Divi's Laboratories Ltd

NSE:DIVISLAB

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the earnings conference call of Divi's Laboratories Limited for Q4 and full year FY 2022. [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 earning call of the company for the quarter and year ended March 31, 2022. 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 results for the quarter and year ended March 31, 2022, 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 the content of the same will be made available on the website of the company. Please also note that this audio call conference is a 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 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 statements, whether as a result of future events or otherwise.

Now I hand over the conference to Dr. Murali K. Divi, Managing Director for opening remarks. Over to you.

[Murali Krishna Divi, executive]

Good afternoon, and thank you, everyone, for joining us at our Q4 financial year '22 earnings conference. I hope that all of you, your families and friends are safe.

The current situation of COVID-19 is significantly improving, with more people recovering and less hospitalization. We still appreciate our government body, who have made tremendous efforts by conducting mass vaccination drive to tackle COVID-19. Divi's continues to mitigate the uncertainty tactically and get up to ever-changing customer requirements and business needs.

At this moment, I would just like to applaud the dedication of all employees across the organization for achieving the milestone revenue of $1 billion, decent profitability despite the hurdle faced during the pandemic.

During the year 2021, apart from creating additional capacity for our pipeline products as well as new capacities for emerging custom synthesis projects. We have also augmented and upgraded our utility infrastructure, which also includes enrollment management. I would like to inform you that our core investment from the last 2 years on debottlenecking, capacity expansion and backward integration has started to help us achieve scale and derisk external supply dependence.

Due to the pandemic, there is much more focus on development of oral small molecule for complex therapy segments for ease of administration, with high competency on handling a wide range of complex chemistry as well as rapid commercialization capabilities, business capacities and capabilities to take on the opportunities that lie ahead.

Divi's, a responsible pharmaceutical firm, has engaged in a number of CSR activities, and we have spent about INR 42 crores during financial year '21/'22. Our initiatives are mostly focused in the surrounding communities around our manufacturing units. These include enabling vital services like providing clean drinking water, empowering women, promoting education to children, encouraging skill development, to name a few.

I would now ask Nilima Divi to brief on operations and financials. Thank you.

[Nilima Motaparti, executive]

Hello. Good afternoon. I welcome everyone to Divi's Laboratories earnings call to discuss the results of our Q4 FY '22 earnings conference. I hope that each one of you, along with your friends and family, are safe.

Supply and cost challenges on procurement side persist, given the geopolitical tension and lockdown in China due to COVID-19. We are actively monitoring the development and managing our inventory based on the product criticality. We are making a huge effort in encouraging and developing domestic Indian sources for some of our material requirements. The risks are mitigated to a large extent, thereby minimizing the impact. Shipping costs and time lines continue to increase. Container shortages, rising oil prices and port conditions are causing great disruptions across regions. Our logistics team are proactively planning shipments, with timely communication to customers, creating a clear supply visibility.

Overall, FY '22 has been quite a challenging year for the pharma industry as a whole. Supply continuity despite various disruptions across the supply chain speaks volumes about our abilities as a reliable supplier. Globally, pharma companies are diversifying their supply network, focusing on stable supply partners with sustainable business model and strong supply chain control. Divi's is ready to capitalize on all these opportunities with ready capacity.

Moving on to financial performance for the year 2021/'22. I'm happy to state we have achieved a consolidated total revenue of INR 9,074 crores for the year, reflecting a growth of 29% over the corresponding previous year.

Profit before tax for the year amounted to INR 3,684 crores, a growth of 38%. We earned a profit after tax of INR 2,960 crores during the year, reflecting a growth of 49%. Our EBITDA margin for the year accounted to 44%. We have been able to contain our material consumption in the range of 34% to 35% based on product mix despite supply constraints and price volatility. Product mix for generics to custom synthesis is 41% and 59% for the full year.

