Ladies and gentlemen, good day and welcome to the Syngene International Second Quarter and H1 Ended September 2021 Financial Results Conference call. As a reminder, all participant lines will be in the listen-only mode. 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 zero on your touch-tone phone. Please note that this conference is being recorded. I would now like to hand the conference over to Ms. Gauri Kanikar from EY. Thank you. Over to you, Ma'am.
Thank you, and good afternoon to everyone. Thank you for joining us on this call to discuss Syngene's Q2 FY22 and H1 FY22 performance. To discuss the financial and business performance for the period, we have on this call today Mr. Jonathan Hunt, Syngene's MD and Chief Executive Officer, Mr. Sibaji Biswas, Chief Financial Officer, and Dr. Mahesh Bhalgat, Chief Operating Officer. After the opening remarks, Jonathan, Sibaji, and Mahesh will be happy to answer any questions you may have. Before we begin, I would like to caution that comments made during this conference call today will contain certain forward-looking statements and must be viewed in relation to the risks pertaining to the business. The safe harbor clause indicated in the investor presentation also applies to this conference call. The replay of this call will be available for the next few days, and the transcript will be made available.
With this, I now hand over the call to Mr. Jonathan Hunt. Thank you.
Yeah. Thank you, and thank you all for joining us on the call today to discuss Syngene's second quarter performance. I'll start by giving an overview of our performance in the second quarter and the first half of the financial year, and then move on to some more operational highlights. Sibaji will provide more detailed insight into the financials in his remarks. The second quarter saw positive performances right across the business and there were positive demand signals as our major client markets of the U.S. and Europe started to see the benefit of their COVID-19 vaccination programs, and many people began to return to more normal working and operating conditions.
Given the natural lag between rising client interest and then business closure and project delivery and onto revenue and billing, while it's positive to see this gradual return to normality, I think it's unlikely to drive this year's revenue performance. It does bode well for the next financial year. For the quarter, revenue grew 17% over the corresponding quarter last year. We continued to manufacture remdesivir for COVID-19 during the quarter. From a societal perspective, I am pleased to see the volumes dropping as the impact of vaccination reduces the need for treatments such as this. In the second half of the year, we'll need to keep a watchful eye and see how COVID trends evolve, both here in India and in other key markets around the world.
EBITDA for the quarter was up 12% to INR 1.9 billion, reflecting, amongst other things, higher raw material costs and our ongoing strategy to invest in foundational dimensions of our business such as digitization and automation, where we're making advances in the way we manage our supply chain, engineering and maintenance, and of course, in our quality systems. Profit after tax is up 9% over the corresponding quarter, to INR 920 million. No doubt you have noticed that we reported two profit after tax numbers this quarter. The second one covering PAT after an exceptional charge. This charge relates to the reversal of the benefit we gained from the Service Exports from India Scheme following the government's recent decision to cap the incentive benefit at INR 50 million.
Just to be clear, this is a one-off adjustment related to the FY 2023, and I'll leave Sibaji to cover this in greater detail in his comments. As we're at the midpoint of the year, I want to pause for a moment on the financial results for the H1 and ensure that everybody has a clear understanding of some of the dynamics that we're seeing. Firstly, you'll recall that the YOY comparison in the Q1 is impacted by a muted Q1 last year due to a period of reduced activity owing to the firsst national lockdown in India. Consequently, Q1 YOY growth for this year was lifted by that soft comparison.
By the second quarter of last year, our COVID control measures had allowed us to return to near normal levels of operations, and consequently, we don't see such an artifact in this quarter's numbers. In this context, the growth of 17% was both pleasing and I think a true reflection of the underlying movement and momentum within the business. Secondly, the manufacturing of remdesivir in the first six months of the year boosted revenue due to high demand during the second wave of the pandemic. While we're happy to manufacture this important treatment, we have little visibility on how demand and volumes will play out for the remainder of the year. Looking ahead, while we've delivered a robust performance in the first half of the year, as I look forward to the second half, I remain both positive and cautious about the coming months.
