Ladies and gentlemen, good day, and welcome to Piramal Pharma Limited Q2 FY24 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Gagan Borana from Piramal Pharma. Thank you, and over to you, sir.
Thank you, Neerav. Good morning, everyone. I welcome you all to our post-results earnings conference call to discuss our Q2 FY24 results. Our results materials have been uploaded on our website, and you may like to download and refer them during our discussion. The discussion today may include some forward-looking statements, and these must be used in conjunction with the risks that our business faces. On the call today, we have with us Ms. Nandini Piramal, Chairperson, Piramal Pharma Limited, Mr. Peter DeYoung, CEO, Global Pharma, and Mr. Vivek Valsaraj, CFO of our company. With that, I would like to hand over the call to Ms. Nandini Piramal to share her initial thoughts.
Good day, everyone, and thank you for joining us today for our post-results Q2 and H1 FY 2024 Earnings Call. We have delivered a healthy performance in the first half of the financial year, with a 14% revenue growth accompanied by over 300 basis points improvement in EBITDA margin. It is also satisfying to note that this performance has been broad-based, with our CDMO business returning to mid-teen growth and the CHG business and Indian consumer business maintaining their steady growth. Healthy revenue growth, along with our cost optimization initiatives, are helping us deliver better profit margins as a large part of our cost in the CDMO business is fixed in nature. Historically, our H2 has been better than H1, both in terms of revenue and profitability, and we expect the same trend to continue with a strong H2, more specifically Q4.
We expect a high-teen year-over-year revenue growth and material improvement in EBITDA margins in H2, versus last year's H2, and deliver a robust performance for the financial year. During the quarter, we also successfully completed our rights issue with a 128% subscription. A significant part of the proceeds from this rights issue has already been utilized to pay down debt. As a result, our net debt is now down to INR 3,823 crore, which is a reduction of INR 958 crore compared to March 2023. Going forward, we would be working towards a further reduction in our net debt through our internal approvals. On the ESG front, we re-released our sustainability report for FY 2023, which details out our progress on integrating sustainability in our operations.
Sustainability for us is more than just in compliance with regulatory norms and standards. We're working diligently to minimize our resource consumption, conserve biodiversity, provide a safe workplace for all employees, deliver quality products and services, promote diversity and inclusion in our workforce, and enhance the quality of life of the communities around us. We have taken a target to reduce our greenhouse gas emissions by 42% by FY 2030 compared to FY 2022, which is in accordance with the 1.5-degree trajectory suggested by SBTi. We've also taken targets in other areas such as waste management, water stewardship, gender diversity, health and safety, automation and digitization, and customer satisfaction, on which we are progressing well.
During FY 2023, we increased the share of renewable energy in our operations, saved fresh water by promoting recycling and reuse, through planting more trees across our manufacturing sites to conserve biodiversity. We increased women participation in our workforce, had zero fatalities, and ensured a best-in-class quality record with 36 successful regulatory inspections and over 100 customer orders. Moving on to business-specific highlights, starting with our CDMO business. In our CDMO business, we witnessed a good momentum in order inflows in Q2 FY 2024 as well. The development, and more specifically, new commercial orders received in H1 FY 2024, are higher by over 40% compared to orders received in H1 FY 2023. The order inflows over the last three quarters have helped improve the revenue visibility growth for FY 2024.
Further, the recent order inflows have a higher quotient of innovation-related work, with a good proportion of commercial orders for non... on-patent molecules. Our CDMO revenues from innovation-related work have grown at 17% CAGR in the last four years and now account for about 45% of our CDMO revenues, compared to 35% in FY 2019. Similarly, our CDMO revenues from differentiated offerings like ADC, peptides, high-potent APIs, sterile injectables, and development of on-patent API have grown at 19% CAGR between FY 2021 to FY 2023. Our generic API business, which is a soft demand in FY 2023, is also seeing a wide year-on-year pickup in demand. Given the pickup in the CDMO business, we've also seen an improvement in EBITDA margin, driven by revenue growth, favorable revenue mix, normalization of raw material costs, and cost optimization initiatives.
We are also pleased to note that we earned our first revenue milestone at the newly expanded Grangemouth facility in Q2 FY 2024. Post expansion, we now have 5 suites compared to 3 earlier. The expansion strengthens our presence in the antibody drug conjugate market. In terms of regulatory compliance, 5 of our CDMO facilities, which contributes to about half our CDMO revenue, have successfully completed USFDA inspections in the last 12 months. Moving on to our complex hospital generics business. Our inhaled anesthesia portfolio continues to deliver healthy performance, mainly led by strong demand for Sevoflurane. We maintain our leading position in the U.S. Sevoflurane market, with a market share of about 44%, compared to 30% about 3 years back. We are also progressing well on our capacity expansion plans for inhalation anesthesia to meet global demands.
We're setting up a manufacturing line for Sevoflurane in our Bethlehem plant to cater to the growing demands of emerging markets. We are also expanding at the Grangemouth plant to increase our key starting material capacities and to have a higher degree of vertical integration. During the quarter, our inhalation anesthesia manufacturing facility at that plant underwent a USFDA inspection. We received two observations, both related to system improvements and none to data integrity. We are currently addressing these observations and look forward to closing them at the earliest to ensure full compliance with the US FDA , the GMP standards. In the intrathecal segment, we continue to command a leading market share in the US. Our brand Baclofen continues to be the number one ranking Baclofen prefilled syringe and vial brand in the US, with a market share of 76%.
