Divi's Laboratories Ltd

NSE:DIVISLAB

Earnings Call Analysis

Revenue Growth and Margin Dynamics

The company reported a total income of INR 1,950 crores for the current quarter, a year-over-year improvement from INR 1,821 crores, but observed a dip from the previous quarter's INR 1,995 crores. Material consumption was favorable, with gross margins benefitting from a good product mix and softer raw material prices. Profit before and after tax stood at INR 489 crores and INR 358 crores, respectively, with exports being 87% of the quarter's revenue. Although the constant currency growth was 7% this quarter, a 10% negative growth was reported over nine months. The contrast media segment showed a 'visible ramp up' contributing to significant sequential gross margin improvements. Upcoming logistical challenges, including a potential 30% spike in freight costs due to the Red Sea situation, are expected to increase future expenses, but no delays have been reported this quarter.

Introduction to Divi's Laboratories Earnings Call

During the earnings call for the third quarter of the financial year 2024, key figures from Divi's Laboratories, including Dr. Kiran S. Divi (Whole-Time Director), Ms. Nilima Prasad Divi (Whole-Time Director of Commercial), Mr. L. Kishore Babu (CFO), and Mr. Venkatesa Perumallu (GM, Finance and Accounts) shed light on the company's performance and outlook.

Steady Performance Amid Market Opportunities and Pressures

Divi's Laboratories has exhibited stable performance during the quarter with the generic business segment holding firm. The company foresees growth potential in new generic products due to patent expiries. Additionally, major projects in Custom Synthesis have moved to full-scale production, with expectations for increased contributions. Ongoing CSR initiatives continue to reinforce Divi's commitment to community support and sustainable practices.

Custom Synthesis and Generics - Pillars of Growth

A significant portion of revenue composition comes from Custom Synthesis (46%) and generics (54%). Two large Custom Synthesis projects have begun contributing to the revenue, and several molecules are advancing through regulatory stages. Looking forward, growth is anticipated in both segments due to molecule commercialization and patent expirations slated to augment the generics pipeline beyond 2025.

Margin Considerations Amid Changing Conditions

Concerning margins, cost pressures due to logistics and insurance have been partially impacted by geopolitical tensions in the Red Sea. While the previous quarter remained comfortable for Divi's, future periods may see significant effects on logistics and supply chain costs, with a potential 30% increase in freight costs. Divi's Laboratories continues to mitigate these challenges through efficient routing and timely deliveries.

Expanding Footprint in Contrast Media and Peptides

Divi's is making strides in contrast media, particularly with iodine-based compounds like iopamidol and iohexol, targeting opportunities in regulatory markets as opposed to competition from China in ROW markets. Additionally, the company is active in peptide building blocks used in new antidiabetic and anti-obesity drugs, and is in the process of being qualified by innovators for the supply of these blocks.

Kakinada Facility - A Future Growth Driver

A new manufacturing site in Kakinada is expected to start production in Q2 of the next financial year. However, the commercial impact is anticipated by the end of Q3, subject to necessary regulatory approvals. This development is a stepping stone for future growth opportunities, especially in the export markets.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to the Earnings Conference Call of Divi's Laboratories Limited for Q3 and FY 2024. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. M. Satish Choudhury. Thank you, and over to you, sir.

[M. Choudhury, executive]

Good afternoon to all of you. I'm 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 Q3 FY '24. From Divi's Labs we have with us today, Dr. Kiran S. Divi, Whole-Time Director; Ms. Nilima Prasad Divi, Whole-Time Director of Commercial; Mr. L. Kishore Babu, Chief Financial Officer; and Mr. Venkatesa Perumallu, General Manager, Finance and Accounts.

During the day, our Board has approved financial results for the quarter and 9 months ended December 31, 2023. 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 note that this audio 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.

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. Kiran Divi for opening remarks. Over to you, sir.

[Kiran Divi, executive]

Good afternoon, ladies and gentlemen. Welcome to our earnings call for the third quarter of the financial year 2024. We are pleased to have all of you here and I hope that you and your families and loved ones are in good health. I shall commence with a review on the operational performance of Divi's Laboratories. Divi's witnessed a steady quarter, driven by expanding market opportunities, slight decline in raw material prices subdued by persisting pricing pressures across the generic markets.

Coming to our generic business segment. The business remained stable with sustained demand for most of our established products. While opportunities from patent expiry products continue to create positive prospects, we expect the products with recent regulatory filings to fuel our growth beyond the financial year 2025. The Custom Synthesis segment is on a rise, particularly with the 2 major projects from the big pharma entering into full-scale production where we expect their contribution to further increase in the coming quarters.

We have several molecules at various regulatory stages at our customers. And with the expanded production capacity for both large and small volume products, we are ready for the new opportunities. Likewise, we are actively involved in the peptide blocks used in the new antidiabetic and anti-obesity drugs and are strategically focused on developing this peptide portfolio.

On the CapEx front, our forward momentum continues with Unit 3 infrastructural establishment. The production activity in the 200 acres Phase 1 greenfield project will commence on Q2 of '24-'25. Moreover, Divi's remains committed to responsible business practices and making positive contributions to the communities we operate. Throughout the year, we have actively undertaken infrastructural improvement, road development and sanitization system renovations in villages across Telangana and Andhra Pradesh.

As a part of our CSR initiatives, we dedicate ourselves through projects empowering children and women and encouraging afforestation and supporting rural health care along with long-lasting impact.

Now Ms. Nilima Divi will present to you with the financial highlights of the quarter. Thank you.

