Ladies and gentlemen, good day, and welcome to the Q2 FY 2021 earnings conference call of Ipca Laboratories Limited, hosted by DAM Capital Advisors Limited. 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. Nitin Agarwal from DAM Capital Advisors. Thank you, and over to you, Mr. Agarwal.
Thanks, Margaret. Hi, good morning, everyone, and a very warm welcome to Ipca Labs Q2 FY 2021 earnings call hosted by DAM Capital. On the call today, we have Mr. A.K. Jain, Joint Managing Director, Ipca Labs, and Mr. Harish Kamath, Corporate Counsel. I will hand over the call to Mr. Jain to make some opening comments, and we will open the floor for questions thereafter. Please go ahead, sir.
Thanks, Nitin. Good morning to all participants, and thanks for taking out time and joining us for Q2 Ipca Laboratories conference call, earnings call today. Today's con call and discussions and answers given may include some forward-looking statements based on our current business expectations that must be viewed in conjunction with our business cases. Our actual financial performance may differ from what is projected or perceived. You may use your own judgment on the information given during the con call. I would like to inform you that the company's business and financial performance in Q2 FY 2021 has been strong in spite of testing time on account of global COVID pandemic. We have used our internal integrated business capabilities in furthering our global drug formulations and API business. The business and margin growth in Q2 FY 2021 is largely driven by domestic formulation business, had a very good revival in Q2.
Overall business growth was 6%, excluding business from antimalarials, where we had a significant debacle in this particular quarter. The division had a significant decline. The antimalarials business division had a significant decline in business in FY Q2. On base of INR 95 crore, the base is now reduced to almost around INR 59 crore. A decline of almost around INR 36 crore was observed in Q2 in antimalarial business. The pain and cardiac business that constitute more than 70% of the domestic business of the company. In Q2, the pain segment had almost around 10% growth, from the base of last year's base of INR 251 crore, the business went to almost around INR 276 crore in Q2 of current financial year. In cardiovascular also, we had 6% growth. From a base, last year's base of INR 91 crore, business became almost around INR 97 crore.
All other businesses also are reviving except the cough and cold, where we are still seeing some kind of decline. Antibacterials, we are seeing some kind of decline, but all other businesses, their decline was much higher in our newer segments like derma or your ophthalmology in first quarter of the current financial year. Second quarter, there has been a significant recovery. There are only marginal declines are there in these businesses in the second quarter. We see that all these businesses will turn to positive growth in the coming quarters. Domestic had a very good revival in the second quarter, except your antimalarial divisions, where the business decline was on account of the seasonality and all. Also that segment as a PBI segment, where the business decline is also continuing.
Higher currency realizations on exports, almost around 5%, has also helped the company in overall growth. Overall reduced traveling costs and marketing costs has also helped in overall having higher business margins continuing for the first quarter and second quarter. Institutional business in Q2, we had a very good performance, also similar to that we had in Q1. These upsides were somewhat offset by the fact that we have not made any provision for the MEIS benefit in Q2. Normally, in a quarter, that benefit would have been almost around INR 12 crore-INR 13 crore. In view of uncertainties, and no budget provision still, in view of that, no provision has been made. Almost around INR 12 crore-INR 13 crore worth of that earnings are not available in this quarter. Export freight continued to remain very high in current financial year.
We almost paid almost around 61% higher freight in current year. That trend has continued. Of course, the higher percentages will come down to around 30%, but overall, the freight continued to be high. Having given the basic presentation, all numbers are there in front of you. I would request now for question answer.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the 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. Anyone who would like to ask a question, please press star and one at this time. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We would also request participants to limit your question to two at a time. Should you have a follow-up question, please rejoin the queue. Thank you. The first question is from the line of Rahul Jain from Credence Wealth. Please go ahead.
Thanks for the opportunity. Sir, congratulations on a good set of numbers. Just a couple of questions. You did mention about domestic business getting into the growth path now. Can we see for the next two quarters growth, compared to the last year? Any focus areas in terms of therapy, which now we are focusing compared to, say, six months back? Secondly, sir, do we have any one-offs, like in quarter one, we had some one-offs for additional business coming from HCQS and government business we did on the domestic side. In this quarter, anything with regards to some kind of business which probably could not be a repeat business? Lastly, sir, on margins front.
Our gross margins continue to be around 67.5%, but we have seen a sharp jump in operating margins for this quarter, probably due to the other expenses, operating leverage kicking in. Do we see now the shift going in the next two quarters and the year ahead? What kind of sustainable operating margins are we talking about, or where do we see the operating margins for next six months or next 12- 15 months?
