Ladies and gentlemen, good day and welcome to Piramal Pharma Limited Q2 FY 2023 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 the conference call, please signal an operator by pressing star and zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Gagan Borana, GM, Investor Relations and Sustainability, Piramal Pharma Limited. Thank you, and over to you, sir.
Thank you, Vivian. Good evening, everyone. I welcome you all to our first earnings conference call post demerger to discuss our Q2 and H1 FY 2023 results. Our results material have been uploaded on our website, and you may like to download and refer to them during our discussion. The discussion may include some forward-looking statements, and these must be viewed 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 of Global Pharma; and Mr. Vivek Valsaraj, CFO of our company. With that, I would like to hand it over to Ms. Nandini Piramal to share her thoughts.
Good day, everyone, and thank you for joining us on our first results earnings call as an independent and focused pharma company. As you are aware, we have completed the demerger of Piramal Pharma Limited from Piramal Enterprises and are now a separate listed company on both BSE and NSE. It is an important milestone for the company. The demerger simplifies the corporate structure, strengthens the governance architecture with dedicated board and management teams, optimizes the capital structure, and facilitates the businesses to independently pursue growth plans organically and inorganically. This should help unlock value for all our stakeholders. I would like to let you know that the U.S. FDA recently concluded good manufacturing practices, GMP inspection of Piramal Pharma's Riverview, Michigan facility, which was completed successfully last week with zero 483 observations.
I'm going to now move to talking about the performance of the company in Q2 and H1 FY 2023. During the quarter, we registered revenue growth of 9%, delivering revenues of INR 7,220 crores. Our growth for H1 was 11% with revenues of INR 3,202 crores. Historically, H2 has always been much stronger than H1, with about 55% of total revenues and 66% of the full-year EBITDA being booked in H2. We expect a similar trend to follow this year as well. Our CDMO business grew by 6% and 12% respectively during the Q2 and first half of the financial year, backed by growth at our Turbhe, Grangemouth, and North America facilities. Our complex hospital generics grew by 12% during the quarter and 11% for the first half.
Innovation and CVS sales reported a healthy growth during the quarter and first half of the financial year. Our India consumer healthcare businesses registered a robust growth of 18% for the quarter and 12% for the first half of the financial year, despite the high base of the last financial year, where our business grew close to 50% Y-o-Y. Normalized EBITDA margin during the quarter and the first half of the year was 13% and 12% respectively, nearly at the same levels as the previous year. We expect meaningful improvement in EBITDA margins in H2 over H1, in line with improved traction in sales in H2. Over the years, we have consistently delivered profitable growth, which is reflected in the 13% revenue CAGR and 24% EBITDA CAGR between FY 2012 to FY 2022.
The last 2 years, due to the pandemic and others, the Ukraine-Russia conflict, we've seen a challenging business environment. We've been doing our best to address these short-term challenges, and we're optimistic that we will bounce back to our historical growth rates with an improvement in profitability. Even during these times, we have remained steadfast in our commitment to make growth-oriented investments across our sites and businesses in line with our plan. Moving on to business-specific highlights. Starting with the CDMO business. Over the last 10 years, our CDMO business delivered a healthy revenue growth of 13.5% CAGR, driven by differentiated capabilities, diversified manufacturing base, which is aligned to customer needs and integrated service offerings, acquisitions, as well as best-in-class track record in quality and regulatory.
Navigating the current inflationary raw material and energy prices is an important challenge for us, and we're trying to offset that through judicious price increases and working on several cost optimization and operational excellence measures. We're focused on addressing these challenges and are positive about our growth prospects going forward. In terms of structural headwinds, we're seeing an increase in customer audits, which were affected during the pandemic due to travel restrictions and are seeing continued traction in form of request for proposal RFPs. Slower decision-making by customers owing to the macroeconomic environment is leading to some lag in the order book. In terms of customer profile, we have a diversified mix of big pharma companies, emerging biotech companies, and generic companies. We are ensuring low revenue concentration, at the same time, we're looking to grow deeper with our key clients.
Our revenue from our top 10 clients accounts for about 40% of CDMO revenue. Our differentiated offerings, such as potent sterile injectables, high-potent APIs, antibody drug conjugates, peptides, oncology, et cetera, continue to attract customers. Quality and compliance is also an important aspect in our business. During the first 6 months of the financial year, we successfully cleared about 20 regulatory inspections and more than 100 customer audits, thereby maintaining our best-in-class quality and compliance track record. Through customer-led brownfield expansions, we're expanding capacities at our major sites, including Aurora, Beacon Pool, Riverview, Grangemouth, and Morpeth. In all, we've committed about $157 million of growth-oriented CapEx investments across the various sites, which is expected to be completed over the next 18-24 months. Integration of our acquired businesses, as well as the capacity expansions, which at our sites were earlier delayed due to the pandemic, are back on track.
