Ladies and gentlemen, good day and welcome to Q2 FY25 earnings conference call of Akums Drugs and Pharmaceuticals Limited, hosted by Ambit Capital. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and zero on the touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Prashant Nair from Ambit Capital. Thank you, and over to you, sir.
Thank you, Ms. Nagar. Good afternoon, everyone. Welcome to Q2 FY25 earnings call of Akums Drugs and Pharmaceuticals. We have the following members of the management team on the call with us today: Mr. Sandeep Jain, Managing Director, Mr. Sanjeev Jain, Managing Director, Mr. Amrut Medhekar, Chief Executive Officer, CDMO, Mr. Sumeet Sood, Chief Financial Officer, and Mr. Sahil Maheshwari, General Manager, Strategy. I would now like to hand over the call to management for opening remarks, post which we can move to Q&A. Thank you. Over to you, sir.
Perfect. Thanks a lot, Prashant, for the introduction. Hello, everyone, and welcome to our Q2 earnings call. I'm Sahil. Let me draw your attention to the fact that on this call, our discussion might include certain forward-looking statements, which are predictions or projections of future events. The business faces several risks and uncertainties that could cause our actual results to differ materially from what is expressed or implied in our statements. Akums does not undertake any obligation to publicly update any forward-looking statements, whether as a result of new confirmation, future events, or otherwise. I hope everyone has gone through the investor presentations and the results which we shared on our website. I would now like to hand it over to Sandeep sir to take over, please. Thank you.
Namaskar to everybody. Thank you, Sahil ji. Happy Diwali to everybody. We take pleasure in declaring the Q2 results of the company and thank all the stakeholders and shareholders for their continued support to the company. We are the largest India-focused pharmaceutical CDMO with over 30% market share. Our company caters to over 1,500 clients, both Indian and MNC pharma companies, with whom we have long-standing relations. Today, 26 out of top 20 pharma companies in India are our partners. Our total consolidated revenue in Q2 was INR 1,047 crore, which is 2% higher on QoQ basis. However, 10% lower on YoY basis. This is due to a combination of three factors: limited demand resulting in lower volume growth, prices of several key APIs including amoxicillin, cephalosporins, paracetamol, telmisartan, etc., continues to fall.
As you are aware, our CDMO business is a cost-plus model, so when input costs fall, we experience revenue depletion as well. Falling API prices have another secondary impact that affects order frequency because customers wait for API prices to bottom out before building up inventory. The continued fall in API prices of cephalosporin has also impacted our revenues and profitability of API business. Thirdly, we had some significantly higher revenues from an outsourced product development engaged in Q2 of the prior year. All this impacted our adjusted EBITDA margin, which is down to 12.9% versus 15.8% in the prior year. Our adjusted EBITDA margin expanded to 6.4% versus 5.2% in the prior year. This ongoing volatility apart continues to see strong long-term demand for outsourced drug development and manufacturing.
We will continue to invest in building world-class capabilities to help our clients launch new formulations and therapies and support them in their enhanced growth and transformation. We continue to make robust investment in R&D to drive new product development. Our R&D spend was INR 64 crore for the half year, reflecting a robust pipeline of new pharmaceutical, nutraceutical, and cosmeceutical formulations that will drive our growth in the future. We received 30 DCGI and 36 FSSAI approvals in H1 of the current fiscal. We are happy to announce that during the quarter, we received a patent for our formulation, room stable hydroxyurea oral suspension, a breakthrough formulation aimed at managing sickle cell disease, which has a high disease burden, especially in geographies like India and Africa.
Akums has been granted an exclusive right for further development, manufacture, and market the products innovated by Triple Hair Inc. in Canada for India market. Akums will undertake development, obtain regulatory approvals, and commercialize this product in India. The product is a topical solution targeting alopecia hair loss. We are also actively investing in API R&D to develop a robust global pipeline of API with cost-efficient processes. We have over 80 scientists in API R&D and have invested INR 7 crore in H1' 25. In API R&D, approximately INR 330 crore has been invested till date. Similarly, we continue to invest in building production capabilities to support our future growth in H1. We spent around INR 150 crore in CapEx. In Q2, we started commercial production at our new injectable facility in Haridwar.