Positive in that we've continued to operate at 100% of normal operation levels. Positive also in that we can see clear signs of our clients, particularly in the U.S. and Europe, getting back to work and back to a type of normality. This is likely to ensure we see a good demand environment for the remainder of the year. In fact, are more likely to shape next year's revenue performance than this. At the same time, we remain cautious in not knowing how the situation will evolve with COVID-19. Taking those factors into account, I'm pleased to see a positive performance across the business in the first half of the year and believe that we're firmly on track to deliver revenue growth in the mid-teens for the full year, as we've previously guided. Turning now to operational matters.
In the last couple of months, India's vaccination drive has really picked up steam, and to protect our employees, we've continued to implement COVID control measures such as regular COVID testing for employees on site, shift working, social distancing in our laboratories, and so on. This has helped us operate at normal levels and to keep our client projects on track. We've also been conducting campus-wide vaccination drives, and I'm really pleased that more than 75% of employees have taken up on this offer and are fully vaccinated. Most of the remainder have taken their first dose of the vaccine at close to 100%. High 90s have already had a single dose, and they then are expecting to get their second dose when the timing is right.
In a busy quarter, we continue to see a rising number of new client inquiries in Discovery Services, particularly in the emerging biopharma segment, as a healthy indicator of global clients returning to more normal operations. We've made good progress on our plans for further expansion and look forward to commissioning phase III of the expansion in Hyderabad, and that'll ensure that we have the laboratory capacity we need to accommodate future projects. In Development Services and Manufacturing Services, the quarters saw positive performances and early signs of a more buoyant demand environment. Our small molecule plant at Bangalore remains on track with its program to be ready to gain U.S. FDA approval within two years. Across the company, we continue to invest in digitization to reduce the impact of human error and increase the ability to audit quality and other processes.
We know that these investments give great confidence to both regulators and clients alike while making life ever so much simpler for our staff. Finally, we made a number of key executive and operating leadership appointments in the quarter. Alex Del Priore joined the exec team to run our large and small molecule manufacturing operations. Dr. Alan Collis joined the company to build the Integrated Drug Discovery Services that we offer within Discovery Services. Dr. Sridevi Khambhampaty joined the company to lead our biologics development group as part of Manufacturing Services. Delighted to have all three of them on board, and they bring both the depth and the breadth of experience.
In summary, our performance in the second quarter and the first half of the financial year, taking account of the unusual characteristics of the period with COVID, gives us real confidence that we'll deliver results in line with our revenue guidance for the full year. With that, let me hand over to Sibaji to give you more details on the financials.
Thank you, Jonathan. A very good afternoon to you all. I am happy to take you through our results for the second quarter, followed by the half year end of September 30th, 2021, with comments on revenue performance and profitability for the company as a whole. The performance for the quarter has been robust. Revenue from operations increased by 17% for the quarter compared to the previous year. At constant exchange rate, the underlying sales grew by 19% year-on-year. The exchange rate for this quarter has been lower compared to the same quarter last year. This growth came from continued performance in all segments of our business. Before I get into the analysis of the P&L account, let me explain the one-time exceptional downward adjustment of the INR 253 million, that is net of tax, that you have seen in our accounts and Jonathan just mentioned.
This adjustment follows the government's recent decision to cap the Service Exports from India Scheme for research and development services at INR 50 million for the financial year 2020. From financial year 2016 to 2019, Syngene benefited from this incentive of 5% of net foreign exchange earned without any cap. Following precedent, Syngene assumed and accounted the same rate of 5% for accruing the service export incentives for financial year 2020, and this was included in the financial results for that year. Now, based on the current notification from the government, the company has reversed differential SEIS claims receivables, and this has been presented as an exceptional item in the financial results for the quarter and the half year end of September 30th, 2021.
