Divi's Laboratories Ltd
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Earnings Call Transcript

Earnings Call Transcript
2022-Q2

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Operator

Ladies and gentlemen, good day and welcome to the earnings conference call of Divi's Laboratories Limited for the Q2 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
M. Satish Choudhury
Company Secretary & Compliance Officer

Good afternoon to all of you. I am M. Satish Choudhury, Company Secretary and Chief Investor Relations Officer of Divi's Laboratories Limited. I welcome you all to the earnings call of the company for the quarter ended 30th September 2021. From Divi's Labs, we have with us today Dr. Murali K. Divi, Managing Director; Ms. Nilima Prasad Divi, Whole-Time Director, Commercial; Mr. L. Kishore Babu, Chief Financial Officer; and Mr. Venkatesa Perumallu, General Manager, Finance and Accounts. During the day, our Board has approved the financial results for the quarter and half year ended 30th September 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 the 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 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. These 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 officials does not undertake any obligation to publicly update any forward-looking statement whether as a result of future events or otherwise. Now I hand over the conference to Dr. Murali K. Divi, Managing Director of the company, for opening remarks. Over to you, sir.

M
Murali Krishna Prasad Divi
MD & Executive Director

Good afternoon and thank you, everyone, for joining us on our Q2 financial year '22 earnings conference call. I hope that all of you, your families and friends are in good health and keeping safe during this still existing pandemic. It's very heartening to see vaccination drives going at a great pace in nation, completing 1 billion vaccine milestone. This has been reflected in the severity of COVID-19 cases that was declining till recently. However, we are witnessing the rise of another COVID wave in other parts of the world, hence it's important for all of us to be vigilant and responsible even after being vaccinated by following all the COVID-19 protocols. As a part of our focus on the same, we conducted vaccination drives and got more than 90% of our employees and their immediate families vaccinated as we believe that vaccination is probably the best way to imbibe the essence of support and confidence in fighting COVID-19. On the business front, our utmost priority is to ensure uninterrupted production and supplies to our customers with focus on navigating through a secure and smooth supply chain and getting our expansions operational in the estimated times. We have completed many of the expansion and debottlenecking activities planned during the quarter with slight delay caused by the second wave. During the quarter, we have capitalized INR 296 crores. Most of it was for the fast-track projects. We have INR 440 crores of CWIP outstanding at the end of the quarter in projects, especially for creating capacity for new generic molecules, and validation for these new generics are progressing very well. We anticipate to spend another INR 300 crores during the second half of the financial year. Regarding Kakinada project, all cases by the landlords are dismissed by the High Court, and the state government has fixed the price of INR 10 lakh per acre, which we have already paid. We are awaiting for APIIC to hand over 500 acres of land. I would now like to go -- throw some light on the CSR activities during the quarter. Being at the forefront of pharmaceutical industry, we have been contributing to fight pandemic since day 1 and have continued to do our part in helping communities around our manufacturing units wherever possible, especially when the economy is slowly opening up. We have been continuing to support the government schools by distributing essential stationaries, benefiting more than 600 students from 3 high schools as they recently opened. We have been taking several initiatives towards development of villages around our manufacturing facilities by contributing towards developing road infrastructure, helping in conducting vaccination drives, canal development and many other Swachh Bharat initiatives. We shall continue to manage our operations responsibly and create a positive impact around the communities we operate. Thank you. Now I would like to turn over the call to Ms. Nilima Divi.

