Ladies and gentlemen, good day, and welcome to Ajanta Pharma Q2 FY23 earnings conference call. As a reminder, all participant 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 this conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now 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, Joint Managing Director, Mr. Arvind Agrawal, our CFO, Mr. Rajeev Agarwal, Head of Finance and Investor Relations. I'm really glad to inform you that the board of directors have approved an interim dividend of INR 7 per equity share. That is 350% of the face value of INR 2 each. I am also truly delighted to share with you that Ajanta Pharma has been awarded the best managed company for the year 2020 by Deloitte. This validates our Ajanta's journey towards the excellence in product, people, and various other things. Coming to the results, they are already with you. I'm happy to share with you that we have been able to achieve the continued growth in revenue.
I will take you through the business-wide performance for the Q2 and H1 FY 2023, along with the comparison of the previous year's same period. Let's begin with the emerging market branded generic business. I'll first start with Asia. During the Q2, sale was INR 251 crore against INR 191 crore, posting a very healthy growth of 31%. In H1, sale was INR 292 crores against INR 357 crores, again posting a very healthy growth of 38%. The growth appears a bit elevated due to the low base of Q2 and H1 FY 2022. Let's move to Africa. During the Q2, sale was INR 146 crores against INR 159 crores, posting a degrowth of 8%. H1 sale was INR 300 and fourteen against INR 284 crores, posting 10% growth.
The growth in this market was impacted due to the INR appreciation against euro from the previous year, which has adversely impacted our margins. Branded generic business of Asia and Africa contributed 43% to the total revenue during the H1. Our exposure to these markets were INR 397 crores against INR 350 crores, posting a double-digit growth of 13% in Q2, and INR 805 crores against INR 641 crores, a growth of 26% in H1. We continue to post superior growth as compared to the market on the back of identifying opportunities and executing it clinically. We launched 16 new products during H1 in both the territories. Let me now move to U.S. generic business. U.S. generic business contributed 19% to the total revenue.
In Q1, sales were INR 185 crores against INR 192 crores, posting degrowth of 5%. In H1, sales were INR 84 crores against INR 362 crores, posting 1% growth. Despite continued price erosion and absence of new product launches, we're still to maintain the same level of the business as previous year. We continue to have 39 products on the shelf. In the first half of the year, we filed three ANDAs and also received one final and one tentative approval. At the end of September 2022, we have 21 ANDAs awaiting approval with U.S.FDA. We are looking to file 10-12 ANDAs during the year. Let me now move to Africa distribution business, which contributed 66%, sorry, 6% to the total revenue. In Q2, sales were INR 33 crores against INR 66 crores, posting 50% degrowth.
In H1, sales were INR 110 crore against INR 120 crore, posting 8% degrowth. As we have been mentioning in our earlier call also, the institutional business remains unpredictable and depending on the procurement agencies, funds and the requirement by the various donor countries. With this, now I hand over to Mr. Rajesh Agrawal, Joint Managing Director, who will take you through India business. Thank you, and over to you, Rajesh.
Thank you. Good evening to all of you. Let me discuss some of the key highlights of India business with you now. India business contributed 32% in total revenue in first half FY 2023. In Q2 FY 2023, sales stood at INR 314 crores against INR 248 crores, posting a healthy growth of 27%. In H1 FY 2023, sales stood at INR 593 crores against INR 477 crores, posting a healthy growth of 24%. This includes sales from the trade generics of INR 38 crores against INR 30 crores in Q2, and INR 71 crores against INR 57 crores in H1 of FY 2023. We have launched 15 new products in H1 FY 2020, and 3 of them have been first to market.
Our performance has been satisfactory, which was on the back of new product launches, market share gain, and price increase. As for IQVIA March, September 2022, we have posted healthy growth in all the therapeutic segments and exceeded industry growth across therapies. We have three of our brands appearing in top 500 in the IPM. As for IQVIA, we have improved two ranks and now rank 27th in September 2022 from being 29th rank in March 2022. With this, I will now hand over to Arvind Agrawal so he can take you through the financial performance. Thank you, and over to you, Arvind.
Thank you very much. Good evening to all of you, and warm welcome to this earnings call. For ease of discussion, look at the consolidated financials and provide year-on-year comparison. Let me take you through key financial highlights for Q2 and H1 FY 2023. In Q2 FY 2023, total revenue stood at INR 938 crores against INR 885 crores, posting 6% growth. In H1, total revenue stood at INR 1,889 crores against INR 1,633 crores, posting growth of 16%. The breakup of revenue has already been discussed by MD and JMD. Q2 FY 2023 saw material cost at 28% and H1 was at 29%. This is a little higher than our estimate on account of continued high level of raw and packing material costs, continued U.S. price erosion, INR appreciation against euro.