For ample clarity, no SEI benefit has been booked since last year, that is financial year 2021. Hence, this reversal represents a non-recurring one-off exceptional item in our P&L and does not represent the underlying operational performance or future cash flows of the company. Now moving on, EBITDA for the quarter was higher by 12% as compared to the previous year. The EBITDA margin for the period was at 30.5%. Last year was 31.8%. Material costs have increased from 24% of revenue in Q2 of last year to 27% of revenue in Q2 of the current year. We are witnessing some supply chain delays or longer lead times in raw materials as there has been a spurt in demand, a challenge which has been compounded by the ongoing supply chain disruptions across the world.
As a precautionary measure to ensure our projects are delivered as per timelines, we are securing our supplies by advancing certain raw material purchases and stocking them to avoid any potential disruptions. This need to buy in advance is having an impact on raw material costs and working capital, which is expected to continue in the subsequent quarters till the supply chain situation stabilizes. While this may impact our operating margins during the year, we believe it is a prudent approach to ensure timely deliveries for our customers and for optimized utilization of our assets. Let me now take a moment to explain the movement in other cost lines in the P&L. During the quarter, employee costs increased by INR 234 million to about INR 185 billion as compared to INR 1.6 billion in the same period last year.
This is an increase of about 15% and is a result of salary increments and headcount additions and senior hires across Discovery, Development, Manufacturing, and commercial organizations. We strongly believe that hiring key talent in the new and developing areas of our business and in locations closer to the customers is critical for the next stage of growth, and hence, we will continue to invest in human resources, the benefit of which will show with a lag in our P&L. Power cost remains at a similar level to last year, which is less than the rate of revenue growth. Syngene's sourcing of power from green energy in our main Bangalore campus has been around 90%, and we are very proud of that. We have a high share of our power requirements serviced through captive units, both solar and wind, which has been sourced at a lower unitary cost.
This has helped us reduce and control power costs despite an increase in units consumption. We'll continue with our efforts to maximize renewable power consumption in our setup. This is one of the several steps that Syngene is taking to address environment, social, and governance aspects of our business to create a sustainable environment for growth. ESG rating agencies have rated Syngene at or above the industry average in this aspect. Following our summary ESG report, a detailed ESG report will be published in half two of this financial year, setting out our ESG strategy and priorities. Now turning to other expenses, which comprises of selling expenses, IT costs, maintenance expenditures, and other general overheads. These are up by 14% year-on-year to INR 754 million as compared to the same period last year.
Despite continued pressure on expenses due to COVID protocols, the continued digitalization drive across our businesses increased maintenance expenses on the expanded asset base. We have been able to manage discretionary spends effectively, keeping overall operating costs under control. The lower growth in costs has also been a result of lower level of international travel in the first half. We expect international travel opening from Q3. This is very important for building a healthy sales pipeline for our business. Going forward, we may expect some increase in the other expense lines, but otherwise, we'll continue strict measures to control all discretionary costs. Our hedging strategy has always helped us navigate currency volatility over the years.
While the strengthening of rupee versus U.S. dollar against the same quarter last year has resulted in lower rupee-denominated growth in revenues, the hedge we had on U.S. dollar receivables has helped us book a hedge gain of INR 104 million in the quarter. This reflects the difference between forward rate versus the prevailing spot rate. The hedge rate was close to INR 76.5 per U.S. dollar as against the spot rate of INR 74 per U.S. dollar during the quarter. Revenues for the second half is also hedged around the same rate of INR 76.5, and depending on how the rupee moves versus U.S. dollar, the benefit of this hedge will be reflected either in the top line or in form of hedge gains. Depreciation stands at INR 762 million, which is a INR 75 million increase from INR 687 million in the same period last year.
The increase on a year-on-year basis is attributable to addition of assets during the period. The capital during the quarter was around INR 1 billion, comprising of Discovery Services expansion in Hyderabad and Bangalore, expansion of dedicated centers, and investment in our biologics facilities. Now let me come to the tax rate. The effective tax rate for the quarter was at around 18.5%, similar to the tax rate in quarter one of the current financial year. This is higher than last year's effective tax rate of 12% for the full financial year, which had the benefit of accelerated depreciation coming from the Bangalore API plant and other new units that had gone live in various locations. There was also a one-time positive impact in the previous year arising out of revaluation of a tax provision based on a favorable legal opinion.
