Dishman Carbogen Amcis Ltd

NSE:DCAL

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the Q4 FY '22 Earnings Conference Call of Dishman Carbogen Amcis Limited. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Arpit Vyas, Global Managing Director. Thank you, and over to you, sir.

[Arpit Vyas, executive]

Thank you, moderator. Good evening, everyone, and welcome to Dishman's yearly conference call. It has been an exciting year full of eventful things. We would like to briefly mention some important things before we mention the numbers and move on to the Q&A.

Since past couple of years, our CEO -- previous CEO, Mark Griffiths, had requested that his desire to retire. So it was mainly him who was communicating and we said, okay, fine, then let us plan for it. At which point in time, we will identify the possible candidates who can able to fulfill his spot at least as a CEO of Carbogen Amcis.

And after almost 1.5 years' worth of evaluation, both of us were decided that our VP Commercials, Pascal Villemagne, was a perfect fit as a candidate. And about a year ago, we had asked Pascal if he had the desire to take over Carbogen Amcis -- as Carbogen Amcis CEO. And after much deliberation, he gladly accepted and we were extremely thankful to him for this. And he has -- from 1st of April as of this year, he has been -- his contract has been renewed as presenting the CGAM, CEO. And we have allowed Mark to, as planned, retire. He will be available to us till the 5th of August, but his retirement has been granted and he is happy for -- with all of us to allow him to spend the time with his family and to do something for himself now. And we all would like to congratulate him for his well deserve retirement as well as wish him all the best for the future.

Coming to the business side of things. From the perspective of the EDQM challenges, we are very glad to say that we have completed almost 85% to 88% of the EDQM-related collective actions and we are on track to extend the invitation to the European authorities as early as October or November this year. In the meantime, we have been successfully resumed the key major products as of this year. We start manufacturing for the major customers like Janssen and Mylan, which is now Viatris.

And at the same time, we have been working very hard on improving the operational efficiency and working on operational excellence, where we have made -- we have plan to make valid changes in terms of the way we currently manufacture by upgrading the equipments, which allows a lot of a lot of operational efficiency to take place, which will help us increase the yearly output substantially.

And the main agenda would be -- behind this would be that the people will be able to perform much better than to perform in a laborious way. So we are going -- we are adopting more of an automation in terms of upgrading our facilities. So that plan is already underway, and some of it is part of the EDQM as well. And it is going very well.

So all in all, a lot of exciting things to look forward to, we would like to get into the Q&A as quickly as possible. So I would like to briefly hand over the call to our new CEO. Congratulating him for his appointment as CGAM, CEO. And ask him to please introduce himself to all of you. And then Mr. Harshil Dalal will be able to give you the numbers and then we move on to the Q&A. Thank you.

[Pascal Villemagne, executive]

Thank you very much. Happy for your nice introduction. I wish to join you wishing of all the work that Mark has done over those years bringing Carbogen Amcis and Dishman Carbogen Amcis to where we are now.

[Operator]

Mr. Pascal, sir, sorry to interrupt. If you can speak closer to the device or use the handset mode. Your voice is bit muffled.

[Pascal Villemagne, executive]

Okay. Is it better, I guess?

[Harshil Dalal, executive]

Hello?

[Pascal Villemagne, executive]

Is it better, I guess?

[Operator]

Yes, this is better, sir, yes.

[Pascal Villemagne, executive]

Okay. Sure. All right. So thank you, Arpit, sorry for the start with the bad microphone. I wanted to join you to emphasize all the work that Mark has done so far over the years, bringing Carbogen Amcis and Dishman Carbogen Amcis to where we are today.

Some keywords about myself. As Arpit mentioned, I'm not new to the company because I work for Carbogen Amcis since now 10 years as the Vice President of Sales and Marketing. I worked very closely with Mark Griffiths over all those years. I'm coming from a clinical background and clinic by education, and I completed the mass marketing business back in the 90s. Since that I worked for different companies. I started at Sanofi then moved to Philips Electronics, then back to the pharma industry, working for different clinics U.S., Japanese, European-based companies and I joined Carbogen Amcis in October 2011.

Overall, those 10 years at Carbogen Amcis, I have experienced a lot of different momentum. And coming back to the situations right now over the last quarter of the year and this final year-end, we can say that although the market is still very strong in many aspects in the pharma industry, we still face some challenges with the credit situations in China, for instance, or some challenges in some of the pricing because of the cost of energy and steel have been increased.

However, although the global situation is not that easy. We succeed to perform quite well by reaching a very high number by the end of financial year as Harshil will tell you later on. And yes, we can still count on a very, very strong customer base with very, very strong partnerships we have had with some customers in Japan, for instance, as you have heard in the past, we have very close collaborations where we have built a facility, a dedicated facility for drug products which is already in the market in the interim.

Besides that, we're also very strong over the oncology arena, which is the biggest pharma sector with a very important growth and a growth that is going to reach a record for the next few years. So from that perspective, from a business perspective, we do extremely well, and we have a very, very strong pipeline with -- by the end of March more than CHF 100 million of projects into the pipeline. So even much more than last year where we ended the year '21.

In that perspective, we also see a lot of opportunities rising up from the Chinese markets. As I just mentioned, we are facing a bit of issues over there. But we have been very lucky because we have very, very loyal people at Shanghai site. And just for your knowledge, most of our people have stayed on the plant for several weeks and days, sleeping at the facility to enable productions to carry on and to deliver our customer. So very, very much appreciated from all our customer base. And by this behavior, we demonstrate that we can be a very global company completely connecting with our customers.

And that's the end of my introductions and market perspective. And I'd like to hand it over to Harshil for the financial numbers.