The facility has operational and dual SVP FFS lines, and we plan to start vials and lyophilized vials in Q3. Further, in Q4, LVP FFS will also be operational. Akums was one of the early entrants in CDMO injectables market in India, and the new facility will further boost our ability to tap growth in the injectable market of India. We have completed the land acquisition for new plants, and civil works is expected to begin shortly. Commercial production from these facilities will begin 26-27. Our focus on export markets continues. Let me share some of the developments on that front as well. To date, we have filed two dossiers in Europe to leverage our European GMP plants. We are building a pipeline with products which have high unmet needs and with limited competition targeting European markets.
Akums has entered into MOU with the Ministry of Health, Government of Zambia, to set up a joint venture in the sector, Pharmaceuticals in Zambia. The pharma market in Zambia is worth over INR 2,500 crore, with more than half being managed through government purchases only. Akums and the Zambian government will jointly invest in setting up a manufacturing facility in Zambia to cater to local Zambian pharmaceutical needs. We are also focusing actively on formulation export, one of our key future growth drivers in the future. We have fairly diverse formulations across multiple regions and therapeutic categories. We today export to over 60-plus countries, including Southeast Asia, South Asia, Eastern, and Western Africa, CIS, and have recently started in the Middle Eastern market as well. Our export portfolio ranges from oral solid to sterile formulations across acute and chronic therapies, with a total dossiers filed at 367.
In our API business, also, we are taking progressive steps in increasing export to drive better production product realization in H1' 25. Around 90% of our API sales was from exports only, primarily to Asian countries. We also plan to file CEPs in the European market soon. We expect to file at least two CEPs in H2 and also undergo European EDQM audit this fiscal. Looking ahead, we expect demand trends in the second half to be largely similar to the first half. There could be some upside potential if we see some improvement in API prices and uptick in industry volumes, but that remains to be seen. With that, let me hand over to Mr. Sumeet Sood, our CFO, for the financials.
Sandeep ji, thank you very much. I'll come to the financials, and if you, as Sumeet mentioned, that the performance was for the second half and the first half looked similar. I think the quarterly results also, if you look at the quarterly results, they also look similar. If you look at the total consolidated income, we were at INR 1,047 crore. This was 2% higher than the last quarter, but it was 12% over the year-on-year basis. Our consolidated EBITDA was INR 135 crore. This is 3% higher than Q1, but 28% over year-on-year basis. Sumeet, you did mention a large product development income, which was for the last year and not this year. So that's one reason. And if we exclude the income, we would have seen probably a 15% EBITDA growth year-on-year basis. Consolidated EBITDA margin was at 12.9% Q2, similar to Q1, which was 12.7.
However, the Q2 last year saw almost 15.8% EBITDA margins. Gross margins on consolidated basis in Q2 were at 42.3%, similar to Q1, but higher than Q2 last year, which was 40.6%. The consolidated PAT saw an improvement to INR 67 crores from INR 57 crores in Q1. If we were to break the segment-wise revenue, the CDMO remained our driving force. It was added to almost 79% of the revenue share in Q2, followed by branded and generic, which was 16%, and API business adding to 5% of the revenue. Our CDMO business margins are at 15.4%. The branded and the generic EBITDA margins are similar at 10.3% in both quarters, Q1 and Q2, which is higher from the Q2 last year, which were around 4.5%. I think the continued profitability is on efforts to reshape our formulation portfolio and in favor of the branded products, which are driving high profitability.