[Nilima Motaparti, executive]

Good afternoon, ladies and gentlemen. I extend my warmest greetings to each one of you. Thank you for joining us today as we gather to discuss the financial outcomes of the third quarter FY '23-'24. During the quarter, we sustained uninterrupted customer shipments efficiently meeting their deadlines. However, the ongoing Red Seas crisis has introduced disruption to the global supply chain, leading to escalations in freight cost, mandatory war-risk insurance and noticeable delays due to rerouting.

With increased vessel diversion resulting in longer voyages and increased oil prices, international freight rates and insurance premiums are in rise. While the resolution of the situation remains uncertain, we remain vigilant regarding potential challenges stemming from ongoing events and implications for global trade. Nonetheless, strengthened by a resilient supply base, streamlined inventory management and the implementation of various adaptive strategies, we continue to respond swiftly and closely monitor every shipment to ensure normal and timely supply.

I will now provide an overview of the financial performance for the second quarter of the fiscal year 2023-'24. We have achieved a consolidated total income of INR 1,950 crores for the current quarter as against income of INR 1,821 crores for the corresponding quarter last year. And our total income for the immediate previous quarter, that is Q2, was INR 1,995 crores. Material consumption for this quarter came to be about 39% of the revenue due to favorable product mix and softening of raw material prices. Profit before tax for the quarter amounted to INR 489 crores, and we have a profit after tax of INR 358 crores for the quarter.

Exports for the quarter continue to be around 87%. Exports to Europe and America is about 71% for the quarter. Product mix for Generics to Custom Synthesis is 54% and 46% for the quarter. We have, of course, gain of INR 18 crores for the quarter as against a gain of INR 47 crores in the corresponding quarter of last year. Our constant currency growth for the quarter has been 7%, while it is negative at 10% for 9 months. Our Nutraceuticals business amounted to INR 153 crores for the quarter.

For the 9-month period of FY '23, '24, our consolidated total income came to INR 5,804 crores, and we have a PBT of INR 1,450 crores and PAT of INR 1,062 crores. We have a ForEx gain of INR 32 crores for the current 9-month period. We have capitalized assets of INR 77 crores during the quarter, and INR 202 crores for 9-month period. We have a capital work in progress, inclusive of advances of about INR 712 crores at the end of the quarter.

On Kakinada project, we have spent INR 458 crores during this financial year. You may recall that we have spent INR 76 crores on this project until the end of last financial year. As of 31st December, we have cash on book of INR 3,913 crores, receivables of INR 1,792 crores, and inventories of INR 3,201 crores. Thank you.

[M. Choudhury, executive]

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

[Operator]

[Operator Instructions] The first question is from the line of Alankar Garude from Kotak Institutional Equities.

[Alankar Garude, analyst]

Sir, ma'am, in your discussions with CDMO customers, do you get the impression that big pharma companies are really looking to curb their exposure to China? And there has been a lot of anticipation on this over the last 4 years now since COVID. By when do you think this would start translating into business for Indian CDMO companies like us?

[Kiran Divi, executive]

We are seeing a huge amount of growth and a lot of opportunities coming on our side, especially since there is a direction that the big pharma should work more with Indian companies and towards European companies. So we are seeing good opportunities with our existing customers, also opportunities from new customers, which are coming in, which we will see in the next few years, what will happen with them.

[Alankar Garude, analyst]

Sir, the second question is within the peptide segment, you had a lot of prior experience in protecting groups like [ tBoc ] and Fmoc within solid-phase synthesis. I think you also developed [ bBoc ]. Now for semaglutide, tirzepatide as well as the upcoming GLP-1 combination, can either of these protecting groups be used? Or I mean, is it just few of these protecting groups or only one or there is some -- or maybe some protecting group is more appropriate than the other?

[Kiran Divi, executive]

So I cannot mention the name of the drugs, unfortunately. But what I can mention is for any amino acid to create a protected amino acid you need either a [ Boc ] or Fmoc. So we produce protected amino acids -- chain of protected amino acids, they are either dipeptide, tripeptide. They are basically a group of 3 amino acids or 4 amino acids. Some of the compounds have about 30 to 40 amino acids to create the drug. And in some cases, we almost have about 45. So these are done by the innovators or the innovative contract manufacturers. What we produce are the building blocks. These building blocks either use an Fmoc or a BOC which are -- and that's how you can only protect the amino acids.

[Alankar Garude, analyst]

And one final question, if I may, there are already multiple developers of semaglutide API globally. Do you think there is an opportunity for us even in the GLP-1 API space or we would like to remain restricted to the building blocks for now?

[Kiran Divi, executive]

I cannot comment on the drugs again. But what I can say is we are active with the building blocks right now, and we are working with innovators very closely. We are also supplying dipeptides and tripeptides at this point, and we are under qualifications.

[Operator]

The next question is from the line of Surya Narayan Patra from PhillipCapital India Private Limited.

[Surya Patra, analyst]

First question is on the margin front. While we have seen a kind of good ramp-up on the Custom Synthesis front there is a visible ramp up in the contrast media and all that. And hence, the gross margin improvement is quite significant sequentially. But on the other expenses front, there is a kind of an impact that we are witnessing. Is it entirely because of this Red Sea situation? Or what is this impact that we are seeing? And what incremental impact that we can see going ahead in the subsequent quarter because of the Red Sea?

[Nilima Motaparti, executive]

So I would say like it's partially Red Sea and partially also like because of the Red Sea, not just the logistics, but also like the insurance and all other factors kicking into it. But the -- we have -- like the Red Sea started during the end of November, if I'm right. And we have seen it partially in the last month of the quarter. But going forward, we see this is going to highly impact the logistics cost, the supply chain cost, wherein we are seeing reports where they are saying there's going to be a 30% spike in the freight cost.