N
Nilima Prasad Divi
Whole

Thank you. Good afternoon and welcome, everyone, to Divi's Laboratories Limited earnings call to discuss the results for the second quarter ended September 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 operations front, many manufacturing industries are experiencing their own challenges with volatility in global supply chains across geographies. For pharmaceutical industry, on procurement side, power outages in China have impacted the supply, creating a shortage, thereby volatility in prices of basic chemicals, commodities, raw materials and especially the solvents. We have been closely monitoring the recent uncertainties. Production-wise, as of now, we have secured the required materials. However, we are reviewing the long-term strategy to maintain a stable supply chain. In terms of logistics, shipping costs have not only soared but also increased unavailability of containers due to increased crude oil prices, empty container condition in U.S. ports and blank sailing, causing longer waiting times. We are committed to serve our customers despite all these headwinds. The margins are under watch. We are diligent while closely monitoring the situation and trying to mitigate the risk and trust our operational excellence in ensuring an intact supply chain. Before moving on to our operating efficiencies, I'm delighted to mention that the CapEx program for debottlenecking, backward integration and upgrading of utilities taken up during the last 2 years are continuously resulting in minimizing supply risk and production disruptions, achieving a more improved financial performance. I am pleased to state that the company has achieved a consolidated total income of INR 2,007 crores during the second quarter, reflecting a growth of 14% year-on-year. Profit before tax for the quarter amounted to INR 750 crores, a growth of about 10% year-on-year, and the profit after tax to INR 606 crores, reflecting a growth of 17% year-on-year. For the half year ended September 30, 2021, the company has earned a consolidated total income of INR 3,996 crores, reflecting a growth of 14% year-on-year; EBITDA of 43%; profit before tax of INR 1,574 crores, with a growth of 16% year-on-year; and profit after tax of INR 1,164 crores, higher by 15% year-on-year. During the half year, export accounted to 88%. The organization continues to have normal business distribution across regions. Europe and U.S. accounted for 72% of our revenues. Product mix for generics to custom synthesis for half year is 46% and 54% of the revenue, respectively. Constant currency growth for the quarter is 15%, while for half year, it is 18%. The nutraceuticals business for the quarter amounted to INR 168 crores and INR 306 crores for half year. Rupee has strengthened towards end of the quarter. There is a ForEx loss of INR 7 crores for the quarter, while the ForEx gain has been INR 12 crores for the half year. During the current year, assets worth INR 296 crores have been capitalized during the quarter and INR 566 crores have been capitalized in the half year. For this, the new SEZs accounted to INR 281 crores. The capital work-in-progress is about INR 440 crores as of 30 September. Cash on books is INR 1,763 crores. Receivables as of 30th September amounted to INR 1,852 crores and inventories INR 2,676 crores. Thank you.

M
M. Satish Choudhury
Company Secretary & Compliance Officer

Thank you, madam. With this, we will request the moderator to open the line for Q&A.

Operator

[Operator Instructions] The first question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.

T
Tushar Manudhane
Research Analyst

Sir, just on the molnupiravir, is there any traction that is factored in this quarter, 2Q FY '22?

M
Murali Krishna Prasad Divi
MD & Executive Director

Yes, there are some sales from molnupiravir in this quarter.

T
Tushar Manudhane
Research Analyst

Okay. And so are you quantifying that?

M
Murali Krishna Prasad Divi
MD & Executive Director

Pardon?

T
Tushar Manudhane
Research Analyst

Would you be able to quantify it?

M
Murali Krishna Prasad Divi
MD & Executive Director

We are bound by a confidentiality agreement, and we cannot disclose. Given the information that we manufacture molnupiravir, it is all right to have disclosed a bit more. That's how we are able to say that. Otherwise, we are quite bound by confidentiality agreement. I can assure you on that.

T
Tushar Manudhane
Research Analyst

Sure. Sure, sir, sure. Just another one on molnupiravir. Would you be incurring any further CapEx for this product?

M
Murali Krishna Prasad Divi
MD & Executive Director

We don't anticipate at least during the next 2 quarters.

T
Tushar Manudhane
Research Analyst

Understood. And just lastly on the API side, there has been some amount of moderation if I look at the year-on-year growth on the generics segment per se, while the custom synthesis is growing at a phenomenal rate. So would you like to comment on some moderation on this API sales run rate?

M
Murali Krishna Prasad Divi
MD & Executive Director

It's not our intention that we grow more on custom synthesis or grow more on generics. Now we take all the opportunities that come, and we grow them. It so happened that we have a few fast-track projects that are really taking off. That's the reason you have seen the tilt of 55%-45% to 45%-55% -- or 54% the custom synthesis. So we do not see any -- that generics is going down or our custom synthesis is going up. I think both will grow. That's what we said about the 6 growth engines in the last quarter.

T
Tushar Manudhane
Research Analyst

Sure, sir. And just lastly from my side, while we have been working on backward integration on valsartan, given that there is now an impurity issue which has come up for losartan as well, so are we on -- expecting to work on losartan as a product as well?

M
Murali Krishna Prasad Divi
MD & Executive Director

We don't -- we do have it on the radar, but the -- we do not have any problem of the impurities of nitrosamines or other impurities across the portfolio. So we are quite good at that.

