Divi's Laboratories Ltd

NSE:DIVISLAB

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Earnings Conference Call of Divi's Laboratories Limited for the Q1 of Financial Year 2022. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. M. Satish Choudhury. Thank you. And over to you, sir.

[M. Satish Choudhury, Company Secretary & Compliance Officer]

Good afternoon to all of you. I'm M. Satish Choudhury, Company Secretary and Chief Investor Relation Officer of Divi's Laboratories Limited. I welcome you all to the earnings call of the company for the quarter ended 30th June 2021. From Divi's Labs, we have with us today Dr. Murali K. Divi., Managing Director; Dr. Kiran S. Divi, Whole-Time Director and Chief Executive Officer; Mr. L. Kishore Babu, Chief Financial Officer; Mr. Venkatesa Perumallu, General Manager, Finance and Accounts.During the day, our Board has approved results for the quarter ended 30th June 2021, and we have released the same to the stock exchanges as well as updated the same in our website. Please note that this conference call is being recorded and a transcript of the same will be made available on the website of the company.Please also note that audio of the conference call is the copyright material of Divi's Laboratories Limited, and cannot be copied, rebroadcasted or attributed in press or media without the specific and written consent of the company.Let me draw your attention to the fact that on this call, our discussion will include certain forward-looking statements, which are predictions, projections or other estimates about future events. The estimates reflect management's current expectations of the future performance of the company. Please note that these estimates involve several risks and uncertainties that could cause our actual results to differ materially from what is expressed or implied. Divi's Labs or its official does not undertake any obligation to publicly update any forward-looking statements whether as a result of future events or otherwise.Now I hand over the conference to Dr. Murali K. Divi, Managing Director, for opening remarks. Over to you, sir.

[Murali Krishna Prasad Divi, MD & Executive Director]

Good afternoon. And thank you, everyone, for joining us on our Q1 FY '22 earnings conference call. I hope that all of you, your families and friends are in good health and keeping safe during this pandemic. The health crisis and the effects caused by the second wave of COVID-19 pandemic have been immensely challenging for each one of us. However, with a threat of potential third wave around the corner based on predictions from various health organizations along with rising cases in various other countries, it's very important that all of us continue to be vigilant and responsible in the next couple of months. Having said this, we at Divi's are highly committed to safeguarding the health and well-being of our employees and their families. As part of our focus on the same, we conducted vaccination drives and got most of our employees and their immediate families vaccinated as we believe that vaccination is possibly the best way to embark the sense of support and confidence in fighting COVID-19.Moving on to our operational efficiencies. The company has put in place several measures to ensure business continuity with uninterrupted production and supplies to our customers, yet focusing on the ongoing expansion to create a steady supply platform. We have completed many of the expansion and debottlenecking activities planned during the quarter with a slight delay caused by the second wave. During the quarter, we have capitalized INR 268 crores. Most of it was for the fast-track project and INR 579 crores of CWIP projects. especially for creating capacities for new generic molecules, and validation for these new generics are progressing very well. Second stream for the new fast-track project is validated in DCV-SEZ and is now producing commercial quantities. Third stream for the new fast-track project is completed at Unit 1, validated and ready to supply API to real partners.Being at the forefront of pharmaceutical industry, we have been contributing to fight pandemic since day 1 and continue to do our part in helping communities around our manufacturing units. Support has been provided to government hospitals, quarantine centers and community health care centers in Andhra Pradesh and Telangana states by providing 1,200 oxygen cylinders and 100 oxygen concentrators. Support has been provided for COVID testing and vaccination drives in villages around our manufacturing units.In addition to these initiatives, we have also converted 2 of our 4 nitrogen plants to oxygen plants and installed them in hospitals in Hyderabad and in Visak. Concerning the scarcity of the same, we have also taken up several initiatives towards child empowerment, including provision of notebooks in schools. Approximately 1,10,000 saplings were planted along with employing 102 [indiscernible], benefiting 75,000 people in 25 villages. We shall continue to manage our operations responsibly and create a positive impact around the communities we operate. Thank you.

[Kiran Satchandra Divi, CEO & Whole]