For the quarter ended March 31, 2022, we have achieved a consolidated total revenue of INR 2,571 crores, reflecting a growth of 42% over the corresponding quarter of the previous year. Profit before tax for the quarter amounted to INR 1,076 crores, with a growth of 61% year-on-year. We earned a profit after tax of INR 897 crores during the quarter, reflecting a growth of 78% year-on-year.

Exports for the year accounted to 90%. Exports to Europe and Africa accounted to 77% of our revenue. Constant currency growth for the quarter has been 39% while, for the year, it has been 34%. Our nutraceutical business for the quarter amounted to INR 157 crores and INR 629 crores for the year.

We have capitalized assets worth INR 172 crores during the quarter and INR 935 crores during the year. We have a capital work in progress of INR 470 crores. We have a ForEx gain of INR 29 crores for the quarter, and for the year, the ForEx gain has been INR 38 crores.

As of March 31, 2022, we have cash on books of INR 2,804 crores, receivables of INR 2,570 crores and inventories of INR 2,644 crores. Our net worth now is INR 11,691 crores. Thank you.

[M. Choudhury, executive]

Thank you, Madame. With this, we would request the moderator to open the line for Q&A. We will now begin the question-and-answer session. Anyone question on to telephone. If you wish to remove yourself from the question queue, listens requested to use handsets, while asking your question.

[Operator]

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

[Tushar Manudhane, analyst]

Yes. And hearty congrats for ending FY '22 on a very strong note of 28% sales growth. Just would like to understand, given that we continue to have a steady state sales growth of 13% to 15% and against that FY '21/'22 has been a phenomenal year, so would that growth continue even in FY '23?

[Murali Krishna Divi, executive]

Well, I used to project every year is 5% to 10% growth year-on-year on the regular business. It is so dynamic situation right now, which we are in, as some of the volumes that came from custom synthesis projects for the innovators is a very unique situation. Lots of dynamic changes in the therapy segment. We need to be resilient and quickly respond to the dynamic changes.

Yes, it's a wishful thinking that we would like to maintain, but we also have to look at the reality in the dynamic situation. What I can say is we created capacity with multipurpose blocks. We are ready to purchase volumes in a short notice. This model has speed of delivery. And I think what we are saying is we are fulfilling all contracts. The future is good, but at the same time, with so many things happening in the world on energy on various fronts and pandemic situation or economic, how it is going to begin in the coming year, not knowing, it's very difficult to give projections at this moment.

[Tushar Manudhane, analyst]

On the receivables that have been sharply increased over the past 6 months, can you explain that?

[Murali Krishna Divi, executive]

There are no bad receivables. All the receivables are as per the contracts. And what is reflecting is the increase in sales that has happened in the fourth quarter. That's what reflecting.

[Tushar Manudhane, analyst]

Got it. And just lastly, if I may just an update on Kakinada's CapEx? Has that started off?

[Murali Krishna Divi, executive]

We are still waiting for the government clearance to go ahead, though we have all the licenses -- are received. And as soon as it comes, we will be investing.

[Tushar Manudhane, analyst]

Sure, sir. So it's been almost 3 months where documentation is very much in place, but revenue is not coming through.

[Murali Krishna Divi, executive]

We are waiting for it, expecting it immediately to happen.

[Operator]

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

[Neha Manpuria, analyst]

Just wanted to understand what our current capacity utilization is given the capacity expansion in debottlenecking.

[Murali Krishna Divi, executive]

The capacity is around 80% right now, and it varies quarter-on-quarter, 80%, 85%. But what I wanted to understand that the 15% of actual capacity available, it still is quite large volume to accommodate anywhere from 5 to 10 projects in large volumes. It can accommodate. We also have 2 buildings that are ready now to take up new product constructed already.

[Neha Manpuria, analyst]

So the 15% available capacity includes these 2 new buildings?

[Murali Krishna Divi, executive]

The 15% doesn't include the 2 new buildings because the equipment has to still go into the 2 new buildings that are running right now. We are operating about [ 85% ].

