Ladies and gentlemen, good day, and welcome to the Q4 and FY 2024 earnings conference call of Suven Pharmaceuticals Limited. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference, please signal an operator by pressing Star and then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Cyndrella Carvalho, Head of Investor Relations at Suven Pharmaceuticals Limited. Thank you, and over to you, ma'am.
Thanks, Javan. Good evening, everyone. I welcome everyone to our full year FY 2024 earnings conference call. Let me take this opportunity to introduce you to our management team present here with me today. Mr. Annaswamy Vaidiesh, Executive Chairman, Dr. V. Prasada Raju, Managing Director, Dr. Sudhir Kumar Singh, Chief Executive Officer, and Mr. Himanshu Agarwal, Chief Financial Officer. Let's delve into the key highlights of our progress during the quarter, and then we will open the floor for Q&A. Over to you, Vaidiesh.
Thank you. Good evening, everyone. We extend a warm welcome to all of you on our Quarter 4 FY 2024 earnings conference call. In the course of the last eight months, we have set up the business well for both mid and long-term growth. Key highlights of the progress made include: we augmented the team and processes across commercial R&D operations and M&A. We assess the strengths and gaps in the business, which has formed the basis for the strategic roadmap we have laid out for Suven. Extensive customer interactions across multiple forums to strengthen the relationship and elevate us to the strategic partner of choice for customers. I'm so glad to inform that we had a successful completion of FDA audit of our Pashamylaram facility, and other regulatory agency audits, along with multiple customer audits, and outlining the strategy for the platform and working towards building the pipeline.
FY 2024 was a perfect storm with a global slowdown, Ag Chem destocking, COVID flush out, and commodity pricing. However, we think most of the headwinds are behind us fully, other than Ag Chem destocking. We feel very confident about accelerating the journey, given the positive macro tailwinds, the capabilities that we have built, and the gap-filling we have done so far, will continue to do going forward. I will now hand over to Dr. Prasada, our Managing Director, for his thoughts.
Thank you, Vaidiesh. Good evening to everyone. We have a positive outlook for FY 2025 and midterm to long-term growth. We derive confidence from the favorable industry environment, lifted by the increase in the clinical pipeline and China Plus One dynamics. This is evidenced by the uptick in RFQs and inquiries for laterals and commercial products from both existing and new customer relationships. Our team has been proactive, demonstrating our unwavering commitment to building robust client relationships and expanding our market reach. This proactive engagement with our key customers is a testament to our customer-centric approach, which we believe will lead to a significant growth from both existing and new relationships. On Pharma CDMO, we have grown 9.4% year-on-year, ex-COVID base, and expect to accelerate that further going forward.
We have now 13 intermediates and seven molecules in Phase 3, compared to 10 intermediates and five molecules as per our last conversation we had post-merger announcement update. Similarly, our RFQ inflow and conversion is more than doubled compared to the previous years. Our strategic intent on lateral wins and commercial molecules under patents is not just a plan, but a reality. This shift in focus is already translating into more inquiries, indicating more robust and healthier pipeline. We are confident that this strategic intent will make us more relevant and closer to our partners, business initiatives, and enable us to offer our expanded services, leveraging our proven delivery capabilities. The increased inquiries for commercial molecules which are under patent further reinforce our positive outlook and potential for accelerated future growth.
On Specialty Chemical CDMO, as mentioned earlier, we have recrafted our Spec Chem service line as a new strategic business unit with a much higher focus. In line with our customer expectations and business needs, we have started investing in people who are domain experts, including operating partners, moving towards dedicated facilities and initiatives towards driving continuous improvements, including automation and EHS best practices. The Spec Chem softness, as our chairman has mentioned, continues with expected recovery in second quarter of FY 25. Let me hand over this to Dr. Sudhir for latest updates on key initiatives.