Good afternoon. I'm Dr. Kiran Divi. Hello, and welcome to each and everyone of you for the earnings call of Divi's Laboratories to discuss the results for the quarter ending June of 2021. I hope that each one of you, along with your family and friends, are safe considering the continued existence of COVID-19 pandemic.On the operational front, we are back to normal and operating at full capacity. Backward integration to basic chemicals for majority of our products helped us to minimize the supply risk and avoid production disruption. Significant increase in crude oil price over the past year has resulted in increase in solvent prices.On the logistics front, the existing concerns continue to increase and post a wide variety of challenges, including unavailability of containers, long sailing time lines, blank sailings and exponential increase in freight cost. As an example, the first -- the current freight costs are at least 5 to 7x higher compared to the pre-COVID levels and are expected to increase further subjected to various factors such as crude oil prices and significant demand of containers.On the procurement side, there are slight hiccups in the incoming supply chain. However, we are able to mitigate most of these issues because of significant investments that we have made over the last 2 years, towards backward integration to basic chemicals for most of our generic APIs as well as geographically diversifying our supplier base.Moving to the financial performance. For the first quarter of the years '21/'22, we have achieved a consolidated income of INR 1,997 crores, reflecting a growth of 14% over the corresponding quarter of the previous year. Profit before tax for the quarter amounted to INR 814 crores, a growth of 23%. Tax provision for the quarter came higher at INR 257 crores. We have earned a profit after tax of INR 557 crores for the quarter. We have a ForEx gain of INR 19 crores for the quarter as against a ForEx gain of INR 5 crores during the corresponding quarter of last year. Exports for the quarter accounted to 89%. We continue to have normal business distribution across the regions.U.S. and U.S.A. accounted to 70% -- 71% of our revenue. Product mix for generic to custom synthesis is 50% and 50% of the revenue, respectively. Constant currency growth for the quarter has been 21%. Our Nutraceutical business for the quarter amounted to INR 138 crores. We have capitalized assets of INR 270 crores during the quarter as of the end of the current period. We have cash on books of INR 2,060 crores, receivables of INR 1,897 crores and inventories of INR 2,383 crores. Thank you.

[M. Satish Choudhury, Company Secretary & Compliance Officer]

Thank you, sir. With this, we would like to request the moderator to open lines for Q&A.

[Operator]

[Operator Instructions] The first question is from the line of Prakash Agarwal from Axis Capital.

[Prakash Agarwal, Executive Director of Pharmaceuticals]

My first question, sir, is on the strong margin performance. So great job. What is leading to the strong margins? And the second part to that is, while we had a very, very strong growth last year on low base and with new CapEx coming up, how do we see the growth shaping up now?

[Kiran Satchandra Divi, CEO & Whole]

The first one on the margin performance. I think there are several things we have taken up in the last 1 year: Investing INR 2,500 crores in backward integration in top new technology; introducing new technology; upgradation of plants, modern and mechanization; and improving the -- revisiting the processes and improving the yields. I think these are some of the things that caused a positive benefit with green chemistry. And I think those are the main ones. And always revisiting, as I said earlier, is there a better way of doing it? If not, so why don't we do it? So the constant revisiting caused the good margins. If we were happy with whatever process we developed 3 years ago, 5 years ago, I think it's very difficult with the challenging market to maintain the profit margins. Now the second one you asked is about the -- how do you see the growth. I think I used to mention always, I have a dream. I want to fulfill the dream, and I'm sure I would like you also to continue dreaming about. My dreams are unlimited. So I sleep good, but dreams are unlimited. What I can say is that the -- we can say 10% to 15% growth is definitive, and the long term probably it will be better.

[Prakash Agarwal, Executive Director of Pharmaceuticals]

Okay. And sir, the margin points that you mentioned, 3, 4 points of backward integration, new technology, all these are sustainable points, right? So there, what I understood is there is no one-off element of higher pricing or one-off element of shortage opportunities or having -- I mean given the market conditions, these are also there, is what I wanted to. So how much of this is sustainable of 42%, 43% kind of margins, which is very good?

[Murali Krishna Prasad Divi, MD & Executive Director]

I think you have been seeing in the last few quarters, the margins are getting better and better. It's not one-off. It's not just -- we think they are sustainable. And we always tell new projects coming. The custom synthesis are generic when our new products come. The margins can be slightly higher. But overall, I have been saying from the beginning, we have good margins both in generic and custom synthesis. Sometimes there are more margins in generic, sometimes there are more margins in custom synthesis in a few projects. But we need to say the distribution is good. Right now, it is 50-50 between generic and custom synthesis. So that will give you more assurance that the profitability probably can be maintained at these levels.

[Operator]

The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.

[Tushar Manudhane, Research Analyst]

Sir, just on the fast-track project, so any of the contribution in this quarter? Or would that be more 2Q onwards in terms of revenue?

[Kiran Satchandra Divi, CEO & Whole]

We have shipped commercial quantities to the -- for the fast-track project at this point. And there are 2 streams to meet the innovative demand. And the commercial production is going on. We have also created a third stream for the innovators' real partners to take care of their demands.

[Tushar Manudhane, Research Analyst]

Would you like to share the conclusion of that project...

[Kiran Satchandra Divi, CEO & Whole]

I'm not at a liberty to say that.

[Tushar Manudhane, Research Analyst]

And secondly...

[Kiran Satchandra Divi, CEO & Whole]

And this [indiscernible] -- yes, sorry, please go ahead.

[Tushar Manudhane, Research Analyst]

And secondly, just on -- I mean just asking again on while the long-term revenue target remains great, does that -- given the way FY '21 has panned out, even on bad days, 10% to 15% would be possible or more than that?