We expect to navigate through these challenging times and emerge a stronger company going forward. Moving to our Complex Health group, generics. Our CHG business grew by 11% to 12% during the quarter and half year of FY 2023. Our anesthesia portfolio continues strong performance in the U.S. market. In the non-U.S. market, we're seeing a healthy demand for our products and are accordingly increasing our capacities to service these markets. In the inhalation anesthesia portfolio, we're one of the few players in the world that has the capabilities to manufacture all four generations of inhalation anesthesia products. We've also vertically integrated with in-house manufacturing to make starting materials at our specialty fluorochemicals facility in Dahej. Our intrathecal portfolio in the U.S. continues to command a leading market share. In the injectable pain management segment, we've seen good performance in markets like Japan, South Africa, and U.K.
That was offset by supply constraints in other markets. We're working towards improving the supply of these products and are seeing improvements. We continue on our focus to build a pipeline of injectable products that will augment our portfolio of offerings in this space. We have 37 SKUs currently in the pipeline. We launched two products during the quarter, including a pre-filled syringe in Germany, and are expected to launch eight SKUs in various target markets in the second half. Moving on to our India consumer healthcare business. Despite a higher base, we delivered a healthy mid-teen growth in the quarter two and the first half of the year. Robust growth in our value brands have been a key contributor towards this performance, with a growth of 40% in the first half of FY 2023. Our value brands contributed 42% of total consumer healthcare sales during the first half.
In line with our stated strategy, we're reinvesting our profits in the consumer business to grow our value brands. We spent about 15% of our revenues on media and trade promotion, which are yielding good results, as reflected in the performance of our value brands. We also launched 10 new products and 11 new SKUs during quarter two FY 2023. New products launched since April 20th contribute about 15% of the consumer business sales. We have a good reach in the general trade, with access to over 200,000 or two lac outlets. We're strengthening our presence in alternate channels of distribution, including e-commerce, modern trade, and our own website, wellify.in. E-commerce contributes to about 15% of total consumer business sales and has been growing well. To summarize, I'd like to say all of our key businesses have a compelling plan for their growth and are executing on their respective strategic priorities.
We expect about 15% revenue growth over the next three to five years. We also expect to improve our operating margins through scale advantages and therefore improve our return on capital employed. Today, we serve as a strategic partner choice to big pharma, emerging biopharma, and generics companies globally, and our team comprises of over 6,000-plus multicultural employees, 15 manufacturing facilities across the globe, and a global distribution network in over 100 countries. We take pride in our outstanding quality record, and our focus on patient, customer, and consumer centricity. Our conscious endeavors to perform on ESG aspects of environmental, social, and governance are a part of our DNA as a responsible organization. I'd like to hand over the call to Vivek, our CFO, to provide an explanation of our financial statements.
Thank you, Nandini. Good day, ladies and gentlemen. I'll provide a brief explanation on our financial statements. The Honorable NCLT on the 12th of August approved a composite scheme of demerger of the pharma business from Piramal Enterprises into Piramal Pharma, and amalgamation of PCL's wholly owned subsidiary, Hemmo Pharmaceuticals and Convergence Chemicals into itself with an appointed date of 1st of April 2022. Accordingly, the financial statements of Piramal Pharma have been prepared giving effect to the scheme from the 1st of April 2022. Financial statements for Convergence Chemicals and Hemmo, wholly owned subsidiaries of PCL, have been combined as if this amalgamation had occurred on the 1st of April 2021 or from the date on which the company acquired control of these subsidiaries, which I will say later.
Prior to the demerger, Piramal Pharma had entered into an agreement with Piramal Enterprises for continued onward sale by Piramal Enterprises of products under the government tenders that were obtained in the name of Piramal Enterprises till obligations under these tenders were fully met. The agreement also included sale of Piramal Pharma's consumer products through Piramal Enterprises CFA network till all requisite licenses, registrations and permits were fully transferred in the name of Piramal Pharma. In accordance with the scheme of demerger of the pharma undertaking, has been considered as a non-common control transaction and accounted as a business combination under Ind AS 103 in the financial statements of Piramal Pharma with effect from 1st of April 2022. Accordingly, the financial results for first quarter and six months ended September 2022 are not comparable with corresponding previous periods.
The comparative financials are available on slide number 32 of the investor presentation, which is available on our website. All this closing inventory as on 31st March 2022 at Piramal Enterprises in respect of such transactions included the margin element, which was charged by Piramal Pharma to Piramal Enterprises on an arm's length basis. Since the demerger is effective 1st April, the opening inventory transferred to Piramal Pharma at a fair value as per Ind AS included the margin element, and the same has been charged to the P&L in the first quarter of Piramal Pharma financial statements on sale of such products by the company. The one time non-recurring impact of this inventory margin in quarter one financials is INR 68 crores. With this, I now leave the floor open for questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Participants who wish to ask a question may kindly press star one on your touchtone telephone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to use answers while asking a question. We will wait for a moment while the question queue assembles. The first question is from the line of Bharat Gupta from Fairvalue Capital. Kindly proceed. Mr. Gupta, we are not able to hear you clearly, sir. We request you to kindly come back in the queue. Thank you.