The profit after tax before exceptional item was up 9% to INR 920 million as compared to INR 841 million in the same period last year, reflecting an overall strong performance for the quarter. Adjusted for the one-time tax benefit in quarter two of the last year, which I spoke about, the increase in profit after tax before the exceptional item was a very strong 20%. Now moving to half year. Revenues from operations for the half year ended September 30th increased by 28% to INR 12 billion as compared to INR 9.4 billion during the same period in the previous year. As Jonathan explained, this high growth is reflective of good momentum in business and two additional factors. A low base effect in quarter one compared to the quarter one of last financial year, and upside due to remdesivir sales during the first half of the current year.
The underlying business growth remains robust in the mid-10 range. EBITDA is up 19% to INR 3.67 billion, a reflection of the improved operating performance in the business. EBITDA margin for the period stood at around 30% compared to 32% in the previous year, due to the higher material costs in the period. The increased value of fixed assets has resulted in a 12% increase in depreciation expenses to INR 1.5 billion versus INR 1.35 billion in the same period last year. Overall profit after tax for the half-year, excluding the exceptional item due to reversal of export incentive, increased by 19% year-on-year to INR 1.69 billion. Reported profit after tax after the exceptional item for the half year was at INR 1.44 billion. Let me now speak about CapEx. Our CapEx guidance was to spend between INR 7.5 billion - INR 9 billion during the year.
This included about INR 2.5 billion rolled over from the previous year. In the first six months, we have invested around INR 1.8 billion. We have already committed close to INR 5 billion for execution. We are broadly on track with our CapEx program and expect to see an accelerated CapEx spend in the second half as the programs get executed. FY 2022 has some overhang of pandemic, both in supply and demand sides. With travel resuming now, we believe the combination of virtual way and physical way of doing things is likely to ensure a good demand environment for the remainder of the year, a factor more likely to shape next year's revenue performance than this year. Our underlying performance for the first half has remained robust. We are operating at normal levels at our facilities.
This gives us the confidence that we are on track to deliver the revenue guidance for the full year. We will be in a better position to update this guidance in January 2022, when we have a clear visibility on the year ending. Thank you. We can open for questions now.
Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on your touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handset while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Alankar Garude from Macquarie. Please go ahead.
Hi, good afternoon, everyone. Sir, my first question is on the guidance. We have reported 28% growth in the first half. Even if I assume, say, a 15% growth for FY 2022, it just implies a 5% growth in the second half despite the good demand environment as you mentioned. The question is, what is the upside risk to this FY 2022 top-line guidance of mid-10s?
Yeah, good question. I'm not going to quantify it for you. Your math is logical. Maybe it's British English, our guidance was mid-10s. That implies for me a range. If you can start at 13 and go all the way to 19 and define where you think that the middle of that range is or what mid-10s would be, you get a range of percentages. You can do a sensitivity analysis on all of those. In general, I think the message is mid-10s for the full year. Very happy with the performance in the first half, seeing good demand environment and good progress on the business. I think if we come in at the mid-10s or at least the mid-10s, maybe a notch higher, I think those are all likely outcomes.
At this stage of the year, only halfway through, none of us knowing what the next six months will bring in terms of COVID, you'll forgive me, I hope, a little bit of conservatism of saying I'll wait and see what happens for another quarter before I give a more detailed comment on that.
Understood.
Sorry. Hopefully there's enough in my answer that you can get a feeling, if not a point estimate.
No, I understood. Thanks for the context. My second question is, you have mentioned about excellent demand in emerging biopharma Discovery Services. Can you also comment on the demand for biologics manufacturing? If you could highlight where are we in the evolution curve with respect to the return on investments for biologics manufacturing?