Thanks, Rahul. I think overall domestic business revival is very good, except the antimalarial business and all the antibacterial and to some extent, cough and cold business. These are the businesses which are still having some kind of issues, all other businesses are reviving very fast. The pain segment is more than 50% of cardiovascular continue to remain strong. Our other businesses, which are upcoming businesses like Derma, Uro, your CNS kind of business, all are now in the group. We have seen good growth in the month of October in double digits. We expect that business in the second half would be significantly better than what we had in the first half of the current financial year.
It's possible to achieve almost around 10% plus kind of growth overall in the second half of the current financial year, looking at the current business expectations and also the performance which we have seen in the month of October and all. As far as the businesses are concerned, I think overall there is no one-off kind of business in the second quarter of the current financial year. It's all a normal business, what we had. There are no one-offs as such in the top line. Except there was almost around earning of around INR 13 crore, INR 12.5 crore-INR 13 crore, which was received on account of some contracts relating to an MNC company on supply, which subsequently got canceled because of the change in the circumstances.
Since we had incurred a higher cost around that time, there was a compensation of almost around INR 12 and INR 12.5 crore, which we have received in the second quarter of the current financial year. That has been accounted as a part of the other operating income. That's the only exceptional I would say that is a one-time. Other than that, we don't have any kind of one-off neither on expense side nor on the income side. As far as gross margins are concerned, we had a business growth of almost around 7% in this quarter, overall standalone numbers. As against that, our material cost has gone down by 1%. Your trend continue to be, let's say, your overall intermediate trend is now a little softer there. The overall your solvents and other things are at much lower prices now.
This trend is likely to continue because petroleum prices are continuing to remain at a lower end in the cycle. Therefore, we see that more or less in spite of API business growing higher, where the material cost is higher. The gross margin levels has gone up. Also one of the another reason is that in this particular quarter, I would say that antimalarials has declined where we don't make that kind of gross margin. It's basically some of the products are also at a very low kind of margins are there. That business has declined. Other businesses have grown where the margins are better. Therefore, overall gross margin levels are also good. As far as the generic businesses are concerned, of course, we had some kind of decline in U.K., but our European business has done much better.
I think whatever decline we had almost around INR 40 crore from U.K., that has been compensated by the significant increase in the business from the other European countries. There also the business profile, overall margin profile has improved because our margins compared to U.K. is much higher in the other businesses. In general businesses wise, we did better and trend will continue to be good as far as these issues are concerned. As far as operating cost is concerned, operating cost will continue to remain in control. Of course, with revival of domestic, there'll be some kind of additional cost will be there, but the travel and other costs will continue to remain significantly down. Also your other marketing costs, there'll be some increase will be there in the second half of the year, but will remain in not a very high level.
Overall, the margins levels will remain good and whatever margins we have reported, they are sustainable kind of margins that we have reported in second quarter.
Thank you so much for the detailed reply, sir. Wish you all the best. Take care.
Thanks.
Thank you. The next question is from the line of Amar Maurya from AlfAccurate Advisors. Please go ahead.
Hi, sir. Thanks a lot for the opportunity. Firstly, sir, on the domestic business, if you can clarify, I missed in between. I mean, what has been recovered and what is still de-growing, and when it will recover? If you can give the split again for that. Secondly, sir, in terms of the API run rate, I mean, do we expect this kind of API run rate and this kind of pricing to continue for at least next two quarters? So these are two questions from my side, sir.
Thanks, Amar. As far as the businesses are concerned, I would say that the pain segment is the major business segment for us, which includes rheumatoid arthritis and osteoarthritis.
Correct.
Both the segment put together has grown by almost around 10% in this quarter. I have said that from base of last year's base of INR 251 crore, that business has become almost around INR 276 crore. You will notice that pain is now almost more than 50% of our overall business in second quarter.
Correct.
Cardiovascular had almost around 6% growth. From base of INR 91 crore, the business was around INR 97 crore. There also, recovery is very strong. The business recovery has been, let's say in the first quarter, our neuropsychiatry business was declining. That has also come in the positive growth. Ophthalmology business was declining. That has come in positive growth. The decline in Derma business and Uro business was almost around more than 20%-25%. That decline has now become almost around 5%-6%. We see that this business will have a good growth in the third quarter in current year. The only businesses which are continue to show decline is number one the older product portfolio, which we have almost around INR 80 crore-INR 90 crore kind of old product portfolio, where we are continuously seeing around 8%-10% kind of decline.
Antibacterials are continuously declining, and that decline percentage is around 1% or so. Your cough and cold is also having decline, which is around 10%-12% decline is there in cough and cold also. Antimalarial base has significantly eroded. Normally second quarter have almost around more than 50%, 60%, 55%- 60% kind of antimalarial business. This year there was no incidence of malaria practically, and practically that business has declined by almost around more than 50%, 55%. Completely base is eroded as far as antimalarial is concerned. Overall antimalarial now in the business is becoming insignificant because overall as when year-end we will work out the final pie of the business, I think antimalarial will become almost around 4% of the business.
