Ladies and gentlemen, good day, and welcome to Laurus Labs Limited Q3 FY 2024 earnings conference call, hosted by Antique Stock Broking. 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. Monish Shah from Antique Stock Broking. Thank you, and over to you, sir.
Thank you, Yusuf. Good evening, everyone, and welcome to Laurus Labs Q3 and 9-month FY 2024 results conference call. On behalf of Antique Stock Broking, I thank the management for giving us the opportunity to host this call. Today, we have with us Dr. Satyanarayana Chava, Founder and CEO, Mr. V.V. Ravi Kumar, Executive Director and CFO, and Vivek Kumar from the IR team. I will hand the call over to Dr. Satya for his opening remarks. Thank you, and over to you, sir.
Q3 and 9 months FY 2024 results conference call. We are pleased to have this opportunity to update you on our progress and answer your questions. We continue to make good progress in advancing our strategic priorities with focus on long-term success. We are progressing on building promising pipeline, augmented by our widening technology platform offerings and leveraging our commercial excellence. Our enabling capability is gaining lot of customer confidence, and this is quite well complemented by our continued growth investment, and which is expected to accelerate future business potential, driven by several volume and value late-stage projects with key CDMO partners.
We also remain quite excited on transformative cell and gene therapy space that were added through strategic business development, such as India's first indigenously developed cell therapy product, NexCAR19, which was approved in December 2023 and is moving rapidly with commercial collaboration to enhance access, which will benefit cancer patients in India. In addition, the P hase 2 interim results of NexCAR19 were presented during the November 2023 ASH conference, which was well appreciated. Secondly, our collaboration on gene therapy is progressing well and started cGLP lab construction for the manufacture of viral vectors and cGLP gene therapy products. We expect to operate phase 1 of this facility at IIT Kanpur campus from June 2024. Moving on to our financial results.
While our quarter three headline results were subdued, the underlying financial strength of our business have remained quite strong, which was reflected in our resilient gross margins over 52% for several quarters. EBITDA margins were negatively impacted due to higher upfront expenses on growth projects and new initiatives to access innovative technologies. It is important to keep in mind, as well as our year, year-on-year growth was impacted due to particularly strong quarter we had in 2023, which included large PO delivery in the CDMO space. Our revenues for the quarter increased by 6% ex large CDMO PO, but overall declined by 23% to INR 1,195 crores. And our EBITDA came at INR 183 crores with a margin of 15.3%.
The positive momentum in FDF and Onco APIs, as well as dialysis division, was more than offset by softer sales in CDMO and other APIs. This volatility was more driven by timing of several customer contracts. Having said that, the overall volume trend across our business have remained upbeat. Our cost improvement programs are also progressing quite well. We anticipate that a slower Q3 performance should rebound, resulting from both healthy order book and, strong commercial execution from Q4 FY 2024 onwards. Overall, our confidence in the business remains high, and we are moving ahead with a clear focus on technology that, coupled with scale differentiation to address commercial needs of our customers and create a value for our stakeholders over long term. To begin, I would like to share key updates on our formulation business.
Our formulation division reported overall revenues of INR 367 crore for the quarter 3, increasing by 47% over last year. On sequential basis, revenue improved by 11%. Moreover, if you look at our 9 months, the revenues increased by 32%. This is primarily driven by consistent recovery in ARV business, along with growth in developed market sales. Coming to our LMIC business, overall market volumes have largely remained stable, partly supported from stable prices. We remain on course to fully stabilize our ARV franchise business through FY 2024 and beyond. We are actively pursuing optimization programs to counter any pricing impact in the future. Supplies to recent NACO tender have started that will ensure our volume continuity. Coming to the developed market, demand for our broader portfolio have remained healthy.
In U.S., we continue to get good market share on the products that we are selling, and also with very good increase in volumes. We have additional products under launch preparation for the Q4, which will support asset utilization of our expanded greenfield capacity. During 9 months, we filed 2 ANDAs. Cumulatively, we have a total 13 and 39 ANDAs filed to date. Of this, we have a total 16 final approvals and 14 22 approvals so far. In Canada, we have 21 filings, 14 product approvals, of which we have launched 9 products, and we intend to launch two more products in the current quarter. For E.U. markets, we have 18 filings with 14 product approvals and six commercial launches. We are continuing to strengthen our existing CMO relationships and discussing additional opportunities with new customers. Accordingly, we anticipate further volume increases in the coming quarters.
Our FDF division has a total commission capacity of 10 billion units right now, and we anticipate that some of the brownfield capacities that were added in the last year should start to get optimally utilized from the next quarter onwards. This is primarily driven by sales in partner portfolio, full-scale benefit of our new launches scheduled in Q4, and certain key product approvals, besides stabilizing ARV volumes. On R&D front, the overall R&D spending to sales for the nine months FY 2024 was at 4.8%. Our R&D spend in this quarter is in line to enhance our pipeline, which also includes our spend towards additional initiatives in gene therapy assets. We continue to make good progress and invest in portfolio with product-specific approach based on complexity and scale.
