Good morning, ladies and gentlemen. Welcome to the Laurus L abs Limited Q3 FY 2022 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 the 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, Lizanne. Good morning and a warm welcome to everyone to our Laurus' Q3 FY 2022 results conference call. We thank Laurus management for giving us the opportunity to host the call. Today we have with us Dr. Satyanarayana Chava, founder and CEO, Mr. V.V. Ravi Kumar, ED and CFO, and Mr. Vivek Kumar, CFO and investor relations. I would now like to hand the call over to Dr. Satya for his opening comments. Thank you, and over to you, sir.
Thank you, Monish. Thank you for joining us for our Q3 and nine months FY 2022 results conference call. We hope everyone attending this call and their family members, colleagues and their friends are keeping safe and healthy during these challenging times. We are pleased to have this opportunity to update you on our progress and answer your questions. Since our last earnings call, the world has continued to face unprecedented challenges, both on health and economic fronts. At Laurus, we are committed to protecting the health and well-being of our employees and their families. We have continued to implement rigorous safety and hygiene practices across all locations, and this without any compulsion. I'm very thankful to our colleagues for rising up to this challenge and deliver on commitments and ensuring business continuity.
During the last quarter, our industry has faced some interim challenges due to logistics, raw material availability and higher prices, especially for solvents. Most of the solvent prices were at all-time high. We are seeing some easing out of this, including the cost of APIs and solvents and availability of raw materials. However, supply chain and logistics cost situation continue to remain challenging. ARV market seen continued sluggishness during the third quarter due to in inventory at various channels. However, as we indicated before, we are expecting demand increasing from Q4 onwards. Coming to results over nine months, the revenue has a marginal growth of 3% despite lower sales in ARV, APIs and formulations, which resulted in our Q3 degrowth in sales and profits. All other businesses other than ARV, APIs have grown from the quarter and nine months.
increased demand for ARV business from our API customers and formulation sales from global multilateral agencies from Q4 onwards. We believe that this sluggishness is only transient in nature and should be normal from now onwards. Our sustained traction in CDMO is doing very good and we are on course to expand and intensify our diversification plan as we look to prioritize building sustainable growth drivers in the coming years. We are also affirmative on our aspirational $1 billion in sales in FY 2023, and this will be supported with several approvals anticipated and good progress that you have seen in multi-site capacity expansion across API formulations and CDMO division. Moving on to revenue. During the nine months, we achieved INR 3,511 crore as against INR 3,401 crore.
Whereas in the Q3, we achieved INR 1,029 crore against INR 1,288 crore in the corresponding quarter. I'm not going into details of each division, but I will like to give the overview of each division. The formulation division reported revenues of INR 1,318 crore for nine months with 13% growth, whereas INR 373 crore for the quarter with a decline of 13%. The contribution from the formulation segment has improved during the nine months to 30% from 36% in the previous year. Coming to ARV business, overall demand declined due to inventory stocking at various channels, and we are witnessing a normal trend from Q4 onwards. Dolutegravir-based regimens continue to remain preferred ARV, and we believe its use will also increase rapidly in the second line and also in the pediatric treatments as a new standard of care.
Happy to share that Laurus has signed up and will be part of Medicines Patent Pool license for molnupiravir, which is a investigational COVID-19 drug. This will help us to increase the broad access in the LMIC market. Coming to the developed markets, we have broadly observed a stable market share for our existing portfolio. We continue to leverage our front-end presence in U.S., with new launches. We have filed a total of three ANDAs during the nine months. During the quarter, we made a supplementary ANDA filing and expect to file around six to seven ANDAs for the full year. Cumulatively, we have filed 30 ANDAs. Of this, we have a total of 10 final approvals and eight tentative approvals so far.
In Canada, we continue to have 11 product approvals, as we indicated in Q2, of which we have launched five and in the process for launching few more. In the EU market, we have completed validation of two products as part of the contract manufacturing, and we expect a significant upside in the coming financial year from these products. We also have successfully completed approval audit from EU last month for these products. Based on our healthy product pipeline progress, we continue to invest in FDF infrastructure. Our brownfield expansion at unit two is progressing as per our expectations, and it is expected to add significant capacity, which will take the total FDF capacity to close to 10 billion units per year. The capacity will be operational from early next quarter onwards.
On R&D front, we continue to allocate resources to our initiatives and invest in portfolio based on our portfolio now more non-ARV than ARVs. We identified several products in the portfolio which are complex and also need scale. When it comes to API, our antiviral business during the quarter was weaker than expected and declined almost 65% year-on-year to INR 202 crore. The steep decline is due to the higher base effect from forward purchase made by global agencies during the last financial year. For nine months of FY 2022, business reported negative growth of 26%. We continue to believe that the current demand weakness is transient, and we believe Q4 onwards, things are looking bright. In oncology APIs, current quarter we did INR 85 crore sale, reflecting a growth of 33% year-on-year.