Operator

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

S
Shyam Srinivasan
Equity Analyst

My first question is on the overall COVID antiviral space. You talked a little bit about molnupiravir in the past. But just from a capacity perspective and just tieing back to Merck's comments that this year, they're foreseeing about up to $1 billion of sales and next year of about $5 billion to $7 billion, so is that how it will also work for us from a disease perspective given that you and Merck have disclosed that you're one of their largest suppliers? How should we look at this for a next year basis?

M
Murali Krishna Prasad Divi
MD & Executive Director

As I mentioned earlier that we are bound by confidentiality agreements. We are geared up to produce whatever is required or whatever is ordered. We have considerable capacity to meet the Merck requirements, and we are producing. I think that's all I can say.

S
Shyam Srinivasan
Equity Analyst

Got it. And sir, just clarifying here. Yesterday, Pfizer came out with its PAXLOVID. Do you think as -- and maybe you can answer it from an industry perspective. Do you think oral antivirals are now here? And since you've had past experience of working in this space, do you think you will play a larger role? And I'm not trying to tie it down to any specific molecule, but just to understand, is the space very attractive now and we will be one of the key beneficiaries of this overall move towards antivirals?

M
Murali Krishna Prasad Divi
MD & Executive Director

You're right, for the human mankind, the companies are coming up with anti-COVID drugs, which is very good news. One I think you have heard, the military already cleared. And what you heard is right from Pfizer as well that be that they -- that once -- they're available very soon. Now not only the countries which cannot afford vaccinations, not only countries where vaccination is not done, these oral drugs will definitely help the population now. As a business, we are talking about not just $1 billion, $2 billion. I think it's anywhere from $30 billion to $50 billion business per year. And it looks like these 2 are ahead really in the fast runners. I'm sure more will come in future follow-on products, the first-in-class, best-in-class, then the farther, as we have seen earlier in other therapy segments. But we are here to take -- to manufacture because we can manufacture any chemistry. We are experts in chemistry, not necessarily a product. So we are here to take all the opportunities.

S
Shyam Srinivasan
Equity Analyst

Got it, sir. Last question is on the financials. If I were to look at the half yearly balance sheet, cash flow statement, we have seen inventory levels increase significantly. Just trying to measure it using operating cash flow to EBITDA. I think we have had one of the weaker halves in terms of conversion. So anything to read into -- does it tie into your earlier comments around the raw materials where we have sourced up inventory?

M
Murali Krishna Prasad Divi
MD & Executive Director

It's not an inventory issue at all, it's a better management by sourcing -- our sourcing department where Nilima's team has taken additional -- in the volatile, uncertainty, delays in procurement, we have enough stock, we have procured. That's number one. Two, unlike in generics, in the custom synthesis as well, that we have ensured that we have enough stock to meet the requirements without even a single-day delay. And usually, these custom synthesis projects are lengthier route of synthesis, which will take a longer time from start of the day for the shipment. That's how stocks are built up. And so it's really speaking it more on work in progress between inventory management to -- for assurance of supply as well as for the capital work -- sorry. Sorry.

N
Nilima Prasad Divi
Whole

Work in progress.

M
Murali Krishna Prasad Divi
MD & Executive Director

Work in progress.

Operator

The next question is from the line of Prakash from Axis Capital.

P
Prakash Agarwal
Executive Director of Pharmaceuticals

Sir, my first question is on the comment that Nilima, madam, made on cost and margins -- or margins under check. I understand there has been significant power outage and shipping costs have increased. So how do we see this as -- obviously, as a large business, we would have some pressures. But can this be also turned into an opportunity where smaller guys are not able to even meet the customer demand on time? And do we get into the market share? Or are you highlighting more from the cost pressure and margins can take from here? Some more color will help.

M
Murali Krishna Prasad Divi
MD & Executive Director

I think you are right that the market is volatile, we have to be agile. And in the uncertainty times, the largest players like us, yes -- as somebody has -- I think earlier I mentioned the inventories are a result of -- increasing inventory is a result of making sure we have enough stocks of raw materials so that the assurance of supply will be there. Simply put, our generic customers, or the big pharmas, wants to make sure that we don't say that, well, costs improved, our supplier did not supply, so there is no availability of the product, no. Cost of the goods is one thing. Price is another thing. But assurance of supply is the most important thing, on-time delivery. This is where we have a good name, and we want to maintain. So is there more opportunity for the bigger players? Naturally probably yes. It may be a little tougher time for the small companies with the increase of energy, increase of coal price and meeting all the requirements, so.

