Ladies and gentlemen, good day. Welcome to the Laurus Labs Limited 3Q FY 2023 earnings conference call hosted by Antique Stock Broking. As a reminder, all participants' lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing star then zero on your touchtone phone. Just note, 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, Vikram. Good evening, welcome to Laurus Labs 3Q FY 2023 results conference call. We 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 from the IR team. I will hand the call over to Dr. Satya for his opening comments. Thank you, over to you, sir.
Thank you, Monish. Thank you for jmoining us for our Q3 and nine-month FY 2023 results conference call. We are pleased to have this opportunity to update you on our business progress and answer your questions. Let me share quick thoughts on our performance. Our business has continued to perform well both during the quarter and also on nine-month basis, reflecting a sustained momentum across our key growth drivers. We are all well-positioned to close the year with strong double-digit revenue growth with stable margins. We remain firmly focused on our strategic priorities to diversify, drive growth, and delivering long-term sustained value to our customers, partners, and our stakeholders. In addition, we'll continue investing in mechanization, automation, and the digital initiatives to boost operational efficiency.
We also like to update that recently Laurus Labs has been selected as a panel supplier by the Global Fund for ARV drugs procurement. The contract will run for a period of three years. For over a decade, our company has been committed directly and indirectly to the cause of HIV. This tender offers us again a great opportunity to make HIV treatment accessible to more than 150 countries through Global Fund and other multilateral agencies. During this quarter, Unit 5 received EIR from U.S. FDA. Moving on to our financial results, we are pleased to report that we achieved a healthy top-line and bottom-line growth for both quarter and nine months. We made additional advancements in our R&D initiatives, pipeline enhancement, diversification, and new capacities qualified and ready for commercial production.
We are confident in the underlying demand for our portfolio and scale as we continue to see momentum in our business. We have achieved INR 1,545 crore revenues for the quarter, showcasing a 50% growth year-on-year. For nine months, we clocked revenues of INR 4,660 crore, a growth of 33% grow year-on-year. Our strong results are driven by exceptional growth in our non-ARV revenues, especially CDMO and APIs other than ARVs. Our growth was also supported by much-anticipated recovery in ARV formulations and which is expected to continue further. Our profitability margins have sustained despite ongoing disruption in business environment caused by inflationary headwinds and also geopolitical risks. To begin, I would like to share key updates on our formulation business.
Our formulation division has sequentially recovered with 67% growth and reported overall revenues of INR 747 crores for nine months with a decline of 46% year-on-year. If you look at our Q3 revenue, although there is a degrowth of 33%, we have seen a healthy recovery over Q2 base, we expect it to further normalize during the next few quarters. Coming to LMIC business, while broader demand environment in ARV have continued to stay softer, our business has shown some respite off Q2 low base. Pricing has largely remained depressed. We remain optimistic over a gradual stabilization in the volume off take ahead. This is partially supported from open orders and visibility from new Global Fund HIV tender. During nine months, we launched two products, lopinavir and ritonavir, abacavir, and lamivudine combinations.
Additionally, we're awaiting few more products approvals which should help us in stabilizing business in coming quarters. As articulated in the past, we will continue to evaluate our portfolio choices in this business and play selectively for value over volume alone. Coming to developed market, we continue to perform well across our broader U.S. portfolio despite higher competitive intensity. We continue to get good market share on select products and also increasing volumes for our recently launched products. We continue to leverage our front-end presence in the U.S. market for new product launches. During the quarter, we filed two ANDAs, taking the total filings to five ANDAs for the nine months in the current financial year. Cumulatively, we have a total of 37 ANDAs to date.
Of these, we have a total of 14 final approvals and 12 tentative approvals. In Canada, we received two approvals during the Q3 FY 2023, taking total approvals to 13, of which we have launched eight products, and we intend to launch at least 1 product every quarter for the next few quarters. For new markets, we have validated three products as part of the contract manufacturing partnership. We expect a significant upside from these products in the coming quarters. We have a basket of 11 approved products in Europe, of which we have already launched six, and we'll be launching few products shortly. Based on our healthy product pipeline progress, we continue to invest in our non-ARV FDA infrastructure with a total commissioned capacity of 10 billion units.
We anticipate that these ground-tool capacities that we have added recently should start to get better utilized during the course of next year as we begin to see better demand visibility in ARV business, scale-up visible in the partner portfolio, and also key product approvals. On the R&D front, we continue to make good progress and invest in portfolio with product-specific approach based on complexity and economies of scale. We are pleased to share that we filed our first NDA for a HIV pediatric product during Q3. We believe this unique drug product delivery form for pediatric HIV treatment should complement our existing offering. We continue to do further developmental work on orally disintegrating film platform, which can be leveraged to create innovative pipeline in other therapeutic areas.