[Neha Manpuria, analyst]

Understood. Understood. And sir, given that Kakinada is yet to start construction and add growth rate, do you see a risk, let's say, in FY '24, '25, where our growth becomes flattish because of inability to add capacity? Do you run into that risk, not immediately, but let's say, 18 to 24 months down the line?

[Murali Krishna Divi, executive]

I do not think -- I did mention last time that both Unit-I and Unit-II at both sites will have more than 100 acres of land. At Unit-I, 200-plus acres, and at Unit-II, 158 of land available with all infrastructure so that we could start construction of the additional buildings immediately without waiting to take very large volume product, whereas to accommodate 5 to 10 projects without the buildings and equipment available right now. I don't see that Kakinada delay has anything to do with we being unable to fulfill any new opportunities that may arise in the coming 2 to 4 years.

[Operator]

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

[Surya Patra, analyst]

Congratulations for the great set of numbers, sir. Sir, 3 questions. The first question is on this antiviral drug opportunity. So if I remember correct, last quarter that you had mentioned, you are working on multiple molecules on this front. So which could be considered as a limited-period opportunity, but you were mentioning about 1, 2 years of opportunity on those fronts?

And more to that is that this -- the calendar '22 is likely to see a kind of oversupply of this antiviral drugs. The global estimates suggest that $32 billion worth of antiviral drugs will be supplied by 3 players. And if that is the case, then API supply opportunity possibly will be $1 billion plus.

So given our execution and track record for molnupiravir and all that, so how do you see really -- is this opportunity really panning out throughout calendar '22 for the industry and Divi's particularly in FY '23?

[Murali Krishna Divi, executive]

Yes, the -- there are multiple opportunities in the -- for the pandemic, for the COVID-19. As you have seen, the earlier ones favipiravir, ivermectin, dexamethasone chloroquine, [indiscernible], remdesivir. Several of them, people thought they were highly active, and with the virus changing its codes or changing its activity, I think they become inactive or they are being less used.

Now we mentioned the newer ones with the 3 big pharmas coming up. Another 2 or 3 biopharmas, they're also developing. And -- but what is going to be the million-dollar question or multibillion-dollar question is the -- how the pandemic behavior is going to be in the next 3 months, 6 months, 9 months, 1 year? What kind of changes that will take place in the body? That is the real issue.

What I am saying is we are in touch with every big pharma. Every big pharma knows that. If they want 100,000, 500,000 tons of an antiviral drug -- usually antivirus drugs are, especially the oral ones, are not just 5, 15 milligrams, 100 milligrams. These are in grams per day. So if they need -- if the product is successful, they need no less than 100 to 1,000 tons or higher.

And there are not many companies that could handle such volumes in a very short notice. We are prepared to do that, and we have the equipment, manpower, trained employees and analytical equipment available to handle all such. We will not lose any opportunities, what they come to us on these big pharmas. That much I can tell you instead of quantifying this [indiscernible] because it's very, very difficult one to point.

[Surya Patra, analyst]

Sure, sir. My second question is on the, at least on the new product additions. So if I see, sir, in the recent past or after a meaningful gap that we have added products like orlistat, Brilinta, lacosamide, so these are the kind of DMF filings that we have done. So possibly, lacosamide is not possibly much larger product compared to our normal product basket, what it used to be. And in case of early start in Brilinta, possibility against a China replacement strategy that you would be looking for, so sure, what is the thought process in selecting these 3 products in the recent past for filing with the U.S. FDA? Some sense will give better clarity, sir.

[Murali Krishna Divi, executive]

It's not just 3 products. I did mention that there are products going out of patent between '23 and '25, about $40 billion worth. These products are our real targets for making the next generics to give us a good volume. And these -- for these, I think this is one of the growth engines I have mentioned, between the generic opportunities where the products are developed, sample shipped from pilot studies and validations are in the progress. So we are gearing up for supplies of [indiscernible] from '22 -- between '23 and '25 for these good volume products.

