Ladies and gentlemen, good day, and welcome to earnings conference call of DeVees Laboratories Limited Q3 of Financial Year twenty twenty one. As a reminder, all participants will be in a listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Please note that this conference is being recorded. I now hand the conference over to Mr. M.
Satish Chaudhry. Thank you, and over to you, sir.
Good afternoon to all of you. I am Satish Chaudhry, Company Secretary and Chief Investor Relations Officer of Divis Laboratories Limited. I welcome you all to the earnings call of the company for the quarter ended thirty first December twenty twenty. From Divi's lab, we have with us today doctor Murliki Devi, managing director, miss Nilima Motuparthi, whole time director commercial, mister Al Kishorwabhu, chief financial officer, and Mr. Venkatesh Pirman, General Manager, Finance and Accounts.
During the day, our Board has approved results for the quarter, and we have released the same to the stock exchanges as well as updated the same in our website. Please note that this conference call is being recorded and a transcript of the same will be made available on the website of the company. Please also note that the audio of the conference call is the copyright material of Devis Laboratories Limited and cannot be copied, rebroadcasted or attributed in press or media without specific and written consent of the company. Let me draw your attention to the fact that on this call, our discussion will include certain forward looking statements, which are predictions, projections or other estimates about future events. The estimates reflect management's current expectations of the future performance of the company.
Please note that these estimates involve several risks and uncertainties that could cause our actual results to differ materially from what is expressed or implied. DBplus or its official does not undertake any obligation to update publicly any forward looking statements, whether as a result of future events or otherwise. Now I hand over the conference to doctor Murli Kajiri, Managing Director of the company, for opening remarks. Over to you, sir. Good afternoon to all of you.
I welcome you all for the earnings call of the Beach Laboratories.
I hope that all of you and your families are safe and well during this still existent pandemic. We all must be proud that India is producing vaccines for COVID nineteen, and vaccination program is under progress. Let us hope for buildup of antibodies and thereby benefiting the population. Though vaccination is under progress, we still need a prophylactic or a drug that can be used to stop virus or reduce viral load. Crores of CapEx has been implemented since 2018 and we have seen growth and should see further improvement in sales in the near future.
The new major Fast Track Custom Sensitives project is proceeding very well. One stream has already just started production and additional streams are under completion. Apart from this, we are also venturing in a big way into contrast media APIs. Over the last few months, we have completed the validation of several active pharmaceutical ingredients in both the generic and custom synthesis side of the business. The new molecules we have developed on the generic side of the business, we believe we have an edge in the technology, lower raw material costs and high purity of the product.
We have projected several initiatives in our research activities. One initiative of particular interest is our drive towards green chemistry. We have a group of dedicated scientists at both the facilities who are revisiting the chemistry of our existing products to see possibilities of process efficiency and improving and lowering the cost. The end goal is to minimize wastage, maximize stoppage and move towards greener chemistry. Now I ask Nirma to brief on operations.
Thank you.
Hello, and welcome, everyone, to Delius Labs' earnings call to discuss the unaudited results for the third quarter ended thirty first December twenty twenty. I hope that all of you and your families are safe and well during this still existent period. We appreciate you joining us today on this call to discuss Divis' Q3 performance. Firstly, I would like to summarize the current COVID situation in India and impact of it from a global perspective. One year of pandemic and I must say, we still have been facing the effects of it on a daily basis.
However, most of us have adjusted to the new normal and figured out emerging solutions to carry out our daily lives and business as it is unpredictable of what the future shall hold. Nevertheless, there has been a decline in the number of COVID cases in India over the past few weeks. And we can hope that the pandemic may be on its last leg, and we might not witness a second wave, something that other countries have been grappling with. As a result of the second wave in few countries, there has been travel restrictions and lockdowns in few parts of Europe. Container shortages, blank sailing, lockdown in Hebei, and a few parts of Northern China have impacted in disruption of supply chain and thus affecting the logistic management leading to delivery delays, congestion, and higher freight rates across the globe.