Going forward, we estimate COGS to remain at around 27%. In other expenses, we saw significant rise in the export freight cost. Pre-COVID, our freight costs have been around 1%-1%, which got escalated to 9%, translating to INR 38 crore adverse impact for the H1 FY 2023. This expense is not in our control, has adversely impacted the profitability to a large extent. Even in this particular quarter, there were some expenses which got deferred to the next quarter as well. R&D expenses was rupees 59 crore against rupees 49 crore for the quarter, and for the half year it was 113 against 94 crore. R&D expenses stood at 6% of revenue, which will continue at this level. EBITDA in quarter two was at 196 crore against rupees 263 crore last year.
For the H1, it was at INR 418 crores against 483 crores, 20% of the revenue. EBITDA was lower, mainly due to higher material and logistics costs, as informed above. Going forward, we expect around 26% ±1% going forward. Other income stood at INR 73 crores in H1, mainly contributed by foreign INR 61 crores. Income tax stood at 23% for Q2 and 22% for H1. We expect it to remain the same level during FY 2023. Tax in Q2 was at INR 157 crores against 196 crores, 17% of revenue. For H1 it was 331 crores against 370 crores, 18% revenue. We incurred CapEx of INR 63 crores in H1.
CapEx, including maintenance CapEx for the FY 2023 is estimated now at INR 150 crore. We have improved in inventory holding period to 73 days from 88 days in March 2022. While receivables remained at same level of 115 days, and payables at 76 days against 70 days in March 2022. With these highlights, I open the floor for the discussion and then question and answer. Thank you.
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 touchtone 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. The first question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.
Sure. Thanks for the opportunity. Just a clarification on the freight cost, particularly for Q2, how much was the impact?
Almost about INR 24 crore.
Okay. That is what quarter-on-quarter largely explains the increase in other expenses.
Exactly, exactly. Plus also, as I mentioned earlier, there is also some prepayment of expenses which has happened in this quarter. Afterward, in the next quarter it will be little less.
If you could also share the mix of air shipment and air transport and water transport in terms of raw materials as well as finished goods?
I don't have that number readily with me, but one thing which I can definitely say is that, air transport is very less, and there, the freight cost has softened to some extent. Sea freight has not really softened, so that's where the impact is.
Copy, sir. Just lastly, on the ANDA filing, given that we have filed 3, so that is kind of bunched up, considering the target of 10-12 filings? Or this can get pushed to FY 2022?
That is something which is very difficult to say now, but we are trying our level best to complete that 10-12 filings within this year itself.
There is no filing which will get skewed towards the end of the year. Our aim is to achieve that target.
Copy. Just lastly, any further development on generic Chantix?
Sorry.
Pardon me?
Generic Chantix, any further development?
No. Chantix, I don't have any significant update to tell you. It is still a work in progress.
Okay, sir. That's it from me, sir. Thank you.
Thank you.
Thank you.
The next question is from the line of Rashmi Sancheti from Dolat Capital. Please go ahead.
Yeah, thank you for the opportunity, and good evening, everyone. One question on Africa branded. You mentioned that the growth was impacted due to the INR appreciation against euro, correct?
That's right, that's right.
Okay. In CC terms, what kind of growth are we seeing in the business? I mean, in the constant currency.
For the current quarter in constant currency, it was flattish. Pretty much that 7%-8% degrowth which we have seen, that was purely on account of rupee appreciation against the dollar.
Against euro.
Sorry, against euro. I'm sorry. I stand corrected.
Oh.
Against euro. Yeah.
Okay. How should we see this Africa branded business for the entire year? Why there is a flattish growth in the market?
Africa for the whole year, I think, I would say that we should grow in the high single digits for the whole year. I think as already shared with you, because if you add in the constant currency, it could be higher, because the 4% is also considering the rupee appreciation against. This rupee appreciation is purely external factor beyond our control, which that was the impact it had. Had that was not there, the growth could have been even higher.
High single-digit growth, you're talking in INR terms, right?
Yeah, yeah. I'm in INR terms for the whole year.
Okay. In terms of Asia, you know, we are continuously seeing extraordinary growth from last quarter. How should we see in the second half? You know, this kind of growth would continue and therefore for FY 2023, the growth would be much higher versus the guidance of mid-teen growth. Even for India, if you can guide.
I think, really Asia has been very well for us this year. As we have seen last quarter also we did pretty nice. This quarter also the performance was quite good, very encouraging. For the whole year, we are looking to post a growth of 20% and above, for the Asia.
Okay. India, sir?
For India, given that we have had two very strong quarters, we are now confident of posting high teens as against mid-teens what earlier guidance we had given. We are quite confident of going for high teens growth.