We have a total of 61 products in the R&D pipeline, either under review or under development. I'd like to share the status of our filings as of now. We have filed so far 39 ANDAs in U.S., 18 dossiers in Europe, 21 in Canada, nine with WHO, eight dossiers in South Africa and one in Australia, while 20 dossiers were filed in India. 23 products were filed in various rest of world markets. Of the 39 ANDAs filed in U.S., we have 16 Para IV offerings, filings, including 11 first to file opportunities. Overall, R&D to sales for the full year is expected to be around 4.5%. In the generic API space, the revenue from generic API during the Q3 declined by 9% year-on-year to INR 574 crore.
For the nine months, overall revenue was down by 5% only. ARV APIs retained its volume-led strategy momentum and reported revenues of INR 347 crores, a decline of 8% year-on-year and quarter-on-quarter. The current order book for these APIs looks encouraging. We continue to maintain a leading market share in the first-line HIV treatment. Onco API business for the quarter delivered a strong revenue increase of 18% year-on-year to INR 87 crores. When compared to nine months, the revenue increased by 38%. We remain upbeat on this portfolio, which was supported by positive market dynamics. Accordingly, new capacity addition work is also under progress. More importantly, Laurus Labs are one of the largest high-potent API capacity in the country. Our aim is to strengthen global leadership in some of the existing products by focusing on high-potent molecules.
In the other API segment, which includes cardiovascular, diabetes, and asthma, these API sales are largely remained muted and reported sales of INR 140 crores, a 23% decline year-on-year, whereas it was very flat on quarter-on-quarter. The moderation was mainly due to transitory shipment impact, subdued pricing. We anticipate a better Q4 following the scheduled delivery of some of our CDMO contracts. We are confident that the underlying demand for our products in the CDMO space, which have remained very strong, with a strong order book and continue to look healthy. During the nine months period, we filed four DMFs, three in non-ARV category. That shows the diversification efforts of the company, moving away from filing more DMFs in non-ARV space. As of today, company has filed 83 DMFs.
Coming to the synthesis business, during the Q3, the company's CDMO business recorded revenues of INR 212 crore. Baseline business tracking healthy and project pipeline continued to scale up well with our existing and new customers. On nine months basis, ex large CDMO PO, the division recorded a 30% growth. We are seeing good RFPs flow from several big pharma and leading biotechs, and our advanced and integrated scientific platform is helping us in working towards addressing commercial needs of our customers, which is expected to accelerate CDMO growth potential in the coming years. We are working on over 60 active projects with ongoing commercial supplies for about 10 products, including APIs as well as advanced intermediates. Key CDMO CapEx projects across R&D and commercial manufacturing facility are on track.
Our crop science chemical unit is under construction, and the animal health unit has started commercial validation supplies and scaling as well. As we mentioned, the animal health capacities are almost fully contracted to one big pharma partner. The new animal site will have the capabilities to handle steroids, hormones, high-potent molecules, apart from other large volume products. A dedicated R&D center likely to get commissioned by end of this financial year, which will support our new business opportunities. Our focus remain to build diversified CDMO engine, besides riding on the momentum in our NCE clinical projects. Our bio division witnessed a continued strong momentum with INR 42 crore sale in Q3 and INR 131 crore sale in the nine months of FY 2024, reporting a significant growth. The strong growth was led by diversifying the application of our CDMO services across expanding customer base.
We have continued to grow our enzyme engineering and production capabilities into small molecule, clinical as well as commercial API projects, which will augment our pipeline using green chemistry for sustainable journey. Downstream processing at R2 is now operational, increasing capacity by about 20%, and this unit will achieve its peak revenues during FY 2025. We broke the ground for greenfield R3 facility after receiving environmental clearance. The construction is likely to begin this quarter with a target to install up to 2,000,000 liters fermentation capacity in a phased manner. We see overall demand for products derived from fermentation to remain upbeat, and the new large-scale capacity expansion should further transform large capabilities into API offerings and CDMO activity. Let me share brief on our quality and ESG side as well.
While we execute on our R&D-led commercial strategy and planned growth investments, we remain equally committed to advance our quality systems and ESG agenda. We signed GHG commitment with SBTi during the quarter, and there are several ESG projects under implementation, including carbon neutral sourcing of power for three of our manufacturing units. Further, during nine months, FY 2024, a total of 97 quality audits were performed, including several customer audits. To date, since inception, we have successfully passed 96 regulatory audits, including 45 audits from major global regulatory agencies like USFDA, WHO, PMDA, TGA, EMA, and BfArM. With that, I would like to hand it over to Ravi to share financial highlights.
Thank you, Dr. Satya, a warm welcome to quarter three and nine months of FY 2024 conference call. Excluding large CDMO PO, the underlying business delivered 11% growth in the nine months' time. Total income from operations, INR 3,601 crore in nine months as against INR 4,660 crore, with a decline of 23%. During the quarter, we reported INR 1,193 crore sale against INR 1,543 crore, with a 23% decline. But, barring CDMO PO, large CDMO PO, we registered a growth of 6%. The underlying demand across our growth portfolio has largely remained healthy. Gross margin for quarter three have improved at 54.3%. This is in line with our guidance on the improvement in various areas, especially in the ARVs.