While the impact of these have been minimal on our business, we only hope that with the ongoing COVID nineteen vaccination drive and certain promising molecules on the horizon, the world may return back to normalcy, enabling normal business travel. Speaking at an organizational level, ever since the outbreak of the COVID, our main focus has been on the health and safety of our employees, and we are ever grateful and continue to applaud our employees' dedication and persuasion during these uncertain times. In addition to the safety of our employees, our focus has always been streamlining our operations, maintaining a steady supply chain, and focused execution of strategic investment, which has enabled us to continue uninterrupted supply of APIs to the global market. Moving on to our q three FY twenty twenty one financials. On operations, I'm happy to state that we have achieved a consolidated total income of INR $17.21 crores during the quarter, reflecting a growth of 20 over the corresponding quarter of previous year.
Profit before tax for the quarter amounted to INR $6.42 crores, a growth of 32%. We earned a profit after tax of rupees $4.71 crores during the quarter, reflecting a growth of 31% year on year. Staff cost for the quarter includes an incentive of rupees 34 crores paid to the employees in appreciation of their relentless work during the COVID nineteen pandemic. We have capitalized assets of rupees 1,011 crores for the nine month period, of which capitalization this quarter has been rupees 181 crores. As of the end of the current period, we have cash on book rupees 2,064 crores, receivables $14.99 crores and inventories $19.15 crores.
Rupee has been quite volatile for the last nine months. We have a ForEx gain of rupees 2.5 crores for the quarter and a ForEx loss of rupees 8 crores for a nine month period. Exports for the quarter accounted to 85%. We continue to have normal business distribution across regions. Europe and USA accounted to 68 of our revenue.
There has been a modest increase in domestic sales, which accounted to 15% for this quarter. Product mix for generics to custom synthesis is 6040% of the revenue, respectively. Constant currency growth for the quarter has been 1122% for nine month period. Our nutraceutical business for the quarter amounted to INR 145 crores and INR $4.39 crores for the nine months period. Thank you.
Thank you, madam. With this, we would request the moderator to open the lines for Q and A.
Thank you. We will now begin the question and answer session. 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.
First question is from the line of Damian Thikirai from HSBC Securities. Please go ahead.
Hi. Good afternoon, and thank you for the opportunity. Sir, can you bit elaborate more on your new venture into contact media API, where you just mentioned, some projects are already validated. So how soon you can start, commercialization of some of these, products?
Good afternoon. We are producing the contrast media of Iopamidol. We have been producing for the last several years. And with the opportunities in the other contrast medias and getting into the scale, the possibility is that we could be thousands of tons of these materials. The advantage once you go into that large scale league is that the iodine can be purchased at the right price, iodine can be totally recycled, and iodine can be efficiently used.
Because the contrast media, the majority of the cost is iodine. So in a small scale manufacturer or a medium scale manufacturer, it's difficult to recover the iodine from the organic to the inorganic stage. We were able to do that with engineering to commercially recover all our iodine that is going into the waste streams so that our costs will be minimal. We achieved that in the Iapamidol. The same thing now we are we have started implementing in the other contrast media compounds, and we are confident we should be able to get a reasonably good size of the market with the advantages of new technology of recovering iodine with the benefits of already having experience of making the contrast media.
And there are very few players in the contrast media in the world.
Thank you for your response, That's helpful. So my second question is on progress in Kakinada. A few weeks back, we heard about some local disturbances. So how has been progress there?
I think you are aware that we have received all the required statutory approval for starting Coconada Unit three. During our initial start up of work, there has been some concerns raised by the Hatchery Association. Though these concerns have already been addressed during our public hearing, there still seems to be some apprehension about what sea discharge means. Presently, the government of Andhra Pradesh has put in a committee, and the Stockholm State Pollution Control Board is in discussion with them to address their concerns. We'll believe this will be resolved very shortly, and we'll continue our work.
Okay. So, sir, so broadly, once we get update here, the construction and other updates should continue normally because all other approvals are in place. Right?
That's correct. But what I would like to say is that we are not losing any business because of the delay what happened in Coconada. As you know, the Unit 1 and Unit 2 are on 500 acres each, and we still have plenty of plan and clearances to grow. We're also keeping all this in mind, we also built additional production blocks also to cater to this requirements of our new businesses. So it is so we are not losing business at the same time.
