Ladies and gentlemen, good day, and welcome to the earnings conference call of Divi's Laboratories for the quarter two of financial year 2021. As a reminder, all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone 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 you all. I am M. Satish Choudhury, Company Secretary and Chief Investor Relation Officer of Divi's Laboratories Limited. I welcome you all to the earnings call for the quarter ended 30th September 2020. From Divi's Lab, 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 the 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 available on the website of the company, divislabs.com.
Please also note that the audio of the conference call is the copyright material of Divi's Laboratories Limited and cannot be copied, reproduced, 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. These 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 Lab or its officials does not undertake any obligation to publicly update any forward-looking statement, whether as a result of future events or otherwise. Now, I hand over the conference to Dr. Murali K. 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. Hope you are all doing well. First, let me update you on global scenario on pharma and COVID-19 pandemic. COVID-19 has heavily impacted several industries, small, medium, and large. Pharma industry has actually less impacted because of need for life-saving medicines. This also created responsibility for discovering and manufacturing new APIs, antivirals, and vaccines. The developed APIs, hydroxychloroquine, favipiravir, and remdesivir, have added only marginal medical benefit and not become life-saving drugs, or none of them can be used as prophylactic drug. A new drug is required which can prevent the infection, whereby it can be used prophylactically in doubt of contacting the virus. The new drug is also expected to reduce the viral load quickly so that patients will not have severity of infection.
There are few drugs in promising, which may give hope to the whole world. How soon vaccine will be launched is still a big question mark. I'll cover little CSR activities. As a concept under CSR, Divi's Lab is continuing helping 98 villages around our factories. Several programs have been taken up by the company are sanitization in view of COVID support activities, safe drinking water, promoting education, village development, livelihood enhancement, empowering women, environmental sustainability, Swachh Bharat, and GIG. On CapEx programs, our project teams, though delayed due to migrant workers in Q1, now they are functioning fully and have completed some of the important projects. INR 614 crore has been capitalized during the quarter. Several debottlenecking projects were completed. The remaining projects will be completed before end of the financial year.
All the backward integration projects were completed. This not only gives us assurance of supply, but also brings us savings by reducing cost of materials. Few new blocks are planned for new major Custom Synthesis opportunities are under construction and erection of equipment. This investment of capacities to the tune of INR 400 crores. This new capacity is in addition to the INR 1,800 crore capacity. The majority of the utility expansion completed. INR 500 crores of CWIP projects are expected to be completed before the end of the financial year. I ask Nilima to brief on operations. Thank you.
Hello, and welcome everyone to Divi's Labs' earnings call to discuss the unaudited results for the second quarter ended 30th September 2020. I hope that each one of you, along with your friends, family, and colleagues are safe considering the continued existence of COVID-19 pandemic and the sudden incessant rains witnessed recently in several parts of the country. Although COVID-19 crisis continues, we have improved in terms of adapting to it in our everyday lives and businesses during this quarter when compared to Q1. At Divi's, we are closely monitoring the constantly changing and evolving situations relating to this pandemic as we continue to strive and sustain our operations at a normal pace. Challenges like fluctuation in cost and availability of raw materials and supply chain issues have reduced compared to the last quarter, and we are optimistic in ensuring the uninterrupted supply of our APIs.
Our response to restraining COVID-19 at workplace stays constant and consistent, with our main agenda being the safety and well-being of our employees. All protocols like thermal scanning and sanitization, social distancing, and safe transport facilities continue to be implemented and shall remain so until further guidelines from WHO, CDC, and local governments are given. The company has put in place several measures to keep up the business continuity and also sustaining steady supply chain network and servicing to our customers. Moving on to our Q2 FY 2021 financial performance. As you all are aware, we are implementing a large CapEx program during the current half year. We have capitalized assets of INR 830 crores. Of this, the new SEZ account to INR 524 crores and INR 132 crores is for wastewater treatment facility and utility expansion at EOU.
We have also capitalized assets at other units for augmenting capacities as well as utility infrastructure. We have capital work in progress of INR 499 crores as of 30th September. On operations, I'm happy to state that we have achieved a consolidated sales revenue of INR 1,749 crores during the quarter, reflecting a growth of 21% over the corresponding quarter of the previous year. Profit before tax for the quarter amounted to INR 693 crores, a growth of 42%. We earned a profit after tax of INR 520 crores during the quarter, reflecting a growth of 46% year-on-year. Exports accounted to 87%. We continue to have normal business distribution across regions, and Europe and U.S. accounted for 71% of our revenue. Product mix for generics to Custom Synthesis is 60% and 40% of the revenue, respectively. Constant currency growth for the quarter has been 18%.