Our sterile R&D labs, which has already started working on priority projects, and we expect to complete development phase for at least three products in the next few quarters. Overall, R&D spending to sales for the quarter was at 3.2%. We have a total of 64 products in R&D pipeline, either under development or under review, having an addressable market of over $40 billion brand sales. We have filed 37 ANDAs in the U.S., 12 dossiers in Europe, 19 products in Canada, nine with WHO, five dossiers in South Africa, 20 dossiers in India, and 22 products filed in various rest of the world markets. Of the 37 ANDAs filed in U.S., we have 16 Paragraph IV filings and 11 first wave opportunities, having a sizable market. From the beginning, our approach remains product-specific and not market-specific.
Coming to the generic API business, our antiviral API sales for this quarter is at INR 376 crore. As indicated earlier, we expect volumes and pricing are going to stabilize around the current levels. We continue to maintain a leading market share in the current product pipeline and also expect increase in our supplies to developed markets. Onco API business declined 13% during the Q3, but improved sequentially 35%, and we achieved INR 74 crore sales for the current quarter. For nine months FY 2023, the segment has seen a decline of 14%. As you're aware, Laurus Labs have one of the largest high-potency API capacity in India. We're also expanding the high-potency API manufacturing capabilities in Unit 4 to meet continued demand for such products.
Our other API segment sales, which include cardiovascular, diabetes, and asthma products, have seen steady ramp-up both for the quarter and nine months. For the Q3, we achieved a sales of INR 182 crores, growing at 33% year-on-year. For nine months, the growth is very robust at 65%, supported by new contract supplies. During the Q3, we filed three DMFs, all in non-ARV category. With this, total number of DMFs filed to date is 77. We initiated validation of few APIs and expect to see good potential over coming years. We are also working on CMO opportunities with few global generic companies, and some of them are in advanced stages of implementation at the plant.
When it comes to synthesis business, which has continued to sustain robust growth over 200% year-on-year for the quarter. We achieved sales of INR 642 crores. During the nine months FY 2023, our CDMO business have grown over 2.4x to INR 1,939 crores. This growth is driven by robust underlying demand from both new and existing clients and our ability to do strong commercial execution. We remain quite excited about this division as we are focused on both commercial execution as well as expanding our pipeline projects in various clinical phases. We continue to work on over 60 active projects at different stages. Ongoing commercial supplies for about 10 products, including APIs as well as several intermediates.
Our greenfield investments towards building a dedicated R&D center for this division at Genome Valley and two manufacturing units in Vizag is progressing as scheduled. New sites for the synthesis division will have capabilities to handle Animal Health as well as Agro. The facilities will have dedicated blocks for steroids, hormones and high-potential molecules, apart from large volume products. We expect to qualify one of the dedicated Animal Health manufacturing site by mid of next fiscal. Laurus Bio revenues were largely muted at INR 22 crores due to unplanned downtime, resulting to some production deferment during Q3. This has been rectified and brought online. For nine months, bio sales grew by about 22%. We do anticipate pick up with the ramp up of new capacities with our large scale CDMO partners in the coming quarters.
We have completed scheduled expansion at R1, including new R&D block, along with balancing equipment. We initiated process for acquiring land for our pre-greenfield expansion near Mysore. We believe that the new site should further strengthen our Laurus Bio capabilities in offering CDMO services in animal origin-free proteins as well as growth factors. We believe global opportunity in alternative food proteins is an exciting phase, this will be a fast-growing segment in the long term. Our focus is to have the right scale, cost and functionality, which will drive our technology differentiation. With that, I would like to hand it over to Mr. Ravi Kumar to share financial highlights.
Thank you, Doctor, and very warm welcome to everyone for our quarter three and nine months earnings call. Total income from operation for the nine months is INR 4,660 crores as against INR 3,511 crores, showcasing in 33% growth. During the quarter, we have done a INR 1,545 crores against INR 1,029 crores with a 50% growth. Gross margin for the first nine months is at 55.4%. Our EBITDA for nine months is INR 1,307 crores with a EBITDA margin of around 28%, whereas quarter three, INR 404 crores with a margin of 26.1%. A lower margin is due to the negative operating leverage.
Our diluted EPS for the nine months is INR 4.70, not an annualized basis, with a 14% growth. Our ROCE is at 26% on an annualized basis on the back of sustained operating leverage across units. Of course, despite of investments into the CapEx. On the CapEx front, we invested around INR 200 crores for the quarter and slightly more than INR 600 crores for the nine months. We have guided INR 2,000 crores CapEx in the FY 2023 and FY 2024. I think we are still committing to the around that number for this year and next fiscal.
We believe our capital allocation framework, including commitment towards diversification and strengthening of non-ARV portfolio, building niche capabilities, invest in disruptive technologies, backward integration programs, and improving operational efficiencies, will continue to be in force in creating a long-term value. With this, I would request the moderator to open the lines for the Q&A. Thank you.
Thank you very much, sir. 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 then 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. To ask a question, please press star followed by one on your touchtone phone now. We have a first question from the line of Sajal Kapoor, an investor. Please go ahead.