Oh.
Now that risk is completely gone. Normal second quarter, that's the highest base and that base has already declined. In future, even if antimalarial something happens, it's hardly going to be insignificant because now the overall base of antimalarials are very low. Therefore, we are saying that, yes, there is a good revival. Of course, that is subject to that if there is a second wave of infections and some lockdown, which are unlikely. If it happens, then business may again have some kind of issue. Otherwise, we are seeing that, yes the business growth is likely to be good in domestic in the second half of the current financial year.
Okay.
As far as the API is concerned right now we are not there in the U.S. market. There is a zero business in that kind of segment. There is where the most of the stocking and higher pricings and all that things has happened. As far as we are concerned, it's a business as usual because we don't have any supply to U.S. currently.
Okay. Correct.
The business growth will continue. Of course, as we have said earlier that we have capacity constraint. Continuously we are working to do the debottlenecking. A lot of those kind of initiatives are currently also going on. We are creating incremental capacities and with that the business growth is continuing. We have already started work on our Dewas project. Civil work has already started. All clearances are received. Hopefully, I think in maybe around 14, 15 months' time plant should be ready and thereafter validations and all may take around 17, 18 months overall to be ready to do the commercial business from there. That's a new thing. Otherwise, the API run rate by and large will continue.
Okay. API run rate will. Sir, if I may ask one more. Sir, antibacterial and cough and cold would be how much contribution to the domestic business?
Antibacterial was almost around 5%. cough and cold is around 4% of the business.
Okay. Thank you, sir. Thanks.
Thank you. The next question is from the line of Abdul Puranwala from Anand Rathi. Please go ahead.
Hi, sir. Thank you for the opportunity. Sir, my first question is again from the API side. Sir, is it possible for you to provide the current utilization at your plant and how confident would we be for this run rate to continue for next year as well based on the current capacity?
As I said that some kind of 10, 13% capacities we are continuously creating by debottlenecking. That will continue. The capacity utilizations are currently very high. Absolute number giving is very difficult because some product may have eight, 10 steps, some product may have just two, three steps. Volume and all differs. The pricing and everything are different depending on what kind of starting material prices and all are there. I would say that plant utilizations are almost around 90% currently, and some kind of incremental capacity creations is in pipeline, which is happening now at our existing plant at Ratlam and others. That will continue, I think. Overall, we are projecting that the business growth in API in the second half will remain around 18%-20% kind of business.
Sure, sir. Sir, my next question would be on any update from the U.S. FDA side with regards to reinspection or any submissions, any clarification you would have seek from us?
We are continuously engaging with FDA. Till the time anything reaches to the finality, I would not like to comment. I would say that status quo is continuing.
Sure, sir. Thank you for answering my questions.
Thank you. The next question is from the line of Surya Patra from PhillipCapital. Please go ahead.
Thank you for taking my question, sir. Basically, first question is on the institutional business front. As the Global Fund has raised their budget for the block of the current three year almost by 25% more compared to the earlier period in terms of procuring the product. Means whatever product that they have been procuring, whether it's antimalarial or whatever, all those segments. There they have raised. Have you started seeing any benefits that's flowing into your supplies, sir?
I think overall, we have given projections of around INR 200 crore-INR 225 crore for the current financial year.
When you look at the number in the first two quarters.
Yeah.
We've already done more than INR 170 crore.
Exactly. That is why I'm asking.
The run rates are very strong.
Okay.
That trend will continue. Hopefully business growth on institutional front is going to be very good.
Generally, sir, for the general export also, like this quarter, a marginal kind of sequential decline, of course, having a kind of a robust quarter last [fiscal] quarter. This is just a kind of a sequential kind of issue that we are seeing and the YoY 17%, 18% kind of growth that we are seeing. This is the normalized YoY growth and should continue or this is a quarter which is seeing some kind of moderation and possibly we can see pickup subsequently or your sense from the export front, sir?
I have guided for API business growth of around 18%-20% in the second half of the current year. As far as domestic business, I have talked about that the growth could be around 10%.
No. General formulation export I'm talking about, sir.
Formulation export, there will be some kind of better business will continue because institutional business is continuously doing very well.
Generics are other than U.K. business is going good and U.K. will recover. In the second half, we will see a significant business increase in U.K. Even generic business growth is going to be good.
Okay. U.K. was seeing some kind of moderation or anything, sir, or any challenge that during this quarter?
Yeah, we had some kind of issues with distributors because of that some overdue outstandings were there, so account was not regular, so we had to reduce the supply. Now the account has become perfectly in order, and we have started accepting the orders and all.
Okay.
