philippines and Iraq too?
Yeah. In the Philippines, there is enough space to grow. Of course, last year we have had a low single digit growth. Rather current year. Primary reason being last year, because of COVID, we had seen an exceptional amount of surge in the pharma market growth and as well as we posted a very healthy growth. This year is just averaging out. Next year, we are expecting to come back into double digit, maybe lower teen growth rates. There is enough head space to grow in these markets. We also have good product launches which are in the pipeline, which hopefully will come in any time in Q1, Q2, which will drive the growth further. Similarly for Africa and other West Asia markets also, there is good enough headroom for us to grow.
Again, coming back to the earlier comment I made, we have launched a lot of products during the year and added a number of big field size also. Increasing the market share from existing products, getting the market share from the new products and increasing the productivity, new people existing market, there is enough head space for us to keep growing for next few years.
Just on this, maybe in some of the bigger markets, what would be the steady state growth, let's say in Iraq, Philippines or Sub-Saharan Africa? Market growth rate.
You're saying market growth?
Yes, market. I mean, at what pace is the market growing?
they are growing at different levels. I think Philippines is
Philippines must be single digit, 8%-9% maybe.
Yeah. I would have to check latest, but, so we are at par or faster than the market. Yeah. Africa is in the low teens. I think Iraq is in fact de-grown last year. We are of course posting higher than the market growth.
Got it, sir. Thank you.
Thank you. We have next question from the line of Aditya Khemka with InCred Asset Management. Please go ahead.
Yeah. Hi. Thanks for the opportunity. On the just to understand the raw material cost trajectory. I understand the one-offs that are there, and that's absolutely fine. My question is more pertaining to the raw materials that we acquire, the API that we buy from outside. The pricing trend, the spot market prices seem to indicate a significant drop from the peak prices that were there, let's say three months, six months earlier. However, I do understand that you maintain inventory and therefore the higher cost inventory must be getting consumed. My question to you is the high cost inventory impacting the entire quarter that you reported, the December quarter? Or was the high cost inventory a partial impact in the December quarter and partially you were able to consume lower priced inventory?
no, I think, as far as the inventories are concerned, so far there is no major benefit which we have seen. Definitely going forward, we should see that benefit in the coming quarter. This quarter there was no benefit at all.
This quarter your entire inventory that you consumed was a higher cost, raw material inventory?
Yes.
Understood. Sir, you mentioned expansion in field force in India and Asia. This is 50%, 5,015. I couldn't catch the number.
It is 50%, for the emerging markets, not for India.
50% field force expansion for Asia and Africa.
Yes.
Right. What drove this decision to expand field force in Asia and Africa? I mean, what is our productivity there and what are we hoping to achieve by hiring more people?
As I mentioned, we have made a number of launches. Around 30 products were got launched in the year. As you know that in the pharma market, a team or a particular MR can handle only so many products. In fact, this was designed that these are all good products which can be built into the big brands. To be able to do justice with these products and these brands, we have done this field expansion. That is where we are looking that I think going forward in both these markets, Africa and Asia, we should be able to expand our or consolidate our positions in various therapeutic segments of, you know, GP, specialty like cardiac, diabetes, ophthalm, FDC, so on and so forth.
Right. Understood. Also, just one last question on the U.S. business. Obviously, you're seeing some growth sequentially, and I'm assuming a majority of that sequential growth is Tamiflu sales in this past quarter. Summation, the price erosion is mid to high single digits, so that's a relief from the earlier situation. Is the entire delta in the current quarter versus the last quarter coming from Tamiflu or is there any other products where, you know, competitor might have gone out and you have gained market share, et cetera?
No, no. I think, most part is, Tamiflu only.
Most part of it is Tamiflu only.
Yeah.
Okay. The Forex loss that you reported, you know, INR 37 odd crore. Was it primarily related to pound or was it also some of it is also related to the dollar?
No, it was both dollar and euro. It was both. Again, Aditya ji, you have to understand that this is the MTM loss.
Mm-hmm.
This is only derivative loss which is there.
Mm-hmm.
Actually there is a gain also, which has gone to the other income. It is only because of the accounting policy that you need to show it in the other expenses separately and other income separately. Otherwise, overall for the 9 months, we have got a INR 45 crore gain in Forex.
Yeah. Which implies, sir, that we partially hedge our exposure, right, in terms of our receivables and sales.
Yes.
What % of our receivables do you hedge?