[Harshil Dalal, executive]

Thank you very much, Pascal. A very good evening to everybody. Regarding the financial numbers for the quarter ended March 31, 2022, we posted a net revenue of INR 569 crores. So this was a record revenue for us as far as the quarterly performance is concerned.

As far as the EBITDA is concerned, there were obviously a lot of one-offs that were charged in the P&L as a provision in the current quarter. So it is better to look at the adjusted EBITDA rather than the reported one. The adjusted EBITDA for the quarter stood at INR 84 crores, representing 15% of the net revenue. The cash profit for the quarter stood at INR 70 crores.

As far as the yearly performance is concerned, we posted a revenue of INR 2,140 crores as compared to INR 1,912 crores for the full financial year '21. The adjusted EBITDA for the full year stood at INR 394 crores as compared to INR 274 crores in the previous year. So there has been a substantial improvement over the previous financial year. The cash profit for the full year stood at INR 340 crores as compared to INR 254 crores in the previous financial year.

Talking about the one-offs in the current quarter, for which specific provisions were made, we can go item by item. So as far as Carbogen Amcis AG is concerned, we had booked a provision of CHF 2.46 million for certain impurities that were observed in one of the batches for our customer. And this was an impact of -- in rupee terms of roughly about INR 20 crores which has been provided for in the current quarter. We obviously are currently evaluating the options of operating an insurance claim because this is fully covered by insurance as well as regular claim against the vendor because the root cause for this particular impurity was a defective supply by one of the vendors.

There was also a onetime provision for pension and lease that is classified under employee benefit expense, and this is to the tune of about INR 12 crores. So these are the 2 major impacts in Carbogen Amcis AG, which has actually impacted the EBITDA performance for the quarter. Apart from this, in Carbogen Amcis AG, bulk of the revenue in this quarter out of the CHF 45 million of revenue that Carbogen Amcis did, CHF 30 million was attributed to development revenue and most of it was related to preclinical Phase I, Phase II, where the margins are comparatively lower as compared to the Phase III revenue.

Also within the projects that were closed during the quarter ended March 31, '22. There was a lot of revenue that got accrued because of the invoicing of the material components in the development projects, which obviously come at a much lower margin. Specifically, they come at a margin of about 7%. And hence, that had a negative impact on the overall margin at Carbogen Amcis AG. But as we have mentioned earlier, it is difficult to see the performance on a quarterly basis. And as these projects keep on moving as we keep on invoicing and as we keep on booking the revenue based upon the percentage of completion, we could see that the margins coming back to 20% in the coming quarters.

As far as the one-offs in Carbogen Amcis BV, that is our Dutch business is concerned, there is a onetime provision of INR 4 crores for the soil recommission. So we need certain cleaning for the soil at the particular site because of the chemical usage. And it's been done after a span of almost 5 years. So there is a INR 4 crore of provision that has been built in.

One of the major impacts that we also saw in Carbogen Amcis BV as well as in our U.K. entity was a significant rise in the power and fuel cost, mainly caused by the Russia-Ukraine war. And this steep hike in the prices of gases and fuel amounted to -- combined amounted to roughly about INR 8 crores. So what we try to do at our end is to pass on the increased cost, whether it's related to power and fuel or otherwise to our customers. However, since this was an unprecedented event, which happened in the last quarter and the purchase orders for most of the customers were already booked, it was not possible to pass on this cost in the last quarter.

What we believe is that as the contracts with our customers come up for renegotiation, as they are right now, we would be able to pass on most of this cost to our customers in the revised contracts and in the revised purchase orders.

Lastly, there was a change or there was an interpretation from the IFRS perspective for certain IT project costs, which were incurred in our French entity as well as in Carbogen Amcis innovation amounting to almost INR 18.4 crores. So we had implemented the Microsoft Dynamics 365 in France. And according to the new interpretation, which has come out from IFRS, all of the implementation costs along with the license cost for these kind of projects have to be expensed out rather than getting capitalized and amortized over a period of time. So we have taken that onetime hit of INR 18.4 crores.

All of this put together amounts to a total impact of about INR 62.34 crores as a onetime impact which is added to the reported EBITDA amounts to INR 84.3 crores as adjusted EBITDA figure. This adjusted EBITDA figure obviously does not have the impact of the lower margins on account of the material invoicing for the development projects that I explained to you, but that is also another factor because of which the margins at Carbogen Amcis AG are greater.

Talking about the segment-wise revenue and EBITDA performance, Carbogen Amcis AG had a margin of 14.7% for the fourth quarter of FY '22. This translated into a full year margin of 18.7% as compared to 19.1% in the corresponding year FY '21. So if you see on a yearly basis, the margins are more or less comparable. But because of the one-offs that I explained, the EBITDA margin for the quarter looks to be subdued.

As far as the U.K. entity is concerned, the EBITDA margin stood at 13.8% for the quarter. This translated into 17.6% for the full year and this compares to 19% for financial year '21. On the marketable molecules side, Carbogen Amcis BV reported a margin of 30%, 29.5% for the quarter, translating into 30% for the full year as compared to 34.5% in the comparable year FY '21. The reason for the decline in the margins at Carbogen Amcis BV has to do largely with more sales of cholesterol as compared to vitamin D analogs in the current financial year, which we believe is again a moving piece. And as the sales of vitamin D analogs keeps on increasing, we should again see these margins in the range of 32% to 35%.

As far as the revenue breakup is concerned, CRAMS India for the quarter did a revenue of INR 48 crores as compared to INR 23 crores in the comparable quarter last year. So this is again reinforces what we have been saying that the India operations has been improving both from an operational standpoint as well as from a revenue standpoint.