Yeah, hi. Thanks for giving the opportunity to interact. Two questions. Given that our CDMO synthesis business will be self-reliant in about two years' time, is it fair to expect that management would disclose gross and operating margins, balance sheet and cash flows, in CDMO synthesis, separately, in FY 2025. That's one. Secondly, my sense is that once the significant CDMO synthesis CapEx at Vizag is complete, there will be time consumed in validation batches. There will be an extended qualification period for regulatory audits and U.S. FDA plus other approvals. There will be a lag before we actually start commercial shipments in a meaningful way. On the presentation slide 14, it says, expect to qualify dedicated Animal Health unit by mid 2023.
Can you help us understand the anticipated commercial shipment timelines for all three new facilities, currently under construction? Thank you.
Thank you, Sajal. The two facilities for CDMO which are in construction, one is for Animal Health, the one we will also start construction for Agrochemicals. We want to update you. For Agrochemicals, we already completed construction of a pilot plant for the registration batch on that. Registration batch is already produced in the Agrochemical plant. When it comes to Animal Health plant, currently one NCE program validation was done in a dedicated block in one of the other manufacturing of the parent company. Once the new site is qualified, this will be a new site to be added into the file. There are some products in some markets, the approval times are shorter. This site will cater to the global markets, not just U.S. market for Animal Health.
That is your answering your qualification of the programs. When it comes to the separate balance sheet and P&L numbers for the synthesis division, I'll leave it to Ravi Kumar to answer.
Right now we are using the same common facilities, and it is very difficult to segregate a balance sheet and P&L account. Whatever we can segregate, we can, the revenue only can be segregated. That's how we have showing only the revenue breakdown. Probably in the next three to four, maybe three to four years when we have a separate subsidiary, everything in under subsidiary, then you will know the balance sheet, P&L of the synthesis separately.
Yeah. Thanks, thanks, Dr. Satya, for your qualification and the commercial shipment response. That's really helpful. Mr. Ravi Kumar, the reason, the only reason investors are interested in knowing more about the economics of our CDMO synthesis is that the economics as a division are significantly better than the rest of our businesses. When we say that we will have an independently self-sustaining sort of business in two years' time, that is FY 2025, it should also mean that, you know, we'll have enough room in the balance sheet to raise external resources if required. Otherwise our operating cash flows adjusted for working capital should be able to sustain the growth momentum of this business going forward.
As we understand, the CDMO synthesis business has a very long runway of growth ahead. The way Team Laurus has executed, in the last seven, eight years, I mean, we were just INR 100 crore, including the ingredients and the innovator synthesis back in 2016. We have come a long way, but we are still scratching the surface. It would really help all investors to have a, you know, a better color on the economics of this business. Not immediately, but yeah, as I said, two to three years out. That'd be helpful.
I appreciate that point, but the only challenge is, because there is a common facilities, the segregation is very difficult. Over a period of time we will see what best can be done.
Thanks, Ravi. I have more questions. I'll join the queue. Thank you.
Thank you.
Thank you. We have next question from the line of Bharat from Quest for Value Capitals. Please go ahead.
Sir, in many forums in the past you said that ARV business, both API and formulation combined, will be less than one-third by FY 2025. Do you still think that you can achieve this by FY 2025?
If all our diversification plans goes as we are thinking, it is possible. As you see for nine months, our ARV APIs is 22% of our revenue, and our ARV formulations is about 10% of our revenue for nine months. That is 35% of revenue came from ARVs, APIs and formulations in the coming this nine months period. We do anticipate rest of the divisions will grow faster than the ARVs. We are hopeful that by FY 2025 the ARV business will be 1/3 of our business. Yeah.
Okay. Thank you. Currently we have around 5,000 employees, and revenue contribution per employee is around INR 1.2 crores. In one of the recent interview, you said that you have vision to double the number of employees that is from 5,000 to 10,000. Also have a revenue contribution per employee from INR 1.2 crores to INR 2 crores per employee. May I know, like, by when you want to have this vision to be achieved?
I think we didn't put a timeline to that.
Yes. Yeah.
We didn't put timeline. Currently we are.
Do you think like in three years or five years or what?
Close to 6,000 team size now.
Mm-hmm.
Close to 6,000 team size. We have added about 20% new colleagues in this current financial year, and about 25% new capacities in APIs. 50% new capacities for formulations were added during the current year. I think we can't give you a specific timeline when we will be 10,000 team size.
You said only 10,000 team size.
Yeah.
Not the other one.
Okay. Thank you. Regarding this global fund allocation, which we got for the period, 2023- 2025, may I know if the volumes allocated is more than the previous allocation? Also like how much price erosion was there compared to the previous allocation?
We can't give you the price erosion in absolute terms or also volume in absolute terms. We got fair share of business. We are not the lowest bidders in the tender. That much I can tell you. Yeah.
Okay. Okay. Thank you. That's helpful. Also, sir, there's a sharp jump in number of active projects in CDMO. In Q2 presentation, it was mentioned as 50. Now, in the latest presentation it is 60. There's increase of 10. May I know what led to the sharp increase in the number of active projects?