70%-80%.
70%-80%, both in the euro as well as the dollar, is it?
Yeah. Yeah, yeah.
That's helpful, sir. Thank you.
Thank you.
Thank you. We have next question from the line of Nitin Agarwal with DAM Capital. Please go ahead.
Hi, sir. Thanks for taking my question. Hello?
[Cross Talk]
Hello. Is it better, sir?
Yes.
Yes. Go on.
Sir, on the India business, I think we've done far better. I mean, we've done pretty well for the nine months as well as for the quarter. I think this quarter particularly we are much ahead of the market. Sir, are there any specific molecules where which has sort of led to this growth, or it's been like a very broad-based growth for the business?
No, it's a broad-based growth, which is very healthy for us. It's not led by one particular product. The growth is across segments. Dermatology, we are growing more than four times, three to four times the market growth rate. We've been putting in a lot of hard work in resurrecting the whole derma segment for us, and we are now gaining the traction in it. Cardiology, we are growing much faster as well. Ophthalmology, even though we are number two in the entire domestic market, we are still growing at par with the market, 14%. It's a broad-based growth, which is good for us.
Sir, From this growth in India, while it's broad-based, is it again largely driven by volumes for the existing portfolio or is it again very, I mean, on new product launches are playing a larger role in this, in this growth for you?
It's a very healthy mix for us. Volume growth is 6%, whereas industry volume, if you look at, IPM is reflecting -1, either a stagnant or a degrowth. Of course, price growth is at par with industry. New product launches also is at par with industry. For us it's a very, very healthy mix of the composition of the entire growth rate.
There's no reason to expect that this sort of this trend should change for us in the coming quarters. I mean, given the growth is extremely well spread out across various parameters.
Yeah. Hopefully not. I don't see any strong headwinds as such. Next year forecast remains, you know, early teens, low teens for us. We will be outpacing the market hopefully.
Okay. sir, do you foresee any disruption in the market because of the NLEM price, introduction, sorry, revision pricing introduced in the market in the last quarter?
Yeah, it's been unfortunate that the price revisions have taken place. Of course, 12% of our entire domestic portfolio is covered under DPCO and NLEM products. And we have had 2 major revisions in there. Not hopefully, we are quite confident looking at the WPI index until December, and as per our internal calculations, that the entire erosion that has happened will be recovered coming starting April. The impact is only going to be for the 4th quarter. That's all.
Sir, if you just help me understand it a little better. I think the prices, the new prices got introduced in Q4, so which are lower by about 10 odd %, versus the previous prices.
Correct.
I guess we'll get a WPI link price hike all over again in starting April, which will sort of compensate for whatever reduction happened in Q4.
Exactly. That's what's going to happen.
Is this leading to some sort of volume pressure also in terms of, you're not pushing enough material or trade not willing to take on enough because there's a price uncertainty around the pricing which is there right now?
No, not at all. It's a very transitory one-week or 10-day kind of a disruption that happens. Nothing at all, honestly. I mean, it's perfectly fine. It's just for that we have to basically suspend the sales of old MRP until the new price is sold, so and that takes about 7-12 days for the turnaround to happen. Except for that, there is no issue whatsoever.
You see this situation being for the entire industry, or you think it could be players who have a larger share of, obviously DPCO products could have a larger impact on this transition? Just your assessment.
Yeah. In my view, companies who have more products exposed to NLEM products may have got impacted in a larger way compared to what we have. There is no doubt in that.
Right. Sir, secondly, on the international business, although you've talked about it, so you know, in Asia, obviously you've got these two large markets. Africa is a fairly spread out market for us, diversified market base. Now, when you look at the growth for the next three to five years in your... It is largely what growth for you is primarily gonna be a function of growth in these existing markets or, you really need to diversify into newer markets, grow into newer markets to maintain the double-digit growth you've been doing over the last several years now?
There's going to be combination of both. We still feel that we have a lot of products under registration in each of these markets under various therapeutic segments. As and when they keep coming to the market, we'll be bringing those products to the market. It's going to be combination. In the existing markets, we see that there is opportunity and potential to keep growing for a foreseeable future. In the new markets, we are now putting more trust on Anglo Africa, two countries in particular, Uganda and Kenya. In Central Asia also we are putting more trust. These all put together, they are in the excess of about $3 billion odd market.