Yeah. Sure.
The next question is from the line of Ankush Agrawal from Surge Capital. Kindly proceed.
Yeah. Hi. Thank you for taking my question. Are you audible?
Yes, we audible.
My first question is around the CDMO business, specifically the generic part of it, which I believe is a significant part of the overall CDMO business. Could you help me understand some dynamic of this business? Are we doing APIs in this business or it is finished goods and what kind of clientele we have? Is this likely big pharma or generic players or what is the kind of nature of contract? Is it long-term contract with stable and fixed margins or are these niche products? If you can highlight something on that around this specific generic CDMO business.
Mr. Gupta, if I have understood the question correctly and I will try and respond that. There are two kinds of generics as broadly categorized as. The first part is the generic that we do for our customers under CDMO arrangements, and this includes both APIs and formulations, which are done from our various facilities in India and overseas. The second part are generic APIs. We have our own DMFs, which we supply to multiple customers, that is made to stock. That is the second part of the business. Was that the question that you were looking for?
The CDMO business also includes some spot API business as well, is what you are saying?
Yes, it includes both APIs and formulations.
Okay. Would you be able to quantify little more, like how much of the business like spot API business you're saying it's small business you're doing and how much is spot CDMO business you're doing is in like a long-term contract?
Broadly, our categorization is about 60% of our business is into APIs and about 40% is formulation.
Okay. This includes the developmental pipeline as well, right?
Yes, it does.
Okay. In the medium to long term, what kind of expectation is there from this kind of generic business? Do you expect the CDMO business to move more and more towards the tanking in development pipeline, or do you continue to believe that you do want to grow in the generic space as well in the longer term?
This is Peter DeYoung here. I'd say that on the generic business, we would expect on the API side, we would expect to continue to see growth there because we are obviously going to be filing some new DMFs and looking to get further sales with existing DMFs that are not fully accessing all their customer potential. I think a second dimension of growth that will probably be higher in the generics API area would be our recent acquisition and integration of Hemmo Pharmaceuticals, which makes generic peptide APIs. We think that there's a very compelling pipeline of DMFs in the pipeline for that business as well. That being said, we would also expect to see good growth in our API services business as we continue to support our customers as their pipelines progress in the clinic and then later hopefully succeed commercially after being approved and launched.
We would see multidimensional growth across our API business, both in the generics area and in the services area for the reasons described.
Okay. Lastly, would you be able to give a qualitative sense of the margin tier between different business segments of PPL, which would be the highest margin business across this segment that you operate in, something on that front. Is it possible to give that?
As we said, we are taking the consumer healthcare business, we're taking it as breakeven, so the other two are the average.
Okay. It's broadly on the same lines.
Next question, please.
Thank you. Participants are requested to kindly restrict your questions to two per participant. The next question is from the line of Damayanti Kerai from HSBC. Kindly proceed.
Hi. Thank you for the opportunity. My first question is CDMO business. Last quarter it was mentioned that segment got impacted due to some project delays and some cost pressures, et cetera. Can you update on that, what has been the progress? Ma'am mentioned there will be significant improvement in margin in the second half. How do you see margin trajectory moving over next few quarters and what is your goal in terms of reaching your CDMO business ultimately?
Yeah, Damayanti. Thank you for your question. Firstly, the challenges that we had spoken about in the earlier quarter, want to state that mitigation measures have been taken against each of them, which we are continuously monitoring. We spoke about people and attrition. Several measures have been taken to ensure that our vacancies are filled in across multiple sites. Also with respect to whatever are the execution challenges that we face at some of our facilities, there is an action plan. Most of the measures which had to be taken, they are all being implemented and monitored on a consistent basis. In terms of the overall operating margins for H2, which is October to March period, we expect a meaningful improvement. This will largely come in from a higher top line.
We expect top line to have a mid-teens growth in H2. That will also lead to improvement in the overall operating margins due to fixed cost leverage. Going forward, our aim is to consistently improve upon this margin. We stand by our earlier guidance of aspiring to move towards the mid 25%, 26% range over the next few years.
Sorry, mid-30s you said or 20s?
About 25-26 across all businesses.
Okay. My second question is again on CDMO piece. Very broadly at sector level, can you discuss a bit about the demand scenario? In your press release mentioned that you are seeing lot of request for proposals, but finalization of projects, et cetera, are getting delayed. Should we assume that due to difficult macro environment, customer queries are coming in but they are not getting signed at this point time, but eventually they should be open for business in coming period?