In the injectable pain management segment, our brand Fentanyl is the number one ranking brand in its representative markets of Japan, South Africa, and Indonesia. While we focus to further strengthen our positioning in our existing product portfolio, we're also building a pipeline of 28 injectable products which are in different stages of development. The addressable market size of these products is about $2 billion. Moving on to our India consumer health business. Our ICH business delivered a year-on-year growth of 13% in the H1 FY 2024, aided by growth in our power brands and new product launches. We continue to invest in media and trade spend to drive growth in our power brands. Promotional spend during H1 FY 2024 was 14% of our India consumer healthcare revenues.
Our power brands grew 14% during 2Q FY 2024 and contributed to 42% of our total consumer healthcare sales. Our key brands, such as Little's and Lacto Calamine, grew at about 24% and 19%, respectively, in 2Q FY 2024. We've also increased the pace of new product introduction in recent years. Over the last three years, we have launched 100+ new products in the market with healthy success. During 2Q FY 2024, also, we launched 7 new products and 2 new SKUs. New products launched in the last 24 months contribute about 16% of our consumer business. Our sales on our e-commerce platforms are growing well. We now have a presence across 20 e-commerce platforms and our own direct-to-consumer website, wellify.in, which has seen an encouraging response.
During the quarter, our e-commerce sales grew about 34% year-over-year and contributed to 16% of ICH revenue. To summarize, I would like to say that we have delivered a healthy performance in the first half of the financial year with a broad-based revenue growth and year-over-year EBITDA margin expansion. We expect a better H2 in the second half of the financial year. Historically, our H2 has been better than H1, both in terms of revenue and profitability. We expect a similar trend to play out this financial year as well. Our CDMO business has returned to mid-teen revenue growth on the back of continued order inflows, especially for our differentiated offering and innovation-related work. Our inhalation anesthesia portfolio is also seeing a healthy demand. Further, our India consumer healthcare business is delivering a good growth driven by our power brands.
We continue to maintain our best-in-quality quality track record and are taking multiple initiatives in the area of ESG. We hope to continue our momentum in H2 FY 2024 and end the financial year on a strong note. With this, I'd like to open the floor for the Q&A.
Thank you very much. We'll now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we'll wait for a moment while the question queue assembles. Participants, you may press star and one to ask a question.... The first question is from the line of Aditya from AJ Investments. Please go ahead.
Yeah. Thanks for the opportunity. Very good set of numbers. Ma'am, I have a few questions. One is related to margins for this quarter, right? We have done 14% margin, but as I see, it is mainly coming from the change in inventory. So is it kind of one-off or is it sustainable? That is my first question. And the second question is related to how much I've seen that you have mentioned the innovative pipeline is picking up. So for this, what is our target to achieve an innovative CDMO? And the third question is, if I see complex hospital generics, there is a drop on quarter-on-quarter. So are we losing the momentum here or are we still good to grow 15%-20% on complex hospital generics? These are my three questions.
Okay. So with respect to the margins, there are actually three components to it. One of them, as you pointed out, is related to the inventory. So you would see that the other expenses line is actually higher in terms of growth, and the corresponding credit for that resides in the inventory. That has no impact on the overall EBITDA margin. The second is last year, we had higher than normal provisions for inventory, one of our businesses. And the third is there is also the benefit of various, cost optimization and operational excellence initiatives, which are helping the overall, operating margins and the gross margin in particular. So all the three are actually driving the overall margin enhancement.
Is it sustainable?
A large part of this, of course, is sustainable only to the extent of inventory. This will get reversed off in 3Q and 4Q as we sell more, but the others are all sustainable. Moving on to your next question on complex hospital generics. Actually, if you look at it, you should look more at the H1 growth. There is a bit of lumpiness in the sales last year, especially on between 1Q and Q2, but on a H1 basis, the growth is 13%, which is a reasonably good growth for the business.
In terms of balance between innovation work and kind of generic work, I think we do see that trend picking up over the next few years, and we would like to continue to see that. I don't think we have a particular target in mind, but we believe that the innovation work and specialized work will help promote healthier margins going forward.
The current quarter margins, whatever we are having for 14%, it is sustainable. For the second half, what are the expected margins?
I think we've expected we'll see revenue growth in the mid-teens going forward for high teens, high, high teens going forward. And we will see our EBITDA margin actually improve considerably as we get operating leverage. Historically, our H2 revenues and EBITDA margins have been obviously much healthier than H1, and we expect to see that same trend continue.
So what would be the margin for our figure? It will be 16%-18% or more than that?
So Aditya, we're not calling out the margin. I think you will be able to make that guess. As we mentioned, that we'll have high teens growth in H2 in revenue, and that will lead to operational leverage and yes, definitely margins will be better than what they are in H1.
Okay. So basically, the revenue guidance is 15%-18% for full year, and margins would be up 15%, correct?
We are not calling out specific number on the margins. We still say that it is going to be high-teen growth, and accordingly, the margins will improve materially YOY in H2.