A good number of product registration costs which we've incurred in the current year have gone into the product registration in these markets as well. We believe that next year onwards we should start getting approval, and we should be start to build our teams there and bring them to the market. We know it takes about 18 months odd for the teams to really stabilize and start yielding the results. These are the new markets which we are adding. Next three, four years, we believe that they will also start contributing in a meaningful way to the, to the entire sales and P&L of the organization.
Basically these markets should also continue to grow hand in hand with the India sales that we are doing on the branded side in general on a very broad basis.
Absolutely. The way to look at our business now, I think, should not be classified as India export. Let us look at as a Branded Generics business which are spread across different geographies, whether it is India, Africa, Asia or Central Asia now. This is the one big bucket, because the whole approach towards that is same of having the sales force and generating the demand and building the brand. I think we feel that in all our Branded Generics business vertical, we see a good potential to keep growing in our existing geographies as well as these two new markets which I talked about.
That's great. The last bit on the US, you know, where does US now fit in with this sort of, thought process? You've got a very, very solid branded generation generic business. With whatever has happened in the US business over the last couple of years, I mean, how are you looking at? I mean, Is there any change in the way you've been, looking at investments in the US, going forward?
Absolutely. Absolutely. We are very careful about the spends which we are doing for the US business now. When we had the products, so we went through multiple filters to evaluate and select each of the products. That does it make sense to spend money on that and bring them to the market. After that, whatever products we are working on, that is a much shorter list than what we had earlier. Chances of these products succeeding whenever they are filed and we get the approval are much significantly higher. We are going in a very, very cautious way on what spend we do for the US market, what are the risks which are involved, and what are the returns we are looking at.
There'll be a more calibrated approach towards the U.S., very selective product portfolio which we are building next 2 years. As we said, I think the large expansion or OpEx is happening towards the Branded Generics business.
Thanks. Last one on, have you got a target for the Vermiclean product?
It's still work in progress. Let's see. Hopefully, if all going well in next year, we should be able to launch the product. I don't know when-
Have you submitted your CR response to the CRL?
Sorry, I can't divulge so much about it. I think it's a work in progress. We are still working with.
Okay. Okay. Thank you very much, sir.
Sure, sure.
Thank you. We have next question from the line of Vinod Pathiparampil with InCred Capital. Please go ahead.
Hi, good afternoon to all. Last questions got answered. Abhin, just a quick question on this foreign loss accounting.
Please.
If you have a derivative gain from a derivative instrument that comes in other income, is it right?
Yes. Yes.
Isn't it logical that a derivative loss is set off against that, rather than coming in other expenses?
That is what exactly I was arguing with the auditors. They are saying, you know, it as per accounting standards, IAS standards, you know, you can't do that. The loss has to be put in other expenses only. That is why you are seeing in other income there is huge money which is sitting on the gains and there is a loss which is sitting in the other expenses.
It is absurd, but, this is what it is.
Oh, understood. Okay. For the full year, for the full year also when you compute if there is a net, gain-
Yeah.
still it will be divided by gains on top and losses in other expenses. Is that correct?
Yes. See, what happened is that in the earlier 2 quarters, the loss was hardly anything. It was just about INR 6 crores. It didn't really matter. This quarter it was INR 37 crores additional. That really made a whole change. Otherwise it was always gain. You know, for 9 months, net gain is INR 45 crores. INR 37 crores has gone up and INR 43 crores and another, you know, INR 88 crores has come down. That's how the whole breakup is.
Understood. Okay. Good. That's it. Thank you very much.
Yeah. Yeah. Thank you.
Thank you. We have next question from the line of Alisha Mahawla with Envision Capital. Please go ahead.
Hi, sir. Good evening. Thank you for the opportunity. Two questions. One, the MR strength that you've increased by 50% for the Branded Generics, are we done or are we looking at increasing that strength even more now?
No. For now, I think, we believe that this will be the trend going forward. There could be minor increase here and there, but nothing significant.
The employee expenses we're seeing in the current quarter should at best go up only marginally now.
Correct. That's right. That's right.
Sure. Coming to your margins, if I see FY 2022, we did about 31.5%. 9 months is 20.5%. I do understand that there's been significant Forex gain. There has been some Forex derivative loss also. Largely, I think the amount is getting set off because in H1 we had INR 40, almost INR 60 crore of Forex gain. Against that we have INR 37 crore of Forex loss. Assuming that that has got set off, what has led to a more than 10% decline in EBITDA margin? Because we started the year saying that we will be closer to 28%, and now even for next year we're only aspiring for a 25%.
