Ladies and gentlemen, good day and welcome to Syngene International's first quarter ended June 2022 financial results conference call. As a reminder, all participant lines will be in listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Miss Neha Shroff from EY. Thank you and over to you, ma'am.
Thank you, Steven, and good afternoon, everyone. Thank you for joining us on this call to discuss Syngene's Q1 FY 2023 financial and business performance. From the management side, we have Mr. Jonathan Hunt, MD and Chief Executive Officer, Mr. Sibaji Biswas, Chief Financial Officer, and Dr. Mahesh Bhalgat, Chief Operating Officer. Post opening remarks from the management side, we will open the line for Q&A, and we 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 risk 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 subsequently made available. With this, I will now hand over the call to Mr. Jonathan Hunt. Thank you, and over to you, sir.
Thank you, Neha. Good afternoon, everybody. Thanks for joining the earnings call to discuss Syngene's first quarter results. I'll start my remarks with a quick overview of the key financials for the quarter before getting into operational and strategic highlights. Most notable being the 10-year strategic biologics manufacturing partnership with Zoetis. After that, I'll hand over to Sibaji to give more details on the financial performance, and then we'll be happy to open up for questions.
Overall, the shape of the quarter was pretty much in line with the expectations we set at the start of the financial year. You'll recall we guided for mid-teens growth in revenue from operations for the full year. We said there'd be some phasing through the year with growth rates picking up as we went along.
We expected muted growth in the first quarter in comparison to what was a boosted first quarter last year due to the one-off spike in demand for remdesivir, and that's pretty much what we saw. In fact, the first quarter result is better than our predictions, with signs of strong operational delivery and I think a clear boost from currency. I'm signposting those two now as I know Sibaji will cover them in more detail in his remarks.
Reported revenue from operations grew by 8% to INR 644 crore. EBITDA was up 6% to INR 188 crore. EBITDA margin for the quarter was maintained at 28.5%. Profit after tax, PAT, declined 4% year-on-year to INR 74 crore.
In the same period last year, Syngene's revenue was boosted by the manufacturing of remdesivir to fulfill the high demand as India battled the second wave of COVID. While the company retains a voluntary license, there hasn't been much demand in the first quarter. A reflection, I think, of the increased uptake of vaccinations and the positive impact we're all seeing from those vaccination programs.
The demand for treatments like remdesivir has reduced, and I think that's a pretty positive sign for all of us. If we exclude the impact of remdesivir, underlying revenue from operations in the quarter was around 30% year-on-year. PAT, profit after tax, for the quarter grew by around 31% year-on-year. The underlying growth rates, excluding remdesivir, I think are maybe a better indicator of the sort of momentum that we're starting to see.
These results reflect sustained performance across all our business divisions, with the growth momentum being led by the Development and Manufacturing Services divisions as a result of consistent delivery of planned projects during the quarter. Discovery Services and Dedicated Center also continued to perform well, and they did play a part in contributing to the revenue growth.
With a healthy demand environment supported by rupee depreciation, we are raising guidance for the year from mid-teens to high teens. As I mentioned, a recent highlight was the signing of the 10-year strategic partnership with Zoetis. This contract relates to the commercial manufacturing of Librela, a first of its kind injectable monoclonal antibody which is used to alleviate pain associated with osteoarthritis in dogs.
Zoetis has already launched the product in key markets in Europe, where it's enjoying considerable success, and they anticipate it taking it to the U.S. soon, subject of course to gaining FDA approval. Our role will be to support them as the product grows by manufacturing the drug substance on a commercial scale.
We gave you a sense of the overall financial value of the deal. Let me remind you to see that we see this as having the potential of being worth up to $500 million over the next 10 years, subject of course to regulatory approvals and market demand. Sibaji will cover his thoughts on how best to model this in his comments.
As some of you will know, we've been collaborating with Zoetis since 2011, originally within our Research Services business, and we really are delighted to be partnering with them across now the full value chain. The deal will leverage the sustained investments we've made over recent years in setting up world-class production facilities for biologics.
Overall, we expect Development and Manufacturing divisions to contribute an increase in share of our revenues going forward. I'll let Sibaji give you his thoughts on how best to incorporate that into your models. I caution you that we captured the benefit we expect this year in our upgraded guidance for the full year. Really, it's only a modeling factor you have to form a view on for next year and beyond.
Also in the quarter, we continue to invest in new infrastructure and capability development. I'll give you a couple of examples of how we're rounding out our range of services and continuing to keep pace with the leading edge of science. By the way, these examples are really just meant to illustrate enhancements in the use of technology and skills rather than a trigger to change something in your forecast models.
The first is the addition of a kilo lab to our polymer specialty materials team in Development Services. This facility will shorten the development timeline for clients who look for highly customizable and flexible systems to expedite formulation and process development work.
Secondly, this is part of phase III of our expansion in Hyderabad. We commissioned a PROTACs lab adding over 150 scientists and analysts. PROTACs, as you know, is targeted protein degradation, and it offers therapeutic interventions not easily achievable with many of the existing drug discovery approaches.
