Ladies and gentlemen, good day, and welcome to Earnings Conference Call of Divi's Laboratories Limited Q3 for Financial Year 2021. 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 then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. M. Satish Choudhury. Thank you, and over to you, sir.
Good afternoon to all of you. I am Satish Choudhury, Company Secretary and Chief Investor Relations Officer of Divi's Laboratories Limited. I welcome you all to the earnings call of the company for the quarter ended 31st December 2020. From Divi's Labs, we have with us today Dr. Murali K. Divi, Managing Director, Ms. Nilima Motaparti, Whole-Time Director, Commercial, Mr. L. Kishore Babu, Chief Financial Officer, and Mr. Venkatesa Perumallu, 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 Divi's 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. Divi's Labs 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 Dr. Murali Divi, 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 Divi's 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-19, 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. INR 2,500 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 pass track custom synthesis 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 validations 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 cost, and high purity of the product. We have started 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 product efficiency and lowering the cost. The end goal is to minimize wastage, maximize profits, and move towards greener chemistry. I ask Nilima to brief on operations. Thank you.
Hello, welcome everyone to Divi's Labs earnings call to discuss the unaudited results for the third quarter ended 31st December 2020. 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 Divi's Q3 performance. Firstly, I would like to summarize the current COVID-19 situation in India and impact of it from a global perspective. One year of pandemic, 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. 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 have 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 logistics management, leading to delivery delays, congestion, and higher freight rates across the globe. While the impact of these has been minimal on our business, we only hope that with the ongoing COVID-19 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 perseverance 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 Q3 FY 2021 financials. On operations, I'm happy to state that we have achieved a consolidated total income of INR 1,721 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 642 crores, a growth of 32%.
We earned a profit after tax of INR 471 crores during the quarter, reflecting a growth of 31% year-on-year. Staff costs for the quarter includes an incentive of INR 34 crores paid to the employees in appreciation of their relentless work during the COVID-19 pandemic. We have capitalized assets of INR 1,011 crores for the nine-month period, of which capitalization this quarter has been INR 181 crores. As of the end of the current period, we have cash on book INR 2,064 crores, receivables INR 1,499 crores, and inventories INR 915 crores. Rupee has been quite volatile for the last nine months. We have a Forex gain of INR 2.5 crores for the quarter and a Forex loss of INR 8 crores for the 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 60% and 40% of the revenue respectively. Constant currency growth for the quarter has been 11% and 22% for nine months period. Our nutraceuticals business for the quarter amounted to INR 145 crores and INR 439 crores for the nine months period. Thank you.
Thank you, madam. With this, we would request the moderator to open the line for Q&A.
Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question, you may press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Anyone who wishes to ask a question, you may press star and one. First question is from the line of Damayanti Kerai 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 contrast media API, where you just mentioned some projects are already validated? How soon you can start commercialization of some of these products?
Good afternoon. We are already in contrast media, iopamidol. We have been producing for the last several years. With the opportunities in the other contrast medias and getting into the scale, the possibility is that we could be thousands of tons of this material. 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. The contrast media, the majority of the cost is iodine. In a small scale manufacture or a medium scale manufacture, it's difficult to recover the iodine from the organic to the inorganic stage. We were able to do that with an achieving engineering to commercially recover all our iodine that is going into the waste streams. So that our cost will be minimal. We achieved that in the iopamidol.
The same thing now we have started implementing in the other contrast media compounds, and we are confident that 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. There are very few players in the contrast media in the world.
Thank you for your response, sir. That's helpful. My second question is on progress in Kakinada. A few weeks back, we heard about some local disturbances. How has been progress there?
I think you are aware that we have received all the required statutory approvals for starting Kakinada Unit III. During our initial start-up of work, there has been some concerns raised by the hatcheries association. 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 State Pollution Control Board is in discussion with them to address their concerns. We believe this will be resolved very shortly, and we'll continue our work.
Okay. Sir, 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.
Okay.