However, EBITDA for the quarter was lower to INR 183 crore at a 15.3% EBITDA. Our EBITDA for nine months was at INR 539 crore with a margin of 15%. The impact is primarily due to operational deleverage, lower CDMO business, and these are the two reasons. Our diluted EPS, INR 0.4, and for nine months it is INR 1.60. Our ROCE and net worth was lower due to the lower profitability and higher investments. On the CapEx front, we have invested INR 191 crore during the quarter, and for the nine months it is INR 576 crore. As you're aware that FY 2024, the majority of the CapEx is in for the synthesis and bio divisions.
Most of the expansion projects are on track to support our future growth. You may refer for further details in an IR. With this, I would request the moderator to open the lines for the Q&A. Thank you.
Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handset while asking a question. Ladies and gentlemen, we'll wait for a moment while the question queue assembles.... First question is from the line of Chetan Kapoor from Invesco. Please go ahead.
Hello?
Yes, your line is unmuted. Please go ahead.
Okay, thank you. Thank you. Thanks for taking my questions. So, first up, Laurus operates in highly regulated markets, including the US and Japan. We have multiple lines of businesses in bio CDMO and CE CDMO, generic APIs and generic formulations. We have a diverse development and manufacturing footprints across several units and locations, and we are growing, so in future we will be a much bigger organization. With all that context, my question is: How do you verify that good culture is uniform, and that there is no cross-contamination between compliance plus mindset and the practice of cutting corners and not maintaining the high standards of compliance, and that regulators and stakeholders expect from Laurus? That's my first question, and I've got another one. Thank you.
Interesting question. Our philosophy always remain: operate all units to one standard, quality standard. When we go through audits, either customer or regulatory audits, any comments which will improve our quality systems are implemented across the units. Even one unit comments from the audits, we don't implement for that unit. We take those improvements across all our units. That's the corporate culture, and we don't want to deviate from that. So going back to your question, the quality culture will remain similar across all units. There are no cost cutting or corners taken or unit-wise.
That's helpful and reassuring, Dr. Satya. My second question is, one of our Indian competitors, which is a pure play CDMO, has close to 100 projects with 400 scientists. So, four scientists per project is the, is the average. We have 60 projects and 750 scientists, excluding generic formulations and generic API, scientific talent that we have. So I'm adjusting the number that we have published, which is 1,088, and I'm reducing that to, a number closer to 750, spread across 60 projects. Now, this is way above the industry average of, 4-5 scientists, per project. So 60 projects should require anywhere between 200-400 scientists, as a, as a rough estimate, depending upon where that project is in the life cycle.
Early stage projects will require more scientists, phase three projects will require less scientists, and so on. So how come our scientific talent pool, purely on the CDMO side, is double that of the industry average? That is the question I'm trying to get your view on, because clearly scientific talent is a fixed cost for us. And part of the operational deleverage that we are seeing in the operating margins is because of this high fixed cost that is not translating into revenues, and scientific talent is definitely one element in that fixed cost. So why are we having, you know, such a high ratio of only six projects with 750 scientists? Thank you.
Thanks for asking this question. It all depends on the stage and complexity of the projects being handled. If it is RSM, which may involve one or two steps, if it is intermediate, maybe six, seven steps. If it is API, it could involve additional steps. I'll give you an example. We executed one project last quarter, including backward integration, we did say 15 chemical steps. So, you can't compare projects and number across the 60 projects. We are also hope to work on some projects which are even more complex than what we're handling so far. 30, 40 chemical steps for each projects. Then the demand for the scientific talent, I would say, depending on number of steps, your initial comment of four scientists may be valid for one step.
If you are handling 30-40 steps, you may need 100 people for project also, depending on the complexity. So, the advantage what the company is having, is the ability to handle complex projects at scale. Maybe we are in a sweet spot to attract such kind of projects, high volume, high complex, large synthetic scales. That is taking away a lot of our scientific talent. One good thing is there are not many companies who can offer such complex chemistry and scale. That is the reason we have some interesting projects coming to scale up. I hope I answered your question.
Definitely, Dr. Satya. Thank you so much. I've got more questions. I will reach you. Thank you.
Thank you.
Thank you. Before we move to the next question, a reminder to the participant, anyone who wishes to ask a question may press star and one.... Next question is from the line of Jeevan Vijay from Sahastraa Capital. Please go ahead.
Yeah, good evening, sir. So just wanted to understand, so I would request you to actually give us some sense on, you know, how we are going to move in next quarter and next year. So, since start of the year, we are saying this is a consolidating year for us, and we are seeing that, in terms of technology, in terms of, projects, everything, we are basically moving towards diversifying from ARV base, and we have, we are doing it pretty successfully. I just want to understand in terms of numbers. So qualitatively, I understand we are on right track, but quantitatively, just want to understand where are we? So, because last three quarters, I think, not able to. So it's, honestly, it's below our expectations.