P
Prakash Agarwal
Executive Director of Pharmaceuticals

Understand that. And what is our flexibility to increase the prices or pass on the cost? Because supply, obviously, in the finished good product would be a big challenge, and the customers would understand that. Is there an acceptability of cost increase by them?

M
Murali Krishna Prasad Divi
MD & Executive Director

Most of our -- as you know that we export more than 88% of what we produce, and our customers are large customers in U.S., Europe and elsewhere. So we also have a long-term contract where some of these cost enhancements are going down or automatically built in their calculations whereby we can transfer at least most of the cost update. But again, how much we can transfer, how much we'll absorb, I think these are all -- is it a short term or it's going to be a long term in China from -- maybe the impact is not just China alone on solvents or materials. Because of the backward integration, we escape a lot of this abrasion. But some of the basic solvents and liquids and some of the gases and coal, for example, so these are the ones that will impact everybody. So we'll see. Our intent is to make sure that somehow we retain margins as much as possible. And let us see.

P
Prakash Agarwal
Executive Director of Pharmaceuticals

Understood. And lastly, on the CapEx guidance, sir, for this year and next year, fiscal '22 and '23?

M
Murali Krishna Prasad Divi
MD & Executive Director

The -- Nilima mentioned about INR 400 crores is about the capital work in progress that would bring us to complete most of our projects. I did mention that another INR 300 crores, we should be spending before the end of the year in CapEx mainly to see some of the products. The next one is on the Kakinada. When they -- and there would be land to us. Probably -- we are estimating anywhere from INR 1,000 crores to INR 2,000 crores of investment.

P
Prakash Agarwal
Executive Director of Pharmaceuticals

Okay. So what I understand is about INR 900 crores for this year and a similar number for next year.

M
Murali Krishna Prasad Divi
MD & Executive Director

The similar number depends upon the -- more on how soon we will have Kakinada in our hand and how soon we will start.

Operator

The next question is from the line of [ Timana Banumathi ], [indiscernible].

U
Unknown Analyst

I've been a regular follower of your business. Quite good results this quarter also. One thing I'm observing is you are very punctual in providing shareholders bonus every 5 years. It's almost -- more than 5 years for the third bonus. When we can expect that?

M
Murali Krishna Prasad Divi
MD & Executive Director

I think at an appropriate time, we will do that. Let's -- look, I think we need to, in the coming quarters -- we need to wait and see.

Operator

The next question is from the line of Cyndrella [ Thomas ] Carvalho from Centrum Broking.

C
Cyndrella Carvalho
Analyst of Pharmaceuticals

Wish you all a happy Diwali. Sir, I just want to understand on the generic side of the business. If we look at it, are we saying that the inventories would normalize as we go ahead and the demand should come back along with the 2 highlighted -- you said that there are products which are under validation and moving faster, so along with the new generic products, which are -- how should we see this segment in terms of growth over coming 18 to 24 months?

M
Murali Krishna Prasad Divi
MD & Executive Director

The investments have happened. The investments are happening with CWIP on these generics -- sorry, generic opportunities where we said that these are the ones going out of patent in '23 where the growth 6 engines (sic) [ 6 growth engines ] where we are validating, we are ready to take the opportunity as and when they grow (sic) [ go ] out of patent. That's the first thing. And the second engine where we increased the capacity from the current 20%, 30% of the world demand to -- going towards the 70% of the capacity, those already happened, and we are increasing our market share and it is happening. These are the 2 things that's happening in the generics.

C
Cyndrella Carvalho
Analyst of Pharmaceuticals

And sir, in terms of -- just now we were discussing around the long-term supply sustainability around all the commodities and solvent increases. Do you see any specific opportunity for us, we being among the first ones to backward-integrate for our portfolio? So do you see any specific opportunity in terms of backward -- further backward integrating our portfolio to ensure that the margins would sustain? Is there any visibility? Or is there any thought process that you could share with us?

M
Murali Krishna Prasad Divi
MD & Executive Director

The major products, we're already backward integrated to make sure that we have assurance of supply as well as cost savings. Now the newer generics which we are entering, yes, there is opportunity to backward integrate once we reach 60%, 70% of the market share. I'm talking about the second growth engine where we were 20% of the market and we are going towards the 70% of the market. Those -- once we reach the 70% -- 60%, 70% of the world's market, yes, there will be opportunities to invest on backward integration again, just like we did on our naproxen, dextromethorphan, gabapentin and several other products.