[Surya Patra, analyst]

Okay. Just last one question, sir, from my side. Generally, I wanted to have a kind of a big picture view from your side. See, let's say, what is our aspiration over the next 5 years? Considering these couple of facts, see, we know that this China replacement is a much bigger opportunity for particularly in the APIs and intermediate space, that is one.

Secondly, the old concern, the old and standing concern of rising cost, which has been a key factor for outsourcing also manufacturing activity. So that is becoming more and more serious only.

So -- and third is that your dominant position in that API and intermediate space for both patented molecule as well as generic one, India's favored position in the current time frame. And also, your nonpresence in the biologic, which is likely to be one of the key growth drivers. Considering these 4 factors, what 5-year goal and aspirations that you are having, sir?

[Murali Krishna Divi, executive]

Well, it's unlimited. Those are unlimited because sky is the limit if one wants to bring. I think I always say, dream high and -- but makes sure that your feet are on the ground. I repeat again, they aim high, dream high, but keep the feet on the ground, live in reality. The reality is we are a [ distinct ] company. We have INR 3,000 crores of cash in the bank, and we have a lot of investments done, already has its capacities, and we are further investing.

Now in the small molecules, I think we are probably one of the first ones to reach $1 billion sales in the small molecules, APIs and intermediates. And how soon we can grow from there to the next level to become $1 billion company is one thing. Growing from there -- within the area where we are closing, as you said, is an opportunity. The gene replacement and also the -- there are several new molecules coming out. They're not coming from the big pharmas. They are coming from small biotech companies or small companies, which are being funded.

So the big pharmas are buying these companies when they are in Phase I, Phase II. And all of a sudden, they need capacity to manufacture these products in large volumes. We are evaluating some of those or few of those. And we see great opportunity in the coming 3 to 5 years in those as big pharmas don't own chemical plants anymore.

Those you say that make in Europe, make in U.S., but there are no big API manufacturing facilities. The [ minimum ] they can do is maybe take N minus 1 and finish the APIs for the requirement of only in U.S. or for Europe. At least certain quantum to say that it is made in U.S. or made in Europe. So we are ready to take all the opportunities that are arising from these areas.

[Operator]

The next question is from the line of Jiten Doshi from ENAM Asset Management.

[Jiten Doshi, analyst]

Many congratulations, Dr. Divi. This is an exceptionally good year with very strong results. So my compliments to you and your entire team for achieving this Herculan task in this environment. So it's really heartwarming to see your results and the value that you have created.

Sir, I have just one question. If you look out about 4, 5 years, where do you believe are the sustainable growth rates and the sustainable margins? I'm not discussing quarter 2 or 1 year, the coming year. But let's say, if you look at 5 years ahead, where do you see sustainable growth rates and sustainable margins?

[Murali Krishna Divi, executive]

It's not an easy question to answer because we are getting the surprise of pandemic, which had 3 years straight in terms of several issues. Fortunately, Divi's did not get impacted.

Now looking at the energies, the logistics, I think the main one is the logistics in the world, right from containers to transportation to ports being blocked or being into trouble. I'm not talking about the Ukraine. And I'm not talking about Sri Lanka or China or such. As overall, I think there's a lot of problems in the transportation also. But as a company, making APIs and intermediates, sky's the limit, and we are prepared. We are giving them with all the capacity requirements, and as you know, the big pharmas are looking at more and more small molecules because it is easy to administer.

When the pandemic came, people try to [indiscernible] that within few other things as injectables. But again, that will limit to take care of the people, whereas in the oral forms, it is much easier to administer to mouths of millions of people. So several companies are looking at APIs, which are administered orally. These are mostly small molecules. And I think we expect a good growth. And as you said, not in the next 1, 2 years, 5 years, I think we can expect good growth.

[Jiten Doshi, analyst]

And sir, can I take 40% as your base margin without which you don't want to work?