So we have to be conscious. We have to be like looking forward to seeing how this is going to -- not just regarding the cost but also the rerouting is what is -- what we are more looking into currently because you need to make sure the material reaches our sites on time and they have to reach our customer on time. So we are being very conscious of the fact that we have to make sure that the time lines are met.

[Surya Patra, analyst]

Okay. But whether -- because of this longer route shipments, whether any portion of your export got impacted this quarter, ma'am?

[Nilima Motaparti, executive]

Not this quarter. I mean we haven't seen any delays in shipments or any material not reaching our customer in this quarter. This quarter, we have been very comfortable, I would say. But we have to look into the future quarters.

[Surya Patra, analyst]

Okay. My second question is on the contract media. So we have obviously seen ramp up there, but -- could you share that, okay, what -- see there are multiple contrast media product opportunities, and we have been working on a basket of products there. So how many products that we would have so far launched and contracted and started supplying to big pharma? And how many product opportunities that we are targeting to capture further going ahead?

And also an extended question here is that whether it is China, which is our bigger competition so far as contrast media is concerned for Divi's?

[Kiran Divi, executive]

So to answer this question, contract media, there are 2 types. One is CT scan where we use iodine-based contract media, and then we have the gadolinium compounds where we use it for MRI. So in terms of iodine-based compounds, we are very strong in iopamidol and iohexol. Dr. Divi has also mentioned this in the previous calls. And we are going forward with a good growth rate.

Apart from this on the [ gadolinium ] compounds, we are working with the innovators at this point and were under qualifications.

Now coming back to the iodine-based products, we are also looking at few other generic molecules where the qualifications are going on. You are also well aware that in the world there are about 3, 4 innovative companies, which control about 80% of the market share, where we are working with them very closely. And in some stages, we are undergoing qualifications to be the additional supplier and then take over quantity.

[Surya Patra, analyst]

Sir, here particularly on the contrast media for the China-related thing what I asked that we have seen in many of the products the key suppliers so far are Chinese, the input material suppliers. So -- hence the China Plus One could be a kind of big clear trigger and China Plus One really play out a big opportunity for us in the contract media, is it fair to believe that way? Or how do you see Chinese competition, particularly in the contrast media?

[Kiran Divi, executive]

So coming, so you're talking mostly of the generic molecules. When you look at China, China is a competition in the generic world, but that is mostly in the ROW market, not in the regulatory markets. So we are focused mostly at the regulatory markets right now, selling to U.S. and Europe and other regulatory countries. Apart from this, we are also entering into the ROW markets. We don't look at it as a threat because we start from basic raw material. We start our chemistry right from Iodine. We learnt -- we know the art of recovering iodine thereby it brings our cost down. And that's why we are efficient on atom to atom efficiency. So price-wise, cost-wise and quality, we are much more superior in the generic market, and that's why a lot of people are qualifying and moving to us.

[Surya Patra, analyst]

Okay. slightly differently, sir, on the contrast media. See, globally, whatever is the -- what is the current size of the global market in contrast media? And by what -- the number of products that we are currently -- already marketing, so what portion of the target market that we are addressing or capturing so far? And what is the potential opportunity further that is there with the potential pipeline that we might be addressing those?

[Kiran Divi, executive]

Like I said, right now, we have actively -- we are working on iopamidol and iohexol. We have launched it in several markets, and we are increasing our volumes and our market share in several products. Globally, the iodine-based contract media is about $5 billion and [ gadolinium ] compound is about $4 billion to $4.5 billion market share. So we are looking at -- and most of it is controlled by the innovator.

So on the innovative side of the business, as we get qualified as the volumes come to us in the coming years, we will see a much better opportunity in this. But as of now, the compounds we have launched as generic, we are having -- we are towards the process of having a good market share in them.

[Surya Patra, analyst]

My next question on the peptides and [ peptones ]. So what is the practical progress of us on that front in terms of the development of the molecules or the products as well as in terms of the manufacturing capability? And when that we can see is commercial opportunity in GLP fructifying for us?

[Kiran Divi, executive]

Coming to GLP-1 products, as I explained before, we produce protected amino acids, amino acids with 3 chains or 4 chain amino acids. We are in the process of getting qualified with several customers who basically customers are innovators, where they're using their molecule at their contract site. We will see opportunities more towards 2025. Since the qualification takes time, their impurity profiles take time, we have to get into their filings. So the whole process is almost a 1-year process since -- once the qualifications are completed.

[Operator]

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

[Shyam Srinivasan, analyst]

If I see the -- I mean Ms. Nilima commented 46% is Custom Synthesis for the quarter, right? Did I get that right?

[Nilima Motaparti, executive]

Yes, please. Yes, it is 46% from the CS and 54% from generic.

[Shyam Srinivasan, analyst]

Understood. Sir, just if I were to put that in numbers, like around -- you've seen a very good Q-o-Q improvement in CS, right? It was 40% last quarter, now it's 46%. So what's driven some of the growth in this CS segment? If you could give us some qualitative sense.

And also for the path forward, I know these numbers vary between quarters, but how should we look at Custom Synthesis contribution when we look forward? Are we in the phase now where custom is starting to pull its weight a lot more versus what was the historical quarters again last 4, 5 quarters.

[Kiran Divi, executive]

To answer this question, like Dr. Divi has mentioned in his previous call, the 2 big Custom Synthesis projects have commercialized and the results have we have started production, started supply, and we will see much more benefits in the coming quarters as the volume scale up and the shipments start. So that's why you have seen a change in the CS business.