Thanks, Dr. Prasad. As Dr. Prasad has mentioned, we have continued to meet our customers multiple times. The feedback has been very positive about Suven's capabilities, and we feel good about the strategic nature of the business. Encouraging the discussions with three major innovators companies recently initiated are moving forward in a positive direction. On the ESG front, we eagerly anticipate the release of Suven's ESG report in the coming quarter, reaffirming our commitment to sustainable business practices. We are pleased to announce that our Pashamylaram Unit Three site has been awarded the EHS Excellence Award by the CII, which serves as a testament of our dedication to maintaining standards in environmental health and safety practices. Additionally, during the quarter, we were honored with an international safety award from the British Safety Council for the same recently, as previously reviewed.
Our new Genome Valley R&D center has been inaugurated recently with the presence of senior executives from a leading global pharmaceutical company. The new block in Suryapet is undergoing validations, on track for commissioning. Handing the call to Himanshu Agarwal, our CFO, to update you on the financial performance.
Thank you, Sudhir. In FY 2024, Suven generated a free cash flow of INR 307 crores, and now our cash and bank balance at the end of the year stood at INR 824 crores. Overall, the company revenue declined by 21.6% for the full year. However, adjusting for the COVID as well as Ag Chem, the business has grown at 16.2% in the current year. Even the pharma segment, adjusting for the COVID base, has grown at 9.4%. While we are experiencing certain inventory shortening in the pharma CDMO, which is leading to order delays, we view this as temporary in nature. Our reported EBITDA margin for FY 2024 stood at 39.4%, reflecting the investment that we're making in the business aimed at scaling Suven towards growth.
If we adjust the one-time cost in FY 2024 of INR 211 million, which includes the one-time inventory adjustment of INR 13.4 crores, which I had talked about in the previous quarter, the ESOP charges of INR 20 million, the M&A expenses and other costs of approximately INR 57 million, our adjusted EBITDA margin for the full year stands at 41.4%, and the adjusted PAT margins stand at 30.4%. In terms of the update on the proposed merger with Cohance, we have received approvals from the stock exchange, and we are currently awaiting approvals from SEBI before we approach NCLT. We understand from Cohance investor presentation that has been updated on the Cohance website, that Cohance has achieved an adjusted EBITDA margins of 31.2%, with an absolute revenue of INR 1,341 crores.
The Cohance business has grown at a CAGR of 13% over the last five years. The CDMO business of Cohance has continued its growth streak with a four-year CAGR of 30% and a year-on-year growth of CDMO at 20%. I would now like to hand it over to Dr. Prasada, for his comments on Cohance business performance, as I have mentioned in the Cohance investor presentation, which is updated on their website. Thank you, Himanshu. As per our review of the Cohance investor presentation, we understand that on the progress in the ADC segment, the ADC platform continues to grow significantly by its commercial products, therapy expansion, and market registrations. Several other new products continue to be in developmental phase with innovative customers.
Cohance is also expanding its R&D pipeline of new designer payloads and adjacent payloads, which are in advanced stages of development, which organically will enable the expansion of payload market coverage. On the non-ADC CDMO, one product is progressing well in phase three. In the API Plus business, the down cycle seems to be behind us, and the Cohance expects to return to healthy growth rates through market and customer expansion, supported with new product introductions.... ending March of 2024, five new product validations have been successfully completed by Cohance. Overall, while this year has been muted, given the macro, we continue to be excited about growing the combined platform by our CDMO focus. We expect to see growth both in revenue and EBITDA for full year of 2025, with growth accelerating in FY 2026.
At a combined platform level, we look forward to doubling the business over next five years organically and adding further growth traction from M&A opportunities over similar timeframe. As mentioned, we anticipate growth in the second half of FY 2025 and Suven closing the financial year with good year-on-year growth, both on revenue and EBITDA. Further growth acceleration expected from FY 2026 onwards.
Now we request the operator to open the floor for Q&A.
Certainly, ma'am. 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 withdraw yourself from the question queue, you may press star and two. Participants are requested to please 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 Jatin Chawla from RTL Investments. Please go ahead.
Yeah, hi, good evening, and thanks for the opportunity. My first question is on your comments that you are seeing increased traction because of China Plus One dynamics. Now, is there an acceleration in this in the fourth quarter after discussions on the Biosecure Act, or you've seen this solid traction, you know, throughout FY 2024?
Jatin, throughout the FY 24, we have been hearing, but we started getting the positive signal more from Q4 onwards.
