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Ajanta Pharma Ltd
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Ladies and gentlemen, good day, and welcome to Ajanta Pharma Limited Q3 FY 2023 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I'd now like to hand the conference over to Mr. Yogesh Agrawal, Managing Director of Ajanta Pharma Limited. Thank you, and over to you, sir.
Thank you. Good evening, and welcome to all of you. With me, I have Mr. Rajesh Agrawal, our Joint Managing Director; Mr. Arvind Agrawal, our CFO; Mr. Rajeev Agarwal, AVP Finance and Investor Relations. I hope that the results are already there with you now, and I'm happy to share that we have been able to achieve continued growth in the revenue for the current quarter as well. I and our Joint MD will take you through the business-wise performance for Q3 and 9 months FY 2023, along with the comparison of previous year same period.
It was yet another good quarter with continued growth revenue growth. The total revenue for Q3 stood at INR 972 crores and for 9 months, INR 2,861 crores posting growth of 16% for both Q3 and 9 months. The business is divided in 3 verticals; branded generic, U.S. Generics, and institution business in Africa. Let us first start with the branded generic business. During the 9-month period, 73% of the total sales came from the branded generics, which is spread across India, Asia, and Africa. This business has surety, scalability, and sustainability for the long term. During Q3, branded generic sale was INR 666 crores against INR 621 crores, posting 7% growth. In 9 months, sales were INR 2,065 crores against INR 1,738 crores posting healthy growth of 19%. This growth is in line with our expectations and the guidance. To begin with, I invite Mr. Rajesh Agrawal, Joint MD, to take you through India business. Thank you, and over to you, Rajesh.
Thank you. Good evening to all of you. Let me discuss some of the key highlights of the India business with you now. India business contributed 31% in total revenue during 9 months. In Q3, sales stood at INR 294 crores against INR 260 crores, posting a growth of 13%. And in 9 months, sales stood at INR 888 crores against INR 737 crores, posting a healthy growth of 20%. We launched 21 new products in first 9 months with 6 first-to-market products with consistent growth in business without any increase in MR strength, we have seen continued improvement in MR productivity as well.
Our performance has been satisfactory, which was on the back of new product launches, market share gain, and price increase. I'm delighted to mention that our overall growth was 2x the IPM growth rate as per IQ we have make December 2022, with Ajanta's growth of 15% versus IPM growth of 7%. Even in all therapeutic segments that we are present in, our growth was much higher than the segment growth, as you must have already seen in our press release and the presentation.
In the covered market, we stood at fourth largest against CHF 27 in the overall IPM. It will be heartening to note that in all therapeutic segments, our ranking in covered market is among top 10 with second rank in ophthalmology and dermatology as per IQVIA MAT December 2022; cardiology contributed 40%, ophthalmology contributed 31%, and dermatology contributed 21% of our India business with remaining 8% coming from pain management. India business includes revenue from trade generic of INR 38 crores against INR 30 crores in Q3 and INR 109 crores against INR 87 crores in 9 months of FY 2023. Now Mr. Yogesh Agrawal, MD, will take you through the other business performances. Thank you, and over to you, Mr. Yogesh Agrawal.
Let me now discuss some of the key highlights of the branded generic business in emerging markets. The branded generic business of Asia and Africa contributed 42% in total revenue during 9 months. Our exposure to these markets were INR 372 crores against INR 361 crores, a growth of 3% in Q3, and INR 1,177 crores against INR 1,002 crores, a growth of 18% in 9 months FY 2023.
We launched 30 new products during 9 months in these territories. We continue to see mid- to high 'teen growth in the branded German business of emerging markets on back of our robust product pipeline, increased productivity, and excellent execution of the strategy across various countries. In Asia, our business is spread over Middle East, Southeast Asia, and Central Asia. During Q3, sales was INR 227 crores against INR 194 crores, posting a healthy growth of 17%. In 9 months, sales were INR 719 crores against INR 551 crores, posting healthy growth of 31%.
Africa business is spread over to our West and East African countries. During Q3, our sale was INR 146 crores against INR 166 crores, posting 13% degrowth. The growth was adversely impacted by about 6% due to INR appreciation against euro from previous year. However, in the month of December 2022, we have seen a reversal of this trend, and we hope to see the growth in this market again going forward. In 9 months, FY 2023, sales were INR 458 crores against INR 451 crores, posting 2% growth.
Now let us move to the U.S. business. This is the second vertical of business and contributed 22% of the total revenue in 9 months. In Q3, sales were INR 266 crore against INR 166 crores, posting 61% growth. In Q3, there were tailwinds due to high flu season, which contributed incremental revenue during the quarter. The flu season is now almost over, and we do not see this to continue in coming quarters. Price erosion has stabilized to the mid-single digit to high single digit in our existing portfolio of the shares. In 9 months, sales were INR 631 crores against INR 528 crores, posting 19% growth. At the end of 9 months, we filed 4 ANDAs and also received 1 final and 1 tentative approval. We now have 22 ANDAs awaiting approval with U.S. FDA.