I would comment on this. This is primarily in the on-patent segment within the services business in the CDMO. On that we're seeing consistent RFP flow in this year versus prior years by value. We are seeing the RFPs coming in and we are spending time in them with our potential customers, some of which are current customers. We are seeing that when they do conclude, our win rates are the same as in prior years, we are winning, what we would say, consistent percentages of the proposals that do come in when the clients make decisions. We would say that the majority of the clients or potential clients that we're working with are appropriately financed to make decisions and progress their pipelines as the decisions are needed to be made.
I think what we would say we are seeing is that perhaps in the prior funding environment, our clients or potential clients would be making decisions before clinical results would happen in a given phase, so they could be positioned for success, assuming a positive result from that trial that would be underway. Whereas now it seems that as they're looking more prudently at their cash flows and their allocation of capital, that they're making decisions on those same programs after the clinical results would happen. We would see a more protracted time from, let's say, RFP intake to RFP decision this year than prior years.
Okay. Just to clarify, it's just the timing which is getting shifted, as you mentioned, but the win rate or the kind of projects which you are getting is similar to what you achieved in the past few years.
Yeah. Only one minor difference would be is that we maybe are seeing a bit more of a late-stage proposals coming in than perhaps earlier years. The actual mix of proposals is also slightly higher weighted towards, let's say, a phase III, whereas in prior years we'd see, let's say, a higher weighting of, or a moderately higher number of phase I and IIs. From our perspective, we think that those potential clients would be better funded and also the ultimate values and volumes When successful would be higher. Also we find that typically a phase III decision would take longer than a phase I or II decision.
That's helpful. Thank you.
Thank you. Participants are requested to restrict their questions to two per participant. The next question is from the line of Sumit Gupta from Motilal Oswal. Kindly proceed.
Hi, thank you for the opportunity. Sir, I have two questions. First is, considering the muted first quarter of fiscal year, does the ratio of the EBITDA for first half to second half still stands at 32 to 68, or can it be expected to be more lopsided in second half?
as Nandini alluded to, we do have a significant skew towards the second half historically as we have seen, and that trend will continue. likewise, you'll see a very similar trend in terms of margin as well. It will be significantly skewed towards the second half as you've seen in the past.
Okay. Thank you, sir. second question is regarding, can you give us a breakdown for the growth prospects in the Complex Hospital Generics into demand available for existing products versus the newly launched products?
We are not giving demand forecast separately by business segments and sub-segments of the business unit.
Okay. Sir, last question is, if you can provide the outlook on the net debt levels and the interest cost?
As we have guided to Sumit earlier that our debt levels that we are looking at about is 4 to 4.5 times EBITDA, and that is the level that we should be comfortable standing by.
Okay. This is for FY 2023 and 2024. 2024 will be less?
For FY 2024 as well. As we have already guided that we will be having some growth investments that we are going to do. It would be on similar lines, the criteria we applied for FY 2024 as well.
Okay, sir. Thank you.
Thank you. The next question is from the line of Praveen Srinivas from Samsung Asset Management. Kindly proceed. Hello, Mr. Praveen Srinivas? As there is no response, we will move on to the next question. It is from the line of Surya from PhillipCapital. Kindly proceed.
Yeah, thanks for this opportunity. First question is on the overall business structure. Since after being Piramal Pharma becoming a kind of innovative company, can you reiterate your segmental growth plans for, let's say, next 2 to 3 years or next 5 year, let's say? Because you have talked about capacity additions, you have given margin indications over 2 to 3 years and all that. But in terms of growth, what are the key drivers that you are witnessing for the three business segments? That is the first question.
This is Peter DeYoung here. I would say the growth segment-wise, the first segment would be the CDMO segment, and we would look at essentially a combination of capacity investments coupled with client pipeline progressions. If you look at it, we have a number of late-stage clinical programs that are at our facilities already being, doing work on them. We would expect with a reasonable attrition rate of those programs in the clinic and their subsequent progression of those that succeed, combined with capacity investments to support our being able to serve those clients as we progress, is why we think that our growth in that overall segment should be much higher in the future than it was in the past, and that is driven by the fact that we have nearly 34, 35 phase III programs and about, I think, nearly 20 on-market, recently launched commercial programs.
That bulwark of late-stage clinical work and early commercial work is a lot of what's going to drive future growth at a higher rate than in the past. That's on top of all the ordinary course of work and business we're doing that's going to continue, and that's why it's going to be on top. I think that's the CDMO answer. In the complex hospital generics market, we are still far from fully realizing our potential in the inhalation anesthetics segment. We have a limited number of competitors, and we've been steadily growing market share there, and we believe that we are well-positioned to support continued growth in that segment, and we're investing in further back-end capacities and capabilities to support that growth.
We think it continues to be a meaningful grower as it has in the past, and we still think there's meaningful market opportunities there. I think the second leg of growth will be as we now are gaining more control over the supply chain through the transition of the CDMO for our acquired injectable pain products. We think that we're going to be able to exploit some modest opportunities for growth in that segment. A third one is that we're continuing to progress our pipeline of other pharmaceutical products that we sell to the same channel that we sell our inhalation products.