For the full year, India CRAMS did a revenue of INR 160 crores as compared to INR 53 crores in the comparable quarter FY '21. So that is a significant improvement. CRAMS - Switzerland, France and China put together did a revenue of INR 375 crores in the fourth quarter of FY '22 as compared to INR 342 crores in Q4 of FY '21, representing a 9.4% growth. This figure is on an annual basis translated into INR 1,371 crores versus INR 1,280 crores in FY '21, representing a 7% growth.

CRAMS U.K. did a revenue of INR 25 crores as compared to INR 21.6 crores in Q4 of '21, representing a 16.5% growth. For the full year, this revenue stood at INR 118.8 crores as compared to INR 98.6 crores for the full year FY '21, representing a 20% increase.

Carbogen Amcis BV, our Dutch business, reported a revenue of INR 63 crores in the fourth quarter as compared to INR 72.7 crores, representing a decline of 13% in the quarter. However, as you would be recollecting Carbogen Amcis BV did exceptionally well in the first 2 quarters because of significant amount of sales of cholesterol as well as vitamin D analog. And hence, for the full year, the revenue stood at INR 306 crores as compared to INR 262 crores, representing a 16.8% growth.

As far as the others within marketable molecules is concerned, the revenue stood at INR 57 crores for the quarter and INR 185 crores for the full year. So in all, we did a revenue of INR 569 crores for the quarter and INR 2,140 crores for the full year, representing a 12% growth over FY '21 number.

Apart from this, we also had reported a couple of exceptional items which are below the profit before tax. And this exceptional item relates to one research expenses that we had earlier capitalized, which have been charged to the P&L as well as certain inventories, which was outdated, which we have written off in the P&L. So these were 2 major one-offs as far as the exceptional items are concerned in the P&L.

I think with that, I would like to hand over the call to Mr. Sanjay Majmudar, our Independent Director.

[Sanjay Majmudar, executive]

Thanks, Harshil, and good afternoon -- good evening to all participants. So as Harshil explained, there were quite a bit of one-off provisions, which are actually noncash provision. And that's done on a very conservative basis to ensure that there is no baggage that we subsequently face.

I do understand that even on a normalized basis, there is a bit of a minor compression on the EBITDA margins in Q4 even after we consider the adjusted EBITDA, which is at around 15%. But I believe that going forward, because of the typical issues relating to revenue mix that we saw in the Q4, particularly in Carbogen Amcis and more importantly, now with the EDQM more or less behind us in Bavla and therefore, India CRAMS also expected to post a very smart recovery in the fiscal '22, '23.

I think '22, '23 looks like very much a normal year that we should see both in terms of a decent normal growth and a significant improvement in profitability expected as compared to the -- so if the top line may grow, say, just around by 10-odd percent, the bottom line of the profitability should improve much more than the top line in the current '22, '23, which should signal as the return of complete normalcy.

I think with this, Harshil, we can open the house for Q&A.

[Harshil Dalal, executive]

Sure.

[Operator]

[Operator Instructions] The first question is from the line of [ Praveen Srinivas ] from Samsung AMC.

[Unknown Analyst]

Sir, one question I wanted to ask was if you look at your employee costs over time, right, so when FY '19, they were at around 35% of your sales. And now you've obviously increased while the sales have not moved as much. So how do you sort of think about this employee expenses going forward, given the growth that you're expecting for the next 2 years, how will we sort of think about the employee expense growing on the current base?

[Harshil Dalal, executive]

So as far as the employee expenses are concerned, obviously, there has been quite a bit of recruitment over the last 12 months. And this is obviously considering the projects that are going to be up and running in the next 12 months or so. So we would see much of these employee expenses translating into revenue over the next 2 to 3 years' time.

Having said that, one of the other factors, which is a major contributory to the increase in the employee expenses, is obviously the ForEx impact because 90% of our employee expenses are from Switzerland, France, U.K., from all of our overseas entities. And all of this employee expenses, while in the local currency, they are paid in the local currency. When the translation happens in India in INR, the ForEx impact on these expenses is inbuilt into the financial numbers that you see.

So overall, we do believe that there would be a steady recruitment of people even going forward as we start taking new projects. But many of the FTEs have been recruited over the last 12 months, which would yield into revenue figures in the future. And maybe Pascal, do you want to add something?

[Pascal Villemagne, executive]

No, you summarized very well the situation. We are facing from some challenges in some affiliates, and if we look at the French affiliates, the overall cost of salaries increasing because we are starting the process to hire people. Prior, we finished the time because we need those people to run the qualification. I mean, in the meantime, we don't have the revenues that are coming in front of that. But it will come when the plant is going through rise, for sure.

So yes, there is here-and-there some increases, some due to the kind of very low unemployment rate that we are facing in Europe. So you can see some inflation in some income layers and some of us, like I said, in France that we are anticipating a number of positions in front of the new facility to get operational in a few months from now. So yes, it's a challenge. But as you said, in the next few months, we are going to recover and transform those increase in cost into revenues in some extent. And with the gap in terms of pure cost, we are going to transfer this to the customers.

[Unknown Analyst]

Okay. Another follow-up question on that. So how should we think about sort of the part to profitability for the CRAMS business? And also like in FY '19 and in FY '20, you used to do around like 15% to 17% EBIT margins, right? So how should we think about that going forward? Like how we'll get there again? And how should we sort of think about what would be sort of driving that profitability, right? Is it just an increase in sales? Or is it like something else that you're thinking of lowering those costs? How should we think about that?