Operator

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

S
Surya Narayan Patra
VP & Pharma Analyst

Congrats with a good set of numbers. Again, first question on cost control, sir. See, despite all the challenges in terms of trade, in terms of the container cost and the spike in the solvents, what we have seen in the recent times, along with the raw materials, so still we have seen a kind of a very good cost control in terms of material cost, which is -- despite of all this challenging situation, we have maintained our gross margin intact either on a sequential basis or a year-over-year basis. So my first question is, did you see any impact of this -- all these challenges, sir? And which possibly you would have neutralized by your backward integration more and more? Was that the scenario?

M
Murali Krishna Prasad Divi
MD & Executive Director

I think it's not that we didn't face challenges or we are not facing challenges or we are not going to face challenges. We are facing challenges, no doubt. But how quickly we can react to it and how quickly we can start working on it. The advantage for us is the human element. We have continuity. We have the senior management who have been with us, the middle and senior management, for more than 15, 20 years with us. So they constantly work on expanding into new technologies, atom chemistry and efficiency. It's not just recoveries alone, cutting down the wage, consuming less and less raw materials. And I think this is not just one thing.

S
Surya Narayan Patra
VP & Pharma Analyst

Okay. Okay. Just an extension to that, sir, and may I know what is the share of the solvent cost in the overall raw material cost there for you?

M
Murali Krishna Prasad Divi
MD & Executive Director

It changes from product to product. And also, it changes from -- broadly in some customers since these products, they may not allow you to recover the solvent, whereas in some products, we may be able to recycle, recover and reuse. So they may range anywhere from 5% to 10% or around that, the cost of solvent.

S
Surya Narayan Patra
VP & Pharma Analyst

Okay. My purpose for -- purpose of asking that question was that, see, in a challenging time, if we're maintaining this gross margin at this level, so if there is a kind of improvement in the situation going ahead, and more and more backward integration that we might see because of our effort. So then, can we further improve our gross margin situation, sir?

M
Murali Krishna Prasad Divi
MD & Executive Director

There are several plans that is -- as I said, it's a continuous planning going on. Now will we go to manufacturing our own methanol and ethanol? I think that's a question mark, no.

S
Surya Narayan Patra
VP & Pharma Analyst

No.

M
Murali Krishna Prasad Divi
MD & Executive Director

But yes, we will manufacture majority of our key raw materials, key intermediates where chemistry is the key. It's not a massive volume of making it if you [ the right ] -- or mass volume of the solvent space. No, these are not the -- they don't add much value as chemistry because these are proven state-of-the-art technologies available. And our consumption is really nothing compared to what other industry consumes. But there will be price up and down, sometimes 2x for [indiscernible] or maybe if we can [indiscernible] -- indeed, we have to pay for some of that. But they will come back.

S
Surya Narayan Patra
VP & Pharma Analyst

Okay, okay. Sir, just last question on one of the components of your sixth (sic) [ 6 ] growth engine, what you had mentioned. So you talked about entering new APIs which are likely to be going off-patent during FY '23 and '24, and there's a larger opportunity we are seeing. But it is slightly different -- I mean, this approach is slightly different compared to our earlier stance. We never used to chase new generic opportunities. Rather, we used to have a well-integrated product profile before entering any market. And that used to provide us a greater market share for any new entrants -- or new product entries. So sure, sir, in this case, when we are saying that we are targeting products which are going to be off-patent soon, then how integrated will you be by then and whether this would be similar in terms of profitability in a way that we have been having?

M
Murali Krishna Prasad Divi
MD & Executive Director

Definitely, these products will have either a similar profitability or higher profitability because they will be just going out of patent at that time, and we'll be entering it when they've just become generic. The, I think, 2 fundamental things I don't -- I want everybody to remember, that we do not manufacture dosage forms.

S
Surya Narayan Patra
VP & Pharma Analyst

Great.

M
Murali Krishna Prasad Divi
MD & Executive Director

As a result, we don't compete with our customers. So our customers who make formulations, they prefer to buy their API from independent API manufacturers like us than buying from somebody who makes APIs and also formulations. So once we start manufacturing -- once the patent situation is cleared, it becomes generic, we will take the opportunities. We have done these in the past. It's not -- this is not the first time. We feel it is our second growth engine, where we have produced a product immediately after expiry of the patent and slowly expanded to 20%, now going towards the 60%.

