Q3 19/20

Jan 31, 2020

Ladies and gentlemen, good day, and welcome to Laureus Labs Q3 FY 'twenty Earnings Conference Call hosted by Kotak Securities Limited. As a reminder, all participant 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 call, please signal an operator by pressing and then 0 on your touch tone phone. I now hand the conference over to mister Chirag Talati from Kotak Securities Limited. Thank you, and over to you, sir. Good morning, everyone. On behalf of Kotak, I thank, Laurus management, for giving this opportunity to host this call. From Laurus, we have with us today doctor Satya Narayan Chawar, CEO Mr. Ravi Kumar, CFO and Muni Shah from the Investor Relations team. I'll I now hand over the call to the management for for opening remarks. Over to you, sir. Thank you, everyone, and very warm welcome to our results conference call on the Q3 and nine months FY 'twenty. Our Q3 revenues stood at INR $7.30 crores, so getting a robust growth of over 38% year on year. To begin with, I'd like to share key updates on our formulation business. We are happy to share that our Unit 2, which underwent a successful year 30 inspection in November 2019, has received the AR. Moving to the performance of coordination business, the division reported its highest ever quarterly revenue of crores. And in the cumulative nine months, we did INR58 crores. The overall contributions from FBS segment have improved to about 40% in the quarter and about 30% for the nine months in the financial year. From low single digits in the corresponding year, this was a significant shift. This shift is in our business model and also underscores on our philosophy of investing in manufacturing and research ahead of time. During the quarter, we have reached the maximum utilization levels of our formulation unit. And with the healthy outlook and order book, we continue to invest further in our way, as we have infrastructure and also in the development. But both together for the formulation business remains a standard driven LMSE anti retro world market funded by Global Fund Praful and other in country tenants. We continue to have good visibility for FY '21 as well. We also expect two new major approvals in the next couple of months for TLE 400 and TLE 600. The sales growth also we have in U. S. As well as in EU. But in EU, our sales was primarily driven by pregabalin sales by a partner, Ryzen. And we have more than 10% market share right now. As of today, we have received total eight approvals, five final approval and three twenty two approval from USADA. Going forward, we expect two more approvals and launch a few more products, maybe two in the financial year and a few more in the April 21. In Canada, we also have five product offerings, and we are launching two, and we are preparing to launch two more shortly. As far as new market is concerned, we are happy to share that our contract manufacturing partner for non air formulation have done exceedingly well. And we have a very good output for FY '21 as well. Besides this, we are also launching two products in the European market under our own label. So far, we have five products approval from Europe, and we are only launching one, and we are planning to launch two more. And we always said, our FDA for r and d is geared up to, do develop and validate between eight and ten products per year, and we continue to believe we'll need this number. So far, we have filed 24 randas in US, six dossiers in Europe, nine in Canada, and eight with the with the India, and the two with the, you know, South Africa, and also two dossiers in India. And we also find that several in various countries for the ancillary products. Of the 24 ANDAs file, we believe that there are two, three, four, and seven possible opportunities which others will market us several billion dollars. As we always speak, our approach remains product specific and not market specific. That is the reason we are filing our associates in various geographies across the globe. Moving into the business segment, although we had great success in, formulations, which, cleared our growth, we had a setback in our API, where there was significant degrowth, and rest of the dividends to confirm the as per our expectations. Synthesis did the portion version more than the corresponding quarter, and the ingredients did exceedingly well. The the version more than the corresponding quarter. But our generic API as a total, we did we grew that segment by almost 20% quarter on quarter. And when it comes to AIR, the growth mainly came from lack of clarity on the awards of supplementary tender in South Africa, where our key customers are not building up inventory. Once the tender results are clear, we expect to we will able to improve our ARV sales in the coming quarters. No. We have completed filing of our second line ARV API, open and and we expect to do some formulation development of the other second line API side. Yeah. When it comes to Onco, our revenues were as expected. We did the 37 growth in q three, and that was more than hundred fifty thousand nine months. The revenue growth is as we expect, there is no significant growth, but this is as we expected. In the past year, we were unable to ramp up a portion of one of our key on core API because of backward integration, we didn't complete on time. But now we since, last quarter, we're able to ramp up the Internet manufacturing for the key our key on core API, and we expect q four will be very good for us. Now the API segment, we did exceedingly well, primarily driven by contract manufacturing of the APIs to other generic companies. We also have a very good visibility for the pay in the q four and after '21 for the contract manufacturing and the APIs are our partners. When it comes to services business, we are doing extremely good. In q four, we did 62 crores, and so far nine months, we did $1.80 crores. And we have a very good, sales plan for the q four. When it comes to ingredients, we did the 80 crores in q four and, 64 crores so far from nine months. We also launched the one key product, to a customer in US, and we expect that will do very well in the near future as well. With that, I would like to I'll go to Ravi to share financial highlights. Thank you, doctor Satya, and very warm welcome to everyone on our call for the three and nine months FY '20. Total income from operations for the quarter is $7.30 close and even a $5.30 close in the corresponding quarter last year during a robust growth of 38%. And for nine months, total income from operations came at $19.93 crores, again, at $16.57 crores, a growth of 