The API revenue showed a marginal improvement of 4 crores and for six months increased by 36 crores. The continued softening of API prices had an impact on the margins of API business, wherein the margins for the quarter were negative 14 crores and negative 26 crores for six months. The cash flows for the company, the net cash flows, if you look at, there is a cash surplus of 341 crores that the IPO proceeds have also come in. A large part of the IPO proceeds till November have been drawn down. Cash flow from operations for H1 September 2024 was 71 crore positive, and the free cash flow post-investing activities was minus 65 crores. The company's long-term rating sort of improved. We got AA stable from ICRA on a long-term basis, and the short-term rating continues to be A1 plus. I think that's from our side.
We are happy to take questions on the company and the performance. 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 the touchstone 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. Ladies and gentlemen, to ask a question, please press star and one. Anyone who wishes to ask a question may press star and one. The first question is from the line of Abdulkader Puranwala from ICICI Securities. Please go ahead.
Thank you for the opportunity. So can you please quantify on the one-off income, what you had in the last fiscal quarter, and was it part of the CDMO revenue as well?
Yeah. So last half year, we had a one-off income of INR 82 crores, which was of the CDMO business. So there was a product we had to develop for a particular customer, which we did. Now, if you look at the six-month number, so you'll see our EBITDA is 265, while it was 295 for six months last year. So while that was a huge income which came in, which was not here in this particular period, but we've sort of still maintained the company's EBITDA pretty well.
Understood. So could you share some highlights on sir mentioning about the export orders, both for formulations and API, and how do we see the traction being built up in this particular space?
Sure. So on the export side, as Abdul had asked. On the export side, as we said, we continue to gain traction. So we are expanding our portfolio, as we mentioned, right from OSD to injectables. We have also filed a couple of dossiers in Europe. We have multiple others in the pipeline. We have a few of our plants as well, which will soon be triggering the European approvals. So the idea is to go stronger and deeper in markets we currently are, which are Southeast Asia, Africa, and South Asia, and build a robust pipeline and presence in Middle East markets as well as the European markets. So that's there. As we said, we are expanding not just to distributors. We are also recruiting people so that we build a brand recall in these markets of prominence. So that is there.
Okay. Perfect. And for the formulations, would you be able to assume that the PIA would look for integrated operations entirely?
Abdul, can you please repeat your question?
Yes. Sure. So I think for the European formulation business, would that be a very interesting question that your current API sites would be utilized for APIs for those formulation products?
No, Abdul. So API, as we said, largely we have captive and the labs have limited general APIs now. So this is forward integrated in a way you can say the European operations will largely be supplied formulations from a CDMO business. So that is forward integrated. I would not really call it as a backward with an API.
Okay. Okay. Next one, the new injectable site at Haridwar. So I understand you would be commissioning that in phases till the end of the fiscal year. Any further you would like to provide as to what are the products you're considering here and in terms of your existing site, what is the overlap with your previous manufacturing units as well?
Yeah.
[Foreign language]
Okay. Thank you. And I have a final question on the second fiscal quarter. So congratulations on the space, but when do we see the commercial revenue building up in this quarter? And this will be documented or this is a contract manufacturing opportunity?
[Foreign language]
Okay, sir. Thank you.
Thank you. Ladies and gentlemen, to ask a question, you may press star and one. The next question is from the line of Ashish Thaker from JM Financial. Please go ahead.
Yeah, thanks for the opportunity. Sir, I had this question on our export business. Like, you speak about Zambia, the European forays that you guys have started. Will you see the real commercial benefits going in from whatever investments we are making into markets?
Right. So, hi Ashish. So, European business we will likely see within a couple of fiscals. So, we have already found, as you would acknowledge, that it takes approximately two years to finally get the approval. These are prescription oriented products. So, these will slowly and steadily build volumes in the European market. Zambia as well. So, we have recently entered into the MOU. Once finalized, we will start setting up the facility, which will take anyway between 18 to 24 months. This will have a quick ramp up compared to the European, because this is essentially a government procurement, which will enable us to supply the essential medicine in Zambia. So, that is there. Apart from this, while apart from this, while these two are the focus ones, the other ones are of continued focus as well. So, we continue to file dossiers in the European, in the South East Asian and the African markets, Middle East markets as well. The current business, which is largely propelled by these geographies, right?