Our nutraceutical business amounted to INR 167 crores for the quarter and INR 294 crores for the half year. Thank you.
Thank you, ma'am. With this, we'd like to request the moderator to open the line for Q&A.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. A reminder to the participants, please limit your questions to two per participant. Should you have any follow-up, request you to rejoin the queue, please. The first question is from the line of Vishal Biraia from Aviva Insurance. Please go ahead.
Hello. Thank you for the opportunity. What led to the urgent need for expansion of the CS capacity, the Custom Synthesis capacity? That is the first question.
I'm sorry. Can you please repeat?
The expansion of Custom Synthesis capacity. What led to this decision? How soon do you plan to complete it? Is it because of a movement from China to India or some other factors? Could you elaborate a bit more on this, please? Thank you.
Historically, I think you all have good experience at Divi's that we do not invest just because we have funds. We do not expand because we just have funds. When we foresee an opportunity, we start investing. This time, in the last two quarters, more in the last one quarter, we have seen from the very big pharma of international, Europe and the U.S., we have received some very fast track projects with a lot of incentivization, and these projects will have very high returns, and we need to finish them on a work put basis. These projects we have been doing, this is the one we are planning for INR 400 crores. We have to complete in the next six to nine months.
Okay. The next question is on the contribution of COVID portfolio to revenue and EBITDA.
Can you please repeat the question again?
Sorry. The contribution of the COVID portfolio, COVID-related drugs, to revenue and to EBITDA, please?
In the second quarter, what we are reviewing right now, there is almost zero. I think, I don't know, whether few lakhs, whether it is involved. Otherwise, we had no income from the COVID-19.
Okay. Thank you very much. I'll come back to you. Thank you.
Thank you. The next question is from the line of Prakash from Axis Capital. Please go ahead.
Thanks for the opportunity and congratulations on good numbers. Sir, if you could help us understand the gross margin expansion, both YoY and QoQ. Sales mix, if I see Custom Synthesis to generics, more or less similar. Not much change there. In terms of product mix, what has changed? Given the supply disruption, pricing is healthier, if there is some commentary there. Thank you.
I think we have been saying always that it's very difficult to go by quarter-on-quarter between Custom Synthesis and generic. With the investment of the plus the additional INR 400 crore, as we are completing them, we have already completed the de-bottlenecking project, as I mentioned a few minutes ago, and we have also completed some of the expansion plans. What we are looking at now is the After validation, there's a gestation period of anywhere from six months to one and a half year for the regulatory authorities to clear the product and also the customers validating the fresh product at their facility. At this gap end, you will see the incremental quantity in the quarter.
Okay. I just wanted to understand what would be the sustainable levels, actually. I mean, I understand quarterly fluctuations could be there. With this de-bottlenecking and all, say, 64%-65% is sustainable, or we should model in 62%, 63%?
60% to 63% of?
The gross margin, sir.
People concentrate on how to save tax money, and people concentrate on other things. I think the majority of the expenditure is on the raw material. The majority is on overhead plant expansion. I think if you look at the several balance sheets, we have been able to hold on to around 55%-60% quarter on quarter. That's why we are able to retain good profit. I think going forward, yes, we should be able to do 60%. I think that makes it not better. You commented that backward integration and other projects being complete. Definitely, yes, I mentioned that. It not only gave us assurance of supply, but also definitely with the new technologies we introduced with maximum and high productivity, our costs have come down. Raw material costs have come down.
I think it's a combination of all these what you are seeing better numbers. Don't go by quarter on quarter, I think we can definitely continue what we are doing.
Okay, understood. My second question is on the CapEx. INR 4 billion exclusively for Custom Synthesis, but for the INR 18 billion that we announced some 18 months back. Of that INR 18 billion, I understand INR 3 billion is for de-bottlenecking, and INR 6 billion for each of these unit one and unit two. I wanted to understand on that INR 12 billion, what portion or what percentage is attributed towards Custom Synthesis capacity?