Now coming to CS in general, I've explained, we have several molecules which were in discussion, which are in Phase I -- Phase II, Phase III, some are much more advanced, some are in the final stages in FDA approval for our innovators. So once the approval comes in, we are ready with capacities to go forward. So the opportunities are very positive at this time, and we will see growth in the coming years.

[Nilima Motaparti, executive]

And also, we would like to say at this point that the Generics to Custom Synthesis differs from quarter-to-quarter based on whether the material is going towards -- is shipped in one particular quarter or another quarter, we should look on an overall perspective of the entire year rather than looking at quarter-to-quarter. And sometimes we need to also look at it from the perspective that this is not the quarter where that defines the business. The Q3 is the quarter where our business actually slows down a bit compared to the other quarter.

[Shyam Srinivasan, analyst]

My second question is just on the rest of the business, right? I think Generics and Nutraceuticals or Carotenoids, both of them have seen like a softer quarter. I think Mr. Kiran talked about Generics pricing pressure. But we're getting a little mixed signals here, right? All the formulation companies are talking about low pricing erosion. So if you could kind of give us an outlook for the generic piece specifically. And also the elaboration on the comments you said that once the patents expire, we'll start seeing opportunities beyond 2025. If you could just clarify those two?

[Kiran Divi, executive]

Okay. So coming to your -- first part of your question, in Generics this type of cycle it happens every 4 years or 5 years where we see a lot of our competitors starting to destock their products, whereby there will be a drop in price, and that's why we see pricing pressure across the world. And though we have been maintaining our market share, despite of all the price pressures, we have gained about 3% to 5% of market share in most of our large volume products. So the corrections and everything would happen in the near future once our competitors stop destocking and when things start stabilizing again. So we think maybe in the next 2, 3 quarters, we will start seeing stability in the Generics business.

[Shyam Srinivasan, analyst]

And elaboration of the point about patent expiries, that lever of growth, Kiran?

[Kiran Divi, executive]

There -- we have several molecules with one of our growth on future generics which we have been working on. We believe in -- we have completed all the qualifications. We have also submitted quantities to our customers. We have done their validations and stability studies. Now we are just waiting for the patent to expire and FDA to approve it, and then we will launch it into the market. We are also well were aware Divi's are very selective on what they select as a molecule. If you look at our traditional big volume products like naproxen, naproxen sodium, gabapentin, nabumetone, levetiracetam, carbidopa, levodopa, even though we started in late, we are one of the world market leaders controlling about 70% to 75% market share.

So when we come in, we look at backward integration, we look at cost-to-cost efficiency, atom efficiency and then think about how to bring the product in this green's industry and green concepts. With that being thought process, we have selected certain molecules where we feel we can become market leaders, and we have brought it in. So we believe by 2025, 1 or 2 of the patents will start getting off and the product will start commercializing, and we will see it from there.

[Operator]

The next question is from the line of Neha Manpuria from Bank of America.

[Neha Manpuria, analyst]

My first question is just an extension on the generic commentary that you gave. Is it fair to assume based on your commentary that given pricing is weak and a lot of these new policies are going to come in '25, we should expect the generic business, the generic API business to remain at this level? Or are the drivers to see an improvement in the generic piece itself as we go forward?

[Nilima Motaparti, executive]

I'm sorry, your voice is not very clear. Can you repeat the question again? There is some disturbance I guess.

[M. Choudhury, executive]

Could you repeat the question again, the voice was not that audible?

[Neha Manpuria, analyst]

Sure. So I was saying that given your commentary that pricing -- generic API pricing probably would take a couple of quarters to new molecules will come in into 2025. How do we see recovery in the generic API business? Would that then be more next year onwards or is there levers that we have to improve the generic API business?

[Kiran Divi, executive]

So the Generics business, in general, we have not lost any market share. In fact, we have gained market share in several of our large volume APIs. We have also increased capacity in several of our APIs. For example, if I take levetiracetam, we increased from 400 to 1,000 tonnes, from valsartan increased from 400 to 700 tonnes, levodopa almost doubled the capacity.

So we have several molecules where we increased capacity. We know the market share, we know what's happening in the market. We're very close to the molecules. So with this in mind, we believe that we will grow in generic. Apart from this, we have our future generic molecules, which I just explained that some products are coming off patent in 2025, some in '26, some in '27 and '28. So we have the molecules in line.

We are backward integrated. We started from the basic raw materials. We have total control on the process. So we believe the generic business will grow once -- okay, if you say the pricing pressure, it's there once every 4 years. We have seen it in 2017, we have seen it before in 2011. So it is a cycle where the prices go down and then they raise up, okay? So it's always -- it's not something new that it's the first time in the market, but it is something that's very standard.

[Neha Manpuria, analyst]

Understood. And Kakinada should start contributing to the generic business as well, right, in the second half? Or it could be -- it will be more for the Custom Synthesis business in the beginning?

[Nilima Motaparti, executive]

Kakinada would be like it would start -- you can say we can start the product in Kakinada around the end of Q2 next year. And we also -- like we need to consider the time to be given for regulatory approvals and because we are mostly export oriented and not -- very little domestic market we supply. So by the time we start actually commercializing, it should be end of Q3 of next year -- next financial year is what we are looking at.

[Kiran Divi, executive]

Subjective to regulatory approval.

[Nilima Motaparti, executive]

Yes, subjective to regulation.

[Neha Manpuria, analyst]

Fair enough. And my second question is on the margins. If you look at our pre-COVID margins versus where we are today, I mean the Custom Synthesis business, which was INR 2,000 crores in 2020, 2019, north of INR 3,000 crores now, even though the share is the same, I understand that. Plus you've gained more share in lot of Generics, but margins have come down. Can this margin improve and go back to what we were at pre-COVID levels? And would that need a lot of this pipeline and GLP-1, et cetera, to kick in for that to happen? Just trying to understand the trajectory of margin.