We got awards for clinical supplies. We expect this number will continue to grow. Yeah.
Okay. Thank you. My last question is, you have increased this API capacity by 1 million, I guess, in Q3, and also you are planning to increase another 1 million in Q4. That's almost 2 million increase in API capacity. May I know which division will use this additional 2 million liters? Is it for non-ARV API or for captive FDF or for CDMO?
It's a very interesting question. Most of the increased capacity will be used for non-ARVs.
non-ARV API, you mean other APIs, is it?
Yes. Other APIs and CDMO.
CDMO?
Yeah.
Okay. Okay. Thank you. One more question, if I may. I see that, you know, in the investor presentation, that there is a new capacity planned for Laurus Bio adjacent to R2. I mean, is it a brownfield expansion of R2 we're talking about here?
In R2 Laurus Bio, we had a mismatch of downstream processing when it comes to upstream processing. We are debottlenecking that. Like, we have taken land adjacent to R2. With that, our output will go up. Our upstream capacity is much larger, downstream is less. We are removing that mismatch because we know what products from the CDMO partners. We have a better visibility how much downstream is needed. We are doing that. Our real expansion will happen in R3, where we have identified and paid the advance for land near Mysore.
Uh-huh.
Yeah. That will be the real expansion where, eventually that site will have a 2 million liters of fermentation capacity.
Exactly. this R3.
Sir, I'm sorry to interrupt, Mr. Bharat. Would you like to come back with the question queue?
Okay. Thank you. Thank you very much. Yeah.
Thank you. Ladies and gentlemen, in the interest of time and fairness to all participants, kindly restrict questions to two per participant. If you still have more questions, please join the Q&A flash. We have next question from the line of Nikhil Mathur from HDFC Mutual Fund. Please go ahead.
Hi, sir. Good evening. I have a couple of questions. My first question is on the formulations business. In nine months, the business has roughly declined by around 45%. Can you give some understanding how much of this decline is attributable to ARV formulations and how much of this is attributable to non-ARV formulations?
Close to two-thirds is ARVs, one-third is non-ARVs.
Two-thirds ARV and one-third is non-ARV. Okay. What is the reason behind the decline in non-ARV formulations? Although many other export-oriented companies have also been reporting soft numbers, is it something to do with de-stocking or more competition in the markets? What are the reasons can you pinpoint why the non-ARV business is also under pressure in the formulation side?
Our formulation contribution from non-ARVs was around 20%-25%. Because of ARV revenues were less, the percentage-wise non-ARVs contributed to 1/3. Otherwise, we didn't see a decline in non-ARV formulations in absolute terms.
Okay. This entire decline is basically the ARV formulations piece then?
Yes. Yes.
Okay. Understood. Also in your investor presentation, you have mentioned that the FY 2025-2026 goal is to have more than 25% revenues from synthesis. Now, I'm not sure what over 10%, 25% means, and that it could be 25%, 30%, it could be more than 30% as well. It does seem that from 42% or the nine months FY 2023, this number is gonna decline, the synthesis contribution. The question here is that what happens to margins in this case if your custom synthesis contribution will go down over the next couple of years? Because the broader understanding is that custom synthesis is usually the higher margin business. Does it imply that the margins could be in some sort of a pressure over the next couple of years?
When we are looking at our investor presentation outlook slide, that was the goal. Over 25% doesn't mean it will come down to 25%. That is the goal we wanted to keep for our internal. That we already achieved. You can consider that the goal is achieved much earlier than FY 2025. This goal we put when our synthesis revenues were contributing 18% to our revenues last year.
Okay. Yeah. Still, sir, intuitively, I mean, there is a very strong year for the synthesis business in FY 2023. I'm not sure if we are calling out, the level of unsustainability in, in this scale in FY 2022. The absolute contribution should only go down in 25%, 24% and 25%, right? Wouldn't that imply that margins should be under pressure next couple of years?
Are you there in the line?
Yes, I am there.
Okay. In FY 2025, when we say 25%, it is on the increased revenue of FY 2025, right? It's an in absolute number, this will be much higher than what it is today.
Okay. Okay. Understood, sir.
Yeah.
Thank you.
Thank you. We have next question from the line of Krish Mehta with Enam Holdings. Please go ahead.
Hi. Thank you for taking my question. I just had two questions. One is on what was the absolute ARV revenue for this quarter?
Absolute ARVs for this quarter, the APIs is INR 367 crores. INR 376 crores for APIs and INR 140 crores for the formulations. About INR 516 crores. About 36%, 35% of revenues came from ARVs, both APIs and formulations.
Okay. What was ARV FDF for this quarter?
[audio distortion].
Okay. Thank you so much.
Thank you. We have next question from the line of Surya Patra with PhillipCapital. Please go ahead.
Yeah. Thanks for the opportunity. I just wanted to understand freight cost or to understand the cost equation better. Sir, what is the share of the overall cost would be freight cost? What would be the rise in the energy cost for this quarter over last year, if you can share that?