For nine months, there is a growth of 8%. As you are aware, Laurus Labs has one of the largest high-potent API capabilities in the country, and we are adding more capacities into the high-potent areas and located at unit four. Our aim is to strengthen further our leadership in some of these oncology and high-potent molecules. In other APIs, which includes CV, diabetes, and asthma, reported quite normal sales during Q3, and revenues have grown sequentially at INR 137 crore. The segment recorded 38% growth quarter-on-quarter, and there was a slight decline when it comes to nine months. We had 3% decline. During the quarter, we have filed four DMFs. Interestingly, two DMFs are in non-ARVs, taking the total of number of DMF to 71 to date.
We have also initiated validation of several new APIs and expect to see good DMF filings next financial year. In the synthesis business, it was a very strong quarter for us and delivered robust growth of 63% year-on-year at INR 207 crore. For nine months FY 2022, CDMO business also grew over 60%. As you are aware, we indicated in the last quarter, we started constructing a dedicated facility for a global life science company, multi-product, multi-year supply contract. We are also investing in one more greenfield facility for synthesis division and also building an R&D center at Hyderabad. All these are progressing as we planned earlier. When it comes to Laurus Bio, the segment achieved sales of INR 32 crore, taking to INR 92 crore for the nine months FY 2022.
During the quarter, Laurus Bio commissioned two more fermenters of 48K each, taking the total capacity to 180K. There was a few months delay in qualifying the fermenters. Now we can say all the fermenters are running and doing CMO activity for global companies. We're also in process of expanding the research block and also debottlenecking R2, thereby adding more downstream equipment to better utilize the fermenters. Our focus on ESG, quality and regulatory compliance to drive sustainable growth and further accelerate our pipeline opportunity is one of our top priority. This will add to our journey towards our vision and strengthen our core values. We are in the process of qualifying the manufacturing infrastructure, both in APIs and formulations, to achieve our aspirational target of $1 billion sales mark by end of FY 2023.
If we receive the required approvals on time, and we are confident to achieve this target. With that, I would like to hand it over to Ravi to share some financial highlights.
Thank you, Dr. Satya, and very warm welcome to everyone on our quarter three and nine months earnings call. Total income from operations for nine months is INR 3,511 crore as against INR 3,401 crore, within 3% growth year on year. Whereas the quarter, we ended up at INR 1,029 crore against INR 1,288 crore, reporting a degrowth of 20%. Gross margin for the quarter three is very healthy and at 58.8% vis-à-vis 54.7% for the corresponding quarter. Our EBITDA came at INR 290 crore with a margin of 28.2%. Our EBITDA for nine months is at INR 1,038 crore with an EBITDA margin at 29.6%.
Though this reflected through better product mix and compensated for negative operating leverage. Despite the ARV lower sales, we were able to achieve these numbers in the first nine months. We remain confident of achieving about 30% EBITDA on a full year basis for FY 2022. On diluted EPS for the quarter at INR 2.90, not annualized, and INR 11.10 for nine months, not annualized. Our ROCE is at 25.5% on an annualized basis. On the CapEx front, we invested close to INR 246 crore during the quarter, and cumulatively about INR 770 crore in the nine months. We remain on course to strengthen our position as a cost-effective integrated pharma player.
We are investing in backward integration efforts in making intermediates, creating further API and FDF capacities. As you're aware that we have embarked upon significant growth CapEx of INR 1,500 crore-INR 1,700 crore in two years, FY 2022 and FY 2023. We want to update most of the investment across key projects is on track. You can refer to our IR presentation for more details in this. With this, I would request the moderator to open the lines for a Q&A.
Thank you. Ladies and gentlemen, we will now begin with the question and answer session. Anyone wishing to ask a question may please press star and one on your touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.
Yeah, thanks for the opportunity. Sir, on the other API, there has been a good traction. Just would like to understand, is this to do with the new molecule addition or you're seeing the market share gain in the existing molecule?
The other API we have added only one molecule this year. The growth came from CM contract manufacturing APIs to our customers in Europe.
Okay. Is this to do with the restrictions in China or do you think this is more sustainable trend rate to go by?
This has nothing to do with the rest, disturbances because of China. This is normal growth, and these molecules we are doing earlier, and we were able to get more orders because our partner got more market share in EU region.
Got it. Okay. Just lastly, on this, dedicated facility for a global licensed company, could you share some more color in terms of what kind of investments on this particular project or what is the size of the contracts and spread over what year?