[Nilima Motaparti, executive]

So if we are looking at -- like we do have a lot of opportunities. We do have pricing pressure. But we are also thinking about like we need to look at Pre-COVID and during COVID, and post-COVID is 3 different scenarios. Pre-COVID we were driven more by generic business and partial Custom Synthesis. During COVID we were driven mostly by Custom Synthesis business. And post COVID, we are now trying to establish and create new products in new markets and new -- what do you say, molecules in a place where we are also looking at logistical costs being increased and the margins are being affected, but this is not a long-term thing that we are foreseeing.

So comparing it to pre-COVID to now is not a similar scenario. What we can say, however, ex COVID, the last 9 months, if you compare to the last financial year's 9 months, we did see a double-digit growth.

[Neha Manpuria, analyst]

Okay. But is it fair to assume that margins can improve from here? Or this is the steady-state margin that we should build in given the expansion and all of the investments that we are making in new molecules and new products?

[Nilima Motaparti, executive]

With all the backward integration in the green chemistry and everything that we are foreseeing, we are hoping that there would be a better margin in the near future.

[Operator]

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

[Tushar Manudhane, analyst]

Just on this GLP-1 protected amino acids where you are under qualification with various customers, would this require subsequent CapEx and then the commercial benefit or we already have the capacity to gain the traction post approval?

[Kiran Divi, executive]

As of now, we have enough capacity to take care of their initial requirement what they have requested. If the volumes go beyond expected what we are seeing right now because they are also in-house manufacturing and then if they require additional volumes beyond what we expect and beyond what we are discussing, then yes, we will have to invest and then build additional capacity.

[Tushar Manudhane, analyst]

And typically, this would be what as a percentage of API cost of this GLP-1 product, the protected amino acids?

[Nilima Motaparti, executive]

It is -- I would say that at this point, we would not like to disclose it for various reasons because it also reflects sensitive information.

[Tushar Manudhane, analyst]

Okay. Secondly, on this gross margin, at least for the quarter-on-quarter improvement, you attributed 2 reasons. One was the Generics and Custom Synthesis mix and another one was raw the material. So let's say, out of 200 bps improvement, broadly, could you share like what would be the benefit on account of raw material -- lower raw material costs and how much to deal with because of the Custom Synthesis share?

[Nilima Motaparti, executive]

As you have seen that CS is more in this quarter, I mean there are multiple things that affected it. Like one the CS is more in this quarter. There is softening of raw material prices, which we have been mentioning in the last few conference calls that have been there that we are seeing the softening. And we are hoping that it will continue -- the trend will continue to be the same going forward. And yes, there are multiple factors that are affecting the change. But these are the 2 key reasons is what I would share.

[Tushar Manudhane, analyst]

Got it. And then -- so just extending to that as the proportion of Custom Synthesis increases because these 2 major projects scales up. So to what level of gross margin we can expect?

[Nilima Motaparti, executive]

We cannot explain product by product like -- but as I mentioned...

[Tushar Manudhane, analyst]

No, at a consol level.

[Nilima Motaparti, executive]

It's just a product mix. How it happens in that particular quarter. Like this quarter, the Custom Synthesis did increase, but the next quarter it may or may not be the same. So it's hard to define like quarter-by-quarter Custom Synthesis to Generics like is the business growing and create a future outlook based on that. I would say, rather we look at it as a whole year rather than just a quarter-on-quarter basis.

[Tushar Manudhane, analyst]

Fair enough. And just last, if I may. This Kakinada project involves the -- primarily the generic APIs? Or is it to do with innovative projects, if you could just give some comment on that?

[Nilima Motaparti, executive]

It is a mix. We are not focusing only on one particular segment there. As you are aware that we are an organization where we have multipurpose plants. We don't build a block just dedicated unless we see a long-term benefit in doing just a dedicated block. But most of our manufacturing blocks are multipurpose. So we use it between Generics and Custom Synthesis. So I would say Kakinada would have a mix of both.

[Tushar Manudhane, analyst]

And this GLP-1 would not require dedicated, right? That would also -- that capacity can also be quite fungible.

[Kiran Divi, executive]

GLP-1, we all -- like I already explained, we have already -- we already have the capacity, and we have already built the capacity required for this for the existing demands or projected demands that customers have given us and we are undergoing qualification. So as of now, we don't need additional capacity. But yes, for GLP-1s, it will be dedicated capacity.

[Operator]

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

[Damayanti Kerai, analyst]

My question is to Nilima. So you mentioned about supply chain challenges due to adverse geopolitical developments, et cetera. So I just want to ask, do you have any headroom to pass on additional costs to customers? Or it's not possible for you to do so.

[Kiran Divi, executive]

I would answer this because it's more related with the customers. So we have long-term contracts with the customers at various -- with various price locks. So there are certain price leads, which are linked to it. And when the upper threshold hits on the contract, that's when we have the opportunity to sit and discuss with them. Some contracts are once in 6 months, once in 1 year, some are based on a 6-month average. So it depends on the contract that we have that we have leveraged with customers to discuss.

[Damayanti Kerai, analyst]

But in case that doesn't happen, you will incur all the elevated costs, like you will absorb it, right? There is not much room to pass it on.