What I would like to here say is that we are not losing any business because of the delay, what happened in Kakinada. As you know, the Unit I and Unit II are on 500 acres each, and we still have plenty of land and clearances to grow. We're also keeping all this in mind. We have also built additional production blocks also to cater to the requirements of our new businesses. We are not losing business. At the same time, as soon as the company is clear 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 questions per participant. If time permits, please come back in the question queue for a follow-up question. The next question is from the line of Cyndrella Carvalho from Centrum Broking Limited. Please go ahead.
Thanks for the opportunity and congratulations on good set of numbers. Sir, if you could help us understand the gross margin improvement in a little granular level would be very helpful.
Thank you for your comment. I think it's not the volume margin, it is the quality of the margin 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 integrations of our raw generic compounds and continuous process improvements. This is a combination of all these.
At every opportunity, though, we make sure that what improvements can be done in making more margins and minimizing waste and achieving more of 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. I think going forward, we are quite confident that we should be able to maintain good margins.
That's very helpful, sir, very elaborative. Sir, just coming back to our recent CapEx, how should we look at the current utilization of the recent brownfields that we have already commercialized to an extent? What has been approximate entire contribution this quarter?
The investment, I think if we look back, we started investing heavily from 2019. If you take 2018, 2019, our sales was about INR 5,000 crores and our PBT was INR 1,800 crores. Our PAT was about INR 1,300 crores. We started investing from then. In 2019, we invested about INR 876 crores. In the last nine months, we capitalized about INR 1,000 crores, and we'll be completing the remaining INR 500 crores-INR 600 crores soon. Some of them are for debottlenecking, some of them are for assurance of supply, some are for introducing new technologies, some are for making our own intermediates. Not only we are free from supply threat from China, it also resulted in, as I said on the normal cost saving. We already achieved on the good margins. You have seen this in nine quarters. Three quarters, nine months, we have already achieved INR 5,100 crores.
What otherwise it was a full year of income, INR 1,975 crores of PBT and INR 1,467 crores of PAT. This is for the nine months, you can extrapolate to see the growth. This is just the beginning of the growth, and I think in the coming quarter, the last quarter of this year, as well as 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 where starting from naproxen and dextromethorphan, gabapentin, all these compounds where we became leaders in the market. We have selected the next 10 generic products, just became generic or becoming generic, and that is where we completed qualification of some of them and are waiting for approvals to take the market.
That's very helpful, sir. Wish you all the best. I have more questions. I'll come back. Thank you.
Thank you.
Thank you. The next question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.
Yeah. Thanks for the opportunity, sir. Hello?
Yes.
Yeah. Thanks for the opportunity. Sir, I joined the call a little late, apologies. I just wanted to understand the sustainability of the gross margins and the EBITDA margins, as these are the new normal, like 41%+ and at the EBITDA level. In a couple of quarters, we have seen that given the volume and the margin tailwinds. Are these sustainable over one, two, three years timeframe, given there is a significant amount of investment, so the volume is visible? 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, and the company is technology-driven company. 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 design a 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 teething troubles are removed during the production process. This is where our experts, we have people experts for the last 20 years. This is where retaining the employees is important. We are able to retain more than 2,000 employees for the last 10, 15, 20 years. As a result, we see always everybody striving towards how to bring down the cost. That's one target always.
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. I think we have good days ahead of us.
Okay. Thank you for that answer, sir. Very helpful. Secondly, sir, on the CapEx journey we started one and a half year back of INR 18 billion. How much of that has been achieved? We also had announced the new round of CapEx, where we are in that as well, if there is any 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 end. That's 2019 and 2020 until now or till March. The investments made, the products, either it's for debottlenecking or it is for assurance of supply, backward integration, they're all complete, and some of them have been qualified already, yielding in capacity and improved sales. Several more are yet to happen because we are waiting for the clearances of the agencies, whether it is U.S. FDA or Europe, because some of them are involved with changes in the process, which we need a clearance. With the scale up, clearance is not an issue, but if you want a higher yield, if you want some conditions to be changed, the clearance needs to come, which will come very soon.