Got it. Got it. That's very useful. These RFQs that you're receiving, are they largely from the large pharma players or, also the smaller and, you know, the biotech firms?
Jatin, we are primarily with large biopharma companies, and we are with large innovator firms only. No small biotechs and medium biotechs.
Got it. And, as we look to kind of further build this platform out, are you looking to target some of the smaller biotech firms in that space? Or would you, you know, largely focus on the larger pharma players only?
Our primary priority is to farm with our existing large pharma companies. Step two, we prefer to add few more large pharma companies. Step three, based on the nature of the product and unique therapy, we might selectively take an opportunistic call on some of the biotech firms. Today, we are primarily focused on first two phases.
Got it. Got it. And, on the pharma CDMO side, is there any way you could split the revenues into development and commercial? Because, you know, commercial tends to be more sticky, so one at least gets a sense of, you know, what is recurring in nature.
Look, Jatin, I mean, our business is more on the commercial side. However, as you would understand, this is a proprietary financial information, and we would not be really comfortable giving a split, of this information.
Got it. No problems. But just one last question. On the CDMO side, what is giving you the confidence that you will see a recovery in the second half of the financial year? Are you seeing anything on the ground which is suggesting that? Or, you know, this is just you're expecting a normal cyclical recovery.
Based on the interactions from the customer, whatever signals that we've picked up led us to believe this.
Okay. Okay. And on the second side, on the Suven kind of standalone, any increase in the number of molecules that has happened or likely in the next 12-18 months?
That's the view that we have it, Jatin. Just to add to the point, after a long gap, we have also started getting new RFQs also in the Spec Chem space. These are all the two evidences that we have.
Got it. Got it. Thank you. Thanks a lot.
Welcome.
Thank you. The next question is from the line of Saurabh Kapadia from Sundaram Mutual Fund. Please go ahead.
Yeah, thanks for the opportunity. Do you mind sharing my doubling?
Sorry to interrupt. You're not quite clearly audible. I request you to please speak a little louder and closer to the mic.
Yeah. Hello?
Sorry, we are not audible again, sir.
Saurabh, are you there?
Yeah. Hello?
Saurabh, please go ahead.
So my question was, so you mentioned about the doubling of the revenue in the next five years. So, the in order for... Now, what kind of-
Sir, sorry to interrupt once again, but the line for you is breaking up in between. May I request you to please move to an area with better network, sir?
... Hello? Hello.
Go ahead, sir.
Yeah. My question was, you know, you are talking about doubling of the revenue in the next five years. So what kind of investment, what kind of investment you are looking, you know, in terms of CapEx to have that kind of a revenue?
With the current view, we have up to 1.5-1.6, whatever the current investments that we have already committed, we don't seem to be requiring any additional CapEx, Saurabh. However, 1.5, 2 years down the line, again, we calibrate whatever is needed for the future expansion. Otherwise, enough capacity is already available to have at least 1.5-1.6x.
Okay. Secondly, more in terms of new RFQ what you are getting, is this for the existing chemistry of Suven, or new chemistry, maybe of Cohance, and how we are looking at in terms of chemistry-wise, new molecules, what you are developing?
So it is predominantly with the proven chemistry and scalar capabilities. As an organization, we have it for several years. It is only just the question of having more traction of more number of RFQs in flow to us. And of course, it is not just a number of RFQ inflow, Saral, there is also very encouraging conversion is also happening.
Okay. And, you know, to in order to serve these new molecules, do we need to invest more on R&D side? Will it be our CapEx on the investment on R&D will go up?
So if you can recollect our previous calls, that was the first decision we have taken when we took the charge in September of last year, and we have decided to invest in R&D. As we are speaking, as Dr. Sudhir has mentioned, it has become real, and we have a state-of-the-art R&D facility spanned across 24,000+ sq ft in Genome Valley. It is operational already. R&D scientists, as you understand, it is based on the need we keep adding the resources as well. In the budget itself, we have added few resources already. It has been very well thought through, Saral.
Okay. Lastly, now, in terms of margins, how we should look at least, you know, for FY 2025, you mentioned there will be growth of standalone entity, but how we should look at the margins for next year?