Further highlights of the quarter, we've been awarded the most preferred workplace by Marksmen Daily in association with India Today. We really are very proud of the careers we offer to scientists, and we offer opportunities for them to develop their skills while collaborating with some of the leading global science-based companies and best scientists in the world.
In that respect, this award's very much a welcome recognition of our efforts. In conclusion, I'm delighted with the signing of the long-term agreement with Zoetis. We see this as a significant strategic step forward for our biologics business. We pride ourselves on the many long-term client relationships we've built over the years, and we're excited to extend our relationship with Zoetis even further.
Each of our divisions performed well in the quarter, and we continue to invest in capability building, and we'll continue to explore opportunities to invest where we see healthy demand. Finally, given the positive starts of the year on an underlying basis, supported by the benefit of depreciation of the rupee, we are raising our revenue guidance for the year from mid-teens to high teen growth in revenue from operations. With that, let me hand over to you, Sibaji, for more details on the financials.
Thank you, Jonathan, and a very good afternoon to you all. I'm happy to take you through our results for the first quarter. I'll start with revenue performance, then take you through margins and profitability for the company as a whole, and end with thoughts on outlook for the rest of the year. I'll also advise you how to model the Zoetis deal so that you have a better understanding of how it contributes to Syngene's growth profile.
Please note that you'll hear me refer to underlying performance throughout my remarks. The context for this, just to be absolutely clear, is excluding the impact of remdesivir manufacturing, which is particularly significant in the first quarter, as you might have seen. We recorded high sales of remdesivir during the first quarter of FY 2022, and this is due to the second wave of COVID, and no remdesivir sales has been recorded in Q1 FY 2023, which is the quarter we are reporting.
Now let me begin with highlights of quarter one performance. As you have heard, revenue from operations for the quarter grew by 8% versus the same quarter last year. Underlying revenue growth was around 30%, a pretty strong performance. This growth is driven by contribution from all divisions. In particular, our Development and Manufacturing Services are showing good growth and future looks positive with good demand situation.
While the supply chain issues which impacted the biologics business last year continue, we are sufficiently stocked up to navigate such challenges. With this and with the signing of the long-term commercial supply agreement with Zoetis, we are looking forward to scaling up the biologics business to drive revenue growth.
Now let me spend a moment on the Zoetis agreement. The agreement with Zoetis to manufacture the drug substance for Librela will take Syngene into commercial manufacturing of large molecules, which is in line with our strategy to offer an end-to-end discovery, development, and manufacturing platform.
As Jonathan mentioned, Zoetis anticipates U.S. FDA approval for Librela this year. From our perspective, this will trigger an FDA and EMA inspection for Syngene's facility to qualify for the commercial supply before the manufacturing start. Syngene's overall investment in biologics has been about INR 550 million, and we expect to generate healthy return on investment and an asset turnover of around 1x as we scale up the manufacturing.
We have plans to invest another $30 million in the current year, taking the cumulative biologics investment to $80 million by end of this financial year. We expect the overall EBITDA margin for FY 2023 to be around 30% as guided earlier. With increased capacity utilization of the manufacturing facilities, we expect operating leverage to improve from FY 2024. That's next year.
Jonathan mentioned rupee depreciation during the period, so let me address that. Our hedging policy requires us to fully hedge receivables in advance, and the hedge rate for Q1 FY 2023 was around INR 78 per U.S. dollar.
Due to our hedging policy, which prevents us from taking any speculative positions, our P&L is insulated from forex fluctuation in the short to medium term, and therefore, at the PAT level, we do not have any benefit from recent rupee depreciation. However, the top line is improved as the rupee depreciation benefit moves up from the hedge gain line in OpEx to the revenue line, improving the optics of revenue growth.
At constant exchange rate, our underlying growth net of remdesivir in base is around 25%. This quarter, we have a hedge loss of INR 3 crore compared to a net gain of INR 15 crore same period last year, and the swing will have an impact on the EBITDA margin. This is because rupee depreciation improves the revenue line without any corresponding improvement in EBITDA, thereby reducing the reported EBITDA margin.
The reported EBITDA margin for the quarter was 28.5% compared to 29.2% in the same quarter last year. Normalizing for the rupee depreciation impact in the top line and adjusting for hedge losses and gains in both periods, EBITDA margin for the quarter is higher by 50 basis points compared to the previous year.
I'll now cover the other cost line items of the P&L. Material costs decreased from about 32.1% of revenue in the first quarter of last year to 24.6% in the first quarter of this year. This is mainly because of the high raw material costs from remdesivir in the previous year.
You would remember from my previous commentary that we expense non-inventorizable raw materials on purchase, so this quarter's lower raw material cost is also a reflection of materials purchased last quarter and used in the first quarter. On a normalized basis, the raw material cost in the business should be in the range of 26%-27% and this may move up a bit with increasing share of manufacturing in revenue.