We would expect that as those projects come to the market, that we should have growth from those new additions, and we are seeing growth in them in the current period and would expect to see growth in the subsequent periods as well. I think those are the three legs of, I guess, sources of top-line growth in the complex hospital generic. Nandini, do you want to comment on the-
On the consumer products, then getting to my health, I think we should see growth through our power brands. We're investing about 15% of top line currently in media and trade promotions, I think as you get scale
We will see increased profitability from that business as well. The way we would see increased growth is both by finding new consumers for existing products, but also launching new products and new formats across the board.
Sure. Thank you for that. To better understand the profitability of this segment and the overall consolidated operation of Piramal Pharma. We have seen a very strong margin performance, let's say, trend over 2019 to 2020, 2021 like that. Then 2022 was a kind of a depressed one. This running year is looking even more further depressed. It is really difficult to understand what is the core margin trend of these businesses. Also, CDMO, if we see that, okay, it is a long established, steady performing and consistently growing business that we have seen. There's a track record, but the margin profile has not moved on to the kind of peers level. It is subdued meaningfully.
Could you give some sense of, let's say, last year, FY 2022, if we say that it was 18% and now from the first half, if you are saying it is a 14% kind of margin trend. How far are we from the kind of a normalized margin trend for the consolidated business and particularly for the CDMO? If you can give some clarity, that would be useful.
Sure. Let me first articulate as to why the margins actually dropped during the interim period. As you're aware, there are a couple of factors that happened. First was our conscious decision that as far as our consumer products business is concerned, we would be reinvesting the profits back into the business. Consciously, we are keeping this at EBITDA neutral and spending more on sales promotion so that we can grow the pipeline faster. The second is during the course of the pandemic, sales, more specifically at our overseas facilities, were at a scale lower than what it should have been. As you can imagine, the overall fixed cost is substantially higher and therefore this had an impact on the overall margins. Coupled with this was the larger macroeconomic factors where inflation and general increase in all the cost of inputs also led to margin pressure.
Having said that, actions are being taken. As we have spoken before, price increases wherever possible, we have been taking those. Whatever cost optimization, operational excellence initiatives have to be done, we will introduce those as well. As far as the CDMO business is concerned, it's largely a fixed cost leverage game. The more we sell, the more the margin can increase. The intent right now is whatever is the capacities that we are building across our various overseas facilities as well as creating capacities wherever there is demand, idea is to grow those sales faster so that we can see a margin expansion. Yes, we remain committed to our guidance of increasing the overall margins to the levels that I alluded to before. We would be moving in that direction to be able to expand the margins.
Okay. Just last question, with your permission, can you give some more clarity about the CapEx that you have alluded already at about $157 million. In which areas that you are putting that, and what is your current global market share for the inhalation anesthetic?
For the CapEx, I'll just list some of the larger ones, if you look at our investor presentation, we do actually itemize some of the other ones. We have an ongoing expansion at our Riverview, Michigan API facility, which is focused on, I guess, potent and high potent API services. The second one is in our Grangemouth U.K. facility, which is focused on conjugation of our ADCs or Antibody-Drug Conjugates, and that's a brownfield expansion at that location. Those are the two largest expansions in terms of consumers of capital committed projects. We do have a number of other projects ongoing at our Sellersville facility, at our Lexington facility, at our Turbhe Peptide facility and some of our other locations. You can see that list in our investor presentation.
Sure. On the inhalation market share, please.
That would be. I would say you can probably get your own IQVIA data to your own interest, but I'd say maybe in the low to mid teens. We have a lot of headroom.
Okay. Sure. Thank you. Thanks very much.
Thank you.
The next question is from the line of Praveen Srinivas from Samsung Asset Management. Can we proceed?
Can you hear me now?
Yes, sir, we can hear you. If you can be a bit louder.
Sure. I wanted to understand firstly, what is the nature of the other income that is on the financial statement? There's INR 276 crores in FY 2022 or the INR 118 crores in H1. What is the nature of that?
Yeah, Praveen. This includes the Forex gains. It includes the government grants which we get on our capital investments, especially overseas, we get subsidies. It includes that. It includes a bit of fair value, a bit of past provisions which are no longer required. It's a mix of many things, actually.
which would be the dominant aspect amongst all things you have listed?
Currently, a predominant portion is Forex gains.
Dominant of Forex. Can you give some sense of how much of the other income would be Forex?
We're not discussing some GL level numbers right now.
Okay. In the CDMO business, can you tell me currently how many products are in commercial manufacturing? Also, I think you have given the pre-commercial product number in the slide, right, for FY 2022. Is there any update on that number for Q2?