Okay. Sir, finally on the expenses, if you could give like, you know, what is the price erosion currently in the U.S. market? Any particular guidance, you know, which you can give that, you know, this year U.S. would be, majorly in the declining phase or, you know, it would remain flattish or probably we will have some good launches in the second half. If you can guide on that. On the expenses side, you know, we are seeing that the raw material cost has come up exponentially. So quarter-on-quarter, any sharpening of the API prices or anything which you have noticed? Even on the freight cost, you know, after September, how are you seeing the trend?
Whether it is coming down or it is still high and it is going to keep on impacting even in the H2? And your overall EBITDA margin guidance, you know, for the year.
Okay. I think this was a very loaded question with a lot of subsections. Let me take one by one. First you said about the U.S. business. U.S. business, we are looking at one or maximum two launches during the year, whatever approval we've got. Based on that, we are looking at full year to be a high single-digit growth which we'll be able to post in the U.S. Despite, I think the CFO will take on the COGS and the part. Even because we are going to, so that's a high single-digit growth for the U.S. Because of the price erosion, the margins have shrunk, so that will impact our.
That has already impacted the effect already you've seen on the Q1, Q2 in the past as well as in the EBITDA. Second on the freight front. Some freights they have softened, but that was purely for the regular containers for some markets. When you add other costs of the freights which are there, overall when you add, some of the products which we sell, they are in the reefer containers, so they have not softened so significantly. We've seen some softening of the freight around 5%-7%. Let's hope that this continues and it further softens. That's on the freight. I think on the expenses and the-
Yeah.
EBITDA therefore will be impacted.
Yeah. In terms of the COG which you were talking about, that, you know, it has softened from Q1 to Q2. In Q1, you know that there was, you know, impact of some inventory write-off which was there. Practically, we are almost at the same level currently. Going forward, we are expecting some benefits certainly, you know, in the material cost COG because of softening as also the business mix. The product mix will change to some extent positively, because of which we should get some benefit there. In terms of other expenses, as I mentioned earlier also, that some expenses got preponed. Certainly some expenses will be little lower as compared to what we have incurred in this year.
Overall, as I mentioned in my response that the EBITDA guidance which we are talking about is about 26% ± 1%. That is the estimate which we had for the EBITDA guidance for the whole year. Thanks. That's it from my side.
Yeah. Thank you.
Thank you. The next question is from the line of Kunal Randeria from Motilal Oswal Institutional Equities. Please go ahead.
Good evening, and thanks for giving me the opportunity. Yogeshji, firstly for you on the U.S. front, I think the data suggests that FDA is approving 6-7 ANDAs on a monthly basis.
Sorry, your voice is fluctuating a little bit.
Give me a second, please.
Yeah.
Yeah. Is this better?
Yes, better now.
Yogesh Agrawal, you know, if I look at the data from the FDA, around 65-70 ANDAs are being approved on a monthly basis. But since you haven't got any approval and, you know, this monthly approval rate from the FDA is almost at pre-COVID level. Just wondering, you know, what exactly, you know, the reason for not getting those approvals?
Yeah, good question. A lot of ANDAs we had filed from our Dahej facility. For a number of ANDAs, I think four, five ANDAs, FDA told us that the review process was at one stage, but the facility inspection was a pre-requirement for approving these ANDAs. Dahej has undergone the U.S. FDA inspection last few months back. We had 2 Form 483 observations, which were of a routine nature, which we have responded. We believe the EIR should follow in the normal course of a few months. That clearly paves the way for the approval from all the ANDAs which we have filed from Dahej. After the EIR is received, we are expecting a flurry of approvals that should come through.
That was to answer your question, the holdup was primarily FDA's requirement for the FDA inspection of the Dahej facility. Now since that is behind us, we are expecting approvals to come through.
Sure. Thanks for that. Second question is on the India business. In the last three or four quarters, you have demonstrated industry-leading growth. While, you know, I understand your guidance and all, I just want to understand what's the, you know, the reason that you have been so consistent in India.
Primarily if you look at the segment-wise growth, dermatology has been doing exceptionally well for us. That is contributing to the growth percentages. We are growing multifold compared to the industry growth rate. Pain management also we are growing robustly, so that also is adding to the growth, and so is the niche adding also.
Sorry to cut you off, sir, but, you know, actually I saw that data in the press release. You know, I just want to understand the reason. Have you taken higher than average price increase or is the, you know, there is substantially new, I mean, new products are contributing a lot more? What exactly is driving this growth?
Price increases are as expected, or maybe as guided by NLEM and also as per the NPPA guidelines, correct? We have the RPI increases maybe slightly more than the industry. The volume growth is what is driving our growth. Industry is de-growing in volume by -1%, whereas we have grown by 4% in volume. Which is the best thing to happen, which shows the inherent strength of the brands that we have built. Does that answer your question?