[Kiran Divi, executive]

At every stage, everyone will be as absorbing. For example, let's take an example that the dollar has gone to, let's say, INR 90 a dollar, okay? At that point, I'm getting benefited, right? So when it goes down, okay? And I'm still selling at that price, I lose it. So it is -- at the end of the day, you average the game and see what happens. So at some quarters, you may take it in, some you may lose, and sometimes you have the benefit. So it is we have been doing this based on averaging out over the year.

[Damayanti Kerai, analyst]

Okay. So for near-term margins, we should be focused more on cost efficiency, et cetera, like what was discussed earlier, that should be driving the margins and then obviously if top line increases better then operating benefits will be coming in?

[Nilima Motaparti, executive]

I would say that yes.

[Damayanti Kerai, analyst]

My second question on nutraceutical business. So this remains a tiny part of your business. So I just want to understand what is the constraining factor here, whether it's capacity or something else? Because it seems like a good business, but it remains broadly rain-bound in -- sometimes in the last 2 years or so.

[Kiran Divi, executive]

Nutraceutical business, we are largely into products like astaxanthin, canthaxanthin or beta-carotene amino. So we have fixed certain of the vitamins and the food supplements or Vitamin D3 where we are looking strongly at the regulatory market. If you look at products like astaxanthin, we have almost about 80% market share. So these are very specific products we are going in. As of now, we are running at full capacity. We are looking for -- and as you know, in the world right now, the consumption of natural products and everything has slightly gone down, though we have not lost any market share we are right now being cautious on the Nutraceuticals side, and we're seeing about a 10% steady growth year-on-year.

[Damayanti Kerai, analyst]

Okay. And do you plan to add on capacity or not as of now?

[Kiran Divi, executive]

Pardon me.

[Nilima Motaparti, executive]

Pardon me, can you repeat that again, please?

[Damayanti Kerai, analyst]

No, I was just saying for Nutraceuticals, do you have plan to add capacity in near term? Or it's not required, like you have enough -- although like you said it's running at full capacity.

[Kiran Divi, executive]

If the need be, we might. Like I said, right now, the demand worldwide has been very stable. So -- and because the prices are at a challenge at this point, so we will add when the opportunities increase. As of now, we have a double-digit growth on -- in the Nutraceuticals business.

[Operator]

The next question is from the line of Amey Chalke from JM Financial.

[Amey Chalke, analyst]

I have 2 questions. First one is on the innovative projects for the Custom Synthesis projects you were talking about the 2 projects. Is it possible to explain whether these projects are life cycle management projects for the clients where the patent expiry has already happened or about to happen? Or these are newly commercialized or novel projects where the patent protection will be there? That is the first one.

And the second question I have on the capacity front, if you can explain the final gross block number for the Kakinada and also the GLP-1 capacity.

[Kiran Divi, executive]

Coming to the 2 branded molecules. The products are under patent, and they are being produced by us for them. And that's why the commercialization just took place, and we have a long time as the patent will expire and we have good opportunity with them. I cannot give the breakdowns or anything on those products at this point because of confidentiality. But what we can say is, they are very good opportunities. And we have several molecules in the pipeline, which are -- which hopefully with FDA approval and new approvals, we should see -- they should see the light very strong.

Coming to GLP-1 compounds, we have dedicated capacity for -- I would put a ballpark of several hundreds of tons at this point, which we have kept ready for commercialization at -- once we have all approvals in place from our innovators.

[Amey Chalke, analyst]

Sir, the Kakinada block, how much would be the CapEx we have sent or the asset which we are looking on the balance sheet, if you can.

[Kiran Divi, executive]

We have built about 7 production blocks there as of now with the total capacity -- with a total investment of INR 458 crores.

[Operator]

The next question is from the line of Nikhil from SIMPL.

[Nikhil Upadhyay, analyst]

Just 2 questions. One was on capacity. See, we -- in last 2 years, we added a lot of capacity. And now the gross margins have improved because of the mix change. But sequentially, can you help us with how the utilizations have improved? Or are they same as it was last quarter?

[Kiran Divi, executive]

Like I explained, in the large-volume generic market, we have picked up about anywhere from 3% to 5% market share. If you take an example of a large volume product, we produce about 5,000 tonnes and 5% of it is almost 100 tonnes. So capacity wherever we have increased -- wherever we have built it is being utilized and it is operational. And in some cases, qualifications are going on, and you will see commercial realizations in the near quarter. And also, the 2 big projects we have done for the big pharma, we have done investments over there where the commercialization has now taken place.

[Nilima Motaparti, executive]

As you have said, like you've seen the gross lock improve, we can say that the capacity utilization for this quarter is around 80%.

[Nikhil Upadhyay, analyst]

Okay. So if we look in last 4 to 6 quarters, the utilization has improved, but the operating leverage because our cost on -- the cost inflation which has happened on the employee and other expenses is not covered because of the fall in realization? And that is why it's not reflecting in our EBITDA margin. Would that be a right assumption to make? Or would you -- yes.

[Nilima Motaparti, executive]

I mean we need to look at it as a product mix over a period of time. We can't just say that looking at one particular quarter, that this is the future outlook.

[Nikhil Upadhyay, analyst]

Secondly, on post Kakinada coming up, how do we see -- would we look at going slow on capacity addition for next 1 or 2 years? Or would the investment and opportunities which we have talked through our strategic 6 levers, do you see this investment phase to continue at INR 500 crores, INR 600 crores over next 3, 4 years? How should we think about this?

[Kiran Divi, executive]

If you look at Kakinada in general we have about 500 acres right now, out of that we are utilizing 200 acres. And also I have explained -- we still have 300 acres available in Kakinada as a greenfield for future development. As our -- as the opportunities with big pharma increase, and as we see potential volumes keep increasing, and the new generic volumes that we are launching in the next coming years, we see more opportunities and the Kakinada gets all regulatory approvals, we will see investments coming in again.