I don't think we update those numbers on a quarterly basis. When we next refresh them, we'll let you know. I think what's in the slides is the most recent.
Yes. In terms of commercialized products, how many are there?
I think we disclose the number of on-patent commercial products in the materials, but we aren't disclosing the number of total off-patent products.
How many are in patent? Eight, I think, correct? If I'm not wrong.
19, right?
Nineteen.
Nineteen.
Okay. finally, could you tell me the CapEx guidance for both FY 2023 and FY 2024?
It would be about $157 million.
Over the period.
Over the period.
Over the period. Okay. All right. That's all from my side.
Thank you. The next question is on the line of Ranvir Singh from Edelweiss Wealth. Can we proceed?
Yeah. Thanks for taking my question. In press release, you mentioned that during the demerger, part of the tender-based business in India remained with Piramal Enterprises and part of the OTC products also because the licenses BT2 were the transfer is pending. that I want to understand, what's that portion of revenue that is just aligned with Piramal Enterprises?
let me just clarify that firstly, the arrangement is Piramal Pharma actually sells this to Piramal Enterprises so that Piramal Enterprises can do the onward sale. This is basically because those tenders were won in the name of Piramal Enterprises. all of the revenue actually goes through Piramal Pharma to Piramal Enterprises. The difference between the two is to the extent of the unsold inventory that was remaining with Piramal Enterprises. All those inventories have now been taken back. it's not as though there's some sale which is recording Piramal Enterprise, which is not part of Piramal Pharma. All revenues are routed through Piramal Pharma to Piramal Enterprises. this will continue only till the point these tenders obligations are complete, post which Piramal Pharma will directly service obligations against such tenders.
understood. when that Piramal Enterprises will completely be out of channel?
I'm sorry. If you could please repeat your question.
from Piramal Pharma, whatever inventory is currently routed through Piramal Enterprises, so when we can expect that directly they will be selling it? I mean, what is the life of that particular tender where we needed to send inventory through Piramal Enterprises?
See, we expect all these obligations to be completed by the end of this fiscal. Whatever are the new tenders, Piramal Pharma is directly applying in its own name.
Okay. Understood. this I think you alluded to earlier participants also. On margin side, again, if you look at in FY 2018-19 period or before that, our CDMO business used to generate 20%-plus kind of EBITDA margin. what actually went wrong? There is one factor you said that in consumer healthcare we have started investing. you also mentioned that consumer healthcare is breaking even now. even at this equilibrium level and if you explore this business also, so it still seems that CDMO business has somehow significantly lost their margin. what was the reason? Is it that some competition has come in there in those particular geographies, or my understanding is not correct here?
firstly, I don't think we have spoken about CDMO margins specifically. Whatever we've reported are for the company as a whole. secondly, as I earlier mentioned, during the pandemic we did see sales actually getting impacted in the CDMO space. as you're aware that we acquired some of the facilities overseas in CDMO. The revenues were not up to the mark in terms of what was actually expected during the pandemic, and the CapEx investments during the pandemic were delayed. That's the reason there was a margin compression. Having said that, in future, the margin expansion would largely be coming from higher top line. as I alluded earlier, it's a fixed cost business. As you sell more, your margins start improving. it's about fixed cost leverage, and that will be the primary driver for margins in the CDMO space.
I think the other one is that we expect some of the on-patent phase III molecules to actually get to commercial. As they get to commercial, we should see volumes and orders increase. That will also basically fill up the capacity.
It's more of operating leverage only. That's what you are saying. It is like we are not expecting any high-value products or something coming in pipeline which could drive the margin here in CDMO space.
Right now, let's aim for the ones and twos. If you get a four and six, that will be upside.
This CapEx of INR 157 million, so 18 months is an implementation time or in 18 months will become million?
some of it's a series of projects. Some of them will come online sooner rather than later. it'll kind of over the next 18 to 24 months.
Understood. the last one, within debt side, what level of debt we can expect by end of 2023?
as I said earlier, the max debt that we're looking for is in the range of four to four and a half times the EBITDA. That's where we'll see ourselves.
No, in absolute term, currently 4,300 something debt we have. what's that debt repayment obligation in next six months?
Our debt repayment obligations are fairly well diversified. If that's where your question is heading towards. It's fairly well diversified and it takes into consideration what are our investment requirements as well. Our debt level could be about four to four and a half times EBITDA. That's where it will be.
Okay. Thanks a lot. That's it from my side.
The next question is from the line of Kunal from Nuvama Wealth. Kindly proceed.
Good evening, everyone, and thanks for this opportunity. Sir, my first question is on complex hospital generic business. Now, one of your U.S. competitor, generic player, has said that they're going to launch sevoflurane by the end of this year. I understand this is a business where supplies are restricted. Just want to understand when a new competitor comes in the market, how does the market dynamic change?