[Murali Krishna Prasad Divi, MD & Executive Director]

Looking at the -- maybe Kiran can say better on the growth engines.

[Kiran Satchandra Divi, CEO & Whole]

So we have developed about 6 growth engines, which we are working simultaneously. One, we have established generic where we already have anywhere from 60% to 70% market share, and we believe that is growing at a 10% growth rate year-on-year. We are increasing capacities for several of our existing generic molecules where we have 20% to 30% market share. And we believe with the dynamics and our sales team that we should be reaching the 60% to 70% over the next few years.Compared to the third one, which is our very interesting drive is the sartans. We have a huge advantage because of the nitrosamine impurity with the way we can control it and the Azido impurity in the product, where we are venturing into all the sartans. We are already in large production for a few of the sartans, and we'll be getting into all of them, keeping us in a very unique position.The fourth growth engine is the contrast media, where we are already one of the large players. We have entered into the other segments of contrast media, where we are signing up with innovators and several big companies. And we believe in the next 2, 3 years, we should see good results.In our fifth one is -- sorry, the fifth growth engine is there are 2 big custom synthesis projects, apart from the fast-track, which are also in a very fast-track right now, and we believe we will be seeing huge advantage over the next few years. And these are long-term contracts for the company in CS. Our sixth growth engine is our new generic projects, which we have selected for products, which are expiring in -- from the year 2023, all the way to '25. These are large volume or niche molecules, which require very specific technologies. And we have already developed them, and we believe we should be in a good position once the patent expires.

[Tushar Manudhane, Research Analyst]

That's really interesting. Just a last question on the sars. So why will the -- why we would have a good advantage in terms of the impurity part? But how is the pricing scenario playing out? Is that still making a good economic sense in terms of continuing to build up on the sartan as an opportunity?

[Kiran Satchandra Divi, CEO & Whole]

So like Dr. Divi has explained, we are quite strong in backward integration, where we have developed the basic raw materials for all the sartans, the starting materials for the sartans, unlike several players who are buying their intermediates from different vendors across the world. This gives us a huge cost advantage and also helps us in controlling our impurities. And this -- by doing this, we have not only achieved cost efficiency in sartans in general because the starting nature is almost similar for all the sartans. We also were able to control the Azido and the nitro impurities, whereby we are one of the few companies in the world where FDA or EDQM had no objection with us with -- our files.

[Operator]

The next question is from the line of Surya Patra from PhillipCapital.

[Surya Narayan Patra, VP & Pharma Analyst]

Congrats on a good set of numbers. Just can I get some sense about the portion of the projects, which have already got -- or which has already started commercial activities out of our, let's say, the INR 1,200 crore kind of growth CapEx of last year and last 1 and 2 years and the Fast Track project, which that we were expecting to commission by first quarter of current financial year?

[Murali Krishna Prasad Divi, MD & Executive Director]

I think we have been talking about the investment of INR 2,500 crores since 2018, when our revenues were INR 5,000 crores, PBT was INR 1,800 crores and PAT was INR 1,300 crores. That's when we started implementing these projects. And in '21, we reached INR 7,000 crores of revenue with INR 2,627 crores of PBT and INR 1,954 crores of profit after tax. And it is still growing. We expect 10% to 15%. That is the growth rate we are seeing. Sometimes based on the product mix, based on the approval, we still see good growth.

[Surya Narayan Patra, VP & Pharma Analyst]

Okay. Okay. Fine, sir. So given the large -- or the mega CapEx phase, what we have just completed. So is it fair to believe, sir, a large part of this new capacity additions contribution will be back-ended to some extent, let's say, FY '23 onwards or something like that, where the growth momentum could be much faster or just like -- or could be like FY '21 growth?

[Murali Krishna Prasad Divi, MD & Executive Director]

I think you also want to remember that it was -- the investment was not only for expanding capacities, introduction of new products, the fast-track project, but also were, number one, for debottle -- for the backward integration where China was almost controlling all the key raw materials, and we would have been out of business or if we had continued to depend for our large volume generics container. So even in the custom synthesis, we were told by the big pharmas that -- they asked us to either manufacture or source from Europe or U.S. And some of these investments also has gone into the early blocks, where we built in 1994 and 2002 at Unit 1 and 2. They have been upgraded to meet the current requirements of USFDA or the regulatory bodies.

[Surya Narayan Patra, VP & Pharma Analyst]

Okay. Sir, one interesting thing what I'm finding in the quarterly numbers is the cost saving on the other expenses front, what we are witnessing this quarter. See, despite of the challenges, like what you just mentioned, that multiplying jump in the logistic cost or the -- let's say, the container cost and possible some impact of the COVID during the peak period what we have just encountered this quarter. And hence, according additional spend that we would have done. And also, there are multiple new projects, which are in the various stages of implementation. So despite all that, we have seen a kind of meaningful saving in the other expenses, sequentially. So how should we think going ahead? Despite of all these challenges of doing this, so is it a continuous phenomena in terms of improved efficiency in terms of cost?