So, Saral, you know, we, we have shared the margins in terms of what we've, kind of delivered during this year. Yeah. I think there are two aspects that we have to a s we said, that we are expecting to grow the business in FY 25, right? So therefore, we will have a base effect of higher revenue coming in. Obviously, the cost is now going to grow, in line with the revenue growth. So we do expect the margins to grow from what we have reported in the current year.
Okay. Fine. Thank you.
Thank you.
Thank you. Ladies and gentlemen, to ask a question, you may please press Star and One. The next question is from the line of Vaidyanathan, an individual investor. Please go ahead.
Hi, good evening. I would like to know whether, along with the acquisition of Suven Pharma, the Casper Pharma also was being acquired by Advent. Am I right?
This was, if you, if you really look at the chronology of the events, Casper acquisition has happened by Suven prior to Advent acquisition of Suven. That's how it has to be looked at.
So, that was a part of the Advent acquisition also, or was it not? That was my query, actually.
That is also included. It came along with the Suven acquisition.
Yeah.
Because Suven is an integral part of Suven.
Okay. Then I have a question associated with, because Mr. Jasti had told that around INR 300 crores-INR 350 crores, we were driving it over a period of 50 years. After the acquisition of Casper, any progress has been made on that front?
So currently, we are focusing on product filings and approvals as we are speaking today, and combined at an overall formulation level, we have +22 ANDAs already approved. 7 of them are coming from Casper. Another four are pending for approval. As you understand, this business takes time. In the next one to one and half years, we see the complete uptake of the revenue.
Okay, thank you. And one more, the last question, please. This doubling of revenue, is it a combined Cohance with Suven, or you combine the, this one and then you double it up, or is it only you are talking of the Suven revenue, which is being double- which is being doubled in the next four to five years please?
Base is at a combined level.
It's a combined level. Okay, thank you very much. God bless you.
Thank you.
Thank you. The next question is from the line of Ritu Kumari from LKP Securities. Please go ahead.
Yeah, hello, can you hear me?
Yes, please, ma'am.
Yeah, thank you for taking my question. I just wanted to know, what is the M&A focus that we have? What are the gaps that you think we need to fill? Can you please elaborate on the M&A strategy? Thank you.
Ma'am, during our last calls also, we did mention this. Our primary intent is to ensure the Suven growth has to be accelerated. To do that, we have recognized some opportunities of technology platforms. As we are speaking, we are constantly scouting for a meaningful technology platforms, which will enable the Suven's growth journey.
Okay, noted. Okay, thank you so much. Yeah.
Thanks a lot.
Thank you. The next question is from the line of Rashmi Shetty from Dolat Capital. Please go ahead.
Yeah, good evening, and thanks for the opportunity. So on your API segment, you know, while I'll understand that FY 2024, the API, sales fell lower compared to FY 2023, but I, that, that is what I'm seeing from your presentation. You know, I just want to split, like, you know, what was the rate variance, versus the volume. Most of the other, peers, you know, they are also talking about that there was a negative rate variance in FY 2024, in high double digits. So if you can, give about the Suven, it would be helpful. Suven plus Cohance.
So then, Rashmi ma'am, if we understand your question, you are talking about rate variance-
Yeah. So I'm just talking on the pricing front in the API segment. If I'm correct, that you know, whether the pricing for FY 2024 versus FY 2023, we compare, what was the decline in the pricing, and what was the volume growth in FY 2024 over FY 2023, only in your API segment?
Okay. It was, I'll just try to simplify, Rashmi ma'am, if it is okay with you. We see close to around 4%-5%, not beyond. Because it's across various products, the price correction has happened up to a 4%-5% level.
Okay.
Not clear.
What was the volume growth? On an average, what was your volume growth?
Volume growth, again, it's a factor of customer and market. We might not be able to corroborate that, but definitely price level for our select range of molecules, around 4%-5% of correction has happened.
Got it, sir. So this 4%-5%, you are talking mainly at the, value growth or just from the pricing front?
Pricing.
Hello?
Pricing, ma'am.
