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Dishman Carbogen Amcis Ltd
Earnings Call Analysis
Q3-2024 Analysis
Dishman Carbogen Amcis Ltd
The robust quarter witnessed by Carbogen Amcis CRAMS function, predominantly bolstered by commercial and Phase III supplies, led to an exceptional EBITDA margin of around 22.3%. Looking forward, the company is quite optimistic with a prediction of significant top line growth, especially in France and India following the resolution of initial teething issues and regulatory clearances, respectively.
Financial stability is underscored by a reduction in net debt to CHF 158 million and controlled capital expenditure, expected to be near $30 million at the fiscal year-end. Encouragingly, regulatory approvals from Japanese authority PMDA, EDQM, and AIFA have been secured, laying the pathway for re-engagement with clients on existing and new projects and targeting revenues between EUR 7-8 billion this quarter.
Cost of goods sold, at an average of 20%, was affected by surging prices of wool grease, a critical raw material. However, expectations are set for cost normalization in the upcoming quarter.
The company highlighted the importance of receiving regulatory clearance for the Bavla site, which not only paves the way for more European business but also speaks to a strategic collaboration between the Swiss and Indian operations.
A favorable shift in energy market dynamics and positive regulatory outlook indicates a likelihood of energy costs and interest rates decreasing in the next two to three quarters, benefiting overall costs especially in European entities.
Carbogen Amcis is witnessing historically high order levels with a 50% pipeline increase over two years and demonstrates resilience with a stable EBITDA margin of around 20% compared to other sectors like general chemicals or agrochemicals.
The company is aiming for a remarkable CAGR of approximately 15% on a consolidated basis, fueled by high-capacity Indian operations, a steady Swiss entity, and a profitable ramp-up in the Dutch entity's vitamin D analogues business. Additionally, the Quats, intermediates, and PTCs business is expected to fetch around 25% EBITDA margins.
With plans to make strategic investments in the digital transformation of Carbogen Amcis entities and a focus on organizational integration, the firm projects a modest ongoing maintenance CapEx of $16-17 million annually without major CapEx expectations for the next three years.
Depreciation has been accounted for starting from Q3 of FY '24. The company is looking at a prospective deleveraging plan, striving to reduce net debt through internal cash generation, albeit without clear intentions for immediate debt prepayment over the upcoming three years.
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Ladies and gentlemen, good day, and welcome to the Dishman Carbogen Amcis Limited Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Pascal, CEO of Dishman Carbogen Amcis Limited. Thank you, and over to you.
Thank you, Moderator, and good afternoon, dear shareholders. Welcome to our quarterly call. Between quarterly review, I'm giving you a bit of the news about Dishman Carbogen Amcis and particularly Carbogen Amcis on our performance on the third quarter of this fiscal year.
This third quarter was kind of a consolidation of all the efforts we are initiating in different parts of the group to grow to the next level. Paolo is going to come back on the big success we had on EDQM, 18th September, and latest large consequences that we had on that. On the Carbogen Amcis part, despite of challenging currency, ForEx issues with Swiss franc varying, we succeeded to perform a nice quarter 3 results, in line with our performance last year and the budget this year. So we are very happy with that.
It's a bit more challenging on the profitability level because we still bearing the difficulties we were having on the beginning of the year with delayed start of our drug product business in France. The good news is that now, end of the third quarter, we finalized the GP collection on that side, which was validated and delivered to the customers. So we are now going through a few operational steps with a nice pipeline of projects there, and we are currently having a production timing, which is full until the end of the summer. And we have announced a large pipeline of quotations with different types of customers around the world. And we are very confident that next fiscal year we can achieve our targets with greater side.
On the drug substance available with our Swiss, U.K., and Chinese operations, we are doing pretty well. We have closed the quarter with a large amount of purchase order for the development kind of activities. As we speak now, we have announced approximately 150 million pieces of orders in hand for that lot, which we had approximately 90 million of commercial overheads for next year. We are in a very, very good position to fulfill our targets for next year. So it's very good.
Beginning of this year, we've also participated to the JPMorgan Conferences in San Francisco, and we got the confirmations that -- of 2 important factors for our business. First of all, globally, the pharma industry, as you all know, is doing very well, beginning of this year, with a nice performance for '23 for most of the big pharma and also mid-sized pharma companies in the world, which are all our clients.
A large number of deals, big deals, like Pfizer acquiring Seagen, Seattle Genetics, in U.S. with $43 billion are really pulling the market and investors to put more money in the biotech industry, which is giving us a lot of opportunities with new clients and projects that are coming.
As you know also, ADC business is very trendy as well as the oncology applications for new drugs and new treatment of cancers, the 2 areas where the group is very strong. So we are also very confident for the coming quarters that we are going to harvest the fruit of our strategy of focusing on both oncology and ADC business at both Carbogen Amcis and Dishman Carbogen Amcis side.
So all in all, we are very confident with our future in the long term, despite of small challenges, and I think we are going to come back on that with profitability due mainly to some of high exchange rates that are playing in our favor, being Swiss francs-based affiliate of the group.
I will be happy to answer your questions in the call. And I hand up the call to our global CFO, Harshil -- Mr. Harshil Dalal.
Thank you very much, Pascal. Hello, everybody. A very good afternoon to all. As far as the financial performance for the quarter ended December 31, 2023, is concerned, it was a strong quarter for us in terms of the consolidated numbers. As far as the revenue is concerned, we closed at INR 651 crores on a consolidated basis as compared to last year same quarter, which was at about INR 640 crores. So the growth was about 2%. But on a 9-month basis, the revenue was INR 1,961 crores as compared to INR 1,794 crores, which is a growth of about 9.3%. So the year continues to be strong for us and we do expect a strong Q4 as well.
As far as the EBITDA is concerned, excluding our notional ForEx impact, which was to the tune of about INR 76 crores in the quarter ended December 31, '23. This stood at INR 119 crores as compared to INR 115 crores in the comparable quarter of FY '23. This notional impact of INR 76 crores is largely driven by the movement in the U.S. dollar-Swiss franc currency pair.