In terms of numbers, in terms of quantitatively, can you just give us some sense, you know, where do we stand, and how do you see the year closing, FY 2024 year closing, and the next year?
We believe we are putting the bad quarters behind, and we hope Q4 onwards we definitely see improvements. That confidence is coming because of the order book and the deliveries what we are going and planning to do in Q3. That's the confidence what we have.
Any quantitative, any number sense that you can say? I just request you to, if you can just share some number, because we are already close to the FY 2024 year. So, one month already into Q4, and we'll be closing the year after two months. So is it something we have... So, so last year it was like we will be somewhere closer to what we did in FY 2023, and now we are almost 23% lower than that. So, so is it like we are going to close at, say, -10%, -15%? Where, where we, where do you see this year getting closed? In terms of FY 2025, so we've seen that our capacity, what we have added in FY 2024 are getting utilized in FY 2025 to some extent.
Based on our interaction with the client, based on our pipeline, some sense on the quantitative. I'm not asking for a specific guidance, but some sense.
So, Ravi, to give some light on this.
I think we can't give any quantitative guidance, we never gave except once. But but if you look at in our investor presentation, we have given a slide where we said that based on the CapEx investment, what could be the asset turn, we can do it, what we have done in the peak. So this is a some of the we are in a growth phase. We also indicated in the last two, three quarters back that we are three year back, actually, we have seen the same situation. We are hoping the history should repeat and there is any progress. So but the we can't give-
I also have the similar view, Ravi, that history will repeat the FY 2020, FY 2021 numbers should start again coming in FY 2024, 2026. But, so just want to... So what is happening in last week? So after Q1, everyone or I also thought that the bad is behind and now we should move ahead. But Q2 was, again, the number didn't come, and now Q3, again, the number didn't come. So I'm just trying to understand, are we still, are we closer to now the end of the tunnel?
That's what Dr. Satyanarayana Chava indicated. And, if you look at last quarter, last call, we have guided that second half will be the better than the first half. We are still commit to that. We not indicated quarter three will be better than quarter two, but second half will be definitely better than the first half. That's what we indicated in the last call, and we are still committing to that.
Okay. And on the buyer side, we say that we have started the work on the new facility, that two million liter facility, and we say that the phase one should start in June 2026, which is almost 30 months from now. So, why there is so much of time? Is it like the... So is it like once we start the phase one, the next phases will come quickly after that?
As I mentioned, the two million liters fermentation capacity will be added in a phased manner. The first phase, we are expecting to add 700,000-800,000 liters fermentation capacity, and which will come up in qualified trials done in 24 months. That's the estimation what we have right now. It's not a brownfield, it is a greenfield expansion. Yeah.
Okay. Okay, and then the next expansion, the next phase will come pretty fast.
12 months. We expect it will be 12 months. Yeah.
Okay. Okay, and the third question, the last question is, we have commercialized the ImmunoACT, the CAR-T cell therapy in India. So any sense on, you know, how is the response or how, what is our strategy to reach to the patients in India? How do you basically plan to reach to the mass of the India?
So last month, they started enrolling patients, and we're happy to share. Hopefully, they will-
... turn from red to green in this quarter. Yeah.
Okay, cool. Okay.
Yeah.
Thanks a lot, boss. Thanks a lot.
Thanks. Thank you, Yusuf.
Thank you. Next question is from the line of Harith Ahamed from Avendus Spark. Please go ahead.
Hi, thanks for the opportunity. So Ravi, sir, when I look at the operating cash flows that you've shared in your presentation, I see that for nine months, FY 2024, it's around INR 370 crores, which is less than what you have shared in the last quarter. So there's, we've seen a negative OCF in 3Q. How do you explain this?
Harit, your, your voice is not very clear. Are you using a hands-free?
No. Yes. Yeah. Is it, is it better now? Can I try again?
Yeah, it's better. It's better.
Yeah. So for the operating cash flows that you disclosed for nine months, FY 2024, it's less than what you had disclosed in one month. So it appears that there is a negative operating cash flow in the third quarter. So I'm just trying to understand what exactly has happened.
Mm.
So the INR 370 crore number that you've that you shared in the 3Q presentation, for six months it was INR 475 crore.
Okay.
So if that 3Q for 9 months OCF is less than six months OCF. That's my question.
It cannot be. Probably, we will discuss offline on this.
Yeah.
We will discuss offline.
Yes. Yes. And then, you know, last couple of years, we had a CapEx of around INR 900 crore, and it appears that, we are looking at a similar number for FY 2024 as well. So, from FY 2025, how do you think about CapEx? Will there be a moderation from this INR 900 crore or INR 900,000 crore numbers that we've seen in the last few years?
We right now the CapEx for the FY 25, the ongoing projects of the part of an animal health, or maybe one block from animal health and agri unit also will be there, and then bio. These three are the ongoing projects. Apart from that, the LSPL R&D. These four are the ongoing projects. We are not taking up any new projects as of now. So probably on the specific number, what we are planning for FY 25, we will come back in the April conference call. But we are also thinking like you. So like, if possible, actually, you know, we want to downsize without cutting the feature.
