Ladies and gentlemen, good day and welcome to Ipca Laboratories Limited Q1 FY 2021 earnings conference call hosted by IDFC Securities 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 touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Nitin Agarwal from IDFC Securities. Thank you, and over to you, sir.
Hi. Thanks, Steven. Good morning, everyone, and a very warm welcome to Ipca Labs Q1 FY 2021 earnings call hosted by IDFC Securities. On the call today, we have from Ipca management, Mr. A.K. Jain, Joint Managing Director, and Mr. Harish Kamath, Corporate Counsel. I hand over the call to the Ipca management team to make the opening comments, and then we will open the floor for questions. Please go ahead, sir.
Thank you, Nitin. Good morning. Thanks for taking out time and joining us for Q1 FY21 earnings call. Today's call and discussions and answers given may include some forward-looking statements based on the current business expectations that must be viewed in conjunction with the risk our business faces. Our actual future financial projections performance may differ from what is projected and perceived. You may use your own judgment on the information given during this con call. We would like to inform you that company's business and financial performance for Q1 FY21 has been strong in spite of testing time on account of global COVID-19 pandemic. We have used our integrated business capabilities in furthering our global API and drug formulation business.
The business and margin growth in FY 2021 is largely driven by the business opportunities due to COVID-19 on account of chloroquine and hydroxychloroquine API and formulations, higher currency realizations on exports, improved productivity, and lower cost of operations, reduced traveling and marketing costs, spillover sales from previous quarter due to lockdown for promotional branded formulation business. These upsides were to some extent offset by COVID-19 led to the lower India branded formulation business growth due to the reduced patient footfall, additional attendance incentive payments made to the plant workmen and staff during the period, the figure was almost around INR 20 crores. Increased freight cost. Having given the opening remarks, now I will request participants to ask questions.
Thank you very much. We'll now begin the question-and-answer session. Anyone wishes to ask a question may press star and one on the touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handset while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Rahul Jain from Credence Wealth. Please go ahead.
Thanks for the opportunity, and congratulations for a wonderful set of numbers, sir. Sir, with regards to our quarter one results, we understand HCQ and chloroquine has almost contributed about INR 250 crores-260 crores in this quarter.
Yeah.
Leaving aside one-off businesses in quarter one, can we understand what is the sustainable business or how much business you could attribute to one-offs in quarter one, which may not be again repeated?
Overall, hydroxychloroquine and chloroquine business relating to COVID, what we have done in Q1, is almost around INR 259 crores on consolidated basis, and that has also contributed a significant margins overall to the company. That is basically, it's the incremental business over the last financial year on these products, particularly on account of COVID. This is how you can say that some of these businesses could be a one-time business out of that. There are no other exceptional other than the significant business what we have done on chloroquine and hydroxychloroquine. Rest is all normal operations. Apart from that, this also includes whatever institutional business on chloroquine, but hydroxychloroquine, what we have done in India. It includes all promotional markets, generic markets, whatever additional API business what we have done on hydroxychloroquine and chloroquine. It includes everything.
It's basically incremental business over last financial year first quarter. That is by and large an opportunity on account of COVID, and that has helped us to work in this quarter.
Sir, with regards to the guidance in the previous quarter, you had given a guidance of about 14%-17% for top line, an improvement in margins by about 150 basis points.
Yeah.
With the quarter gone by, can we understand that we can improve our guidance for the full- year or in both top line and margin part?
Let's say COVID-related business opportunities have significantly come down now. Let's say we are not seeing that kind of incremental business relating to that from Europe or Asia, other geographies, except some API business are currently happening in some Latin American markets now. Mostly the people bought the higher quantities in the first quarter itself, so they are still carrying the stocks. I don't foresee that there will be any kind of further additional businesses in these geographies. U.S. has already withdrawn the emergency authorizations as far as chloroquine and hydroxychloroquine are concerned, so therefore, we don't see any kind of further business coming from there also. The business of hydroxychloroquine now henceforth is likely to be more or less the normal business which we used to do earlier. That business opportunity may not be there to that extent.
Almost around 50% of our business is India formulation business. Currently, there are challenges are there. In first quarter of the current financial year, of course, it has grown by around 8%, but that also includes the government business what we have done. If we exclude them, then I think overall, the India formulation business of that will be around 4% only, which also include the higher hydroxychloroquine business. There are challenges on India formulation business. Of course, gradual recoveries are happening. Each month is better than the month. We have still to reach to the full potentials or maybe even to that kind of level. Still we feel that patient footfall is very low. Certain therapies like your antibacterials and derma and ophthalmology and all, we are still seeing some kind of decline.
We are also seeing that malaria season, which normally happen from July to September, which is a peak period. We didn't find much of the malaria cases currently happening. Looking all that, taking into account, our growth projections for the next quarter, maybe it's around, overall growth may be around 10%, maybe in the next two quarters, we may start growing by almost around 12% or so. Overall growth of the company for the whole of the year will be little higher than what projections we have given earlier of around 14%-17%. It may touch 18%, 19% kind of growth is possible. It all depend how the recoveries are, because 50% of our business is domestic formulation business, how recoveries happen in Indian market, that's very crucial for driving the further.
Sure.
Mr. Jain, sorry to interrupt, but for any follow-up, request to rejoin the queue, please.