[Murali Krishna Divi, executive]

I won't say -- is that I don't want to work. We will work towards it. See, if somebody is getting 20% or 30% on a product, we know what to do if [indiscernible] that the continued improvement in terms of cost savings, improving yields, increasing productivity, recycling solvents, reducing work on atom efficiency, where people see that to make a 10% margin is difficult. I can say that we'll make 50% margin in that product.

We're doing that in some of our generics. It's not that it's difficult. We choose the product. We always choose product that will grow, that will be required for a long time. We are not looking at immediately whether we'll build a 30% margin or 60% margin. It doesn't matter to us. We know we can work on it, and we see the opportunity on atom efficiency, and we go operate. [ This is where we go ] define equipment research, who are dedicated to work on.

[Jiten Doshi, analyst]

Sure. So sir, next 5 years, you would be spending what, about INR 7,000 crores, INR 8,000 crores of CapEx to accomplish your vision?

[Murali Krishna Divi, executive]

The planning is about in the next 2, 3 years to spend about INR 2,000 crores, INR 3,000 crores. But if opportunities require, we don't mind spending INR 4,000 crores to INR 5,000 crores because we do accumulate -- our reserves do permit such expansion.

[Operator]

The next question is from the line of Shyam from Goldman Sachs.

[Shyam Srinivasan, analyst]

Just the first one on custom versus generic versus nutraceutical. So I just want to understand -- and this is, again, disclosure you put out in the annual report, but I'm just preempting it here. What is the largest product? And what is the concentration or how much does it contribute to your total sales for fiscal '22?

[Murali Krishna Divi, executive]

We don't disclose the by product, by company or by customer. We have been saying from the beginning that custom synthesis, generic, a ratio of anywhere from 40%, 60% or 60%, 40%, which keeps changing by quarter-on-quarter or year-on-year. 40-60, 60-40, generic and custom synthesis.

I think right now, the exports are about 90%, 95%, 94%. And it happened to be this year is about custom synthesis around 95 -- sorry, 60% custom synthesis and 40% generic. Again, my usual thinking is that we maintain 50-50. I've been saying all the time, but we want to maintain that.

[Shyam Srinivasan, analyst]

That's helpful, Dr. Divi. I'm just referring to your fiscal '21, naproxen you've given in your annual report is 20%. I'm not going to push you there, but maybe we will wait for the disclosure in terms of what the largest product is and if it has changed this year versus last year.

My second question is, if I were to use the disclosure of 41% generic, which includes nutraceuticals, and 59% for custom for the full year, I'm getting pretty weak numbers for generic API. This is excluding nutraceuticals in -- for the fourth quarter, like a 25% decline. Maybe the -- some of the numbers are rounded, and I appreciate that. But just the decline in the generic API piece over last year.

Clearly, the ratio has moved from 60-40 to 40-60. I get that. But how should we look at it on the go forward? Do we now have either demand visibility or capacity for the new molecules, plus the '23 to '25 expiries of patents? How should we look at the generic API piece? I'm coming from a point where people are worried about like many other participants of our sustainability of the revenue momentum. Since we don't know what some of these products are contributing, they're trying to strip off and look what is the base business, excluding, say, any onetime opportunity that may be there. So that's the context. It's a long question, but I hope to -- I hope you can give us some clarity there.

[Murali Krishna Divi, executive]

Well, generics, as such, is under a lot of price pressures. Generic as such, the customers, because of the pandemic behavior, either they want it just in time, or the way they used to sell directly to the stores now is going to be the big guys are [ subtrading ] in mass volume and local distribution center.

Now looking at -- yes, generics are going through price pressures, not volume pressures. The volumes are still there. We did not lose a customer. We did not lose volume to the -- to anybody else. In fact, the opportunities are coming based on the pandemic. The therapy segment demands have changed some of them. Some of them came down. Very few went up. Everybody is looking at just use what is required for the pandemic. And the postponed purchases are the generic anti-inflammatory or the anti-infective or pain killers that are all being, I wouldn't say neglected, postponed, less consumed. That's where it starts at the end user.