U.K. business in last financial year, Q2 was almost around INR 53 crore-INR 54 crore. That has come down to around INR 12 crore in this quarter. Almost around more than INR 40 crore reduction is there in that. That is almost around similar kind of from other than EU business, which was INR 48 crore last year in second quarter. That has become almost around INR 83 crore. Significant increase of almost around 70% has happened in the other EU business. More or less now, even in third quarter, U.K. would do well, Europe will continue to do well. Australia, New Zealand, Canada, these businesses are continuously doing very well. We will see a good growth in generic business also.
Backward integration aspects, whether it is through the PLI scheme, any update on that, or what is the level of now, if you are providing the quarterly data point, let's say, what percent of your formulation is currently integrated? In the, incrementally, what is the kind of thought process that you are now having for your case and dedicated site that is the Noble Explochem that you have acquired? Something on these sides which will ultimately achieve a kind of better integration for your overall business. Your thought on that sir.
As far as on backward integrations on intermediate side is concerned, we have put up one project at our Aurangabad site, and that's a continuous process kind of plant. The deliveries of machines and all, which were expected in the month of April or May, that got significantly delayed because of COVID. Large number of people from suppliers got the COVID infections, and the whole schedule got upset. I think one part of the system is already received and installed and put to use. The second part of the system is now under installation, so probably that will become operational. Full automations will happen by December now, which we're earlier expecting that at first quarter end, that could have been happening. That's one intermediate for one of our sartan products that will be produced through this kind of backward integration.
A continuous operating plant, not a batch processing kind of plant. One of its kind, that technology is new. All manufacturers are producing that intermediate through the batch process kind of thing, and we have put up continuous manufacturing plant. If this experiment succeeds and everything goes well, we will further increase the capacities of in-house production, so dependence on China on intermediate sales can significantly come down. That's one update on that thing. As far as Noble Explochem is concerned, yes, because of again, pandemic and the travel restrictions and other things, we could not do much on that side. Now we are working on the projects and internal team is working. Hopefully maybe in next three, four months, we will be applying for environmental clearance and all the environmental impact studies and others will be initiated.
Anything happening on ground after that, it may take around six, eight months time. No CapEx would happen in current financial year. Next financial year, yes, we have lined up almost around three, four intermediates to be integrated at particular sites after the receipt of your environmental clearance. That will take still some more time. As far as PLI scheme is concerned, we are ready with the submissions for the two products on organic or [inaudible] chemistry product, not a fermentation product. We are not participating as far as fermentations are concerned. Your other API side, the chemistry side, we are putting up the applications of two products. That's the update here.
Thank you. I would request Mr. Patra to rejoin the queue for follow-up questions. The next question is from the line of Kunal Dhamesha from Emkay Global. Please go ahead.
Thank you for taking my question. As we alluded that the most of the CapEx would be in FY 2022, so that would include both Noble Explochem and Dewas, or will we be doing some CapEx for Dewas in the FY 2021 and then some would be spilled over to FY 2022?
As I already cleared that Dewas we already started construction.
Okay.
That is going on. Next six months, all civil structures would be ready, and installations will start somewhere at the year-end or maybe early part of the next financial year. Noble Explochem will take some more time, yeah. Some more capacities are maybe around INR 100 crore is happening at Ratlam site on API side, on debottlenecking and others. That will become operational by March. Yes.
Okay. What would be the CapEx that you would be doing for Dewas and Noble Explochem?
Dewas overall will have almost around INR 250 crore. Noble we have yet to work out numbers, so will not be able to give you anything. Dewas will be around INR 250 crore.
Okay. The second question is on this continuous manufacturing that we've been talking from last couple of quarters. How much edge it provides us in terms of the manufacturing cost over, let's say, batch manufacturing? Do you see that batch could eventually lead to lot of market share gain in certain product?
As continuous manufacturing concerned, your operating efficiencies are better. Your CapEx is high because it's continuously console control kind of plants, everything is automatic. Your reaction outputs are better. Your reaction coefficients are far better. I will not be able to talk much right now till the time we put up the plants and start seeing the benefits. Yes, the piloting and all indicates a significant reduction in the cost.
The significant would be 15%, 20% or even higher?
Right now, I will not give numbers. Let the thing come. Yeah.
Okay. Thank you. All the best.
Thank you. The next question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.
Yeah, thanks for the opportunity. Sir, if you could elaborate what really went wrong in U.K.? You said there is the business dropped from INR 50 crores+ to INR 12 crores. Why you're expecting it to recover? Has the issues resolved?
Prakash. If you see first half of the current financial year, there is a substantial reduction in the U.K. business. Last year first half, we did about INR 94 crore, versus that this year we have done about INR 33 crore. There is a INR 60 crore reduction in the U.K. generic business. European business last year first half was INR 75 crore, versus that this year first half we have done INR 178 crore. There is a substantial improvement in the EU business, almost hundred.
Understood that. I wanted to know in U.K. what has gone wrong?