I think we've seen the introduction of new competitors in the US market over time, and we believe that this particular product category is more resistant to entrants, and that's due to the combination of limited people who can manufacture the actual active ingredient and the bespoke bottling requirements to actually package it into the final packaging. And then the actual product is then used in a hospital setting or an institutional setting where the bottle is actually placed into a vaporizer, which is attached to an anesthesia machine and the vaporizers in many, but not all cases, would be provided by the company that's providing the drug. And further, many of these are contracted through GPOs, IDN or hospital contracts.
At least when we saw the last entrant come in after us, we saw that they kind of nippled on the edges but didn't really get meaningful share and they've been in the market for a number of years because it's a slightly more complex sale than just a straight catalog sale, let's say, in a retail market where you would see different buying dynamics. And that's part of why we like this segment, because we do find that while people may get approvals and they may enter, we do find that in due course it's difficult for them to gain share because it requires specific capabilities and a particular channel strategy.
Got it. Okay, sure. Second is on consumer business. I understand your fairly ambitious plans of doubling revenues in next three to four years, but I assume to do that you'll have to put in a lot of investments, especially there will be a lot of OPEX also, a lot of digital advertisement and so on, so forth. So does it mean that the profitability in this business will also remain subdued in the next three years?
I think what we see is as we get to about a 1,000 crores, I think we'll start. In a way, we think that's a sufficient scale to cover a lot of the fixed and variable costs and we should then see a steady increase in profitability from there. Will we jump to the steady state profitability immediately? No. But we should see steady increases in profitability.
In three years' time, would it be fair to assume that you'll be somewhere in teens in this business, teens margin, or would it be lower?
We'll be on the pathway.
You will be there. Okay, perfect. Lastly, if I can squeeze in one more. While you want to double your CDMO revenues in the next five years, I assume that the mix in the business should also change. Otherwise, I mean, if the mix doesn't change, then it becomes difficult to increase the profitability also, right? For example, you have around 70% from commercial manufacturing today, so would that become lower, will it become higher? Will developed markets contribute a lot more? I just want to understand if you can drill down a bit more on how we should see this business three or four years down the line.
We don't give sub-segment level guidance, but we can give you some directional trends. We would say that right now about 60% of the revenue in the CDMO would be from API or drug substance, and we would probably expect that should probably grow at a faster rate than the overall. I think the second maybe guidance I could give from a qualitative level would be is that we would expect our on-patent development and on-patent commercial to grow at a faster rate than the overall.
I think those two together and not all on-patent development or commercial is drug substance and not all drug substance is on patent, but I'd say that those two sections should grow a bit faster and I think maybe the only outlier I would draw is that we would expect our fill-finish capabilities, which are drug products, will probably go at a faster rate than our overall AD drug product capabilities.
Okay. Thank you very much, and all the best.
Thank you. The next question is from the line of Hitesh Agarwal from Fairvalue Capital. Kindly proceed.
Yeah. Hello. Thanks for the opportunity. If you look at the net debt to EBITDA ratio, it is around at 4.5 times, as mentioned, and you have guided a CapEx of around 1,200 crores in the next 18 to 24 months. I wanted to know if you could throw more color, how are we able to fund this CapEx? Second question, could you elaborate more on the CapEx spending across different segments?
Great. I think I, in a way, responded to the query earlier. As I said, our overall debt schedule, which we have today, is healthy and as described, it does take into consideration whatever our investment needs. Also, over a period of time, internal accruals should be able to be sufficient for repayment of debt as and when they fall due for repayment. All of this has been taken into consideration. My only request is if you look at the net debt to EBITDA ratio as it stands today, I understand where you're coming from, but you need to understand that the year obviously has seen some impact. Going forward, we obviously expect these ratios to improve and accordingly, be able to service debt both through a mix of internal accruals as well as being able to raise debt for the ones that we've already retired.
That should help take care of the overall requirements of CapEx.
Okay. My next question is, we have seen good revenue contribution from the developed market. I believe it's kind of due to the headwinds there, inflationary headwinds and energy costs there. Are we seeing more order inquiries by the innovators from those markets as such?
We're seeing, maybe this is a bit of a macro question, and I presume you're talking about the CDMO business. In that, we're seeing three trends that are playing out somewhat in parallel, and we have yet to see how they're going to fully conclude. That's also why we think our business model choice is favorable, because we have capabilities in both the West and in the East. The first one is we're hearing a number of inquiries from companies looking for a China plus one strategy. What this means is that at least from the board perspective of a client or the decision-making governance, they're maybe currently sourcing something from China and they're saying, "Can we get one other source in an emerging market where we could have reasonable value, but something other than China?" We're seeing an increasing number of queries.