As soon as the company is cleared that, we'll start production. Sorry. Construction.
Okay. Thank you, sir. That is helpful, and wish you all the best.
Thank you.
Thank you. A request to all the participants, please restrict to two question per participant. If time permit, please come back in the question queue for a follow-up question. The next question is from the line of Sandralla Thomas Kavala from Centrum Broking Limited. Please go ahead.
Thanks for the opportunity, and congratulations on good set of numbers. Also, if you could help us understand the gross margin improvement in a little granularity level would be very helpful.
Thank you for your comment. I think it's not the volume marks, it is the quality of the marks is the most important thing. I think what it means is that how good is the process, how profitability is the business. I think that's what it matters. While we are building the volumes, while we are expanding our capacity, it is very important that we do improve our margins and not compromise on the margins.
Now how did we achieve this lower material cost and higher margins? It's not an overnight situation. It is the introduction of new technologies, new designs of equipment by our engineering department and backward integration of our gold generic compounds and process continuous process improvement. This is a combination of all these. And at every opportunity, though we make sure that what improvements can be done in making more margins and minimizing waste and achieving more of a product.
I think this is always the focus right from planning, designing, the research and execution. This is the result you are seeing that in the API industry across, we have been looked at differently that the margins are different. And I think going forward, we are quite confident that we should be able to maintain good margins.
That's very helpful, sir, and very elaborative. Sir, just coming back to our recent CapEx, how should we look at the current utilization of the recent ground fields that we have already commercialized to an extent? And what was the approximate entire contribution this quarter?
The investment, I think if you look back, we started investing heavily from 02/2019. If you take twenty eighteen-twenty nineteen, our sales was about INR 5,000 crores and our PBT was INR 1,800 crores, our PAT was about INR 1,300 crores. So we started investing from then. In 2019, we invested about INR $8.76 crores. In the last nine months, we capitalized at about INR 1,000 crores, and we'll be completing the remaining INR500 crores, INR600 crores soon.
As if all these are some of them are for debottlenecking, some of them are for issuance of supply, some are for introducing new technologies, some are for making our own intermediates. Now not only we are free from supply threat from China, it also resulted in, as we said, on the normal cost savings. Now we already achieved on the good margins. Now you have seen this in nine quarters, three quarters, nine months, we have already achieved INR 5,100 crores. But otherwise it was a full year of income and INR $19.25 crores of PBT and INR $14.67 crores of tax.
This is for the nine months, and you can extrapolate to see the growth. And this is just the beginning of the growth. And I think in the coming quarter, the last quarter of this year as well as when you from the first quarter of the next year onwards, you will see the growth curve. Because it does take time, yes, we did qualify several generic APIs, which have a lot of opportunity. We had one set of good generic APIs with starting from MacProps and Dexamethasone and Gabapentin, all these compounds where we became leaders in the market.
Now we have selected the next generic products, just became generic or becoming generic, and that is where we complete completed qualification of some of them and are waiting for approval to take the market.
That's very helpful, sir, and wish you all the best. I have more questions. I'll come back in queue.
Thank you.
Thank you. The next question is from the line of Prakash Agarwal from Access Capital. Please go ahead.
Yeah. Thanks for the opportunity, sir. Hello?
Yes. Good.
Yeah. Thanks for the opportunity. Sir, I joined the call a little late. Apologies. But I just wanted to understand the sustainability of the the gross margins and the EBITDA margins as these are the new normal, like, 41% plus and, you know, at the EBITDA level.
And would these I mean, in a couple of quarters, we have seen that given the volume and the margin tailwinds. So are these sustainable over one, two years, three years time frame given there is a significant amount of investment, so the volume is visible. But on the margin front, if you could just help understand the sustainability at these levels of gross margin and EBITDA margin, sir?
I am more confident on the margins than the sales. The reason being we are technology people, technology and the company is technology driven company. So we are winning all these margins based on the technological improvements we have made to the process and completing them. It's not just enough to develop a laboratory process or a designee laboratory process. It is very important to translate that into the designs of the equipment in the plant and installation and making sure that any keeping troubles are removed during the production process.