I think it is, again, the blocks are not meant just for Custom Synthesis or for generics. The buildings are all multipurpose. They can produce either a generic product or a Custom Synthesis product depending upon the need in the campaign. Some buildings are, yes, dedicated to a generic product or dedicated to a Custom Synthesis product depending upon its demand. On overall, whatever we have completed, we are able to utilize between the DCV-SEZ and DC-SEZ. In the backward integration, we are able to use them fully. In the generic, we are able to qualify and start producing and some products we have been able to export, it was waiting for the total regulatory authorities clearance. Some of them we are waiting, and in Custom Synthesis, de-bottlenecking projects, they are yielding some of the sales already.
Okay, sir. Thank you. I'll join back.
Thank you. A reminder to the participants, please limit your questions to two per participant. The next question is from the line of Bharat Shah from ASK Investment Managers. Please go ahead.
Yeah. I wanted to know, there was this case against in SEBI, which was going on. It has now been closed. What is the status of the company's stance on this?
Can you please repeat?
There was a case against the company officials in SEBI, recently that has been closed now. I want to know what is the status in terms of the stance of the company about those individuals.
The people who are involved have settled the issue with SEBI. Company has always been complying to the code of conduct and business ethics, and shall ensure compliance as well.
I didn't understand. Hello?
Hello.
Yes, I have not understood what exactly you're saying.
I think I mentioned that [inaudible] and the others who have settled the issue with SEBI, company has always been compliant and business ethics and shall ensure compliance well.
Well, Dr. Divi, can you speak without speaker phone because your voice is not clear at all.
I think everybody is hearing my voice clearly. I don't know why you are unable to hear.
No, I'm not talking about company being compliant or not. I am asking, there was this case. Now I believe there has been a compromise arrived at, and there has been a compensation paid by the individuals concerned. What is company planning to do about it is what I'm asking you. If you can formally clarify, that would be helpful.
I think company has nothing to say.
Thank you. The next question is from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.
Hi. Good afternoon. Thank you for taking my question. My first one is on the generic API segment. It has grown faster than the 21% that was called out based on the numbers that you shared on the call. Just want to know what are some of the building blocks, how much is price? Is it largely volume-led? Have there been new products that have been introduced? If you can help us give some color.
We are fortunate that all the de-bottlenecking, and capacity expansion projects we have done. In naproxen, for example, 5,000 tons, gabapentin, 2,700 tons, valacyclovir, levothyroxine, levodopa, pregabalin, metoclopramide. All these products we have de-bottlenecked capacity substantially, and we are able to start selling the product without compromising on price, I think this is what you are seeing the increase in sales. Going forward, yes, we did and some of the expansions which we have done are in totally new blocks that needed to get some regulatory clearances. Because when we upgrade at new blocks, we always technologies, new ways of working, so that the productivity goes up and also the material costs come down, minimizing the waste. All these will sometimes be viewed as a change. two, three smaller changes become a medium change which we are waiting for customers' clearance.
As and when they come, you will also see some more increase in sales in the generic products.
Got it. Thank you, sir. My second question is on the Custom Synthesis. Could you actually talk us a little bit about the qualitatively in terms of the number of projects that we have actually started doing? Are they linked in some form or shape to COVID-19, or this is in general the non-COVID-19 portfolio as well? I thought you said phase III. I think I couldn't pick up that comment clearly as well. If you could share some comments around the Custom Synthesis business, and also linking to the point about the INR 400 crore additional you talked about war footing. Just trying to piece together the entire Custom Synthesis segment, sir.
We have never been giving details on how many in phase II, how many in phase III, and this project because the existence of the confidentiality agreement company is highly confidential, number one. That's why we are not in a position to explain how many projects with which companies and what we do. Therapeutic segments I am willing to talk. Yes, some of these expansions are for some of the discovery of COVID drugs, some of these are for some other therapeutic segments. It's a combination of See, the chemistry does not know whether it is for a COVID drug or a cancer drug or a blood pressure drug or something else. What we know is 24 name organic synthesis reactions. A combination of few of the reactions a COVID drug, anti-COVID drug, or can produce anti-cancer or anti-ulcer or anti-blood pressure drug.
Yes, we are involved in a combination of these therapeutic segments in the Custom Synthesis. That's why we have received some very fast-track projects and with a lot of incentivization, and we had to hurriedly do them. This is where this additional new INR 400 crores is going.
Sir, last, just follow up.
Mr. Srinivasan. Sir, for any follow-up, I request you to rejoin the queue, please. Thank you. The next question is from the line of Girish Bakhru from Bank of America. Please go ahead.