So, we still have almost 350 dosages in pipeline. We gained approvals, significant approvals in the first half as well, almost 30 plus approvals. So, so that is, Ashish, the focus area.
Yeah, good enough. Okay, just so, since you said the second half will be largely similar to first half, not expecting any positive surprises. Then, with whatever initiatives you have and your current engagements with your clients, how do you see FY25 panning out? Because the way investors are looking at this business is approximately IPM, right? And so, if you make any comments on how do you see FY25 panning out, can we return to the double digit or 15 points every four months in the next fiscal?
So, Ashish, a couple of points, which initially Sandeep Sir also mentioned, which looks a drag on the financials currently. One is, as it is a cost plus model, the API prices have an impact. An update on it is, while we saw the API prices soften in Q3, most of the intermediates and the KSMs have started showing some solidification. So, either in Q3 or Q4, I expect the API prices will at least average and normalize. So, this will have a positive impact on our revenue cycle. Right? And the volume of the industry, while the Q1 was strong on the volumes, as I said, the continued fall in the API prices and the stocking, which happened in the Q1, that resulted in the H1 volumes being largely flatish, which is similar to the industry. Right?
So, if the industry volumes and the new launches pick up, I feel that FY26 should be moving on those lines, essentially.
So, sir, I am sorry. Are you guys using the future on the volume side?
Ashish, I also have not done an updated calculation on that front, but that is not the case. I think if you really compare to the industry, we are performing as the industry, right? So, that should not be a case on the loss in the market share. Additionally, we have, as I said, we have a couple of plants, which recently got commissioned, the injectable facility as well as the multi facility. And happy to announce, also, the Penem facility has successful client audits as well. So, with these utilizations in the capacity, we should have an increased volume going forward in FY26.
Sir, lastly, on this API loss, and so, internally, are you still on track of making this business able to be given by fiscal of FY25, and do you feel those timelines could be shifted ahead?
No, Ashish, this is Sumeet. So, I think, you know, the API prices softening has not helped because, right? So, to answer you very directly, I don't think that in the Q4, you know, that this will turn around or it not be, you know, a bit positive. I think we will have to give it six months from here, and we will revisit our, you know, business plan starting April. But, in the short term, next three to six months, honestly speaking, we don't see that this is going to turn a bit positive.
Okay. Actually, actually, on the whatever corrective or the, because you are trying to feature your own SFT, that parovilet products, so, all those activities are over, and they are still going on? Those activities, sorry, sir, aap boliye.
Sorry, sir, sorry .
[Foreign language]
Thank you. Participants, who wishes to ask a question, may press star and one. The next question is from the line of Prashant Nair from Ambit Capital. Please go ahead.
Yeah, hi, sir. Sir, question is on the CDMO business. If I remember, in the first quarter, you had good volume growth. So, I think double digit, so volume growth, volumes were increasing. Can you share what the volume growth, I mean, would you have had volume growth in the second quarter, if you adjust for the one-time contract you had in the previous year, and have volumes drop even after the second quarter?
Prashant, yes. So, we did not experience a volume growth. We had a volume decline of roughly 11% this quarter.
And this is on the full basis, or this is adjusting for the one time contract you just called out last year?
So, this is volume. So, that was R and D, so that had no commercial supply.
Okay. All right. All right. All right. So, what is driving this drop in your view? Because, while IPM growth had been sluggish, there still been some growth in volume. So, is it climbing, and is there any other factor, which, you know, you can call out, which may have led to lower volume?