I now move to African institution business. This is a third vertical of business comprised of antimalarial product and contributed 5% in the total revenue. In Q3, sales were INR 31 crores against INR 36 crores, posting 15% degrowth. In 9 months, sales were INR 141 crores against INR 156 crores, posting 10% de-growth. As mentioned earlier, institution business remains unpredictable and depends on the procurement time, schedule and funds availability with the agencies. With this, I will now hand over to Mr. Arvind Agrawal, CFO, to take you through the financial performance. Thank you, and over to you, Arvind.
Thank you. Good evening to all of you, and warm welcome to this earnings call. I know that the time the results they are there with you were very short. So my apologies for that but I think I will take you through the entire thing and then maybe you can ask the questions.
For ease of discussion, we will look at the consolidated financials and provide year-on-year comparison. Let me take you through key financial highlights for Q3 and 9 months for the 2023 -- in Q3, total revenue stood at INR 972 crores against INR 838 crores, posting 16% growth. In 9 months, total revenue stood at INR 2,861 crores against INR 2,471 crores, posting growth of 16%. The breakup of revenue has already been discussed by MD and JMD in their speech. COGS continued to be at 28% for both Q3 FY '23 and 9 months FY '23, in line with Q2 FY '23. U.S. price erosion and INR appreciation against euro have adversely impacted COGS to the extent of around 1% each. As the Euro-INR exchange rate has come back to the earlier levels of INR 88 or in December 22, we expect some relief in COGS in Q4 and expect it to be around 26%.
Personnel costs have been an increase of 19% in Q3 and 17% in 9 months FY '23. Out of this, about 10% was towards increments to existing teams and balance towards increased team size across international field force, production, and R&D. As part of focus on branded and generic business, we have scaled up our international amortization by 50% over previous year, which will yield dividends in years to come.
Other expenses saw a sharp jump during the quarter on account of the following. For earlier 2 quarters, we had a foreign exchange gain and it continues to be so in 9 months FY '23. However, we incurred a ForEx derivative loss in Q3 of INR 37 crores, and 9 months, it is INR 43 crores due to sharp movement in USD and Europe. This loss is part of other expenses, whereas the gains are reflected in other income. And that's why you must have seen, I have given you adjusted EBITDA also in the results which we have given to you in the presentation.
So, the logistic cost is witnessing downward trend, but it still remains higher compared to pre-covid level. Further, the requirement of reefer containers in some of the markets continues to keep freight cost at a higher level. In U.S., the early arrival of full-blown flu season took everyone by surprise. And to meet the market demand so that small babies and children get treated, we send sizable quantity by year due to which we saw additional trade expenses of about INR 16 crores.
In Q3, as part of the increased focus on branded generic business, the selling expenses, we are higher by about 100 points, basis points, which also yielded results of superior performance of branded and generic business across India and emerging markets. R&D expenses was at INR 61 crores against INR 51 crores for the quarter, and it was INR 174 crores and against INR 145 crores for the 9 months, an increase of 20% over previous year. R&D expenses continue to be at 6% of revenue. Higher R&D expenses were mainly towards branded and the verticals across India, Asia, and Africa in the form of new product development and is registration fees.
With the above impact on COGS and other expenses, EBITDA margin saw a dip during Q3 and stood at INR 170 crores or 17% of revenue from operations. For 9 months, EBITDA was at INR 588 crores or 21% of revenue from operations. Impact of COGS was 2%, unrealized age loss of 4%, and incremental freight of 2%, as explained above, which if excluded take the EBITDA to 25%. As some of the impacts are onetime in nature, we expect EBITDA to improve as per last guidance of 25% plus in coming quarters.
Other income was at INR 108 crores in 9 months, mainly contributed by a ForEx gain of INR 88 crores without adjusting the unrealized ranges of INR 140 crores, which is taken for the India other expenses. There was a net gain in ForEx transaction of INR 45 crores in 9 months after adjusting unrealized loss. This reaffirms our prudent and robust hedge policy. Income tax stood at 20% for Q3 and 21% for 9 months. We expect it to remain at around the same level for full year for FY 2023.
Profit after tax in Q3 was at INR 135 crores against INR 192 crores. 14% of revenue in 9 months. It was INR 466 crores and against INR 561 crores, 16% of revenue. We incurred CapEx of INR 115 crores in 9 months FY '23. CapEx, including maintenance CapEx for the FY '23, is instrumented to be at about INR 150 crores. With these highlights, I open the floor for the question and answer. Thank you.
[Operator Instructions] We have a first question from the line of Nikhil Mathur with HDFC Mutual Fund.
Just to understand the margin performance better in this previous quarter. So, you mentioned that there is a INR 16 crores impact from additional freight costs for shipment. There is 2 percentage points of negative impact about the currency from gross profit, right?
Yes.
Okay. So, anything else apart from these 2-line items a one-off in this quarter?
For the quarter, if you see that unrealized sales loss, which is there, that is almost about 4%.
That is fine.
Yes. So, of the COGS impact is about 2%. U.S. price erosion and Europe appreciation, that is 11% each. Then 2% is freight, 4% is unrealized sales loss. So, all put together, you are talking about almost 8% of the things which are there in this.