Operator

[Operator Instructions] The next question is from the line of [ Vivek Gautam ] from [ GE Investment ].

U
Unknown Analyst

Congratulations, sir, on once again, a good set of numbers. Huge wealth has been created by Divi's for Indian shareholders since getting listed. But one question -- I have a few questions. Regarding the KSM crisis. You have been able to solve it in a very exemplary manner for us. So what prevents other pharma companies to go in contact with a very difficult sort of a thing? And how long this crisis of increased KSM prices and freight charges will persist, sir, in your opinion, sir?

M
Murali Krishna Prasad Divi
MD & Executive Director

Well, if I understand right, you're saying that the increased prices, what China has done for the APIs and advanced intermediates, we were able to get over with that quickly because we started this 3 years ago when we started looking at the impurities, that they are not consistent. So we have done it for 2 reasons: one, assurance of supply; two, to have consistent quality with no impurities; three, a backward integration to help our costing. So I think it's not just one objective. So we'll follow similar for other products. Now how long this will happen? I think it depends upon the volatility and what's happening in China. One time, it was environment. Second time, it was safety and explosions. Third now is the energy crisis in China or maybe the COVID, something else. So it looks like for the last 3, 4 years often on -- more than 50% of the time, there is always price pressure either on API or on intermediates or on starting materials.

U
Unknown Analyst

So what do these other pharma companies do going for the integration through KSM levels that -- any -- and overall for the pharma sector as well, sir, and Indian pharma sector, sir?

M
Murali Krishna Prasad Divi
MD & Executive Director

I really do my business and I'm confident on my business. Really, I spend less time on what's happening in India with other companies because I am unexposed. I interact with all the companies who compete with me in U.S., Europe in custom synthesis as well as in generics. So I don't think we want to comment on anything on other manufacturers in India.

Operator

The next question is from the line of [ Rahul Maheshwari ] from [ CCPL ].

U
Unknown Analyst

Yes. I congratulate team Divi's for such a fantastic result. Sir, I just want to understand a small thing. Yesterday, I think Pfizer announced they're filled with 89% efficacy rate vis-a-vis Merck's estimated 50% efficacy rate. So how is this going to impact the overall business for disease because your association is with Merck?

M
Murali Krishna Prasad Divi
MD & Executive Director

First of all, I think we need -- as I think I've made a statement -- what I would like -- I made a statement saying that the 2 companies, the Pfizer, Merck, they are bringing these oral formulations which will help the suffering humanity. I think we want to look at it that way first because, as you know, recently, the other products from IDEA pharmaceuticals, that did not do well. So wishing these to do well is the most important thing. Coming back to opportunity for those 2 companies and also the custom synthesis manufacturing companies, for those 2 companies, the world is very large. It's not -- it's billions of people we are talking about. The opportunity is something like $70 billion. Yes, it's going to be $70 billion at least for these pharma companies. So sky is the limit. There's a wide gap between vaccines and the oral dosage forms, which is the easiest way somebody can have access from a general practitioner. So we think each one will have their own plans and games, and we are here to support any requirement of dosage forms or key ingredients by not only these 2 companies, any company, that comes out with complicated chemistry for support.

Operator

The next question is from the line of Aejas Lakhani from Unifi Capital.

A
Aejas Lakhani

Yes, sir. Congratulations on an exemplary quarter again. Mirroring what all the other participants have said, you've done a phenomenal job, so kudos to you on that. Sir, 2 questions, 1 tactical and 1 more strategic in nature. The tactical one being, sir, that you called out at the start of the call that you had some of the price escalations built into your contracts. So is it fair to assume that the margin trajectory that we were on earlier in 1Q and last year, we see a move back to that level? That's my first question.

M
Murali Krishna Prasad Divi
MD & Executive Director

Pardon, can you repeat that? Can you please repeat that?

A
Aejas Lakhani

Yes. Sir, I -- my first question, sir, is that you mentioned at the start of the call that you have some of the price increases built into your contracts to some extent. And you spoke about the KSM situation quite briefly. You mentioned all of that. So is it fair to assume that the margin trajectory that we were on in the last year, you see the situation moving towards that in the second half of the year?