This is where our expert we have people experts for the last twenty years. This is where the retaining the employees is important. We are able to retain more than 2,000 employees for the last ten, fifteen, twenty years. As a result, we see always everybody striving towards how to bring down the cost. That's one target always.
So these dedicated employees drive the cost down. And I am very confident personally that we should be able to maintain the margins in spite of large CapEx, in spite of introducing number of products, both generic and also in the custom synthesis, and I think we have good base ahead of us.
Okay. Thank you for that answer, sir. Very helpful. Secondly, sir, on the the the CapEx journey we started one and a half year back of 18,000,000,000 rupees, how much of that has been achieved? And then we also had, you know, announced the new round of CapEx.
Where we are in that as well if there is an CapEx update, sir?
The new round of CapEx, I have not discussed till now. The CapEx I talked about is the CapEx plan since 2018 and that's 1920 until now, up till March. Now the investments made the product either is for debottlenecking or it is for issuance of supply, backward integration, they are all complete and they have been some of them have been qualified already yielding capacity and improved sales. And several more are yet to happen because we are waiting for the clearances of the the agencies, whether it's US FDA or Europe, because some of them are involved with changes in the process, which we need a clearance. But the scale scale of clearance is not an issue.
But if you want a higher yield, if you want some conditions to be changed, the cleanliness needs to come, which will come very soon. Now talking about the INR400 crores investment, the fast track projects that I mentioned last time, which came all of a sudden as opportunities, They are extremely getting completed. This is what I said in my starting remarks that one of the stream already, we went into the production. One of the 400 crores of investment, and few other two other screens are yet to be commissioned, and the other product investment is happening, and the production will start somewhere in the first half of the next year.
Okay. Perfect. And lastly, customer sales, sir, what has been the percentage for the quarter and likely to be for next year?
Can you repeat your question again, please?
So, normally, we give a breakup of the custom synthesis business and generics. What was for the quarter, and how is it likely to be next year?
It's about 62% 40% for the generics to custom synthesis.
Sixty forty, you said? No. What varies between nowadays. I think I said 40%, 60%. It could be generic.
It could be custom sensors. I think in this particular quarter, the generic seems to have taken a lead compared to the carcinogens. You may want to realize that there is more carcinogens, that's why there is more margin. But I'm sorry to say that it's reversed. Even we had a higher can reach, and the profit margins are also higher.
I don't think we can link it that way, really.
Understood. But what was the percentage since we give it every quarter? If you can
share that with said it's about 60% generic and 40% custom synthesis.
Okay. Perfect. Thank you, and all the best.
Thank you. The next question is from the line of Girish from Bank of America. Please go ahead.
Yeah. Hi. Thanks for taking my question. Doctor Girish, just on the Kalkinoids business, I think it's, I mean, growing pretty well and almost reaching 10% of the top line. If you could give some color on what's the overall market share now a company has in the overall market, and is the mix similar to, like, Genvix and keratinoids where 68% is from Europe and US?
The keratinoid business, more than 95% is Europe and US. We don't have we have very little business in India. And the market for nutraceuticals in this keratinoid is still is about a billion, which is still growing. We have come we have been qualified by majority of the customers. I'm talking about in the feed in feed business of the salmon and other feed industry.
And in the nutraceuticals for the human, it just started the business got just started. The we are looking the current business is about INR 600 crores on an annual basis, and we have just expanded 100% in capacity. This is part of the expansion we have taken up one year ago, and we are geared up to produce 100% more than what we are doing. This is based on the business we can foresee.
And just to add on that, if you can give some color on whether the margins in nutraceuticals would be almost like a generics business?
The margins are I think it is just about the same. And because the business is distributed into three companies, still the DSM, the BASF and Divis, that's where the majority of the business is. And looking at the competition today, if any one of them drops, that's the price they are going to be sky high. But we are happy with where we are, and the margins are similar because we are very unique compared to the other two manufacturers that everything is integrated. For them, API is made somewhere.
It is sent to another country for making the beadlet, then it is sent for consumption somewhere. Here, everything is happening at Unit 2 under one roof. The APA is produced. The beadlets are produced and exported. This gives an advantage to contain the cost.