Yeah. I mean, yeah. Just for sure, so you know, you have grown volume to 4% and let's assume RPI growth will be 6%-7%. The remaining 6%-7% will be coming from new products that you have launched?
Yeah, new products also. Yes. New products is at par with the industry, which is contributing around 2%-3% for us.
Okay, okay, fine. Make that, you know, offline with that. Last question for, Arvind Agarwal. Arvind Agarwal, you said that, you know, if I-
Sorry, turn here. Kunal, your voice is breaking up again.
Sure. I hope this is better now for the next question.
Yes, sure.
Yes. Arvindji, if I heard you correctly, you mentioned that the freight cost is around 9% of revenues. Is that correct?
Yeah, you are right. For the exports, huh?
I mean 9% of the export revenues.
Yes.
Okay. What would it be for the total revenue?
No, this is for the export revenue. The, you know, the export revenue, earlier it used to be 6%, now it is 9%, so almost about 3% increase on the export revenue.
Okay. Sir, the reason I'm asking this is because year-on-year basis, while I understand that exports would have gone up, some trade elements would have come down, right? Like container costs or something. Why such a sharp increase? You know, I'm not being able to completely understand. Or is it because your air shipments are substantially higher? I'm not able to completely understand.
No. Kunal, it is primarily because of the global factor which is affecting not only Ajanta, everyone. The container costs have gone 3x-4x, the ship costs, the shipment costs. We've seen for the U.S. as high as 4x of what it used to be at the pre-COVID level. Now that has started to soften a little. That's why from everything Arvindji has said, from 6%, pretty much 50% rise has happened. From 6%-9% it went up. Primarily it's external factors which hopefully starts to soften and come down.
Okay, got it.
There is no element of the raw going up or anything like that. Those kind of components are, I think, in line with what we had in the past as well.
Okay. Got it. Thank you.
Thank you. The next question is from the line of Priya Harwani from Perpetuity Ventures. Please go ahead.
Hi. Good evening. Am I audible?
Yeah, yeah, you're audible. Go ahead, please.
Yeah. Hi. I just wanted the clarification on the CapEx number you mentioned for this quarter as well as the guidance for full year.
It is for the first half INR 63 crore. For the whole year, we are targeting INR 150 crore.
INR 150 crore. Okay. Thank you so much.
Thank you. The next question is from the line of Abdulkader Puranwala from Elara Capital. Please go ahead.
Yeah. Hi, sir. Thank you for the opportunity. Just one clarification on the EBITDA guidance. This guidance of ±126% is for the second half or for the full year of FY 2023?
Second half.
Okay. On the sequential basis, if I see your other expenses.
Yeah.
There has been a rise of almost like INR 25 crore, out of which, 10 crore as explained would be the freight cost.
Yeah.
Would it be fair to assume that the balance INR 15 crore or large part of it would be the pre-payment of expenses?
To some extent you can say. About INR 10 crore you can say.
1%.
Yeah.
Okay.
Almost 1%.
All right. Got it. Just one final one on this INR appreciation against the euro which impacted your Africa sales.
Yeah.
Would there be some amount of Forex loss also which would be sitting in your P&L for Q2?
Yes. About INR 6 crore is there in the P&L, which is there in other expenses also.
Got it, sir. That's it from my end. Thank you and wish you all the best.
Thank you.
Thank you. The next question is from the line of Vinod Pattabiraman from InCred Capital. Please go ahead.
Hi. Good afternoon. One follow-up on Chantix. If I remember correctly, earlier you had said that there were some FDA queries which you were in the process of responding. Have you responded? And if not, when do you plan to respond?
No, we have responded. It is work in progress from FDA. Based on that, they have asked for something, some additional data. We are in the process of submitting that with FDA now.
Okay. Got it. Thank you.
Sure, sure.
Thank you. The next question is from the line of Nikhil Mathur from HDFC Mutual Fund. Please go ahead.
Hi. Good evening. My questions are more on the margin side. If I look at the mix this particular quarter, your India plus Greater Asia sales is almost 60% of total revenue. And then you have spoken of gross margin of around 72%. If I look at pre-COVID, let's say FY 2020, when the mix of these two markets combined was more 50%-55%, the company was doing almost 75% gross margin. Can it be safe to assume that the entire 3 percentage points hit or the RM hit is more than that, more than 3 percentage points? Because your mix has improved, but your gross margin is under 3 percentage points, so the RM hit could be around 4-4.5 percentage points.
Can it be the right way of looking at the R&M hit?
I think what we need to understand is multiple factors. See, one is the, you know, cost has gone up. Now, that is something which is across. Even for the
Global inflation.
Exactly. Global inflation for the raw materials. Everywhere it has increased. This is something which is normal.