Sir, this is just about that margin part which was not being answered. I just wanted to understand on the margin part. Very simple, sir. In the balance three quarters, I'm not asking, we have been generally reporting around 20% margins for last four, five quarters, somewhere around 20%, 21% margins for last four, five quarters. Of course, 38% margins are not sustainable. For the balance nine months, can we expect the margins to be around 20%, 21% on a normalized basis?
We will continue to have some kind of margin improvements. The overall, let's say, cost pressures are down. Material cost pressures have come down significantly now. Overall operating costs are also in control. Of course, there will be now, the first quarter we didn't pay any kind of field operating costs. There are 5,000, 6,000 people who continuously travels, and their daily allowances and their travel costs and all those costs was significantly lower in the first quarter. Of course, that cost is going to be there down the line. Since business is also at a reduced level, even there will be some kind of reduction in the promotional cost would be there. I don't think so there will be a significant amount of reduction in those kind of costs. Margin certainly is likely to be better than what we have earlier talked about.
Thank you so much, sir. Thank you so much. That's all.
Thank you. A reminder to the participants, please limit your questions to two per participant. Should you have any follow-up, request to rejoin the queue, please. The next question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.
Yeah, good morning. Just on the INR 259 crores that you mentioned. This is across the, which line items would it be? Formulations, API, India formulations, or the API domestic, which has also increased manifolds?
It includes everything. In fact, what we have done is, what hydroxychloroquine and chloroquine relating to export business. I have not taken chloroquine normal business of India.
Okay.
hydroxychloroquine business last year and business in this, so incremental figure is taken of all the businesses. Whatever chloroquine export related business is additional done, so that is added to that. Mostly the India API business, what you are looking for, that is also the significant increased figure what you are looking is also relating to chloroquine for U.S. exports.
Okay. You have all baked into this INR 259 crores is what you're saying?
Everything is included in INR 259 crores, yeah.
Okay. India API as well as exports is already baked in in this INR 259 crores.
Domestic formulations, institutional sales in domestic promotional market, additional business on hydroxychloroquine, generic market, additional business on hydroxychloroquine, local API business on hydroxychloroquine, additional business, export API business of hydroxychloroquine, and also chloroquine for U.S. exports, which we have sold in India for U.S. exports. Put together everything is included in INR 259 crore.
Okay, fair enough. Second question is on the gross margin side. It's a 900 basis points improvement. You clearly mentioned part of it, currency, part of it is one-off.
Yeah.
If you could just help us understand what will be the normalized gross margin going ahead, given that HCQS, you are saying, had higher gross margin, so we exclude that, and assuming currency at 75?
Let's say, overall, if you look at our last financial year, our material cost to sales ratio for the whole of financial year was almost around 33%. A year prior to that, it was little lower because there was some kind of material cost increases were there. First quarter, it was almost last year was around 35%, started 33%, 32%. That's the kind of overall material cost ratios were there. We see that these ratios are going to be down in the next two, three quarter, and it may be around 32% or 31.5%. That's the kind of ratio is going to be there. There'll be improvement in overall gross margins in the current financial year.
This would be led by what, sir?
It's a lower material cost.
Okay. Fair enough. Thank you.
Thank you. The next question is from the line of Surya Patra from PhillipCapital. Please go ahead.
Yeah. Congrats for the great set of numbers, sir. Just on that INR 259 crore, one small clarification just wanted. First is that, you said on the domestic business side, you also got impact of this COVID and the disruption and all that. See, this is the incremental number, obviously, for the HCQS supply, but the business impact what we have seen, can you quantify that?
I have already said that overall business growth. Overall business growth is around 8%.
Correct.
Out of which 4% has come because of institutional business, otherwise, overall business growth is around 4%. If you take hydroxychloroquine out from that. Practically there will be around 2% kind of growth.
No. Okay. I was trying to understand what is the revenue that you lost in the quarter because of the COVID impact.
At the beginning of the year, we were looking for around 15%, 16% kind of domestic business. Overall business growth, there was no projections for institutions.
Right.
In between that, we have got 4% growth, so around 12% business is lost.
Okay. This is recoverable, or how is it, sir?
No, patients who are not treated, that business is lost once and for all.
Okay.
Yeah.
Fine. My first questions, if you can just these are like relatively long-term orientation oriented questions. You have already mentioned about filing few of products, DMFs through Pisgah in U.S. What is the update on that? How many products that you have filed, how many that you are having in the pipeline to file? That is one. Secondly, on the KSM manufacturing thought process you have said earlier, and you want to create a dedicated site at your acquired asset or acquired company site of Maharashtra. What is the outer timeline during which you can achieve that KSM manufacturing for your strategic products?
As far as KSMs are concerned, we have very integrated business of API and KSM production. A lot of KSMs are produced in-house. A lot of starting materials we import from China.
Correct.
Some of the KSMs also we import from China. For most of our larger products. The KSMs are produced in-house only.
Yeah. Okay.
Some of like, say, product like losartan we have the BCFI is another material which is largely was imported earlier from China. We have developed now certain indigenous suppliers for that. We are working on a continuous process plant, i t is currently under installations, and hopefully by September, that plant will start operating. The BCFI we will internalize, and that will also give us substantial cost reduction. Conversion ratios are likely to be far, far better and cost reductions are going to be much better.
Okay.
That will further enhance our competitive edge by and large, for all larger APIs we are producing KSM ourselves. As far as your Nagpur sites are concerned because of lockdown and other issues and COVID issues. We have really not taken any kind of effective step on that. Our first priority is to set up a plant at Dewas.