[Nikhil Upadhyay, analyst]

Sir, just to flip it, what I'm trying to understand that, see, when you decide to put a CapEx of even, say, something like [ 100 ] a new block, what is the time period in which you believe the optimum utilization of this CapEx will be achieved? Is it like when you are thinking about it based on the orders from the customers and all, is it like 2 years, 3 years, just getting a sense of how you think about when to put a new block because if the block remains unutilized, it will start hitting our operating leverage. So how do you think about this?

[Kiran Divi, executive]

Typically, it's about 2 years since we build a block. There are several factors we have to take in place. One is the length of the chemistry, how long it takes. Then we also have to look at the qualification, how critical it is. In some cases, there are nitrosamine impurities, you need additional qualifications, FDA can come back and ask you several more questions before they approve the project. So with all this in place, we typically -- our history tells us it's about 2 years. But we have also seen 2.5 years in some cases.

[Nikhil Upadhyay, analyst]

Okay. Just last question. On the GLP side, I think someone had asked this question, but you excuse. But putting it differently, if the GLP products come in for us, would they be accretive to the overall gross margin than what we are doing as of now?

[Kiran Divi, executive]

I would say so. I would agree with it.

[Operator]

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

[Nitin Agarwal, analyst]

See, on your Custom Synthesis projects in your experience, when the project that you're working with the innovator goes off patent, typically how does the cycle really play out subsequently? Do your volumes stay as they are? Or do you have a meaningful loss in volume as well as pricing subsequent to the patent expiry for the innovator?

[Nilima Motaparti, executive]

Usually, when the product is under patent and it expires on the patent what we normally notice is the competitors do such for a much more cost-effective way of manufacturing the same compound. And also the product cost and the pricing of the product does go down because of the contributions being there for that particular molecule. So yes, we do see that whenever the product goes off patent, the price falls and there are multiple competitors in the market and the cost also is substantially lower than what the innovator initially had innovated the cost with.

[Kiran Divi, executive]

So typically what happens is when the molecule is coming off patent with the innovator, we work on late life cycle management for the molecule. So during that process, we bring the most effective route where we discuss with the innovator in hand. And then we work with them in requalifying this new process which is more cost effective and helping them to keep the market share. In the process, we also keep a decent amount of share.

[Nitin Agarwal, analyst]

But per se, is it fair to sort of say that from a gross profit contribution perspective, the contribution for the product comes off after the patent expires and is that meaningful? Is the drop meaningful, which happens with whatever initiatives you undertake?

[Nilima Motaparti, executive]

I would say that, yes, growth for the customers and whoever are involved in that patented product for them if they move on once off-patent it does affect.

[Nitin Agarwal, analyst]

Okay. And second one, you talked about 2 large opportunities which are there for us on a going-forward basis. One is the contrast media products and the other one is GLP-1 sort of building blocks which are there. Now is there a way to -- I mean, just taking your sense on it. From a quality perspective in your assessment, which is a bigger opportunity for Divi's over the next 5 to 10 years?

[Kiran Divi, executive]

Could you repeat the question again, please?

[Nitin Agarwal, analyst]

I'm saying -- you talked about 2 major growth opportunities for a business, which is, one, there is the contrast media products. And two, is GLP-1 intermediates building blocks that you're working on. If I take a 5-year view of the business, which is going to be in your assessment, probably a bigger contributor to Divi's business between the two.

[Kiran Divi, executive]

We cannot say that. We cannot go by a growth engine because we have about 7 growth engines right now. And we cannot say which one is bigger and which one is smaller. In both of them, we see really good opportunities. We see promising opportunities and the opportunity, which one will kick in first, which one will kick in later, we cannot say that right now. But what we can say from 2025, we will start seeing some good numbers on both the fronts and positive results.

[Operator]

The next question is from the line of Prashant Nair from AMBIT Capital.

[Prashant Nair, analyst]

First question is on the broader business mix. You seem to be now getting back to close to the 50% generic to Custom Synthesis split that you have maintained generally. Looking at whatever you have in the pipeline over the next say, 3 to 5 years, do we see this split broadly remaining in this range? Or could it get skewed towards one or the other segment?

[Kiran Divi, executive]

I would say that the ratio we should always look at it as year-on-year. And we believe that both generic and custom will grow parallelly hand-in-hand. So it's not like they're concentrating only on one segment of the business and ignoring the other segment. We believe both the segments have good opportunities based on the growth engines, our future generics or the existing generics where we increase capacities and qualifications are in the process and also in the Custom Synthesis, the 2 big molecules which have just commercialized. Apart from that, we also have several molecules in the pipeline where our innovators are waiting for FDA to approve or EU to approve. So I would say they're hand-in-hand. I wouldn't say that one is dominating the other at this point.

[Prashant Nair, analyst]

And second question relates to the Kakinada plant. How much would that add in terms of fixed overhead or fixed cost.

[Nilima Motaparti, executive]

Can you repeat that question again, please?

[Prashant Nair, analyst]

Yes. So the Kakinada plant, how much could it add to your fixed costs on the P&L of fixed overhead?

[Kiran Divi, executive]

We cannot be currently specific.

[Nilima Motaparti, executive]

See, we can't be very specific about every product, every unit and everything. But only thing we can see is with Kakinada adding into the portfolio '24-'25, we do foresee a double-digit growth year-on-year.

[Operator]

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

[Rahul Jeewani, analyst]

Talking about margins that business...

[Operator]

Line is not very clear for you, request you to please use the handset mode.