Apart from that, certainly the product mix also has got some impact on that. As the product mix will improve, I think that should give the
I think as CSO said, there are three components. One is the raw material prices going up on account of global inflation. Second is the euro adversely impacting, that has further increased the,
Price division.
Price division. Third is the price division. All three impacted our costs, which is what is reflecting here. All three things. I think what is important to see is that the health of the business is. Are our brands growing? Are we increasing our market share? These are the factors which are going to be there. There will be. Now the bottom line is that they've improved. I think the long-term overall approach is that we are able to gain the market share, we are able to grow the brands. That's, I think, the key health indicator of the organization.
Right. I'm not fully clear, sir, but if I may just try to understand this better. Are you also trying to imply that while the raw material costs have hit across business segments, perhaps the margin sectors in India were also in branded Asia, they are also under pressure? Because you are in pursuit of growth both in India and branded Asia, we might not go back to historical high gross margin, whatever they were. Obviously, we don't have exact numbers there. Qualitatively, we are at a margin level which is much lower than what it was pre-COVID. As you chase more growth in next 2, 3 years, the margin diversion in those markets might not happen to that extent.
I think, to some extent, like what we said, you know, the inflation, obviously, you know, global inflation which is there in the RMPM cost, that is going to be there. That is something which definitely will be there. We are talking about, 26% as the, you know, right, you know, COG, which should be there for the way forward. That is what we are expecting, yes, too.
Sure, sir. As is in India, in terms of growth in 2023, 2024, 2025, what are your expectations from new product launches? I mean, I believe Ajanta in last few years has been higher than industry average of 2.5 percentage points, I think more in the range of 3.5%-4%. Is that budgeted for next fiscal as well from new products in terms of growth?
Our expectation would be in line with the industry growth from the new products. Our contribution also, even if you look at the first half, is at par with the industry, which is 2% growth. I expect that to be the same going forward.
Got it, sir. Another question, sir, on the logistics side. Again, sorry to harp on that. I'm having multiple questions on that. I'm just trying to understand when we look at various data points, including the Baltic Dry Index and whatever we hear from some certain other industry experts and companies as well, there seems to be a pretty sharp softening of logistics costs. Actually the spot prices have gone down. Is it that your contracts on the logistics side are more, you would have entered in the more near term. That's why your pricing on the logistics front is higher than the spot, and that's why a bit more benign margin commentary from your end for second half.
Would that be a right way why there's a bit of disconnect between your guidance and what the prices and things like?
To summarize your question, you are saying that freight costs, what is there in the press or otherwise have gone down, we have not gone down corresponding. Is that your question?
Yes. Yes.
Okay. Yeah, yeah. There are two things. The one is that the freight costs, let's say for example, for the U.S., it has gone down for the regular containers, which are not cold chain. We export our products into the cold chain containers. The prices have not gone down to that extent. We have seen 7%-8% price reduction in the reefer containers. Whereas for the regular containers, the price drop has been quite significant. This is common to all. Any company who want to export the product in the reefer container, they are seeing this kind of price reduction. Non-reefer containers, the price reduction has been slightly better. Other markets, the prices are reduced, but not to the level to the pre-COVID levels.
There are some fluctuations which is happening. We'll see how it stabilizes in the coming next half of the year.
Okay.
Is there any other?
Yes, I think that helps a lot. One final question on the U.S. market. The commentary from various industry experts has been pretty guarded for some quarters now, including yours as well. I think last quarter, if I remember correctly, you sounded a bit cautious in the U.S. market. Any evidence that changes that outlook for the market, or it continues to be as bad as it was in last quarter or a few quarters back as well?
Yeah. Nothing changes. It remains same what we've been talking for the last few quarters. We continue to be cautious and trade very carefully and navigate the challenges as they come. There is nothing further to add than what others have guided in the industry as well.
Got it, sir. Thank you so much. It's helpful knowing.
Sure, sure.
Thank you. The next question is from Kushal Chavda from Equirus Securities. Please go ahead.
Hello. Sir, the domestic business has been doing quite well in the past few quarters. I have just one question with regards to that. What has been the contribution of the institutional business of the whole domestic business?
For the first half, it is about INR 70-odd crore.
Yeah.
INR 73 crore.
Yeah. INR 71 crores.
INR 71 crore to be precise.
71 for the first half.
What was the contribution in FY 2022?
22.
FY 2022, 8 point small.
I will share the number. Sorry.
No, that was only first half.
First half, yeah.
No, it was full year.
FY22 was INR 100 crores. INR 100 crores to be precise.
Okay. Thank you, sir.
Yeah. Okay.