I will tell you. U.K., now the account of the distributor is in control. It is online, actually, there is no delay at all. We have started accepting order. You will see a good growth in the U.K. business in the second half compared to same period last year. Europe will continue to grow, U.K. will also grow in the second half compared to same period last year.
I understand growth will come back. I'm trying to understand the reason of the decline.
No, I said because there was lot of receivable from the distributor, his account was not up to mark. That is why we stopped accepting order.
Okay.
Now the account has come up to level, whatever we were expecting. Now we have again started receiving order and manufacturing is happening.
Okay.
Yeah. That is the only reason. Nothing else.
Now how will it revive?
No, I said orders are already there. We have started manufacturing. You will see uptake in the shipment in the third quarter as well as in the fourth quarter.
Okay. For the years to come, because we have this business built on a good platform now.
Yeah. Parallelly, we will be starting our own distribution, as we explained last quarter, and that work is also happening parallelly.
Yeah. Okay, understood. Fair enough. Any commentary on the sartan opportunity in the API, you did mention that growth of 15%-20%, but how is the pricing competitiveness market share in the sartan?
There has been not much variance with pricing compared to first quarter and second quarter. We continue to have good order position in losartan, where we are one of the biggest exporter from the country, and we believe that the thing will continue going forward.
Pricing, market share, both are not the issue.
I mean, so far it is not a issue.
Okay, perfect. Lastly, on the CapEx, you did mention INR 250 for Dewas, what are the expectations for second half and next year on an overall company basis?
Including our routine maintenance CapEx.
Yeah.
This year it will be about INR 200 crore, Prakash. Next year it may increase to around INR 300 crore-INR 350 crore. Most of the CapEx for Dewas would happen in the next financial year.
Understood. Fair enough. Great. Thanks and all the best.
Thanks. Yeah.
Thank you. The next question is from the line of Mukesh Shah from Motilal Oswal Asset Management. Please go ahead.
Thanks for the opportunity. Just one question from my side. You mentioned that the margins of about 28% that you made in this quarter is sustainable. I just wanted to understand, is that understanding correct for the second half of this year? Going forward into next year, should we be building similar margin structure or should we build a higher margin structure? How should one think about that?
More or less, whatever second quarter margin is there, more or less that margin will continue in the third and fourth quarter of the current financial year. Based on the presumption that the domestic branded business will improve as we move month after month. That is what we are seeing.
Sure. Sir, we historically used to always look at margin expansion on a YOY basis. Is it safe to assume that next year we can build in on 28.
No.
28 is there to sustain.
Mukesh, please understand, in the first quarter, the margin what we had, it is impossible to repeat because of that additional business and all. Let us focus on second, third, fourth quarter. Whatever margin we are doing, that will continue. First quarter margin, if you consider in the overall year, it is very difficult to replicate that kind of a margin.
I understand. My only question was that if you are at 28% margin, FY 2022 and 2023 should be above 28%, closer to that range, right?
Yeah, that is correct. Right.
That-
There is some variation between 25% and 27%, it will fluctuate.
That will still be a very significant jump than what our historical margins were. At 19, 20% you will be at it. Okay.
If you see during 2014, our margins were as good as what we are doing now.
Yeah. Okay.
When our U.S. business was ongoing.
Sure, sir. Perfect. Thank you, sir.
Thank you. The next question is from the line of Abhishek Sharma from Jefferies. Please go ahead.
Yeah. Thank you for taking my question. Sir, just two questions on sartans. First is on the landscape. Do you see any competition on horizon, any of your competitors doing CapEx, any new player trying to install capacity? Just what are you seeing on the market? That's the first one. Second is on the intermediate. You said that you're basically bringing in one intermediate. I just wanted to check if that is OTBN. How many such intermediate do you plan to bring in? When that process is done, would you become the lowest cost producer? Thank you.
Abhishek, Mr. Jain has said these intermediate fees for sartan business. I won't name the intermediates. As far as the sartan businesses are concerned, whatever guidance we have given, whatever internal guidance our marketing team has given to us, we are progressing as per that guidance. As you may be aware, the API business is now highly regulated, it is not so easy for any consumer to change source from one to another. They have to go through a lot of processes and all. As far as we are concerned, whatever projections we have given, whatever our expectation is there, sartan businesses are progressing as per that.
I'm sure you are doing some landscaping in terms of your competition. People who have gone out of market, et cetera, do you see any of them coming back?
In any case, Abhishek, we were not a big player in valsartan. The people who went out are mostly for valsartan API. There, whatever business I am doing today is plus on whatever I was doing earlier. As far as losartan is concerned, there has been no disturbance. Whatever growth projection we have given to the market, we are moving as per that.
Right, sir. Just on intermediates, without naming the intermediate, after you've done this entire backward integration exercise, would this make you the lowest cost producer for sartan?