20%. Our gross margin continued to show an improvement both sequentially and lower the corresponding growth rate to 12%. Improvement in gross margin was mainly set for favorable product mix and higher factors. EBITDA margin at 41% and the growth in EBITDA was mainly because of improved operating leverage from the business of formulation and other APIs. Our diluted EPS for the quarter at six point nine rupees and thirteen point six, not annual increases with a growth of three ninety six and one at 183%. On the CapEx front, we invested around $1.30 crores for nine months, and we will have a nominal CapEx of around $2.50 crores in the current year. For the next year, we're still working on based on the more demand we expect to slightly higher than INR $2.50 crores, but we will come back in probably in the next quarter, all what will be our guidance for FY 2021 CapEx. With the improved contribution from our high margin business of our peers and other APIs, we remain confident of improving our return ratios. We are very optimistic about the improvement of our return ratios in FY twenty twenty and looking forward to positive free cash flow in FY 'twenty one and beyond. With this, I would request moderator to open the lines for Q and A. Thank you. Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press and one on your touch tone telephone. If you wish to remove yourself from the question queue, you may press and 2. We have our first question from the line of Hari Belawat from Texan Consultants. Please go ahead. Good morning, sir. Congratulations for such nice results which has come during this quarter. It's really very good. Sir, sir, this is regarding USFBA inspection. Unit 2, yes, you got EIR. But for Unit 1 And 3, in the month of June, inspection was done, and the EIR was given. Again, in the month of November, the inspection was done. And, again, some three observations were raised. How, sir, the these inspections have come so quickly, one. Second thing is why the observations have come in the second inspection? Unit 113 underwent FDA inspection in June 2019 was a routine GMP inspection and for which we have received AR. And in the November, we had another inspection for a product specific pre approved inspection in PAI. And we had three minor observations, and we responded to those, and we expect May as soon for that testing day as well. Okay. That means it will be cleared very soon, whatever observations are there. Yes. You're right. Yes. Another thing is that this is regarding the investment in, totally, you said, but till March, some INR $2.50 crore in FY 2021, also INR $2.50 crore. What will go for how much will go in formulations and how much will go in API manufacturing? We are still finalizing the numbers, but next year, you have probably the formulation and API will be equal. Okay. Okay. And because of the degrowth investment in API segment or any such view is being taken? Actually, if you look at our formulation business, it's also driven by a remote APIs. So the API production was never came down. So our API division is giving APIs to formulation division. So Okay. That means both will continue to run that way. Yes. Yeah. You're you're right. Just one small query. This, again, China problems are there, and, so many APIs are being imported. Will it affect, this our company also in this regard? We are very well backward integrated, to starting materials. So we don't import any APIs or advanced integration in China. So we don't export any disruption in supply chain because of this. Okay. Good. Good. Sir. Wish you all the best. Thank you. Thank you. Thank you, sir. We have next question from the line of Sudarshan Patmanabhan from Sundaram Mutual Funds. Please go ahead. Good morning. Thank you for taking my question. Sir, my question is on the formulation side. I mean, this quarter has been phenomenal with almost INR 300 crores of sales. And you did talk about capacities more or less reaching in the top of block over there. I mean, given that we have invested in the nine months, close to about INR130 odd crores, I mean, should the given that we are seeing fair amount of growth and more products coming in, in the fourth quarter, should we be having capacities to kind of drive incremental growth as we move towards FY 'twenty one? We are getting some additional capacity between April and June '1. So after that, we also have plan to construct a new building, which we expect will come operational between April to June 2021. So we have some capacity augmentation coming in next quarter, that is Q1 FY 'twenty one. And again, significant capacity expansion will be available in the Q1 FY 'twenty two. Sure. Yes, sir. And on the ARVs segment, I mean, one, I think you had talked about, you know, in in the API is being used internally for formulations, which is a good thing. The second is, you know, if you can give a bit more color about, you know, the you know, what we are seeing is that, you know, the older molecules, specifically the you know, you have you know, where is in Santenofo, we're seeing some kind of or if I wasn't specifically seeing some kind of a slower growth, whereas the expected is towards, you know, more towards lamivudine and, you know, Doritab Gruber. So if you can give some color about whether we are seeing that shift happening, is it getting delayed? When can we see some kind of better margins, better mix as well as better growth in the segment? If you look at the ARV APIs in Q3 contributed only 27% of our revenue, whereas formulation contributed 20% of our revenue. If you look at nine months number, 39% of the revenue contributed by ARV APIs, whereas formulation contributed 28% of our revenue. See, the decline in sales of ARV API is a combination of many products, not only attributable to FR and GP growth. See, if we get to Clarity and South African Supplement tender, we supply FR and standard of care and infrastructure with three APIs. So decline came from a bunch of APIs, not alone, FR and there is also shifting regimen. So other than South Africa, majority of triple combination is the ZOLTEQ based rather than FRN based. That has also contributed some decline in our APO sales because we are not selling as much as used to sell FR range. Sure, sir. And how about the oncology, sir? I mean, you did give some color about, you know, the third party, I mean, dependence coming down with primarily some internal capacities coming in. And, definitely, I think compared to 1Q, you know, you were expecting some kind of volume ramp up as well as value ramp up to happen. How do we see the trajectory over here, I mean in terms of