Yeah. I think 28% is something which is really a little far now at the moment. As we mentioned, you know, mainly COGS itself, if you have seen, there was 2 aspect. One is the US price erosion and one was the Euro appreciation. This 1% impact is there definitely on the COGS itself. That 2% is something which I assume that next year at least it will taper down. It may not be there to that extent. That benefit should flow in. The freight cost. Freight cost is something which is, at the moment it is about 2%. This freight cost, looking at the current scenario, we should...
We are feeling that this also should taper down and that benefit of 2% also should flow into next year. That 4% clearly will flow in from there. This unrealized hedge loss which I was mentioning, that also is about 1%. We feel that there will be a, you know, gain from there. Practically, about 5%, positive, you know, flow should be there in EBITDA margin from current EBITDA margin of about 21%.
Where has the balance 5% gone? The price erosion that we're talking about, if I compare to full FY 2022, the price erosion then also was quite significant in the US market, almost high single- to double-digits, which has in fact if anything eased off in the last quarter. In 9 months, I want to believe that the impact would be relic on relative basis, slightly less. Despite that, the bridge is only, I think, a 325%. Where is the balance 5% of the margin?
What I think CFO was telling is that we'll recover 2% from the freight. It is still significantly higher. We'll be able to still, there is 1% freight component which is still going to sit in there. The cost also which we are recovering, it was higher. Still that cost of 1 U.S. price erosion is we can't recover that. That is there now. It's staying with us. That impact will continue, that 1% price erosion, 1% freight. Similarly, I think, another 1%. That's why we feel that now that 28 this is a 3% which is unrecoverable now.
1% from freight, 1% from price erosion, 1% from Forex.
Yeah. Not from Forex, from other, from other expenses.
Yeah.
Okay.
Yeah. This 3% will get carried, will get continued. We are not able to recover that.
That's why instead of 28%, we'll be talking 25% for next year.
Correct. 25% plus. Yeah.
Yeah.
Okay. Thank you.
Thank you. We have next question from the line of Tushar Manudane with Motilal Oswal Financial Services. Please go ahead.
Thanks for the opportunity. Just to know this Forex gain, how much is it in other income?
It is, total for 9 months, it is, INR 88 crores.
For the quarter?
For the quarter, how much it is? For the quarter, I'll tell you.
In the meantime, I think for the derma therapy, there has been a sharp growth compared to IPM. If you could, you know, call out anything in particular here in India market?
In particular in the sense, no, it's a broad-based growth. All the brands are doing exceptionally well. We are focusing on larger opportunities that we have. Moisturizing creams plus any other brand that we have.
In the earlier 2 years, as you would remember, just pre-COVID and maybe in COVID also, we have taken a hit in dermatology. We have done a lot of good customer relationship management activities, which is yielding the results. We are growing rapidly in this.
Understood. Secondly on this gross margin part, if I leave aside the currency impact, so 70%-73% is something to look out for next year, right?
Yeah. I think, yeah, 73, 74, yes. I think 73 should be possible.
Just recently, how much of the raw material price reduction have you witnessed in the recent past? Is there any reduction in the raw material cost on an absolute basis?
Not really, very less. In fact, there is a increase in the excipient prices sharply in the recent past. I think, pressure continue.
Effectively then gross margin will largely remain stable, the operating leverage with higher sales growth is what will drive the EBITDA margin. That is the line of thought, right?
No. That's why I said, we should be able to get about 2%, definitely in gross margin. That's what I mentioned to you. Because especially, you know, in this year, we had that inventory write-off in the first quarter. You know, like this, U.S. RPM cost increase. To some extent, I will definitely recover. Plus euro appreciation. All that put together, 2% definitely benefit will be flowing in next year.
Also, I think, if we are saying that U.S. next year will be flattish, and the Branded Generics business will go up, that change of composition % also will impact the growth.
Yes.
All put together, I think, it should be.
It's safe, yeah.
right now. I think currently we are, it's around 20%, what we are looking at. We should be able to, I think, recover 1.5%, surely, I think.
2%.
Around 1.5%-2% we should be able to recover next year.
Yeah.
Understood. Understood. Just in case of that, for SBN in other income for the quarter, is that number available, I take?
Yeah, yeah. INR 31 crores.
INR 31 crores. All right. Thank you.