Okay. Understood, sir. Sir, second question tied to this is that you might have also benefited from positive operating big benefits in the U.S. because of the Q2 growth on account of flu. But if, let's say, from $32 million of this quarter, U.S. sales this goes back to $23-$24 million, what we're doing in the previous 2 quarters. Wouldn't there be a neat operating deleveraging in coming quarters and hence, whatever margin benefits you're talking about that might get negated by this.
Not really, actually, because as you said, it is right that it was a one-off thing which was there for closes. That will go away. But certainly, that expenses of INR 16 crores and all that also will not be there. So, to that extent, I think we should be able to protect our EBITDA margin as such.
Sir, I mean, if I do all these adjustments, our current quarter, Beta margin was 45%, right -- so unless in the coming quarters, if your gross margin moves up, it would be difficult to maintain 25% right?
You're right, absolutely right. And that is what we expect that our gross margin should really improve. That's what I mentioned in my talk that gross margin should improve definitely by 2% at least.
Okay. And sorry, the 50% sale force addition, has it been in both Asian and African market?
Both.
Okay. And can you remind me when this exercise come -- when did the mobile expansion started and then when it ended?
Yes. It just happened during the year. there was no particular timeline like significant one that we can say. But it kept some happening during the year.
Okay, all through 9 months, which is each happening?
Yes, absolutely.
Got it. And sir, was when the last time when such kind of an expansion has been in the Asian market, branded Asian assets in market?
So this is, I think, in absolute number, this is the most aggressive expansion we have done. In the previous also percentages may have been there, but the absolute numbers were not so significant. So here, I think one of the most aggressive expansions we have done so far.
All right. And then typically, these much, how much time does it take for a no to recover the cost 1 year to year, how much time does it take?
So typically, we see that the second year is the time when they start performing and third year is a year when we actually see the good benefits on the start to block them. So, we have to give at least a year start becoming really productive.
Right. Okay. So fair to assume that there is significant of margin pressure sitting in the P&L because of expansion?
Correct. So as our CFO mentioned in his comments, the employee cost, which has also gone up. So, there was employee cost, which got expanded because of all this addition of the people also, which currently is sitting in the P&L, but we start to see the benefits of that in the second year from now.
We have a next question from the line of Rashmi Sancheti with Dolat Capital.
On this Africa branded business, can you give the growth in CC and how this -- whether we are seeing any lower growth in Franco Africa or in the English-speaking countries, where -- what kind of challenges are you seeing in those branded markets? And also, if you can give that the field force, how much have you added? So, what is the total input? Is the expansion completed or we are still doing it?
So, as we mentioned that the growth for the 9 months is around 1% to 2%. That is primarily because of the 6% impact on the currency. So, if you add that, then the growth goes up to around 9% in the constant currency basis, which we feel that going forward now since the euro has bounced back to the level assuming it stays there, we are looking at, I think, that growth to come back again. And the growth is there in both the markets, Franco and Anglo. Of course, Franco is the biggest base of the business, and Anglo is smaller. So, for the field force expansion, unfortunately, we'll not be able to give you the market-wise breakup but there has been aggressive expansion in both the geographies, actually.
I mean pick on business; we are performing in the market growth rate?
Yes. If you see the IQVIA data, we are outperforming the market.
On both... I mean both Asia and Africa branded business, in this expansion.
So no, as we said, this expansion kept out happening during the year. And we believe that we are towards the tail end of the expansion process. This expansion was also done on back of a lot of products, new products which we launched. As I mentioned in my opening comments, we launched around 30 new products across different geographies. And actually, the existing teams could not absorb those products, and it's natural that when you create a new teams, and that was the entire strategy to begin with. So both put together, I think that is where we've seen the expansion. So, I think a good part of the expansion has towards the tail of it now.
Okay. And sir, my second question is that on EBITDA margin, as you all have guided that in the quarter 4, we should do 25%. We should come back to the 25% EBITDA margin. What is your outlook on FY '24 where the cost is also normalizing. Most of the expansion is also done so, your investment has bills come down. your -- Your COGS and everything would also improve freight costs will also come down. Also, how does it feel in FY '24?
See, this what I mentioned was about FY '24 only, not about Q4. Because Q4 also, it will be a little soft only because the effects are going to take some time to give the positive benefit there. But for FY '24, we have mentioned that we should be somewhere around 25%.
Okay. So, in quarter 4, if you're expecting the soft then, are we downgrading our overall FY '23 guidance from earlier 24% to 25%, to now at a much lower level?
Yes, almost about 21%, 22%, you can say.
Okay. And finally, on the U.S., since now the date we have already resist EIR, are we expecting any launch in the quarter 4?
Yes. We are going to have one launch in the Q4. And all going well, we should be able to launch around 4 to 5 products next year.
Okay. Sir, and finally, lastly, on price erosion, how much is the price erosion, whether it is in very high double digit currently? Or has it normalized now and getting reduced. If you can comment on that?
No, it has definitely cooled off now. It is quite in control. So definitely not in double digit. It is in the single digit. The mid- to high single digit is the price erosion, which we are seeing now.