growth run rate, etcetera, sir? The Onco segment will give around INR $2.50 crores per year. So that's a good number. We don't expect significant growth coming from Angkor APIs. See, Angkor APIs, as you know, volume is so low. And we despite of we having very large capacity and good market share, that is the nature of Onco business. Interestingly, the Onco business, what happened, our gross margin is going up in Onco business when compared to the previous year. Yes, sir. So one final question from my side is, if we are looking at the run rate that we are seeing in the Formulation side, almost from 100 to 150 to 300 now. I mean, it be a right assumption that you know, at the, you know, beginning of the year, we had probably looking at about INR500 crores this year, you know, and we are probably running at around INR750 crores or, you know, INR800 crores this year going by the run rate. And definitely, next year, we should be able see, even even if you're looking at this in the kind of a run rate, you know, over INR 1,000 crores, INR thousand to 1,100 crores of formulations happening. And probably with additional capacities coming in, you know, it should also further improve from, you know, here on. So what is the kind of internal targets that you have for the formulation side? And how do you see it in the next couple of years, sir? We are not giving any guidance, but you are on the right track. So you can annualize our INR $2.90 crores, 300 crores. That's why we have geared up to deliver that kind of capacities to the market. Thank you, sir. We have next question from the line of Kishore from Motilal Oswal. Please go ahead. We lost the line of Mr. Kishore. We have the next question from the line of Prem Dushi from A. C. P. Please go ahead. Hello. Hi, sir. Good morning. Congratulations on a great start of your day. I have a couple of questions. One is that we have a significant leadership and anti retrovirus, if I am correct, globally. So have you seen a demand bump up related to the coronavirus outbreak in China? No. No. There's no demand Bump up yet? There's there's no demand. There's a small demand. Small companies came, but that is not going to be significant for us or anybody. So the value will be so low. Okay. Okay. And another question is, are you looking to bring down the promoter pledge that is on the shareholding as of now? Not right now, but we have plans to reduce the payroll period of time. Okay. Alright, sir. Thank you so much. Thank you. Thank you, sir. We have next question from the line of Kosta Bugna from Rare Enterprise. Please go ahead. Yes. All this is 40% of revenues that's coming from with SDF in quarter three FY twenty and twenty eight percent coming from SDF in nine months FY '20. How much of it would be the tender business? And could you for example that? About 7580% of the business is coming from channel driven, ARV business, and remaining is coming from North America and Europe. Okay. So that's helpful. Now on the 7580% that's coming from the tender business, could you explain exactly how sustainable this is? How does the tender process work? How much clarity do you have for the next few years in terms of like where is this growth coming from? How much will it grow year on year? What's the clarity on ground? Like could you explain that situation? See, there are three parts of this business, global fund driven, PEPFAR driven and in country tenders. So in country tenders is, winner takes all, there is no preference. You have to quote based on that particular tender date. Whereas in the Kaphar and Global Fund, Global Fund, especially there will be fixed allocation percentage wise, whatever they buy, we will get some fixed allocation, allocation, which we cannot reveal how much we will get. But that is more certain, and they will place other rewards period of several quarters. We have good visibility from GlobalFund. We have reasonable visibility from PEPFAR. And the infantry tenders, we can't commit right now because it is a tender to tender codes and then winner takes generally winner takes off. Whereas in the case of Pepper and the Global Fund, there is a fixed allocation and they make sure the business is sustainable enough. We are doing actually, we have done so far, majority of our business came from Global Fund and PEPFAR and but some business also came from In country tenders. Okay. And what is the margin profile of this full tender business versus the rest of your business? It's comparable with the overall company. See, you look at our gross margins improved when we were a few API players who were integrated. So the MDF business is certainly helping us to increase our gross margins because we are getting more gross margin than API for sure in Power Grading business. And working capital cycle? Pardon? And working capital cycle for this tender business which is. Mean, intermediate to formulation, it's slightly higher than API. No. No. Sir, I'm specifically talking about the tender business of formulation, not The US and Europe business. Tender business of formulations, the payment settings are very, very good, and we never had any problem of receivables. So Ma'am, we want to receive the receivable days for for the tender business? No. We can't. It's less than ninety days. Okay. Okay. Thank you. Thank you, sir. Thank you, sir. Your next question from the line of Nitin Agarwal from IDSP Securities. Please go ahead. Thanks. Thanks for taking the question, sir. Sir, on the on the a a API other segment which is there, I mean, given the upsurge which is there in general API moment API business momentum, I mean, how how do you see the segment really playing out for us? Are there any specific new molecules where we see opportunities? Or how should we look at growth in the segment? The APA segment, our growth will be primarily driven by getting more clarity on the top of containers that will fuel our growth in the API. In our API segment, we are doing significant contract manufacturing, and we have great visibility for Q4 as well as several quarters from now. The majority of the growth is coming from actually world markets rather than from new APIs market are working. So people are trying to move business from more regulatory uncertainty manufacturing facilities to more sustainable regulatory companies. So we have seen some traction, but this business is even somebody wants to move their API to a new vendor, it takes anywhere between twelve to twenty one months. So we are in the cycle. So we expect good traction coming from non ARB APIs, in the coming twelve to eighteen months. Sir, overall, even if you split