We can't give you the size of the contract, but it is a multi-product, multi-year contract. Part of the CapEx is also funded through commercial advance. We just started building facility for that client. As an interim, we also added a manufacturing block in our existing unit four to complete the validation of the NCE as part of that contract. Once the new manufacturing unit is up and running, we will transfer this to the new site so that our partner will gain a year in the regulatory approval process. This is very significant for us, and a dedicated team is working on the development of those projects, technology absorption of those projects, and things are moving as we anticipated earlier.
Thank you, sir. Just lastly on molnupiravir, while, you know, there has been a lot of talks on the efficacy of this and then comparing to the Pfizer drug, but at the same time, you know, we've gone ahead and, you know, have a license from MPP. Are you seeing good amount of traction on the business prospects on this product? Or given the efficacy, this is not so great a product to look forward for?
There are the sales, but it is not meaningful. There were many approvals. Many got licenses from MPP. ICMR did not include this in the treatment guidelines, so the uptake is not as expected. The business is not going to be a meaningful one for us.
Thank you, sir. That's very helpful. Thank you.
Thank you. The next question is from the line of Sudarshan Padmanabhan from JM Financial PMS. Please go ahead.
Thank you for taking my question.
Sorry to interrupt, Mr. Padmanabhan. Sir, we are not able to hear you clearly.
Yeah. Can you hear me now?
Much better. Thank you.
Yeah. My question is to, you know, understand a little bit more on the ARV business. Both if I look at the API side and the formulation side, there has been a drop worse than expected. I mean, you know, when you talk about the inventory and, you know, things getting back to normal, we have basically seen the numbers coming right from over INR 550 crore a quarter in the fourth quarter of the previous year to about INR 200 crore. Do we see a gradual ramp up back to where it was, or are we going to see, you know, pretty faster kind of a, you know, ramp up? Do you see that in fourth quarter things can normalize completely?
Fourth quarter, we see majority normalization will happen. We are not anticipating our ARV API sales will go back to INR 400 crore-INR 500 crore. Maybe Q1 next year will be quite normal. Even though there is a little bit normalization pending for ARV APIs in Q4, but our other divisions are doing extremely well, so we don't see any challenge for us to get back to normal track, a normal growth trajectory for us from Q4 onwards.
Yeah. Sir, with respect to, I think, the synthesis business, I think we have done a phenomenal job. You know, we are running at now 200-
Sorry to interrupt, sir. We are not able to hear you.
Yes, sir. My next question is on the synthesis business. I mean, we have done a phenomenal job in terms of the, you know, ramp up. You know, almost moving from INR 60 crore, you know, in FY 2020 almost per quarter to about INR 200 crore now. Can you give some color with respect to where do you see the business, let's say, in the next three years? You know, given the opportunity, given that we have a dedicated plant for a, you know, customer, what is the kind of scale that we can see, I mean? And what are you doing, you know, at this scale to get, you know, give that kind of importance to this business?
This business is very important to us, and we are giving required focus to strengthen this. We are creating dedicated R&D. We are creating dedicated manufacturing sites. We believe INR 200 crore per quarter is not a big number for CDMO. If you look at the global CDMO companies, they're doing extremely well. We believe we have all qualities to become a very large player in CDMO. Our regulatory track record, our EHS compliance, our manufacturing quality infrastructure, our team in quality. We have all qualities to become a much bigger player in CDMO space. We can't give you the quantitative numbers how we will do in the next two, three years, but we have so many avenues to grow.
As we are investing in a new manufacturing site for a customer, we haven't got any revenues from that plant right now. This business, we believe we are at a very infancy stage. INR 200 crore per quarter is very, very small for our aspiration.
Sir, with respect to Richcore, I mean, we had a plan that we should be able to.
Sorry to interrupt, Mr. Padmanabhan. Sir, we are not able to hear you. We request you to come to the microphone.
Yes, sir. Hello?
Yes, sir. Please proceed.
Yeah, yeah. Final question from my side is, you know, when we bought Richcore, they You know, we wanted to extend the bio capabilities wherever possible in the current business as well. You know, is that happening? Are we starting to look at extending the bio capabilities in the current business and seeing some kind of an operating leverage or synergies flowing through that?
It is happening as we expected. They have gave several enzymes for our chemical synthesis, and they are optimizing those enzymes to improve the yields. They are also working on classical fermentation of APIs, especially for steroids. It is going on very well. What intention we purchased significant equity there is working very well.
Sure, sir. Thanks a lot. I appreciate it.
Thank you. The next question is from the line of Ritesh Rathod from Nippon India. Please go ahead.
Yeah. Hi, sir. Can you explain what are the risks and the upsides with the regimen change fro m TDF to TAF, like tenofovir alafenamide?
The regimen change from TDF to TAF is not happening, which we also captured in our investor presentation so that our investors can also better inform. We don't see any change. Based on the CHAI projections, the TAF market share gain by end of 2024 is not significant.