[Murali Krishna Prasad Divi, MD & Executive Director]

I think here, the -- this should not be looked at -- of course, we are not a young company. We feel low overheads, I won't say that. We have employees who have already completed 20, 25 years with a decent salary. So still we are able to maintain low overheads because of the revisiting of the factories, controlling energy, high-efficiency motors and multiple investments we have done to keep the energy cash flow to be manpower low, and that's how we are able to control them between anywhere from 20%, 25% compared to various other pharma companies going up to 50%, 55% of other expenses.I think, one, we don't have any financial expenditure interest. Two, we are able to take fresh graduates from the university at the starting salaries and adding them and letting them grow their knowledge as well as identify them with the company. So as a result, they have developed a culture where having an attachment with the company, and that's how we are able to maintain the low overheads.

[Surya Narayan Patra, VP & Pharma Analyst]

Okay. Sure, sir. Just one clarification, sir. See, this logistic cost or the container cost, is it that adjusted from the top line itself while reporting in the P/L?

[Kiran Satchandra Divi, CEO & Whole]

No, it's not adjusted from the top line.

[Surya Narayan Patra, VP & Pharma Analyst]

This is part of other expenses?

[Kiran Satchandra Divi, CEO & Whole]

That is correct.

[Operator]

[Operator Instructions] The next question is from the line of Shyam Srinivasan from Goldman Sachs.

[Shyam Srinivasan, Equity Analyst]

The first one is on the...

[Operator]

Sir, sorry to Interrupt. May I request you please speak a bit louder. Your audio is not very audible.

[Shyam Srinivasan, Equity Analyst]

Sure. The first one is on the molnupiravir opportunity. So stream 1 and stream 2, I think you said it's been commercialized. And stream 3 is for the VLs. So I was just looking through the disclosure from Merck and the agreement that they have with the U.S. government for about 1.7 million treatments. This is obviously contingent on them getting in UA. So from a contribution or a significance to our perspective, given we'll be one of the biggest suppliers to them, how should we look at this as an opportunity? And if I look at the number this quarter, you said 50% is coming from custom synthesis, so just trying to add -- try and tying these 2 things together. Once Phase III trials are over for molnupiravir, and let's assume they get an approval, do you think the quantities could further ramp up?

[Kiran Satchandra Divi, CEO & Whole]

Molnupiravir, I'm sure whatever you have read is what is publicly disclosed by Merck. But at this point, because we are bound by confidentiality, we cannot talk about their volumes or numbers or their future projections.

[Shyam Srinivasan, Equity Analyst]

Sure. But we can just -- I want to understand the direction. I'm not looking for specific numbers. But would we be a large player in that space if and when things are -- start increasing? Because I'm sure we are not -- they are not supplying 1.7 million treatment costs even on a monthly basis. So I'm just curious to understand, is the direction -- are we directionally aligned with that? That's the point.

[Kiran Satchandra Divi, CEO & Whole]

We are one of the large suppliers for the product. I -- and if the total thing, whether the product -- when it will get launched and what is the innovative idea would predominantly depend on their Phase III clinical trials.

[Shyam Srinivasan, Equity Analyst]

Fair enough. But Dr. Kiran, it's a take or pay, right? Once they get approval, it means the U.S. will -- looks like will buy the entire thing? It doesn't matter whether there's an actual demand or so.

[Murali Krishna Prasad Divi, MD & Executive Director]

There is nothing like buying the entire thing. If -- as and when made, we are shipping the product, and we get paid.

[Shyam Srinivasan, Equity Analyst]

Got it. Second question, Dr. Murali, is on the API or the 50% of the business, including nutraceuticals. So we have seen, I think, a Y-o-Y decline. And I don't think it's unique to you. I think many of the other companies have also seen some kind of a decline for the quarter, Y-o-Y, some of them Q-o-Q. So just want your thoughts on the generic API space. I know you have said in the past that don't look at quarterly. But is there some of the euphoria around generic API last year? Do you think that has died down a bit? Or do you still think, given the 6 levers of growth that you're talking about, there is still scope to grow even the generic APIs?

[Kiran Satchandra Divi, CEO & Whole]

So I will answer this. So in -- it is very difficult for us because of the product mix on quarter-on-quarter. Sometimes the CS business goes up, sometimes based on the sales, sometimes the generic volume goes up. As such, we have not seen any drop either from our customers worldwide or the demand has not gone down. It's just a product mix and what has been shipped out at this time.

[Shyam Srinivasan, Equity Analyst]

Got it. And last question, if I may, is on the raw material imports. It's now come down, as per your annual report, 44%. So there's been a big significant reduction from, I think, 50-plus percent. So is there more levers to go just on the backward integration going back to basic chemicals? Do you think we can further reduce dependence on imports?