Okay. Thank you. I'll come back in.
Thank you. Participants, you may press star and one to answer question. Next question is from the line of Vivek from DSP Mutual Fund. Please go ahead.
Good morning. Congratulations, and it's good to see the company get its mojo back. My question was on the overall environment. Last year, the narrative seemed to be more around biotech companies facing trouble and, you know, a slowdown in the CDMO business. But this year there's been a sharp bounce back. So could you tell us about the nature of the customers? Are they better, better funded, bigger customers, or how is the industry moving? That's my only question. Thank you.
So I think, you know, last year we did have a tough year. I will say that. The biotech funding crunch, I think, still is, kind of part of the macro environment. I think what we have seen that some of our biotech customers were bought by Big Pharma, and we've, in a way, rebalanced a bit to Big Pharma. So overall, I think if we look at it, we have a healthy mix of customers between biotech and Big Pharma. So I think we're doing reasonably well. Lastly, I think there is funding still if you have proven clinical work. So especially phase II, phase III, things that are in the pipeline are getting funded, and, so we expect to see that continue.
I would just add one line, which is that we've seen, we're continuing to see growth in both emerging biopharma and large pharma, but we have seen a little bit more growth in the recent period from large pharma for the reasons, Nandini, you mentioned, but we are still obviously targeting both segments.
Thank you, and wish you all the best.
Thank you. Next question is from the line of Ranvir Singh from Nuvama. Please go ahead.
Yeah, thanks for taking my question, and, congratulations, for a good set of numbers. So a few, clarity on CDMO side, can you give the split, between innovation-related revenues and, generic API related revenues, that is one. Secondly, if you could give the revenue from the JV during this quarter.
Okay. Our innovation related work is about 45% in FY 2023 for the entire business. That would include development work, on- patent, commercial work, as well as on- patent formulation and discovery work. Our generic business is both formulations and API. Some of it is, I mean, some of it is made directly to order for customers, as well as some is owned by us. I think that balance, while we haven't released FY 2024 numbers, right now, it would be approximately the same.
Ranvir, on a question on the JV revenues, let me just clarify that the JV revenues are actually not part of the financials per se. What we have is a one-line pickup of the profit after tax, which comes as associate income. So, the overall revenues do not include the revenue from the JV, in case that was a confusion.
Hello. Ranvir, may I request you unmute your line and go ahead with your follow-up question, please? Ranvir, can you hear us? Due to no response, we move on to the next participant. Next question is from the line of Yasser Lakdawala from M3. Please go ahead.
Hello. You know, congratulations to the team on a great performance. You know, I had a-
Yasser, sorry to interrupt you. You're sounding a little distant.
Yeah, just a minute. Hello?
Yes, go ahead.
Yeah. Congratulations to the team on a great performance. You know, my first question is, you know, could you possibly outline a debt reduction roadmap for the next, say, three to five years? We've had, you know, obviously, post the rights issue, we've done, you know, we've reduced the leverage. What would be our sort of long-term sort of roadmap for regarding debt reduction?
Yeah, Yasser. You know, from where we stand today, as a first step, our aim will be to bring the debt down to less than 3. As we keep growing EBITDA further, we will use the incremental cash flows to keep paring down debt. One step at a time, the first step is, you know, we are currently higher than 3, and our aim will be to try and bring it down to less than 3, and then start looking at incremental cash flows to pare down debt thereafter.
You know, regarding the cash flows, I think we generated almost, I think, INR 500 crore of operating cash flows this first half. What would be the quantum of, you know, CapEx we, you know, see ourselves sort of undertaking over the next, say, two to three years? You know, based on the order inflows you're getting from, you know, some innovative customers, you know, our CapEx requirements and the complex injectables. How do you see sort of, you know, our cash flow being deployed there versus, you know, we get a better understanding of what can be used for debt reduction, et cetera, right? If you could help us there.
Yasser, you know, and let me talk about FY 2024 to begin with. In the first half, we have spent about $40 million, and in the second half, the CapEx is likely to be anywhere between $50-$55 million for this particular financial year. Going forward, we'll come back with a more specific guidance, maybe towards the end of the fiscal, as we take stock of what are the requirements from customers for the next fiscal, and come back with something later. But for now, this is where we are heading for.
That would be fantastic. You know, just a broad level question. You mentioned the... Sorry. You mentioned the biopharma buyouts, you know, of our emerging biotech customers. So I wanted to sort of understand, how does the pipeline work flow to you? Like, does that, you know, transaction, M&A transaction, enable you to tap into their other assets as well? Or, like, can you mine them for other, other lines of business as well? Like, you know, if you could just give us a qualitative insights on the conversations that happen at that level and get a, you know, give us a better understanding of how this plays out.
Yeah. It's a great question. I'd say the first thing that typically would happen when one of these transactions were to occur is that, the acquiring company would look to understand the supply chain that they acquired through the transaction, and if they aren't already one of our customers, or if they are a customer, but not for that type of offering, it's a great opportunity to introduce them to what we have to offer. And so there may not be an immediate benefit from, let's say, cross-selling opportunities, but in almost all instances, it provides a window to introduce another side of ourselves, and we have seen that to be beneficial, in most cases, where we can, either introduce or reintroduce ourselves to a much larger customer. So we generally view these events as positive events for us.