Now moving to staff costs. During the quarter, staff costs as a percentage of revenue was 28.2%, same as first quarter of last year. The year-on-year increase of 9% is in line with the increase in the staff strength. Power costs increased from 2.2% of revenue in quarter one FY 2022 to 2.6% in quarter one FY 2023.
While we added new facilities and infrastructure, which is increasing the cost, there was also an inflationary impact and unscheduled downtime in public distribution lines, forcing us to use alternate sources of energy, which is more expensive. We believe this will somewhat moderate in the coming quarters.
Now moving to other costs. I would like to remind you that the first quarter of last year was impacted by the second wave of pandemic, with activity at the minimum level required to run the operations without any disruption. While this reflects in a year-on-year increase of 57% in other costs, if you compare on a sequential basis, that is compare with quarter four of FY 2022, the last quarter, the other costs have actually declined by 7%.
Now let me explain the underlying reasons for the cost increase in this line year- on- year. The facility and equipment maintenance costs increased as we opened new lab space and installed new equipment and infrastructure during M last 12 months, mostly in Hyderabad and Mangalore. Also, as we came out of pandemic restrictions from quarter four last year, global travel and sales execution activities have picked up, nearing the pre-pandemic levels.
This, along with other operating investments, including commercial team expansion, acceleration in digitization and automation across the business, is also leading to higher costs on year-on-year basis. We are also witnessing inflationary pressures like most other businesses, which is driving up costs. The increase in cost, however, is in line with expectation and guidance given at the beginning of the year.
Overall, EBITDA for the quarter was INR 188 crores compared to INR 177 crores for the same period last year, a growth of 6%. As Jonathan mentioned, underlying EBITDA growth is broadly tracking the top line growth and is reflecting of the operating leverage in the business. Depreciation for the period was INR 86 crore compared to INR 75 crore in the same period last year. This increase of 15% on a year-on-year basis is mainly owing to the new investments.
Interest income for the quarter increased from INR 12 crore last year to INR 16 crore in the current year with the improvement of interest yields. Finance costs increased from INR 7.9 crore to INR 9.4 crore as we recognize the interest component on new leased assets during the period. With strong net cash balance, we continued to earn net interest income.
Now turning to tax. The effective was around 20% compared to 18% during the same period last year. As mentioned previously, there is a gradual increase in the tax rate as some of our units move out of SEZ tax benefit periods, and also an increasing share of business now are coming from locations not enjoying SEZ benefits.
Profit after tax stood at INR 74 crore as compared to INR 77 crore, a decline of 4%, which is in line with what we mentioned in our previous call, indicating a decline in profit for the first quarter. However, on an underlying basis, profit after tax grew in line with underlying revenue and EBITDA growth.
Now let me spend some time on the guidance for the year. In our last call, we gave you guidance of mid-teen growth in revenue from operations for the year, taking into account the effect of remdesivir in FY 2022. We can see how this played out in the current quarter in diluting the overall revenue growth. For clarity, the mid-teen growth guidance for the year already factored in a good element of growth in biologics manufacturing.
Now, with the benefits we are seeing from rupee depreciation and with the commencement of manufacturing of Zoetis towards the end of the year, we expect overall revenue growth to move up to high teens in FY 2023. Just to be clear, Zoetis-related growth is subject to regulatory approvals. We'll provide further clarity on this as we progress through the year.
As a modeling input on the Zoetis deal, you could simply divide the deal value by the number of years, but adjusting for the first two years as we scale up to the optimal utilization level. Also as a caution, the revised FY 2023 guidance now being given already includes some elements of Zoetis, so please don't double count the same.
If we look at this upgraded guidance on an underlying basis, excluding remdesivir, you will see underlying growth of upward of 20%, and we see that as this as a reasonable guide for expected growth in FY 2024 as well. With this type of strong underlying growth, we believe we can also maintain our 30% EBITDA margin guidance despite the inflation pressures in the business and additional operating investments that we are making.
We will continue to provide further update on our revenue and margin guidance in the subsequent quarters based on the progress during the year. This concludes my remarks, and we can now open the phones for questions. Thank you.
Thank you very much, sir. We will now begin the Q&A session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.
Good afternoon. Sir, first question is on the, you know, the constant currency growth that we have seen in the quarter, and what would be the constant currency revenue guidance for us? I hear you saying a high double digit led by Zoetis as well as currency, but what's the constant currency growth guidance for us?
Thanks, Prakash, for this question. As I mentioned, the underlying growth at constant currency has been 25% versus the reported growth of 30%. That will give you an idea of what has been the you know impact of rupee depreciation first quarter.
Our hedge rate has been 78. We are now seeing around 80, and that would continue to give a rupee depreciation benefit going forward, and you can calculate effectively what that would mean in terms of the benefit that we can see on the top line.
Currently, what we are building in is you know from mid-teens to high teens. Zoetis starts only towards the end of the year, and part of the guide increase comes from the rupee depreciation based on our understanding, and that's what we have seen in the first quarter.