[Murali Krishna Prasad Divi, MD & Executive Director]

You are right that the dependency, we wanted to bring it down. That's why we started making the investment 1.5 years ago. It's true that the more we concentrate on those and as we produce them continuously, we'll have better margins and probably a better grip on the product API itself.

[Operator]

The next question is from the line of Nitin Agarwal from DAM Capital.

[Nitin Agarwal, Head of Research]

On the business, you mentioned about one of the growth engines in the contrast media business. Sir, how -- from where the business is today to over the next 2, 3 years? The growth that you were really talking about, what will be the primary drivers of growth in this business? It is largely just be contract manufacturing, a custom synthesis driven growth? Or is there opportunity in the generic space in the contract media business?

[Kiran Satchandra Divi, CEO & Whole]

Could you please repeat your question? You are not clear, please?

[Nitin Agarwal, Head of Research]

I think on the contrast media business, the growth is going to be driven by the custom synthesis opportunities? Or it's going to be more about generic products [indiscernible] generic products in contrast media?

[Murali Krishna Prasad Divi, MD & Executive Director]

I think Kiran has made it, I think, very clear in the previous, but I'll reply that we are already in the contrast media-making products. And we are beginning stronger based on the technology we developed by consuming and saving the iodine being able to recycle. That's the key to the contrast media. Have we been successful? Now, yes. One of the big products we are entering with the big pharma in the custom synthesis, that's what Kiran said earlier. Yes, it is true. So the growth is coming from both engines, the custom synthesis engine for a contrast media project as well as the existing generic APIs of contract media. And as overall when you see, you're iodine efficiency will go much better.

[Nitin Agarwal, Head of Research]

Okay. So one housekeeping question. What will be the sales of nutraceutical business this quarter, sir?

[Murali Krishna Prasad Divi, MD & Executive Director]

I think nutraceutical business, we cannot go by quarter-on-quarter. It's about INR 600 crores for the full year -- we have projected in a year. And the growth is about 10% to 15%. And I think, in these COVID times, people are trying to see how to have immunity boosters. And I think going forward, we expect the nutraceutical business to grow better.

[Operator]

We take the next question from the line of Damayanti Kerai from HSBC Securities.

[Damayanti Kerai, Analyst, Healthcare and Hospitals]

Sir, my first question is on supply status to the regulated markets on the added capacities. So are we supplying to U.S. and Europe from the expanded capacities? And a continuation of that, what is the status of Kakinada plant?

[Kiran Satchandra Divi, CEO & Whole]

Sure. Thank you. Answering your first question, what would be -- our supplies to U.S. and Europe is about 71% of the total sales, and this is across all both generic and custom synthesis products, both to the U.S. and EU market.

[Damayanti Kerai, Analyst, Healthcare and Hospitals]

Sir, my question was whether from the added brownfield capacities, have you started supplies to regulated market? Because I understand we are already supplying to nonregulated market. But for regulated market, we are looking for some validation completion and all. So that was my question.

[Kiran Satchandra Divi, CEO & Whole]

So the validations have been completed for the brownfield project of DC-SEZ and DCV. The qualifications have gone through to -- and this quarter, it has commercialized about 20% of the sales. Over the next quarters, once all regulatory approvals are in place, we should see a good growth in those SEZ's.

[Damayanti Kerai, Analyst, Healthcare and Hospitals]

Okay. Sir, on Kakinada, like how are you placed?

[Kiran Satchandra Divi, CEO & Whole]

So with reference to Kakinada, all cases by the landowners were dismissed by the High Court. The State government has fixed the land cost for which we have already paid the full amount. We think in this month, the AP should be handing over the 500 acres of land to us. All statutory compliances are in place. So maybe by next month, we should be in a better shape to start activities.

[Damayanti Kerai, Analyst, Healthcare and Hospitals]

Okay, sir. My second question, quickly, on operating cost, like we already discussed. But in view of rising costs for fleet, logistics and you mentioned some price pressure on solvents. For next few quarters, are we expecting, I'll say, higher level of expenses to go? Or do you think you'll be able to mitigate so that broadly we can maintain our current quarter performance?

[Kiran Satchandra Divi, CEO & Whole]

I -- the product mix, based on quarter-to-quarter is increasing. So high volume of solvents, some will use low, some are air-shipped, some are sea-shipped. So it's very difficult to say quarter-on-quarter what the other cost would be. So as of now, we will take a comfortable 27% -- 25% to 27% as our other fixed costs.

[Operator]

The next question is from the line of Alankar Garude from Macquarie.

[Alankar Garude, Analyst]

Sir, my first question is on custom synthesis ex of the molnupiravir opportunity. Had we faced any COVID-linked challenges at all over the past 1 year, like, say, slower clinical trial activity or slower new deal wins, which could potentially ease out going forward?