[Pascal Villemagne, executive]

This increase that's something we are working on. We'd like to come back to what we could call a standard performance in term of profitability in our business. As I was saying, we are also facing a number of issues in terms of increase of cost, in terms of cost of energy, for instance, that are really, really affecting our P&L right now. And those costs, we have been able to retransfer it straight to our customers because there's the pace we have on projects and the pace we are running business between the time you get a commitment with a purchase order and we start the project and we finish a project, it's very difficult to retransfer those extra cost straight forward. So you have to wait for the next wave of extension. So there's definitely a lag between the price. We see those extra expenses effecting us and the time we can recover those costs. I hear some instructions to the different sales we negotiate where the possible pricing and project cost with customers to move -- delivering the cost.

And further on the line, we also look at different type of operational efficiencies that we can apply in our plants to basically work on our internal costs to improve our internal profitability. So playing on those 2 leverage, we should be able to go back to a normal profitability I would say.

[Harshil Dalal, executive]

And apart from that, [ Praveen ], if you see over the last 2 years, obviously, the India operations has not been yielding -- well, the EBITDA is negative as we speak right now. So as we see the ramp-up in the operations of the India business, both from Naroda as well as from the Bavla sites, we both see the margins at a group level are also increasing substantially because India is the largest manufacturing setup that we have and in terms of EBITDA margins, it has always been the highest contributory in terms of the percentage to revenue. So as we see the ramp-up in the India operations happening in the current financial year and going forward, that would also have a positive impact on the group EBITDA.

[Unknown Analyst]

Sure. Sir, just a follow-up on that. So would you say that as utilizations in the Bavla plant goes up and more products coming out of that? Are the costs of that already sort of baked in currently? Or would you be doing that with some more incremental costs?

[Harshil Dalal, executive]

So right now, obviously, all the fixed costs are getting incurred irrespective to the capacity utilization. And that is the reason why the EBITDA is subdued as far as the India operations is concerned. So what will happen is that going forward, I think it will be just the variable cost which would be kind of the cost component in terms of what would impact the profitability. Otherwise, the fixed costs are already built into the costing that we are doing right now.

So what we do is that now we have a robust costing system in India as well, where we are able to price our products in a much better manner and that could also help us in increasing the overall profitability for the easy operation. We have also putting up slides specifically into the investor presentation mentioning about all of the changes that we have been doing in India in order to bring in process efficiencies as well as implementing a lot of quality softwares, a lot of engineering improvements.

So under the guidance of our Chief Operating Officer, Mr. Paolo Armanino, who has taken over since April 2020, we are making significant changes in Bavla as well as Naroda in order to make sure that just with the existing operating capacity.

So like, for example, in Bavla, we have 7 units out of 11 units that are running right now. So we are trying to optimally utilize all these 7 units in such a manner that these 7 units can yield greater revenue than what we were making by operating all the 11 units within Bavla site. So -- and this is getting achieved by way of bringing in all of these efficiencies that I mentioned to you about. And maybe, Arpit, you want to maybe speak in greater detail on the changes that we are doing on the technical side?

[Arpit Vyas, executive]

Yes. So what we did also to give a detail evaluate where we can become extremely efficient in terms of the output whereas Harshil bhai mentioned in terms of the plant manufacturing better. And we saw some major challenges -- not challenges but some major opportunities inside the plants, which allowed us to do minor changes by bringing in a few extra equipments, which could help us -- bring -- not allow us to take the burden of not operating the 4 extra plants that we had.

So if you see currently in the 7 plants that we have operational, we are doing everything -- we have started to do everything that was done in the previous years' post-EDQM all the customers. So every building block to be laid for APIs, everything is being managed in a much more efficient way and in a much quicker way as well. The quality aspects are improving substantially in that.

So the idea is to have a less number of plants, but to have a greater output. And that, of course, will not happen in a single shot, that will happen slowly and steadily of course bringing in equipments and plants within -- in a regulatory environment requires customer approvals and regulatory approvals as well. So that will take its own course. But this is, in general, the idea that we want to create a maximum output from each and every plant going forward, starting with the current ones that we have.

[Unknown Analyst]

Sure. Sir, finally, 2 bookkeeping questions. One, your current CapEx is around INR 350 crores to INR 450 crores, somewhere around that range, right? So for your future growth, do you expect to spend a similar amount going forward? Or would you be spending lower? And secondly, I think on your net debt number, it's currently around INR 1,000 crores sort of a number currently. Where would you expect that over the next 1 to 2 years?

[Harshil Dalal, executive]

Sure. So on the CapEx, I think our run rate would remain within that particular range. So right now, as you would be aware, the major CapEx that we are incurring is in France, where we are setting up this greenfield project for injectable, and that is going to be an expense of about CHF 50 million. Apart from that, we are upgrading or we are implementing actually SAP across all of the Carbogen Amcis entities except for France for now, where we have implemented the D 365. And we are also updating our quality systems in Carbogen Amcis as well as in India.

So those are the areas where the major CapEx is getting incurred. And we believe that INR 350 crore to INR 450 crores will be a fair range as far as the CapEx for the next few years is concerned.

As far as the net debt is concerned, yes, we are at roughly about USD 122 million as of March 31, '22. We believe that at its peak, the net debt could be there around $130 million, so we don't expect it to be much greater than that.

[Unknown Analyst]

Okay. So you expect it to increase a bit over the next few years?

[Harshil Dalal, executive]

Well, the $130 million, so it could be like at the close of a particular period because sometimes what happens is that in order to do a CapEx, we have to make advanced payments to the suppliers where we will have to draw down the facility from the bank. And as we keep on generating the cash accruals throughout the course of the year, the net debt in the next quarter or during the course of the year can again come down. So I'm just talking about that peak it might be say $130-odd million. But otherwise, we don't expect the net debt to increase significantly. And in the next 2, 3 years, the net debt might even come lower than what it is right now. Having said that, since all of our debt is denominated in foreign currency, the cost of debt for our sales is not more than 4%.