Yeah, hi. Thanks for taking my question. Sir, great set of numbers. Last quarter, you mentioned that there is a possibility of new units starting production and same products and same technologies you could have launched from those facilities without inspection. Can you update on that if that has happened? Similarly, any color on when inspection can happen of these two units?
Yes. When I mentioned in the last con call, the unit-1 and unit-2 are situated in 500 acres each sites. These are two sites with 500 acres each, where at unit-2, we call it new DPAPZ as a unit in about 60 acres of land. This unit is acres of site is already cleared by USFDA. The new block, new unit we have built. Usually they do not require if I am using the same technology and if it's for the same product. I can start exporting immediately by keeping some batches in stability. If I am making a new product or utilizing totally a new technology in this block, then of course, I need to wait for the clearance of the whether it is U.S. or others.
What I would say is that at unit one also where it is DPAPZ where we are investing INR 600+ crores . Again, the same. The total facility is USFDA inspected. The new block we construct in this DPAPZ where some of it is backward integration, some of it is for the new product. We should be able to utilize part production and where we need clearances from U.S., we have to wait.
Thank you. The second question was on the mix. I realize this new investment in Custom Synthesis is meaningful from a near-term opportunity. Can you give possibly some color on how generic versus Custom Synthesis mix will change over two years? If that's possible, that will be very helpful.
The ratio always we would like to maintain 50/50. We would like to maintain 50%-50% each. However, the customers in generic and the Custom Synthesis projects decide whether it should be 60/40. Maybe for a few years, Custom Synthesis will take a lead, and again, generic may catch up.
Thank you.
Thank you. The next question is from the line of Surya Patra from PhillipCapital. Please go ahead.
Yeah. Congratulations on the great set of numbers. Sir, regards the cumulative CapEx of INR 1,800 crore that we had done. Given the kind of enhanced productivity or improved profitability, what we are seeing since last couple of quarters, is it fair to believe the asset turn of this newly added CapEx will be higher than the asset turn what our old assets are currently generating? See, the older assets seem to be generating a revenue asset turn of something like 1.5. For new fully added CapEx, is it fair to believe slightly better than the historical trend?
The CapEx we discussed earlier, INR 300 crore between two sites. Some of it was the bottlenecking, which we completed. Some of it was backward integration, upgrading utilities, QC infrastructure, and modern wastewater treatment plants at both sites. All these are looking at five years, 10 years, 15 years down the road, preparing for new regulations that would come, in addition to increasing capacity. The INR 400 crore, what we are talking about is purely on Custom Synthesis, with contracts being, in other words, the assurance and agreement being in place. It's not that we are looking at projects anticipating business building, which used to be the case. Now the business is in place, and we have to complete these INR 400 crore projects quickly for the business to happen.
Okay. Sir, just wanted to have a sense on the CapEx, on the same question. Sir, having seen a kind of a strong phase of CapEx over current year and last year, which is again continuing. After this, is it fair to believe that the CapEx momentum will see some kind of a stagnation there and before we identify a new site? Because the Kakinada is also not seeing any progress from the administrative issue side. Is it fair to believe that we might not see any major CapEx going ahead in the near future and possibly a couple of years down the line, once we see an optimal utilization level for the existing one? Till that time, it will be a kind of a moderated CapEx phase for company.
Based on the opportunities we have, the existing site probably will not require major CapEx. We have been planning our unit near Kakinada and unit-4 near Nellore. These two units we have been planning to complete for a long time. The unit-3 near Kakinada, the government has almost cleared everything, and we hope to start somewhere in December, January, the construction activity. The CapEx could be there to the tune of around INR 300 crore on that.
Oh, okay. About [inaudible], sir?
Sir Patra? Sir, sorry to interrupt, but for any follow-up, request you to rejoin the queue, please. The next question is from the line of Damayanti Kerai from HSBC. Please go ahead.
Hello. Thank you for the opportunity. Sir, clarification on the CapEx for Custom Synthesis business. Did you mention you expect to complete that project in another six to nine months, and after that you can start executing orders which you have received? Hello?
Can you please repeat the question?
Sure, sir. Sir, I was looking to clarify. Did you mention the new CapEx for Custom Synthesis business that you're aiming to complete in next six to nine months, and then after completion of project, you can immediately execute the projects which you have received from customers, right? That's what you mentioned earlier.