Okay, understood. Secondly, on the margin, clearly there is a lot of inflationary pressures, and this 30% again is quite phenomenal. But this is including the other income that you calculate, which is the interest income on your investments.
When you say 30% margin, we give operating margin guidance. We do not give margin guidance including interest income. The answer is no, this is operating margin guidance. Prakash, yes, there is pressure from inflationary, plus there is also the arithmetic of the rupee depreciation increase in the denominator, but EBITDA remains same. It's both influencing the EBITDA margin, but we are still giving a 30% margin guidance in view of the upgraded top line guidance.
Okay, lovely. Lastly, in terms of the business model, I mean, given that, you know, growth rate is increasing, we are tying up with more, large players, when do we see the operating leverage to start with, in terms of, improving margins? Could it happen with Mangalore facility kicking in or, I mean, or we model businesses, with a target of 30% EBITDA margin?
Thanks, Prakash. I mean, I think it's a well-trodden path of a conversation. We've had this one on more than one occasion. Over the last decade or so, our margins at the EBITDA level have sat comfortably around 30%-33%. We've said countless times that we think that's strategically a stable place for us to be.
That puts our margins certainly well above average for our global industry group, their top performing margins. I'd be delighted to keep them in that range. As for calling it quarter-over-quarter, we'll happily guide you at the beginning of each year. Further out, that's a modeling challenge for you.
Okay. The second part of this question was on the Mangalore side. When is it expected to start delivering dollar revenues? If that comes in, do we expect margin trajectory to move up, down, or remain 30%?
I think, well, disaggregate the two parts. We will continue with the sort of margin range that we've enjoyed traditionally as our business grows among all of the divisions. I don't see it as an inflection point up or down, given the comment I gave you earlier that an EBITDA margin range of 30%-33% is the zone that we've operated in for a decade or more.
As for the timing of Mangalore, I'm sure you can set your watch by the answer I'm about to give you, which is, I think last quarter I said 15 months was the pathway that we were anticipating through to regulatory inspection, and that was an important milestone for Mangalore. You can do the math. It's 15 months minus 3 this quarter, which would be 12 to go.
Okay.
All of the operational things that need to happen are happening, and we'll update you when we get there. Make sense?
Okay. Yes, sir. Thank you so much, and all the best.
Thank you, Prakash.
Thank you. The next question is from the line of Shaleen Kumar from UBS Securities. Please go ahead.
Yeah, hi. Thanks for the opportunity. Sibaji, just want to understand one thing that while we are increasing our guidance for the top line and taking some benefit of Zoetis and keeping our margin constant, would you like to increase your or would you like to retake your PAT margin as well? PAT guidance.
Can we reiterate the PAT guidance for the year?
Thanks for question. Did you wanna refresh everybody's memory of what?
Yeah
We said around PAT?
Yeah. What we said, PAT will grow single digit. The reason, if you remember, Shaleen, we gave was the increase in effective tax rate.
Mm-hmm
Year- on- year, we maintain that guidance. Essentially what we are saying, high teens growth in revenues. EBITDA margin guidance remains at 30%, which means there will be some increase in absolute EBITDA. PAT growth, we are still saying single digit in view of the headwind that we are facing from increase in effective tax rate.
This we said, right now we're at 20, and over the next few years it will gradually go up to 25%, so please model it appropriately. However, from an increased growth trajectory that we are witnessing now, we expect the operating leverage to improve from next year onwards, and that should improve the overall PAT outlook going forward.
Sibaji, you know, I understand that your tax assumption should be there, right? I don't think that there would be a material change in your tax assumptions. Shouldn't there be upside to your guidance if you're upping your top line guidances and keeping the margin guidance same?
Yeah. Yeah, Shaleen, don't forget we are in a big investment mode at this point of time. We gave a $100 million+ CapEx guidance. Many of them will actually get installed and commissioned in the current financial year. We'll immediately start depreciating, so the depreciation will also start hitting our P&L. They will start generating revenues over a period of time. They are in a high investment mode.
Turn to something a little bit more obvious. The guidance is single-digit growth in PAT. Where in the range of the multiple options of single digits did you have it and where are you leaving it? That makes sense, we don't need to change the guidance, but you've got a whole range there. I leave it for you to decide what growth rate you put in your model.
Sure, Jonathan. That's fine. Just to clarify on the EBITDA margin, 30% because as per the last participant. This quarter, our EBITDA, operating EBITDA margin was 26.8%. INR 173 crores of EBITDA. That we should take, right?
Yeah, yeah. Yeah.
So-
Essentially, what you
Sorry, please go ahead.
Yes, please complete, Shaleen.
That's the margin.
Hello?
EBITDA margin we are looking at 30%, right? Which
Yeah. Essentially, if you see.
Mm.
Yeah. Essentially, if you see our business and if you look at the trajectory that our business has seen over the last few years, EBITDA margin generally increases during the year. That's because, you know, there is some amount of seasonality in our business or a back-ended revenue generation in the business. We expect overall EBITDA margins to go up over the year. We keep that into consideration while giving around 30% EBITDA margin guidance.