This is very helpful. And just the second question was on the contract media market. Overall, do you have a number how big the market would be, and how many products are you, let's say, envisaging to do? And if you could also give some some color on competitive landscape there?
The contract media is about anywhere between 4 to $6,000,000,000 business because nowadays, with the affordability, every day, you are seeing people in queues having the contract being done for one thing or the other. Even common public are able to go and they're able to afford. So the consumption of the contract media has increased tremendously in the last two years or three years. And it's a question of, till now, there are only very few companies survived in this industry because, number one, ID independency. Number two, how somebody can recover the ID and reuse.
Otherwise, the this is not viable. This is where we have broken that high, and we think we are going to play a major player. We will be the major player in it.
Thank you. Sorry to interrupt you. Sir, we request all the participants to restrict to two questions per participant. Girish, I'll request you to come back in the question queue for a follow-up question. Thank you.
The next question is from the line of Santan from Pinebridge Investments. Please go ahead.
Good afternoon, sir. Congratulations on a great set of results. If you could just elaborate on on your plans on green chemistry, and then if you can just give us some ideas to where we are and and and what are our goals in in terms of in in terms of slightly more detail as to how we expect to get more from our processes, try and reduce our wastages. If you can get some new quantitative data on this, it'll be helpful.
Excuse me. I missed the sentence. Can you please repeat?
Yes, sir. So I heard your comment comments on on green chemistry, and and I understand we are very efficient. So I just wanted some further details in in terms of what we are doing and in terms of real chemistry and and and what are our goals in in in this area. Okay. What is the potential Yeah.
Yeah. We expect to see.
Yeah. Green chemistry involves conserving materials that can neither be created nor destroyed because they are limited. So once we say that now we keep consuming, the regeneration is difficult. That's why the prices keep going up. So what we are doing here is that developing atom efficient technologies.
That means if there is a mass, if there is a 10 kilograms mass, we wanna make sure that our wastage is minimal and all the materials we add to make a product. Majority of it goes to creation of that. Not that he live with 50% yield and losing some 50% into the waste streams without recovering. First, our conversions should be higher, 70%, 80%, 90%, and the remaining, we should be able to recover, recycle, reuse. So with these new technologies, it is possible that we should be able to work on atom chemist atom chemistry and be highly efficient, and this is possible only when you have critical mass.
If you just start producing 500 tons of naproxen or 50 to 30 tons of betamethrower pen, 200 tonnes of dabapentin, it's not possible. But at this scale we operate, it is possible to make investments of hundreds of crores to make sure that our yields are the highest, our recoveries are the highest, our waste are least and the chemistry is becoming more and more greener by conserving less energy, conserving less solvents, less emissions, less wastage to the treatment plant. This is what it will become more and more greener. Okay. Thank you.
Thank you. The next question is from the line of Shyam Srinivas from Goldman Sachs. Please go ahead.
Hi. Thank you for taking my question. I'm just looking at the generic API business. I'm removing, say, custom as well as the nutraceutical number that was shared. So that's about 51% of the total business, has seen good growth at the first two quarters, doctor Divisar, but we started seeing it slow down.
And I'm just trying to understand from some of the other competitors that probably the demand that we saw in the first half of this year or even the nine months is probably starting to plateau or maybe fall. So what are you seeing from a generic API, maybe even a competitive standpoint? We are hearing that at least trade data seems to be showing the Chinese API exports is also picking up tremendously. So just your thoughts on the generic API, please.
We I understand what you are saying that when you say generic APIs, it's a vast area. Are we talking about antivirals? Are we talking about painkillers? Are we talking about antibiotics? Are we talking about fermentation products?
So the products where China is quite strong in antibiotics, in fermentation, in some of the antiretrovirals and others, yes, probably the competition is happening. And when China comes back, probably there will be pricing pressures as well as competition pressures. But we are in products where we have been the leader prior to the COVID. And since then, we expanded. Since then, we have made our process more efficient, cost efficient, quality higher quality, and with all regulatory.