As you are aware, most of our revenues in Switzerland are denominated in U.S. dollars. And we also hold balance in the U.S. dollar account, which needs to be restated at the closing exchange rate of the U.S. dollar-Swiss franc at the end of the reporting period.
This ForEx loss pertains to that particular moment, where the U.S. dollar-Swiss franc as of 30th of September '23 stood at 0.9156, which as of 31st December '23 stood at 0.8417. So there was a movement of almost 750 bps in that particular currency pair. And the balance that was in the U.S. dollar account was to the tune of about $120 million. So there was that notional impact on the bank account balance, part of that notional impact is already enforced in the current quarter because the U.S. dollar-Swiss franc is again back up to around 0.8850.
But since the reporting of the Swiss entity takes place in Swiss franc, we had to account for this translation loss on account of this price movement. So the right way to look at our numbers would be to ignore this notional impact for calculation of the EBITDA and the financial parameters. So the EBITDA stood at about INR 119 crores for the quarter. And this translated into a strong 9 months EBITDA, which was to the tune of INR 309 crores as compared to INR 287 crores in the 9 months of FY '23.
As far as our segment-wise performance is concerned, Carbogen Amcis CRAMS continue to show good growth. So we saw a growth of about 9.4% in the quarter as compared to Q3 of FY '23. In absolute numbers, the revenue stood at INR 506 crores as compared to INR 462 crores in the comparable quarter. And this translated into a 19% growth in the first 9 months of the financial year, where the revenue stood at INR 1,504 crores as compared to INR 1,264 crores in the comparable 9 months of the previous financial year.
As far as our vitamin D analogues and cholesterol business is concerned, we saw a dip in the revenue in the current quarter. So the revenue stood at about INR 61 crores as compared to INR 82.5 crores in the comparable quarter of FY '23. However, since the first half for the cholesterol and vitamin D analogues business in terms of revenue was quite strong and hence, for the 9 months, the revenue growth is at 14.6%. The lower revenue in the current quarter is largely on account of lower sales of cholesterol FX, which was kind of a conscious decision because of the increasing prices -- or the increased prices of one of the key raw materials, which is the wool grease, which we are expecting should come down in the coming quarter.
As far as the India CRAMS business is concerned, the revenue stood at about INR 55.6 crores as compared to INR 46 crores in the comparable quarter last year, which is a growth of about 21%. And as we had mentioned in the previous call as well, we do expect that the India CRAMS business should generate growth in the second half of the year and the increase in revenue in Q3 of FY '24 is in line with our expectations and we expect the Q4 should be even much stronger than what we saw in Q3 as far as the India CRAMS business is concerned.
The India Quats and Generics business, which is largely the business that we do out of our Naroda facility, we saw a dip in that particular business, largely on account of a slowdown in the chemical sector because what we manufacture are largely the quaternary compounds, the PTCs as well as certain generic APIs. So we do expect that we should start seeing a ramp-up in that particular business starting from Q4 and going into the next financial.
So overall, the quarter as I mentioned earlier, we ended with INR 651 crores of revenue. On a 9-month basis, it was INR 1,961 crores. As far as the margins are concerned, Carbogen Amcis CRAMS business at an EBITDA level, excluding the ForEx -- the notional ForEx impact, did an impressive margin of close to 20% for the quarter. And for the 9 months, this stood at about 18.3%, very much in line with what we did for the first 9 months in FY '23.
In Q3 of FY '23, Carbogen Amcis CRAMS business had a large amount of commercial supply and especially Phase III supply, because of which the EBITDA margin was exceptionally higher about 22.3%. The cholesterol and vitamin D business did an EBITDA margin of 16.6%, which is very much in line with Q3 of FY '23, where we did about 17%. And for the 9 months, it stood at about 15% as compared to 18% for the 9 months of FY '23, largely on account of the increase in the material prices that we saw over the last 12 months.
The India business on the CRAMS side did an EBITDA of about 11%, while the India Quats and Generics business did an EBITDA of about 7.5%. So we do expect, now with the clearances from 2 major regulatory agencies having been received, including the official certificates in January from Japanese PMDA and the EDQM, respectively, we do expect the India business to come back on track as far as the CRAMS business is concerned.
So these were more or less the financial highlights for the quarter and the 9 months ended December 31, '23. The net debt as of 31st December stood at about CHF 158 million, which is about CHF 2.5 million less than what we had reported in the last quarter. And the capital expenditure for the first 9 months was at about $25 million. We expect that it should be closer to $30 million by the end of the financial year.
Having said that, I would like to hand over the call to Mr. Sanjay Majmudar, our Independent Director, to say some few words. Thank you very much.
Thank you, Harshil, and very good afternoon to all. So as Harshil explained, 2, 3 major highlights, and as Pascal also highlighted; one, the France facility, whatever initial teething troubles have been there, I think they are about to be solved or they are mostly resolved. And that should see France starting to contribute in a regular manner, definitely a little bit from Q4 of this year and much better on an overall basis in the next fiscal.
Similarly, India, after the EDQM and the Japanese authorities have given official clearance, Indian CRAMS should also see a very handsome growth. The co-investment project progress is also quite good. A lot of developments are happening. So I'm reasonably confident that next fiscal should be one of the real regular, steady fiscal, with a significant top line growth as compared to the current fiscal because of all these favorable factors. At least in a higher -- mid to higher teens is what we're expecting and a very considerably strong EBITDA growth with the normalization expected in almost all quarters. Historically, because of a very long period of time we have been facing difficulties, we are sounding cautiously optimistic. And internal level of confidence is quite high.
So I think with this, Harshil, we can hope for a very good next fiscal year. And we can open the call for Q&A. Or do you want -- Harshil, do we have anything else to say or you want the call to be opened for Q&A?
I think we'll just hand over call to Paolo to give an update on the India site, and then we can open the floor for Q&A. Go ahead, Paolo.
Please, go ahead, Paolo.
Yes. Thank you, Harshil. So good afternoon to all the shareholders, I would like to give a few words more regarding the compliance GMP at the site. As we mentioned, we received the final approval from the Japanese authorities, PMDA, on 23rd January 2024, and this is related to the audit on 31st July till 3rd of August. We received, after that, just after 10 days, approx 1 week, the final certification from EDQM and AIFA, Italian Medicines Agency, at the end of January. The EU GMP compliance certificate, which was the certification awaited was uploaded by AIFA to the Eudra GMP website on 2nd February, which is less than 2 weeks ago.