Okay. Okay.
Is not significant.
Okay. Sir, for this quarter, since you provide your standalone numbers as well as consolidated numbers, your subsidiary revenue has gone up sharply to INR 96 crore versus historical average of INR 25 crore. Anything particular because there has not been proportionate increase in cost or anything in the subsidiary financials, but a sharp jump in revenue. Is it linked to some one time income over there?
Ravi, do you want to answer this question?
There is no one-time income, but our new one of the subsidiaries started generating revenue.
Yeah, there was no proportionate increase in the cost or anything, when you see historical quarterly numbers, which you provide every quarter.
There is no one-off kind of income.
Okay. Because your historical average for last five, six quarters is INR 25 crore. This quarter subsidiary number is 96 crore. The number is a huge jump of INR 50 crore-INR 60 crore increment.
That's correct. You're right.
Yeah. Because the cost base has remained flat or no change in the cost. Anyways, maybe if you can explain it later, it would help.
Okay.
That's it. Thank you. That's all.
Thank you.
Thank you. We'll move on to the next question that is from the line of Krish Mehta from Enam Holdings. Please go ahead.
Yeah. Hi. Thank you for taking my question. I just wanted to know the ARV versus non-ARV split for the company as a whole for this quarter?
What is the question? Can you repeat?
I wanted the ARV versus non-ARV split as a whole for the company for this quarter.
About 50%.
Okay. Thank you.
Both APIs and formulations put together. Yeah.
Thank you. Thank you so much.
Yeah.
Thank you. The next question is on the line of Bharat Kumar from Quest for Value Capital. Please go ahead.
Hello. Hi. Thanks for the opportunity. My question is for Dr. Chava. Regarding the new formulation capacity of 4 billion tablets, which is coming up this year, you said that in the last concall that it would be used for our European partner, and site transfers are already done. Our site is also included in the dossier. You said that the regulators have scheduled for the site inspection. May I know if this inspection is complete and did you get the approval for commercial production?
One inspection was concluded, two weeks back. It was successful.
Mm-hmm.
One more inspection for packing lines is expected in May this year, and which is on track. See, nowadays inspections are happening online, so we don't see any challenge there.
You can expect revenue coming from June, this year.
You're right. You're right.
Thank you. My second question is regarding the global tender. The global tender for ARV formulation, which we got in 2018, I think it is supposed to end last year, but because of COVID, I think it is extended one year and, I think this year end, I think it's going to end. Can you please let me know, like, if you have applied for the new global tender for the next three years?
It's extended by a year, so we'll be part of that. See, we are a significant player in not just APIs, but also in formulations. We'll be there. Yeah.
You're applying for it.
It's a regular phenomenon. I'm sure we'll be there.
Okay. Did you get the tender for the next three years or is the process ongoing?
It will come. Yeah.
Okay. Thank you.
Yeah.
Thank you. The next question is from the line of Pranav Tendulkar from Rare Enterprises. Please go ahead.
Hi, sir. Thanks a lot. When you say that the business will be at normal margins and normal growth rates, what exactly is normal? Because just six to seven quarters ago, 46%-47% gross margins and sub-20% EBITDA margin was normal. Clearly the pandemic had supply chain issues, and they are getting resolved now. Can you just highlight how the margin can be drastically different from, say, five to six quarters ago going forward? I'm not asking on a quarterly basis, but on a sustainable yearly basis. Thanks a lot.
We invested in R&D much ahead of the business. We invested in capacities much ahead of the business. If you look at our R&D expenditure remained constant as a number, but as a percentage came down by almost 3.5-4%. Our manpower cost used to be 12%-13%. Now it is at 9%. If you look at it, if 4% came from R&D expenditure, 4% came from manpower. This is the operational leverage. That led us to EBITDA margin expansion.
Right.
EBITDA margin expansion has nothing to do with COVID, because we are not in the COVID-related products. We don't have remdesivir, we don't have other biological products. Our growth in EBITDA margins came because of the expansions planned and the commercialization of those facilities, commercialization of those products.
Perfect, sir. On gross margin level, the increase of 5 percentage points? Yeah.
You asked a very interesting question. The gross margin improvement is because of expansion of non-ARV business.
Right. No, no, I'm asking about 5 percentage points over last seven, eight, so-
That's what I'm saying.
Pre-COVID. Okay.
That is because of our ARV. Non-ARV business is growing much faster than ARV business.
Right.
Non-ARV business, synthesis business, formulation business, other API business are more profitable, more gross margin business than the ARV business. That is the reason EBITDA expanded and also gross margin expanded. There are multiple things which led to the EBITDA expansion, operational leverage and then gross margin, improvement.