So we are not look and, also, we have strengthened it further by going backward integration to make sure that we are not being dictated by anybody about supply of the materials, either on the increasing cost or as a shortage. So we don't foresee or at least in the near future, I'm talking about in the next two, three years or next four years, any issue at all to our generic business because of two reasons. One, it's not that easy to create the capacities, huge capacities we have in generic our products for somebody to invest and get into production, number one. Two, even if somebody does, it takes three, four years to get the approval from the big from the regulatory authorities. That would take time.
Somebody has to make a large investment, wait for two, three years after completing the plant for the sale. So somebody should have the staying power of three to five years after borrowing money. The good thing for us is we don't borrow money. We use our results widely, and this is where we are more efficient. And we are continuously investing into the process development to make sure our tenses are strong.
Got it, sir. Very helpful. My second question is, in your opening remarks, you talked about the next 10 molecules that you are targeting. So the concern probably is that maybe the mature molecules are now slowing down. Like, you disclosed top five is what about 45% of revenues in in your annual report.
So is there is there comfort that the next 10 molecules can slowly replace or offset some of these slower growth that comes from the top molecules?
I do not think so. I don't think so. The reason being that once patients are used to, let's say, ibuprofen, they come they continue to use ibuprofen. Though we have come with naproxen and we have increased our capacity to, 5,000 tons, but ibuprofen demand did not go down. It's still fifteen, twenty thousand tons and still growing.
So I think when a new product comes, it will have some advantage of either in some therapeutic additional advantage, but the original traditional generic API, which was used for the last twenty years, is not going to disappear. Now they're all still growing because these are found to be very, very safe. So they are still growing. We have seen that all our generics. Now the new generics or recent generics or the future generics with large volumes, There are not many.
There are, let's say, about 10 of them. Some of them, yes, one or two of them are in the same therapeutic segment where we already have a generic product, but this is little specialized. It's a difference between having a oxygen monitor or oxygen into the nose versus incubator. People needing incubators, they have to go to the incubator. People just needing oxygen support, they need that.
So in generic, again, what we are looking at is that the specialized product with volumes, which are similar to our generic compounds, I think this is where we have Mr. Kiran Devi, the CEO has chosen with personal interest and have targeted them and we developed a process, qualified the process for several of them and they are under regulatory permission and we should see their growth in the coming years along with our generic products growth.
Got it. Thank you, and all the best.
Thank you. The next question is from the line of Arvankar Please go ahead.
Hi. Good afternoon, everyone. And sir, congrats on the strong performance. So firstly, broadly, how was pricing for your API portfolio, generic API portfolio moved in the last one year? And what are your expectations going forward?
Pardon?
So my question is, broadly, how has pricing for our generic API API portfolio moved in the last one year, And what what are your expectations going forward?
I think it's a two way thing that's that's happening. In general, what I can in general, up and down, it keeps happening. Some of the generics, the demand is about the same. I think it all depends upon some shortage of ramble at one place, some certain requirement elsewhere, improper planning. That fluctuation will be there.
But because even in the not only big pharma, with the generic majority of our customers, it's a long term, long contract. It's not spot business where you try to sell 10 tons somewhere at a high price or at five tons at a disposing at a lower price. That's not our business model. Our model has been that we are a dependent supplier and they assured to our customers. So the customers sign long term or very long term contracts, whereby I think we are not afraid of the fluctuations of pricing.
Fair enough, sir. And my second question is, traditionally, we have been very strong in high tonnage products. But over the years, gradually, slowly, and steadily, we are seeing the tonnage requirements for new molecules coming down. So for the custom synthesis business, do you see this as a very long term risk? And is there any need to tweak our business model in in the future?
I don't think we need to change our business model, number one. Two, the reason is that when we entered into this business twenty five years ago, most of the big pharmas had more than three to five manufacturing sites for API in different countries. Today, most of them don't most of them do not have even a single API manufacturing unit. Yes. You are right.
When we entered, every big pharma was coming out with several APIs, at least three, four, five every year with decent volumes from their discovery bag. Now there are more small volume products coming out, and the larger volume products are one or two. Yes, there is a reduction. But they also cannot find too many EAPI manufacturing sites which can accommodate such large volume requirement of equipment. This is where we are very uniquely positioned that they also don't have much choice to go than to go to a preferred supplier like Divvych, having a relationship for twenty, twenty five years and on time supply, all the time quality maintained and decent price.