Yes, that's what I meant, that these projects incentivization that we have to complete on fast track. Yes. On completion, they would immediately go into production. Yes.
Okay. Thank you for that. Sir, on the Kakinada plant, I missed your comment. You mentioned you got the clearance from government, right? Then you can start work there.
Yes. We were waiting for the final clearances every year. Now we have and we hope to start in December or January, the Kakinada plant construction activities.
Didn't hear that number.
No, I said we would start in December or January activity of Kakinada plant.
Sir, any CapEx plan for that?
The CapEx is about INR 600 crores.
Sir, thank you for your answers.
Thank you. The next question is from the line of Alankar Garude from Macquarie. Please go ahead.
Yes. Thank you for the opportunity, and congrats on the strong performance. Sir, my first question is: In the last few years, we have seen the U.S. contribution to overall sales coming down for us, while that from Europe has been increasing. Now, this is even applicable in the last 2.5 years when the direct impact of the import alert shouldn't have been much. Any particular reason, sir, which you would like to highlight for this, and how should we look at the U.S. contribution going ahead?
It's very difficult to say that what we ship to U.S. or what we ship to Europe or what we sell in India or what we sell into the Far East, because the big pharmas have relocated several of their manufacturing facilities or outsourcing the dosage forms to either European companies or at their tax haven in Ireland or Singapore or elsewhere. That is the reason our reporting is exactly on to where we are shipping the product than whether the company is headed is in U.S. or Europe or where it is. The focus, I think changed. I think geographically it is different because several of the big pharmas have closed their plants and moved them to either Europe or elsewhere. That's why you are seeing the reporting that way.
I think what we need even in India, for example, some of the contract manufacturing of formulations is happening by the big pharma from U.S. and Europe. We have to ship on behalf of, for the big pharma to some company in India whereby they export the dosage form. I think our U.S. business did not go down. In fact, I think it's in good shape.
That's helpful, sir. Sir, my second question is: If you look at the top five customers for us, those account for about 35%, 36%. Yes, that number has been coming down over the past few years. Generally, in terms of client concentration, it's a bit higher than most of our global peers. I just wanted to understand whether there are any conscious efforts to add more new clients and improve mining among some of these relatively newer clients.
There is no plan like that as such. Probably it is happening because we have been growing at a faster rate and adding more customers and more products. When you add more products, you will have more customers. That's what is happening. When you increase the capacity, you always will have more customers. There's no plan that we want to add more customers, but definitely we want to add more products and more capacity.
Thank you, sir, and all the best.
Thank you.
Thank you. The next question is from the line of Cyndrella Carvalho from Centrum Broking. Please go ahead.
Yeah. Thanks for the opportunity. Congratulations on great set of numbers. Dr. Divi, if you could help us understand, out of the INR 1,800 crore CapEx that has been announced so far, how much has been able to utilize so far? Because we have capitalized most of it and some of it is still remaining. If you could help us understand, out of the Custom Synthesis program that you have announced and the Kakinada that you specified would be around INR 600 crores. Custom synthesis, I understand that would be available from next year onwards itself. By when can we expect Kakinada as it's a greenfield that you would be starting?
I'm sorry, I lost your first question. Can you please repeat?
I said, sir, out of the INR 1,800 crore CapEx announced, how much is available presently? How much of it is available for this year? I understand that some of it is left, which we will complete by end of the fiscal, is what we have said already.
I think I mentioned that the de-bottlenecking program, whereby some of the capacity would go up, have been completed and we are seeing some of that benefit. Number one. Two, some of the capacity expansions for some of the generic products also have started resulting in the proofs. Some projects where for the as well as API, we validated and we are waiting for the customer as well as the agency clearances. As we get the clearances, they will go into the production. Coming to the Kakinada investment, what it would take about a year or a year and a half to complete the project, then it goes through the validation and qualification.
That investment would take time to give us returns, maybe more than, I would say, investment project construction about a year and a half, and sales start after another year and a half, two to three years.
Sir, on the brownfield CapEx on the INR 1,200, I understand that we have completed the backward integration as well as the EOU-related CapEx. On the brownfield, how much we are able to utilize as of now?
On the brownfield also, there were backward integration projects from the brownfield as well as the new block. The backward integration, already we are able to use about 20%, 30% of the capacity. Remaining of the buildings, we are waiting for the regulatory and others to clear the utilization.
Okay, that's helpful.