Right. Perfect. That makes sense. Just two supporting data or view if you can give. What is the price correction on ARV and other products or formulations that have happened from, say, during COVID? And what is the difference in the two gross margins, ARV and non-ARV? If you can actually provide some comfort to investors about that. Thanks a lot, sir.
That's difficult to give numbers. We're comfortable to give the split, how much we are making in ARV formulation, how much in other formulations, because that is a very sensitive information which we don't want to speak.
Okay. Thanks a lot for the opportunity, sir.
Thank you. The next question is on the line of Jeevan Patwa from CandyFloss Investment Advisors. Please go ahead.
Congratulations, sir, for a very good set of numbers. There are a few things that I liked about the number. One is obviously the CDMO sales has been INR 207 crore this quarter, which is a very good run rate. Question is this sustainable run rate for the next few years, or next year you think this run rate will be even higher from here?
Our synthesis business, as I explained, the INR 200 crore is a very small part of our capabilities. We do expect significant growth in this business.
Secondly, you said it's too little for our aspiration. What is your aspiration for synthesis business, sir? How much you may need for your synthesis business in next three years or four years?
By FY 2025, we want this business to be at least 25% of our overall revenue.
25%. You are including biologics as well in this CDMO?
All.
Second question is, in the biologics side, we have INR 25 crore run rate quarterly, and we have commissioned two more fermenters. Can we assume it's going to be INR 60 crore from here onwards? Can we assume that?
It will be around INR 40 crore probably until we expand capacity further.
Okay. In one of the interview, Mr. Rajesh Krishnamurthy of Richcore has actually said that they are planning for 2 million liter fermentation by FY 2023.
Yes. They have taken land.
Okay.
30-acre land, and in the process of finalizing the design and also talking to the customers who intend to use that capacity. 2 million L will not be put in one go. They will put in a phased manner of 1 million plus 1 million plus 1 million. In fact, the land can accommodate up to 3 million L fermentation capacity.
Wonderful, sir. Thanks a lot, sir. Next is, if I look at nine months numbers, our sales has actually gone up 3%, but our profit, gross profit has actually gone up by INR 130 crore. But our PBT is down because of obviously the operating leverage. We have got depreciation interest, other expense and other costs basically going up. That has eaten up our PBT. But our inventory actually went up from INR 185 crore to INR 321 crore, almost INR 140 crore increase in our inventory. The question is, do you see some part of that inventory getting liquidated in Q4?
Yes, sir. See, our ability to ramp up production and then the ARV demand will come all of a sudden. We are prepared to take that opportunity. We are not having any concerns on this inventory level, sir. Yeah.
Perfect. Thanks a lot, sir.
Thanks, sir.
Thank you. The next question is on the line of Hussain Kagzi from Ambit Asset Management. Please go ahead.
Good morning. My first question was with regards to formulation. If I get it correctly, 65%-70% of our formulations is ARV. I just wanted to know that, since we are seeing a decline in the ARV API side of it, is there any case of this being shown or similar decline being visible in the formulation side, probably with a lag effect? That is my first question.
There was a decline in the ARV formulation, but not to the tune of ARV API decline. ARV API quarter-on-quarter, we saw 65% decline, but we didn't see that much decline in formulations. There was a 20% decline in formulations, but not to the tune of API decline.
All right. Any update on the approvals that you were seeking to get on the formulation side of it? By when do we expect to get those approvals in non-ARV?
One we are expecting this quarter, and one maybe in the month of April. We are having a lot of approvals pending with various agencies, and we are on track to get those. There was a delay of three quarters, not because of our facilities. Everything is on track now.
All right. Got it. Lastly, there's no doubt that ex-ARV we have done exceptionally well, if I see growing at 45% CAGR for two years. If I go by your numbers, I think as of Q3, it's still 50% of our revenue. You know, the remaining 50% of our business is ARV. Basically, I just wanted to get a sense that you did mention that there'll be a little bit of volatility in the ARV API side of it, and I understand that's the nature of the business.
On a steady state, what would be, say, you know, your view or your assumption, or where do you see a steady state run rate for that business in the future, say, by 2024 or 2025? Because we finished the year, I think, at around INR 1,300-INR 1,400 crore in ARV API. Is that a stable run rate which can be seen in the future barring the quarterly volatility? I just wanted to understand that part, if you can help me.
INR 1,500 crore-1,600 crore could be the base, what we think is sustainable in ARV APIs.
Right. That would be for the next two to three years.
Yeah.
All right. Thank you. Thank you so much for taking my question. I wish you the best, and I'll get back in the loop.
Thank you.
Thank you. We'll move on to the next question. That is on the line of Tushar Bohra from MK Ventures. Please go ahead.