This is very positive end of a very long journey. And I want to remember that Dishman Carbogen Amcis applied from EDQM inspection on 18 October 2022, but the audit took place only on 18 to 20 September 2023, and the final approval was just received 2 weeks ago on 2nd February 2024. So a long period.
The [approval] generated a lot of enthusiasm among other customers who were awaiting for the EDQM final results. Since the last 2 weeks, we have been able to restart all the discussions with the customers regarding their older and new projects. Needless to say that, that is the great achievement for the company and for the group overall.
I'm giving back the call to our global CFO, Harshil Dalal.
Thank you, Paolo, for the updates. So Moderator, I think we can open the floor for Q&A now.
[Operator Instructions] We have our first question from Niteen Dharmawat from Aurum Capital.
A couple of questions. So what is the revenue we are targeting on the French facilities in the next financial year considering the delays that we had?
Pascal, do you want to take that? Or should I answer that?
Yes, I can take that. For this quarter and with the start -- the restart of the revenue, knowing that we resonate revenues from the development activities, but not from the operation line activities where he had delays, we are aiming for this quarter end between EUR 7 billion or EUR 8 billion revenues in this quarter.
Okay. The cost of materials consumed has gone up significantly. What is the reason for this? Is it going to be similar way in the subsequent quarter and the financial year? Or are we seeing any moderation in cost of material?
So the cost of goods sold for us, on an average, remains at roughly about 20%. So I think more or less for the year, we should be closing at that. So the only place where we have seen a significant increase in the raw material price, as I mentioned in my remarks, is in Netherlands, where the prices of the wool grease, which is one of the key raw materials, that price has gone up significantly over the last 12 months or so. So we are expecting that, that should normalize over the next quarter. But apart from that, the cost should remain at roughly around 20%.
I see. So in one of the remarks by the Independent Director, he has mentioned about significant growth possibilities in EBITDA and sales in this financial year that the company has been talking about in the previous con call also. So what makes you confident that we'll be able to achieve this growth and we see so many positive changes? So what has changed from the current quarter and current financial year which is going to result in this in the next financial year?
I think there are 2 or 3 triggers that we can mention here. One is the French facility where we have already done the CapEx. The CapEx -- I mean, the plant is already ready. We are now producing from that particular plant. So we will have the first full financial year of production and sales from the French facility. So that will be an accretion to the revenue as well as to the EBITDA and eventually to the PAT.
So this year, with EUR 7 million to EUR 8 million of revenue that the French entity will be generating, we would still be generating an EBITDA loss, which would be, say, to the tune of about EUR 5.5 million to EUR 5 million. So next year, we do expect that we should be breaking even and even turning into profit depending upon the revenues that -- I mean, achievement of the revenues that we have projected for the next financial year. So this is number one.
Number two is that as we had mentioned earlier, we have entered into this agreement for an ADC molecule with a large Japanese innovator, and the expansion that we had done for ADC in Switzerland that is also now qualified and we should start seeing the revenues coming -- the production and the revenues coming out of that particular expansion, again, in the next financial year and going forward. So again, that would be the first financial year for the production and sales coming out of the expansion that we have done in Switzerland.
And number three is obviously, one of the key factors that everybody was looking forward to was the regulatory clearance for the Bavla site, especially from the EDQM and the AIFA. So now since that certificate is already in place, it would allow us to secure more business from the European region, which is the largest market for us as far as India is concerned.
So in terms of the APIs, we would be able to procure more orders; one, from their existing customers; number two, even from the new customers and we are also looking at possibilities how we could closely collaborate with our -- I mean, we can have a close collaboration between the Swiss entity and the Indian entity in order to transfer some of the products to India.
So with all of this, we do believe that it should have a positive impact both on the revenues as well as on the operating margins for the group as a whole.
I understand. So there is it looks like a lot of dependency on the Europe that we are talking about for the growth. In the previous quarter, you talked about high inflation rates and energy costs, especially in Europe. So how is the situation on that front right now?
So we are seeing the energy prices coming down from what they were about 1.5 years back when the war had broken out between Russia and Ukraine, now close to 2 years. So we are seeing the prices coming down, though those haven't come down to what we had seen prior to the war. But yes, I mean, we do expect that, that should normalize or that should be at the current level for the next 12 months and going forward. So that is number one.
As far as inflation is concerned, yes. I mean, right now, it does -- I mean, it is high. But now we are seeing, based upon the data that is being published and what the Fed is talking about, what the finance regulators of the other countries are talking about, we do expect that the interest rates should start coming down during the course of the next 2 to 3 quarters. So that should help in improving the inflation scenario, which should also help us in the overall cost that we are able to manage out of our European entities.
Having said that, what we're also trying to do, and it's a continuous process, is to pass on this cost. I mean, not -- it won't be like a one-to-one immediate transfer. But we have been successful and we would be pursuing our customers in order to transfer part of this increased cost to our customers, which will start showing up in the selling prices that we charge to our customers.
So we are working on both the fronts; one, on the cost control; secondly, also on increasing the selling prices wherever possible. And also from that perspective, it also -- it was also quite critical for us to get the regulatory clearances in India so that we can always evaluate India as a destination where we could do the larger scale manufacturing, and that is the place where we can actually bring in larger amount of cost efficiencies.
So all said and done, we are trying to work on both the paths, on the cost control as well as increasing the selling price.
So what is generally the lag time between price -- raw material prices going up and the price which are passed on to the customer, what is generally the lag time, 1 quarter, 2 quarters, 3 quarters?
See, it depends on customer to customer and the length of the contract that we have with the customer, plus the relationship we carry. So I would say, it could range anywhere between 2 quarters going up to 4 quarters. Again, having said that, if there is a contract which comes up for renewal, that, obviously, opens up the possibility to renegotiate the contract. But I would say, on an average, it would be on an annual basis. But Pascal, if you want -- if you have something else to add, please do.