We the have next question from the line of Kunal Randeria with Nuvama.
Sir, on the U.S. front, any benefit from products from import alerts or serious for some of your competitors have got?
No, not really. We scan the companies which got the import alert, but we have very few product overlaps actually. So, we shouldn't get any significant tailwinds because of that.
So I think a lot of questions have been asked on the margin side, but I saw there was a to look at other expenses, right? This quarter, excluding the ForEx loss, and excluding the R&D, you get somewhere around INR 240 crores of other expenses. So, prior to COVID, I have seen that this other export has grown at almost like a 20% CAGR, right? So, while the field force expansion and all, I understand, I just want to get some sense on the next 2 to 3 years, how will these lower expenses will grow? Because I think this is something that's driving your margin down.
See, in fact, the other expenses, if you remove the effect of this quarter for the hedge loss of INR 37 crores and that extra freight of INR 16 crores to the U.S. I think then it is absolutely normal. So above 280 to 285 range of 280 to 290 range is something which is quite quarterly, that should be the run rate which we are talking about. And of course, urban inflation, whatever are there next year, that will be there in any case.
Okay. So now -- I mean, okay, let me put it this way. On a base of INR 280 crores, growing at maybe 8% to 9% a year. Is that a fair way to detect this?
Absolutely.
Okay. Fair enough. And just one more from my side. So, Asia branded is obviously a big chunk of the business. Now you are also presenting CIS markets, but I believe Philippines and Iraq would be a major chunk of your business. And since you have been in top 5 in Iraq and top 15 in Philippines, should we sort of assume that to grow faster in the market will be difficult and the next leg of growth has to come from CIS markets, or is there enough space to grow in Philippines and Iraq?
Yes. In the Philippines, there is enough space to grow. Of course, last year, we have had a low single-digit growth rather comment here. The primary reason being last year because of COVID, we had seen an exceptional amount of surge in the pharma market growth and as well as we posted a very healthy growth. But -- so this year is just averaging out. But next year, we are expecting to come back into double digit, maybe lower 'teen growth rates. So, there is enough expense to grow in these markets. We also have good product launches, which are in the pipeline, which hopefully will come in any time in Q1, Q2, which will drive the growth further.
Particularly for Africa and other West Asia markets also, there is a good enough headroom for us to grow -- and again, coming back to the earlier comment I made, we have launched a lot of products during the year and a number of big field times also. So, increasing the market share from existing products, getting the market share from the new product and increasing the productivity, new people market. There is enough headspace for us to keep growing for the next few years.
Just on this, maybe in some of the bigger markets, what would be the steady state growth looks in a Philippines or Banco Africa, market growth rate?
Are you saying market growth?
Yes, market. I mean what pace is the market...
They are growing at different levels. I think Philippines is around the...
Single-digit 8% to 9%, maybe...
Yes. I would have to check later. But -- so we are at par or faster than the market. Yes. Africa is in the low 'teens. I think Iraq is also, I think -- I think has grown into last year. So -- but we are, of course, posting higher than the market growth.
We have next question from the line of Aditya Khemka with InCred Asset Management.
Just to understand the raw material cost trajectory, so I understand the one-offs that are there and that's absolutely fine. My question is more pertaining to the raw materials that we acquired, the API that we buy from outside. The pricing then the spot market prices seem to indicate a significant drop from the peak prices that were there, let's say, 3 months, 6 months earlier. However, I do understand that you maintain inventory and therefore, the higher cost of months be getting consumed. So, my question to you is, is the high-cost inventory impacting the entire quarter that we reported, the December quarter? Or was the high-cost inventory a partial impact in the December quarter and partially you were able to consume lower priced inventory.
No. I think as far as the inventories are concerned, so far, there is no major benefit which we have seen. But definitely, going forward, we should see that benefit in the coming quarters. This quarter, there was no benefit at all.
This quarter, your entire inventory that you assumed was the higher cost raw material?
Yes.
Understood. And sir, you mentioned expansion in profit in India and Asia. So, this is a 50%; 5-zero or one-5? I didn't catch the number.
It is 50% for the emerging markets, not for India.
50% in profit plans for Asia and Africa.
Yes.
Right. Sir, what drove the decision to expand field force in Asia and Africa? I mean what is our productivity there? And what are we hoping to achieve by hiring more people?
So as I mentioned, we have made a number of launches, around 30 products were got launched in this market. And as you know, that in the pharma market, our team or a particular MR can handle only so many products. And in fact, this was designed that these are all good products, which can be built into the big brands. So, to be able to do justice with these products and these brands, we have done this field expansion. And that is where we are looking that I think going forward in both these markets, Africa and Asia, we should be able to expand or consolidate our positions in various therapeutic segments of GP specialty like cardiac, diabetes, ophthal, pedia, so on and so forth.
Right. Understood. Also, just one last question on the U.S. business, so obviously, you've seen some growth sequentially and I'm assuming a majority of that sequential growth is done through sales in this past quarter. In summation, the price erosion is mid-to-high-single digits. So that's from the earlier situation. But is the entire delta in the current quarter versus the last quarter coming from Tamiflu -- or is there any other products where competitor might have gone out and you gained market share, et cetera?