the business into formulations, APIs, and the synthesis, I mean, so so on API overall, I mean, what kind of, say, you take a three year view, what kind of growth the overall API segment can deliver given the challenges are there in the oncology business, in the hep C as well as the ARV API segment? I think based on our current estimate, maybe we can expect, I mean, 10% growth in API business. Whereas formulation and synthesis will drive our majority growth. And the synthesis growth is going to be driven by existing products or contracts? Are you envisage your ramp up coming through some newer sort of contracts and pipelines? Majority of synthesis growth will come from the existing customers and existing products going into the next clinical development and some commercial suppliers as well. While we grow from existing clients and products, there is also a possibility that we will have new clients and new products, which is also that we've added two interesting clients last year. Okay. And, sir, last one on the formulation side. Sir, on this on ARV formulations, what is the peak size that we can, you know, potentially do on this business? So, you know, whenever the into what is the peak potential opportunity which is there in this market for us, sir? It's difficult to predict. You see, there are twenty five million patients on treatment and about twenty two on the top line. So whether we get to 10% market share, 50% market share, it all depends on but today, we are geared up around 10% market share. Our capacities are created to get 10% market share. 10% of $1,000,000,000 market, Yeah. Billion dollar. Okay, sir. We have fixed on top of it. So we have gained up to a 10% of the billion right now. Okay, Thank you, sir. We have next question from the line of Arun Supramaniam from Ampersand Capital. Please go ahead. Yeah. Hi. So just the two question. When you were saying that your API will grow at about 10% year to year and formulations will grow a lot faster, so what you give us a sense of what is the overall growth of the company over the next two, three year? And considering that you are doing with this 250 crores kind of CapEx, which will continue. So what will be the overall growth over three years? See, if you look at our nine months, we did grow 20% despite our significant drop in the API. So we expect that trend will continue. At least we will have 20% growth this year, next year as well. So we we can't tell you beyond that. We don't have visibility. Your lack of visibility, which you're talking about considering that you are putting on the capacity and you have just got 10% market share, the lack of visibility is because of what that you have to you cannot get substantially higher market share? Or I mean, I had that considering your cost structure and your cost advantages, I thought that you'd be in a far better position. It's not absolutely lack of visibility. Are not giving any guidance. See, generally, we can say we are investing in capacities and we will grow, but we are not giving any guidance how much we will grow. But I'm giving you the trend what happened. See, in nine months, we grew by 30%. So it is reasonable to estimate that we'll also grow in Q4 by 20% and FY 'twenty one also by 20%. These are asking FY 'twenty, how much will grow? We haven't run our numbers right now. Understood. Understood. And, sir, last thing that I wanted to understand from you is that, when you are seeing this drop in API, and and the the significant expansion in formulations, But formulation is far more tender business. Is the tender business lot more bunch, like and there's a bunch of other things that is, like, not not not a smooth, focusedable number? Or no. I mean, what I'm saying is that is the tender business like a normal, production, manufacturing, and sales business or not? It's just how you this tender orders on a on a very big quantity, and then you are not sure when the next tender will be open. I'm just trying to get a sense of how smooth Which tender or is it long term tender? It's not so you you will get tender for half a million times. So you get tender and with committed delivery delivery times. So for example, we have visibility for q four and q one next year as well. So that is the kind of visibility that you have. Okay. Okay. And, sir, the final question, like, earlier, when when we're interacting with you, you now now when when in your calls, you're saying that you are winning more and more tenders. Is that something which is the status now or you are, like, because you're fully already applied, so you will just continue at current level of operation? For Q4, we run at the current level of operations. For Q1 FY21, we are adding more capacity. So we have scope to grow our formulation business in Q1 FY 'twenty one. We have next question from the line of C. Srihari from PCS Securities. Yes, thanks for the opportunity. Firstly, congratulations on a good set of numbers. I have a few questions. Firstly, if I look at the product mix, it has improved dramatically sequentially, but the gross margins are more than 500 basis points. So could you please explain that? And secondly, on the formulation front, if you could please give The U. S. Sales breakup for Q2 and Q3, that would be great. And I would also like to know whether there's any exceptional out here in terms of, let's say, profit share or a milestone receipt. And finally, on the ARV front, you have indicated that you're going to file for Lokinavir and return away. Now was this as per schedule or you are trying to accelerate the process for some development? Maybe I'll answer the questions in reverse order. So locally written yield, we have a gold date already. So I didn't expect FDA going through faster approval because of coronavirus. That is one. And second, there is no runoff in Q3. That is the one we wanted to clarify. So then the third one is our formulation business as we explained, little more than two thirds three, three fourth is coming from Yahri, and Rajiv coming from North America and Europe. We can't give you the how much we are selling in North America and Europe, but that trend will continue. That was that quarter of revenue comes from North America and Europe, and three fourths coming from LMIC. Could you at least give an indication directionally your sales has increased sequentially? It is right. Your sales, see, when we have increased our revenue from INR150 crores to INR290 crores in Q3, our U. S. Revenues also went above, and not to me, Canada revenue went up and Europe revenue went up, yes. Okay. Finally, I mean, basically, based on the guidelines