Thank you. The next question is from the line of Tushar Manudhane, Motilal Oswal Financial Services. Please go ahead. Tushar, your line has been unmuted. Please go ahead. As there is no response, we'll move to the next question from the line of Harsh Beria, Professional Investor. Please go ahead.
Hi. Am I audible to everyone?
Yeah, yeah. You are audible.
Hi. Congrats for the great set of execution and the branded business in India and Asia. My question is about one of your recent product approvals, which is Vimovo. I think Ajanta got it a month back or something. When do you plan to launch this product, and how is the market currently in this product in the U.S.?
We are gearing up for the launch, and maybe it will get pushed out to the Q4. The product has declined significantly from what it used to be when we had filed the NDA. Let us see. We will try to do our best to garner whatever market share we can. It will launch in Q4.
Okay. One question I have about your trade generics business in India, what was the sales in this quarter?
This quarter INR 38 crore.
What was this number in the last quarter or in FY 2022, so Q2 FY 2022?
Q2 FY 2022 was
INR 30 crore.
INR 30 crore.
INR 30 crores. From 30 it has gone to 38, and for first half from 57 it has gone up to 71.
One thing which is very clear in the trade generic numbers is Ajanta is doing quite well. Now, I think this year you will end up with close to INR 130 crore-INR 150 crore. Can you throw some more light on this business?
We are operating just the way as industry operates. Yes, we are doing exceptionally well, and it is primarily pharmacy or a chemist push business. It's all branded generics. That's how we've been operating. Our team has been very, very active in identifying new product opportunities and also exploring markets which are untapped by some of the other competitors, which is giving us the growth.
Once we have some kind of a pool for a given product, do we also plan to migrate it towards branded generics? Migrating products which already are showing traction in the trade generics to branded generics.
Usually, I have not seen that from trade generic a brand would come into prescription generic, branded generic as such. We don't intend to do that. You are right. If there is some kind of pool that gets created, some kind of market that's created, especially for any chronic nature of product, then there is an auto demand that happens when it. It's better for the organization as such because the influence or the control of the chemist reduces to that extent for that brand.
Okay. My last question is on the U.S. price erosion. What was the price erosion in our base portfolio for this quarter?
We have seen a double-digit growth, price erosion.
This would be early double digit or mid double digit?
Yeah. Mid double-digit.
Okay. Thanks. That's it from my side.
Thank you. The next question is from the line of Alisha Mahawala from Envision Capital. Please go ahead.
Hi, sir. Good evening. Thank you for taking my question. A couple of clarifications. One, the EBITDA margin guidance that you've given for H2 of 26%, is this including other income?
No. EBITDA margin doesn't contain other income. It is excluding the income.
Okay. No, in the presentation the EBITDA was including. Hence I thought of the clarification. The other thing.
No, it is not including other income.
Okay. Got it. In my U.S. market earlier we were talking about four to five launches in the current year, and now we're talking of one or two launches. The reason for the relatively lower launches than earlier anticipated?
As I had explained earlier, that is purely related with the approval of the ANDAs.
The ANDA approval got linked with the facility inspection. Now since the facility inspection has occurred with very routine type of tool for observation, we are expecting the EIR to come in next few months. After that, this will pave the way for the approval of the product, ANDA product. As we get approved, then we will bring them to the market. It was purely the approval regulatory process. We are just awaiting that to be completed.
Okay. You mentioned that margins in this quarter were impacted because of higher sourcing from cost prepayment. What is cost prepayment? What could this be pertaining to?
Some of the product registration, R&D, and also some of the promotion expenses.
Okay, sure. Thank you.
Thank you. The next question is from the line of Nitin Gosar from BOI Mutual Fund. Please go ahead.
Yeah, hi. Good afternoon. Two questions. I wanted to understand the stand on U.S. generics business, keeping in mind it has been constantly seeing price erosion, especially for the portfolio that you carry, the price erosion has been pretty harsh. The incremental investment that you are doing for R&D, how are we trying to secure the future growth prospect and the profitability pool in U.S. generics?
We are very careful in the product selection, and we are putting lot of filters to identify and see the products which we try to do the modeling and forecast and see that what kind of competition it will have and what kind of margins we will be able to get. Earlier the aspiration was to price much higher products, but then we have curtailed the ambition, and we've dropped number of products to make sure that we do our best in product selection. I think we are trying our best to see how we can maintain and increase our market share in the markets where we have a front end there.
Should we keep in mind that until we don't see new launches, this trajectory of price erosion or the profit pool of U.S. generics will continue to remain negative?
I think, without the new launches, the current Q numbers which you have seen, we expect that to remain. Maybe there will be minor variations here and there depending on the quarter performance. This is the base, which will be, we believe, is there. Based on that, then if our approval works then we should be able to add on this base going forward.
Could you comment on the U.S. profit pool? How are we in terms of break-even post R&D?