You know, and, you know, relating our, sorry for that. Relating to the peptide sort of CapEx that we've done with, at, you know, our Hemmo facility. You know, this entire space is sort of seeing a lot of interest, especially when it comes to, you know, the GLP-1, GIP. Where are we in the sort of, you know, on our journey of supporting, you know, potential sort of, you know, innovative sort of molecules there, are we seeing any traction on that side? Are we providing any sort of, you know, base level sort of support?
If you could give us some, you know, qualitative understanding there as well, 'cause, you know, from our understanding of the space, I think, like, I think GLPs have, like, 20 druggable targets in the human body, and, you know, it becomes a very exciting area for, you know, for incremental sort of, research dollars. So if you could help us understand that, that would be great.
But say from a background, this, this capability we currently have at that location is really the peptides and are not only nucleotides. That being said, within the peptide area, when we acquired it, it was predominantly a generic play. We have invested significantly in the people, the processes, and the facility to allow us to be more suited towards the, what we would call the services segment, which would be the on-patent area. And we've seen some very recent, favorable traction with customers as we look to add the additional offering along with our new capabilities. And so we would be seeing the mix from the on-patent and the services area in the area of peptides become, an increasingly, an increasing contributor and more important to that location as we go ahead.
We find this to be a more rapid grower, higher margin, and higher ROC addition to our portfolio. As the services mix increases, we think that can only become better.
Thanks a lot for that, Peter. You know, one final question on the India consumer business. How is our sort of profitability trending in that business? And if you could just sort of highlight, like, our, you know, say, medium sort of outlook on, you know, getting that to towards company level margins, maybe in the next, say, you know, 3-5 years.
So I think we, as we reach our kind of INR 1,000 crore kind of target, we expect to see steadily improving profitability year on year. So right now we would be in single digits, but you would kind of... It's not a hockey stick, it would be incrementally growing every year.
Thank, thanks a lot, Nandini and, you know, really glad to see the business sort of turn around and, you know, deliver to its potential. Congratulations once again. Yeah. Thank you.
Thank you. Next question is from the line of Sanjaya Satapathy from Ampersand. Please go ahead.
Yep, thanks for the opportunity and congrats on the set of results again. So my question is that on your de-leveraging plan, which you have highlighted, it's, is it going to be predominantly internal accrual, or you have some kind of asset monetization possibilities available with you?
So at this stage, it's primarily going to be internal accruals, not really looking for any asset monetization. As you know, our EBITDA growth will have more free cash flows to look at, de-leveraging the balance sheet further.
I understand that while you are facing capacity constraints on certain part of the business, there are other parts where the utilization is much lower. Can you just highlight which one are those and how those segments which are lagging behind will also recover going forward?
So, if you look at it, and, we've explained this broadly to say that, we have more capacity in our formulations facilities versus our API facilities. And, we have done capacity investments in those API facilities where, we've had those challenges and where we thought we had the highest potential for growth and where there was a market demand. So that's where we've done our investments. In formulations, we will see some steady increase in the capacity utilization as the years go by. But, predominantly, I think our investments have been put in the direction of APIs, where, the demand has been higher and where, there was a need for putting in investments.
Thank you.
Thank you. Participants, you may press star and one to ask a question. Next question is from the line of Harsh Shah from Dimensional Securities. Please go ahead.
Hi, good morning, everyone. My question is more on the macro scale. If I do a very back of the envelope calculation between our India business and overseas business, overseas business, I would gather, is mainly complex generics and the CDMO part of it. So on that, asset churn is pretty low on the overseas side, maybe around 0.5, 0.6x. So just wanted to understand, and the ROEs is, I would guess it would be in the negative territory. So just wanted to understand, what are the levers for us to, you know, really rev up the overseas business? So if you look at mid-teen kind of ROE or ROC for this business, the overseas part, just try to understand what is the roadmap and what are the levers that the company has.
Harsh, if you're looking at the first half, I think it may not be very representative of the asset turns, because as we mentioned, it's H2 which brings in a substantial portion of the revenues for the business and more specifically for the overseas sites. The situation will change as you look at the full year numbers. That is one. Secondly, a lot of investments that we did were done recently, for example, the one we did at Riverview, or the one which is going on at Grangemouth, or the one we did at Canada. All of them have become part of the denominator, where revenues are just starting to come in, and obviously as the revenues increase, that will also help improve the asset terms.
I think, and also, if you look at some of the recent acquisitions that we did, were also overseas. The denominator is higher to that extent, more specifically in the overseas, leading to a slightly lower overturn. As the revenues improve, this should start showing a difference.
Actually, I was referring to FY 23 entire year's number, where the asset turnovers is 0.5, 0.6. So just wanted to understand, what kind of asset sweating or turnover can we expect going ahead? I mean, can we say it moves to maybe 1.0, 1.2, 1.3 kind of number?
Yeah. So, if you're looking at FY 2023, firstly, FY 2023 may not be a very representative year, because we've had impact on our sales, as we had mentioned during the calls in that year. And secondly, yes, we will be looking at asset terms which go anywhere between 1.5, 2, and even 2.5 in some of the sites. That could be the range, depending upon the size that you're talking about.