I think this is where the strength still is. Yes. We are also prepared. We have built multipurpose small volume plants at both sides. So we are prepared if there are more opportunities.
If we need to take 10 molecules of few 100 kilos, we are ready to do that. We also have such designed manufacturing blocks right now.
That helps, Thank you, and all the best.
Thank you.
Thank you. The next question is from the line of Chirag from DSP Investment Managers. Please go ahead.
Yes, sir. Thank you for the opportunity. So there is a 167 crore increase in inventory in the quarter. Is this related to the custom synthesis fast track product?
The
increase in my inventory, 167 crores, is not is a see, every third quarter, if you go back to the historically, every big pharma, every generic house in US, Europe, everywhere, they want to maintain lean, and they don't want any huge stocks on December 31. It is a generalized listing. Maybe that could be the impact. I think let me see.
And also some of the capitalization that we have done, a few the two SAZs that have come into operations, I I think that's the reflection of the in inventories from there that you
are seeing the rise. What what Nil might say is that we got two HCG HCZs, DC HCZs, DCV HCZs, they started activities, They started qualifications. They started just commercial production. All those need a lot of raw material, built up of inventories, and even the API produced in in one case and in two, three cases and stopped it because until we get the clearance from the regulatory agencies, minor or major, I think we need to hold. Some of them are must have reflected into that stock.
Yes. What Neelma said is right in addition to what I generalize is that in q three year on year.
Sir, will this relate will this lead to higher sales in q four because this material will be sold?
As I mentioned that, one is q four, I think we don't want in all of you to look at us on quarter on quarter. Please. Please look at us on the investment we made, and I mentioned that you will just you will see some increase in q four. But I think you should wait for the bigger case, which is going to be more attractive in the Year. Beginning of the year or a or end of the year the next during next year and follow on.
I think that's where I think is the the KT.
Understood, sir. Fair point, sir. And the the second question was on CapEx for FY 2022 and 2023, sir. Any plans formed up?
I think we all mentioned that last time that the the next capacity is to the Kakinada 600 crores. And whenever we start Krishna Patnami as a backup for Kakinada, then, otherwise, I think, pretty much, we are not seeing much, except there are few buildings we built then, production buildings, in 2000 1019 yeah. 1995, those buildings, I think, are not comparable with the modern systems of automation, modern systems of mechanization, modern systems of gadgets requiring more manpower than the newer buildings. So we may the CEO may make a call and say, well, let's go ahead and invest in creating the modernizing these blocks. I think it's a call that may happen.
Otherwise, we are not planning.
Okay, sir. Thank you so much.
Thank you. The next question is from the line of Tushar Manodani from Motilal Oswal. Please go ahead.
Sir, firstly, on the contrast media aspect, while you have highlighted the market size, could you also elaborate on the volume wise? Is it like will it be a high volume products or low volume products?
I think I already covered it. I mentioned that these are high volume products because know that the contrast media is given anywhere from twenty grams to 80 grams to each of the individual to get a good picture of how is inside bones to any everything else is. And so this is high dose and high volume business, and it's growing also very much in the developing, underdeveloped countries along with the developer countries.
Sir, secondly, so we have been, you know, have been for many years into the IBM based APIs. Any any thoughts on the gadolinium based APIs in this sub in this subject itself?
We have looked at the gadolinium compounds in the past when the innovator was disrupting. It was quite a long time ago. I'm talking about fifteen years ago. But we haven't reconsidered them unless, as I said, it has to pass the CEO before it comes to me to look at the technology. So our marketing vice president and the CEO, they need to look at to revisit.
Right now, it is not in my radar.
No. And just lastly, on with respect to this contrast media and the new molecules in the API which you alluded to, these would require fresh investments. Right? As and when when it reaches commercialization?
The investment is already planned and allocated. The projects are under progress. Some validations have been completed, and some and some for some products, they have been even submitted. So it's a combination. It is within the investment plan already done.
Okay. That helps. Thanks a lot.