Yeah. Sure, sure. No, just wanted to confirm that we are looking at the right margin number, right? Operating margin, not including other income.
Yeah.
Just wanted to confirm.
Yeah.
Confirm all that.
All right. Sh aleen, but you know, because you are modeling, the only unpredictability is the rupee depreciation. Because rupee depreciation will, if it happens more than what it is today, it will improve the top line. It will keep on decreasing the margin. That is the uncertainty, which is pure arithmetic, which is not business driven.
Understood. Sibaji , how should we build a forex part then? We kind of have INR 3 crore of losses. If, let's say, rupee remains at 80 and our hedge is at around 78, should we expect similar kind of forex loss going forward?
Yes, you, it all depends. Nobody can predict a currency movement, right? I'm not, you know.
No, as.suming let's say.
Trying to get-
Let's say it remains at 80.
The U.S. dollar is.
Yeah, that.
What I'm saying, we may go wrong on the top line, but we'll never go wrong on the bottom line because the P&L will ultimately have it captured at INR 78, which is our forward hedge rate.
Yeah.
Hope that's clear.
No, that's clear. What I'm trying to understand, if, let's say, if for my modeling assumption, if I'm taking 80 as a rupee, what kind of forex-
Shall we maybe we can catch up later to give you a little more clarity on how the modeling can happen so that others can also, you know, ask questions. Let's have a discussion later, if you don't mind, please.
Sure, Sibaji. Thank you so much. That's it from my side.
Thank you.
Thank you.
The next question is from the line of Dheeresh from White Oak Capital. Please go ahead.
Yeah. Thank you for the opportunity. Sibaji, on Librela, we are getting involved at the commercial scale. Were we also involved in the development and discovery part?
Actually, if you go back, that relationship with Zoetis goes back over a decade or so. They're a real innovator in their industry. They were the first company to discover and develop a monoclonal antibody for use in animals. That was actually a program that we did early-stage work in for them many years ago. That relationship is now mapping all of the major touchpoints in our business from research into development into clinical and now commercial manufacturing. Yeah, it's an end-to-end relationship.
Okay. Thanks, Jonathan. This number that you mentioned, $55 million and then another $30 million-$85 million, this would be spread across commercial as well as discovery and development assets, right? For the biologics.
That's the investment in the total biologics business, so it includes process development and clinical and commercial scale manufacturing. That's correct. But it won't include the research part. No. Exactly. It's in a different division.
Largely just, you can draw a boundary around it and think biologics manufacturing. Development and manufacturing actually in the biologics space is sort of synonymous. It doesn't have the right division that you get on the small molecule side, where they're very different. It's much more iterative in the way you do it. Development flows fairly quickly into the commercial manufacturing piece.
The CapEx numbers we gave you, if you just allocate those to biologics development and manufacturing and think of it as an integrated whole, you'll be thinking about it in the right way, or at least you'll be matching what we do operationally.
Understood. Just one clarification, Jonathan. This is the first commercial scale manufacturing project for us, the one that we're doing with Zoetis for biologics.
Yes. I think that's the sentiment. Yeah, that's the sentiment. It's the first commercial one at large scale. We may well have had projects in the past which might have been commercial, but it may have been for a particularly small indication.
You know, it's an arbitrary distinction. If you're getting the general tone that we think this is a strategically important milestone, we're delighted to be partnering with a world leader in animal health. We like the fact we've got a decade of experience, but it now maps across all of our value chain.
This is an inflection point for our biologics business. Puts them onto a pathway of really driving up, you know, not only their own performance and growth, but heading towards major market regulatory milestones. All of those sound like very positive indicators for the business.
Thank you. Thank you so much for taking my question.
Thank you.
Thank you. The next question is from the line of Surya Patra from PhillipCapital. Please go ahead.
Yeah. Thanks for this opportunity, sir. Congrats for the management team. The first question is on the regulatory clearance pathway for the biologic manufacturing plant which will be utilized for Zoetis deal. How different is the regulatory clearance pathway for the facility from that of the normal U.S. FDA inspection and clearance as for other plants? Is there any meaningful difference?
No. I'll invite Mahesh, if you've got a comment on that. My high level answer would be no. It's the same regulator. It's the same sort of dimensions around it. There may be technical bits about what they actually come and inspect because you're looking at the manufacturing of, you know, a small molecule in one case or a biologic in the other.
In general, the regulatory approach, the standards they operate to and the sort of time, timescales that they operate to all look very similar. Anything you'd add to that, Mahesh?
Yeah. Just to add a little more clarity, right?
Yeah.
Within the FDA there is what is called as the CDER and the CBER. Both of those are still part of the FDA, and so the overall approach is still the same.
Okay.
The specifics, as Jonathan mentioned, around what we are looking for are going to be different parameters, and these are extremely technical around how we run the operations, how we run the facilities in that unit.