Okay, sure. That's helpful. Thank you so much.
Thank you. Next question is from Alok Dalal from Jefferies, India. Please go ahead.
Hi, good morning, everyone. First question on the sales guidance for the second half. Can you rank, in terms of growth, which could be the fastest and which could be the slowest, in terms of, say, CDMO, complex hospitals, or OTC?
So if you look at it, in terms of the sheer absolute value, because CDMO happens to be the largest part, nearly 60% of our revenue comes from CDMO, that's where the largest value driver will be. In terms of the overall percentage, I think more or less all the three business would be fairly similar, in close range, in terms of the overall growth.
Okay. And, as far as cost control measures are concerned, I understand same time last year, you had initiated an exercise to control costs. So has that already started playing out in margins, or should we expect more such cost control measures boosting the overall profitability?
So, the initiatives were taken last year, as you rightly mentioned, and yes, they have started showing results. A lot of it will actually come in H2 as well, because when we sell more, they will start reflecting in the PNL. So yes, the impact of that you will see going forward as well.
Okay. Vivek, one last point on free cash flow generation. You mentioned about CapEx, about operating cash flow. Is there a room to cut down working capital? Can working capital release give you an extra free cash flow, which can be used to pay down debt?
So Alok, that's certainly an area which can. In the current instance, you know, one, of course, is given the lumpiness in the sales that we have, we do end up carrying higher inventories, higher than normal. And of course, we are also carrying certain strategic inventories to take advantage of the prices. So if you look at the overall working capital cycle, the current at which we are operating is slightly higher and elevated. So yes, there will be room for it, and it's an area that we will be looking at.
Okay. Okay, great. Thank you, Vivek. Thank you for taking my questions.
Thank you, Alok.
Thank you. Next question is from the line of Tushar Manudhane from Motilal Oswal. Please go ahead.
Thanks for the opportunity. Sir, just on the interest cost on the INR 3,000 crore-
Tushar, sorry, you're sounding a little distant.
Is this better?
Slightly.
Okay. So just on the interest cost, now that, with the reduction in debt, how much do you consider as the interest?
See, there are two parts to it, to answer your question. Firstly, the overall interest cost, for this particular quarter, if you look at it, we got just one month of benefit of the right issue because the process closed end of August. So going forward, we will see some, full benefit of reduction to the extent of the debt that we have reduced. Having said that, the interest rates continue to be high. They are in the range of between 8%-9%. So, overall, we are seeing anywhere between INR 11-12 million of interest costs in a quarter at this point in time, and of course, we are looking at what we can do to further optimize this.
You know, as performance improves, we'll be able to probably refinance some of them at lower rates, and those are things we are looking at.
Okay. Okay. And just coming back to the asset turn, given the kind of CapEx which we continue and given the free cash flow maybe post and if I even include the interest cost, will the internal accrual be sufficient to do that kind of CapEx?
So, yes, in terms of meeting the CapEx requirements, yes. If your question is on debt reduction, it will happen over a period of time. So it's not going to be a dramatic reduction, but, as the cash flows improve, we'll keep looking at, how we can pay down debt.
Okay. And lastly, now that there's a PBT as well, so how much tax rate to be considered?
See, we operate in multiple jurisdictions, right? There is India, there is the entire North American part, there is UK, there are several countries in Europe. The highest tax rate is in the range of about 25.17%, which is there, and that's what it is. Having said that, the ETR might slightly change because some of the overseas facilities have not yet turned around and are negative. So ETR might be slightly higher, but on an average, the tax rate is 25%.
Just one more to squeeze in. As I could see, quarter-over-quarter, CDMO sales has been better, and I assume that is what is driving the gross margin from 64% to 66%. Given that second half will further have higher-
Tushar, sorry, we are losing your audio.
Is this better?
Little bit. Go ahead, Tushar.
Better?
Yeah, yeah. Go ahead.
Yeah, just on this-q uarter-over-quarter CDMO sales has been higher. I assume that is what is driving the gross margin from 64% to 66% for the quarter, and given that second half will be further higher on the CDMO sales. So how to think about the gross margins?
So, as we responded on the first question, this quarter may not be fully representative because we've had higher inventories and inventory overhead credit as far as gross margin is concerned. Just to reiterate, no, no change from an EBITDA standpoint. Going forward, gross margins in the range of about 64%-65% seems to be reasonable. That's, that's more, a normalized gross margin.
Understood. Understood. Thank you. Thank you for this.
Thank you. Next question is from the line of Omkar from Bonanza Portfolio. Please go ahead.
Thank you for taking my question. I just wanted to have also... this is part of the asset turns . Can you give us a blended capacity utilization, is that possible?
A blended capacity utilization is actually quite difficult, 'cause we have got 17 sites and different forms.
Okay. Okay.
That number would be meaningless, I think.
Okay. And is it possible for you to give us a broad range of the EBITDA margin segment-wide CDMO, CG... CH S, and ICH? Is that possible?
No, we are not doing a segment level EBITDA margin split. Right now, we're looking at overall. We operate in one segment, which is pharmaceuticals. We're not getting into vertical level margin split.
Okay. Okay. That's it. Most of the other questions have been answered. Thank you.