[Murali Krishna Prasad Divi, MD & Executive Director]

We don't -- we did not see any slowing down on that activity. In fact, you may have noticed that there are several follow-up molecules coming from the Roche, aTyr Pharmaceuticals, [indiscernible]. The [ Sanofi ] is coming to the product, Pfizer PF-07-321332. These are all in the -- following the molnupiravir products coming up. So there's a lot of opportunities in these segments, and people are pretty much that we may have to live for a few more years with our friendly COVID-19 looks like and which probably just vaccination is not enough because of it's changing of the spike. So API like molnupiravir or the other APIs, I mentioned coming up from various other big pharmas, -- the good thing is these are all small molecules. That means we have the greatest opportunity. But the biologic is different. So it is in the same field where we are in. And I think they all are going in the right direction. There's no slowdown on this.

[Alankar Garude, Analyst]

Understood, sir. Sir, in general, if you look at the generic API space, there have been a lot of expectations from the Indian industry, especially over the last couple of years. Being the industry leader, where do you think the industry is heading towards over the next 3 to 5 years? And what would be your expectations from the government to help support the group?

[Murali Krishna Prasad Divi, MD & Executive Director]

Well, everybody wants everything free and the government is ready to give. I don't believe that. But I think what wins is the technology. If you are good in technology, I think sky is the limit because as there are more people being that could afford the medicines in the underdeveloped and developing countries, I think there will be more usage. But the question is, I think, the challenge is that are you implementing the new technologies? Like, we are implementing inflow reactors, gaseous phase reactors, tubular reactors, vapor phase emitting bags. These are all the things and analytical tools with Orbitrap, which can detect cost per trillion. Now there are only either FDA and we have such instruments, and having the most modern waste treatment plants. I think these are all -- you need to investment -- you need to invest for the next 5, 10 years. It's not just enough trying to develop a process and introduce generic API quickly. I think there's still very good opportunity for companies to grow in generic APIs. As Kiran said, the sixth growth engine is a $23 billion -- $20 billion APIs going out of patent in '23/'24, for which we have developed the technologies and are validating and we'll be filing soon. So I think if you invest in technology, if you invest in new plants, I think there is good scope, good opportunity.

[Alankar Garude, Analyst]

And one small bookkeeping question. Any reason for the high tax rate in this quarter?

[Murali Krishna Prasad Divi, MD & Executive Director]

High?

[Kiran Satchandra Divi, CEO & Whole]

Tax rate?

[Murali Krishna Prasad Divi, MD & Executive Director]

We always pay tax. We were never zero taxpayer. It's good to pay tax in my opinion because it helps the government to run. Some of the opportunities we had -- we have made them in the SEZ, where there are no benefits. And now going forward, all those products will be made, as Kiran said, in the DCV and DC-SEZ. So the coming quarters, the tax rate should come down to below 25%. And probably at the end of the year, we expect it will be below 25%.

[Operator]

[Operator Instructions] The next question is from the line of [ Param Pratik from Choice Investment Broking. ]

[Unknown Analyst]

Congratulations on a very good set of numbers. Most of my questions are answered. I just had one question. You said that the mix of custom synthesis and generics is now 50-50. So going forward, can we expect that custom synthesis will contribute more to the revenue? And likewise, will contribute higher to the EBITDA margin?

[Kiran Satchandra Divi, CEO & Whole]

It is difficult to go quarter-on-quarter as the product mix is very, very important. Sometimes, the generic products will go in larger volumes and sometimes the custom synthesis would also go in larger volumes. So this quarter, it has been 50-50. Like you've seen in the previous quarter, it has been 60-40. So it will always vary.

[Unknown Analyst]

Okay. Okay. And sir, can you just guide us on the CapEx plan, especially on the incremental CapEx over a period of next 2 years?

[Murali Krishna Prasad Divi, MD & Executive Director]

We have mentioned that now the capital for CWIP is about INR 500 crores. And we think we will be able to -- we need to spend another INR 300 crores as a CapEx -- immediate CapEx in the year. And Kakinada plant was projected to be INR 600 crores. This is about 3 years ago. So we need to really look at the products we planned and what the project cost would be. So in the next 2, 3 years, probably we should be having based on the Kakinada and Krishnapatnam projects, it can be anywhere from INR 1,000 crores to INR 2,000 crores.

[Operator]

The next question is from the line of Bharat Sheth from Quest Investment.

[Bharat Sheth, Co]

Congratulations on good set of numbers. Sir, Mr. Kiran elaborated 6 growth engine. So can you throw some light whether the existing infrastructure will be able to meet all those growth engines? Or we will need to again go for a substantial CapEx to take care of the top line and the opportunity which Mr. Divi say that coming in from '23, '24 onwards. So how do we really see from 5 years onwards our CapEx plan?