Abhishek, I would say something like this. To remain competitive, we need to do all this. I won't say anything further than this. Whatever if it works, whatever we are projecting and whatever we are doing, if it is successful, that will give us further competitive advantage with these other players when it comes to sartan business.
All right. Thank you.
Thanks, Abhishek.
Thank you. The next question is from the line of Naresh Suthar from SBI Life Insurance. Please go ahead.
Yes, sir. First, one clarity on the margin guidance which you just provided. Second half, you are expecting to continue around second quarter level, like 28% margin, and for the next year and after that, you are expecting a range of 25%-27%. Is this right?
Yeah, that is next year I said that correct. If you see historically, the second quarter, second half margin is lower than the first half margin always.
Right.
Second quarter business in the domestic is always highest, if you see our quarter-wise domestic business pie. This year, because of this COVID situation, hardly any malaria business.
Right.
Going forward, our third and fourth quarter will be definitely better than the second quarter domestic business. Based on that, the projection what I gave you.
No, my question is more about the.
Yeah. It will be in the range of 25%-27% going forward.
Sir, last year we had around 20% margins and because of this pandemic, we had some cost savings and also benefits in gross margin. The shift from 20%- 25%- 27%, that 5%, 6% shift, is it higher because of the cost savings in marketing spend or is it higher because of the gross margin benefit you are seeing? What is the major benefit?
Mostly it's because of the gross margin benefit. There is a 100, 150 basis points improvement in the gross margin.
Sir, that is only 150.
Yeah, 100 basis points-150 basis points. Right.
Another INR 450 is because of other expense, right?
That is correct. Right.
That is mainly because the allied marketing activities which we are doing are.
Field operation cost. Having said this, we also incurred additional manpower cost, which was COVID allowance. There we have spent about INR 20 crore+ .
Okay.
Another thing which is not there in this quarter is about INR 12 crore- INR 13 crore MEIS benefit on the export formulation business, which we used to get every quarter. This quarter because of the government, they are moving out of MEIS scheme and there is no budget provision for paying that. We have not provided for that. Otherwise this quarter it would have been another 100 basis points improvement in the margin.
Understood. What I'm saying, sir, this quarter also has a little lesser marketing activities.
First quarter, there is additional expenditure when it comes to marketing activities. It will get normalized over maybe two to three quarters going forward, unless there is another something COVID peak and other thing.
Okay. One more question, if I may. Sir, of the India marketing expenses, how much is expense related to conferences which you do for doctors? If you are able to share.
Very difficult within marketing cost, how much it is and all. Whatever little bit saving is there, partly it is offset by whatever COVID allowances we have given to our workmen in the first quarter.
Okay. Thank you.
Thank you. The next question is from the line of Nikhil Upadhyay from Securities Investment Managers. Please go ahead.
Yeah, hi. Good afternoon, sir. Thank you for the opportunity. One clarification, this INR 20 crores on employee cost, is this booked in this quarter, the COVID allowance?
No. It was in the first quarter.
First quarter.
Most of that was in first quarter.
Okay. Secondly, sir, on this continuous processing and batch processing, this question could be quite naive, but just to understand now, if we go in for a continuous kind of a manufacturing, does this create that the facility becomes specific for a product or the product versatility remains in the production process?
Mostly it is product specific.
So in case-
There will be lot of synergy in the operation, manpower, yield, time cycle, everything there will be improvement, if it works the way we are expecting it. Because whatever R&D we have done, it is working in that R&D scale. Which is something a new concept, so it will take time to understand how it will progress in the commercial scale.
Okay. No, where I'm coming from is because, in case in future the pricing or the market dynamics for that product go bad, because the line would be product specific, does it create a risk of impairment of or any of that sort?
No. Not necessarily. There could be some balancing equipment and that way you can work.
Okay. Lastly, if you can just help me understand on the subsidiaries performance and how are you looking at that going forward?
As far as subsidiaries are concerned, Onyx Scientific is doing well.
Okay, sir.
Onyx has contributed about an INR 10 crore profit to standalone in the first half. Whereas the major losses that is contributing is by Pisgah Labs, where U.S., where it will continue for another maybe three, four quarters because the products are under development, then filing will happen, then registration will come. That pain we have to continue for another three, four quarters.
What is the loss?
Sir, all subsidiaries, there is some marginal loss in Ramdev Chemical also because this is a plant which was hardly hit because of this COVID pandemic. There was manpower shortages. There were so many other logistic issues. The plant is now again coming back to normalcy.
Okay.
All other subsidiaries are mostly registration holding companies other than Bayshore, which is a pharmaceutical distribution company in the U.S. There they have done about INR 75, INR 76 crore business. Marginal loss is there because of depreciation of their product portfolio goodwill. Otherwise, business to business, there is a small profit they have made.
Okay. Fine, sir. Thanks a lot.
Yeah.
Thank you. The next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.
Thank you, and good afternoon, everyone.