Correct.
Which we have already received now in this period. Last three months, the lockdown period, the environmental clearance has already come. It has come at the end of the quarter. We will be after, say, this monsoon period of August, September to start the construction there and build the API facility there. API capacity constraints are currently there, and those we will be resolving through our Dewas facility. Thereafter, the priority will come on a lot of those kind of further scaling up of the KSMs and all for which we are really looking for more such continuous operations. The R&D and piloting team are continuously working on that part. At least five, six products will be in the pipeline in time to come on that.
Okay. About U.S. filing, sir?
About U.S. filing, I think two DMFs work is done, and we are awaiting inspection there. Once that happens, they are all very high value and small volume kind of products are there because their CSGA doesn't have very large capacities.
I know.
like a CRAMS kind of facility, and they have all these narcotics product also, they have license now.
Scope for a scale-up up there, sir?
We are really not looking for much of API production in U.S. currently.
Okay. Fine, sir. Wish you all the best.
Thank you. The next question is from the line of V.P. Rajesh from Banyan Capital . Please go ahead.
Yeah, thanks for the opportunity. Sir, my first question is regarding your expenses below the gross profit. Last year, we had about INR 2,100 crores of expenses. Is there any guidance for that, given some of the items you called out in your introductory comments about the higher employee expenses, et cetera?
As far as this quarter is concerned, overall, let's say your personal cost has gone up by around 18%. Largely, it's because of around INR 20 crore additional we have spent on giving incentives to particularly the staff and workers of the plants, because it was very necessary to keep all the site operational. Around that time, lot of fear factor was there in the mind of people. A lot of activities we did to reduce those kind of fear. At the same time, announce the incentive so that people come and because there was a huge amount of pressure from government, we needed to supply huge amount of tablets, almost around INR 12 crore tablets we supplied to the central and state government within a period of 45 days.
We had to cater the domestic ROW, all those kind of, and increase production of hydroxychloroquine and chloroquine was required around that time. That's an additional cost which we incurred. Otherwise, in this particular quarter, there was some reductions in the marketing cost because promotional cost was low. Also there was your travel cost is low. These two costs has come down. On manufacturing side, our operating cost has just gone up by 2%, except on manufacturing and other expenses. Whereas on marketing side, there is a reduction in the overall cost. I don't foresee any kind of marketing cost reductions are not likely to be that much. There will be some reduction because there'll still be your restricted travels and all will continue to be there. More digital activities are likely to be there from the senior management of marketing and sales.
They're traveling and others, and also a lot of those kind of the knowledge sharing and those kind of activity which keeps on happening. Those cost is likely to be lower, but field operations are now continuing. In the first quarter, we have saved cost on that, almost around 5,000 medical reps and their managers' traveling cost and their daily allowances and all that it was not there practically. Very small part of that was there. A lot of those period, the people were not operating. Those costs were lower, and promotional cost was also lower.
Right.
Going forward, these costs will also increase now.
Right. What will be the cost once you take all these increases? What is the expectation of the cost for the next three quarters, basically?
Let's say HR cost, if you look at, it will be likely to grow around 8%-10%. It's not going to grow to that an extent. On other expenditure side, your plant operating cost may have around 5%-6% kind of growth. On marketing side, there will be some cost reduction and some increases. Maybe around some 5%-6% kind of overall cost rise would be there compared to last year. Because freight cost is high and still it is high. Those costs are going to continue in the time to come.
Okay.
Overall, we see that cost will be at a lower side, yeah.
Understood, sir. You earlier said the cost of material will be around 32%, or did you say some other number? I'm sorry, I didn't catch that properly.
Yeah, overall numbers is going to be because there is the tendency of the material prices going up significantly last financial year, which has come down.
Right. What is the number you said for the remaining three quarters? It's going to be around 32% or lower?
32%, yes.
Okay. Thank you so much. Thank you.
Thank you. The next question is from the line of Tarang Agrawal from Old Bridge Capital. Please go ahead.
Hello, sir. Good morning. I have two questions. One, what were your capacity utilizations for Q1 FY 2021 across all facilities? The second question is, when I look at your overall revenue, it's almost up by INR 500 crores. Out of which you said almost about INR 260 crores is on account of HCQS and maybe another INR 40 crores in the domestic formulations business. Of the balance INR 200 crores, where did it come from and how much of it is sustainable going forward?
I would say that, sir, your generic businesses, your API exports, your promotional market businesses, all those businesses plus institutional businesses have done well. All those numbers has come from these kind of the businesses what we have seen in the first quarter of the current year.
Would it be fair to therefore presume that this is a sustainable sort of a market from where these revenues came?
What we had talked about earlier, that we have projected our, I think, institutional business growth of around almost more than INR 200 crore. That is perfectly achievable. The number of first quarter is seen that we have done significant. Even second quarter number is likely to be good. Overall, we expect that business will be good. As far as the promotional market business is concerned, overall for the whole of the year, we have projected a 15% kind of growth. Also taken into account those kind of spillover shipments which we had in the first quarter of the current year. That business growth is also good. API business growth overall for the whole of the year is also likely to be in the region of around 20% kind of thing.
Overall business growth is expected to be good for our current financial year.
Sure. Utilizations in Q1?