[Murali Krishna Prasad Divi, MD & Executive Director]

Okay. I think what Kiran Divi said, the 6 engine growth. The first engine, the generic, is already invested. The second engine, the generic capacity increase from 20% to 60% is already invested. The short-term investment is going on in the CWIP now, where we have another INR 500 crores CWIP. It will be completed. And the contrast media investments, it is also part of the CWIP going on right now. And the new generics, which will go out of patent in 2023, the investment is already happening now. So this fixed engine growth where -- when we complete this CWIP, we should be already invested for that growth. The Kakinada growth, the investment where I said INR 1,000 crores to INR 2,000 crores is for other products outside the 6 engines.

[Bharat Sheth, Co]

Okay. And sir, do you have any plan to take the peptide business substantially high from this level? Since the last few years, we have been ranging 500, 600 and slowly growing. So do you have -- what kind of ambition do we have for this peptide business?

[Murali Krishna Prasad Divi, MD & Executive Director]

Peptide. I'm sorry, did you say peptide business?

[Bharat Sheth, Co]

Sorry, nutraceutical.

[Murali Krishna Prasad Divi, MD & Executive Director]

I was wondering because I was a dreamer of peptide business. I was the first one in India who made protected amino acids, who made the dipeptide, tripeptide and T20 project out of [ Roche. ] So I was really dreaming at that time. The dream did not come true. It's okay. But now the nutraceutical, we have expanded at 100% capacity, and we have geared up to supply. We're at INR 600 crores, as we mentioned earlier, growing at rate of 10%, 15% year-on growth we anticipate. It could be higher based on this COVID and other pandemics. People are more into nutraceutical. So we may expect further growth, but we have been conservative and it's about we think INR 600 crores with a growth of 10% to 15%.

[Operator]

The next question is from the line of Ritika Agarwal from Value Quest.

[Ritika Agarwal]

Sir, my question is on molnupiravir API. I wanted to check if we are fully backward integrated in this API?

[Murali Krishna Prasad Divi, MD & Executive Director]

There are key challenges for other companies in this back -- on the production. So we are fully backward integrated. We have developed our own technology for the very base material. And yes, we are ready to -- we do not have any issues with our base materials.

[Operator]

The next question is from the line of Saion Mukherjee from Nomura.

[Saion Mukherjee, Head of India Equity Research]

Sir, my first question is on, your comments suggest that there is a concerted effort to increase vertical integration and lower the dependence on China. I just wanted to understand, sir, where we are in that path? How much we have achieved? And how has dependence on China gone down? If you can share some numbers over the last, say, 4, 5 years?

[Murali Krishna Prasad Divi, MD & Executive Director]

We just started this 2 years ago, going to the backward integration. As you know, China has a very large basic chemical manufacturing, and the pharmaceutical companies have been importing both API, advanced intermediaries, starting materials and the base materials. As a result, I think several of the countries as well as India forgot how to make the key starting materials and the base chemistry. So this is when we identified 2, 3 years ago that we should be producing our own key raw materials for our big products like naproxen, gabapentin, dextromethorphan and other products. So we have invested substantially. And now we are totally free, our large volumes and the KPIs. No dependency on sartans materials. And for where we are still sourcing some raw materials from China, we have alternate source -- identified alternate sources from Europe, U.S., and we are buying some percentage of quantity to maintain continuity of purchase from the European and U.S. sources.

[Saion Mukherjee, Head of India Equity Research]

Okay. Sir, on sartans, I mean -- correct me if I'm wrong, so your current revenue contribution is not much right? And how large is the API sartan market today globally?

[Kiran Satchandra Divi, CEO & Whole]

We have a decent share in the sartan market right now on the generic side of the business. And we -- with our technology, what we have developed and backward integration of the key starting materials, we are now entering into other sartans, and we feel we'll have a good share in the market.

[Saion Mukherjee, Head of India Equity Research]

Okay. So I mean it is lower than for large molecules, like we have 60%, 70% market share, it's lower than that at this point for sartans? Is it right understanding?

[Kiran Satchandra Divi, CEO & Whole]

At this point, yes, it is lower than -- that is the right word to say.

[Saion Mukherjee, Head of India Equity Research]

Okay. Okay. And sir, finally, I know you talked about upcoming generic expiries. You also mentioned that you're in the process of filing. But sir, for products which are going off-patent in '23/'24, filings have already been made. So how should we think about, is it from a longer-term perspective, these are the molecules where you will gain market share and you may not be participating in the first wave as such?

[Kiran Satchandra Divi, CEO & Whole]

So Divi's strategy has always been, we file a product with one of the best processes available. So we can file quickly with a very high cost process or we can look at the long term and play a longer game. So for us, we have 2 goals: one is we look for the most efficient process, green chemistry, and look at atom-to-atom efficiency and see the best process available. The second thing is we do not do any [ catapults. ] We do not challenge our -- any innovator. So we wait till the product expires, and then we launch the product. A typical example, if you look at our history, either with gabapentin or naproxen, naproxen sodium, dextromethorphan, all these products, some of them, we are the 20th one to enter into the market, but we became 60% to 70% market share leaders. All this comes over goodwill, consistency. Our process helps us to do this. I hope I answered your question.