No, no. I think the most part is Tamiflu...
Most part of it is Tamiflu. Okay. And the ForEx loss that you reported INR 37-odd crores. So, was it primarily related to pound or was some of it is also the dollar?
It was both dollar and euro, it was both. But again, Aditya, you have to understand that this is the MTM loss. So, this is only derivative loss, which is there. And actually, there is a gain also, which has gone to the other income. It is only because of the accounting policy that you need to show it in the other expenses separately and other income separately. But otherwise, overall, for the 9 months, we have got a INR 45 crore gain in ForEx.
Which is implied sir, that we partially hedge our exposure, right, in terms of our receivables sales. So, what percentage of our receivables do you hedge?
70% to 80%.
70% to 80%, both in the euro as well as the dollar, is it?
Yes.
We have the next question from the line of Nitin Agarwal with DAM Capital.
Sir, on the India business, I think we've done pretty well for the 9 months as well as for the quarter. I think this quarter, particularly, we are much ahead of the market. So, are there any specific molecules there, which has sort of led to this growth? Or it seems like a very broad-based growth for the business?
No, it's a broad-based growth, which is very healthy for us. It's not led by one particular product. The growth is across segments. Dermatology, we are growing more than 4x - 3x to 4x the market growth rate. We've been putting in a lot of hard work in restricting the whole derma segment for us, and we are now gaining the traction in it. Cardiology, we are growing much faster as well. Ophthalmology, even though we are #2 in the entire domestic market, we are still growing at par with the market, 14%. So, it's a broad-based growth, which is good for us.
And sir, so from this growth in India, while it is broad-based, is it again largely driven by volumes for the existing portfolio? Or is it, again, I mean, on the new product launches are playing a larger role in this growth for you?
It's a very healthy mix for us. Volume growth is 6%, whereas industry volume, if you look at, then IPM is reflecting minus 1, either a stagnant or a degrowth. And then, of course, price growth is at par with the industry. So -- and new product launches also is a part of the industry. So, for us, it's a very, very healthy mix of the composition of the entire growth rate.
And so there's no reason to expect that this sort of these trends should change for us in the coming quarters? I mean given that the growth is extremely well spread out across various parameters.
Yes, hopefully not. I don't see any strong headwinds as such. And so next year forecast remains early, low 'teens for us. So, we will be outpacing the market hopefully.
Okay. And sir, do you foresee any disruption in the market because of the price revisions and introduced in the market in the last quarter?
Yes, it's been unfortunate that the price revisions have taken place. Of course, 12% of our entire domestic portfolio is covered under GCL products, but -- and we have had 2 major revisions in there. But not hopefully, we are quite confident looking at the WPI index until December. And as per our internal calculations that the entire erosion that has happened will be recovered coming starting April. So, the impact is only going to be for the fourth quarter, that's all.
So sir, just help me understand it a little better. So, I think the new prices got induced in Q4, so which are lower by about 10-odd percent versus the previous prices. And I guess we'll get a WPI linked price hike all over again in starting April, which will sort of compensate for whatever reduction happened in Q4.
Exactly. That's what's going to happen.
And is this leading to some sort of volume pressure also in terms of trade of willing not -- you're not pushing enough material upgrade, not willing to take on enough because there's a size uncertainty around the pricing, which is there right now?
No, not at all. It's a very transitory 1-week or 10-day kind of a disruption that happens. But nothing at all, honestly. I mean, it's perfectly fine. It's just that we have to basically suspend the sales of old MRP until the new price is sold and that takes about 7 days to 12 days for the turnaround to happen. Except for that, there is no issue whatsoever.
And you see this situation being for the entire industry? Or you think it could be players who have a larger share of the DPCO products could have a larger impact on this transition in just your assessment.
Yes, in my view, companies who have more products exposed to NLEM products may have got impacted in a larger way compared to what we have. So, there is no doubt in that.
And sir, secondly, on the international business that you talked about it. In Asia, obviously, you've got these 2 large markets, Africa is a fairly spread-out market for us, diversified market base. Now when you look at the growth for the next 2 to 5 years, in your -- it is largely what growth for you is primarily going to be a function of growth in the existing markets? Or do you really need to diversify into newer markets, grow into newer markets to maintain the double-digit growth you've been doing over the last several years now?
There's going to be a combination of both. We still feel that we have a lot of products under registration in each of these markets under various therapeutic segments. And as and when they keep coming to the market, we'll be bringing those products to the market. So, it's going to be a combination in the existing markets, we see that there is opportunity and potential to keep growing for the foreseeable future. And in the new markets, we are now putting more thrust on Africa, 2 countries in particular, Uganda and Kenya. And in Central Asia, also, we are putting more cuts.
So, these all put together there in the excess about $3 billion-odd market. So, a good number of product registration costs, which we've incurred in the current year have gone into the product participation in these markets as well. So, we believe that next year onwards, we should start getting approval, and we should start to build their teams and bring them to the market. We know it takes about 18 months or for the team to really stabilize and start yielding the results. But these are the new markets which we are adding. In the next 3, 4 years, we believe that they will also start contributing in a meaningful way to the entire sales at PNM of the organization.