Hi, Sameer. Good afternoon. Yeah.
Yeah. Sir, you said there was no one-off HCQS et cetera in Q2. Just for my information, I mean, did you sell any HCQS at all? If yes, how much was that?
No. Whatever regular HCQS business we are having, formulation in India, in ROW market, API in India and rest of the world except U.S., that is continuing, Sameer. There is no issue.
Okay, got it. Can you quantify that if that's possible?
No, whatever regular business, there is nothing COVID related HCQS business in this particular quarter. They are all for rheumatology, whatever use is there in the market.
Okay, fair enough. Sir, second question is, I know many people have asked on U.S. FDA. They're not coming. Sir, through informal channels, is there anything that you are hearing? I mean, when would inspectors begin inspection? I mean, are they waiting for vaccination? What really is.
No idea, Sameer. As far as we are concerned, our facilities are concerned, it is status quo. Unless all these things will improve, I don't think any inspection would happen so soon.
Okay. Fair enough. I'm just wondering, given that now so many plants await there, and there's so much of backlog, so even when they do begin, how do they choose where to go? Even after they begin, can it be a wait for long tunnel before they come to you, for example?
No idea, Sameer. Really, no idea. Our guidance ex U.S., whatever we have been guiding market, that will continue. When U.S. will come, as and when it will be plus on to whatever we are talking.
Fair enough, sir. Sir, last question is on the India business. Any take, I mean, are the doctor consulting, doctor clinics are all more or less operational, and the patient footfall per clinic in that sense, is it all normalized, or do you think we are still falling short?
Lot of improvement is there. October was better than September, largely better. There are few areas like nursing homes, surgeries, where there is still lot of issues. Pediatric is another therapy where parents are not taking their children to doctor and all. Those things are continuing. We are seeing good growth. Doctor practicing as well as patient footfall, except hospital-related business.
Okay. Got it, sir. Thank you.
Thank you. The next question is from the line of Sapna Jhawar from Dolat Capital. Please go ahead.
Yeah. Hi, sir. Thank you for taking the question. You also acquired Resonance Specialities some time back. How is that contributing to the business now and what capabilities does it bring to the business? If you could just explain that. Thank you.
Sapna, we have not bought anything Resonance. Ipca is not concerned with Resonance acquisitions, Sapna.
Oh, sorry about that. Thanks.
Yeah.
Thank you. The next question is from the line of Amar Maurya from AlfAccurate Advisors. Please go ahead.
Hi, sir. Thanks a lot for the opportunity again. Sir, one clarification. If I see the API export business, the run rate was around INR 300, INR 310 and INR 323 crores kind of run rate. When we are guiding for 18% kind of a growth in second half, are we talking that the run rate of this API will come down? Because if I do the math, that it will be around INR 277 crores and INR 250 crores for the-
Yes. What guidance we are giving, 17%-18% growth is the same as last year's second half and this year's second half. See, if you consider the run rate, first quarter, as we already said, was very exceptional. That kind of API business we cannot even dream of doing.
Correct.
Yeah.
Your second quarter was also high at INR 323. It means capacity perspectives, we have capacity and further debottlenecking can actually increase the capacity further by about 10%. Do you see in FY 2022, going by your full capacity and then debottlenecking, it can add back to the growth?
New capacities will take further time. FY 2022 plant will be theoretically ready, then validation, scale-up, registration, approvals, it takes lot of time.
Okay.
Till all these activities are completed, we have to depend on Ratlam only. Whatever little bit CapEx we are doing and debottlenecking we are doing.
Sir, no, I understand.
As Jain said, API there are so many possibilities. Number of cycles, prices are also different from one product to another. There is $20 product also, there is $200 product also. All those things come into play, and you have a flexibility.
Understood. Basically, at your full capacity, I'm talking about the current capacity, not the new capacity, including debottlenecking, do you think the plant can do about roughly INR 1,000 crores kind of a INR 1,200 crores kind of a revenue? That's what basically you are suggesting.
No. What we are guiding is going forward, the API business in this second half, there will be improvement of 15%, 18%, and thereafter our guidance is a normal 12%-13% growth.
Understood.
Yeah.
Sir, the second question is in terms of the EBITDA margins. If I look at last year, fourth quarter, as well as year before fourth quarter, typically, your fourth quarter margins are lower compared to third quarter and the company average. What is the typical reason for this?
See, it is mainly because of the domestic branded business. If 100 is my business, in fourth quarter, I do about 80, 90 out of that. Whereas the 80 gets transferred to other three quarters. This is the main reason.
Okay. That basically pushed down your margins to some extreme the fourth quarter. Despite that.
Our portfolio, the January- March period is healthiest. For the people, not to us.
Oh, I see. Understood. Despite then you are suggesting that this year, second half margins you will maintain a second quarter. This is despite the fourth quarter typically is a slightly low margin business. What can we.