Yeah, that's good. I don't think I said excellent. I think I said positive. The general tone I'm giving I think is, certainly in Europe and the U.S., as their national vaccination campaigns kick in and really seem to be making a difference, you've got a general sense, and it's palpable if you go to the U.S. at the moment, of people going back to work, getting back into the routine of being in an office, and that's triggering them to sort of catch up a little bit on projects that had run a little bit slowly. It's warm rather than hot.
I don't think it's a hot environment yet, but it's warming up, and that's a good thing for next year rather than for this, because it'll take a while to respond to those client inquiries, turn them into contracts, one, and then start delivering them. Yeah, we've been positive, I think, on that. On the biologics, structurally, actually, I think it's a good market to be in. There's an awful lot of demand. The whole global response to COVID has consumed quite a lot of biologics capacity. Therefore, there's a general sense that capacity, if you've got it, is valuable and a scarce thing. I'm hopeful that we'll start to see that come through in future quarters and into next year in our P&L. We are seeing a rising number of client inquiries and a rising number of client wins.
It's not there yet strongly in the P&L, but I think it should have every reason to think it will be next year.
Understood. That helps, Sir. Thank you and all the best.
Thank you.
Thank you. Before we take the next question, a reminder to the participants, please limit your questions to two per participant only. You may rejoin the question queue if you have a follow-up. The next question is from the line of Surya Patra from PhillipCapital. Please go ahead.
Yeah, thanks for this opportunity. Sir, just one clarification about the gross margin. In fact, in the previous quarter also, we had seen a kind of sharp YOY decline from the gross margin. That was led by incremental Manufacturing Services activity, what we had done for remdesivir. I think sequentially the number has come down drastically above remdesivir manufacturing, but still there is a kind of 500 basis point kind of YOY impact still that is visible. One reason you have mentioned that some raw material inventory built up for that. Is it that-- and it is likely to sustain it in the subsequent quarters that you have mentioned. Whether this is going to be a kind of ongoing concern that gross margin as it stands, we will be seeing some dent.
I'll take it. You're right. Last quarter, it was mainly on account of remdesivir, which had a very high percentage of raw material cost. What we see this quarter, we see a bit of that, remdesivir although much lower. However, as I said, we procured a lot in advance. What happens when you procure a lot in advance, most of it goes and sits in the inventory, but some are in nature of consumables and like solvents, which go and get into the P&L immediately. As a result, you see a high material cost in the P&L. Over a period of time, as we use this material, and that may be over a few quarters, we should see this gradually normalizing.
We keep a close watch on that because it's not always good to buy raw material in advance, but we prioritize that because we think customer experience and our delivery is very important, and hence we decided to do what we did. Over a period of next few quarters, we should see this gradually normalizing. Yeah, if I answered your question.
Okay. Yeah. Just to comment, if I could. I don't see it particularly as a negative, but I actually think it's a prudent thing to do. In general, we've made an active choice to carry higher inventory levels, higher stock of consumables. Our warehouses are running full as are our stock rooms. That's really deliberate. I mean, we're in a pandemic environment. We see more broadly in the economy and in other industries, people struggling at times with logistics and distribution and supply chain and lengthening supply lead times. I'd much rather make sure we're as insulated from that as we can do. One of the ways of insulating yourself from that is to carry a little bit of a higher inventory load. For me, it's quite a healthy indicator.
We're doing that because we see demand, and we want to be ready to service that demand.
Yeah. Thank you, Sir. Just a clarification on that again. Sir, whether this remdesivir manufacturing was from Bangalore unit?
In terms of the specific location. Sibaji?
No, it is not from Bangalore unit. We get it manufactured from our other manufacturing facilities that we have.
Okay, sure. My second question is, Sir, on the biologics plant. Out of that total spend of like $50 million spend on the biologics plant, what portion of that is already capitalized, and what is the occupancy, I mean, utilization rate that we'll be having for that unit?
Sibaji , if you maybe take the opportunity to sort of do a broader recap of where we are on CapEx this year. It's a big program this year. We gave guidance at the beginning of the year. As you do that, I can sneak in and say, you'll forgive us, but we won't be giving you the asset utilization of individual plants and lines. It's not a level of disclosure that would be usual in our business. I'm sure, Sibaji, you'd be happy to give you the general shape of the CapEx program, what we're investing it in and why.