Utilizations is a relative term. I would say that as far as we produce higher amount of hydroxychloroquine and chloroquine from our those facilities, some of the other APIs which we are producing, some of those shipments or some of those capacities got impacted because of additional production of those certain other plants. Those products could not be produced. Otherwise, I would say that API capacity is almost at full capacity we are currently running. As far as your domestic plants are concerned for the formulations, maybe it's around 75% kind of running and on generic formulations, on my particularly Athal plant, which is supplying for the most of the generic market, their capacity utilization may be around 75% or so.
Sure. Thank you, sir. All the best.
Thank you. The next question is from the line of Cyndrella Carvalho from Centrum Broking. Please go ahead.
Thanks for the opportunity and congratulations on great set of numbers. Sir, you mentioned about the continuous manufacturing and that leading to cost reduction going ahead. If I have understood this correctly, if you could give us a little more, you said that you are adding 4- 5 more products on a continuous manufacturing basis. If we look at over 2- 3 years time frame, how should this benefit us overall? Looking forward, do you think that industry would also shift to these kind of things and overall cost could come down? Is this a possibility?
You see, we are an integrated player, we continuously keep on working on the key starting materials. Normally, we like to produce key starting material either ourselves or give the technology to the smaller peoples and get it manufactured under our control. That has been our business philosophy. Currently, I said that one product we have already set up a plant, which is under installation currently and which is likely to be operational by September end or so. A quarter thereafter, we will start seeing some kind of advantage. Other products are working and other products are in R&D, and as far as piloting is concerned, we have yet to order the certain plants on that. As and when these R&D and other piloting work and everything is over, we will also be going forward for more those kind of automation plants.
As far as the industry is concerned, it's very difficult to say that which company has what kind of strategy and all. We are also not tracking which company is also producing from what technologies and others. Except looking at patents and all that kind of thing. It's very difficult to know that what is their manufacturing practices and all those are there. I would say that very few plants are there in India which are on continuous process as far as API and intermediates are concerned. On chemical industry, yes, it happens, but not much on API side in India.
Okay. Sir, would that continue our benefit on the gross margin side as and when this comes in our base, as you are saying? That should help us on the gross margin side. That's a clear understanding?
Yes. That happens because your reaction efficiencies goes up.
Okay.
also goes down because number of people employed is also in handling and all, everything get reduced because it's continuous operating plants where person sitting in your control rooms, he manages all the kind of operations.
Okay. Sir, on the export institutional side of business, if you could help us understand, apart from HCQS and chloroquine, what else is driving it?
By and large, most of our institutional business is relating to malaria, because we are not there in either AIDS or TB or those kind of products are there. It's only the anti-malarial products. That's what is currently driving that kind of business on institutional side here.
The seasonality we can say.
It's all different countries, different seasons are there. By and large, it's more or less throughout the year, that kind of business happens.
Okay. Thank you. I have more questions. I'll just step back.
Thank you. The next question is from the line of Charulata Gaidhani from Dalal & Broacha. Please go ahead.
Yeah. First, congrats for the amazing results. My question pertains to the increase in the scale-up in institutional business. You mentioned that it is particularly malaria. Do you expect it to sustain going forward at the same level?
We have, in last few years, we have added, you see, on artemether-lumefantrine dispersible tablets, we have injectables. The injectable now plant is running at full capacities and all. That is also helping us in overall business. As far as the global front supply chains are concerned, we are now a very strong supplier now and taking, again, the more market share therein. That is helping us in overall our institution, because we are a backward integrated company as far as all these anti-malarial products are concerned, because we are leaders in anti-malarials. That's our strength area, and that is helping us in the overall institutional business.
Okay. Second, the scale-up of the generics business and exports, do you see that continuing at the same level?
Generic business, let's say earlier we used to have U.S. business. Right now it's not there. We wish to be there on that market, and once that start happening, then business will further grow. In Europe, we are now penetrating in more number of markets, but it's all through the distributors in those markets. We are not having any kind of setup. First, we are now really looking for having a setup in U.K. to start with, and I think that operations may start happening somewhere maybe on third quarter or little that kind of period. A lot of activities are currently happening, and we have already got lot of approvals, so we will be commercializing that. That's the journey which will be there. European generic business, currently generic business are being done in Europe, Australia, New Zealand, South Africa, Canada.
These are market, and most market we have good growth currently.
Sir, can you give the-
I'm sorry to interrupt, but for any follow-up requests, could you rejoin the queue, please? The next question is from the line of Surjit Pal from Prabhudas Lilladher. Please go ahead.
Yeah. Hello. Good morning, sir.
Good morning.
Yeah. Sir, I have two questions. One question is that in your institutional business, you earlier gave some kind of very good guidance, and given the kind of growth we are seeing this quarter, is it mainly again from HCQS and CQ or some normal business cropped up?
There are no hydroxychloroquine, chloroquine business in institutional business.
Right.
It's zero.
This kind of growth will happen in every quarter, or do you think that this is just one or two quarters, and after that it will be normalized?
Institutional business, you can't say that same kind of number will get repeated. Sometimes there are country tenders. Country tenders comes at different level, different intervals and all. In this quarter, maybe one or two country tenders were there. They may not be there in third quarter. Maybe there's some in fourth quarter. Some fluctuations keeps on happening there. Overall, I have guided that in current year, our institutional business is going to be more than INR 200 crore.
INR 200 crore. It will be growing at 20% in FY 2022 also as a result?