You're absolutely right on this increase of pricing. There's always a bit of a lag between the time when we can transfer those increase in cost to customers due to sequence of opening the negotiations with customers. And as you can imagine, in front of us, we have a pretty big company with a pretty big purchasing power, so we really have to push harder to negotiate harder on those things. But little by little, we are successful in all our contracts to pass it by.
What we are facing is, over the last few quarters, inflation was coming and going. And once you start to negotiate new pricing and this pricing coming into play and we face another level of increase. So we are -- we were, I would say, in that kind of a race where we only have to come back to the customers to talk about new price increase.
What we can tell from now is we see decrease of this inflation rate. It's not terminated. From time to time, we see some slight increase. But this curve is decreasing definitely. So that's the good news. And that means we are going to end up the race of ongoing discussion, negotiation of new pricing. And after some time, we should cope with our new pricing, our new cost and we should come to back to a profitability level, that's very true. So that we don't leave anything on the table and we will push out all the customers whenever we have the opportunity to pass this cost increase. This is extremely important for us.
I think just to add, Harshil and Pascal, while, yes, it's true that we are dependent on Europe, the fact is that we are in a very niche kind of the pharma broad categorization. And we're still seeing an extremely strong pipeline for the new orders at Carbogen Amcis level and at EBITDA of about 20%, adjusted to that one-off, I think, overall, our situation is relatively less impacted as compared to maybe a general chemical or a agrochemical kind of sector.
Absolutely, Sanjay, yes, you're right on that point. As I was mentioning, at Carbogen right now, with this CRAMS development with current pipeline at 150 million received in total, we face a historical high level of purchase order for the Carbogen Amcis entity. So that's important to say. If you look only 2 years back, [indiscernible] 90 to 100 million. So that's a 50% increase in 2 years in this order pipeline. So it demonstrates how confident our customers are to place orders -- long-term orders with Carbogen Amcis, definitely.
We'll take the next question from the line of Nirvana Laha from Badrinath Family Office.
I hope I'm audible.
Yes, you are.
This is my first time on this call. So I'll take you back a little bit in history, so pardon me for that. So in your history of Dishman Pharma over 10 years, I think the company made something like 10% to 12% return on capital and about 10% to 12% return on equity. If you compare with other CRAMs or API players with plants abroad or in India, this is probably on the lower side. Since the merger in 2017, our ROCs, even when we were doing 25%, 26% EBITDA margin, our ROCs were at 5% to 6%. And since we have started the CapEx and since the Russia-Ukraine war has started, it's almost no returns on capital.
So can you help me understand, as a person who is evaluating this company with fresh eyes, what has led to this subpar performance on capital allocation? And today, what is the Board's expectations of return on capital or return on equity going forward in the next 1 to 3 years?
Thank you, Nirvana, for your question. So as far as the return on capital employed is concerned, if you look at our balance sheet, basically, there is one large amount of goodwill which sits on our balance sheet, which arose largely on account of the merger that we had undertaken in 2017. So it was a merger between the group entities, but the advantage that it gave us was to bring on the balance sheet, the intangible assets that lies within the company. So that was part of it, and part of it is the goodwill on consolidation.
So when you look at the ROC, the right way would be to discount that goodwill when you take the capital employed because there is actually no cash which is going out for the creation of that particular goodwill. So that is number one. Number two, as far as our fixed assets are concerned, most of our fixed assets are located in geographies outside of India. So those fixed assets get restated at the closing exchange rate, and so does the goodwill, gets restated at the closing exchange rate at the end of every reporting period. So if you take 31st March, that gets restated at the closing exchange rate.
So we have done a calculation, I think, about a year back. So the impact which is embedded in the fixed assets just on account of ForEx, that was -- that stood at about INR 600 crores. And today, that impact would be even higher. So even that needs to be discounted when you take the capital employed. If you take this out, the return on the capital employed, especially -- I mean, obviously, the last 3, 3.5 years, we were impacted adversely because of the regulatory issues in one of our largest manufacturing plant. But apart from that, if you take like financial year 2020 or 2019, our ROC came to roughly about 15% to 16%.
Our internal target is to move towards 20%, 25% in the medium term and get towards the 30% mark in the long term. But that is something which needs to be taken into account when you calculate the ROC ratios because that would be the right way to look at it. And if you're considering the debt, the right way to look at the debt would again be in foreign currency rather than INR, because there is a mark-to-market impact which keeps on happening on that.
Okay. That was very helpful. So in terms of your growth -- in terms of revenue growth, will you be in a position to tell us what kind of growth you are looking for from FY '25 to FY '26, and how would that look like segmentally? So I'm not looking at exact numbers or anything, but in terms of percentages if you've already been able to project something, how does the overall growth look like for the next 1, 2, 3 years? And segmentally, like India and Europe CRAMS and the generics and the vitamin D business, how would -- which would contribute how much to the growth?
So if you take a 3- to 5-year view, we would want to grow. And based upon what we have planned internally, we should be growing at a CAGR of close to about 15% on a consolidated basis. The major drivers of this would be, one, definitely India because now with the kind of the changes that have been brought in by Paolo and the team on the operational side, both at Bavla as well as Naroda, we believe that India now has the capacity and the capability to do a revenue of close to about INR 1,000 crores without any major CapEx. So that is the capability, which has already been built as far as the India sites is concerned, and it will be one of the key growth drivers, both in terms of revenue as well as in terms of the profitability.
As far as the Swiss entity is concerned, that has been growing year-over-year, and we do expect that it should be -- it should keep on growing at anywhere between 9% to 10%, if you take a 5-year view. So that is as far as the Swiss entity is concerned. As far as the margins are concerned, we should be somewhere around 20% to 22% because it would be very difficult to increase the margins exponentially in the Swiss entity, largely because of the cost, especially of the employees that needs to be incurred in order to get more and more development projects.
As far as the Dutch entity is concerned, we do expect a good amount of ramp-up in the vitamin D analogues business and that is the most profitable business for as far as the Dutch entity is concerned. Yes, I mean right now, we have certain pricing issues in terms of raw materials. But on a 5-year view, we do expect that, that business should keep on growing at somewhere around 10% to 12%.