Freight cost, I think, if at overall level it could be very insignificant. It's not very significant.
Okay. Any specific reason, sir? I think, generally freight cost is, around, mid-single digit kind of number. Last year the weight had appreciated, so that will become a kind of important number, or I'm reading slightly differently.
The most of the export sales happen in the sea, by sea. If it is by air, actually, I agree with you that the costs are too high. It will impact. Most of the sales happens through by sea.
Even the freight cost of sea-based freight costs had.
Gone up significantly, but when it comes to percentage to revenues, it's not.
Oh.
It's not very high. It's not very high.
Okay. Sure.
You were asking about the power cost increases.
Yeah.
Um, during the f irst quarter, we have seen significant rise in the energy cost, because of lack of power in our industrial zone. We did buy from private power, which was expensive at the time. Now situation improved, and we are not buying any private power higher than the grid power costs.
Okay. Sir, if I just compare the FY 2022 energy cost number versus FY 2021. During 2021 it was 2% of our revenue was energy cost, which became 4% in the FY 2022. It is believed that FY 2023 numbers are much higher obviously than FY 2022. That is why I was trying to understand whether it is now around 5%-6% of the total cost.
No, the energy cost, not only power, actually the coal cost also there.
Yeah.
In the middle, the coal cost, coal prices have also shoot up. Now the coal prices also become a, you know, normal. I think that kind of a substantial increase is not there, but definitely increase is there. If you need any specific percentage, actually we will let you know.
Sure, sir. My ultimate question was that, sir, see even this quarter performance, if you see, the gross margin has sequentially come down. Although you have indicated that the product mix would have to some extent impacted. If you see the revenue mix, there is not much change sequentially. There is a 2% kind of gross margin erosion. On the other expenses front, if I see from the pre-COVID level, now it is almost like 4% kind of rise. These two thing I wanted to understand a bit. If you can elaborate that is fine.
Yeah. We'll try to answer your question. When it comes to the decline in gross margin, that was primarily driven by the ARV, APS and formulations. We don't expect to further decline in ARV, APS and formulations. As the revenue from other divisions increase, so the margins will continue to go up. We don't expect the margins will come down further.
Okay. About other expenses if you.
Other expenses higher because of several new capacities were qualified in API as well as in formulations. As you know, company's philosophy is to expense all pre-operative expenditures. There is a operational deleverage. Yeah. Yeah.
Okay. Okay. Sure, sir.
Thank you. Ladies and gentlemen, please restrict questions to two per participant. We have next question from the line of Tushar Manudhane with Motilal Oswal Financial Services. Please go ahead.
Thanks for the opportunity. Just extending previous question. How much would be the operational cost related to this expanded formulation facility of 5 million units?
We can give you the new block has about 300 colleagues right now. Yeah. We can't give you the specific number. I can reiterate the company's philosophy is to expense all those. Yeah.
Okay. Just secondly, given that we are sort of exploring CDMO across three fronts, pharma, Agrochemicals and Animal Health. If you could elaborate, you know, what kind of asset turn or margins or the return ratios you would have sort of thought about when utilizing the, let's say, the capital allocation for CDMO across these three different spaces?
Based on our current understanding, the Animal Health and human health CDMO have similar return ratios. Agro, asset turnover is higher, but the margins are a little lower when compared to this. When you multiply asset turnover and margins, I think return ratios could be similar.
In terms of opportunities, in terms of the developments happening across Animal Health or, the Agrochemical in particular?
Animal health is a fixed portfolio right now. We know what to make, how much to make, what price and all. It is with one customer, Animal Health, the entire program. Whereas Agro, we have already have two. It's a limited portfolio right now. We are exploring further. Yeah. We'll give you more details as and when we are in a position to share.
Sure, sir. Just lastly, while you're saying that the margins would be stable, given that nine months we have 28%, for Q3 in particular we are down to roughly 26%. Does it mean that we would be expecting a good uptick in the margins for the fourth quarter?
For the next year, this year we'll be closer to 28% probably. Next year will, because the one reason why we are confident is we don't expect further price drops in ARV, API or formulations. We don't expect significant growth also. The segment which are growing have higher margin than ARV, API and formulations. That's the reason our belief the margin should improve. Yeah.
Sure. All right. Thanks.
Thank you.
Thank you. We have next question from the line of Devvrat Mohta with Capital International, Inc. Please go ahead.
Hello.
Please go ahead, sir.
Hello.
Yeah.
Yeah, doctor. Hi, Devvrat here. I had one question. I wanted to just follow up on margins. You know, if you look at the export data until Q2, you had this big benefit, from, you know, certain intermediate which you were supplying.
Which it seems like, you know, the intermediate probably demand for that will probably fall off quite significantly as we go forward. And, you know, if I look at the numbers, roughly I say INR 400 odd crores of revenue from that one intermediate. And if I work with a 40% EBITDA margin assumption on that single product, I mean, that basically means that the underlying business was probably low twenties EBITDA margin this quarter. So what gives you confidence that, you know, if that product goes away as well, that, you know, margin build up at 30% versus, you know, the underlying margin kind of 20%, low 20%s now?