Basically, these markets should also continue to grow hand-in-hand in the India sales that we're doing in all on the branded side in general, on a very broad basis.
Absolutely. The way to look at our business now, I think should not be classified as India exports. Let us look at as a branded generic business, which has spread across different geographies, whether it's India, Africa, Asia, or Central Asia now. So, this is a one big bucket because the whole approach towards that is same of having the sales force and generating the demand and building the brand. So, I think we see that in all our advantage in business vertical, we see a good potential to keep growing in our existing geographies as well as the 2 new markets, which I talked about.
That's great, sir. And the last bit on the U.S., where does U.S. now fit in with this sort of thought process, which you've got a very, very solid branded-generic business with whatever has happened in the U.S. business over the last couple of years. I mean, how are you looking at -- I mean, as you -- is there any change in the way you've been looking at investments in the U.S. going forward?
So absolutely, absolutely. We are very careful about the spend which we are doing for the U.S. business now. So, when we had the products, so we went through multiple filters to evaluate and select each other product that does it make sense to spend money on that and bring them to the market. And after that, whatever products we are working on, that is a much shorter list than what we had earlier. So, the chances of these products proceeding whenever they are filed and they get the approval are much significantly higher. So, we are going in a very, very cautious way on what spend we do for the U.S. market, at are the risks which are involved and what are the returns we are looking at. So, there'll be more delicate approach towards the U.S., a very selective product portfolio, which we are building next 2 years. And as we said, I think the large expansion or OpEx is happening towards the branded business.
Sir, last one on -- how do you call a tablet for vermin product...
Still a work in progress. Let's see, hopefully all going well. And next year, we should be able to launch the product. I don't know… I can't dive so much about it. I think let's just wait for it.
We have next question from the line of Bino Pathiparampil with InCred Capital.
So just a quick question on this ForEx loss accounting. So, if you have a derivative gain from ret instrument, that comes in other income. Is it right?
Yes.
Okay. So is it is logical that a derivative loss is set off against that rather than coming in other extra?
That is what exactly I was arguing with the auditors. And they are saying as per accounting standards, IAS standards, where you can't do that, the loss has to be put in other expense only. So that is why you are seeing in other income, there is a huge money, which is sitting on the gain, and there is a loss which is getting in the other expenses. So, it is absurd, but it is what it is.
Understood. Okay. So, for the full year in the compute, if there is a net goal. Still, it will be divided as gains on top and losses in our expenses. Is that correct?
Because see, what happened is in the earlier 2 quarters, the loss was hardly anything. It was just about INR 6 crores. So, it didn't really matter. But this quarter, it was INR 37 crores additional. So that really made a whole change. So otherwise, it was always gain-gain. So, for 9 months, net gain is INR 35 crores but INR 37 crores has gone up and INR 43 crores and another INR 88 crores has come down. So that's how the whole breakup is.
We have the next question from the line of Alisha Mahawla with Envision Capital.
Two questions. One, the MR trend that is increased by 50% for the branded generics. Are you then probably looking at increasing the trend even may now?
For now, I think we believe that this will be a strength going forward. There would be a minor increase here and there, but nothing significant.
So the employee expenses we've seen in the coming quarters should address coupon marginally now?
Correct. That's right.
Sure. And coming to your margins. If I see FY '22, we did about 30.5%, 9 months is 20.5%. And I do understand the tailoring there has been some ForEx derivative loss as well. Lastly, I think the amount is getting set off because in H1, we had 4 INR 60 crores of coring that we have INR 47 crores of ForEx loss. So assuming a 10% decline in EBITDA margin also because we started by you are saying that we will be closer to 28%. And now even for next year, we are just 25%?
Yes. I think 28% is something which is really a little far now at the moment. But as we mentioned, in the COGS itself, if you have seen, there was 2 aspects. One is the U.S. price erosion and one was the Euro appreciation. So, this 11% impact is there, definitely on the COGS itself. So that 2% is something which I assume that next year, at least it will taper down. It may not be there to that extent. So that benefit should flow in.
Then the freight cost. Now freight cost is something which is -- at the moment, it is about 2%. Now this freight cost, looking at the current scenario, we are feeling that this also should taper down and that benefit of 2% also should flow into next year. So that 4% clearly will flow in from there. And this unrealized hedge loss, which I was mentioning, that also is about 1%. We feel that there will be a gain from there. So practically, about 5% positive flow should be there in EBITDA margin from current EBITDA margin of about 21%.
So where is the barring one and the price erosion that we're talking about, if I compare to full FY '22 to the price erosion, then also was quite significant in the U.S. market, almost high single to double digit, which is, in fact, if anything, lease was in the last quarter. So, in 9 months, I don't believe that the impact would be well on the little basis slightly less. And despite that, there is the balance 5% of the margin?