Thank you. Next question is from the line of Vinod Jain from Wells Fargo Advisors. Please go ahead.
Hello. Thank you for the opportunity. I wish to ask, on the financial side of the question. You have had a situation where H1 and H2 phenomena continues over the years, where H1 delivers much lower returns than H2. Now, going forward, how do we look at it? Is this going to change, or it will continue because it affects the annual working of the company?
I agree, it does affect the annual working. I think the challenge is if you think about it, a lot of our customers are pharma companies that actually want to run down inventories by the end of the calendar year, and then pick up inventories in the Q1 of the calendar year, so, which ends up being our last quarter. So I agree it is challenging, but that's kind of how the industry works. And quite often, our factories will be busy actually creating and producing in order to deliver in H1, but that only kind of shows up, I mean, that will show up in the last quarter.
So is there any possibility of further cost reduction in the first half? Because the first half typically shows negative results, and that hurts overall working out, of course.
Yeah.
So-
Unfortunately, in the CDMO business, I think, costs are relatively fixed. And two is like, as, you know, we noticed our inventory is a bit high, and that's because we've kind of bought the materials and are producing in order to deliver in H2. So the, kind of the factory is working, so to speak, in order to-
Very well. Very well. Very well. That answers my question.
Thank you. Next question is from the line of Bharat Gupta from Fair Value Capital. Please go ahead.
Hi, thanks for taking my question. I have just one question, and that pertains to one of the statements which was made by the chairman prior to the demerger. So in the pharma business, the chairman highlighted that the margins is likely to be on the improvement trajectory, and that remains to be near about 25% odd levels over the next 4-5 years. So now with nearly 1.5 years passed by, so how do we see, like, are we still on the target to achieve and sustain the margins about 25% odd over the next four, five to five, 4-5 years? And what can be the growth levers, like, likely to be there across the different segments?
So I think obviously last year we had a tough year, so I'd say we're back on the improvement trajectory. And I think you could say mid-twenties margin is something that is feasible in the next, in the midterm. I think the growth levers would be increased revenue from our CapEx that we have invested. So as Vivek mentioned, we've actually just opened our Grangemouth CapEx. We got our first revenue milestone last quarter, and would expect to see revenues from that going forward. Similarly, we've done you know growth investments in Riverview as well as Turbhe and Aurora. So I think we should see increased revenue coming from that, as well as I think we'll continue to focus on costs. But we believe that operating leverage and will help us.
Right. And, just particularly with respect to the product mix, currently, if I look at the CDMO space, so the innovative category constitutes close to 45% of the overall pipeline. So in order to the margins to sustain over 20+% , so where do we see the product mix changing over the next 4 years?
So I think, as you rightly noted, our innovator product mix is something that is been increasing over the last three years. We expect that to continue further. I don't think we have a particular target in mind, but I think that will also help us in creating sustainable operating margins.
Right. Thanks. That's my only question.
Thank you.
Thank you. Next question is from the line of Anil, individual investor. Please go ahead... Anil, may I request you to unmute your line and go ahead with the question, please?
Yes, Anil, go ahead.
Due to no response, we move on to the next participant. Next question is from the line of Sanjeev from SKD Consulting. Please go ahead.
Sir, good morning, everybody. Am I audible, so I continue?
Yes, please.
Thank you. Ma'am, I have two little questions. One is regarding the fact that we have added lot of orders in this quarter. So what is the visibility of, turnover from CDMO in the next quarter? How much we are going to execute out of the total pending order? That is one. Secondly, now with the rights issue, INR 1,000 crore in our, kitty, the next six months interest outgo, if you can kindly give some ballpark figure. Thank you. I, for answer.
Yes, Sanjeev. So, firstly, we've given a guidance for H2, in terms of a high teens growth, and that takes into consideration the kind of, order book we have. So it's already factored in that we have a certain visibility based on which we have given this guidance. And secondly, in terms of interest cost, while we've used that to pare down debt, our debt volume has come down, but we are mindful of the fact that interest rates continue to remain high. And, based on what we hear from the macro, environment, it, it might remain at that level for some time. So currently, we've said that we have about INR 11-12 million of interest, outflow in a quarter. And, of course, we are making attempts as whatever we can do to reduce the rates going forward.
Sir, you know, can you give some figure of turnover, so that we can understand the execution that is possible for the pending order? You know, sometimes the orders are being given, but, you know, the execution doesn't start with the order receipt.
So if you look at our historical performance, H2 has been higher, and that's based on the execution that has been done in H2, right? So,
I understand that you are not able to quantify. I mean, if you cannot quantify, then please say no about it. I meant a figure to be given to me about CDMO turnover, that's all.
Yeah. So, as we mentioned, we are giving a broad guidance. We are not quantifying a number.
Okay, no problem. I mean, there is no objection. So, sir, one more, sir. We have 17, 18 sites all over the world. So, I mean, is there any way we can consolidate and reduce our cost of operations? Is it likely in the near future?
One of the benefits of our 17 sites is that they actually almost serve different customers and have different specialties to some extent. Customers quite often will say, "Look, I want it in..." For example, "I want something made in North America." Or they'll say, "I want something made in India." So geographically, they may have a preference, and they also might have a preference for the kind of team and the kind of dosage form, et cetera. So what we see going forward is that as revenues increase, you'll get benefit of operating leverage because once the sites reach a certain scale. So what you will see going forward is that the cost will form a smaller part of the overall.