There is, as you might have seen, the active projects have increased from 50 to 60. We expect the number will go further. There are projects which are not one-off in our CDMO. That will drive our growth. [crosstalk]. Sorry, go ahead.
Sorry . Go on, go on.
What will be the negative operating leverage, which was pulled down the margins this year? When we have an better operating leverage that also will improve the EBITDA margin leverage. Devvrat are you there?
Yes, I'm there. I lost you for a second, though.
Okay. Okay. Yeah.
Sir, do you have any further questions, Mr. Mohta?
No, that's it. That's it from me. That's it.
Yeah. Thanks. We have next question from the line of Harith Ahamed with Avendus Spark. Please go ahead.
Hi. Good evening, sir. Thanks for the opportunity. You mentioned in your presentation that you've been selected as a panel supplier in the Global Fund tender. What exactly does it mean, being a panel supplier?
See, they allocate majority of their procurement, percentage of their procurement. We know how much percentage we are getting, Global Fund procurement, for 2023, 2024 and 2025. These panel suppliers will have assured quantity from Global Fund.
Okay. Will you be able to share the percentage allocation?
No, no. We can't share those numbers.
Okay. Okay. Last quarter, you had after revising your guidance, revenue guidance for FY 2023, you had lowered that number to around INR 6,500 crores. Do we still maintain that guidance for FY 2023 revenues?
We're working on that.
Strong double-digit growth.
Yeah. We're working towards that.
Okay. This NDA that you filed for this ODF technology-based product, is it a PEPFAR filing or is it a normal NDA for the U.S. market?
We I think eventually we will sell that in developed markets as well. Yeah. See, right now this oral film is not there in the guidelines of WHO. They will put into the guidelines once we get an approval from FDA. Yeah.
Okay. Yeah, last point from my side, this, supplies under the purchase order, can you share some directional sense versus 2Q, was it maintained at the same level or did we see a very sharp decline in the supplies? How we should think about, the fourth quarter and FY 2024, for this particular contract?
Well, we can't share details on that contract.
Okay. Thank you, sir, for taking my questions.
Thank you.
Thank you. We have next question from the line of Anandha Padmanabhan with PGIM India Mutual Fund. Please go ahead.
Thanks for asking my question. Am I audible?
Yes, you are, sir.
Yeah. I couldn't understand your response to the question of the earlier past participant with regard to the guidance on the full year basis. What is the current visibility that Laurus has based on the based on whatever contracts that are there in hand in terms of achieving that guidance of INR 6,500 crores on a full year basis?
We're hopeful to meet that.
Okay. Okay. With regard to the CDMO business, you said that even though that one contract for those surplus intermediates run up, you have other contracts which you see good visibility. How should we look at the current run rate? If I look at the average CDMO run rate, it comes to around INR 650 odd crores. Should this be taken as the base business run rate for the CDMO business going forward for FY 2024 or one should work with a much lower number?
CDMO business for anyone is a lumpy business. Yeah.
I'm thinking on a full year basis. If I just annualize it.
What we are looking at is are we getting new partners into CDMO. We have added twp new big in this current year, and our number of active projects has gone up from 50 to 60. We are building dedicated capacity for CDMO, and we are building a dedicated R&D for CDMO. All those should clearly indicate that we have very high focus on this segment. All the investments happening in the company are to support this sustained growth.
Okay. One final question with regard to the margin. When we come to the next year, we would see that the contribution from ARV business would go up as your formulation, ARV formulation revenues picks up. The CDMO, while there could be lumpiness, but in all probability, CDMO as a percentage of revenues will start coming down. Inherently, the business mix would be inching towards more lower margin business than what it is currently. Should we work with the much lower margins for FY 2024 than what we have achieved in the first nine months of FY 2023? Or are you of the opinion that the current margins of FY 2023 on a nine-month basis, whatever you have achieved, is something that is still sustainable?
I think we'll give some flavor during our whole year finance results. We can't give you any guidance right now.
Okay, okay. From a longer term basis beyond FY 2024, if all your projects work out, you're confident that you'll be able to maintain the current margin profile.
That's for sure, yes.
Okay. Okay. Thank you. I'll get back to you.
Thank you.
Thank you. We have next question from the line of Nitin Agarwal with DAM Capital. Please go ahead.
Hi, sir. Thanks for taking my question. Sir, on the CDMO business, you know, in your assessment, Animal Health and the Crop Protection business can comprise of what proportion of our CDMO business over the next thre, four years? Currently, I presume all our CDMO business is on human health only.
Our CDMO business is also very diverse spread within. We have a portfolio of steroids and hormones. That business is very stable right now. Our human health side is growing very well with NCE programs. We also have CDMO, CMO for dietary supplements and cosmeceutical ingredients also. That is also growing very well. Animal health, we are seeing very small base right now, but once the facilities are qualified, that division will grow. Crop production serious revenues will come only in FY 2026 actually. FY 2025, not before. The only facilities we are constructing and qualifying, that will become.