Yeah. Thank you for the opportunity, and morning to everyone. Sir, just one point. On your, you know, one of the slides, I saw that the gross margin expansion YoY, I think slide number five. Your gross margin expansion YoY is significantly higher, or rather I'm referring to slide number eight. You have a 410 basis points YoY gross margin expansion and a 540 basis points EBITDA compression YoY. That's almost a 900 basis points swing between gross margin to EBITDA, you know. While some of this could be possibly because of operating deleverage because of lower sales, I'm sure there would also be some costs associated with new capacity, which is still not contributing. Can you just help us with the breakdown of, you know, where this slippage has happened?
As you rightly mentioned, the operational deleverage reduced the EBITDA margins because we have the facilities, we have the teams, we have the investments into R&D. All those are happening without revenues. That was the reason for the EBITDA de-growth. Whereas the gross margin improvement is because of the product mix. All of you are aware the ARV APIs are not high gross margins when compared to the rest of the business. So ARV APIs were 25%, less than 25% of our sales this quarter, Q3. Our EBITDA margin improved because of that. Sorry, the gross margins improved because of that.
Sir, how much of the capacity is not revenue generating today? You know, let's say, so how much of the cost can be attributed to capacities that will start contributing, you know, meaningfully going forward? New capacities.
Ravi, do you want to answer this question?
Yes. The whatever be the new additions we have done CapEx this year, that is not generating any revenue, Tushar.
How much either gross block or the cap cost of these facilities, you know, operating cost, some metrics, sir, would be helpful.
I'll do the gross block-wise. 25% of our CapEx is not yielding revenues right now.
25% of your CapEx done over FY 2022-
No, no. 25% of our gross block. I'll give you.
25% gross block.
Yeah. Yes. Yeah.
It would be fair to assume, sir, that at least 300-400 basis points slippage would be only because of this new capacity, which is not yielding revenue and not necessarily operating deleverage.
Yeah. You are broadly in that direction, sir. Yeah.
Okay. Sir, a different question. Now we see a significant contribution from synthesis this quarter. Below normal contribution in that sense from the ARV API. Is it fair to assume that there would have also been some gross margin compression on the API side, and therefore the overall addition from synthesis in margin is much higher than the 200 basis point suggest?
We can't give the margins that granular, sir. Yeah.
I won't ask for specifics, but is it fair to assume, sir, that our synthesis margins would be significantly higher than the corporate average?
Yes. Yes, yes.
Likewise, formulation margins would be reasonably higher than the corporate average.
Maybe synthesis formulations and other APIs and ARVs, that's the order.
Sure. Finally, one last question. If you can help understand, qualitatively, what are the things happening on synthesis side. I mean, we are talking of about INR 800 crore run rate annualized today. If I do the math correctly, 25% of your revenue in three years would be about INR 2,500 crore-INR 3,000 crore. You're talking almost a 3x-4x jump in synthesis over a three-year period. Just help us understand, you know, the demand side breakdown to this. Do we have specific contracts in place or what kind of discussions we are having? Something, sir, that would help us understand this pull-up, sharp pull-up.
We can give you a very broad view. We're building a dedicated facility for the contract which we have signed. As of now, that contract is not giving any revenues. That's the one significant. We have contracts in place, multi-product, multi-year contracts. Two products which may go from phase II to III and commercial in the next two to three years. Those are also very significant. We are the only one source for those projects. We have a lot of projects, a lot of customers who were added into CDMO. I'm not saying every product will be successful with every customer, so that risk is there in CDMO. We have lot of projects and we are building capacities to take on those opportunities.
This new project, sir, that we are referring to, for which you are building up a dedicated capacity, it would be fair to assume that it is sizable in context of current synthesis revenues?
Very sizable.
Okay. Fair enough, sir. Thank you so much and wish you all the best for the coming quarters.
Thank you.
Thanks.
Thank you. We'll move on to the next question. That is on the line of Nitin Agarwal from DAM Capital. Please go ahead.
Hi. Thanks for taking the question. Dr. Chava, on, you know, the other API business. Rather let me go top down first. You've talked about the fact that FY 2023, you're still holding, you know, a belief that you can achieve a $1 billion top line. Now, that's almost INR 7,400 crore-INR 7,500 crore top line, you know, versus the INR 4,000 crore run rate that we had for the quarter. Very large jump that we're talking about, from a very short period of time. You said that this is subject to some of the approvals coming through on time. Sir, in which segments are these approvals, this guidance contingent on? Which segment these approvals would be in our business?
Diabetes, cardiovascular. These are the two where we are expecting approvals.
Yeah.
At the same time here we are seeing the run rate of Q3. This year, if you look at nine months, we have done INR 3,500 crore.
Right.
Your run rate of INR 4,000 crore for this year is not on the lower side. Okay.