Ms. Carvalho, I'm sorry to interrupt, but for any follow-up, I request you to rejoin the queue, please. The next question is from the line of Nitin Aggarwal from IDFC Securities. Please go ahead.
Thanks for taking my question. On the nutraceutical business-
Mr. Aggrawal, can you speak closer to the handset, please?
Yeah. Sir, the question is on nutraceutical business. What opportunity do you see in the nutraceutical business going forward? This year has been a very good year from a growth perspective for this business.
The nutraceutical business is growing about 10%+. That is the growth rate right now, maybe 10%-15%. About INR 600 crores is expected this year. Going forward, we are looking at 15%-18% as we are reaching more and more markets. I think the trend in the industry is to go for more nutraceutical, and I think there may be a slightly disturbance with this pandemic, but definitely the goal is that it'll be more nutraceutical usage in the coming years. We are geared up to take all advantage by having backward integration of API as well as the formulation.
Thanks. Secondly, on the Custom Synthesis project you talked about. Just want to clarify, is this a single project or it is a combination of projects for which you are putting the CapEx for?
It's a combination of projects from several Big Pharmas. It's not one project, there are two projects.
Okay, sir. Thank you. That's all.
Thank you. The next question is from the line of Ankush Agrawal from Stallion Asset. Please go ahead.
Hello, sir. Thank you for taking my question. My question is on the CSM business. Can you help me understand little bit on the business mix that we typically have in terms of projects that we undertake during the development phase of a molecule versus project we take during the commercial phase of the molecule, wherein we are the second supplier? If you can highlight something on this.
I think we need little more clarity because we are not in the clinical trial, we are not in the gram scale, we are not in the few kilograms scale. When it passes through phase I, that's when we enter in phase II. That is when the chemistry will get locked up. We enter not when the chemistry is in the nascent stage. We enter when the chemistry is robust to produce in tons of quantities. That's when we enter at phase II, III, so the impurity profile can be controlled, and the productivity can happen, and the best technology can be used. Our involvement is from phase II, III, and then be in the launch, then trials will be patent period. We are not joining as a second supplier for any innovative product, no. That used to be the case, I'm talking about 10, 15 years ago.
Now majority of our clients are new, entering in phase II, III. Yes, in some cases, if the Big Pharma wants to close several hundred tons of it, or they need all of a sudden several hundred tons, there are not many companies that can handle with resource and technology, with assurance of supply to cater to the needs of these Big Pharmas with stringent EHS requirement, stringent quality requirement, regulatory requirements. This is where we are strong at.
Okay. Just to be clear, for the most part, in the CSM business, we enter during the phase II, right?
We enter in the phase II, phase III, yes.
Yes. Okay. Secondly, sir, typically in the CSM business, we do batch manufacturing and not the continuous manufacturing, which is what my understanding. Is it right?
That's right. Most of the Not most. 90% + or 92% + APIs are produced on a batch process basis. We are developing some technologies for a continuous processing, I think there are some limitations. We are able to implement continuous processing of at least certain stages or certain operations. Now, where we need to really control either a impurity or a safety, we are able to implement. As a product totally, it's not that you put raw materials in one end and the product would come out at the other end continuously. No. There is no such possibility in an API.
Okay, got it. That was very helpful. Thank you.
Thank you. The next question is from the line of Lakshmi Narayanan from ICICI Mutual Fund. Please go ahead.
Thank you. Sir, on the Custom Synthesis business, approximately how many clients we have, what kind of repeat business we get on the CS business? It's also mentioned that top five products contribute 47% of revenues. Does it have any Custom Synthesis product when you talk about these top five? The next question is that, in terms of reactors, we have commissioned BCV and we have put up some reactors. From the efficiency of reactors, what you commissioned earlier to now, how you improve the versatility and the size of reactors? These are my two questions.
I think your first question is the five products in the Custom Synthesis or how many companies we have in the Custom Synthesis. The relationship, the existence of the relationship disclosed in number 1. Definitely we have many Big Pharmas as our clients. We do get repeat businesses because of the good business we do with them, and good service we give them, both supply on time, all the time, and quality product with no rejections. These are the minimum expectations, and not only at the best cost, best quality, and with all the EHS requirements and quality requirements and regulatory excellence.
My question is, among the top five products which you call out as 47% of your revenues, does anything is in the CS business or everything is in the non-CS business? The top five products.