These two segments have the potential to be what? 1/3 to half of your CDMO business or it'll continue to be dominated by human health only?
It's too early to give a number in that direction, Nitin. Yeah.
Okay, sir. Sir, secondly, with the new developments that have happened on the ARV tenders, how, I mean, how do you look at your INR 3,000 crore per annum guidance for ARV formulations and APIs? I mean, are we in a position to exceed that? It's gonna be, you still see that's gonna be an optimal number where we'll be operating the business at?
We lowered that number to 2,500, both APIs and formulations. I think we are pretty on target for that.
Sir, even on a going concern, you don't see increase happening to that number much beyond this?
We If growth comes, we are okay. Even if the growth doesn't come, we are okay. We are not adding any capital allocation to ARVs, both either APIs or formulations. We are putting more focus on high margin, high growth business, rather than trying to run around the business which stabilized. There's not much growth even we are not anticipating.
Okay, sir. Then, sir, when you talk about this ARV business, guidance, do you take into account the new NDA that you filed over the last two quarters? I mean, do they have potential to add meaningfully to these numbers, or they will be part of this, overall mix only?
I think depending on how WHO puts guidelines for pediatric treatments. We are also developing a portfolio of films, not just ARVs in other therapeutic areas also. I think this platform is very exciting. We're adding more products there.
Okay, sir. Lastly, on the other API segment, I mean, you've had pretty strong growth in the last two quarters in particular. Any particular reasons, you know, why any one-off, any non-recurring elements in this number? Or this is like a new base on which the business grows on from here?
This is based on our product portfolio. Our diversification efforts are giving results. Yeah.
Okay, sir. Okay. Thank you, sir.
Thank you. We have next question from the line of Kunal Dhamesha with Macquarie. Please go ahead.
Yeah, thank you for taking my question. First one on the Global Fund allocation that we have got. While we have some clarity in terms of the volume allowance for the next year, the pricing at which it would have happened, would it remain stable going forward, or there will be annual revision on that?
Prices will be stable. Yeah.
Whatever prices, you would have bid would be the price that would continue through 2025, or there'd be like next round of bidding, which will happen maybe one year down the line?
The pricing already depressed. We don't expect prices will go down further on this.
Okay. Okay. Second question, given my belief is that the API facilities are generally fungible, you know, except for very different chemistries. Given that the, you know, ARV API seems to be going down, probably in terms of pricing and hence the return ratios for whatever capacity that we employ would also be going down. Why then go for, you know, new capacities for CDMO business, and why not just utilize, you know, so rationalize some of the ARV portfolio where we are not making that much return and then just utilize that kind of, you know, API capacity?
It's a good question. If you look at the size of the ARV business, both API and formulas, it's not so small. It is significant. We don't want to divert the ARV facilities to CDMO. CDMO we are building anyway. Yeah.
The other way to, maybe, you know, just, my final question is, whatever capital we would have invested in ARV business, would have we got that back by now, in terms of the payback or, let's say over next three years that will happen in terms of pay?
Just to give you overview of capacity utilization of ARV facilities is pretty good actually.
Yeah. Mm-hmm. Okay. Perfect. Thank you.
Thank you.
Thank you. We have next question from the line of Jeevan Patwa with Sahasrar Capital. Please go ahead.
Thanks a lot. I think, Dr. Satya, what's happening is, basically, I just want to understand whether we'll be able to maintain the gross margin at a 54% level and above for next year and onwards when we basically start the new FDF formulation contracts, both ARV, non-ARV. If you are able to maintain 54% gross margin, I think we will be able to maintain even the EBITDA once we get the operating leverage. The question would be, will you be able to maintain the 54% kind of gross margin and above?
Currently, where the operations deleverage is happening, once the operation deleverage is over, and then the margins profile will improve. Yeah. EBITDA margin.
Basically I just give you the overview where I'm coming from.
Uh.
If I just look at the best quarter that we had, Q4 FY 2021, we had similar gross margin of 54%. That time our employee cost was 6% and our other expenses was 14%, and that's why we actually reported 34% EBITDA margin. What is happening is our employee cost has gone up to almost 9.5% and other expense gone up to 18.5%, and that's where our EBITDA margin is down. Once we have the operating leverage and we are able to utilize our capacities better, if we are able to give run rate of say INR 2,000 crore quarterly run rate, I think we'll get back to that EBITDA margin again. We need to maintain the gross margin of 54%.
That's where, the question is whether we'll be able to maintain a gross margin of 54%. Gross margin, I would say.
I think it's, it all depends on the product mix, and the, and then the business division mix also, right? It all depends.
Right. We are starting new orders next year, right? Both ARV and non-ARV formulation orders.
Correct.
Will we be able to have this kind of gross margin?