Sure. Yeah, I will do that. You know, broadly based on whatever we told you are right, we have invested around $50 million in the biologics and it's on the ground. For the current year, our CapEx guided has been INR 7.5 billion or $100 million-$120 million. That included an expansion of our biologics plant as well. Part of that has already happened, and it has been reported in half one, and some part of that will happen in the rest of the year. We will continue to expand our biologics facility based on the demand that we are seeing. The amount of CapEx that has gone into biologics plant will vary from quarter to quarter.
Sure. Okay. Yeah.
Yeah.
Yeah. Thank you, Sir. Thanks a lot. If I just add one more, please. In the previous quarter, you had mentioned about the five proteins what you have developed, given the kind of situation what the entire world is facing about COVID and all. Any progress on the commercialization aspect on those development fronts?
Maybe, Mahesh, you could dive in and take the opportunity to talk a little bit about that. One of the things I would caution you is, all of those COVID-related activities for us are often scientifically interesting, certainly something that we've got skills to contribute, but it's not a strategically core business for us.
Sure.
We're doing it as much driven by a sense of obligation and duty to play our part in a global pandemic response as we are for commercial reasons. Many of those activities, the reason for disclosing them to the capital markets was less about their financial value, more just to demonstrate that we're playing an active part. Mahesh, do you have any other comments?
I think you covered it, Jonathan. I'll just add a little bit of more color to it. The kind of things that we have done are more supporting in nature outside of remdesivir, which is a direct help, right? What we've done is make sure that there are reagents that are available that are needed for kits. We've made sure that we have tests that are developed. We've made sure that there are tests that the vaccine manufacturers can use. These are all supporting services, literally just to enable the movement of these other manufacturing organizations, such as the vaccine manufacturers, or the clinical trial groups, or the diagnostic labs to help in the pandemic. The focus has been really to take our scientific acumen and expertise for that purpose as opposed to purely making the revenue generating opportunity.
Okay. Was that leading to any cost pressures as in the recent?
Sorry to interrupt. May I please request you to rejoin the queue for your follow-up as we have reached the waiting limit on-
Yes. These are items that are
Sorry, Mahesh. I think we lost you. What we'll do, we'll continue with the queue, and if we get a chance, you can make a comment on that at the end.
Sure.
Thank you.
Thank you. Thanks for the questions. Back to operator.
Before we take the next question, a reminder to all the participants again, please limit your question to two per participants only. The next question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.
Hi. Good afternoon to you all. My question is towards margins. In the last two, three years, we have seen significant improvement in the product service offerings. We've been talking about ADC and recent press release also talking about couple of new initiatives and biosimilars also ramping up. Just trying to understand how and when while the growth is definitely looking upwards and 18+, when do we see the step function, step up in the margins? We are in that range of this 28% - 30%, I'm excluding other income here. When will we see the margin inching up for us into the next 200-300 basis points? How do we think about adding new and improved services, which I understand are higher value, how do we see margin improvement from there from these services?
Yeah, good. An interesting question. Actually, I'd put an even broader frame on it and go back a little bit. Syngene's margins been pretty much consistent in that sort of very high 20s, low 30s at the EBITDA level. I remember five years ago, having the same discussion with you on analyst calls and saying, "Look, that's a solid, sustainable rate. We'll fluctuate a little bit around within that zone. I think that is sustainable while investing consistently in the business and continuing to grow and globalize and add new services." That's exactly what we've done, and I think we're continuing to do. That's a pretty top-tier set of margins by our industry standards.