As far as the French entity is concerned, that's a completely new revenue stream for us, and that would keep on growing exponentially over the next 3 to 5 years' time. And at its peak, it can do a revenue of anywhere between, say, EUR 40 million, EUR 45 million. So that will be all incremental revenue, which will be coming in over the next 3 to 5 years' time.
Shanghai, Manchester to keep on supporting the other business entities in terms of the intermediates and the key starting materials that we manufacture. So that will be kind of an integral part of the Swiss entity, Indian entity and the French entity.
So this will be more or less how we should be looking at the business where we would see a high amount of double-digit growth as far as India is concerned, and close to about 10% to 12% as far as the other entities are concerned.
Got it. And on the Indian entity, one, I think right now, the run rate on CRAMS is about INR 200 crores plus. So as you scale up towards INR 1,000 crores, how will the EBITDA margin trajectory look like? I think it's right now around 11%.
So if you see historically, the India CRAMS business had been doing close to about 40% kind of EBITDA margin. So we do expect that it should be able to reach those kind of EBITDA margins on the CRAMS side the business. As far as our Quats, intermediates, PTCs business is concerned, which we do out of Naroda, we should be able to generate close to about 25% kind of EBITDA margin. So that would be kind of the right way to look at it.
Okay. Got it. And a couple more questions. So one on CapEx. So I think the last call, you said that most of your CapEx -- once the CWIP is commercialized, your CapEx only becomes maintenance CapEx from next year. So is that right? And how much would that CapEx run rate be and for how many years?
So our maintenance CapEx is close to about $16 million to $17 million, all entities put together. So that is something that we will keep on incurring year-over-year. As far as the growth CapEx is concerned, yes, I mean, there will be a certain amount of CapEx. I would say, not significant, but only if it is driven by certain customer projects. Like for example, we had this ADC molecule, where we entered into a co-investment agreement with the customer and there could be a possibility in the future as well, where it is completely driven by increased offtake agreement that we entered into with the customer. Apart from that, we don't expect any major CapEx to happen over the next -- at least for the next 3 years.
The only other area where we are incurring, so to say, capital expenditure is on the digital transformation initiative that we are undertaking across all of the Carbogen Amcis entities. And we are trying to integrate the organization as much as possible as far as the systems, the processes are concerned.
Got it. And if I had to model your depreciation, I understand CWIP is yet come in. So how would you suggest that we try to project your depreciation in the coming years? Is there a percentage to revenue or something like that, we could look at?
I think, more or less, we can take the depreciation that you see in Q3 as, more or less, a depreciation that you will see in the future because the French assets are already, so to say, put to use. So we are already accounting for the depreciation starting from Q3 of FY '24.
Very nice. And last question from my side. You have about INR 1,000 crores of long-term debt. So what will be the kind of deleveraging plan for this in the next 3 years? And what kind of free cash flow to equity are you looking to generate from FY '25?
So as far as the long-term debt is concerned, if you see, most of that accretion has happened over the last 2, 2.5 years, largely because of the new facility in France, the ADC expansion, certain lab expansion in Switzerland and for the CapEx that we had done in India. So we do expect that with no major CapEx plans over the next 3 years or so, whatever cash generation happens from the group, it should help us in reducing the net debt at a group level. And again, while we might not prepay some of this debt, on a net debt basis is what we will keep on seeing a good amount of deleveraging that should happen over the next 3 years' time.
We have our next question from the line of [Kanv Garg] from [Garg Advisors].
Am I audible?
Yes.
Sir, one question. The first question is, if I look at the number of commercialized molecules, I think they have increased by 2 in this quarter. And I think there has been one increase in number of late Phase III molecules. Just trying to understand like what should be the potential of these -- revenue potential of these commercialized molecules and where and which therapy.
Pascal, do you want to take that?
Yes. So if I had the answer to that particular question, a precise answer that could be fantastic. But we are speaking of a moving target because they -- all those projects in Phase III, the revenue that potentially generating those molecules at commercial level depends on the market authorization, which is not in our hands because it's not our molecules that is belonging to our customers. So it's an average we can tell and you can be completely wrong because you have an assumption that this molecule could be a good fit for the market and then they don't get through the market authorization.
What we can tell from the historical data point of view is we used to have a bunch of molecules, 1, 2, 3 molecules that are going through this commercial bridge from the Phase III to commercial. So that's going to be the same. Now it is going to be a success for our customers. Are they going to reach their own marketing targets? What we have seen so far is a lot of the forecast that we are providing, we are not at the level that we were thinking at the beginning or at least we were just below that level.
So it's very difficult to pull something out of that and tell you something that is going to be aware of. I'd like to, I'd love to, because that will make our lives much more simpler, but it's almost impossible to predict a number. What we can tell you is what Harshil has mentioned in terms of global growth, that's what we are aiming and that's what we are trying to achieve this 15% growth over the few years, that's exactly what we are aiming at. I'm going to be more than happy to be there if we get a more successfully molecule in the pipeline.
One thing is sure, it's from the one that recently moved to this position of commercial, and I'm thinking of this specific ADC business that we have with this Japanese partner. We have extremely strong forecast and the return on the clinical trials that can be committed from the oncology community. So we are confident that we can reach this minimum 15%. This is crystal clear. Beyond that, very difficult to give you a number. I mean if I'm giving something, I will be completely sure, honestly speaking.
Sure. My second question is, sir, I think in the previous call -- firstly, congratulations on getting the regulatory inspection. I think in the previous call, we were mentioning that there is a pretty strong order inquiries, and I think customers are waiting for this inspection to happen. I think we were saying that from this site, after the clearance, we can make some INR 400 crores to INR 450 crores revenues in the next year itself because the last 3, 4 years, the inventory has been exhausted.
So I think the growth expectations, at least for the FY '25, I mean, I think in the opening remarks, you said it will be mid-teens to high teens. I think the numbers will be significantly higher, right? I mean, INR 400 crores or INR 450 crores addition from Bavla, then I think the French facility has gone online. In Dishman, again, like you said, the ADC molecule has come into picture, that will also come into commercial production. So I mean why are we giving that 15% to 20% kind of revenue because it seems that the growth will be much higher at least for the next year?