FY 2022 is difficult to say now. Yes, we have other products in the pipeline for pre-qualifications and all. This business will have some growth in FY 2022 also. We don't see that this business is going to go to INR 400 crore and all because it's only anti-malarial kind of business which is there. It's a forward integration of our API basket, and we are really not looking for institutional business to be there in those kind of other kind of product like TB and AIDS and all. Of course, we are filing the products on hormones and other. For pre-qualification, one product is already pre-qualified, another product is filed. We are waiting for pre-qualification. More such products will come in time to come. Largely, these products again goes in institutional business.
Bottom line you are saying is that INR 200 crore+ you are guiding for this year.
Yeah.
Mainly it is driven this year by injectables, and next year could be by dispersible tablets.
Yeah. Next year's guidelines we'll give in next financial year.
Okay. Second question is that regarding your European business, which you were again saying European generic business is mainly driven by HCQS also. If you can recall that last year, your major growth come from API as well as generic, mainly from sartans in European market. As well as you have now two partners in U.K. I believe there are some issues from their partner side. Can you throw some light on these two aspects, please?
Partner side, we don't have two partners. We have only one partner there, and we will be starting our own also there, as far as U.K. is concerned. Partner was facing some kind of delays on payments to us, and therefore, we have put some break till the time again the account come in order. There will be some kind of lower business maybe in the first quarter current year and second quarter, there will be some lower business. Now things are again normal, and the business will start back on normal level.
sartan? Hello, is it part of that question?
As far as sartan businesses are concerned, yes, it's important part of our businesses, and we are continuously doing well. We are producing losartan, valsartan. These are the two major products we have, and we will be further increasing our capacities on those kind of products in time to come.
Thank you. I have few more.
Yeah.
Thank you. The next question is from the line of Sudhir Kedia from Principal Mutual Fund. Please go ahead.
Yeah. Good morning, sir. I have one question regarding your raw material. In the current quarter, your raw material cost has gone up by only 6%. Could you give us some idea in terms of how is the volume and price breakup of the 6%?
Let's say the increment business relating to COVID has come at a very high margin. When you work out the ratios and all, yeah, that number, you will not be able to. Because of higher top line, that will appear to be on a lower side. I have guided that overall our material cost in the whole of last financial year was around 32%-33%. More or less, there will be some reduction in the next three quarters by around 1% or so, because of overall soft prices and all there. These numbers are likely to be in that region only.
No, sir. What I was trying to understand, that including your COVID-related sale, the overall sales have gone up by INR 450 crores.
Yeah.
While at the same point of time, the raw material cost has gone up by only INR 25 crores. We may have seen a significant reduction in raw material prices, or it's something else. I'm just trying to understand that part. How much of this raw material decrease, if any, is sustainable in nature, or this is one-off in your view?
That's what I have replied, that in coming quarters, the material cost ratio, which used to be 33% or so there could be a reduction of one, 1.5% in that. That's the overall likely to be there as far as material cost is concerned. This quarter, because we have a significant higher promotional business where the margin levels are higher, and also other businesses where the margins were high.
Exchange.
Yeah. Exchange gains were also there because we have used the materials which were imported earlier, maybe at around 69, 70 level, and realizations were almost around 76 level or so. The higher exchange realizations has also helped in that. When top line is higher and your consumptions are at materials which are with a lower cost, that has helped in overall lower cost of material costs. In future, it's likely to be on a level which was there earlier, a little less than that.
Sure. Sir, one more question. The total increase in sales is about INR 450 crores.
Yeah.
If I reduce the COVID-related sales, which is about INR 300 crores, including the domestic part. The rest of the sales have gone up by INR 150 crores.
Yeah.
At the same time, you have also mentioned that you have lost a significant part of the sales because not enough prescription has been given, and similarly, the infection rate related with malaria and all is lower.
It all depends on your product mix profile. There are products where there are high material cost, there are products where lower material cost. In this particular quarter, businesses are happen where the margins are high.
Yeah. That I understand. I was just trying to understand this INR 150 crore, how much of sales you would have lost due to COVID in our normal business. That's what I was trying to understand. This INR 150 crore should have been how much? If the thing would have been.
Our domestic business growth, if you look at last five, six years, has been around 13%-15% kind of range is there. We have been always growing around last seven, eight years by almost around 1.5x the overall market growth. Current quarter is only around the same, if you exclude your all the additional business of hydroxychloroquine and also government business in first quarter, our domestic business growth net will be around 2% only after excluding the additional business of hydroxychloroquine and also institutional business. On that domestic business, you have lost almost around 12% kind of growth.
Sure.
Thank you. The next question is from the line of Kunal Dhamesha from Systematix. Please go ahead.
Thank you for taking my question. First question is on the API PLI scheme. I think now the more details are out, and we are also planning to do CapEx on increasing our KSM production. So is it possible for us to participate in the scheme and bring our export as well as the domestic consumption under one plant? How do you think about that scheme, and what are some of the molecules which are looking attractive? I think sartans are also there. Are we looking to participate in the scheme? Second question I'll ask you.
We are certainly looking to participate in this kind of scheme, which we will do. As far as this scheme is concerned, the incentive that Government has announced is purely only on the domestic sales, not on export sales. Also, the larger incentive parts are there on fermentations, not on the other products. Each company-wise annual incentive could be around INR 2 crore or so for each participant, something like that, which Government has said. Incentive is not going to be that great. Yes, in spite of that, it's the Government of India program, and we also have those kind of products in our pipeline and all. We will be applying under PLI scheme for certain products, but it all depends. They have given certain metrics on price and also on what kind of volume you want to produce and all that.