Now talking about the INR 400 crores of 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've entered into the production out of the INR 400 crores of investment and few other streams 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. Lastly, custom versus generic, sir, what has been the percentage for the quarter and likely to be for next year?
Can you repeat your question again, please?
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 60%-40%, the generics to custom synthesis.
60/40 you said. It varies between always I think I say 40%, 60%, it could be generic, it could be custom synthesis. I think in this particular quarter, the generic seems to have taken a lead compared to the custom synthesis. You may want to argue that maybe there is more custom synthesis, that's why there is more margin, but I'm sorry to say that it's reverse. We had a higher generic and the profit margins are also higher. I don't think we can link it that way really.
Understood. What was the percentage? Since we give it every quarter, if you can share that.
I think as Nilima said, it is 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. Dr. Divi, based on the carotenoids business, I think it's been 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 company has in the overall market, is the mix similar to generics and carotenoids where 68% is from Europe and U.S.?
The carotenoid business, more than 95% is Europe and U.S. We have very little business in India. The market for nutraceuticals in these carotenoids is about INR 1 billion, which is still growing. We have been qualified by majority of the customers. I'm talking about in the feed business of the salmon and other feed industry. In the nutraceuticals for the human, the business got just started. 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.
Just to add on that, if you can give some color on whether the margins in nutraceuticals would be almost like generics business.
The margins are, I think it is just about the same. Because the business is distributed into three companies still, the DSM, the BASF and Divi's. That is where the majority of the business is. Looking at the competition today, if any one of them drops that, the prices are going to be quite high. 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 beadlets, then it is sent for consumption somewhere. Here, everything is happening at Unit II under one roof. The API is produced, the beadlets are produced and exported. This gives an advantage to contain the cost.
This is very helpful. Just the second question was on the contrast 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? If you could also give some color on competitive landscape there.
The contrast media is about anywhere between $4 billion-$6 billion business because nowadays with the affordability. Every day you are seeing people in queues having the contrast being done for one thing or the other. Even the common public are able to go, and they're able to afford. The consumption of the contrast medium has increased tremendously in the last two years or three years. It's a question of, till now, there are only very few companies survived in this industry because number one, iodine dependency, number two, how somebody can recover the iodine and reuse, otherwise it's not viable. This is where we have broken that ice, 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, we request you to come back in the question queue for a follow-up question. Thank you. The next question is from the line of Sayantan from PineBridge Investments. Please go ahead.
Good afternoon, sir. Congratulations on the great set of results. If you could just elaborate on your plans on green chemistry and if you can just give us some ideas to where we are and what are our goals 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 give some quantitative data on this, it'll be helpful.
Excuse me, I missed the first sentence. Can you please repeat?
Yes, sir. I heard your comment on green chemistry, and I understand we are very efficient. I just wanted some further details in terms of what we are doing and in terms of green chemistry and what are our goals in this area.
Okay.
what is the potential- we expect to see?
Green chemistry involves conserving materials that can neither be created nor destroyed because they are limited. Once we say that, now we keep consuming, the regeneration is difficult. That's why the prices keep going up. What we are doing here is that developing atom efficient technologies. That means if there is a mass, if there is a 10 kg mass, we want to 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 you 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.
With these new technologies, it is possible that we should be able to work on atom chemistry, and be highly efficient, and this is possible only when you have critical mass. If you just are producing 500 tons of naproxen or 50 - 30 tons of dextromethorphan, 200 tons of gabapentin, it's not possible. With the scale we operate, it is possible to make investments of hundreds of INR crores to make sure that our yields are the highest, our recoveries are the highest, our wastes 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 Srinivasan 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. That's about 51% of the total business has seen good growth at the first two quarters, Dr. Divi, sir, but we started seeing it slow down. 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. 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. Just your thoughts on the generic API, please.