Jeevan, your point is well taken. The employee benefit expenses was FY 2021 was 9%. For the current nine months is 10%. Other expenses was 14% and current is 18%. Yeah. There is lot of deleverage is there, and we appreciate your view that if leverage starts kicking in, even the margins are stable, EBITDA percentage will go up.
He's talking about gross margin now.
The gross margin remains same.
Yeah.
Leverage kicks in, then EBITDA will go up.
Correct. That gross margin, the question basically, will we be able to maintain the gross margin 54% and above?
Yes. Hopefully. Yeah. Yeah.
Okay. Thanks a lot, sir.
Thanks.
Thank you. We have next question from the line of Hussain Kagzi with Ambit Asset Management. Please go ahead.
Hi. Thank you for taking my question. Sir, my question is with regards to our non-ARV formulation division. If I see that, we must have done roughly INR 278 crores in the first nine months. I remember that most of our capacity, what we have 10 billion, out of that, I think around 2/3 is towards non-ARV formulation with further capacity or brownfield addition of 5 billion possible. Here, I just wanted to get a sense of the division between how much of this revenue, what we are doing currently is CMO-based and how much would it be on the basis of the ANDAs which we have filed.
This is because mainly I wanted to understand the strategy going ahead that, will we be focusing more on CMO side or probably go more after the ANDAs which we are filing? Yeah, that's the question.
The current capacity utilization is over 50%. INR 10 billion is qualified, currently we are at INR 6 billion usage. Out of that INR 1.5 billion is CMO.
Sorry, you said $1.5 billion is CMO in total?
Yeah, yeah. 22% of capacity is used for CMO.
Okay, okay. Is this what going ahead will be focused more on the CMO part or is it, you know, more on the, say, our launching our own products in the market? I mean, how do we distinguish between that strategy going ahead, sir?
I want to clarify one point here. When we are saying CMO of formulations, we are not offering CMO for our formulations unless we make the API. For the formulations, we also make API. Even the CMO.
Okay, okay. Got it, got it. All right, thank you. Thank you.
Thank you. We have next question from the line of Palak Shah with Infina Finance. Please go ahead.
Hi, sir. Thank you for taking my question. Just one from my end on your synthesis business. Given the number that you have reported, does it have any new contract that we have recently won in last two quarters? The contribution despite of one-off project going off, it's still at INR 650 crores.
We have a healthy pipeline in our CDMO. Several new active projects kicked in. That looks very promising. We can give you that details.
Okay. Just if I clarify a bit, would that mean that the annual run, quarterly run rate of INR 120 crore-INR 150 crore at which the total date actually jumps to INR 350 crore-INR 400 crore now or even above that?
The lot of active projects, I go back to my statement, a lot of active projects, we can't give you specific number right now.
Got it. Got it. Sir, thank you so much for this.
Thank you. Thank you.
Thank you. We have next question from the line of Sajal Kapoor, an independent investor. Please go ahead.
Yeah, hi. Thanks a lot. Question on sterile injectable. Last year we commissioned our sterile injectable R&D labs and we started working on few priority projects. As a broad long-term vision, where can we go in sterile injectables in terms of, you know, commercial scale over the medium term of say three to four years? That's one. Quick question on Laurus Bio. I heard about this debottlenecking at R2 to enhance the downstream and resolve the mismatch in between the upstream and the downstream, which is a common phenomenon in biotechnology. What is the anticipated sort of timeline for this completion of debottlenecking on the next sort of plant or land that we have acquired? On R3, are we still on track to get to 1 million new capacity by FY 2025? Thank you.
Right. I think I will answer your last question first. In the bio, debottlenecking at R2 will be completed in the next six to nine months. Construction already started. When it comes to R3, we will do instead of two p hases, we'll plan to do three phases to go to 2 million. We probably will do less than 1 million in phase I, maybe around 650,000 liters. Three phases, three equal phases, 650,000 each to go to 2 million liters instead of 1 + 1. That's the current plan in R3. We are at the design finalization phase right now with R3. Once the construction starts, we expect it will take between 18 and 24 months to go commercial.
Sure. On the sterile injectable, if you could just shed some color on the medium term.
We started several projects in R&D, and we are yet to start the construction of commercial facility in for sterile products. We have taken land, but construction not started yet.
In terms of the commercial scale, I mean, three, four, fie years out, I mean, do we have a sort of a rough sketch in terms of how big we want to be in this, in this area, over the medium term?
We have a plan in place, yeah.
Right. Right. That's very helpful.
We will give you more details when we complete R&D stability and then ready to go for commercialization.
Yeah, of course. We have always followed that approach R&D first and commercial manufacturing later. Yeah, really happy to have all those responses, Dr. Satya. I wish the entire team very best. Thank you.
Thank you.
Thank you. Ladies and gentlemen, due to time constraint, that was the last question. I'd like to hand the conference back over to the management for closing comments. Over to you, sir.
Thank you, Monish, for organizing this call, and thank you the participants, investors for your active participation and very insightful questions. Thank you. Thank you.
Thank you, sir. Ladies and gentlemen, on behalf of Antique Stock Broking, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.