[Operator]

The next question is from the line of Ranvir Singh from Sunidhi Securities.

[Ranvir Singh, analyst]

My questions were related to India CRAMS. So can you give a number of what operating loss we have made in this quarter in India CRAMS?

[Harshil Dalal, executive]

This quarter, the operating loss would be close to about INR 6.5 crores.

[Ranvir Singh, analyst]

Yes. So just doing some backward calculation. So operating cost has been in the range of INR 30 crore to INR 35 crore on a quarterly basis for last few quarters. And if I consider the INR 6.5 crore operating loss, so that shows that operating cost level has gone up to INR 55 crore.

[Harshil Dalal, executive]

So basically, in this particular quarter, obviously, the costs have increased, and that has been across the logistics cost, the power and fuel cost, et cetera. So yes, I mean, the costs have actually gone up. But again, we are in negotiation with many of our customers to pass on that cost to them. So this is -- if you take the full year basis, then our operating costs will be similar -- in the similar range as what we mentioned. But yes, on a quarter-over-quarter basis, this might fluctuate.

[Ranvir Singh, analyst]

Okay. And second on in the balance sheet is looking that capital working progress INR 755 crore. So if the annual run rate has to be INR 350 crores, INR 450 crores, so that see -- that capital version progress is likely to exhaust in the next 2 years.

[Harshil Dalal, executive]

Yes, because the moves of the capital working progress is related to the CapEx that we are doing in France as well as in Switzerland. So most of this would get capitalized over the next 12 to 15 months' time.

[Ranvir Singh, analyst]

So that's -- okay. So maybe by FY '24, that would be added to our gross loss, okay?

[Harshil Dalal, executive]

Yes. So right now, it is part of the gross loss, but it's part of the CWIP and then it would get reclassified to property plant and equipment.

[Ranvir Singh, analyst]

Okay. Fine. So just on ballpark number, can you give guidance for where the India CRAMS will likely to be in the next 1 or 2 years, if you could give?

[Harshil Dalal, executive]

So as far as the India operations is concerned, we expect that in the current financial year, the overall revenue should be closer to INR 400 crores. And we would expect this to grow at least 15% in the year after that, 15% to 20%.

[Ranvir Singh, analyst]

Okay. Okay. That's good. And similarly for Switzerland-based CRAMS, if you could give some indicative growth there for FY '23, FY '24?

[Harshil Dalal, executive]

So we expect that if you take a 3-year view, the CAGR should be close to about 10%.

[Ranvir Singh, analyst]

So despite this capacity expansion we are doing, so are you including this in overseas CRAMS business?

[Harshil Dalal, executive]

So the capacity expansion is happening largely in France. In Switzerland, yes, but that's largely on the lab development capacity. So the development -- because right now, we are almost full in terms of the development capacity. And we have orders to start worth of about $106 million. We can keep on getting more and more molecules for development that is just on lab capacity. So the incremental revenue of 10% over 3 years, that includes this additional lab development capacity and the revenues that would be coming out of it.

[Ranvir Singh, analyst]

Okay. Fine, fine. And last one, just a clarity that in exceptional items, there's a 2 items. One is related to reclaiming land, which was contaminated, another was certain batches was contaminated. So these 2 events are related or is it 2 separate events?

[Harshil Dalal, executive]

No, both are separate events. One is in Carbogen Amcis Switzerland and that is related to that particular batch of about $2.4 million. And the second one is related to Netherlands, which is for the soil reclamation.

[Ranvir Singh, analyst]

Okay. So is this going to affect the operation for a longer period?

[Harshil Dalal, executive]

No, no, no. So as far as the Swiss thing is concerned, we have already provided for this particular batch in the Q4 of FY '22. So one, we will be filing for the insurance claim for this particular contaminated batch as well as we'll be filing a claim against the supplier of this particular equipment. So -- and obviously, we will try to repurify this batch if it is possible.

So what will happen is that in the coming quarters, we would see the revenue worst case, at least the cost of this particular batch being booked as revenue in Carbogen Amcis AG. So there would be a reversal in the coming quarters for this particular cost.

[Ranvir Singh, analyst]

Yes. Sir, this cost may not be very significant, but thing is that for a client perspective because the batches contamination or contaminated. So do you see that any -- that may create any problem client not taking or client having profiling you lesser as compared to other suppliers?

[Pascal Villemagne, executive]

No. We have close discussions with the clients. What happened in the plant was really a one-time pure incident because the material has been maintained as it should be. So that particular thing in the chemical could happen. But yes, it happened that time for the particular client. So I'm in regular contact with the top management of that client. They are not losing the confidence with Carbogen Amcis. Quite the contrary, they still count on us to resolve the issue and move forward on that one.

But yes, it's a onetime effect that is not very nice to have in a relation, but they understand that we are also industrial and they understand fully that those kind of things from time to time even for the best could happen.

[Ranvir Singh, analyst]

Okay, okay. Okay, fine. And the last one that in commentary, Arpit said that EDQM-related remediation that may over by October -- September, October. So that remediation would be over or that -- we expect that even facility to normalize and as that producing and contributing to revenue from October, November?

[Arpit Vyas, executive]

So the remediation will be over much before that. What we want to do is that we want to introduce the CAPA. And on the CAPA in many of the cases, it is related to the systems, IT-related systems and quality IT systems. We want to qualify all of them and generate the data worth of 1 or 2 months. Post which our data, we will invite the EDQM to come. And in the best case -- if we invite them in October, the best case would be that they come in November, the worst case would be they come in April. So it is -- but for us, we will be ready much before that. We just want to have the data for us to show the EDQM of what all CAPAs we implemented and what it generated after that.