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? 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. We are in products where we have been the leaders prior to the COVID. Since then, we expanded. Since then, we have made our processes more efficient, cost-efficient, higher quality, and with all regulatory. 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 of the shortage.
We don't foresee, 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 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 approvals 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. 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 wisely, and this is where we are more efficient, and we are continuously investing into the process development to make sure our pencils are sharp.
Got it, sir. Very helpful. My second question is, in your opening remarks, you talked about the next 10 molecules that you are targeting. The concern probably is that maybe the mature molecules are now slowing down. Like you disclosed top five is whatever, 45% of revenues in your annual report. Is there comfort that the next 10 molecules can slowly replace or offset some of the 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 continue to use ibuprofen. We have come with naproxen, and we have increased our capacities like 5,000 tons, ibuprofen demand did not go down. It's still 15,000, 20,000 tons and still growing. I think when a new product comes, it will have some advantage of either some therapeutic additional advantage, the original, traditional generic API, which was used for the last 20 years, is not going to disappear. They're all still growing because these are found to be very safe. They are still growing. We have seen that all over generic. 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 incubator, they have to go to the incubator. People just needing oxygen support, they need that. In generic again, what we are looking at is that it is specialized product with volumes which are similar to our generic compounds. I think this is where we have Mr. Kiran Divi, 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 submissions, and we should see their growth in the coming years, along with our generic products growth.
Got it. Thank you, and all the best, sir.
Thank you. The next question is from the line of Arman Khan from Macquarie. Please go ahead.
Hi. Good afternoon, everyone. Sir, congrats on the strong performance. Firstly, broadly, how has pricing for your generic API portfolio moved in the last one year, and what are your expectations going forward?
Pardon?
Sir, my question is, broadly, how has pricing for our generic API portfolio moved in the last one year, and what are your expectations going forward?
I think it's a two-way thing that's happening. 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 raw material at one place, some sudden requirement elsewhere, improper planning. That fluctuation may be there. 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 five tons at a lower price. That's not our business model. Our model has been that we are a dependent supplier and assured to our customers. 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. 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. For the custom synthesis business, do you see this as a very long-term risk? Is there any need to tweak our business model 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 25 years ago, most of the Big Pharma had more than three to five manufacturing sites for API in different countries. Today, 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 bags. 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 API 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 than to go to a preferred supplier like Divi's, having a relationship of 20, 25 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 multiple small volume plants at both sites. We are prepared if there are more opportunities. If we need to take 10 molecules of a few hundred kilos, we are ready to do that. We also have such designed manufacturing blocks right now.
That helps, sir. Thank you and all the best.
Thank you.
Thank you. The next question is on the line of Chirag from DSP Investment Managers. Please go ahead.
Yes, sir. Thank you for the opportunity. Sir, there is a INR 167 crore increase in inventory in the quarter. Is this related to the custom synthesis Fast Track product?
The increase in inventory, INR 167 crores, every third quarter, if you go back historically, every Big Pharma, every generic house in U.S., Europe, everywhere, they want to maintain lean, and they don't want any huge stocks on December 31st. It is a generalized thing. Maybe that could be the impact. I think, let me see.
Also some of the capitalization that we have done, the two SEZs that have come into operations. I think that's a reflection of the inventories from there that you're seeing the rise.
What Nilima is saying is that we got two SEZs, DCA SEZ, DCV SEZ. They started activities, they started qualifications, they started just commercial production. All those need lot of raw materials, build-up of inventories, and even API produced in one case, and in two, three cases, and stocked because until we get the clearance from the regulatory agencies, minor or major, I think we need to hold. Some of them must have reflected into that stock. Yes. What Nilima said is right in addition to what I generalized is that in Q3 year-over-year.
Sir, will this lead to higher sales in Q4 because this material will be sold?
As I mentioned that one is Q4, I think we don't want all of you to look at us on quarter- on- quarter, please. Please look at us on the investments we made, and I mentioned that you will see some increase in Q4, but I think you should wait for the bigger cake, which is going to be more attractive in the beginning of the year or end of the year, during next year and follow on. I think that's where I think the cake is.