Thank you. The next question is from the line of Anubhav Agarwal from Credit Suisse. Please go ahead.
Sir, good evening. Just one question on your customer synthesis portfolio. Just wanted to check over the next few years, just as an idea, how many products can come off patent? Is there a risk to us, or that's a very small part of the portfolio for us?
We have been we since we started this custom synthesis, I have been mentioning that we cannot talk about the products, the ratios, how many in phase one, phase two, phase three. We have been not been doing that. And I think we would like to be that way so that we the commitments we've made with the big pharmas by signing the confidentiality agreement can be honored better. So we don't disclose that how many projects and which phase and with which company, which region or which therapeutic segment.
Yes, sir. Sure. I appreciate that. I actually did not want any product detail. I was just asking a very high level that not even asking how many molecules do you
have right now there.
But is there a risk to the overall profitability of that segment that over the next two, three years, certain molecules go off patent, and that would impact us in terms of growth?
Oh, I'm sorry. The I got your point. That even after patent expiry, we have seen some of the compounds. They did not go down. In fact, this growth still is being there.
I think the newer molecules, they are much tighter impurity profiles. And for the generic industry overnight to develop such cost, such impurity profile with strict quality is getting tougher. We are seeing there is a resistance in the market in the medical community that for neurological, for example, they don't wanna change from the traditional tablet of the big pharma to a generic because even a little variation in the impurities can cause enough of disturbance in the brain to the neurological. So they still would like to the same thing in rubber leather. You have seen recently the impurities of these nitrosamines where the whole world went into upside down in the sarcom, in the anti ulcer compounds.
So the generic industry could not dent to enter with these impurities and now several lawsuits and whatnot. So we are not seeing if your quality is good and if your impurity profile is good, if you are in green chemistry, if you are atom efficient, if we have a manufacturing scale of the world scale, I think you have bright future. But if you are happy with the original process 1995, what the Big Pharma gave you, it's like enjoying our grandparents' you know, whatever they gave us, then I think it's not possible. We cannot survive. But we have been always improving, and we are confident that we will have good opportunities in this consumption business without compromising in margins.
Got it. Thank you.
Thank you. The next question is from the line of Surya Patra from PhillipCapital. Please go ahead.
Yes. Thanks for the opportunity, sir. Just I pardon me that I if possibly, it could be repetitive in the question that I'll be asking because I enjoyed it lately. So just wanted to have a sense on the on the margin and the gross margin scenario for the quarter as well as for the future period. See, whether the gross margin expansion is led by improved product mix or it is a cost effect what has supported by the gross margin expansion or it is a realization.
Can you give some sense on this, Finsir?
In fact, if you look at the expenditure side, we have paid one month salary as a incentive valuation of 34 crores to the employees because of their excellent devotion and performance during the pandemic period. Now that also went into the expenditure in spite of that. Now the margins have improved because of, number one, majority of PPA has to be on the low on the improvement of the process, improvement of the green chemistry, atom efficiency, whereby our cost of manufacture, the material cost has come down substantially. That's where the majority of it. Yes, the price of the product, the face price may have in some products slightly increased.
But to compensate that, some of the very basic materials like solvents, some of the alkalis, some of the reagents have gone up substantially in the last two quarters. It's not the Chinese impact. It's a general impact. It has happened. So that much have compensated if any benefit we received in the in the increase in some of the marginal prices for our API.
Okay. So having seen a kind of a SaaS improvement in the overall margin beyond 40% for this current financial year despite of this COVID situation, so going ahead, we would be seeing the new projects or newer plans would be commissioning getting commission, and the another cost would also be there and all that. So
Hello, sir. Can you hear us?
Hello?
Sudhir Bhatra, we are not able to hear you. Are you there? Sudhir Bhatra, are not able to hear you. Sir, we don't have the participant anymore. Ladies and gentlemen, that will be the last question for today.
I will now hand the conference over to Mr. M. Satish Chaudhry for closing comments.
Thank you all for joining us today for the earnings call of Devis Laboratories Limited. In case you need any further clarifications, please reach out to our investor relations. Thank you.
Thank you very much. On behalf of DBS Laboratories Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.