[Operator]

The next question is from the line of [ Naman Jain ], an individual investor.

[Unknown Attendee]

Just a couple of clarifications before I put up my question. One is on, Harshil you said that your -- on a company level, you are expecting a 10% CAGR growth over the next 2, 3 years, is it?

[Harshil Dalal, executive]

That's for Carbogen Amcis. At a company level, it should be closer to about 12% to 15% if you take a 3- to 5-year view.

[Unknown Attendee]

Okay. And on the EBITDA front, if I heard you correctly, then you said this year, FY '23, you're targeting a 20% kind of EBITDA margin blended, is that right?

[Harshil Dalal, executive]

No, 20% would be for Carbogen Amcis. At a group level, we should be closer to 24%.

[Unknown Attendee]

Okay. And this is expected to reach how much by -- in next 2, 3 years?

[Harshil Dalal, executive]

So in taking a 3- to 5-year view, our internal expectation would be to go towards 28% to 30%.

[Unknown Attendee]

Okay. Secondly, on the debt, while we have a foreign debt and the cost is 4%, how much of it is hedged?

[Harshil Dalal, executive]

So basically, what we have is not the debt because we have corresponding receivables in the same foreign currency as we take the debt. So most of our debt is denominated in U.S. dollars, Swiss francs and euros. So we have corresponding revenues in those currencies. Because of the timing mismatch, what we do is that we enter into forward contracts in order to hedge our export receivables. So the export revenues is what we hedge.

And on the debt side, the only hedge that we would do is if we take something in INR or if we pay something in U.S. dollars. And if -- most of the revenue is in CHF or euro, we would have a cross-currency swap. Otherwise, we will keep on hedging our export revenues.

[Unknown Attendee]

So I think effectively, almost the entire debt is covered partly by natural debt and partly by this kind of FX cover?

[Harshil Dalal, executive]

[ Naman ], we can't hear you if you are online.

[Operator]

[ Mr. Jain ], if you can hear us, please do respond. It seems like we lost the connection for the current participant. We will move to the next question from the line of Subrata Sarkar from Mount Intra Finance.

[Subrata Sarkar, analyst]

So my past session on our -- the pipeline of products, so in the -- so we already have like 13 products on the Phase III trial. So if you can guide us something on that. Like despite having such a huge amount of Phase III trial portfolio in our beta, like our revenue is not growing to that extent. So any guideline or any expectation from your side that out of the 17, what is the tentative time line of what number of molecules, not on individual molecule, but like a number of molecules to get commercialized? Any guideline? Although I understand you have a confidential agreement, but as a whole, if you can throw some light on that? It's my first question.

[Pascal Villemagne, executive]

Yes, sure. All those projects in Phase III, their future coming to the market is not in our hands, it's completely in the hands of our customer and the authority to do the NDA or the market authorization to then another country they are hiring. The thing that is not under our control is to make sure that we have a solid pipeline of early phase projects that could eventually come to late phase and then eventually those late phase programs can go to the market.

That said, once we start to look at our historical data, in an average with such pipeline, we can say that 2 to 3 molecules are generally growing and getting their market authorization. And once the molecule is in the market, it depends how it's going to be received by the community. Our biggest difference with the other treatment. It is a really breakthrough in treatment of some of the disease. And this is particularly difficult even for the marketing teams of our clients to predict. So there is always a dimension of the future.

The best things we can say knowing that things are not totally in our control, if you look at the historical data. And yes, in average, we can say that 2 to 3 molecules are coming to the market every year with different phase and different success or speed to ramp up. Does that answer your question?

[Subrata Sarkar, analyst]

Okay. And second one, sir, I have a small question like in this current quarter filing, we have told that we have Dahej plot, land. So any specific reason for that, we don't have like that plant? Or what is the thought on that sir? Why did we return it back?

[Harshil Dalal, executive]

Yes. So the only reason why we've returned it back is that we want to first make sure that we are able to operationalize whatever we want to as far as the Bavla and Naroda plants are concerned. So this was basically taken on a long-term lease for the future expansion. But since we didn't want to go to the Dahej for that particular purpose, which was originally planned about 5, 6 years back, probably even more, we just thought that it would be better to surrender it and get the cash from the government.

[Subrata Sarkar, analyst]

Okay. So in this respect, are we castling our expectation on India? Or like what is the reason that is a more important question from my side.

[Harshil Dalal, executive]

So we are trying to increase our operational efficiency in the existing units, which are already up and running, which we believe can do our revenue much more than what we have done earlier with all the units operational in Bavla and Naroda. So once we achieve that, after that we can think of any kind of further expansion or acquiring any land for future expansion. Right now, we try to optimize our facilities that we have in Bavla and Naroda, and that is exactly what our focus area is. So out of the 11, we have 7 units that are up and running. Two of the units we don't expect to start in the near future, but those 2 units can again be used for our future expansion by converting them into GMP compliance facilities.

[Subrata Sarkar, analyst]

Okay. Now again...

[Arpit Vyas, executive]

[ Naman ], sorry to interrupt. The logic behind the Dahej plant was there usually there was an indication that in Naroda which is our fine chemical and API facility, there was an indication that it might be called into a greenbelt zone, in which case, we would not have been able to -- we would not be able to run the plant anymore. So the idea behind the Dahej was that to have something which has already an infrastructure-ready where we could move instantly when -- if and when this sort of situation arises. But in the past 5, 6 years, the indication has gone away, and it doesn't -- and things are progressing well in terms of what is going to be allowed in the Naroda or not.