Okay. Okay. And then you mentioned that we have operationalized LSPL-2 during the quarter. So I'm just wondering if there is a contribution from the animal health contract in the CDMO revenues for the quarter.
Very small. Very meager. The very meager in quarter three, and maybe quarter four onwards, it will maybe slowly pick up, but-
Yeah.
I think it got clear. As we envisaged it before, it has got a 1-2 quarters delay.
Yeah. Yeah. Again, sir, just to rephrase my previous question on the operating cash flow. When I look at net debt number currently, based on your disclosure of around three times EBITDA, it's around, it's working out to around INR 2,500 crore. The same number in, at the end of September quarter was around INR 2,000 crore, so there's a INR 500 crore increase in net debt. That, that cash flow deficit is what I'm trying to understand. Anyways, I'll connect with you offline on this. But what I wanted from my side is, is on the R&D center, the CDMO R&D center, which you've guided for commissioning in June this year. So and then, how should we think about revenues from this center?
Is this R&D center for our captive R&D work or should we look at this as a revenue center and will be, you know, this commissioning will lead to revenue generation from this center? So just trying to understand the nature of work that we are planning at this center.
R&D center will augment our capacity to offer more clinical early-stage projects. We don't anticipate significant revenue coming out of that R&D center.
All right, sir. That's all from my side.
Thank you.
Thank you for taking my question.
Thank you. Ladies and gentlemen, to ask a question, you may press star and one. Next question is from the line of Rohit Jain from Tara Capital Partners. Please proceed.
Yeah, hi, can you hear me?
Yes, you are audible.
Yes, you are.
Please go ahead.
Yeah, hi. One question from my side. Can you help us understand what is the target margin, let's say, levels for FY 25, EBITDA margin levels?
As the volume of sales picks up, we do anticipate significant improvement from the...
... EBITDA margins from current little over 15% to definitely beyond 20%. We'll not-- We can't give you a number, but it will improve significantly. Yeah.
Just one, you know, I think one of the earlier callers also mentioned this, over the last three quarters, what we have seen on the call is just qualitative comments that it will get better without any tangible numbers. So for us, to be honest, you know, it's a very difficult situation because, let's say, if you have 15% going to 18, that can also be classified as significant improvement. 20 can also be significant, 22 can also be significant. So how should we think about the actual numbers? Because a lot of improvement is obviously already baked in.
I think, see, one confidence what we wanted to give the investors is, one is quality of business, second is quantum of the business. As we mentioned in this call, the quality of business is very good. We are doing gross margin well above 52%, even in the current quarter, Q3 FY 2024, we did over 54%, and we expect that will continue. As we increase our sales in CDMO space, which we expect next year will increase, the ability to remain at that level for gross margins is very high. And what we are saying, as the order book increases and the revenue goes up, and most of the gross margin will flow into EBITDA, not all of that, most of the gross margin. So that is the reason we expect significant improvement. And it's not that we haven't done that performance earlier.
So we had some without significant contribution from CDMO, we were at close to 30% of EBITDA, and we came down, but we never went down near the gross margin level. So that's the confidence the management has, and I'm sure we will regain your confidence for sure in as shortest possible time as we can. Yeah.
Just one last question on margin again. Your slide said that your asset turn is right now 0.9, and the average is 1.1. So assuming we reach 1.1 next year, let's say 20% increase from the current level, and if we assume gross margin at 50%, and, you know, we assume that the entire incremental sales, you know, flows to EBITDA, then we get to a margin of 20% from the current 15%. Would that be the right way of looking at it? That is pretty much the ceiling as far as our utilization remains at 1.1.
I'm not into the arithmetic of that statement, but we are on the right direction, you and we, both of us.
Okay, fair enough. Can you help us understand, you mentioned that animal health has been delayed by a couple of quarters. So is this just a time delay or the initial amount that we thought we will get from this, has there been some tempering in that also? Thanks.
No, no. So we have a long-term contract in place. The delay was two reasons. One was there was delay in qualifying the facility. There was some delay in validations because of the strong chemical synthesis needs of that. And as I mentioned in the opening remarks, whatever capacity we have created in that unit is already contracted to one big pharma, and we don't have any reservations that the quantum of the business will go down than what we anticipated. Like, the CDMO revenue coming from our unit 5, steroids and hormones, went into a pretty stable mode, we expect to—animal health revenues will also go into a stable mode in the next three years.
We will have a very detailed plan in place, how many products are going to validation, how many products are going to filing, how many products are going to be commercialized. This is well-structured program, and we don't see any challenges out of that.
Okay, thanks. I think you mentioned to the other participant that you will clarify on the cash flow and the debt. Even we can't understand you know whether this quarter had a negative operating cash flow because that is what the slide deck suggests. So in case there is any clarification it would be really helpful if you can you know file it with BSE so that the wider group can understand what happened with the cash flow in this quarter. That would be one suggestion. Thanks a lot.
Presentation. If there are looks like we need to change, we'll submit, revise if there are changes.
As far as the debt is concerned, as the previous question is indicated around that level.