[Operator]

The next question is from the line of Ankit Agarwal from UTI Mutual Fund. As there's no response from the current participant, we take the next question from the line of Sonia Lalwani from Stratford House Advisors.

[Sonia Lalwani]

So this one is on the CapEx. So I understand that a lot of amount, INR 2,500 crores, has been spent on CapEx since last 3 years. If you could give us some sense -- a part of the question you already answered, but if you can give us some sense on what is the capacity utilization? And how much have the capacities increased over the past years?

[Murali Krishna Prasad Divi, MD & Executive Director]

It's very difficult to say because when you say we have 1 million-liter capacity, we'll get a lot of capacity unutilized, 15% to 20%. But if you take product wise, probably some of the products we are producing at 80% to 90%, 90%, 95% capacity, and some of them, we are only utilizing 50% capacity because, one, we are reaching the market; two, the customers are slowly taking our products while they have to switch from another supplier. So you can say, on an average, about 80% of the capacity of the plant is occupied, you can say.

[Sonia Lalwani]

Understood. And also just one clarification. You said you will be spending around INR 1,000 crores incremental CapEx in the coming years, in next 1 or 2 years?

[Kiran Satchandra Divi, CEO & Whole]

So this investment would be predominantly towards Kakinada and Krishnapatnam ports. Both are virgin site greenfield projects. So once we get government approvals and all statutory approvals, which are already in place, once everything is there, we will then, based on the product mix and the opportunities, we will start investing.

[Sonia Lalwani]

Understood. And sir, one just -- so when you speak -- when you spoke about 6 growth engines, can you elaborate a bit on the third growth engine that you spoke about, nitro impurities control? And what is this exactly? And what is the strategic value of this engine?

[Murali Krishna Prasad Divi, MD & Executive Director]

You may recall that 2.5, 3 years ago, the FDA has come out quite strong that there is a nitrosamine impurity in the sartans. And because of that, several of these sartans got -- several companies got into trouble. When they did that -- they are called azido impurities. And these impurities when FDA came and audited us, they could not find those impurities in our process because the way we developed the process, they are not found. This technology what we use for sartans gave us an opportunity to enter into some of the big pharmas for base supply as well as gave opportunities, as Kiran said, why not we make new sartans where we were not even present at this moment? So those are the ones that the capacity is getting created and we should be introducing them during the coming year, both validation and commercial quantities. The advantage are twofolds, all the sartans start from the starting material called OTBN or o-Tolyl benzonitrile. We make in-house. We have developed that technology. So from there, all the sartans by controlling the impurity, we can produce. So the leadership what we have in 1 sartan is giving the benefit of entering into several sartans. That's what Kiran said.

[Operator]

We take the next question from the line of Nitin Gosar from Invesco Mutual Fund.

[Nitin Gosar, Analyst]

Sir, 1 question. I was looking at the previous con call and around the second quarter FY '21, we did mention that the transition of revenue share between CSM and generic will shift more towards 60% for CSM engine and eventually will settle down at 50%. At this juncture, have we settled down at 50-50 or the shift towards 60 is yet to play out in CSM?

[Murali Krishna Prasad Divi, MD & Executive Director]

It is very difficult to say. See, the control is -- the switch is not in my hand. The switch is in the customer's hand. We are creating capacity to increase both for generic products as well as custom synthesis products. And we prefer maintaining 50-50. At the same time, it so happen, we always say, it is either 40-60 or 60-40. Depending upon the quarter-on-quarter or year-on-year, it may range in that 40-60, 60-40. But I would like to emphasize, once again, we should not say profitability is more in generic or more in custom synthesis. We think that both are profitable depending upon which API or which project we are talking about.

[Nitin Gosar, Analyst]

Fair point. But at today's juncture, we should keep ourselves in terms of -- direction understanding, we should keep ourselves open to seeing 60% as a possibility in interim? Would that still be a consideration or we should settle down at 50-50 from trajectory perspective?

[Murali Krishna Prasad Divi, MD & Executive Director]

The opportunity, the wishfulness is that, yes, we want to maintain more profitability. There's no doubt about that. The question is we take all the opportunities both from generic as well as custom synthesis, which if you maintain flexibility, that will be better for the sustainable future.

[Operator]

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Satish Choudhury for closing comments. Over to you.

[M. Satish Choudhury, Company Secretary & Compliance Officer]

Thank you all for joining us today for the earnings call of Divi's Laboratories Limited. In case you need any further clarification, please reach out to our Investor Relations. Thank you.

[Operator]

Thank you. On behalf of Divi's Laboratories Limited, that concludes this conference. Thank you all for joining. You may now disconnect your lines.