Fair enough, sir. Sir, on diabetes and cardiac that you mentioned, so these are approvals on the formulations on the API side? Any specific market that you're looking at, where the approvals are contingent?
For Europe as well as the North American markets.
Okay. These would be the primary driver for our other API business.
Other API and formulations growth.
What would be currently assuming once the API, the ARV formulation business normalizes at the current 6 million capacity, what is the capacity utilization of a formulation plant right now?
Right now it is very good actually. Not much of spare capacity available now. That is the reason we are building in a phased manner from, in fact, next month onwards.
Sir, when do you see this capacity of 10 billion getting completely utilized, you know, in your assessment?
By maybe early first quarter of 2024.
Okay. Sir, lastly, on the oncology business, oncology API business, how should we look at that business? Are there newer molecules that we're looking to add in that segment? Or, do you see opportunities for significant volume growth with existing products?
It is, it's both, sir.
Okay. Thank you, sir.
Thank you. We'll move on to the next question. That is on the line of Ranvir Singh from Sunidhi Securities. Please go ahead.
Yeah, thanks for taking my question. My question relates to our aspirational goal to have $1 billion revenue by FY 2023. Just wanted to understand if you could, you know, explain in little detail because going by the API revenue, we are saying we will not be able to reach the historical peak on ARV segment. About that 25% upside in next two years, next three years in CMO. Just I wanted to, you know, understand that how much, because even nine-month figure annualized, or even a better guess some $650 million kind of revenue. $350 million remains a gap for FY 2023. That I wanted to understand.
See, in the API space from November onwards until April this year, we are adding 25% more capacity than what we had earlier. That's very significant. As we are discussing, our formulation capacity is almost doubled, going to be double from the current capacity to the expanded capacity. What we need to have, first one is capacity, second one is products approval, and then customers. We have capacity. We are in the process of getting approval, and the customers are happy to buy. Why we are saying aspiration is $1 billion, for that we need to have capacity first, which we have done. Then approvals are going on. Our customers are happy to buy from us because we are not adding a new customer. We are increasing sales to our existing customers. That is the reason we are still comfortable with that number.
Okay. Just I missed on ARV API side, I think, one of participant asked that average, you know, the kind of normal revenue, where we see the normal revenue on quarterly basis coming to? Because if I factor the restocking cycle and de-stocking cycle, the average should be some INR 350 crore-INR 400 crore kind of revenue. Are we reaching there?
Yes. We expect Q4 onwards we'll reach that level, closer to INR 400 crore ARV APIs.
Okay. In your commentary you said that three elements actually was challenging, availability of raw material, logistics, and, you know, prices of certain products. Availability of raw material, did you mean related to ARV API or some other API?
Other APIs, not specifically ARVs.
What's your status now, availability?
Now it's improved. Yeah. See, the availability is there, but we have to pay higher price.
Okay. Okay, fine. Last one, what is your current debt? After this expansion we believe that debt would go up. What is status right now?
Ravi?
Around INR 1,750 crore debt. As we indicated before, by March our debt is going to increase. From next year onwards we are expecting debt to be reduced.
Okay. Okay, that's it from my side. Thanks a lot, and all the best.
Thank you. The next question is on the line of Tarang from Old Bridge Capital. Please go ahead.
Hello, sir. Good morning. Four questions from me. First on the synthesis business. This business largely entails manufacturing of intermediates or APIs or both?
Both.
As you move forward with this business and you ramp it up, what proportion of your revenues here are likely to be from new molecules either commercialized or in the process of commercializing?
As I mentioned by FY 2025, so we have a strategy to take synthesis division revenue contributing a quarter of our total revenues.
All of it would be from new molecules, right? Under commercialization trials or getting commercialized. Would that be accurate?
Yeah. From new clients or existing contracts, new products.
NCEs largely, right?
NCEs, yes, you're right. See, the synthesis division, our approach is we don't add the CMO of generic APIs synthesis. CMO of generic APIs will go into the generic division only. These are one product, one customer business comes here.
Got it. Among the plants that you have here, are these FDA-approved capacities?
Current capacities are all FDA-approved. The one we are building will also go through approval when we validate products.
Got it. Last, how much is the CapEx for nine-month FY 2022?
About INR 700 crore we did CapEx.
And-
the first nine months
plan for the next three months would be?
See, in FY 2022 and 2023, our CapEx will be in the range of INR 1,500 crore-INR 1,700 crore. That number is still valid.
Got it. Thank you, sir. Thank you so much.
Thank you. The next question is on the line of Krish Mehta from Enam Holdings. Please go ahead.
Thank you for taking my follow-up. So basically, as you mentioned, the future possibility of this 25% of the gross block being utilized, could you actually throw some light on what this future revenue possibility might be of this 25% that's not being utilized?