Most is in the non-CS business because we do enter at the phase II, III, but after phase II, III, they go to launch quickly. We don't do the 50 molecules in clinical trials and 80 molecules in clinical. We don't do that because the killing rate or death rate or whatever you call it, the falling rate is very high there. It's high risk. High reward, I don't know. Definitely we are not in that business. We have been saying that from the beginning.
Sir, on the reactor thing, the second question is.
On the number of reactors, yes, we have the traditional reactors, what we were using is totally different from what we use now. From the traditional, we have changed from design to our own design, from whatever is available in the market designed to our own design, both from the point of view of material of construction to the way it mixes, the way it can be multipurpose to use, to arrive at the right particle size and right quality and right form. Because it's not producing API important today, you have to produce the right form and right particle size. Definitely the quality of reactor is total. Design of the reactor is very important today, and it has changed a lot from the time we started.
Thank you.
Thank you. The next question is from the line of Ritesh Rathod from Nippon India Mutual Fund. Please go ahead.
Yes, sir. In the Custom Synthesis business, are you seeing additional inquiries from clients, but you are not committing to them because you'll wait for this current capacity build-up to happen and the progress on that, you will wait and watch, and then eventually you'll commit to those kind of inquiries?
I'm in a fortunate seat with all my discipline in holding onto my money instead of venturing into other activities. What I meant is that the INR 1,800 crores of cash we have or INR 1,000 crores of cash at any given time in my hand to invest on projects expansion and come up with capacity. We haven't turned down any project from any big pharma based on not having capacity, not being able to build capacity. We may have turned down few projects where the technology is not available, because like monoclonal antibodies or fermentation or steroids or hormones. The price pressured so much on the therapeutic segment that we were not interested in the project. Looking at normal therapeutic segments, a good product, there is no way we would leave an opportunity.
We've got all the capability and capacity to create or somehow accommodate, because all our plants are multipurpose, all our buildings are multipurpose. We could always make a product without any issue.
Sir, my second question would be, how supportive is the Indian government, both state and central, in terms of your CapEx execution, and have you seen any major change in times from their support?
Fortunately, I think for all the exports we do with the big pharmas, with all the funds we have in-house, it's only regulatory clearances we need from the Pollution Control Board and various other governmental bodies, and we receive excellent support from either the state or the center. We have certainly no issue, and we get lot of encouragement.
My question was more post the recent PLI scheme. Are they incrementally more supportive in terms of clearance of approvals?
I think we did mention even in the last con call that the PLI scheme is not beneficial to us, because the products that are involved in the PLI scheme, a majority of them are antibiotics and others. We are not in those products. It's only INR 2.5 crores they would give per product, per applicant, and the investment we're doing, INR 2.5 crores would not make any dent.
Thank you. The next question is from the line of Charulata Gaidhani from Dalal & Broacha. Please go ahead.
Yeah. Hello, sir. Congratulations on the good set of numbers. My question is about the gross profit margin. There is a remarkable increase over the last three quarters. Can we assume it as a new base for going forward, or if you could give a range of margins?
Well, the intent needs to have better margins always. Every company wants to have better margins. We aim for same, but the capacity is not only for increasing the margin. As I mentioned, the capacity is to have these factories, what we have, be ready to face all the regulatory challenges that are going to be posed in the next five, 10, 15 years, from environmental EHS to quality regulations internationally, in addition to creating more higher capacity with new technologies. While doing this backward integrations and new technologies and new products, definitely the margins should improve.
Okay, we can assume around 63%-65% range for gross margins going forward?
I have been very conservative from day one since 1995, since I started the company. I used to say 50%. Now I have graduated to say 60%. I think my younger generation may promise you 70%, I don't know, in future, when I retire and when they take over fully. Right now, I am very conservative person, and I think a 60% definite is my saying. Always, see, the product mix is the problem. It's not I want to drive it to 70%, but what happens, the product mix, one product goes down, one product goes up. A combination of these products makes it. Some competition from all of a sudden comes from nowhere to kill a product. In generic, all of a sudden, 20% less price available. Should we sell, not sell?
With our marketing team faces such challenges, sometimes they do have to agree with the customer and reduce the price. I think it's fair to say that the 60% can be maintained.
Okay. Pertaining to the expanded capacity, by when do you expect regulatory clearances?
You're talking about the Kakinada plant and that one?
Yes. The Custom Synthesis.