At the same time, what we have, we already have a tremendous land bank. We have 300,000 square meters of land in Bavla itself, and we have another 300,000 square meters of land in Bagdogra. The challenge in Bagdogra is that there was no -- there is -- yet not infrastructure available. So if Naroda had to be transferred immediately -- Naroda cannot be transferred immediately, then Bagdogra would have to be a challenge. But since that is not the case now, then the Dahej land in itself becomes null and void, it was just to have a -- to hold on to -- to have a -- to do a risk mitigation for our current Naroda business.

[Subrata Sarkar, analyst]

Okay. Sir, just another follow-up question on this called late-stage pipeline. I suppose a significant percentage of debt comes from so-called research-driven biotech company. And in this scenario, we're now getting PE funding, is this becoming difficult for those kind of companies? Are these -- is there a challenge to our debt portfolio in terms of further development from our client side, sir? Are we foreseeing something?

[Arpit Vyas, executive]

Not really. And already, as Pascal mentioned before, we have almost $100 million worth of orders in hand yet to start. So that part of we being funded is to yet not seen. Of course, what happened with this war, we don't know. But as of now, in any circumstance there is a difficult situation, which causes physical issues in the -- to the human health, pharmaceuticals is the one where the money is going to go. Maybe, I don't know, Pascal, what is your view on this. I don't see anything changing in terms of funding in pharmaceuticals.

[Pascal Villemagne, executive]

No, definitely, the Chinese plant, and that's what I was saying in the introductions, as demonstrated these capability through the high commitment of our employees to deliver and keep on delivering during very difficult circumstances.

So in that respect, all the clients that our experiences, the Chinese clients are very happy with the continuous production plant that we have put in place. So far, our customers have been quite happy with the Chinese plant and we will continue. But we cannot ignore a global perception of some clients that might see China as a challenge from time to time. And this is the reason as well. We also develop locally with Chinese customers while our product portfolio for the Chinese units. So for the time being, it's not an issue, but if it would become an issue, we really anticipate...

[Subrata Sarkar, analyst]

Mr. Pascal, the question was related to the funding in small biotechs whether we see that being changed or not further in terms of the revenue -- for development work that we are going to be. The funding for a small biotech company.

[Pascal Villemagne, executive]

We can continue to this with small biotech company definitely, if it was the question.

[Subrata Sarkar, analyst]

That was the question. The question was that the PE -- whether we see the PE funding being affected in -- small biotech companies, yes, which are our potential clients and the current clients.

[Pascal Villemagne, executive]

Yes. So very definitely a certain resistance in the late few weeks goes by the war. And there are some major capital investors especially in U.S. that they are the cherry picking their projects and how they are going to finance some projects. That said, the last 2 years has been extraordinary, huge in terms of money flowing. And just in U.S., more than $200 billion has been spend in the pharma industry and a lot of projects have been funded with a lot of money. And of course, all these projects are to carry on.

So we should not see any short-term issue on that. We just have to keep an eye on how people will see the global situations with the conflict in Ukraine and the VC capital are still very careful to fund new projects with new biotech especially on to U.S. markets, which gives the trans global market.

[Subrata Sarkar, analyst]

Okay. Sir, a last bookkeeping question like some thoughts. We have always in foreign currency, we had debt. So now from Indian perspective, sir, one thing is that in a higher inflation situation, like cost of debt, interest rate is going up. On the contrary, like Indian currency is also like fluctuating, although -- it is depreciating. So in this context, although we have some matters isn't it shouldn't that we pay back or like reduce some amount of debt by way of other capital restructuring, just a thought from my side if you can give some comment on that.

[Harshil Dalal, executive]

Sure. So Subrata the strategy is right here. So right now, while the rupee has been depreciating against the dollar and even the other currencies, what we tend to do is that we would increase our forward cover for the future receivables. Because today, if we hedge for a period of 1 year, we are able to get a forward rate of -- in excess of INR 80, dollar to the rupee. So what we will do is we'll keep on increasing our forward cover for the future receivables so that the future realizations for the revenues happen at a higher exchange rate than what it is right now. That is number one.

Number two, on the debt side, as a strategy, what we have been doing is that taking the loan either in foreign currency directly linked to that so far or we have been taking it in INR at around 6%, 7% and swapping it into foreign currency, which helps us to reduce our cost of borrowing on the long-term side as well as on the short-term side.

And even with the interest rates increasing in India as well as overseas, the way it helps us is that overall the forward premium on some of these currencies, especially the Swiss franc, where we have a sizable amount of revenue coming from, we are able to book more forward contracts for that particular currency, and that will help us in improving the exchange rate for the future as well.

So in that way, the currency fluctuation and the higher interest rate scenario due to inflation, as you pointed out, really doesn't impact us and having a good amount of liquidity on the balance sheet, which is largely invested in high-yielding bonds as well as in fixed deposits also helps us to get a positive padding on that particular investment.

[Arpit Vyas, executive]

So I mean -- just to add, in India, hardly, we have any revenue in rupees. So entire revenue worldwide is in foreign currency. And therefore, if the debt is in foreign currency, there is always an equalization factor. So of course, it does impact when you translate all currencies into the mother currency. But in effect, I think we are very much fully hedged and very closely monitoring the situation.

[Operator]

The next question is from the line of Ritwik Sheth from One-Up Financial.

[Ritwik Sheth, analyst]

Yes. Sir, I have a few questions. Firstly, on the other expenses, there are a few one-offs in the quarter as we have mentioned. So at what level should we expect the other expenses to settle at because PAT is somewhere around about, say, INR 75 crores to INR 85 crores on a quarterly run rate, which has moved to INR 145 crores because of one-off. So -- at what level should one expect these other expenses to settle at?