No, in spite of that, the second year business itself is low. We will be growing over that.
Okay. Sir, last year in the fourth quarter there was no big problem in terms of the revenue base. Margins were low because it is not healthy for you, otherwise, revenue was not that bad.
No, I know that. Last year also, fourth quarter we have grown 10%, 12% when it comes to domestic branded business.
Correct.
This year also we will grow compared to what we have done last year.
Sorry. Again, margins again last year, fourth quarter were lower, generally speaking. I'm saying from that perspective.
No, that is why I gave a guidance of 25%-28%. Quarter-on-quarter it will vary.
Understood.
Yeah.
Understood. Okay, sir. Thank you so much.
Thank you. The next question is from the line of Rahul Sharma from Karvy Stock Broking. Please go ahead.
Yeah, morning, sir. I just wanted to get some sense of the performance of various regions in the export market for the first half, generics and branded.
I have already given Rahul, EU including U.K.
Okay.
Last year first half it was INR 169 crore versus that it is INR 211 crore this year. Australia and New Zealand from INR 60 has become INR 89 crore. Canada has become INR 56 from INR 30 crore. These are the major continents when it comes to generic business. Institutional, it is there already in our press release
Sir, INR 156 crore is which region, sir?
Canada. Last year it was INR 30 crores.
INR 116 crores is EU, right?
No, EU is INR 178 crores and UK is INR 33 crores.
Okay. What about Russia, sir?
Russia, first half there is a growth of 11%, INR 92 was last year. This year it is INR 102.
Okay. Any other traction, any other generic markets, sir? Branded?
Generic market, we covered now all the territory. It is EU plus Australia, New Zealand, Canada, and South Africa. These are the markets.
Okay. What sort of growth you're foreseeing for the current year in your branded and generic formulation business, sir?
Rahul, the company as a whole going forward, we are confident we will grow anywhere between 10%-12% offline growth. Similar number, more or less, the domestic branded business. This is comparison to YoY. Generic, we are confident it will grow by about 15%, 16%, generic business. There will be good growth when it comes to institutional business.
Okay. Branded, sir?
Branded, our guidance is about 10%, 11% growth for whole of the year. Quarter-on-quarter, there will be a lot of pluses and minuses, depending on shipments and all.
Okay. Sir, FY 2022, can we see a spike in institutional business? Is there a possibility?
Rahul, our institutional business is only antimalarial. All depends on season and so many other things. Now we have a range of product. The other two registrations what we got, AL dispersible and injectable also, we see lot of traction and orders coming in. You just can't see a very big growth and miracle in that kind of a business.
Sir, any outlay on R&D? Is it increasing or any thoughts on that?
As we said in our earlier con calls, our more focus is now ex-U.S. development cycle. Europe and all other generic market, institutional business and other things, branded ROW market business. R&D, for time being, will be in the range of around 3%-4%, but when we are back into U.S., those expenses will improve thereafter.
Okay, sir. Thank you. I'll join back.
Thank you. We will take one last question, which is from the line of Charulata Gaidhani from Dalal & Broacha. Please go ahead. Charulata Gaidhani, your line is in the talk mode. Yes, please go ahead.
Yeah. Sir, can you please repeat the outlook for U.K. and Russia, and the numbers also?
Charulata, we said the branded business, ROW market, whole of the year, it will grow around 10%, 11%. That is what is the guidance. In the branded ROW business, quarter-on-quarter, there will be always variance because of the shipment and other reasons. This is the guidance. Quarter-wise, it's very difficult to say this quarter we have done so much, next quarter we will do so much. Year guidance we can give when it comes to promotional branded business of ROW market. Generic business, yes, we will continue to grow quarter-on-quarter. That is what the guidance we have given.
Okay. U.K. will see a higher growth?
In the first half of the current year, there was hardly any business from U.K. Last year it was a INR 94 crores first half business U.K. This year it is only INR 33 crores.
Okay.
Going forward, there will be good growth compared to these two quarters as we progress further.
Okay. Yeah. Fine. Do you see more growth coming from formulations or APIs?
See, API, our guidance is there about 18%. Domestic formulation, we should see a growth of anywhere between 10%-12%. ROW, I said around 10%. Generic, there will be about 15% growth. Overall, formulation business growth will be around 12%, 13%, and API growth will be about 18%. This is YoY growth, third and fourth quarter.
Yes.
Yeah.
Yeah. Thank you, sir. All the best.
Thank you.
Thank you, ladies and gentlemen. That was the last question for today. I now hand the conference over to the management for closing comments.
Thank you, everybody. We are continuously committed for and improving our systems on regular basis so that we are back in U.S. business. Management commitment to that is 100%. Hopefully we should be back as and when the inspections and other things happen. Thank you so much.
Thank you. On behalf of DAM Capital Advisors Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your line.