We do not give the numbers by territory-wise. I think I have some limitation in sharing that kind of information.
Yeah, I understand. If you could acknowledge whether we are breaking even post R&D.
I'm sorry, I'll not be able to comment much.
Okay. No worries. One last bit on Africa business. We try to understand here. In past, we have tried not to aggressively hedge ourselves on currency part, but this time, it has not worked in our favor. Going forward, A, how are we approaching the currency hedging now? B, the kind of currency volatility that we are seeing, does it forces us to look for price increases in those territories to compensate for the margin erosion that we're seeing?
We are not looking at the price erosion, price increases there. There are some limitations that they are regulated and controlled, the price approval. It's difficult to get a price increase there. More or less, the best we can do is hedge the currency, which we are doing. Rest I think we are able to see once this Russia-Ukraine war settles and hopefully then that kind of the Europe bounces back for me. I think that is a factor which is beyond our control.
Okay. Okay. That was all. Thank you.
Thank you. The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.
Thanks. Thanks for the follow-up. Sir, on just on Asia business, first half has been phenomenal. Compared to that, we are still guiding for a lower number for a full year of FY 2023. Given that second half FY 2022, in any case was soft. Any particular comment on this?
I think if you remember Asia business last year, maybe it's Q4 was the highest, you know? Because of that, I think that will not be sustainable. To that extent, I think we are expecting that to get corrected and because of which the overall guidance is about 20%+.
Any foreign gain in other income for the quarter?
Pardon me?
Other income has been higher at about INR 40 crores. Any foreign gain?
No, I think maximum is foreign gain only. As I mentioned in my talk, I think it was INR 63 crore for the whole half year is foreign gain. That is what is basically the hedging which we have done, that has benefited. It has not gone in the top line, but it has come into the other income.
How much was it in the Q2 in particular?
Pardoning?
Sir, how much was it in Q2 in particular?
Q2, half year INR 63 crores
Oh.
Q2 INR 39 crores is Q2. Out of 63.
Okay. Thanks. Thank you.
Thank you. The next question is from the line of Naushad Singh from Aditya Birla Sun Life AMC. Please go ahead.
Hi, thank you for the opportunity. Couple of clarifications, firstly on the free cash flows. When we look at in next couple of years, two, three years, we are generating very strong free cash flow.
Yeah.
Plus we have a decent cash on the balance sheet as well. How are we planning to utilize this? Any thought on the acquisition piece?
As far as acquisition is concerned, I think we are continuously looking for it, but unfortunately, we have still not got a suitable candidate for the acquisition. We keep on looking for it. We are open for acquisition at every time, and we are, you know, looking at every opportunity which is coming to the market certainly. Only the thing is that unless it happens, we really don't know. As far as free cash flows are concerned, you have seen in the past two years, board has to decide how they want to deal with it, but we have been repaying to the shareholders consistently. Like last year, we have given almost INR 450 crore back to the shareholders.
All right. Secondly, in terms of percentage of billing in dollar terms, would you be able to share what percentage of our revenue billing we do in terms of dollar?
Majority is dollar. Only one small portion is in euro, which is the
Okay.
Exactly.
Yeah.
Africa is euro, but else everything is in dollar.
Okay. Lastly, just again, I'm touching on the margin side. Just a clarification, sir. Based on your guidance, if I see your revenue mix towards India and emerging markets has improved and it will improve going forward as well. Your margin guidance has been flat. The reason for this could be either your U.S. business is eating a lot of cash or the profitability of India and emerging markets has gone down versus past. What could be the specific reasons there?
As we have mentioned, it's a combination of all the three things. We have mentioned that the U.S. aggressive price erosion has adversely impact our costs and correspondingly EBITDA. The second was the appreciation of rupee against the euro. That has also impacted our Africa part and that also got baked into the costs. The third was the price increase which we have seen across the raw materials, you know, COVID situation. That was the third. Of course, with the expense we've seen the freight going up. These are the four big buckets which is not unique to Ajanta. That is, I think, impacting any and every pharma company which is there.
This is all combination of costs has resulted into the little bit, the reduction in the costs and impacted the EBITDA as well.
All right. If we leave U.S. business aside, once things improve in terms of your logistics and raw material side, should we assume that the profitability of the India and emerging markets should come back to the normalized level? Or there is no structural changes in terms of the margin profile of those businesses?
Honestly, there is no structural changes. Absolutely no structural changes. We are still talking about, you know, 26%, you know, EPS, for the H2, which is quite good according to me. You know, as if you remove the U.S., definitely it will be at the same level what it used to be earlier.
Right.
Yeah.
Thank you so much. All the best.
Thank you. Thank you.
Thank you. The next question is from the line of Behzad Deboo from Systematix. Please go ahead.