M
Murali Krishna Prasad Divi
MD & Executive Director

Yes, our margins are good, and we always maintain and plan for betterment of the margins. And in this volatile situation, I think I said we have to be agile and we have to closely monitor. And in these uncertainty times, we just have to be responsible and make sure that we supply -- we keep continuing our supplies. So I think they're the most important thing. However, it's different to assess as well. Going forward, what will be the upside? I think that will be difficult because it's very uncertain times. The coal went up from INR 2,500 per tonne to INR 8,500 a tonne. Tomorrow, it could be INR 10,000 a tonne. So I'm just throwing an example. Our base chemical, basic solvent, went up 300%. Now will it come down by March? Will it come down by April? I think these are some of the things -- they may impact, but our -- we are trying to see that there is the least impact. And whatever is there, we'll try -- we'll welcome contracts whereby we can transfer -- at the same time, we are working on our process and things whereby -- to perform well.

A
Aejas Lakhani

No, fair enough, sir. That's very helpful. Now I just want to understand that -- and this is a more broader question that I'd like your commentary on. Probably 5 years back, the sensitivity to taking a price hike by customers would have been a far more noisier conversation. So how much has the conversation shifted from price hikes to more consistent supply, which you had been talking about? So has that noise around your ability to take price size -- or price hikes or your sensitivity to take price hikes really reduced from the customer end, sir?

M
Murali Krishna Prasad Divi
MD & Executive Director

I think what is more important, I think I did mention a few minutes ago that continuity of supply, assurance of supply, and we play a complementary role, not a competing role. In other words, it's not that I manufacture at $10 a kilo and we -- I sell at $50 a kilo to another formulator, but my formulation has a raw material cost of 10,000. So a company that's making formulations and the API and selling API is competing with their own customers, whereas I always say we play a complementary role. So our customers, they do help us to see how they can help us in maintaining our share of the market, our growth of the market, or help us with our [ answer ] when the prices are volatile. They do help us because of the long-term relationships, contracts and also our continuity of supply even in difficult times.

A
Aejas Lakhani

Got it, sir. That's very helpful. And sir, you mentioned the $70 billion market size. What exactly is that market size for? Could you -- I didn't get that. The $70 billion market size is for what?

M
Murali Krishna Prasad Divi
MD & Executive Director

The $70 billion market size is that -- for the antiviral oral tablet formulations that are coming up for this COVID.

Operator

The next question is from the line of Damayanti Kerai from HSBC Securities.

D
Damayanti Kerai
Analyst, Healthcare and Hospitals

Sir, my first question is, again, coming to molnupiravir. So here earlier, you mentioned you have 3 streams, 2 for export and 1 for the domestic Indian players. So are you supplying from all the 3 streams? Or how you see scaling up supplies here?

M
Murali Krishna Prasad Divi
MD & Executive Director

We're manufacturing in all the 3 streams as per the requirement and demand, yes. And we are prepared to enhance whatever quantity is required even further.

D
Damayanti Kerai
Analyst, Healthcare and Hospitals

Okay. Okay, sir. And sir, my second question is, can you update us on your opportunity, which is one of your growth engines, contrast media? So how do you see this opportunity playing a key role in near to medium term for you?

M
Murali Krishna Prasad Divi
MD & Executive Director

This is where the -- I did mention in the contrast media the recovery of pricing is the key. The iodine wants it to be $4 a kilo, went to $25 a kilo. Now it's $50, $60 a kilogram. This is a major raw material for contrast medium. So I did mention that the recovery, recycle, reuse. And whoever is the most -- can -- will remain in business. This is where some of the investment is happening, and we are validating the other contrast media. And once these validations are completed, we will be in the commercial scale.

D
Damayanti Kerai
Analyst, Healthcare and Hospitals

Okay. So most likely, we could see some of these opportunities coming in next 2 to 3 years?

M
Murali Krishna Prasad Divi
MD & Executive Director

Three years is maybe too long. Much before that.

Operator

The next question is from the line of Rahul Jeewani from IIFL.

R
Rahul Jeewani
Assistant Vice President

Now I know you are not commenting much on the molnupiravir financials as such. But can you qualitatively comment on how the sequential trends have been for you on this product? Because on the custom synthesis side, we have seen your revenue going down sequentially by $18 million. So is that sequential decline largely on account of molnupiravir?

M
Murali Krishna Prasad Divi
MD & Executive Director

Going down?