You know, so, Prashant, if you really observe, Q1 saw limited volume growth, but we had it, right? So, CDMOs are one and two months advance of the industry. So, while Q2 saw positive volume growth, we had that in Q1, right? And while we are still better off limited the industry, so, that is a cycle, it's there. So, I don't see, it's a challenge of us not being able to grab volume. It is an industry cycle. I think, based on what we see, as we said, H2 overall was positive. H1 was positive on the volume front. So, when we say H2 will always be similar to H1, we still see that overall volume will be up compare to H1. Just the Q2, previous Q2, compare to previous Q2, we had a dip in volume.
Okay. Secondly, on the API pricing issue, which, you know, which impact your value chains in CDMO, when did this start? Did this start some time towards the end of last year, and, you know, is it kind of a first quarter onward issue?
[Foreign language]
Thank you. And, and, one last question from my side. So, on the marketing side, your formulation business, it generate how much more adjustment is needed, and, you know, how much more time would it take to normalize that business, get it to a state where you want it to be?
So, Prashant, we are significantly, as we also discussed last time, we significantly scaled down this business, because it was operating at a very low margin. And hence, to better utilize that cash, we invested into exports, for example, in sterile injectables, right? So, it is on track for now. I think H2, we should be able to bring it at a monthly positive level. H1 had limited loss. I think the bleed is largely because, as we are scaling it down, we have to get rid of some of the prior inventory. So, largely, this is a story for this fiscal only.
Yeah, thanks. That is coming. I will get back.
Thank you. Participants, who wishes to ask a question, may press star and one. The next question is from the line of Gautam Gosai from Monarch AIF. Please go ahead.
Hi, sir. Thank you for the opportunity. So, my first question is on the trade generics in the last quarter, which participants mentioned. Sir, if you could quantify, how much was the trade generic revenue during the quarter and how much was the loss on that?
So, you know, the way we have presented our financials, this is based on the segment reporting. But, you know, and the segments are put together, so we don't disclose that separately. But, as Sahil mentioned, that there is a very very nominal. So, it will be, you know, on a monthly basis, less than a crore rupees on a basis, which these businesses would be, you know, doing. So, while we are constrained to give you numbers, only based on the segments that we have, but to assure you what Sahil said, that this is to me the right, that the numbers for the trade generics business are looking good now.
Okay. Actually, on the CDMO business, so, since we have seen a volume decline of 11%, and if you see the industry, the players, they are showing a positive volume growth on their side, as well as in the CDMO business. So, if you could quantify, like, what is the reason for the decline versus the players, and we are losing market share in this?
good morning. This is Amrut Medhekar. See, as Sahil said earlier, we as CDMO operate at least two to three months ahead of the market. So, typically, the difference between the two quarters behavior, comparing directly with IPM, may not be prudent. It will be easier for us to look at what is happening now, with possibilities seen and recorded in the IPM history in the coming times. Number two, there is also mix of products, which we sell with other CDMOs. So, to say that, what is the product mix impact, we will have to analyze in terms of how other CDMOs are paying in terms of their basket vis-a-vi s us.
Okay. Okay. That's it from my side.
Thank you. Ladies and gentlemen, to ask a question, please press star and one now. The next question is from the line of Ashish Thaker from JM Financial Mutual Fund. Please go ahead.
Yeah, thanks for the opportunity again. Just one question on this government notification on MSMEs, you know, wherein they have to up their compliance levels of quality standards. Is there an opportunity there? And by what timelines do you see some discussions can get into commercial discussions?
[Foreign language]
Okay. Thank you, sir. All the best. Thank you.
Thank you. Participants, who wishes to ask a question, may press star and one now. Anyone who wishes to ask a question, please press star and one. Participants, you may press star and one to ask a question. As there are no further questions from the participants, I now hand the conference over to the management.
[Foreign language]
Thank you, thank you very much. Thank you very much. Yes, namaskar to everybody. Thank you for joining.
Thank you. On behalf of Ambit Capital, that concludes this conference. Thank you for joining us and you may now.