Oh, okay. And sir, how do you see this in FY 25, you know, whether the pricing will remain here only at the stabilized levels, or you feel that there could be, you know, the pricing will go up in the second half of FY 25? Anything, you know, you want to talk related to the APIs in a FY 25 for your business?
Rashmi, if you look at, the broad industry prospects, you might be seeing a lot of pricing pressure for commodity APIs. As you understand-
Yeah.
The portfolio is a little curated and niche. It doesn't have so much of a pricing pressure. However, what we see coming years is going to be other way around. There can be a cross, possible pricing appreciation, and in general, the pricing is also a factor of markets. As we are speaking, our market expansion is under more pharma emerging markets, where the pricing will be much better than what it is today. Combination of both, we feel the price appreciation will be better than the current baseline what we have.
Okay. Copy, sir. And the second question is, on the comments which you made, that, you know, there are increased inquiries in the CDMO segment, especially which you have seen in quarter four. Are the inquiries related to more developmental projects which are in, you know, earlier phases, or it is more related to phase II and phase III pipeline?
It's a combination of both, but more importantly, very exciting laterals have actually come in, and some of them are phase II and beyond.
Got it, sir. And one last question, if I may. In the CDMO segment, you know, earlier we said that, you know, we were, we are actually reviving the clientele of Suven Pharma. So how many new clients you have already revived and, you know, how many new are getting added? If any, clarity you can give on that part.
Current objective is, Rashmi, to farm with existing customers. However, during our last call also we did mention, one of the relationship is becoming more strategic partnership, more number of U.S. RFQs are coming. That's the view that we have.
Okay. Okay, sir. Thank you. That's it from my side.
Thank you, ma'am.
Thank you. The next question is from the line of Chirag Dagli from DSP Mutual Fund. Please go ahead.
Yeah, sir, thank you for the opportunity. If I only-
Yes, please, Mr. Chirag, please go ahead.
Yeah, so thank you for the opportunity. I'd like to give you your presentation pipeline, basically pipeline, for Suven. Similarly, can you share for Cohance as well? I don't know if this is covered in the Cohance presentation, but I'm sorry if I repeat.
So we haven't covered this as such, because it's at a different broader base of the business, but we will share that in the coming quarters.
So the kind of traction that we have seen in the Suven, you know, business, your phase three pipeline has almost doubled, right? If I just look at the number of intermediates from 6 in FY 2023 to 13. Similar traction have we seen in the Cohance CDMO piece as well?
Absolutely. There are two parts to it. One is on the non-ADC, as well as ADC space as well. More specifically on ADC space, it's almost double. Two commercial, two, two more new products are coming. We are slightly constrained with the obligations of the innovators, otherwise, we must have picked up. We are also working on few designer payloads exclusive to a few clients. And we are also expanding to a new payload business, where it is an adjacency of coming from topoisomerase to tubulin. Otherwise, what is happening, we see the same traction all across the platform. Just to give a perspective, as you understand, between last year to current year, the number of clinical products in pipeline are increased by 16%, standing at 22,600, approximately, which is also being seen by the industry, Chirag.
That's an additional insight for you.
Understood. Understood. And, you know, in terms of, in reaching out to clients, are you now reaching out to clients as a merged entity or, or, or that is still pending? We are still reaching out separately. Give some color around operationally, if the merger, you know, happening, or do you wait for the, legal merger to happen before you reach out as, as one entity?
So it's currently a conscious positioning is happening, Chirag. Conscious position is happening. And as we are speaking, some of the competencies of the mutually from Suven to Cohance and Cohance to Suven, customer also wanted to do that. So consciously, the cross-pollination is already started.
Understood. Fair point. And then on the agrochemical piece, why you said that, you know, things should improve? You know, the way, how do we think about, you know, we are at multi-year low as far as the current year, the current run rate for the second piece is concerned, and this is coming on the back consecutively of a very high base. So, the earlier peak for us to reach that peak, was there any one-off in that earlier peak, that it will be difficult to, for us to reach that peak back, some color around, you know, that, was there some inventory filling in that earlier peak, et cetera? Just how do we think about growth off this low base, that we are witnessing in FY 2024?