In particular at the recent CPhI conference, we saw a lot of queries in that direction. I think the second trend is that if you look at the end market pricing for pharmaceuticals and the buyers of those pharmaceuticals, we expect them to be under some amount of pricing pressure because of fiscal deficits and the money being spent in other areas and the Inflation Reduction Act and some of the other equivalents in other countries. We would expect in due course there to be pressure on value, and we would expect that one source of value would be looking East. Those would be two things tugging orders east. On the other hand, there's a very strong tug west, particularly for innovative clients, where they experienced over the last two years a certain amount of supply chain disruptions.
From a governance perspective, a number of them, particularly for lower volume, less chronic, let's just say small patient indications or non-recurring treatment, an example would be a rare disease or an oncology treatment that's pre-approval. They would probably be looking more for that to be placed in the U.S. or North America or depending on their perspective, onshore in a Western market where their customers may be or where they may be because of the lower supply disruption. We are seeing some amount of reshoring preference for on-hand products under development because of the perceived difference in risk and acceptability, you can drive there instead of a long-haul flight, combined with the China plus one and the fiscal pressure point, which may push certain categories east.
We have yet to see how it's going to fully play out, and we think that's why us being in a multi-geography context best positions us to actually support both trends in parallel, depending on the client and their product needs.
Thank you, sir. Just one last question. In the hospital generics business, in the presentation, it was mentioned that nearly 13 products are in the development phase, yet to be commercialized. Can you help us give a little bit more color on the market size of these molecules and the growth traction we envisage in this complex hospital generics business?
I think we described the pipeline and the stage in the pipeline it's in, according in terms of whether it's approved or not, at launch or under development. We give that, and then we then give an aggregate market, addressable market number for that portfolio of projects, and you can see that as being $7 billion in terms of the addressable market for those 37 SKUs. we aren't giving SKU by SKU level breakup, but I think the point is that they are reasonably worth approaching and even a modest share in those would be meaningful for this.
The growth rate traction we see in this hospital generics business.
we aren't giving forward guidance on the hospital generics revenue outlook, but we did give the backward-looking revenue numbers in our comments and in the slides.
Okay. Thank you. That's all.
Thank you. The next question is from the line of Pranjal Agrawal from Axis Capital. Kindly proceed.
Yeah. Hi. Thanks for the opportunity.
Good evening to all. My question is related to the kind of debt we have today. Is there a plan to raise funds? I don't know if this is covered. Sorry, I joined the call late, but is there a plan to raise further private equity fund or something like that?
I think right now we're quite happy. We feel our internal accruals will pay off the debt that we have, and we don't need to raise additional funds at the moment.
Okay. I understand, in the presentation you talked about 2H is obviously higher as seen in the last three years. What is the margin guidance? I understand it's more of an operating leverage as CDMO comes in. especially for CDMO and a company as a whole, is there a color on the margins, please?
I think we'll see sequential Q on Q improvement.
Yeah, but in the range of 15%-20% or it could be lower than that?
It will be meaningfully higher than what you saw in quarter H1.
Okay. normalcy, we were in the range of 25%. Is it possible to reach 25% in 2024, 2025 given higher costs and especially all our sites are overseas-
We'll say that-
the cost advantage is not there, right?
We'll say that, look, in the next three to five years, we should get there, and in the next three years, we'll see a sequential improvement.
Okay. what I understand is sequential improvement is there, but would this sequential improvement also visible in Q1, Q2 of next year? Because Q3, Q4 is given that you will have because your orders are obviously back, second half this thing. I was trying to understand the normalized-
I think we can't comment on FY 2024 at the moment.
Understood. lastly on, A, you talked about the attrition things are past and the ex-Lonza guy had come and he's trying to fix up things. what about inflationary pressures? given that those are there and the revenue visibility is there, I'm just trying to understand not EBITDA margin, but how should we model in the gross margins?
I think, look, inflation pressure is going to continue to be there. we are looking at it as a combination of things to try and address that. It's price increases where we can, operational excellence, as well as cost optimization.
procurement.
procurement cost optimization as well. I think that's where we are. We're looking at a mix of things.
is there a plan to increase the share of manufacturing and services from India versus current share?
The way we look at it is that we go where our customers want, and we help serve them, and their patients better. if they're saying, "I only want U.S.," that's what we're going to do.
Okay, understood. Fair enough. Okay, thank you. All the best.
I think, last question. Last question, please.
Sure, ma'am. The last question is from the line of Tushar Manudhane from Motilal Oswal. Kindly proceed.
Sure. Thanks for the opportunity. Look, again on the EBITDA front, given the first half FY 2023 has shaped up and given that we had business headwinds in FY 2022. Excluding other income, and considering second half FY 2023 to be much stronger than first half, would we be able to cross FY 2022 EBITDA or that seems remote at this point in time?
I think we're not giving such guidance at the moment.
Okay. That's it from me. Thank you.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Gagan Borana for closing comments.
Thank you very much. We hope that we have answered most of your questions. In case you have any follow-up questions, you may feel free to reach out to me. Thank you and have a good day.
Thank you. On behalf of Piramal Pharma Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.