When it comes to the stores, it comes to the wholesaler and finally to the formulator who directly buys from us. So the feeling is that once the pandemic settles, I think it will come back to normal, as we are seeing now. Many hospitals and many -- they have started out therapeutic various treatments, surgeries. So I think it will take another 6 months to 1 year to stabilize if the pandemic doesn't change its course again.

Now coming back to the 41%, 59% and generics, how it's going to -- how Divi's is going to get benefited? Or are we looking at the future? If you recall our growth engines, what we discussed, we have expanded on the existing generics. The contracts are signed, and we don't see any issue with that.

And then we have done a lot of the increase in capacities for the existing generics, where we were playing only a 20% role. Now we have increased that by 60% to 80%, and we signed the contract and they were being implemented slowly because they had earlier contracts signed. They cannot go [indiscernible] to the other earlier supplier, whether it's China or some other suppliers, and we need to make sure that this switch takes place -- is taking place.

And also, I mentioned about sartan. Sartan is the good -- one of the good growth engines to us where we were strong only in one sartan where our [indiscernible] are excellent compared to several other companies, which had to close down. Now we are -- we have created capacity for the sartan. We -- at least 3 sartans, the validations are going on, and we are geared up to take the volumes in the coming years.

Then I mentioned about contrast media. They're going to be a growth engine. This contrast media is now -- is, indeed, in very, very important situation because there are not many people. There are only 2 in the world other than Divi's. And I think what used to be $20, $25 is now $55 to $70. So how efficiently you can consume iodine, how you can recover [indiscernible] with minimum loss where we are excellent, that's the winning situation where we can get by, get as much business as possible in the contrast media. And I think you will see in the next 2, 3 years a good improvement in contrast media with good numbers.

Then we also mentioned as one of the growth engines the 2 large custom synthesis projects. They are progressing well. Qualification and quantities are already supplied. Commercial quantity will be starting in the next 1, 2 years. Again, these are long-term projects. They are not disappearing in a -- disappearing molecules. These are growing molecules.

The future of generics where I said between '23 and '25 going out of current $20 billion, again, we have the capacity [indiscernible], samples to supply from the pilot plant and validations on the progress. And as and when patents expire, we are ready to supply.

So we don't see any reason, and we -- that we will be having issues in the generics, no. Yes, the custom synthesis opportunities, the unique -- where we were in a unique situation in the anti-COVID [indiscernible] gave us a boost. But that doesn't mean that we are not doing well in the generics or, [ in fact ], project. And I think we will come out in the next few months to a year.

[Shyam Srinivasan, analyst]

Dr. Divi, last question. I'll keep it very brief. If I were to look at when any company does -- like a big pharma does an expedited CapEx with your announce of it, let's take the case of Merck, which where you did a INR 400 crore CapEx, I think, a year before. Should we -- once this opportunity goes away, how should we look at the turns on that CapEx? You said in the opening remarks about multipurpose. Should that be how we should look at it? Or do you think that is dedicated and it's -- once that opportunity goes away, that CapEx is not productive?

[Murali Krishna Divi, executive]

Good question. We never build the product plants or blocks dedicated to your product. We build always multipurpose blocks. If the customer wants it, we can use that block only to make this product. But if customers get [indiscernible] only now into 1,000 tons, 500 tons, we can use the remaining 50% of the time to make any other products as a generic or for any other custom synthesis project.

[ If you say -- if I want only ] 30%, 300 tons, we can use it for the next 6, 7 or 8 months for any other product because all these equipments are multipurpose and can be switched within a matter of 30 to 45 days. The [indiscernible] of regulatory bodies, what time it takes for the regulatories to get an approval for an additional molecule. There's only one, whereas we can switch and manufacture any other product.

But the one thing I wanted to remember, any product, they won't die. What is happening, instead of 100%, maybe we'll take 70%, 50%, 40%. That's our experience. And what seems to be less active or more active may become less active and more active. So the molecules behave differently while the pandemic is taking its own variations, bringing some variations.