that you have given regarding asset turnover, if I go by that number, the $290,000,000 seems way beyond what you had indicated as an optimal revenue for the Formulations division. So can you please explain that? Can you repeat the question clearly? I'm not exactly. Yeah. See, for the combinations division, you had indicated earlier that the effect on our should be around 1.7 or maybe at the most, I guess, two x. Whereas where we are right now is, I presume, will be close to three x if you analyze the quarterly number. We are So here, you consider have the API CapEx. See, this is a capital backward integrated project for us. So entire API is what we're using in formulation coming from our own facilities. So we're we are not taking any revenue of API to API division. So when it comes to the asset level ratio, we have to think at your API CapEx as well as the API CapEx. So it's not three. It's not three. Yeah. As you're saying, 300 into four twelve hundred divided by 400 core CapEx, not three asset turnover ratio. It will be you have to allocate certain amount of CapEx we have done for APA as well here. Okay. I'm still not clear about that. But your existing capacity is at 5,000,000,000 tablets, right? You're right. It's a nominal capacity, but we are always doing it with the combination. So one tablet is equivalent to more or less equal to three three dispensing, three granulations kind of stuff. Compression and packing is one, so significant capacity will be used for triple combination. And we are doing the captions, we are doing tablets for other markets. Firstly, if you convert the triple combination as three, we are running around the, around the 300,000,000, 400,000,000 units per month. So I mean, at optimal capacity for the quarter, would be at around 1,250,000,000 tablets. Is that the Yes. You're right. You're right. Production was around 1,250,000 tablets during the quarter. Yes. But you have to today, we have to consider it to be as 3x. See, at the ERV, we are doing a combination of three drugs into one tablet. Right. Right. Harish, you are talking about 200 with two x. So when we are talking on the what is the possible renew from foundation, We have been talking about two times plus we can do it. It was an earlier case. So when you're talking about up to 800 for the renewal, someone not to you, like, when when you are saying that 800 plus we can do it, we have done more than one. So this is a this is a peak. It is possible with the existing capacity. So answer your question straight. Okay. So what is the kind of CapEx you're planning on the two digit front? Another INR50 crores we are planning immediately. And then the further expansion, we have not crystallized the CapEx amount. I mean in terms of capacity, because it's 5,000,000,000 tablets? I think let's not talk on the tablet because it's been it kind of confuses, right? So it is a double combination and all, but or if you have any further things, we will take it offline, Harish. Sure, sure, sure. Thank you. Thank you. Thank you, sir. We have next question from the line of Aditya Kimka from DSP Mutual Fund. Please go ahead. Yes. Hi, thanks for the opportunity. And sorry, I also have similar questions as a previous participant. So just to understand what you're saying, so currently, you are running at a 5,000,000,000 tablet capacity counting to the combination as one. Right? Because that's how the industry deals with it. So 5,000,000,000 tablet capacity, and you are doing three to 400,000,000 as indicated in his comment per month. So you are doing 3.6 to 4,800,000,000 tablets already. So pretty much 100% utilized. Right? So going from by what you previously mentioned that you have visibility that you'll be able to sell this three to 400,000,000 tablets a month for the next three to six months. Right? That's the order book you already have. Correct? You are right, Amit. Yeah. And, also, we also mentioned we are going to debottlenecking and add metric capacity, which will come into operation between April and June this year. Between April and June this year. So perfect. I got your comments there. Yes. So now if if you were to quantify the debottlenecking potential capacity to add to this three to 400,000,000 tablets per month, how much debottlenecking can help? Can it add 50,000,000 tablets? Can it add 100,000,000, 20,000,000? About 20% capacity, it can Yeah. Yeah. Okay. About 20%, it can add. And the cost of this bottlenecking is a 50 crores that we were giving. Correct. Yeah. 60 crores, actually. Yeah. Close to 60 crores right now. 60 crores. Okay. So so the CapEx that we was alluding to is this debottlenecking CapEx. Right? Yeah. Yeah. Yeah. So now is the next question. So we have already incurred CapEx of 400 crores on the formulation side alone. I understand you're using API capacity as well. But on the formulation side only, you have done CapEx of 400. The 60 crores is only formulation CapEx. Correct? Only formulation CapEx. Right. So your total CapEx will be $4.60 crores on the formulation side. Now my question is that now that given that you have been able to sell so well on the formulation side, you have been able to get a very decent sized order book, Why are we limiting our our CapEx on the formulation side to 60 crores only? There are there can be a few reasons for that. One can be that that is only the amount of market share that you're able to get in the end market, or it could be that you don't want to spend as much in that particular segment and you see better opportunity in another another segment. I think that we have in the exist we have one existing building where we did division investment and added another investment. We are doing debottlenecking and some kept some new line addition, but in the existing building. So with this, yeah, additional 64 CapEx, we don't have any space in the existing building. We have to do a new building, which is under planning right now. And probably, we will do our groundbreaking in the next few weeks. There, we'll really need problems to finish that building and bring that into operation. So that is the reason I mentioned some additional capacity will come between April and June this year. And again, in April and June next year, so that will be a very big capacity. We are doing a building and we aren't frozen our numbers, how many billions will do. That that building can take another 5,000,000,000 capacity. Fair enough. Fairly understood, sir. So that's good. Now on the gross margin side, I think one participant asked you this question. So on the in that second quarter of f I twenty, you had a gross margin of 49.5. This