As we explained, we have built this facility to meet our product demand and our customer demand. We can't give you the specific number. See, if the asset turnover ratios, if you look at, it's about between 1.2-1.5. It means, yeah, in that level.
Okay.
Uh.
Thank you.
Thank you, sir.
Thank you. We'll move on to the next question that is on the line of Aejas Lakhani from Unifi Capital. Please go ahead.
Hello. Yeah, thanks, Dr. Chava. My questions are answered, but since I have the opportunity, just wanted to understand that, from a gross margin perspective, and EBITDA perspective, can you give some guidance for or how you are thinking about FY 2023 and 2024?
See, for the last several quarters we were saying, although we had much higher than 30% EBITDA, but we were talking to our investors saying that we are confident to maintain 30% EBITDA for FY 2022 and beyond. If you look at our nine months, we were very close. We are more than 29%, I think 29.5% EBITDA for first nine months. Q4 we are also confident to achieve the 30% EBITDA. We are comfortable to say again that our business now is capable of generating EBITDA margins of 30%, around 30%.
Got it, sir. Thanks a ton, sir. I'm done. Okay. Thanks, sir.
Thank you. The next question is on the line of Ritesh Rathod from Nippon India. Please go ahead.
Yeah. Thanks, sir, for giving the opportunity again. Sir, in ARV API, how has price movement happened from the peak? How much would have been the correction from the peak?
It is 2%-3% lower than the earlier.
Okay. Okay.
It's not big. See, it's highly mature products, so none of them are newly launched products. Products are mature, so price fluctuation is not significant.
Sir, in terms of both API, ARV API and formulation, are there any new players which have got empanelled by the in the global tenders of PEPFAR and all the old players who were empanelled, are they becoming more active? What's the competitive scenario you're sensing for next sic to 12 months?
In the formulation space, you can expect one or two new players coming in. In the API space, at least in the next 12-24 months, we haven't seen anyone investing big infrastructure to get into the ARV API space.
Okay. Yeah. That's it, sir. Thank you.
Thank you. The next question is on the line of Prashant Nair from Ambit Capital. Please go ahead.
Yeah. Hi. Ravi, just one clarification on your margins comment which you made earlier. So when you said that, you're confident of maintaining 30% EBITDA margin, was that for the fourth quarter or was that for the full year as a whole?
Full year.
Okay. You believe you can make up some of the, in the nine months I think you are at 29.2% or 29.3%, so that you can make up in the fourth quarter?
Yeah. That can make up. Yes. Yes.
Okay. Fine. Secondly, just a follow-up question to what the earlier participant asked on pricing. So on ARV formulations, you know, while volumes have been lower in the tenders, you know, has pricing also corrected through the last, say three, four quarters?
Pricing corrected in the ARV formulations. See here, when we are saying pricing is not like 5%, 10% reduction like what we're hearing in other regions. Here it is a 1%, 2% reduction in the pricing. Yeah.
Okay. Got it. Thanks a lot. That's it.
Thank you. Ladies and gentlemen, due to time constraint, we'll be taking the last question. That is on the line of Dhawal Shah from Svan Investments. Please go ahead.
Yeah. Hello, Dr. Chava.
Hi.
Sir. Hi, sir. Just one understanding I want on the ARV side. Like, when we're discussing about ARV business in the past couple of quarters and years, you know, we always have a good visibility on our volumes. In last three quarters, what happened in the, you know, in terms of the procurement by the, you know, by the agency that we saw this dip in our volumes. Just from my understanding, if you could, you know, please explain.
See, if this decline is only for Laurus Labs, then it is a concern. That means we are losing market share and somebody is gaining. This you might have seen from the other listed companies how much ARV revenue decline they have shown. We have done better when compared to them. This decline in ARV APIs is only transient. Our ARV API sale depends on how our customers are successful in tenders. Whereas our formulation sale is follows the general trend of the other formulation company. If you look at our decline in ARV formulations sale is less when compared to the ARV API sales. Yeah.
I mean, you mentioned you will be making around INR 1,500 crore-INR 1,600 crore of annual growth rate on the API and APS side, which will be on a quarterly basis will be much lower than what we had around INR 500 crore-INR 550 crore odd. Why is this a less number? What is changing in the end market?
Maybe we are cautious in saying that number.
Okay.
Okay.
Very well, sir. Thank you. Yes. Thank you.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for the closing comments.
Thank you everyone for your interest and patience and asking some very insightful questions which will help us to reshape, realign any of our priorities. Thanks, Manish, thanks, Vivek, and Ravi kumar for the
Thank you everyone. Thank you.
Thank you.
Thank you. Ladies and gentlemen, on behalf of Antique Stock Broking, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.