I'm talking about cash flow, so in case there's any change in numbers there, that is what I was mentioning.
Okay. Thanks for raising that question.
Thank you.
We'll, if there are any changes, we'll resubmit to the stock exchanges.
Thank you. Thanks a lot.
Thank you. Next question is from the line of Forum Parekh from Sharekhan. Please go ahead. Mr. Forum, your line is unmuted. Please go ahead with your question.
... Well, am I audible?
Yes, you are audible. Please go ahead.
Yeah. Thank you for the opportunity. I only have one question. So in the last con call, the management had assumed that H2 would be better than H1, and nine months down the line, our EBITDA margin is just 15% odd. And now, in the commentary also, you know, the management did mention that H2 will be significantly better than H1, despite three quarters being passed. So are we confident that we will close FY 2024 at 20% EBITDA margin as guided in the previous quarter con call?
Our CFO mentioned, we are committed to our statement made in the last con call, that H2 will be better than H1, and we are very confident that we will deliver better H2 than H1, even now.
Okay. So then, we see that, you know, larger pie of the sales comes from ARV segment, and commodity prices are softening, and also CDMO, which is just 25% of the total sales. So if there's a pickup in CDMO sales too, so do we still think that, you know, when the larger pie is not growing, we can still increase our EBITDA margin?
You are right. We will definitely increase our EBITDA margins. See, currently all our costs are absorbed, and any improvement in sales, the gross margins, most of that will flow into EBITDA. So we're very confident the EBITDA percentage will also move upwards in the Q4.
Okay. So, while our gross margin remains same and EBITDA is expected to increase, so where are we seeing the cost? Are we expecting, R&D sales to come down or employee costs to come down? If you can just, you know, specifically highlight which cost is expected to come down.
Costs are not going to come down, only sales is going up.
Okay. Well, we'll just observe. Thank you.
Thank you. Next question is from the line of Harshal Patil from Mirae Asset Capital Markets. Please go ahead.
Thank you, sir, for the opportunity to ask the question. Most of my questions are answered, just need two clarifications from you. One is for the other APIs where you clearly mentioned of shipments getting impacted or delayed. So, is it that, sir, we will see the shipments coming back in Q4?
Actually, it's not shipment delayed. See, that is a scheduled delivery. Our partner asked us to deliver in Q4 than Q3. Yeah.
Okay. Okay. So it will be there in Q4. And, sir, if you could just also mention like, you know, you also said that there's some impact of pricing. So, any, you know, any flavor of, what can be the impact in terms of maybe percentage or something for the pricing thing?
Actually, the pricing impact was offset by increased volumes in some of the products. So that's the one reason, where our gross margins also went up. If you look at from quarter to quarter, we have improved our gross margin by 100 basis points. Yeah.
Okay. Got that point. And, sir, just, one more thing on the animal health project, where we are envisaging some delay of one to two quarters, I'm sure that would definitely be starting. But sir, any flavor on the potential size of revenues that can be expected from the animal health? I guess it will be mostly in FY 2025 now.
The peak revenues for that unit will be in FY 26, not in FY 25 also. So we have to validate 20 APIs from that site. The currently-
Okay.
Third product validation is going on right now. You can imagine, 17 more products to go validation, and-
Okay.
We have to do at least one product per quarter or more than one product per quarter to complete our validation. We scheduled to complete our validation by April 2026. That's the current schedule.
Okay. So post that only, we would see some material revenues coming in from the animal health.
The earlier products which are validated will be filed, and we expect 12 months time required to get approval from the agencies. So we expect commercial sales will come from first product. Two products are already done. I think we have orders for one product for next year. Second product orders will come end of FY 2025. So it is a very well-defined program we have in place.
Okay. Okay, and the potential definitely would be a sizable one?
It will be very... Yeah, yeah, very good. Yeah.
Okay. Okay, thank you, sir. Thanks for everything.
Thank you.
...Next question is from the line of Tushar Bohra from Emkay Global Financial Services Ltd. Please go ahead.
Yeah, thanks for the opportunity. So first, just to quickly check, what is the expected gross block going to be end of this year, as per the guided CapEx plan, ballpark?
No, I will ask Ravi to take this question.
Around INR 6,000 crore, Tushar.
Next year we are doing another, say, INR 1,000 crore Capex? I don't know the exact number, ballpark what is the guidance for next year?
Nothing at this juncture, but probably we have a visibility of at least INR 500-INR 600 crore. We will get back on the exact number in the April quarter.
Sir, so my question is, you know, just looking back, the first time we hit, you know, say more than INR 1,100 crore, about INR 1,140 crore was second quarter of FY 2021. It was quite a few quarters back. I am just looking at the, the gross margin and the cost structure and the profit structure for the company at that point, versus for the, you know, current quarter, which is INR 1,195 or thereabout revenue. So, you know, the revenue profile is in a similar ballpark, Q2 FY 2021 versus Q3 FY 2024. And, on the cost side, you know, below gross profit, I see a difference of INR 300 crore on a quarterly basis. I, for the corresponding revenue, the costs are higher by INR 300 crore, employee, other operating costs, depreciation and interest.