Yes. So it's always better to...
In the past, the history has taught us that it always pays to be conservative. Let us achieve it and we will talk about it.
We have a next question from the line of Kumar Saurabh from Scientific Investing.
I'm a new investor. One question I have is the amount of volatility I see in the ForEx-related losses and all is very high, and I have a very layman understanding. So why can we hedge it and make it more stable? That is my question number one. Question number two is I have gone through last 3 years of all the con call transcripts and if I look at the projections, I think in one of the con calls, it is said that the minimum expected top line growth rate is 12% to 15% once we get the site approval, congratulations, we've got it, and the EBITDA growth rate should be higher.
There is one more con call discussion where it is said that by FY '26, we will reach almost 24%, 25% kind of EBITDA margin. And the current EBITDA margin is almost 14%. So if we take a 15% to 20% EBITDA growth rate from 14% EBITDA margin in next 2 to 3 years, and also, we are seeing that we'll reach 25% EBITDA margin. Somewhere, I think the numbers don't match. So I have these 2 questions if you can provide more insights.
Sure. Sure, Saurabh. So the first question related to the ForEx movement. So yes, I mean, we have a prudent hedging policy already in place. So all of the revenues, all of the costs, which are in different currencies and the revenues, the liabilities, we have a proper hedging in place in terms of the forward contracts that we enter into. We also enter into [swap] in order to hedge the currencies. But the notional ForEx loss, which is on account of just translating the balance sheet from one currency to another currency, obviously -- and that is because all the reporting has to happen in INR. And similarly, for the Swiss entity, the reporting has to happen in Swiss franc.
So now whatever balance is available, and in Switzerland, it is possible to keep separate bank accounts in different currencies, which obviously in India is not possible. So whatever -- we have like a dollar account, the euro account, the GBP account and then a Swiss franc account. So whatever is the balance, which is remaining as of for particular cutoff date, so say, for example, if a customer has given us an advance on, say, the 29th of December in U.S. dollars, that balance is in the U.S. dollar account, and on 31st of December, I will have to restate that balance at whatever is the closing exchange rate.
Similarly, if there is balance, which is outstanding on 30th of September, the same gets restated. Because of the significant adverse movement that we saw in the last quarter, we will have to account for a mark-to-market impact on that balance, on that cash balance, which is available with us in an account or in a currency which is different from the reporting currency. And the same thing happens in India, because all the reporting is in INR, while most of our balances, most of our loans are all in foreign currency.
So yes, I mean, there will always be a notional impact, but the important thing for us to protect is the realized foreign exchange loss. So if you see, over a period of time, there has never been a realized foreign exchange loss on the liability side or on the asset side because of the prudent hedging mechanism that we have in place, and that is what we try to protect. So that is the answer to question number one. If you have any further question on that, please let me know. Otherwise, I'll just move to the next one.
Yes, sir, please go ahead.
So as far as the second question is concerned, in terms of the growth in revenue and the EBITDA, so what we said is that, yes, we do expect a growth in the revenue of close to about 12% to 15%, and that is the similar guidance that we're giving right now that we expect a CAGR of close to about 15% if we take a 3- to 5-year view. What we said is that the EBITDA growth will be much higher than this 12% to 15%. And you are absolutely right that our target is to move to 24%, 25% of EBITDA at a consolidated level because that is the kind of EBITDA margin that we were already doing if you take the financial year 2020 or maybe even 2019.
So the point that we want to make is that we want to move back to those kind of margins. At that point, pre-EDQM, our target was to move to 30%, which obviously was not possible because of the EDQM overhang. But now that, that is gone, our minimum expectation will be to move to the levels what we were -- the levels that we were at prior to the EDQM observations. So a 24%, 25% kind of EBITDA margin is something which should be achievable and that is what we target over the next 2 to 3 years' time. And I've already mentioned about the key factors that would drive that. And as of now, we don't see any major challenges in order to achieve that.
But just to caution you and just to clarify, the next year's projected target is around 20% because of the fact that we are still in the transition. And we are in the first full year of the new facilities, where it is not the optimum level of operations, neither at the France facility nor in co-investment project that has been just recently commissioned. So the 20% is what is internally targeted for '24-'25. And as Harshil explained, we should see a gradual improvement. But we will talk about it as we start achieving the numbers that we are currently giving as a guidance.
And sir, this 40% number we used to do 4, 5 years back and surely, market has changed in the last 4, 5 years, more competition would have come. So what gives us confidence that old margins are still valid? Like did we have conversation with the client and we have enough confidence that client will be able to serve on the same margins?
Sorry, I didn't get you. Did you say 40?
The 40% EBITDA margin for...
I think, Sanjay, he is talking about -- he is taking from India CRAMS business. So Saurabh, you are absolutely right. So for us, yes, the cost base has increased because of increased compliances that we have put in place as far as the Bavla site and the Naroda site. So yes, the cost base has increased from what it was 3.5, 4 years back.
Having said that, it is not so much so because of the competition, but largely because of the increase in the cost base that we were compelled to and we have also increased the selling prices for many of our customers. And that is, again, an ongoing process as far as the India business is concerned as well. So we are trying to pass on that increased cost to our customers to the extent possible and that will help us to reach the close to 40% kind of EBITDA margin over the next 2 years' time -- 2 to 3 years' time.
Okay. And sir, last question, which is more extension of Nirvana's question. So we discussed about the maintenance CapEx. We have some clarity about the growth and margin. So my sense is our cash flow from operations should go back to INR 300 crores plus in next 1 year and maybe INR 350 crores, INR 400 crores in next 2 years, correct me if I'm wrong, and given we have this maintenance CapEx and then we have debt, which is around almost -- total debt around INR 2,300 crores.
So if we can go 2, 3, 4 years down the line, how do you see this debt reducing? Like will we go from INR 2,300 crores to -- will we maintain it? Or will there be a significant deduction or like INR 1,500 crores? Do we have some internal targets to achieve to make the balance sheet stronger, especially given on the P&L, we almost -- incurred almost INR 100 crores of interest. So if we are able to reduce the debt and save that interest, then of course, it helps to improve our profitability.