Every time I look around the world and look at the whole range of competitors, whether in our industry, whether they're companies in India, whether they're companies in China, Europe, or the U.S., whether they're public companies or private companies, what I consistently see from Syngene is an upper quartile margin structure. I'm not sure I buy into the premise that there should be an ever-upward march on margins when you're already one of the margin leaders in your global industry group. What we are willing to do is actively invest, even if that means that our margins regress a little bit towards the mean for our global industry group. The key thing isn't actually margins. It's about value creation beyond your cost of capital when we do that on an enduring and sustainable basis. I'm generally happy with the margins.
I think if you do a comparison across the global industry group, both public and private, you'll see that we are consistently one of the better margin businesses, one of the leaders. The reason for that is around the value we create for our customers. It's that combination of managing the businesses allowed us to, I don't know, over the last five years, more than triple the revenue, effectively triple the market cap of the company.
Okay. My second question is on the costs related to Mangalore facility. What is the margin pull-down due to Mangalore facility currently? Is it fair to assume that once Mangalore is on, the pull-down stops, and then we can see margin expansion? Would that be correct way of understanding?
A fully utilized Mangalore facility won't be margin dilutive. It should be pretty much in line or even accretive to our core margins. Yeah, we're some way off. I think we've given extensive guidance. Certainly, it's a topic I seem to repeat the same phrase every quarter. The key pivotal piece for Mangalore is getting FDA and other major regulatory approvals. We've got programs ongoing to deliver that. We're on track with those. I think they'll deliver that within the two-year timeframe that we've set. Beyond that, you start to build that business, drive up asset utilization, and that then allows that bit of the business to contribute both to our profit and to our margin structure. We've got more than that going on. Syngene as a business is not a single string to our bow, single-shot business. It's not all about Mangalore.
Mangalore is just one of a number of businesses with even more than that going on within the Manufacturing Services. I pointed to the very good progress we're starting to see in our biologics business. It's one of many operating leverage points. It's not the only one.
Yeah, I understand that. Are we calling out the top line and the cost related to that?
No.
Okay. Thank you.
Thank you.
You're welcome.
The next question is from the line of Anubhav Agarwal from Credit Suisse. Please go ahead.
Yeah, thank you. Just a clarity on the raw material argument that you mentioned. I had not understood it actually. Do you mean to say that you procure raw material and since then the raw material prices have gone down, and therefore when you're pricing to customers, you're not getting equal benefit? The genesis of this question is that with crude oil-
No.
Yes, please go ahead.
I think the premise of the question and the comment from the other questioner was that the proportion of money tied up in raw materials in the business has gone up this year compared to previous quarters. The answer to that is, yes, it has, because we have bought more raw materials to put them in our warehouses and stock rooms. The reason for carrying a higher inventory of raw materials and consumables is because there's a global pandemic going on, and we can see challenges that other industries and other companies are facing with supply chains, logistics, distribution, shipping, lead time delivery, and we want to be insulated and protected from that. The way to do that is to make sure that we've already got the raw materials you need for the second half of this year.
Our P&L for the first half, you can see a rising cost of factors of production like raw materials and consumables. The reason for that is we've bought more of them so that we have them when we need them throughout the second half of the year. Hopefully, does that get to the essence of it?
I'm still confused in the sense that, one, I can understand the inventory is much higher with us, but I'm not able to understand still that if you're stocking higher, why is that impacting your P&L to this extent. That's something still unclear to me.
I tried to explain that.
Yeah, please go ahead.
I'll make one more attempt. As I said, part of the higher raw material is because we continue to manufacture inventory, but it's only a fraction of the increase. The rest of it comes from some of the raw materials that we buy that get expensed off or charged to the P&L immediately. Project-specific raw materials get inventorized. The general raw materials, and we have a lot of that, like solvents, do not get inventorized, get charged off to the P&L immediately. That doesn't mean the raw material is not with us. It's an accounting policy that we follow that if you cannot link a particular raw material to a particular project, it gets to the P&L immediately, and that's why you see the higher charge in the P&L.
Okay.
This is clear now.
Yeah, it's clear to me. Basically, solvents, et cetera, that's not priced into the customer. That's open effectively. If it goes down, benefit. If it goes up, that's a hit in the near term. Understood. Second question is, can you just roughly tell us how big is manufacturing out of the component, let's see, business that you have, discovery, development, and manufacturing today? If 600 + top line, so roughly how much is manufacturing versus how much is?