Okay. Thank you very much. And last question, generic business, you know, I mean, sorry, innovation and patent, are we also looking to register our own patent, either process patent or, you know, any such thing? Are we already registered and have got some patents, or are we looking for that kind of growth also in future?
No. I think at this point, we have no plans to do our own products in the new chemical entity domain.
Okay. Thank you very much. I'm satisfied. Thank you, and wish you all the best, and continue good work, sir. You have been doing a lot of good work. Thank you very much.
Thank you. Next question is from the line of Namit Arora from IndGrowth Capital. Please go ahead.
Yes, thank you for the opportunity. My question was slightly medium term, over the next 3-5 years. So you have three very interesting businesses and, you know, all the engines, you know, and foundation is in place for CDMO, CHG, and ICH. I just wanted your thoughts on, in terms of capital allocation as well as management bandwidth, how do you think about these three businesses over the medium term, given that all of them are extremely promising and all of them have a very solid foundation? Thank you.
So, Namit, I think we've kind of been speaking about it. Firstly, in terms of our consumer products business, as we said, is self-funding. So whatever is the EBITDA it has generated, we've used large part of that for our promotional investments and media investments that we have done as far as this business is concerned. Between complex hospital generics and CDMO, CDMO being the larger part and the nature of the business is such that it is capital intensive, will have a higher allocation of the overall capital outlay as it, as it has been in the past and will continue in the future as well.
Got it. And in terms of the internal organization, you know, in order to make sure that these three businesses all realize their full potential, if you could just give us a flavor of how you organize internally in terms of senior management, you know, to ensure that, you know, these three businesses realize their full potential.
Okay. So we have Peter DeYoung, who is CEO of the global pharma business. Under him, he has the Chief Operating Officer, Hervé Berdou, who is based in the US, as well as the Chief Commercial Officer, Stuart Needleman, who's also based in the US, as well as a CFO. Similarly, in the complex hospital generics, you have a president and, I think, CEO, who is Jeffrey Hampton. We announced his recruitment in June. So he would be also based in the US, and you have a CFO, separate CFO as well. Similarly, in the OTC business and the consumer healthcare, you have a CEO and a separate CFO and sales head, et cetera.
So I think they're all, each of the business does have separate management, but we, yeah, so we are involved quite closely also.
Thank you very much. That's more helpful. Really appreciate your very detailed thoughts. My final quick question. You know, historically, the group has had a phenomenal track record in terms of, acquisitions and, you know, building businesses, inorganically as well over the last several decades. But I'm just, you know, your thoughts on, you know, given that organically also things are going well, so are you going to keep an eye out for some interesting opportunities in any of these key businesses? Or is the focus right now more, internal driven and organic? Thank you.
I think it's absolutely, we always continue to look at acquisitions. But I think we also have acquisitions have to earn the right to kind of, you know, be invested in almost. So it'll depend on what the returns are. I think I would say that the first priority is, until the end of the financial year, as Vivek said, we want to reduce our debt to EBITDA to below 3. So that's the first and current plan, and then we will also continue to look at acquisitions.
Thank you very much for the detailed answers to all my questions, and all the very best to the entire team. Thank you.
Thank you.
Thank you. Next question is from Amit Kadam from Canara Robeco Mutual Fund. Please go ahead.
Yeah, hi, good morning. Thanks for giving me this chance.
Amit, you're not audible. Can you please speak through the handset and a bit louder?
Yeah. Is it now audible?
Yes, right.
Okay. So then my first question is that as the business recovers, and it's clearly showing in the numbers, is what is it still a weak link in that overall business which warrants management attention? And that's point number one. It may be also like some kind of industry, some breathing headwinds, something on that also would be very helpful. Second question is that employee cost is a significant part of our business. It's still like sequentially went up. Any ballpark maybe number in terms of, like, how do we build it in terms of going forward, and what should be the correct pace? So that's another point.
See, I think, overall, as you rightly noted, the macro trend in terms of biotech funding is recovering, but still not back into the boom years. Obviously, that is an overall headwind for the entire business. While we have re-rebalanced our business a little bit between biotech and Big Pharma, you know, the biotech are still a rather important component of this business because that is where innovation has been happening over the last few years. I think that's something that is to be, to be a continued watch out.
I was going to say from an overall priorities perspective, we would say that securing the appropriate level of forward sales commitments from our customers is obviously a critical part for the CDMO and getting a lot of management attention. We've obviously seen some positive results from that, but it's an evergreen activity that needs to be accomplished. I'd say the second thing is that we do have a small number of sites that we are focused on improving our operations in terms of OTIF and right first time, and those are getting our attention. I'd say the third component for the CDMO would be on our cost program. While Vivek mentioned, we've seen some good results from that. Cost is another area that always does need attention and focus, and it's going to get our continued attention.