Is it going to be a more linear recovery or it is going to be a non-linear recovery? Just, how are you thinking about, this piece?
There are two comments, Chirag. It's a very valid point. If you look at the journey from FY 2022 now, the base started from INR 3,094, and the peak was seen at 28 at INR 533. If you look at the composition, dominance of one or two products are there today, which is getting nullified with multiple number of products. Today, the pipeline is better, which is one important factor. Second, whatever the big product has a bit of a challenges of destocking and having a little bit of a adverse impacts on the overall uptake of the product, which is also coming to a normalcy. So combination of situation become normal, coupled with wider basket of products, makes us to believe that it will come back to the growth trajectory.
We are having a very close, engaged conversations with our partners. We also have decided that it is not just one more service line item for us, it has to be a separate strategic business unit. We are also getting one more senior leader who can actually take up this business as a BU head. All these things are actually giving more confidence to our partners also, to see us as a part of their new product pipeline as well.
Okay. So thank you so much for that. Just the last time the merger, when you indicated 12-15 months from February, you know, 2024, when you announced. You know, in terms of the big milestones, is it just timing, that it is, you know, going to take? Are there any specific issues that you witness in consummating the merger?
As of now, it's on track, Chirag. However, I would request Himanshu to elaborate on it. So, Chirag, I mean, we are progressing in line with what we had estimated. And I think we don't sense that the estimated timelines is going to overrun. But having said that, you know, it is a regulated environment, and we do need regulatory approval, so and there is all initiative, and full steam ahead in terms of getting the merger approval. We are more keener than anybody else to get the merger and get the synergies, because that's, as you recollect during the merger presentation also, we had mentioned that the entire drive for merger is because the customers are seeking it. And I think you also asked a question about how we are approaching the customer.
So yes, we are very, very keen in terms of progressing the merger, and we are quite confident that we should be able to reach in the stipulated time that we have mentioned.
Understood. Sir, thank you so much for that. Those were my questions. I also want to, because just, leave a comment. Thank you for, you know, indicating the consolidated pro forma numbers, for how they look, and providing a rich history, for five-year history for that, very helpful, goes a long way in our, decision. Thank you, sir.
Thank you, sir.
Thank you. The next question is from the line of S. Ramesh from Nirmal Bang Equities. Please go ahead.
Thank you and good evening. In the fourth quarter, gross margins have improved, but your EBITDA margins are down. Barring the impact of the option, expenses and employee costs, what is the reason for the increase in employee costs and the other expenses? And is that something which will possibly even out, or is this something which we should assume will be the trend for the next four quarters?
So, first, Ramesh, we don't look at our business on a quarter-to-quarter basis. I mean, I think as you understand, that we are, we are a lumpy business, and the fact is that it's best to look at our business on a, yearly basis, because it's a, it's basically a long-term business. Okay? Having said that, I mean, I wouldn't really read on the quarter four margins. I would kind of draw your attention back to the FY 2024 margins. And I think what I said in a previous, response also, that, you know, we are growing the business, and our expectation is that the growth will be faster than the expense growth. I think Dr.
Prasad has also mentioned, you know, in various communications, that we are investing in the business, and we continue to invest in the business because, for example, we talked about a strategic business unit. We converted for Spec Chem, and that will require investment because I think that's the way we expect that the customers is designing of the business and the focus that we require in the business. And, so yes, the employee cost will increase. We are expanding and adding high-quality manpower, which is so very required for this business. I think we've already talked in the previous conversations also about a very, very strong commercial engine we made, and that comes with a cost.
So, yes, I mean, I think the net answer at a summary level is that margins will remain healthy, and we continue to invest in our business for a progressive growth.
Okay. So if you look at the history over the last five years, after 2021, you know, you're kind of, you know, grown for two years, and then your numbers have gone back to where you were, I think in 2021. So, what's actually apart from the headwinds that most of the industry has faced in FY 2024, is there any company-specific or client-specific factors which has actually dampened your performance in 2024? And, what is the timeframe over which one can expect that, you know, growth phase to come back, say, if you take a two, three year view? And secondly, what is the reason for the sharp increase in net debt to EBITDA between FY 2023 and 2024?