Hi. Am I audible?
Yeah, yeah, you are audible.
I just want to clarify on the EBITDA margin. Earlier you had guided somewhere around 25%-27% for the full year. Now we are expecting around that for second half.
Yeah.
For FY 23, you would be lowering our FY 23 guidance, right? By a few basis points.
You are right. You are right.
Okay. Okay . Thanks.
Thank you. The next question is from the line of Suresh Agarwal, Individual Investor. Please go ahead.
Good evening, sir. Sir, what is our plant utilization, like capacity utilization at present?
We should be around 60%-65%.
If we are planning to go to other geographies for utilization of our this plant to 100%?
No, we have sufficient capacities to take care of our growth requirement for the near line.
If you are planning to go to other geographies like which we have not already entered actually.
There are a few countries which we are working towards. There's nothing significant which will happen. I think our focus is to remain in the existing market and grow them, expand them more. I think that is where the focus is.
Thank you. Thank you, sir. Thank you.
Thank you. The next question is from the line of Mitesh Shah from Nirmal Bang. Please go ahead.
Thanks for taking my question. I just have a question on your branded market, emerging markets. Are you adding the MRs over there? That is already added or you are still adding over there?
We have already added quite a bit, and there will be small additions which may happen in the second half also.
Okay. The advantage of the improvement in the MR productivity will be coming from the next year on, is that?
Oh, yes. Positively.
I think from next year onwards, what would be the drivers for the margin improvement? Because this year definitely it's a blip because of the freight charges, raw material cost and everything. What would be the drivers and how much would you can expect the margins from next year onwards? It's like historical 30%+ margin can be achieved in next two years.
I think it's very uncertain. What we are looking at is that the H2, the COGS will be around 26%. The EBITDA margin is guided as 26% ±1%. Any improvement from here onwards on various parameters which you have said will further improve our margin. If the freight comes down, it will get added into the margin. Raw material prices come down, that will get added into the margin. These are the factors which are beyond the control, and I think we have to negotiate those challenges as they come. As I can say, yeah, so that's the answer, I think, to your question.
whatever is in your control, like operational leverage and such kind of, I mean, other, mix change, would we expect it to be improved on this 150 basis margins next year or couple of years? Will it be possible?
That possibility is always there. As you said, like the, if the productivity we are trying to expand from the existing people. To that extent, correspondingly, the sales will go up and the marketing expenses will not go up to that extent because people are not getting added. Of course, all those possibilities are there, where the margins can get expanded for various reasons.
Yeah, in the emerging branded market also you have increased marketing spend as well, right? This year or you will be. That also will be coming down in next year, right? That would be the possibility for the improvement in margins.
Yeah, that is there. As you said, the effect of this expansion in the addition of people in the field will start to be seen from the next year onwards. Combination of both, hopefully we should be able to be in a better situation.
Got it. The R&D cost would be at around 6%, right?
Yeah, exactly. That's right.
Got it. That's it from my end. Thank you.
Thank you. We request participants to please limit your questions to one per participant. The next question is from the line of Madhav Bhatta from Fidelity International. Please go ahead.
Hi, good evening. Thank you so much for your time. I just wanted to understand on the U.S. business, are we seeing, like, Ajanta or competitors beginning to withdraw products in the market because of affordability being so weak?
We've seen some players talking about exiting some products which are very hyper-competitive. That has been the case in the past also. If there are eight players, if two players get dropped off, it really doesn't shake up the market so much either way, positively or negatively.
U.S. business' competition is gonna remain this high. Structurally, how do we see this profit profile of this part of the market improving like next two, three years if you know competition is here to stay, many people have the capacity to supply. Is there any thought process that you have in terms of how profits improve here, not just for us, but for the industry as a whole?
No, we have to negotiate the challenges as we get there. The thing is that it got the whole thing I think precipitated because of the two factors. One is the price erosion was significantly higher than the historical level. Second, there were no new approvals. Otherwise, what happens is with 8%-10% price erosion is there, and you're launching the new products, and from there you are able to drive, let's say, 20%, 30% growth. Net-net you come out positive of 20%, 15%, 20%. A combination of every trend there is a perfect storm which happened last year. Both happened, and that is why we see a very, very significant adversely impacted business for the U.S. market for the whole company.
Now, as the base gets reset to the margins for the new prices which we have seen, and as the new product approvals comes through, that should be able to, I think, you know, tackle the current situation, and we should be able to grow on that business and expand the margins there.
Thank you. Participants, if you have any further questions, we would request you to please email your questions. Due to time constraint, I would now like to hand the conference over to Mr. Yogesh Agrawal for closing comments.
Thank you everyone for joining today. If there are any other questions which got left unanswered, please feel free to reach out to our investor relations. Thank you. Bye-bye.