[Rahul Jeewani, analyst]

[Technical Difficulty]

[Operator]

No sir, this is not better sir.

[Rahul Jeewani, analyst]

Is it better now?

[Operator]

Slightly sir, yes, please go ahead.

[Rahul Jeewani, analyst]

Yes, so ma'am you indicated while talking about margins that the business has gone through 3 phases pre-COVID, COVID, and obviously now. Given that we are targeting opportunities in both the Custom Synthesis and the generic API segment.

[Nilima Motaparti, executive]

I'm sorry, we are unable to understand the question. It's very broken.

[Operator]

Rahul, we request to please move to an area with better network.

[Rahul Jeewani, analyst]

Yes, is it better now?

[Operator]

Not really, sir. It still has that breaking.

[Rahul Jeewani, analyst]

I will join back, breaking. No worries.

[Operator]

The next question is from the line of Omkar Kamtekar from Bonanza Portfolio.

[Omkar Kamtekar, analyst]

So a few -- first clarification, what are the number of -- number that you quoted for the Nutraceuticals business of revenue number from the Nutraceuticals business?

[Nilima Motaparti, executive]

The Nutraceutical business for this quarter has been about INR 153 crores.

[Omkar Kamtekar, analyst]

INR 153 crores okay. So the first question is with respect to the asset terms. So with the company had about we have said, approximately INR 450 crores has been added to the gross block. And the total gross back as of the year-end of FY '23 is close to INR 6,000-odd crores. So what are the asset turns that you are looking ahead? Because historically, we have been at [ 1.5 ] asset turns in gross block to sales -- sales to gross block which is currently down. How are we looking to ramp it up? And will it come back to these historical levels going ahead?

[Kiran Divi, executive]

Could you repeat the question, please? We couldn't hear you clearly.

[Omkar Kamtekar, analyst]

Am I audible, now. Is this better?

[Kiran Divi, executive]

Now you're audible, yes please.

[Omkar Kamtekar, analyst]

Okay. So the question was with respect to the asset turns, currently the Kakinada block is approximately INR 450-odd crores, and the asset size as on the end of FY '23 was INR 600-odd crores. So currently, we are at close to 1.2, 1.3 sales to gross block. How are we looking to ramp it up? Because historically, we have been at 1.5x, currently we are lower. So how far materially asset turns increase? And as you said in the previous question's answer that we will be looking to add a capacity as and when the opportunities come. So with that being said, could we say that we could reach close to INR 10,000 crores top line by the next 2, 3 years, if we ramp up taking into factor both the increase in the asset turn and the capacity?

[Kiran Divi, executive]

Okay. So like you said, we invested into Kakinada, and I've also explained to you by Q2 -- end of Q2 of 2024-'25, we will start operations in the plant. And then commercialization is subjected to all regulatory approvals, which will take anywhere from 6 months to 1 year, depending on the product and the qualification stage.

Coming -- so it is hard for us to explain when Kakinada will come fully on board. Like I explained before, once we build the block, we usually see 2 years before commercialized -- it is fully commercialized.

Coming to new opportunities. We have already invested for new opportunities, and we are waiting for regulatory approval for several of our branded products and generic molecules and future generic molecules, which have explained to you in my previous conversation. So this opportunity will definitely help us to.

Now coming to your top line growth, what we can comfortably say year-on-year, we will show a double-digit growth.

[Omkar Kamtekar, analyst]

And finally, with respect to the composition of the revenue, so it is 60-40 now Generics to CS and you had mentioned in the previous circular that it is based on opportunities. So if you see an opportunity in the Custom Synthesis business going ahead, so the Custom Synthesis contribution might increase. So we -- so that is how it would go. It would ebb and flow year-on-year, and it is not a specific strategy that we are focusing on anything. Would that be a fair understanding?

[Nilima Motaparti, executive]

Generics to Custom Synthesis is 54% to 46%. And the growth is there on the sides. It's not just in the Custom Synthesis. We do see growth in our older products, quantity-wise, volume-wise and also newer generic products. While we are seeing growth even in the Custom Synthesis, I would say growth is there both sides. So it is difficult to say, like, what percentage is -- how the percentage is going to change quarter-on-quarter basis. But also year-on-year we do see growth happening in the next few years on those fronts.

[Omkar Kamtekar, analyst]

I understood that. But we look at it to be remaining in the same. So are we looking at Synthesis growing faster in the near term or Generics to -- so just that I was trying to understand how will the composition work over the next 2, 3 years? If the CS is going to grow faster than the Generics then that would account for a change in the margins also. And I think the margins, as you said, would be increasing. So that would be on account of the increased contribution from in synthesis business. That is what I wanted to understand.

[Kiran Divi, executive]

Yes. So like I explained in my previous conversations, okay, we have several opportunities in the generic volumes, which are coming off patent. I've also explained that a certain amount of regulatory approvals are required for existing molecules with customers where we are increasing capacities and -- where we increase capacity and we're increasing volumes with them. So all these regulatory approvals are required, and we do not have control on the time line.

The same way in the Custom Synthesis project, our customers are waiting for their FDA approval so that we can start sending commercial quantities. Now we have no control on their qualification time line. So this is not something that I can say that one is going to grow, the other is not, we're hoping both will grow. And maybe 1 quarter, CS may be slightly higher, 1 quarter generic may be slightly higher based on the approvals that come in. So I cannot comment on which one will grow up at what time. It all depends on regulatory approvals at this point.

[Omkar Kamtekar, analyst]

And just as a suggestion if you could start creating a PPT for the results would be helpful.

[Operator]

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

[M. Choudhury, executive]

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

[Operator]

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