For when, you know, key ratios as per the slide 27, and when do you see this net debt to EBITDA ratio being brought back to something reasonable?
I think three points, Ramesh. One, I think we have in the earlier conversations mentioned about the COVID sale, and I think the COVID sale has had a huge base effect. And we talked about the Ag Chem stocking and the impact of the destocking that we are facing in the business. That's an industry-wide phenomenon which is there. So I think that's part one to the question that you have, right? I think the other part which is there is, I think we did mention that we have around INR 800+ crore of cash in the balance sheet. So I think that's the other aspect that has to be covered in terms of when you're looking at the various ratios.
No, I'm just looking at the net debt to EBITDA ratio given in slide 27, so that must be adjusted for the cash, right? So as in, it's increased from 0.7x to 1.8x. Actually, this is net cash. Okay. So normally we put. So this is a net cash ratio, so I stand corrected.
Okay.
So normally we take positive figure as net debt. Okay, fair enough. So if you look at the overall product mix, yeah, will CDMO remain the dominant segment, or will you see some increase in Spec Chem and Ag Chem, say, in the next two, three years? How do you see that? And how do you see the return ratios in the acquired entity, Cohance, you know, catching up with the Suven, you know, ratios? Because Cohance seems to have lower return ratios. So how do you see that improving, say, in the next two, three years?
Let's again, I think, dissect the subject. You have multiple questions. I think what we need to first understand is that, for us, we are creating Spec Chem as a strategic business unit. The direction and the need for creation of a Spec Chem as a strategic business unit is because we do believe in that business unit, and therefore, we would continue to invest for growth in that. During our merger exercise, we had mentioned that we are creating multiple engines of growth, and therefore, all engines of growth will eventually fire. In our commentary today, we have said that other than ADC maybe stocking, we are not sensing that any unit will not fire. So all these filings, and we are expecting and experiencing the growth to come in, in FY 25 onwards.
Yeah, on Cohance, how do you see their balance sheet ratios improving?
See, I think, again, you know, there are, these are two very different business.
Okay.
So it is. I mean, I would say that it would be almost like comparing apples and oranges. So we want. I think it's a very, very different business. So don't. I mean, I would assume that both the businesses will improve, but not that A will reach to B or B will reach to A.
Okay, fair enough. Thank you, and wish you all the best.
Thank you.
Thank you. The next question is from the line of Gagan Thareja from ASK Investment Managers. Please go ahead.
Yeah, good evening. I hope I'm audible, sir?
Yes, please, Gagan. Please go ahead.
Yes. Yeah, sir, the first question is, you know, while, while you've given the, you know, profit contribution from Cohance, is it also possible to give the operating cash flow and the free cash flow contribution from Cohance for the year?
Gagan, I believe it is there in the presentation. Can I request you to please look at the presentation? We have, we have also analyzing the data there.
Which page, sir? Can you refer the page number?
I think, we can send it across later. I don't have an offhand recollection on, which page it is.
Okay, because I, I was unable to find any cash flow contributions related to Cohance. What I could find was that the net working capital on Cohance has increased, and so also it would seem for Suven. If you could give some idea of, you know, how to think about working capital for the year or the, you know, years ahead.
Yeah. So Gagan, that's a, See, on a working capital basis, I think, there is work as we speak on the working capital that is actively being by Cohance management. I mean, that's what we have, gained and learned from Cohance management. I believe that the ratios will improve over the period.
Can you enumerate it? I, I presume Cohance this year was 180 or 180+ days of working capital. What sort of cash conversion cycle are you sort of looking at after improvement, perhaps next year and thereafter?
I mean, I would not be comfortable at this point of time to indicate a number, right? I think, let's wait for six months to see as to what kind of numbers are delivered by the business.
Okay. And you indicated that, you know, over the next five years, you think the combined entity can double on the top line. Is it possible to segregate the growth outlook for Suven separately and Cohance separately? You know, when you say doubling, in five years, you're essentially talking of a 15% CAGR. Do both businesses grow at the same pace, or do they grow at separate paces?