[Harshil Dalal, executive]

So what we expect is that the other expenses would remain elevated. And again, it depends upon the many of the global factors. So the other expenses would remain elevated. And maybe we can take a run rate of close to about INR 100 crores as a ballpark figure.

Having said that, what our endeavor is to do is to pass on most of the incremental cost to our customers by building it into the sales price. And that is something that we are negotiating with our customers, especially when the contracts are coming up for renegotiation. So the future purchase orders can come at a higher selling price. So overall, what we want to do is to protect our operating margins at any point.

[Ritwik Sheth, analyst]

Sure. So what will be the increase in the fresh orders from current level to take -- for complete pass-through?

[Harshil Dalal, executive]

Sorry, Ritwik, can you please repeat your question?

[Ritwik Sheth, analyst]

Yes. So what would be the increase in prices that we would have to take for the upcoming order for a complete pass-through of these increase in other expenses?

[Harshil Dalal, executive]

So that will depend upon product to product, customer to customer. And obviously, we will have to take into consideration the -- some of the long-term relationships that we carry with some of these customers and how critical they are. But I think anywhere between 5% to 6% is something that should be ideally passed on.

[Ritwik Sheth, analyst]

Okay. Sure. Sir, my next question is regarding the CRAMS business, excluding India. If I look at the CRAMS business that we have put in the segment it's about INR 1,500 crores excluding India. So you mentioned that we can look at a 10% CAGR. So would it be fair that this entire piece could grow at a 10% CAGR taking on 3- to 5-year view?

[Pascal Villemagne, executive]

Yes.

[Harshil Dalal, executive]

Yes, I would say so. And one of the other incremental business that would be coming in from the start of the next financial year would be the revenues coming from the greenfield project that we are currently undertaking in France. So that will be the incremental revenue that would be added to the CRAMS ex-India.

[Ritwik Sheth, analyst]

Right. Yes. Okay. Sir, my next question is related on the CapEx. What will be the CapEx for FY '23?

[Harshil Dalal, executive]

For FY '23, we expect a similar kind of CapEx number as the last year, which was close to about $60 million.

[Ritwik Sheth, analyst]

Okay. More or less -- with the increase in revenue from the India business, we should be more or less sufficient to fund this internally?

[Harshil Dalal, executive]

Yes. So what -- so right now, we have the entire CapEx that we are doing completely tied up for -- with the banking syndicate. However -- and again, the cost of borrowing is quite low because all of it is going to be in foreign currency. So there would be, say, certain quarters or certain periods whether that would remain elevated. However, with the cash accruals that we have been generating throughout the course of the year, we might either pay off the debt, but it really doesn't make sense because of the cost of funding rather than that the cash accruals would remain invested into AAA-rated high-yielding bonds. So on a net debt basis, we believe that $130-odd million should be kind of the peak.

[Ritwik Sheth, analyst]

Sure. Sure. Okay. And my final question is on the working capital. We've seen working capital exceed significantly in current year despite this 10% increase in revenue. Sir, so what would be the key reason? And where do you expect this to settle at say in FY '23 and then on a sustainable basis? What kind of working capital base should be work with?

[Harshil Dalal, executive]

So Ritwik, one of the key factors in calculating the working capital for us is also considering the advances that we receive from our customers, which is right now classified under other current liabilities. So if you see the other current liabilities have increased by almost INR 100 crores. So what we do is that for any development project, as a thumb rule, we will not be starting any development project unless and until we get a 30% advance from our customers.

So all of that is classified under other current liabilities. So if you net off the other current liabilities from the debtors inventory and calculate the working capital, I think we are fairly covered. We are fairly in line with what we had last year. So we don't expect the working capital to increase substantially from hereon.

[Ritwik Sheth, analyst]

Okay. Is it possible to quantify this number of advances received for FY '21 and '22?

[Harshil Dalal, executive]

Yes. So for FY '22, it is around INR 250 crores. And for FY '21, it is close to about INR 150 crores outstanding as on March 31.

[Ritwik Sheth, analyst]

Okay. Sure. Because that increase in working capital is about INR 200 crores so for FY '22?

[Harshil Dalal, executive]

Right. So the incremental INR 100 crores is largely on account of the increase in the revenue by about INR 240 crores.

[Ritwik Sheth, analyst]

Okay. And sir, I would like to see one last question. You mentioned that we are looking at INR 400 crores of CRAMS India revenue for FY '23. So what could be the margin for this INR 400 crores? Would it be as high as 45% to 50%?

[Arpit Vyas, executive]

Total revenue.

[Harshil Dalal, executive]

So this INR 400 crores will be total revenue the India operation. And of this, the CRAMS revenue should be at least INR 250 crores to INR 260 crores. The blended margin should be anywhere between 25% to 30%.

[Ritwik Sheth, analyst]

25% to 30% on INR 400 crores?

[Harshil Dalal, executive]

That's correct.

[Operator]

As there are no further questions, I now hand the conference over to Mr. Arpit Vyas for closing comments. Over to you, sir.

[Arpit Vyas, executive]

Thank you, moderator, and thank you, everyone, for joining the call. It was a pleasure answering all the questions. We hope that we have answered according to your satisfaction. As said before, this is going to be -- as of now, we are going to have a -- basically the year of turnaround. And we are going to see many exciting things and major improvements coming globally. And we hope that as you all are as excited as we are. And we will see you next time. Thank you.

[Pascal Villemagne, executive]

Thank you.

[Sanjay Majmudar, executive]

Thank you.

[Harshil Dalal, executive]

Thank you very much, everybody.

[Operator]

Ladies and gentlemen, on behalf of Dishman Carbogen Amcis Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.