So, what I think CFO was selling is that we'll recover 2% from the trade. So, it is still significantly higher. So, we'll be able to still -- there is 1% trade combined, which is still going to sit in there. And the loss which we are recovering, it was higher. So still that cost of 1 U.S. price erosion is we can't recover that. So that is there now. It's staying with us. So that impact will continue at 1% price erosion, 1% freight. And similarly, I think another 1%. So that's why we feel that now that 28 is 3%, which is unrecoverable now.
1% from freight, 1% from price erosion, 1% from ForEx.
Yes. Not from ForEx from the from other expenses...
Sorry, this 3% will get continued. We are not able to recover that.
And that was in a Softline loss to 25% for next year.
25% plus, yes.
We have next question from the line of Tushar Manudhane with Motilal Oswal Financial Services.
Just to know this ForEx gain, how much is it in other income?
It is a total for 9 months, it is INR 88 crores.
And for the quarter?
For the quarter, it is for the quarter is -- for the quarter, I'll tell you.
So mean then, as for the Derma therapy, there has been a sharp growth compared to IP. So, if you could call out anything in particular here in India markets?
In particular, in the sense, it's a broad-based growth. All the brands are doing exceptionally well. We are focusing on larger opportunities that we have, merchandising creams plus any other brand that we have. And in the earlier 2 years, as you would remember, just pre-coated maybe in COVID also, we have taken a head-end logic. But we have done a lot of good customer relationship management activities, which is yielding the results, and we are growing rapidly in this.
Understood. And secondly, on the gross margin side, so you said the currency impact. So, 72%, 73% is something to look for a mix?
Yes. I think, yes, 73, 74, yes. I think INR 73 should be possible.
So just recently, how much of the raw material price reduction have you witnessed in the recent past? Is there any reduction in the raw material cost on an absolute basis?
Not really very less. And also, in fact, there is an increase in the exit prices sharply in the recent past. I think for pressure to continue...
So effectively then gross margin largely remains stable and so the operating leverage with higher change growth is what we do the EBITDA model. That is the line of Ajanta?
No. That's why I said we should be able to get about 2% definitely in gross margin. That's what I mentioned to you because, especially this year, we had that inventory write-off in the first quarter and then like this U.S. RPM cost increase. So, to some extent, I will definitely recur plus euro appreciation. All that put together, 2%, definitely benefit will be flowing in next year.
Also I think if you are saying that U.S. next year will be flattish and the branded generic business will go up. So that change of composition percentage also will impact our cost. So, all put together, I think we should say right now the current year is around 28%, what we are looking at. So we should be able to, I think, recover 1.5%. Surely, I think around 1% to 2%, which began...
Yes. Understood. Please [Technical Difficulty]
Yes. INR 31 crores.
INR 31 crores.
We have next question from the line of Abdulkader Puranwala with Elara Capital.
So most of the questions are answered. So just on the promote. If you could tell us what is the current percentage of the promoter holding, which is a place another?
Yes. See as far as places are concerned, we have already removed the pledges for almost about INR 430 crores. That is already released. So now we are -- from 14%, we have come down to almost about 7% and whatever amount we have raised, out of that, 66% has already been utilized. Balance about another 22% is going to be utilized in the next 2 months, then the loans will fall you and then the places will be getting released. So practically, I think about 80% plus amount will be used for the place remote.
Of course, simple calculation for you. More than 50% of what the pledge was their prerace will get removed. So 50% pledge will probably remain. Okay.
And so my next question was on the lots that we have recorded in the quarter. So how that currency euro how would we, again, record additional INR 31 crore in current amount is can into the other income or how the content could go?
No, no. It is a combination of both euro and dollar. So, it will depend on both the currencies. So, we only hope that now that we have booked this INR 37 crores, there should not be much of loss there, but there can be, again, if the dollar also behaved in that direction.
Understood. And maybe if you could share what was the working capital in terms of number of deals for the 9-months on the net as balance...
9 months, we don't have the balance sheet, so I may not be able to help you on that. But 6 months we have seen definitely that inventory, we have improved, but debtors have gone up a little bit... Yes.
We have next question from the line of Vishal Manchanda with Systematix Shares.
On your emerging market branded emerging markets, would you be able to share what would the Ajanta's market share and ranking in your key markets like Philippines, Iraq and Frances Africa?
I think we've been sharing that given the ranking. Okay, okay. But I think we are significantly higher in the ranking. We are in some markets there in top 5 in some markets we are in top 10. So, we are fairly high. And as I shared earlier, I think our growth rates are definitely higher than the market as well. But I think that's only one part, yes. So I think that's where we are.
Yes. And you have been kind of improving ranking in these geographies?
Yes. Absolutely. Okay.
And second one, in your India brand, in how many categories would your brand be kind of #1 or #2?
In India?
In your Indian brand in the Indian branded market, so whatever brands you have launched? Majority category.
Majority of our brands are in the top 5 in respective subtherapeutic segments. And we are market leaders in most of them 1, 2, 3. So in majority, I would say, more than 70% of the brands, we are in the top 5.
Okay. And just one final one. Recently, we've seen a few transactions on the dermatology side, one was Curash and other the Denmark brand divestment. So would Ajanta have evaluated these opportunities?