Yeah.
Thank you. We have next question from the line of Abdulkader Puranwala with Elara Capital. Please go ahead.
Yeah, hi, sir. Thank you for the opportunity. Most of the questions are answered. Just on the promoter pledge, if you could tell us, you know, what is the current percentage of the promoter holding which is pledged as on today?
Yeah. See, as far as pledges are concerned, we have already removed the pledges for almost about INR 430 crores. That is already released, you know. Now we are from 14%, we have come down to almost about 7%. Whatever amount we have raised, out of that, 66% has already been utilized. Balance, about another 22% is going to be utilized over in next 2 months when the loans will fall due, and then the pledges will be getting released. Practically, I think about 80%+ amount will be used for the pledge remove.
For simple calculation for you, more than 50% of what the pledge was there pre-raise, will get to be removed. 50% pledge will probably remain.
Got it, sir. Okay. Also my next question is on this FX loss that you recorded in this quarter. Now that, you know, the currency EUR has been stabilized, so next quarter, I mean, you know, would we again record a INR 37 crore or equivalent amount as, you know, a fixed gain into the other income or, you know, how the accounting could work?
No, no. It is combination of both euro and dollar. It will depend on both the currencies. We only hope that now that we have booked this INR 37 crores, there should not be much of, you know, loss there. There can be again, if the, you know, dollar also behaves in that direction.
Understood. Also finally, if you could share, you know, what was the working capital, in terms of number of days for the nine months and the net cash balance?
Nine months we don't have the balance sheet, so I may not be able to help you on that. six months you have seen definitely that inventory we have improved, but debtors have gone up little bit. Yeah.
Okay. Sure, sir. Thank you.
Yeah. Yeah.
Thank you. We have next question from the line of Vishal Manchanda with Systematix Shares. Please go ahead.
Hi. Good evening, and thanks for the opportunity. On your emerging market, branded emerging markets, would you be able to share what would be Ajanta's market share and ranking in your key markets like Philippines, Iraq, and French West Africa?
I think we've been sharing that. Have we given the ranking? Nein. Huh? Okay. Okay. I think, we are significantly, high up in the ranking. We are in some markets, we're in top five. In some markets, we are in top 10. We are fairly high. As I shared earlier, I think, our growth rates are definitely higher than the market as well. I think that's only one part. Yeah. I think that's where we are. Yeah.
You have been kind of improving ranking in these geographies.
Yes. Yes.
Yes.
Yes. Yes. Absolutely. Absolutely.
Okay. second one, in your India brands, in how many categories would your brands be kind of, number one or number two?
In India?
In your Indian branded market, in the Indian branded market, whatever brands you have launched. For each category.
Majority of our brands are in the top five in respective sub-therapeutic segments. We are market leaders in most of them, 1, 2, 3. In majority, I would say more than 70% of the brands, we are in the top five.
Got it. Mm-hmm. Okay.
Absolutely.
Just one final one. Recently we have seen a few transactions on the dermatology side.
Sure.
One was Curatio, another, the Glenmark branch, divestment. Would Ajanta Pharma have evaluated these, opportunities?
We evaluated the Curatio transaction. We were also on the cap table until it crossed our expected valuation and, therefore, then we left it at that. We are evaluating acquisition opportunities, which are within our focus therapeutic segments and, as and when we have the opportunity and the right valuation, we will move forward with it.
Got it. Thank you. That's all from me.
Okay. Thank you.
Thank you. We have next question from the line of Aditya Khemka with InCred Asset Management. Please go ahead.
Yeah, hi. Again, thanks for the opportunity. sir, roughly, 10%-12% of the top line comes from the US, am I right, on an annual basis?
No, it is 22% currently.
22. Okay. Sorry. Yeah, yeah. 22. What % of our capital employed will be U.S., if you can just ballpark it?
Will be very difficult, Aditya, because the problem is that we are using all our facilities for all the markets. It is not that, you know, it is only for that market. It will be very difficult to say that, you know, capital allocation is for that. As the MD mentioned earlier also that our capital allocation to Branded Generics we are increasing, but U.S. we are very cautious about any allocation further.
Yeah, I get that, sir. Okay. Sir, on the price increases, what was the average price increase that we took in India now that almost a year has passed by? The WPI increase was 10.77, but we have a lower NLEM portfolio. Non-NLEM portfolio anyways every year is up to 10%. What was the average price increase that we took in India this year?