Yes. Sibaji , do you want to give a comment, just broad shape, four divisions, what's the sort of percentage distribution between them?
On a full year basis, I don't want to go into specifics of a quarter. At this point of time, 1/3 of our revenues come from dedicated centers, 1/3 from Discovery, and 1/3 from development and manufacturing. From quarter to quarter, this may shift, but on a full year basis, this is the pattern we see.
As such a parity, development is basically equal to manufacturing for us.
No. Development is not equal to manufacturing. Development is a stage before manufacturing. What we do today is that we are reporting the two in a combined form. Development and manufacturing is 1/3 of our revenue.
Sure. Thank you very much.
Thank you. The next question is from the line of Charulata Gaidhani from Dalal & Broacha. Please go ahead.
Hello. Yes, congrats on the good numbers. I wanted to know how much would be invested in the current quarter.
Okay, your second question.
Second question pertains to the FDA approval for the Bangalore plant. When you said 24 months, would it mean middle of FY 2024?
Okay, thank you. Sibaji, do you want to give some guidance, maybe Mahesh you can on the FDA one. I don't think we broke it down to a quarter in the past. I think we gave a broader timeline for that. Over to you guys.
Charulata, the line over here broke a bit. If you can please repeat the first question.
The first question is one we're unlikely to answer actually, which is what was the revenue breakup?
Okay.
Of Syngene in the second quarter, first quarter. It's not a level of discussion that we have.
Sure. Charulata, thanks for the question. We don't give breakup to that level, but as we mentioned that at a normalized level, we are growing at mid-10s. If you take out the other aspects, which is soft Q1 of last year, and then there could be from the H1 growth, we are still growing at a mid-10 level. You can then model it based on that.
Okay. Right.
Yeah.
In terms of the FDA approval?
Charulata, this is Mahesh here. To answer your question around the timing for the Bangalore, you can expect that we are looking at a timing that's the early or the first half of FY 2024, to get the first regulatory approvals in place for that facility. As Jonathan mentioned.
Go ahead, Mahesh. No problem. Go ahead.
As Jonathan mentioned that we have the strategy and the pathway for that approval in place. We will, of course, look to continuously revisit that timeline and do everything we can to activate it as well. However, we want to be realistic about the fact that today the environment is very dynamic. There's a lot of changes that are happening with regards to prioritization at the FDA, which is the key regulatory body that we are looking at for getting the approvals.
Yeah. I think you touched on my point, which is, of course, it won't be lost on any of us. When the FDA comes to inspect, it's their decision to do, and it's their timeline. It's not ours. When we give you guidance, it's a prediction or it's an estimate, but as it's not in our control, it's completely down to the regulators.
Right. Do you expect FDA approval for the biologics plant?
I'm not sure which biologics plant you're referring to, which approval. Mahesh, could you share any information on that?
Yeah. Just to emphasize, we have a biologics facility that is an mammalian manufacturing facility, and we are looking at the regulatory pathway for getting that facility approved as well. At this point of time, I would not be able to give you a specific date for that. However, I would say that we are in active negotiation with clients who will help us to use that facility for commercial manufacturing, which of course will happen through the FDA approval process. Stay tuned on that one. The microbial facility we just brought online, we are finishing the qualification, that will be a little bit further down in terms of its approval through a regulatory pathway.
Okay. Thank you.
Thanks.
Thank you. Ladies and gentlemen, due to time constraint, that was the last question. I would now like to hand the conference over to Ms. Gauri Kanikar for her closing comments.
Thank you everyone for joining today's call. Hope we have answered your questions. If there are any further questions, please do get in touch with our team and we will be happy to get back to you. Have a good day and thank you once again.
Thank you. Ladies and gentlemen, on behalf-
Thanks to you.
Syngene International, that concludes this conference call. Thank you all for joining. You may now disconnect your lines.