Yeah. Just one thing. Don't miss the obvious. We're not driving the regulatory agenda. That sits with the client. It's completely in the gift of and managed by Zoetis and the FDA.
Okay. Sure. That is helpful, sir. My second question is on the discovery research business opportunities. Obviously that is one of the fastest growth driver for Syngene. It is really. In the recent past we have adopted many qualitative platforms for faster growth.
Like for example, the SynVent or the integrated drug discovery platform or the platform, the PROTAC or even the peptide synthesis, all these things that we have in the recent past adopted in our discovery practices. Whether it has really improved qualitatively the growth trajectory of our discovery research on this. This is my first question relating to that.
The second point is that so having seen a larger investment already in the capacities, both on the manufacturing capacities and the likelihood of the strong cash flow generation, what we are likely to see going ahead over the next couple of years. The capital allocation towards the businesses, if you consider whether the discovery services business is likely to have a faster and larger asset allocation and hence grows faster growth.
Just give me the last bit of the question again.
The first point.
Let's see if I've got it. Is research likely to have a faster prospective rate of growth than manufacturing?
Yeah. The asset allocation-
Just mathematics. Yeah. Okay. We can disaggregate and give you various bits. Take the INR 100 million CapEx budget for this year.
Mm-hmm.
INR 50 million of that is going into research, INR 30 million of that is going into biologics, principally biologics manufacturing. INR 20 million, the remainder, is going across the rest of the business on everything from basic CapEx infrastructure, IT, development, whatever, all the other line items. 50%, INR 50 million this year is going into research, INR 30 million into biologics, INR 20 million into others.
All right.
That gives you a sense of the CapEx distribution. Mathematically, no. If you, if you're growing off a small base, you're gonna spit out spectacular growth rate numbers. It's unlikely that the Research Services sort of division or divisions, the two of them together, which are 28 years old, are going to churn out growth rates that are mathematically higher than much more recent Development and Manufacturing.
It sort of doesn't matter. I think what you really need to get is that all of them are seeing good opportunities, all are worth investing in, all are generating prospective returns at or above their cost of capital. They're a good use of shareholder funds. I think there was an element of your question with you've told us about, you know, ADCs, you've told us about PROTACs.
Yes.
Are we seeing it in the growth rate? The underlying growth rate for the quarter was 30%. I think that's where it came from, is the fact that we've got a spread of capability.
Sure, sir. Just last one question on the Mangalore plant, which is currently there. Obviously that is underutilized. What is the cost or what is the kind of negative impact of this plant underutilization that we are currently facing? Let's say in the
I'm not gonna quantify it for you. The question gets the sentiment. It's a high quality but underutilized asset. It will be.
Okay.
If we start to increase its utilization time, the bellwether event is the achievement of major market regulatory approvals. The time clock to that is the same conversation we have every quarter.
Sure.
15 months last quarter.
Mm-hmm.
I think it's about 12 months this quarter. That's when we get there. We'll be able to update you. If the strategy's clear, which is that we think it's important for us to be able to offer end-to-end Discovery into Development into Manufacturing.
Mm-hmm
The fact that asset over a period of time, you know, as a negative contribution to margins doesn't really matter. The strategic thing is will you create value from it over the lifetime of the asset? That's the basis that you judge it if you're investing for value creation.
Sure, Jonathan. Thank you. Thanks a lot.
Thank you.
Thank you. The next question is from the line of Anubhav Agarwal from Credit Suisse. Please go ahead.
Yeah. Hi. Good afternoon. My question is on clarity on this asset turns on biologics about 1x. The question is this to do with the product Librela or do you expect most products where you're going to manufacture on the mAb front, the asset turns will be about 1x?
I think that's quite a good modeling assumption. Plug in 1x for the asset independent of the particular antibody that's going through it, and you're not gonna be a million miles off in your model.
The reason I asked, Jonathan, is that to do with the yield? Because my perception was that at least the asset turns in biologics will be 1.5x-2x. So, is that a grossly wrong assumption? Or what is the yield that you're working with? Are you working with 4 grams per L or are you working with 2 grams per L when you give this 1.1 asset turn assumption?
Yeah. You're gonna forgive me for not answering that because that's exactly the sort of competitively sensitive information that, while I'd be delighted to tell you, I don't particularly want to tell all of my competitors. The sort of asset turn that we've guided to you I think, you know, is grounded in our own analysis of our facility. It creates economic value for our shareholders. It's profitable growth, so we're very, very happy with it. It is what it is.
Okay. Second question is on this. Zoetis takes care of what capacity you have right now, $50 million. Now you're building up another $30 million CapEx. With this traction that you're already getting on the Manufacturing and D evelopment front, do you think this $30 million is little underinvestment for the future projects?
Let me break this question down. What's the lead time? Once you spend this $30 million, would you have your entire project ready to take another order in a six months' time , years' timeline? What's the lead time for you to be ready?