Right. You're absolutely right on that. So as far as the debt is concerned, the right way to look at it would be the net debt number and that too in foreign currency because we hardly have any debt which is denominated in INR. And unfortunately, since all of the reporting happens in INR, there is a huge mark-to-market impact on the debt figure. And that is the reason in our presentation, we mentioned the Swiss franc-denominated net debt, which is right now at about CHF 158 million.
What the plan is that as we keep on generating the free cash flow over the next years, we would keep on seeing the net debt coming down with no major CapEx plan that we have in sight. So yes, I mean, we would want to get back to close to about CHF 100 million of debt, CHF 100 million to CHF 110 million over the next 3 to 4 years' time. So that's the target.
Okay. So that means our interest cost should come down from INR 115 crores to somewhere around INR 60 crores, INR 65 crores in 3 to 4 years?
Yes. So there are 2 factors in the interest cost. One is, obviously, the increase in the debt. But more importantly, the increase in the interest cost. So as you already know, because of the high inflation in the U.S., Europe, also in India, the interest rates across the board have gone up significantly. So like for example, the USD LIBOR, which went all the way down to zero, is currently at about 5.5%. Same is the case with Swiss franc, EURIBOR as well as the GBP LIBOR. So we will also see an impact because of the reduction in this interest rates over the next 12 months and going into the future. So one, that will help us in reducing the interest outlook, and the second is, obviously, the decrease in the net debt.
One last question. So we have spent a lot of money. And finally, we have got clearing both from Japanese and European authorities. Just, as a layman, if you can explain what went wrong that time? And through all this investment, what have we corrected so that in future for, let's say, next 3, 4 years, we should not expect any kind of regulatory hurdle and the next journey is going to be smooth? If you can explain in a very layman manner.
Sure. Paolo, you want to take that?
No, I didn't hear, actually. There was breaking in the voice, so I did not listen.
So he was -- I think he was asking what exactly went wrong, why we got this negative remarks from EDQM and what are the key corrections that we have implemented. Briefly, of course, in the interest of the paucity of the time.
What went wrong, let's say -- very briefly, let's say, there were some guidelines that maybe were not implemented very -- that were not updated on time, probably. See, I was not here exactly when this happened at global site level.
What should be done? We implemented the new technology from what concerned the material management, the new quality technology. And we started a long process for what concerned the demand, also regulatory maintenance. So we rebuilt many facilities. So the guideline keeps changing continuously. So to get out of the guideline is becoming pretty simple. So likely, we need to keep updated almost monthly to not fall out of the guideline. So I think this is one of the main issues which is not only in the pharma industry. I think we have to be -- to stay very much updated about the changes of the guidelines. And when the guidelines changes, we have to adapt very quickly to this, on engineering, quality and so on and so on. I think this is more or less what maybe went wrong, and this is what we need to be sure that remain in the right path.
The next question is from the line of Ritwik Sheth from One-Up Financial.
Sir, I have a few questions. Firstly, after the clearance received from EDQM and the Japanese regulatory agency, how has the inquiry been at Bavla? And have you seen better conversion? I know it's too early, but can you give a sense of how that has shaped up after we got the clearance?
Yes. Paolo, I think you should answer that.
Yes, yes, yes. So yes, I have to say just in less than 2 weeks. But we have seen, as I mentioned in the previous call, we are seeing a very great enthusiasm [indiscernible] in October. And of course, the customer needs to see, as I think almost everyone, to see the new GMP certification uploaded in Eudra GMP site in Europe.
So in the last week, we received a lot of calls. As I said, I mentioned also in the past call, we were close to -- closed 2 contracts. So now we are able to sign a new contract for 2 projects, which are old projects, but the contract has expired. And the new GMP certification was the key point to be able to sign this contract.
We have seen many customers are approaching us from -- and they are approaching us also for very interesting project in the past. So we have seen, as I said before, a great enthusiasm. In just 10 days, it's like we see a really positive building around the momentum.
Okay. And does this customer need to physically visit the site?
Yes. So basically, the European customer, they are obliged, basically, to audit us. Even though [indiscernible], there is a kind of regulation in Europe. But many customers, they are also relying on auditor agency. So agency are coming here, they are auditing us and they are using the same report. But for example, last week, we discussed with a customer which was -- wanted a project very urgently, and we shared the GMP report because they were the same products which were audited by the EDQM. They think they can handle this with European authority. So yes, we are expecting a lot of audit from customers.
Got it. Okay. And given this, what kind of revenue growth are we looking at for the India business for FY '25 from the current low base, especially from the India CRAMS business?
So I think the India CRAMS business should grow at least in double digits, if not more for -- I mean, high double digits in the current or in the next financial year. And as far as our Naroda business is concerned, we do expect a good amount of growth in that particular business as well. So overall, I think India CRAMS, we are expecting that it should be closer to what we're doing pre-EDQM in the next financial year.
Okay. So India CRAMS should be potentially INR 300 crores to INR 350 crores in FY '25, would that be a fair assessment?
Yes, that's a fair assessment.
Okay. And sir, second question is on the employee cost. This quarter, we have seen a sharp jump on a Y-o-Y and Q-on-Q basis. So where does this employee cost settle? I think you've previously mentioned because of the currency translation, but -- so where does this settle around the current INR 300 crores, INR 310 crores quarterly run rate? Does it settle here or with this new French and Swiss facility, this goes up further in FY '25 from current base as well?
So this increase in the employee cost is largely driven by the FX movement. So if you just compare Q3 FY '23 to Q3 FY '24, there is an increase on account of FX to the extent of about INR 24 crores. So that is just on account of translation. So while the total increase is INR 30 crores, of that, INR 24 crores is just on account of the Swiss franc conversion into INR. Because last year, the average exchange rate for the Swiss franc-INR was close to about 83, which this year is about 93, so that is an increase of almost about 12% just on account of the translation.
So what we expect is that, going forward, we do see a major recruitment that should be happening at, I would say, globally for us, albeit for the FX movements, more or less we expect the employee costs should remain, more or less, at the same level.
Okay. Okay. And just -- on this, if Indian rupee appreciates against the Swiss franc, this can reverse as well, right, keeping the same...