If you look at the CHG business, we did have a period where we had demand in excess of our ability to supply, particularly with our internally produced products. Since we have an important operations and CapEx plan underway, that should allow us to get more control over the critical products, then obviously there's commercial execution once that supply becomes more available. And then the third bit would be on our pipeline. Obviously, growth will require some amount of execution on our pipeline products, and we want to do what we can to secure that, the prosecution of that and the eventual commercialization. And obviously, cost remains common across those. I don't know if you want to mention anything on the-
Employee cost. Please.
Employee cost, some bit of increase, or variation over the quarters you will see. It's kind of stabilized now if you look at it and compare over the last couple of quarters. But, across quarters, sequentially, you may see some movement, but they are not very material. And, it depends upon, you know, the kind of recruitment to kind of ramp up production at a particular site. And a little bit of variation you will see across sites.
But still, like, can you be more clear, like, on this part and how do we see this thing? Because here I see that we had a, like, the number what we are in terms of 27% of our top line is our now employee cost. We used to operate at a much lower, maybe operating leverage is something which is still yet to be played out. But that's what I wanted to see, because what-- from where I'm trying to come is that maybe a few years back, because our resources are also internationally based, 3% kind, 2%-3% kind of inflation based, maybe hikes would have been a case and ballpark we could have built 5%-6% as a, from a, as a incremental, maybe cost going in this particular.
But as the overall interest rate itself globally has more up, the expectation for salary hikes are also up. So just wanted to know, should we consider that like 8%-9% as a annual increase on a base what?... maybe on, what we, whatever we from in FY 2024, is that a way of, building few things, or how the management is looking forward? Because it's a significant number to our overall things, scheme of things in the, the bringing maybe operating leverage, the things to kick in.
So there's a couple of points. If you look at the blended rate of, normal inflation-linked increase-
Mm-hmm.
- between India and overseas, it will come to about 6-6.5%. That's what the rate normally is. Also, if you are trying to look at employee cost as a percentage of revenues, for our kind of business where there's so much of lumpiness, obviously it throws very erratic numbers across quarters. And if you're going to base this on FY 2023, that may also not be representative because of the kind of impact that we took on the business.
Mm.
Overall, I think you need to look at full year numbers this year to be able to get some idea of what employee cost as a percentage of revenue looks like. The increase will be more or less on, on, on an inflation-linked increase, it will be more or less linked to the 6-6.5%. If we add people, that will be around on top of.
I mean, if-
And currency.
Yeah, if you think about it, to open our Grangemouth expansion, we actually had to do significant recruitment in 1Q and Q2, in order to actually open it. So that is part of the increase in people that you would see.
Also, Amit, you may want to pay attention to the Forex part of it. So there's about 3.5% impact that just comes in because we translate overseas in INR, and there's the Forex impact coming in as well.
Fair enough. I have a few. I'll maybe join back in queue and come back. Yeah, thanks.
Thank you. Next question is on the line of Chintan Shah from JM Financial. Please go ahead.
Hi, thank you so much for the opportunity. So first question is, while we understand that we need overseas manufacturing presence for CDMO segment, as we intend to be closer to the partners, but for complex hospital generic segment, which is more of a distribution-like business, do we really need to have overseas manufacturing facilities? Can you please help me understand?
Uh, sure.
I'd say that the capability was actually acquired, which is how it's placed where it's at, and it has been growing organically through additional incremental CapEx in that location. That has, given where the asset was when it was acquired and the capability at that asset that was there, and that is gonna continue for the benefits of essentially what we call largely sunk investment. We've had very good returns from that business and very good financial profiles. If you were to look at that business's financial performance, it would meet most of your target metrics. If you listen to the earlier bit of the comments, we did describe that we're making incremental CapEx investments at the moment in both our Bethlehem (Digwal) and our Riverview facilities to support that business.
That's where a significant amount of the incremental capital is going for capacities and capabilities for complex hospital generics, going forward.
Okay. Got it. Understood. Fair enough. And secondly, you know, from a near-term perspective of the medium to long term, which is once the things normalize, what sort of steady-state potential in terms of ROC does the business have? If you can just maybe give a range or number of it, sir.
Sorry, was your question of the guidance on the ROC?
More in terms of the potential that the business has to deliver, not necessarily a specific guidance that you'd like to achieve. I mean, if you can just help me understand,
Is it ROC for the entire business or ROC only for the complex hospital generic?
No, for the entire business.
See, overall, you know, as our margins improve, first of all, ROC is obviously a factor of improving the profitability. So as margins improve and move towards the range of 24%-25%, we will see ROCs in the high teens for the overall company.
Okay. Got it, understood. And last question is on the CDMO side. So do we have a target for the innovative share over the next 3-5 years that we're going to reach? And supplementary to that, would that be- would that mean that the innovative business will be growing faster or would be growing a bit slow on the generic side?
We, as mentioned earlier, we haven't given a specific quantified target for the innovative share, but we do expect both innovator and generic to grow. As demonstrated in the past and based on what we're seeing in the customer demand, we would expect the innovator business to grow at a faster rate than generics business.
Okay. Got it. Understood. Thanks. That's it from my side.
Thank you. Ladies and gentlemen, we will take that as the last question, and I'll end the conference o ver to Mr. Gagan sir, for closing comments.
Thank you very much. Hope we have answered all your questions. In case you have any follow-up questions or any clarification, please feel free to reach out to me, and I'll be happy to respond. Thank you, and have a good day.