R
Rahul Jeewani
Assistant Vice President

Right. So your custom synthesis revenue has decreased sequentially by $18 million. So is that $18 million revenue decline in the custom synthesis business, is that on account of lower molnupiravir sales? So I'm talking about the custom synthesis revenue excluding the nutraceuticals segment.

M
Murali Krishna Prasad Divi
MD & Executive Director

Yes. The custom synthesis used to be around 40%, 45% last year and similar numbers the previous year, whereas that has increased to 54% this year, actually this quarter. So the custom synthesis impact has increased substantially in the last 2, 3 quarters.

R
Rahul Jeewani
Assistant Vice President

So yes, sir, I'm talking about the sequential decline in the custom synthesis business. So if we look at your custom synthesis contribution in 1Q, it was around 54% excluding the nutraceuticals segment. But this quarter, the contribution has come down to 43% because Nilima ma'am said that the contributions which you spoke about at 54%, that included the nutraceuticals segment, and that was for first half. So sequentially, we have seen the business coming off. So my question is, is the sequential decline on account of molnupiravir? And whatever quantities you ship on molnupiravir during the second quarter, has the revenue recognition entirely happened for those shipped quantities in 2Q?

M
Murali Krishna Prasad Divi
MD & Executive Director

First of all, we cannot comment on molnupiravir, its quantity, its exports. I think that is highly confidential, and we cannot talk about that. Now in general, I commented that the exports of the custom synthesis have -- has increased to 54% from the first -- 40%, yes.

R
Rahul Jeewani
Assistant Vice President

Sure, sir. No worries. And just on COVID antiviral opportunity, you spoke about that the market opportunity is quite big, and we do have exposure to molnupiravir. But are we working on some other products as well on the COVID antiviral side which the competitors might be developing?

M
Murali Krishna Prasad Divi
MD & Executive Director

The custom synthesis of these products are highly confidential, and we do sign confidentiality agreements. I cannot comment. The reason I am able to comment on molnupiravir is that -- is because Merck has declared that we are the authorized manufacturer. Otherwise, we wouldn't have even mentioned anywhere about that we are the manufacturers for molnupiravir. So I cannot comment on any other products where we do custom synthesis.

Operator

We take the next question from the line of Lakshmi Narayanan from ICICI Prudential.

L
Lakshmi Narayanan

Yes. Good evening. Am I audible?

Operator

Yes, sir, you are.

L
Lakshmi Narayanan

Yes. Sir, my question is that, what are the key business indicators you actually look at on a regular basis in addition to margins and various other things, right? So when you look at business and then -- and you do your MIS on a monthly or a quarterly basis, what parameters do you actually keenly track, Mr. Divi?

M
Murali Krishna Prasad Divi
MD & Executive Director

I follow more on what are the new products, what are the new technologies and how efficiently we should be able to do them. I think those are the things we need to keep monitoring. It's not just P&L and it's not the bottom line. What is more important is what new technologies are coming that we could apply those to either of our generic compounds or our custom synthesis. See, the reason we will come with -- in custom synthesis through [ always ] because we keep investing in new technologies, new equipment, new systems. So what is important is that one needs to monitor what's happening in the world with the new technologies, what kind of new products are coming out requiring such technologies. Both, I think, are to be monitored. Business automatically comes once you are monitoring them.

L
Lakshmi Narayanan

Can you give us a case example of that? Any just to understand this better? Any -- something which you have done quite recently in the last 1 or 2 years on this front? Technology or product?

M
Murali Krishna Prasad Divi
MD & Executive Director

If you -- yes. If you recall, the T20 projects are where there's a 20 -- I'm going to add, the peptides that came out from Roche. We looked at it, we followed. And the moment they were looking at the cure building block, we made our own starting materials, the dye BOC, which is mainly the BOC protection required. We made all the BOC-protected amino acids, the FMOC-protected amino acids. We made [ dye ] peptides, [ slide ] peptides. And we geared it up and we supplied quite good quantity of these building blocks before even people started [ ordering ] them. So that kind of thing is the proactive approach. One needs to go in both investing in new technologies and investing in new chemistries and having the human manpower, dedicated employees, who will continue the technology and refine it to the point then them just learn and leave, learn and leave.

Operator

Ladies and gentlemen, there are no further questions. I would now like to hand the conference over to Mr. Satish Choudhury for closing comments.

M
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, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.