That's good. We'll be happy to take on other clients, would be happy to invest more capital if we needed to. I'd be very happy to come back telling you that we're gonna put more capital to work. It's one of those catch-22s. Each time I tell you about a further capital investment, it prompts a question, will there be more? The answer is yes. We're always gonna be willing to invest where we see good prospective returns and good demand.
I think biologics is an industry area that those are exactly the dynamics we're seeing. Very happy to have what we've already got. Very happy to have the extra INR 30 million that's going in this year. We'll keep you updated as we make decisions to invest more of our shareholders' capital into that area or any other area.
When will this $30 million capacity be ready to take the next project? In a year's timeline, six months timeline, some idea about the lead time?
Oh, I don't know. I'd have to go and look. That's the sort of project level detail I haven't kept in my head.
Okay. Thank you.
Well, no, but to try and be helpful, if you take a step back, I think from a valuing the company as an equity or building a model of our prospective sort of revenues and profits, I think we've probably given you a quite a strong hint of where you need to tweak your numbers.
Just to go back through it, revenue from operations guidance up from mid-teens to high teens this year. We've sort of cautioned you, don't stick anything really material for Zoetis in that number. That's just the organic business going forward. We've given you a high-level number of up to $500 million over 10 years, $500 million revenue from the Zoetis deal.
I don't think you're gonna be a million miles wrong if you divide that by 9 or 10, take an average, plug it back into your model. I'd probably down-weight the front end a little bit and up-weight the last bit a little bit, and that takes you pretty close to what's visible to you today, out of the Zoetis deal. Does that help?
Yeah, sure. That's helpful. Thank you.
Thank you.
Thank you.
The next question is from the line of Sonal Gupta from L&T Mutual Fund. Please go ahead.
Yeah. Hi, good afternoon, and thanks for taking my question. Just one question, around again your guidance and you, like you mentioned, it's, the upgrade is coming from the rupee depreciation. My thinking was that, I mean, like, if you look at.
And-
Hello?
No, go ahead.
Yeah. Essentially, what I was trying to ask was that the full-time employees on Research S ervices, et cetera, would be all dollar denominated, right? As the rupee depreciate, shouldn't our margins also improve?
Okay. I'm looking across at Sibaji. If you wanna reprise the comments you gave earlier. The only thing I would say, just while he's thinking of his answer, we didn't say that the upgrade was solely and exclusively linked to rupee depreciation. Actually I think we're seeing. I made the same comments last quarter as well. I think we're seeing some pretty good demand drivers around the world. Many countries where our clients are getting to a new normal.
I'm not sure if it's going back to an old normal, but people are back at work, they're vaccinated, they're back in their labs, and there's clearly a willingness and an appetite to try and make up for lost ground, projects that maybe ran a little bit slower, and they're trying to re-accelerate them. That's a good environment for businesses like ours, so we're seeing healthy demand.
Secondly, internally within the company, I think we're seeing some pretty good operating performance and delivery. Then you've got the third factor that we largely price things in U.S. dollar. A U.S. dollar when translated into a rupee, has turned out to be more valuable during the course of the first quarter. It was three factors, not one.
Yeah. Sonal, I'll just repeat and try to explain one more time what I said. We do not speculate. We hedge all our receivables. This year, our receivables were hedged around 70-80 rupees, so an average of 70 is a good number to take.
If the rupee depreciates beyond 78, which it has already done, it takes up the, you know, top line, however, doesn't impact anything on the EBITDA because if rupee had not depreciated beyond 78, I would have captured that in the hedge gain, I have reported that every quarter for the last many, many quarters.
Essentially, it does not change the absolute EBITDA number, it changes the top line number. I am, however, still maintaining a 30% EBITDA margin, which effectively means that I am saying that the arithmetic downward movement of the EBITDA margin simply because of increasing top line without the EBITDA margin is going to be compensated by the comment that Jonathan just made. There is a good demand environment in the market.
Towards the end of the year, as I mentioned, we'll start some Zoetis activity, but again, it's towards the end of the year. Overall, if I take all this together, I am saying that it will still hold on. We hope to hold on to, and we expect to hold on to 30% EBITDA margin, which means we'll get something flowing down to the EBITDA line, at least from the top line. Hope I explained that to you, Sonal.
Got it. Just on the hedging part. How many quarters of forward revenue hedge do you have?
We have our policy says that all long-term contracts have to be fully hedged for the contract period. For next 12 months, we are 100% hedged, and beyond 12 months, that's 12 months-24 months, we are 50% hedged. That's broadly how it remains. Second year, we, you know, this is the year when we'll hedge, but at any point in time for the next 12 months, we have to be 100% hedged, and we have to be 100% hedged for all long-term contracts. That's our hedging policy.
Got it. That's very helpful. Thank you so much.
Thank you.
Yeah.
The next question is from the line of Vinayak Mohta from Stallion Asset . Please go ahead.
Congratulations on the order win from Zoetis. I just had a question, you know, broadly around the Zoetis contract only. Just wanted to understand broadly what kind of ROICs are we looking to maintain in the contract because you have mentioned that you would have an asset turnover around, you know, 1x on the fixed asset.