Absolutely. I mean, historically, that has not happened, but yes.
Theoretical, but yes.
Got it. Got it. Okay. And sir, another question was on the French facility. So you mentioned at the start that we're looking to do EUR 7 million, EUR 8 million in Q4. Did I hear it right?
Yes, that's right.
Okay. And for FY '25, this number, can we annualize, EUR 25 million, EUR 30 million?
No, I think it would be around EUR 20 million, Harshil?
Yes. I think about EUR 20 million for the next financial year is something which can budgeted.
Okay. And that is about breakeven at EUR 20 million?
Well, it should be in excess of the breakeven is what we're expecting. Close to about EUR 17 million -- EUR 17 million to EUR 18 million would be kind of the breakeven level. So yes, I mean, we should be a little bit in profit.
Okay. And where does this reporting happened in the segment? Does it come in the Carbogen Amcis CRAMS?
Yes. So right now, it is clubbed in the Carbogen Amcis CRAMS. From next year, what we would be doing is putting it in a separate segment for the French facility because that's a different business. And as it becomes sizable, we will start showing those numbers separately.
Sure. Got it. Sir, one last question from my end. So what is the gross debt and the interest cost? And what is the split of the debt in terms of FX, like Indian currency and Swiss franc and USD and euro, if you can give that split, please?
Our major debt is in Swiss franc. So I would say almost 95% is in Swiss franc, and that is the reason we report the debt in Swiss franc when we keep the presentation at the end of every quarter. So right now, as of 31st of December, the net debt is about CHF 158 million. And the gross debt in INR is roughly INR 2,105 crores.
Okay. So gross debt is INR 2,105 crores and net debt is approximately INR 1,600 crores?
Yes. So net debt is INR 1,558 crores.
Okay. Okay. And what would be the average interest cost on this?
So the average interest cost is -- right now, it is close to about 5%.
5%?
Yes.
I think, Moderator, if we can -- if there are no further questions or if there is a repetition, maybe we can take them again offline and conclude the call with the last question.
I think, Sanjay, there are just two questions remaining. So maybe we can just complete those.
Yes, yes, yes.
We will take the next question from the line of Nirvana Laha from Badrinath Family Office.
So Harshil, the interest cost this quarter, INR 33 crores, can we assume that this is the peak interest cost that we see per quarter because we'll start deleveraging from here?
Yes, I would say so, INR 33 crores looks to be a fair assumption. I mean unless and until something happens and the LIBOR rates go up to 10% or something. But apart from that, yes, this can be taken as the peak.
Sure, sure. And on employee cost, I mean, thanks for your explanation of the inflation of CHF and how much impact that had. But even if I normalize for that, I think you're at about 40% kind of to revenue on employee costs. If I compare that with another CRAMS CDMO player which has factories in the U.S. and also adjust for how much the INR has depreciated against the USD versus the CHF over the last 5, 10 years, I think their costs are around 27%, whereas you are at 40%. So I don't think that even for the currency adjusted to currency that is any way comparable. So what is your thought around this? And is this figure going to come down as India scales up? Or what is the number we should update with, say, 2 years out?
I think as far as the employee cost is concerned here, and if you take entity-wide P&L for us at a group level, the largest employee cost that we incur is in Switzerland. So almost 50% to 55% of the P&L as far as the costs are concerned in Switzerland, that is the employee cost. And that is the kind of cost that we will have to incur in order to make sure that we are able to get more and more projects for development on the NCE side. I mean what we sell is the talent, is the technical capability that we have at the Swiss entity and that attracts our customers the most.
What we are trying to do is to try and see how we could reprice the project as far as the development work is concerned. But it would be very difficult for us to reduce that cost from what the cost is currently. And in a country where we are surrounded by the likes of Novartis, Roche, et cetera, I mean, we have to match the salaries which those guys are paying. And Switzerland, all said and done, is one of the most costly, but from a quality perspective, one of the most stringent, one of the best that you can offer as far as the CDMO is concerned. So I think that is something that we will have to keep on incurring.
And yes, I mean, close to about 40%, maybe we can reduce it a little bit as the revenues increase from India, because that is what I also mentioned earlier that India would be the destination where we can actually bring in the cost efficiencies. And now also China, because China, which earlier used to make losses, now it has turned profitable for us. So these are the locations where we can actually bring in cost efficiencies. And as the revenues keep on increasing, we would see the employee cost as a percentage of revenue declining, and that would also be one of the factors in improving the EBITDA margins for the group as a whole.
Yes. And Harshil, just to add, if you see the consolidated position, the raw material cost is hardly 20%. In Switzerland, 50% of the revenues are coming from developmental work, which is where the main input is human technical inputs. So we have a very strong team of scientists, PhDs, et cetera, working. So there's a lot of intangible or soft skills involved, so therefore, you find this employee cost, historically, it has been high. And still, we should be able to deliver a 20% to 25% EBITDA in a normalized situation.
So I think it's -- we don't know which CDMO or CMO player you have compared our numbers with, but this is what it is actually. So I don't think everyone is directly comparable.
Sir, I mean, I am happy to name it and it's Piramal Pharma. Also, like from 2017 to 2019, I think you guys were doing 35%, 37%...
Maybe what we can do is we can take this offline once we also analyze what you are talking about. And then I think, Harshil, can take care of your further requirements on this, because we'll have to look at the model actually.
We'll take our last question from the line of Amish Sanghvi from Annual Research.
Just I would like to know what is the loss incurred at EBITDA level and PBT level of -- for the French facility?
Sure. So for the French facility, for the 9 months, the revenue was EUR 3.9 million and the loss was EUR 5.6 million. For the quarter, the revenue was EUR 2.3 million, and the loss at an EBITDA level was EUR 1.4 million.
I would now like to hand the conference over to Mr. Pascal for closing comments. Over to you, sir.
Thank you very much, Moderator. And thank you very much, dear shareholders for attending this session of report. I hope that we have answered all your questions. And as Sanjay mentioned, if there is further details, we can address that offline. Thank you very much, and I wish you a good evening.
Thank you so much. All the best.
Thank you very much, everybody.
On behalf of Dishman Carbogen Amcis Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.