Average price increase was, apart from NLEM, we go for anywhere between 7%-9% price increase, provided that the market has the appetite for the higher pricing. Some of the products are already at a very, I mean, you know, mature product life cycle. The industry competitors also don't take a price increase within that. And if it's optimally priced, then we refrain from taking price increases. Overall, as a growth percent, 3% of our growth has come from price increases. Whereas industry, from the growth perspective, has recorded 2% from the price increase.
Is it 3% too low, sir? Because 7-9 on the non-NLEM and I'm assuming similar on the NLEM. Your growth could have been-
3% of the growth, breakup. If we have grown at 14%, 3% of that growth has come out because of the price increases.
Yeah, that would imply that on a total portfolio basis, the growth that you were able to take in your brands is only 3% am I right?
Yeah. Sure.
Yeah. yeah.
Okay.
Yeah. All aggregated together, 3%. That's right.
Yeah. My question to you is... Or my question basically here is that, in an environment where raw material prices were going up, gross margin was under pressure, and you could have taken a 7%-9% price increase, you chose 3%. That essentially indicates, you know, that our competitors also did not take it, and we didn't want to be too far from our competitors in terms of pricing. That also brings me to question whether our brand equity is as strong as, you know, one would like it to be. Because if the brands are strong enough, sometimes higher pricing does get absorbed. Am I right? I mean, I'm just trying to understand your assessment of where your product brand equity lies in terms of your portfolio brand equity lies.
Obviously, some products will have more brand equity, some would have less. Is it that the majority of our brands are like such, on such a scale of brand equity that, there if we take price increases, we lose prescriptions? Is that where we stand?
No. A couple of things. A, the industry growth is only 2%, right? Ajanta is 3%. We are more than 50% of the industry average growth.
Industry is 1%.
Correct.
Mm-hmm. Mm-hmm.
I'm so sorry. One second. Let me correct myself. The price growth of industry is 5%. What I was referring to was the new product growth, whereas Ajanta price increase growth is 6%. So we are still higher than the industry, but we have recorded a 6% growth due to price increases. B, it is not necessarily dependent on the price, on the brand equity at all. It is basically whether we have touched the threshold of that particular molecule and if the pricing is optimum, then there is really no scope for us and neither is there any scope for the competitors to increase, which is also reflected in the IPM price increase growth of 5%. So we are, we are still better placed, I think.
Yeah. if it's 6 and 5, then I understand. because you were saying 1 in 3 or 2 in 3, I was puzzled. okay. 6-
That is for the new product.
I got it. Yeah. That makes more sense. A last question from me. If we are already cautious on the US business and we see that we are not going to allocate or we are going to be very cautious to allocate more capital on the US business, my question to you is why do we do the business, you know, for what exists? I mean, in your calculations, have you worked out that had you just stopped the US business, scrapped it, would your margin top line absolute EBITDA, absolute profits, would that look similar to what we report today or would that look better or worse?
I mean, is there something which I keep wondering and I try to do some of these calculations, but obviously I don't know the numbers like... To me it seems that it's not giving us much PAT. I mean, it may be giving us some EBITDA on top line, but it doesn't seem like it's giving us any material PAT or any material cash flow.
Yeah. It's a bit a complex question what you're asking. The whole scenario deteriorated in one year, we have a lot of work in progress for the new products which are awaiting approval and in the R&D which are at advanced stage. I think one has to take a very rationalized and a calibrated view. This is not like a switch on and off. You can switch on today and tomorrow you can switch off. One has to be taking a very cognizant and a long-term and a mature view. What we are doing is we are rationalizing the spend, as I said. We're being very selective on the spend.
on the products also we are putting more rigor that, you know, what are the products which make sense for us to continue or which are eating up more capital and which we are there. we're going a very systematic and a very thoughtful way about approaching the current situation, current scenario.
Yeah.
Please be assured that, all our focus is there to see that money works to the maximum, but in a very proper and thoughtful way.
Yeah, I get that, and thanks for that, sir. Thanks a lot for answering my question.
Yeah. Yeah.
Thank you. As there are no further questions from the participants, I would now like to turn the call over to Mr. Yogesh Agrawal for closing comments. Over to you, sir.
Thank you everyone for joining for this call. In case if there are any other further questions that got remain unanswered, please reach out to our investor relations team. Thank you so much.
Thank you, sir. On behalf of Ajanta Pharma, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.