We expect similar kind of growth ratios between both Cohance and Suven. The reason being, Gagan, the pipeline of Suven as well as Cohance and the right inputs to deliver the growth has been factored. Hence, one of the important aspect is we have multiple engines of growth. All multiple engines of growth will have to grow disproportionately to what we have it today. Hence, this is what the belief that we have.
Okay.
Predominantly, it is led by CDMO from both sides. If you look at it, the gross contribution of Cohance's business, close to 42%, while the five-year CAGR is 13% revenue, it is more than CDMO growth is more than 30+% . So these are all the things makes us to believe that the both growth engines will continue to propel.
Okay. If I refer back to your, you know, previous quarter's transcript, you indicated that there might be three to four quarters of softness, and then growth will recover. So while you give a three, a four, five year guidance of 15% CAGR, from an immediate 1-year perspective, are we still looking at, you know, growth to be sort of below the mid-year, mid-term guidance that you've given and then recover thereafter?
So second half onwards, the recovery is going to be seen in both the businesses together. Because there are enough evidences, as you understand, there is a lag in each of the businesses, and based on the view that we have, second part of the year onwards, the de-growth challenges are behind us. It is only just, growth is fully back to us and full year basis, there will not be any challenge. And, second half is the real evidence that we can see.
Okay. And, you know, again, referring back to previous quarters and call transcripts, you indicated, I mean, the merged entity pro forma operating margin would be mid-thirties, and you indicated that you would be in an investment phase, in a team-building phase for some time to come, which would mean that margins would probably dip before they, you know, sort of inch up again and improve. Does that, you know, is that still the case, and you feel that for perhaps the next couple of years, you know, because you'll be in a team-building phase, you know, the margins might sort of take some sort of an erosion before they come back again?
Well, the right way is to look at, given the growth aspiration, we have indicated mid-thirties. Mid-thirties is what we've indicated as the long-term margin for the business. You would want to stand by to that, stage management. That's the direction that we should look at.
Yeah, that's the long term, but how does it pan out over the next year, two year, three year time frame? You first come below the mid-30s and then go back up to, towards mid-30s?
We are not expecting that to happen.
Okay. So it will sustain at where it is right through, is what you're saying?
Long term, we will be mid-30s.
You are mid-thirties already, right? On a pro forma basis.
Yeah, so we will sustain it around that.
Yeah. Yeah, yeah. The final question from my side, and this is for Vaidiesh. Vaidiesh, you have a very storied past in Glaxo. Just trying to, you know, sort of, get your inputs on, you know, that business was a branded generic business and you would have, I mean, you're a seasoned professional there. You bring superb insights from that market. I'm just trying to, you know, sort of understand how will those insights aid, you know, the growth of a CDMO business merged entity over the next four to five years? How do you sort of bring to bear your experiences in this market?
Yeah. Hey, thanks very much, and, I appreciate your sentiment. See, first and foremost, at the end of the day, every business has certain, you know, business models and insights, right? As long as we stay close to customers, we understand how to serve them, how to prepare yourself to deal with the customer needs, right? Business, every business, whether it's a branded generic or whether it's this business. I personally believe that Suven, and also the combined entity, is well poised for a good growth because of the fact that phenomenal understanding of customer insights are going into serving them, right? So being an innovative company, which has had experience, innovative company likes the idea of, you know, doing the right things, doing world-class processes, and this company is well-suited.
Suven as well as Cohance is well-suited to serve the needs of the innovators or the global MNCs. So that is the most exciting part, I would say. Yeah.
So just to close that loop with your point, we expect to see a full year basis, we will continue to grow, and there are enough signs for this acceleration, and this acceleration is much better in 2025, 2026.
Right.
That's the view that we have it on the ground.
Thanks. That's helpful. Thanks for taking the questions. Thank you.
Thanks. Thank you.
Thank you.
Thank you. Ladies and gentlemen, we will take that as our last question. I would now like to hand the conference over to the management for closing comments.
Thank you everyone for joining us today and your valuable inputs. We look forward to our future interaction. Thank you, and good night, everyone.
Thank you.
Thank you.
Thank you.
Thank you. On behalf of Suven Pharmaceuticals Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.