quarter, you had reported 50.6% despite a significant jump in your formulation revenues. So the question I think everybody is trying to understand is from a margin profile perspective, how different so so as I understand it, your ARV segment is ARV API is probably the lowest gross margin segment, which is where you have significantly declined this quarter. And your formulation should be ideally your highest gross margin segment where you have significantly grown this quarter. So ideally, delta in your gross margin in the third quarter versus the second quarter should have been much higher than what has been reported. So this is what we're trying to understand as to whether this incremental volume in formulation segment from $1.50 to 300 crores, whether that came at a significantly lower margin versus what we were doing earlier in the $1.50 crores. Aditi, Ravi here. So the there is no here, we APS had a lower gross margin. There's, like it make it slightly lower, not in the very lower. And I think it is actually depends on the product mix. It's like, you know, the formulations are in higher gross margin than an API. But because of the product mix, the same discount. Understood. So is it is it fair to say that formulations are not, like, 20 percentage point higher gross margin than API, more like 5% or 10% higher margin than API? Is that a fair statement? It all depends. Like, it maybe could be from 5% to 20%, that kind of range. Depending on the product that you're selling. Depending on the product. So LMIC would be a lower gross margin in for within formulations, and U. S. And Europe will be higher gross margin? Yes. When compared to U. S, Europe is less is lower than The U. S. Market and Europe actually. But the volume? Yes. Absolutely. Yeah. No. So that explains a lot, sir. That explains a lot to me. Thank you. And on the cost side now, so on our other expenses, the growth in the cost has been phenomenal. Now as I understand it, the capacity that we have already had in the formulation and API so in this quarter or in the last two, three quarters, we haven't added any material capacity. We already had this capacity from a very long time. Right? And the sales actually went up this quarter because we got the tender and we were able to supply. So let's say I'm comparing second quarter to the third quarter. So in second quarter, our other expenses were 88 crores, which was a growth of 11% year over year. But in this quarter, we have other expenses of 92 crores, which is actually a growth of something like 70% year over year. So one is the base effect because the second quarter, f nineteen, other expenses were 80 crores. And then the third quarter, f I nineteen, other expenses were only 54 crores. And this is excluding your r and d spend. So if you add your r and d spend, the numbers become slightly different. But I'm just taking out the entire r and d spend from other expenses and then stating the numbers. So what I'm trying to understand is that ideally, again, with such a huge amount of jump in your formulation sales, I would have expected that your other expenses would have not have gone up the way they have gone up this quarter. So anything that you can point us out to whether this run rate of other expenses is what we should sustain, Or can there be further growth in these other expenses? Okay. So long question, right? So but I can make a I can take a sense on the question that you're asking why the other expenses are higher in the fourth quarter. The answer is there is a one off expenditure like we have a CPH expenditure that has looked as a cash expenses till this year. So probably next year onwards, we are going to move down an accrual basis. That is one. And second, because of the formulation expenses, the selling cost also will increase. These are the two reasons for the higher other expenses in the third quarter. Fair enough, sir. Can you care to quantify the CPHA expenses this quarter? Maybe in maybe 4 and a half crore or 5 crores. About 5 crores. Yeah. That explains a lot on that front. And in your formulation business, you are incurring more selling expenses because in the LMIC but LMIC is a tender business. Right? So what is the reason for incurring more selling expenses in an LMIC kind of business? Carriage or what and price will commission will be there. Basically, carriage. Okay. Yeah. I got you, Ravi, sir. Thank you so much, and all the best. Thank you. Thank you. Thank you. So we have next question from the line of Aditya Grawal from In Growth Capital. Please go ahead. I had a couple of questions. Sir, please give me a hand you. You had mentioned that, you know, we don't buy any APIs or intermediates from China. What would we also be buying any KSMs from China? We we buy significant quantities of KSMs from China. Okay. And, you know, in case, you know, there is a disruption there, you know, what would that how would that affect us? Actually, it's difficult to predict. If there is a reduction, there is no ship coming out of China, not only everybody is in that is a sectorial challenge, not only pharma, many other sectors. So but looking at some more feedback what we're getting from vendors, they are starting their operations from next week. Okay. So our KSM dependency on China is going to hopefully reduce over a period of time? No, no. It's not going to reduce. See, our vendors are let's say, after this STING festival, we will look at the one is coronavirus, other one is STING festival. Most of the China is on vacation. So they they were supposed to come back on February 3. Now they are starting their operations on February 10. So there will be big delay, but big delay in supplies is not going to develop supplies for sure. Okay. Thank you. My next question is roughly what would be our market share in Dalton Graveer till now? Would we have roughly what would that number be? About 10%, calculate this here, the 10%. Okay. And are we expecting our market share in that to increase over a period of time? How are we thinking We are creating capacities to get the instant market share, but we can't say right now what percentage is that, but we are adding capacities to garner more market share. And my third question is roughly what would be our is our market share in the tender business, which is the TETRA Global Fund, etcetera, is that increasing over the last few quarters? And are we projecting it to continue increasing? Increase from Q2 to Q3, but we expect it to it should go up in Q1 FY 'twenty one. We have a next question from the line of Deepan Mehta from LXR Equities. Please go ahead. Please go ahead. Yes, sir. My question is Sir, I'm sorry to interrupt. Have the UP handset. Okay. Is that clear? Yes. It is. Please try. Thank you. So my question is that of the 700 crores of sales which are there, how much would be completely tender driven? What percent? 