We evaluated the Curash transaction. We were also on the cap table until it crossed our expected valuation. And therefore, then we left it that back. So, we are evaluating acquisition opportunities which are within our focused therapeutic segments. And as and when we have the opportunity and the right valuation, we will move forward with it.
We have next question from the line of Aditya Khemka with InCred Asset Management.
Sir, roughly 10% to 12% of the top line comes from the U.S. on right on an annual basis?
No, it is 22% currently. 22.
Okay. Sorry. Yes. And what percentage of our capital employed will be U.S., if you can just ballpark...
It will be very difficult, Aditya, because the problem is that we are using all our facilities for all the markets. So, it is not that it is only for that market. So, it will be very difficult to say that capital allocation is for that. But as we have mentioned earlier also that our capital allocation to branded generic, we are increasing, but U.S., we are very cautious about any allocation further.
I got that, sir. Okay. And sir, on the price increases, what was the average price increase that we took in India now that almost a year has passed by, the WPI was 10.77, that we have a lower NAM portfolio. And non-import anyways every year is up to 10%. So, what was the average price increase that we take in India is there?
Average price increase. So apart from MLM, we go for anywhere between 7% to 9% price increase provided that the market has the appetite for the higher pricing. Some of the products are already at a very, mature product life cycle. And the industry competitors also don't take a price increase within that. So, if it's optimally priced, then we refrain from taking price increases. Overall, as a growth percent, 3% of our growth has come from price increases. -- whereas industry from the growth perspective, has recorded 2% from the price increase.
But it's percent too low, sir, because 7% to 9% on the non-Managing similar on the NLEM. So, your growth could have been...
3% of the growth breakup. So, if we have grown at 14%, 3% of that growth has come out because of the price increases.
Yes. But that would imply that on a total portfolio basis, the growth that you were able to take in your brands is only 3%, as it right?
Yes, sure.
Yes, cumulates yes, all aggregated together, 3%, that's right.
Yes. So, my question to you is -- or my question basically here is that in an environment where raw material prices were going up, gross margin was under pressure, and you could have taken a 7% to 9% price increase, you chose rose 3%. That essentially indicates that our competitors also did not take it, and we didn't want to be too far from our competitors in terms of pricing. But then that also brings me to question whether our brand equity is as strong as one would like it to be because if the brands are strong enough, sometimes higher pricing does get absorbed, right? So, I'm just trying to understand your assessment of where your product brand equity lies in terms of your portfolio brand equity right? Obviously, some products will have more than equity somewhat a less. But is it that the majority of our brands are like on certain scale of bad equity that there if you take price increases reduce decisions. Is that where you stand?
No, a couple of things. A, the industry growth is only 2%, right? So, Ajanta is 3%. So, we are more than 50% of the industry average growth in this is on... Correct? Prices -- I'm so sorry, one second. Let me correct myself. The price growth of industry is 5%. What I was referring to was the new product growth, whereas Ajanta price increase growth is 6%. So, we are still higher than the industry, but we have recorded a 6% growth due to price increases. B, it is not necessarily dependent on the price; on the brand equity at all. It is basically that we have touched the threshold of that particular molecule, and if the pricing is optimum, then there is really no scope for us and neither it is neither is there any scope for the competitors to increase, which is also reflected in the IPM price increase growth of 5%; so, we are still better placed, I think.
Yes. So, if it's 6.5%, then I understand that because we were paying in 3 or 2, I was -- Okay. I got it. I got it. Yes. So that makes more sense. Last question for me. So, if you are already cautious on the U.S. business and we see that we are not going to allocate or we are going to be very cautious to allocate more capital on the U.S. business. My question to you is why do we do the business for what exists. I mean, in your calculations, have you worked out that had you first to the U.S. business scrubbed. Would your margin top line, absolute EBITDA, absolute profits would that look similar to what we report today or would that look better or worse? I mean, is this something which I keep wondering and I try to do some of these calculations, but obviously, I don't know the numbers that you do. So, to me, it seems that it's not giving us much pat, I mean it may be giving us some EBITDA on top line, but it doesn't seem that it's giving us any material PAT or any material cash flow?
Yes. So, it's a bit complex question what you're asking. The role scenario deteriorated in 1 year. And we have a lot of work in progress for the new products, which are awaiting approval and, in the R,&D, which are at advanced stage. So, I think one has to take a very rationalized and a calibrated view. This is not like a switch on and off. You can switch on today and tomorrow, you can switch off. So, one has to be taking a very cognizant and long term and a mature view. So, what we are doing is we are rationalizing the spend, as I said, we're being very selective on the spend. On the products also, we are putting more rigor that what are the products, which makes sense for us to continue or which are eating up more capital and which we are there. So, we're going in a very systematic and very thoughtful way about approaching the current situation, current scenario, sure that all our focus is there to see that money works to the maximum, but in a very proper and thoughtful way.
As there are no further questions from the participants, I would now like to turn the call over to Mr. Yogesh Agrawal for closing comments. Over to you, sir.
Thank you, everyone, for joining for this call. In case if there are any other further questions that got remain unanswered, please reach out to our Investor Relations team. Thank you so much.
Thank you, sir. On behalf of Ajanta Pharma, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.