So my assumption would be a large part of this would be for incremental initiatives which are not yet yielding results, because the revenue profile is very much similar. And, you know, the CDMO business also, while we have seen an increase in revenues, some segment are degrowth elsewhere, but the overall revenue profile is similar. So I am assuming, and that is where I would like a, a commentary from you, that this INR 300 crore, difference in cost, a large part of this, can we attribute this to new initiatives and obviously the, the depreciation interest towards the capacity? That's first. Second, from INR 2,700 crore gross or thereabout gross block end of FY 2021, which was good enough to support, close to INR 5,000 crore revenues that year.
You know, we are now going to be at INR 6,500 crore gross block by end of next year, INR 6,000 crore by end of this year. So, ideally, if we assume that the asset utilization would be similar to earlier levels, you know, we are talking potentially more than INR 10,000 crore revenue being supported by the current gross block alone, and we are adding to it. So just to get a sense, when do we start to see the revenue profile, you know, not exactly in the same ballpark, but the revenues have been stagnating for some time now. When do we start to see material traction on revenues, which obviously will then cover for your operating deleverage for the operating costs as well?
I think the, those are very interesting, thought-provoking question you put. The revenue profile in Q3 FY 2021 to Q3 FY 2024 has changed significantly. From a ARV-driven revenues to non-ARV-driven revenues, that is one. And second, as you mentioned, gross block improved significantly. Our team size has also improved significantly. Not just CapEx, in the last three years, we also invested non-CapEx close to INR 450 crore, almost, INR 300 crore came, equity infusion done in Laurus Bio, and about, a little over INR 100 crore was done in ImmunoACT. And, the gene therapy assets were licensed from IIT Kanpur. So over INR 450 crore, non-CapEx related investments were also done. That is another significant diversification by the company.
And second, 2021, no new R&D center for synthesis, no new unit for animal health, no new unit under construction for crop science chemicals. So we have taken a lot of initiatives to diversify revenues from non-growing therapies like HIV to potentially high growth segments like CDMO, animal health, crop sciences is a great opportunity, disruptive therapies like cell and gene therapy, and also going into new age precision fermentation by investments in bio. So all these have added to our cost structure, significantly, while we are not seeing the real benefit right now. But all these, at some point of time, will start delivering the right results what we anticipated. If you look at bio, which is the investment which is older, other, when compared to other investments, when we invested, the company having INR 50 crore revenue.
Today, this year, I'm sure they will deliver INR 50 crore EBITDA. So that is definitely giving benefit what we thought.
... ImmunoACT will also give benefit, as I mentioned, hopefully this quarter from, they'll become green from red, that is very remarkable for a startup. Whereas our animal health, we invested significant money, we had a full-fledged team, on the ground, but we are only doing validation right now. So it will take another 12 months that unit turn green. Crop sciences will take 18 months to turn green. So all these are very conscious and judicious investment company is doing to diversify and also bring sustainability to the organization.
Sir, noted, and we appreciate the focus of the management, which is not looking at a short-term view. But, you know, so the point to really understand is that the gross block investment is already being done, and it's a sizable investment, and we've done it over a 4-year period, from FY 2021, at least 3-year period until end of this year. Now, so one question that we need to understand is that whether some of the revenue profile that has changed, does this point to a permanent loss of competitiveness or revenue opportunity from the existing business? So what happens to that gross block, which was part of the original INR 2,700 crore, whether that gross block can be or has been repurposed and is yet to deliver results?
Because, you know, we don't have a breakdown of this gross block for each segment, or at least it's not immediately in front of me for me to be able to qualify that. But if you are saying that some of these, you know, the gross block change has gone towards a revenue replacement for the earlier ARV business, then what has happened to the original gross block, the original capacity dedicated to ARV, have they been repurposed in any way? Or how do we ensure that that capacity can be repurposed if the ARV business is going to permanently, you know, be at a different scale than originally envisaged? Second, if the new initiatives like you highlighted, can we have some more milestones for the other segments?
Like, let's say, from here over the next three years, how do we look at Laurus Bio? What kind of numbers can we look at from the, you know, animal health business? Some more clarity that allows us to say, if not segment-wise, at an overall gross block level, this INR 6,500 crore gross block that we're talking FY 2025, how do we look at this over the next three years? How should we look at the overall utilization? And how do we get a comfort that by the time we reach the utilization for this gross block, the management would have not already added another INR 2,000-INR 3,000 crore gross block in anticipation of the business future thereafter. Like, we don't want to be in a perennial investment situation where the investors don't see a profit outcome.
I think, Tushar, your points are valid. Good observation. So the overhead numbers and coming to the ARVs, more or less in this last three-year time, the more or less the ARV revenue is close to the number of what quarter to FY 2021 you have talked about. But if you look at the price fall in the last three years on the ARV side, then the volume increase there in the ARV. For example, Efavirenz is the one product of ARV, which was fallen, which was replaced with the Dolutegravir. We have changed that. But if you recollect the...