On that, they will be deciding which company they want to award that. The incentive, I would say, is not because of incentive that we will be going for PLI, because we want to produce those kind of products and also at a competitive cost to take a larger market share in India and international market. Those will be the considerations to go for it. Incentive will never be a consideration to go for a kind of investment.
Okay. Is it possible for us to bring the manufacturing for the export as well as domestic consumption under one roof? Or, we have to follow different processes for, let's say, export markets which are more regulated like Europe or U.S., and then domestically, processes would be different and then NC compliance costs, et cetera, could be different. Or we can just bring our export volume and domestic under one roof, although we will only get incentive on the domestic consumption.
At a particular plant, it's all what kind of capacities you have set up for which plant. Under that plant, if there are certain kind, you can expand there, on those plants you can put those kind of products which government has announced. Like say, we have plants, the upcoming plant at Dewas, and we have plant which is there in Gujarat. Some of these products, we will take it up there.
Okay.
Except Dewas, which we are planning as a new site, the other site is an existing site. As far as the pharma industry is concerned, your one roof question I didn't understand because we have large number of plants. Some plants are producing a different kind of dosage form, some producing tablets, some producing injectables, some producing your oral. All these plants are different and at a different site. We have API plants. In Ratlam plant itself, we have around 22 API plants, and then we have other plants like Indore. These plants are going to stay. I didn't understand what you mean by bringing under one roof.
Yeah. The question is, let's say you get a machinery to produce valsartan, but let's say valsartan manufacturing process that you have to follow for the U.S. or Europe could be different from what you could do in India for the domestic consumption.
It doesn't go that way, what you are talking about. When you do a regulatory filing, there are different kind of processes. If a customer has approved you from a particular process, then you have to supply him, continue to supply till the time he shifts on different processes. Each customer's specifications are different. You continue to keep on improving the processes. You have filed process one, process two, process three. Some customer may be on process three, and some customer is a old customer, he doesn't want to willing to shift. He may be on process one also.
Okay.
API industry is highly regulated. Till the time he takes the regulatory approval for process one to shifting to process three, he cannot shift. He will continue to buy the material from process one. That kind of harmonization is not possible till the time. Either you lose that customer, okay. If you don't want to supply your process one, you will lose that customer. It all depends on economics and other things.
Secondly.
Sir, sorry to interrupt. For any follow-up request, do rejoin the queue, please. The next question is from the line of Nikhil Upadhyay from Securities Investment. Please go ahead.
Hi, good morning. Congratulations on good set of numbers. Sir, one bookkeeping question. Earlier, for our regulated plants which were under import alert, they were having a negative impact on our P&L. If I'm correct, that was around INR 70 crore-INR 80 crore, right? A year. Now with the HCQS production which we have done, probably their contribution would also be there in the EBITDA margins of this quarter. If you can just help me with what is the utilization now?
Let's say there are two plants which are still there on the formulation side. One is our SEZ Indore plant, and another plant is at Piparia. These are two formulation plants which are largely dedicated to U.S., and there the capacity utilization is at the lower level. Let's say Piparia plant utilization is further lower. There we have produced some kind of hydroxychloroquine for other markets also. As far as the SEZ Indore plant is concerned, we have not produced anything for U.S. from that plant. Their capacity utilization is on the lower side, and we continue to have some kind of losses on these two plants.
Okay. Secondly, sir, on the margin side, if I just want to understand, because if we see last year, whole year, we had that INR 50 crore-INR 60 crore of one-off cost, which included the forex and the impairment charges which we had taken in the last quarter, which itself was around 1%-1.5% of impact on the overall cost margin. Secondly, on the gross margin also, you mentioned that we are getting a benefit of around 100 basis points because of the lower RM cost, which we are seeing, which should flow for the next two, three quarters. Which means for the full- year, the margin improvement and overall other expenses as the numbers which you have mentioned, it's all under in around single digit as compared to the sales growth of 17%-18%.
If we just do a back of envelope calculation, that itself adds 250 basis points, 300 basis points to the EBITDA margin.
Let's say-
Am I missing something here or?
No, you have to also see the quarter to quarter. What we have guided the first quarter numbers are exceptional. For the next quarter.
No, sir, I'm just.
Yeah.
If we leave the first quarter, just the next three quarters, because first quarter was abnormal quarter.
Yeah, next three.
Whatever number we have to see, we have to adjust and then see those numbers.
Yeah.
Just on the next three quarters, based on the guidelines which you have given and based on the one-off costs which were there.
Yeah.
If you just add back those numbers, that itself means that for the full- year, even on a normal basis, we would have 200, 250 basis points of margin improvement. I'm just trying to understand, am I missing something or is it like the cost escalation could be much higher or?
I have already guided on cost escalation, that overall manufacturing costs are not going to go up that much. Your HR cost is going to be going by around 8%- 10% kind of cost, which is there currently in the system. Overall cost pressures are not going to be that much. Yes, if you look at your domestic market, in first quarter, almost around the field staff practically were at home. Those traveling and those cost was lower. In the next quarter, those kind of costs are again going to be there. Also the promotional cost, of course, that may not be at that level, but yes, at a lower level, the cost will be there. Depends. Those savings are not going to be that much.