Understood, sir. Fair point, sir. The second question was on CapEx for FY 2022 and FY 2023, sir. Any plans from that?
I think we have mentioned that last time that the next CapEx is to the Kakinada, INR 600 crores, and whenever we start Krishnagiri as a backup for Kakinada. I think pretty much we are not seeing much, except there are few buildings we built, production buildings, in 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. We may, the CEO may make a call and say, "Well, let's go and invest in modernizing these blocks." I think it's a call that may happen. We are not planning.
Okay, sir. Thank you so much.
Thank you. The next question is from the line of Tushar Manudhane 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 going to be a high volume products or low volume products?
I think I already covered it. I mentioned that these are high volume products because you know that the contrast media is given anywhere from 20 g-80 g to each of the individuals to get a good picture of how his inside bones to any everything else is. This is high dose and high volume business, and it's growing also very much in the developing, underdeveloped countries, along with the developed countries.
Sir, secondly, we have been for many years into the iodine-based APIs. Any thoughts on the gadolinium-based APIs in this subject?
We have looked at the gadolinium compounds in the past when the innovator was discussing. It was quite a long time ago. I'm talking about 15 years ago. 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. Our marketing vice president and CEO, they need to look at to revisit. Right now, it is not in my radar.
Just lastly, with respect to this contrast media and the new molecules in the API which you alluded to, these would require fresh investments, right? When it reaches commercialization.
The investment is already planned and allocated. The projects are under progress. Some validations have been completed and for some products, they have been even submitted. 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 custom 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, sir?
Since we started this custom synthesis, I have been mentioning that we cannot talk about the products, the ratios, how many in phase I, phase II, phase III. We have not been doing that, and I think we would like to be that way so that the commitments we've made with the Big Pharma by signing the confidentiality agreements can be honored better. We don't disclose that, how many projects in 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, I'm 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. 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 have much tighter impurity profiles. 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 want to 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. They still would like to. The same thing in several others.
You have seen recently the impurities of these, the nitrosamines, where the whole world went into upside down in the sartan, in the anti-ulcer compounds. The generic industry could not then to enter with these impurities and now several lawsuits and whatnot. 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 you have a manufacturing scale of the world scale, I think you'll have bright future. If you are happy with the original process, 1995, what the Big Pharma gave you, it's like enjoying our grandparents', whatever they gave us, then I think it's not possible. We cannot survive. We have been always improving, and we are confident that we will have good opportunities in this custom synthesis 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.
Thanks for the opportunity, sir. Pardon me that I possibly it could be repetitive in the question that I'll be asking because I joined bit lately. Just wanted to have a sense on the margin and the gross margin scenario for the quarter as well as for the future period. Whether the gross margin expansion is led by improved product mix or it is a cost aspect what has supported the gross margin expansion or it is a realization. Can you give some sense on this front, sir?
If you look at the expenditure side. We have paid one month salaries as a incentivization of INR 34 crores to the employees because of their excellent devotion and performance during the pandemic period. That also went into the expenditure in spite of that. The margins have improved because of, number one, majority of PTA has to be 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 sales price, may have in some products slightly increased.
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. That much have compensated, if any benefit we received in the increase in some of the marginal prices for our API.
Okay, Sir, having seen a kind of a sharp improvement in the overall margin beyond 40% for this current financial year despite of this COVID situation. Going ahead, we would be seeing newer projects or newer plants would be getting commissioned and their cost would also be there and all that.
Hello, sir, can you hear us?
Hello.
Surya Patra, we are not able to hear you. Are you there? Surya Patra, we are not able to hear you. We don't have Patra anymore. Ladies and gentlemen, that will be the last question for today. I will now hand the conference over to Mr. Satish Choudhury for closing comments.
Thank you all for joining us today for the earnings call of Divi's Laboratories Limited. In case you need any further clarification, please reach out to our investor relations. Thank you.
Thank you very much. On behalf of Divi's Laboratories Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.