If you refer the slide 8, what we have given here, the how the CapEx is right now, 0.9 is the asset turn, and the peak is 1.4, but if you look at last five-year average is 1.1. This is how the revenue will, can be escalated. It's only a matter of time. The kind of an investment what we have made. In the last three years or last four years, when we added INR 3,000 crore CapEx, some of it has not generated any revenue, so that has a potential to generate a more revenue. If you look at on the positive side, we have, if once the everything has been done, actually, we have a capacity to run, people to run. We are incurring the expenditure.
So probably the incremental revenue generate with not significant upside on the expenditure side. That's how you have to look at. And then coming to the numbers, what we are saying, we don't want to give any quantitative guidance, Tushar, and then, I think once you, it happens, once we start generating revenues, then everything will be fine.
Sir, one quick question on-
Sorry to interrupt, Bohra, but please, next question from the line of Indranil Banerji.
Yeah, thanks, Indranil. Thank you.
Thank you. Next question is from the line of Nitin Agarwal from DAM Capital. Please go ahead.
Thanks for taking the question. Sir, you know, we've discussed a bit on the CDMO part during the call, but, you know, the other relevant component of the business, which is the fixed dose formulation business and the other API business segment, I mean, they've also had their share of challenges over the last year and a half. Now, when you look forward the next few quarters, I mean, wait, two things. One is, a, what has really led to, you know, relatively modest growth in some of these segments? I think, you know, we've been reasonably positive on the contract manufacturing opportunities in both these businesses. From here on, sir, how should we look at growth in these businesses?
... You were breaking, but, we got the essence of your question. The some segments did very well in the Q3 as well. The oncology did report significant growth. Other APIs did okay. But the FDF, ARV did well. FDF in developed market did very well. We hope oncology growth will continue to be there, that will also be reflecting in our Q4 numbers you will see in April. The overall, the growth has to come from oncology, other APIs, generics CMO, CDMO, and bio. And as we mentioned, we expect the plateau for ARV, APIs and formulations sale together. It may vary 50-100 million there, but it will stabilize around INR 2,005 crore. We don't expect that will go significantly up or significantly down.
The growth is anticipated in other areas, and that is primarily, we believe, because of the projects we are working, customers who are talking to us on the volumes in various these fields.
Add to that, so on the FDF last capacity expansion that you undertook, you know, most of the capacity was utilized by the ARV supply. Now, since the ARV supply is not an incremental growth driver for the business, and you put up significant FDF capacity since then, how do you see the FDF capacity getting utilized? I mean, what is the utilization driver for the FDF capacity going forward? Because CDMO largely, I presume, is all, you know, API and specialty chemical driven.
The capacity required for ARV formulations is very less. So less than 20% of our capacity, 2 billion. I would not expect we'll use even 2 billion tablets. It is probably 1.5 billion tablets will be used for ARVs, because these are a three-drug combination. We don't expect huge capacity. So increase or decrease in ARV capacity utilization formulations will not consume or will not relieve bigger capacity for other molecules. I hope, Nitin, I answered your question.
So sorry, sir, but what will make up for the—what will, what, I mean, what are therapies, what segments do you think, you know, geographies will use up the INR 8 billion other capacity which is there outside of the ARV? And how much utilization are we on that right now of the INR 8 billion?
We are between INR 6 billion and INR 7 billion right now, and we expect to use maybe INR 1 billion more during this quarter because of the anticipated launches in U.S. And also increased demand coming from our CMO partner from Europe. So in next 6 months, we hope to utilize that capacity optimum, and at the time, I think once we reach that stage, we will get equipping our remaining MB3. But right now, we are definitely have some capacity to offer to our launches or to our CDMO partner.
Okay. Thank you.
Thank you.
Thank you. We will take our last question from the line of Shivam Agarwal from Mirae Asset Capital Markets. Please go ahead.
Yeah. Hi, sir. Thank you for the opportunity. So I have just one question for you, sir. On the CDMO side, so we can, can we assume that the quarter three revenues for CDMO will be the base going forward, and given that, on an ex, tax basis, that we have grown at 30% on the nine-month period, so can this growth trajectory be sustained going forward?
We have enough projects on hand to take our revenue beyond our peak last year, but we are not committing when we will cross that. But we have, we can tell you, we have enough projects to surpass that number. See, we have no control on the advancement of clinical programs, but we have enough projects in advanced stages. That is the reason, despite of the current challenges, management is very upbeat and continue to invest in resources to take us to a next level in our CDMO place.
Thank you.
Thank you. Ladies and gentlemen, that was the last question for the day. I now hand the conference over to the management for the closing comments.
Start by two people on the cash flow, operating cash flow. The numbers are right. Numbers have been reflecting because of the change in working capital. So this we thought, we said we will clarify. We have clarifying in the call itself. Thank you.
Thank you.
Thanks everyone for your insightful questions and also your patience in waiting for our performance and which, as you mentioned, we hope to keep up to your confidence from Q4 onwards. Thanks for your time to join this call. Thank you.
Thank you very much, sir. On behalf of Antique Stock Broking, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.