No. The Custom Synthesis 400 tons expansion should start yielding from the very next year as we complete the blocks they didn't produce. The Kakinada plant, it will take about three years because 1.5 years will go with greenfield design, greenfield projects, about 1.5 years, and qualification batches and validation, another 1.5. About three years.
Thank you. The next question is from the line of Naresh Suthar from SBI Life Insurance. Please go ahead.
Yeah. Thank you for taking my question. Sir, my question is regarding this quarter's numbers. Many of your peers have talked about the clients stocking the API for ensuring the continuity of their supply, and hence the preponement of some of their orders. Have you also seen similar trends, and that's why the second half would be similar or little lower than the first half?
You see, it is always that people, for some time, they want just in time.
The product just in time. That means they don't want any stock. They want stock as needed. They say, "Assurance of supply, please keep 30 days stock.
I think this is the management philosophy which keeps changing at the customer end, time to time. I think all quarters cannot be same, and we don't control anything, neither purchase orders nor shipments. Our aim is to continue selling whatever we produce. You take, for example, the quarter three, almost every year, that everybody who closes their financial year in December, they would say, "No, no, we don't want any stock. Please postpone to the January. Don't ship us from December 10th or December 5th." We don't manage any of that. It just happens. Please, my request is, do not judge us. Do not go by quarter-over-quarter. Look at year-over-year as overall. I think that will be a better way of looking at it.
Thank you, sir.
Thank you. Ladies and gentlemen, due to time constraint, we take the last question from the line of S. Mukherjee from Nomura. Please go ahead.
Yeah. Sir, thanks for taking the question. Sir, just wanted some color on the API generic business. Now, you mentioned about de-bottlenecking, and you mentioned the kind of volume that you're seeing in some of the older products like naproxen, gabapentin, et cetera. Now, I would assume that these are very mature molecules and growing slowly. What's your expectation of growth here? Will you be able to take more market share? Sir, just going forward, what would be the key driver, whether it's the older basket of products or new APIs that would drive growth? If you can give some color, sir.
I think that was a good question. I think the problem is that my grandparents did not live more than 50 or 60 years. My father lived 93. I am dreaming about whether I can reach 100. When people are living longer, they need more life-saving drug support as long as they live. Most of the generic products, the naproxen, the gabapentin, the sartans, the levothyroxine, the levodopa, carbidopa and pregabalin, all these are lifestyle drugs, and as you live longer, you have to use them till the end. As a result, the growth may look smaller when you say 8% growth on year-on-year, or 10% growth or 6%. When you look at a product up to a ton of naproxen growing at 10%, let's say 8%, you need another 650 tons per year in one year.
There is nobody to invest here INR 200 crores, INR 300 crores for 1,000 tons plant. Whereas we are ready to invest when what we built is already sold out. What we expanded is sold out.
My marketing man, Mr. Prakash, vice president, comes to me, "What next?" "Sir, you mean to say you want me to build one more naproxen block for another 2,000 tons?" That's where we are in discussion already. The same thing goes for these few other generic products. It is like, I think, aspirin, paracetamol, Crocin, we still need, and they are still expanding. It's getting a better process and more profitability should be made by designing more newer processes.
Okay. Sir, just one more question. Actually two, actually, if I can. One, in the last call you talked about you are developing some of these COVID-19 drugs like remdesivir intermediates and API maybe, but you mentioned there is no sale here. Just wanted to get that clarification. Also, sir, you mentioned about Nellore unit. Any timeline on CapEx there and the quantum of CapEx?
I think, yes. When we developed the process for hydroxychloroquine, favipiravir API, and also the advanced intermediates for remdesivir, the intention was that if this would save the world, if this would save the lives against the pandemic, we wanted to make sure there's no shortage. Fortunately, it seems that there's no shortage of these drugs. At the same time, they're not fully I don't want to comment on their efficacy, but I think it's not that they are able to prevent the death totally. We have not made any further batches after initial production, and whatever it is there, probably the sales were there. That's why I made a statement saying there is no significant sale in this quarter, maybe INR 2 lakhs. Going forward on the Nellore site, yes, we have the 200 acres of land. The wall being constructed and waiting for all the clearances.
First, I think we would construct the Kakinada plant, and then we would go into Nellore.
Mm-hmm. Okay, sir. Thank you.
Thank you. I now hand the conference over to Mr. M. 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. Ladies and gentlemen, on behalf of Divi's Laboratories Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.