20%. 25%. Yeah. Only only 25% is standard driven, whether it's ERV or generic FDA for whatever output Generic FDA. Yeah. Yeah. Generic FDA. Yeah. Yeah. No, sir. Yes. Because I I understand that there is there is tender business in ARV and generic FDR. So those are the The ARV APIs, ARV APIs, we don't participate in any tenders. Our customers participate, and we supply APIs to them. Whereas generic FDS, we directly participate in tenders. Okay. And next question is how have you seen the prices in the tenders over the past few months, quarters? If you can give us some idea of the direction of pricing, has it been stable or declined? And if so, by what percent? I would say fairly stable, sir. So it is stable. Okay. So that means and the second question is generic FBF. What would be the percentage of sales to US? As we mentioned in the nine months time frame, three fourths coming from, air lease and one fourth coming from North America and Europe. That is the North America and Europe is purely non revenue driven business. So, sir, in generic FDR, you said The US market. Right? That's what I'm saying. US market, US and Europe formation business, 28% of our revenues came from North America and Europe. Why I'm using North America, we're also selling in Canada apart from US. So that segment is your about 28% of our revenues. Okay, sir. Thank you and all the best. Thank you. Thank you, sir. We have next question from the line of Anuj Mumayya from ValueQuest Investments. Please go ahead. Yes. Congratulations, sir, on a good set of numbers. On the year of the business, have you seen any prices correction in the severance API or prices have remained stable? FRM is fairly mature, but the prices are stable, sir. So whatever the loss of business is volume loss is what you're saying? Volume loss, yes. There's no value loss. There is no value loss. Yes. And do you think this will be coming back in the next couple of quarters? Or now this is INR200 crores or INR250 crores for the quarterly is the new run rate for the ERP business? We we expect this is the bottom. Think we expect this should go up. Go up and this will come back coming back to a thousand crores kind of annual Yeah. We we we expect that. Okay. And what is the current gross debt on our books, gross and net? Gross is gross is about 2,600. 2,600 crores in the past. Gross. Dead debt, I'm asking about debt. Debt. Debt around 700 crores. 700. Okay. Sir. We have next question from the line of Prakash Agarwal from Axis Capital. Congrats on good set of numbers. Sir, just one clarification of what you mentioned that we are vertically integrated. So I understand from a, you know, formulation side, you have a strong API, this thing. But from the API side, I think one of the participant also asked that, you know, most of the industry is dependent on KSM from China. So you mentioned that, you know, it's a weak postponement. I heard that. But what I'm trying to understand here is what is the kind of inventory levels we normally keep so that even if there is a delay, we are able to keep the supply momentum on? Not only one, two months, actually, there won't be any issue. But if you are aware that China was shut for last fifteen days because of the check for another month, probably then the trouble may come. So let's let's wait and watch for the next one week, and then probably we can, we will find another I'm just trying to understand, actually, the worst case. Like, when you say trouble and suppose it opens by March and there's a month delay, what really can go for a pharma company is what I'm trying to understand. Like, you know, if you don't get KSM, you would not able to supply. So are there? What really happens from a business point of view? You will adjust most of the inventory then. You have inventory in raw materials, you have inventory in zeroes, inventory in port, inventory of intermediates, inventory API, then it there will not be an issue for a quarter. So then maybe one has to import use of IT, you will cut down your logistics time by three, four weeks if everything has to import by eight. Some so that situation is your we have to plan as things go by. It is difficult to plan right now. So for the temporary purpose, the worst case could be some cost could increase. But what I was trying to understand, could the supply be restricted and not only cost, but could there be death damages in terms of not able to supply or the industry world understands that, okay, there is a, you know, a severe problem and, the penalties are not required? So we are Yeah. That is difficult question. Now, it is very hypothetical. We need to wait and watch how it is going to move. So there will be as the opposite, will be the pipeline will be dried up. So we have to fill in the pipeline through an a to coming A to C to Air and some other measures. So I think we have to wait and watch. Okay, understood. Thank you, sir, and all the best. Thank you, sir. We have next question from the line of Tarang Agarwal from Old Bridge Capital. Please go ahead. Hello, sir. Good afternoon, sir. Sir, please use your hands if we're not able to hear you. Thank you. Hello. Am I audible? Yes. Yes, sir. You are. Yeah. Hi. Good afternoon. So as I see the trend in your ARB business and whatever commentary that I've gathered on your generic FTS, my sense is going forward, we should see a decline in your ARV API, which essentially would be because you would be utilizing those APIs to manufacture your APIs. Correct? And con consequently, getting better margins. It's not true. See, whatever capacities earmarked for in house, the FDA consumption, we have created that capacity upon what we are selling APS to other customers. Okay. And, so other than FPA capacities will be used to cater to your generic SAP business, is it? Yes. Yeah. Yeah. So there is more demand in generic API, we have the APIs. We are geared up to service. So we are not diverting third party API sales to our formulations. Okay. Thank you. Yes. Thank you. Thank you, sir. We have next question from the line of Dushar Bora from MK Ventures. Please go ahead. Good morning. Thanks for the opportunity, and congratulations, sir, for an excellent set of numbers. So just to understand, you know, we've there's been a discussion on gross margins earlier on in the conversation. Would it be fair to assume that, you know, over the next two years as