Could you explain what kind of working capital requirements will be required here? What kind of working capital days would go into a stream, and how would it impact the ROICs and the margins for the contract on a broad level?
Yeah. Any manufacturing business would require stocking of inventory and a higher level of inventory than normally our research business would have. I mentioned that in my commentary that as we move more towards manufacturing, the overall inventory levels and the raw materials cost will keep on increasing a bit. That's already built in.
We obviously are always looking at our return on capital and whether we are investing in projects which is giving us at least a return equal to the weighted average cost of capital plus a good buffer zone. Zoetis comes very much in that bracket. We effectively expect Zoetis to give us a return which does not dilute our current existing return on capital employed. If you know what our ROC is now , that's not going to be diluted from Zoetis.
Understood. Broadly understood. How big would be this Librela and the opportunity that we can go towards? Like, what kind of opportunity size are we looking at for Librela?
That's exactly what we told. Over 10 years' time, it is expected to be a $500 million opportunity. How you can model it is to kind of divide by 10 years, divide by 10. However, the next two years is a gradual build-up till it reach to an optimal capacity utilization.
Very simple modeling. A build-up in next one half to two years to the level where it will give full capacity utilization, and that's what it'll be. Over 10 years, it's expected to deliver around $500 million in terms of.
No, no. I was just trying to understand if, you know, if the opportunity is big enough that we can get an incremental order on the current existing one. Is that a possibility or is it going to be restricted to the current order that you've got? That way I was just trying to understand the opportunity size.
Gosh, I love your enthusiasm of the question. I was delighted that we'd got to the start line. I'm looking forward to kicking that project off over the rest of the year for Zoetis to get through their FDA clearance and for us to get motoring with it. Yes, I like the premise of the question. I'll look forward to updating you on that at some point in the future.
Okay. Just one last. ROC up including the working capital, the ROCs would move to 20%+. Is that fair to assume?
Again, these are modeling details we can catch up separately. Yes, but when I say ROC, all assets are included, so all investments are included. Obviously, we are not excluding any investment while calculating the capital deployed.
Understood.
If you want more details, we can get in touch.
We can assume it to be 20%+ in that case.
Let's catch up separately. I don't want to comment on a number.
Understood. No worries. Great. Thank you. Thank you so much.
Thank you. The next question is from the line of Prateek Mandhana from DSP Investment Managers. Please go ahead.
Thank you for the opportunity. Sibaji, I have one question.
Thank you.
Hello.
Thank you. Just gonna say, I think this is the last question. Your line's buzzing a little bit, so if we can just make sure we can hear, and then I think this is the last one. We're out of time. Go ahead.
I'm saying that can biologics be greater than small molecules API, say, over the next five years or seven years? Do we or would a small molecule continue to be bigger after five, 10 years?
I'm not gonna give you specific firm guidance, but the answer to the question is clearly yes, it could be. Actually, if you take a step back and look at the global life sciences pharma, biopharma industry, we're at a point that's taken about 30 years to achieve.
Which is, if you look now in all of the industry's research pipelines, you've got about a 50/50 ratio between things in development discovery that you would consider to be traditional small molecules that could end up in your API bucket versus those that are biologics and the various multi-forms of biologics and biotech products.
We've reached something that, in the industry is known as platform or technology neutrality. Best tool for the job, not the best tool that you've got. So from that point of view, perfectly possible that biologics within Syngene could be bigger or smaller than the small molecules. I actually think, you know, you got some quite good hints there. It's almost certainly over the next year or two, our biologics business is going to grow to be bigger than our small molecule manufacturing.
But you could back calculate that from the guidance I gave you about the Mangalore regulatory pathway versus the timelines that we're talking about with Zoetis. But I don't see either of those as a strategic point, one being bigger than the other. They're both great capabilities and businesses to have and be in, and they both create value beyond the cost of capital. From that point of view, they're strategically a good fit with our business.
Okay. Do we expect a similar kind of an asset turnover for both or?
Yeah, I think that's pretty much in line with what we've guided.
Yeah. One point over here, asset turnover depends on, you know, how we report the top line, and there is a raw material cost variability over there. So, in biologics, we are able to come forward and very clearly establish that asset turnover of 1x, when it's optimally utilized. For the small molecule, we have to wait for the first commercial deal to come through to have a very clear idea on that. From a ROI, ROC perspective, they are very sound either way.
Got it. Okay. Thank you. That's all from me.
Thank you. Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference over to Ms. Neha Shroff for closing comments. Over to you, ma'am.
Yeah. Thank you everyone for joining today's call. I hope we have answered your question. If any further queries, please do get in touch with our team, and we'll be happy to get back to you. Have a good day, and thank you once again.
Thank you, ma'am. Ladies and gentlemen, on behalf of Syngene International, that concludes this conference call. Thank you all for joining us, and you may now disconnect your lines.