Okay. Just one thing, sir, on Krebs. Just one small thing.
Sorry, sir, due to time constraint, we have other participants also.
Fine.
We'll have to take them. Thank you. The next question is from the line of Naresh Suthar from SBI Life. Please go ahead.
Yes, sir. Thank you for taking my question. Sir, my question is around this guidance again for revenue. Sir, if we exclude the benefits of HCQS for the full- year, if you can give guidance as of this opportunity for FY 2021 for revenue.
Let's say we have given the guidelines for the next three quarters that overall growth is going to be around 10%-12% in next three quarters, which includes the HCQS also. HCQS now is more or less a normalized business.
Okay.
There is nothing to exclude further because whatever additional business was to be done, that has been done in the first quarter. I also said that the European and other customers have bought an additional materials, and they are already having. In a subsequent quarter, there could be some kind of lower shipment also compared to last year of hydroxychloroquine. As far as India is concerned, your hydroxychloroquine business is more or less 10%-12% additional compared to last financial year. It's in a month-to-month basis. It's not a very big number as such on hydroxychloroquine currently. Whatever opportunities were there, that was there in first quarter, and we are not seeing any kind of significant rise in that number in the next quarter.
What we have projected for next three quarters is around 10%- 12% kind of growth, and it also depend on how the India revival happens, Indian market revival happens. A lot depends on that also. That's the one kind of risk factor which we have. Almost around 50% of that business come from overall business come from India business.
Okay. Sir, one question on API side. We have been seeing the peers talking about the API side. They're talking about getting benefited from the increased activity in terms of shift from China to India or any other place. Many players have announced CapExes and they are benefiting out of that. Can you share some outlook for next two, three years, how you are looking at the business and the CapEx over there, particularly from this trend of shifting from China to India and your revenue trajectory which I think used to be a 10%, 12% kind of growth, which can be in mid-teen kind of growth. Can you say, sir?
API business growth is good. Currently, we are talking of almost around 20% kind of growth on API business. That business is going to be good in the current year. I also said that we have a lot of capacity constraint and which we need to resolve in order to take up this business forward. We are continuously doing debottlenecking of capacity, which is adding the capacities and allowing us to do the higher business. In first quarter, a lot of API business of other drugs have suffered because certain additional productions we had to take out from existing plants on producing the KSM and also for the additional production of hydroxychloroquine. Those businesses also we will try to recover. Overall, API businesses are going to be around 20% kind of growth in whole of this year.
No, sir. My question is more of a longer- term. Because of the increased inquiries, are you seeing more CapEx over the next two, three years?
We are already in a process of setting up new plants.
Okay.
We will take care of that.
Okay. Thanks.
Thank you. The next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.
Thank you so much, sir, and congrats. It was great numbers. Just on the quarter, how is the pricing for your products, both branded and APIs? I mean, was there material change quarter-on-quarter?
There is not much of change, except I think the Russian ruble has a little devalued compared to the earlier numbers, so that realizations are on lower side. Other than that, the pricing part has not changed much on other products.
Okay, great. Sir, for this INR 259 crores COVID sales, if I reverse engineer, looks like this must have come at 80% or so gross margin, and that then flows down to PBT level. Would that be a fair assessment?
Yeah. That assessment is fair.
Okay. One final question. How much was the spillover of sales from Q4- Q1?
It was almost around INR 26 crore or so.
Okay. Not that much. Okay, great. Thank you so much.
Thank you. The next question is from the line of Anubhav Sahu from MC Research. Please go ahead.
Hi, sir. A couple of questions. First, regarding CapEx, now since you have got the environmental clearance for Dewas facility, could you just specify timeline for commissioning? Yeah.
I think we will start constructions maybe in the month of October or so. We are in process of finalizing the contracts and other. Overall, the Dewas project will be almost around INR 250 crores. The INR 250 crores, if we add further capacity, it can go to around INR 300 crores and overall timeline would be around 15 months on that. Implementation period will be around 15 months.
Okay.
The plant will be ready.
Okay. Sir, one clarification. You mentioned 75% capacity utilization. This is for the formulation part, right?
Yeah.
Does it exclude all the one-off items which we did there for this causes?
In capacity utilization, there is no one-off.
No, I mean the additional production which we did for hydroxychloroquine and those kind of things.
That's only additional cost was INR 20 crore what we have paid as a one-time incentive to the staff and workers of the plants. Most of the plants. All plants.
No.
That's the one-off additional cost.
Consuming the capacity of these areas.
Capacity, yeah.
Not substantial. The INR 20 crore capacity. Not very big.
This you are asking on the.
Capacity utilization. Yeah. For the normal business. Yeah. Sir, for the formulation business, what is the normal or the average capacity utilization which we have right now?
Formulation capacity utilizations, let's say two plants capacity utilizations which are there for exports are very low. One is Piparia plant and one is SEZ Indore plant , and these plants still continue to have some kind of losses are there. These plants were by and large built for the U.S. and once U.S. start and some generic business we have started taking from these businesses, but still capacity utilizations are low. Other plants are relating to what are by and large for the domestic formulation business and all those kind of international businesses of Europe, Canada, Australia, New Zealand, South Africa, and all those markets. There the capacity utilization is around 75%. Yeah.
Okay. That goes well for the Sikkim plant also? I think that is mainly for the domestic formulation. Yeah.