formulation revenue from US picks up. And I would assume North America today would probably be more Canada than US. Please correct me if I'm wrong. You you are right. Yeah. Okay. So so as US picks up over the next two years and maybe your European formulation business picks up, within formulations, your mix is changing. So, again, your gross margins, overall, is there a scope for this to move up, say, by 300, two fifty bps over, say, next three years? Would that be an overestimate, or or is it a possibility? No. We don't want to give a quantitative guidance here on the percentage, but there are chance of improvement. In the worst case scenario, probably, it's gonna be maintained. Okay. So we should be at or above the current levels, sir? Yes. Yeah. That's the good estimate, sir. Right. Second, sir, just so, again, sticking to numbers, we did about 74 crores profit in this quarter. Assuming that we maintain mobile level levels, just for the sake of assumption, we're effectively saying about 300 crores is the run rate we established at end of FY twenty. Be fair to assume that we are seeing 20% revenue growth in FY twenty one with some operating leverage. The profitability should be higher, and it should be on a 300 crore base. Would that be a fair assumption? We don't want to comment again on the number. But just just generally, the base for profit calculation for next year should be the exit run rate 2520. Would that be fair to assume? The gross margin, we can say that gross margins and EBITDA will be maintained at least the current level. We are not commenting how much we'll grow, but we'll be maintained at the current level, at least. Thanks, sir. That helps. On the overall China situation, again, a lot has been asked earlier by early participants. But just to take a scenario where, you know, this scales up into a bigger issue, and we say worst case, we don't have supplies from China coming in. Maybe a twenty, twenty five, 30% supply cut, or even even some something more drastic. What are the alternatives we have from a sourcing perspective, and how costly could those alternatives be? And second, is there any opportunity also from a supply perspective for us in turn, you know, for any of the APIs and derivatives? Could that be an opportunistic business for Indian companies? There is opportunity, but when API manufacturing, you get 19, you don't get one. That means you don't make an API. As simple as that. So so this is a difficult build. I have seen we are taking this risk to, like, extreme extent, but we we don't see that is going to happen. The reality is supplies will resume very quickly. Yeah. But just sorry to persist. Just to understand, intermediates in KSM is relatively easier to source in India. As in, you can still set up supplies in India, right, if you plan ahead as compared to India? No. Actually, it's relatively easy to get the intermittent in India rather than. The intermittent man, but India also buy from China. Okay. So there could be an issue overall if it's the case of the crisis. Fair enough, sir. Thank you so much for the opportunity. Thank you. Thank you. We have next question from the line of Cindrella Carvalho from Centrum Brokings. Please go ahead. Congratulations on good set of numbers. So I just wanted to understand more on synthesis side. So the Aspen contract, whatever we have said earlier, how do we see it going ahead? And you have also mentioned that there are two commercialized products right now with us. So how many are there with us in total in terms of number of projects, if you could help us understand? And how many of them would be in the late stages, if you could provide some color on that would be really helpful. Yes. Our Aspen business will peak out next year because most of the products went commercial. And then when it comes to the MC part, we have two products commercial, with those APIs, and, one intermediate commercial. I think there are two more in phase three right now and several in the earlier phases. In total, we have maybe this is 32 party active projects right now at various stages. Okay. And sir, just to get some more clarity, the margin profile of this business should be better than our average margin is a good understanding? Absolutely. This is the highest margin business we we are doing right now. Yes. That's very helpful, sir. Thank you and all the best. Thank you. Thank you. We have next question from the line of Charulata Gaitani from Dalal and Brochamp. Congrats on the good set of numbers. Can you give some clarity on the EU partner? You said that non ARB business will grow by what percent? See, the current year, we expect to do about 600,000,000 units to the partner. And the FY '21, maybe we'll do a billion units per month. So that's the level of increase we expect. Okay. And this is entirely formulation? We do API as well, and we convert that API into formulations and give it in bulk to a partner in Europe. Okay. So, what proportion would be, formulations from this? The the entire 1,000,000,000 units is formulations, so that means we are using roughly 20% of our formulation capacity to contract LAN person to The U. Partner, where we make API also for our formulations. Okay. Okay. And my second question pertains to Savirenz. The inventory, has it been sold off? There's no inventory right now. No. It it was there in the last quarter. Right? We we don't have any inventory charges in our. Okay. Okay. And in terms of how are your products doing in The US market, pregabalin? Pregabalin is doing good. We have about 12% market share right now. Okay. And Metformin? Metformin, we have a very small market share right now. Okay. And, yeah, my question was in terms of the ARV treatment. Is the Indian market also seeing some scope for opening up? So far in the early India tenders, we are all participating. Yeah. Okay. But the opportunity is big. Well, so far, we are participating. Okay. But do you think it can, with with more focus on help in the Indian market? Probably, yes, but not in the near future. We are we are not intending to participate in the NAPO Indian government tenders. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments. Sir, over to you. Thanks, everyone, for supporting us in the last several years. And some of your questions were very encouraging and very fast forward looking. Thanks for that special. Thanks to Chirag for the work me and Kotak for hosting this. Thank you. Thank you very much, sir. Thank you. Ladies and gentlemen, on behalf of Kotak Securities, that concludes this conference call. Thank you for joining with us. You may now disconnect your lines.