Yeah. Sikkim plant, yes. Also for domestic formulation. Yes.
Okay. That's all from my side. Thanks a lot.
Thank you. The next question is from the line of Cyndrella Carvalho from Centrum Broking. Please go ahead.
Yeah, thanks for the follow-up, sir. Sir, one question I wanted to understand from a product expansion perspective. What are the key products which we would be looking forward to expand our basket domestically and in export business? The second question is on the Krebs side of fermentation-based facility, what PLI benefits that we should expect? The third is on the U.S. Any discussion, any understanding from the FDA agency? Thank you.
As far as the Krebs are concerned, we are not there in all those kind of products which are antibacterials and which is very large investment, and we are not a very strong player as far as antibacterials are concerned. We are really not looking for those kind of opportunity. There are certain products out of that PLI schemes on fermentations, which we have done the backward integration. Forward integration is still pending. We are looking for whether we can go for and participate in that kind of scheme for one particular product on fermentation. That is there in the plan, and other than that, all the steroid kind of products are there where we don't have much of currently, neither we have those technologies to forward integrate those products. Right now we are not looking for participating on that PLI scheme.
Sir, on the U.S. FDA side, anything? On the future product basket expansion?
As far as U.S. FDA is concerned, we have done most our remedial actions, and we have already informed to FDA, and it all now depend on them when they will be coming. They don't say to us that when they will be coming, and in the COVID period, probably they are not traveling. Only after some things get normalized, travel may happen. It's very difficult to give any kind of timeline on that.
Basically, we've not heard anything from them?
No, we have regular meetings with them and we are discussing, but we have not heard so far anything on that.
Okay. Sir, future product basket expansion in domestic and in export related areas?
We don't add too many products. In a year, we may add around one product or so in every division or so. Sometimes we add in two years, one product. We don't want too many baggages in the system. Whatever product we take, we take seriously, and we do brand building. For our kind of size, we have very less amount of products. Our business philosophy is not to add too many products in because in a division you have three, four power brands and some kind of supporting brands, so you can't have more than that. We don't add too many products. As far as API is concerned, yes, we have good number of APIs in our product basket. Right now, since we have capacity constraints, so those products are not being taken up for further exploitation.
Once the further capacities are added at Dewas and all, we will further commercialize more number of APIs.
Okay, thank you.
Thank you. We take the last question from the line of S. Mukherjee from Nomura. Please go ahead.
Yes, sir. Thanks for taking my question. Sir, on API side, I just wanted to check on Dewas expansion. I think that's critical for future growth. How large is the capacity and how much it adds to your current capacity? Just if you can give that context.
We will be spending almost around close to INR 300 crore on that plant, that will add almost around a production capacity of around maybe 300 tons of overall API. That's the overall number going to be there.
How does it compare to your current, sir, in terms of tonnage that you're currently doing with 100% utilization?
Maybe around 20% kind of capacities we'll add.
Sir, do you think this is enough or you need to add more capacity going forward given the strength that you see in the API business?
We will be adding more capacities in time to come, but still not crystallized, so I will not be able to talk on that yet.
Okay. Sir, would it be fair to assume that since the capacities are full, the growth can be a bit subdued in the near term, and then when this capacity comes on stream, you said 15 months, maybe in couple of years, the growth would accelerate, would that be a fair assessment of the API business?
No, we continuously do bottleneckings.
Okay.
We are right now, except one or two products where we are losing business. We could have doubled the business, but since capacities are not there. Incremental businesses are coming from those kind of the debottlenecking, which is coming at a much lower operating cost and also much lower CapEx.
Okay. Sir, you talked about this continuous plant for API and intermediate. This is for a specific product that you're looking at or there are more than one products for which you want to put this?
I said we are working on almost on five to six products. One product, we are already in the process of installations. That plant is under installation. Balance is at R&D and piloting stage. As and when these products start coming in, but we are working on five, six products to make them a continuous process, yeah.
Okay. Sir, there's one last question.
All these are intermediates, not API.
Okay, intermediates. Sir, one last question, sir, if you can really help get a split of the API business. When you look at the export plus domestic, the overall API pie, how much is sartan? How much is like chloroquine, hydroxychloroquine? Any kind of break up that you can because you focus on a very few segments, so just if you can help us understand that profile of the API business currently.
Largely, let's say the major part of business comes from cardiovasculars, anti-malarials, pain. These are the three main segments that we have.
Okay.
Yeah. Major businesses come from these segments because we have been strong players on the beta blockers, and now we have added the strength on sartans and all that kind things. Plus, we also have a lot of these diuretic products. Cardiovascular is a major basket we have. On anti-malarial, practically everything we produce.
Good basket is there on anti-malarials. On pain side, we produce hydroxychloroquine, allopurinol, etodolac, terazosin. Those kind of products are there.
These three segments would be more than 75%, 80%? Would that be a fair assessment?
Yes, sir. Yeah. Cardiac segment is the biggest one out of that.
Okay. Sir, thank you.
Thank you. I now hand the conference over to the management for closing comments.
Thank you, everybody, for participating. As far as the U.S. is concerned, our continuous commitment is there to resolve all the issues and then come out of it, and then again start our U.S. business, because that's very important for us. In our overall business scheme, where we want to be a very strong player on products, what we have, U.S. is important to us and we are definitely working on that on continuous basis. Thank you so much.
Thank you. Ladies and gentlemen, on behalf of IDFC Securities, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.