[Operator]

The next question is from the line of [ Cyndrella ] from JM Financial.

[Unknown Analyst]

Look, Divi, if we look at our inventory number at INR 2,800 crores for the full year, should this be considered as a visibility for next year's growth? Or is there any raw material inventory build into?

[Nilima Motaparti, executive]

Could you please repeat the question again?

[Unknown Analyst]

If we look at the INR 2,800 crores inventory numbers for the full year -- am I audible, ma'am? Am I audible?

[Nilima Motaparti, executive]

Yes.

[Unknown Analyst]

So INR 2,800 crore number, if we look at the inventory number, should we consider this as a visibility for our growth in FY '23? Or is there any inventory like risk that we should consider when you're looking at this number?

[Murali Krishna Divi, executive]

So the inventory related to the actual products, we are manufacturing, and there is no risk to the inventory at all. The reason probably the inventory looks, whether the average or medium or high because the management takes visions to stock enough product where we may have problems, whether the solvent or catalysts or some of the raw materials.

[Unknown Analyst]

That's helpful, sir. Sir, if we look at the overall scenario on the supply situation on the entire logistical situation, do you think FY '22 would have some of that impact and if we can quantify the same?

[Nilima Motaparti, executive]

I think it would have a similar impact as what it was last year, considering we have some other additional factors that are hitting the market. It could be the port situation that's happening currently even with the Colombo port, along with the Shanghai port, or it could be the war that's happening where the effect is seen slightly in Europe.

So it is very difficult to quantify at this point of time considering where the things are going to head and how they're going to mold into. But also, we need to see how the pandemic is going to play. Is it going to -- because we're, again, listening to cases where it's increasing across the country and as I mentioned. So it's quite difficult to quantify. But yes, we would be slightly conservative, and we would think that we need to operate at -- with stringent practices as we did this previous financial year.

[Unknown Analyst]

Okay. And any risk to the 45% EBITDA margin level that you envisage immediately?

[Nilima Motaparti, executive]

Pardon me. Can you repeat that?

[Unknown Analyst]

Any risk to the EBITDA margin of 45% that you envisage in the future?

[Murali Krishna Divi, executive]

We don't see any risks on the EBITDA. I think this is where always -- I always say bottom line, that's where we concentrate not on the top line. The top line automatically happens as we introduce new products, new generics and new custom synthesis opportunities. The bottom line depends on our efficiency and productivity because of our process development work. And it varies, but we try to maintain it back to what you said, 40%.

[Unknown Analyst]

That's helpful. Dr. Divi, if I may, the last one. We've been talking about immense opportunity for our custom synthesis business. There are a lot of products as per your commentary, on the generics side of the business, which will commercialize. So is any visibility that you can provide? I know I might be asking this question again. But any kind of a broad number that if we will be able to at least maintain the FY '22 number and grow over it at the top line, if any sense that you could help us would be very helpful.

[Murali Krishna Divi, executive]

No. As I mentioned that we are in a situation, I used to project very well year-on-year. But I think with the current situation in the business, we would like to make sure that it's better not to project at least and wait and watch the pandemic situation, the war situation, the port condition situation and also the various molecules coming out the efficiency situation. I think I'd rather not project.

[Operator]

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

[Alankar Garude, analyst]

Sir, my question is on the contrast media segment. It's a pretty consolidated segment with high entry barriers. And you just now alluded to your cost competitiveness given higher iodine recovery. And you have, I think, alluded to that in the past as well. Can you elaborate on how has been the early progress in gaining market share in this highly competitive or other pretty consolidated contrast media segment?

[Murali Krishna Divi, executive]

The contrast media segment is growing at the rate of 15%, 20% year-on-year. And you're talking about if there are -- there's a 4,000 tons of iopamidol at 20%. We need under 800 tons of iopamidol. And companies are not geared up to expand immediately to that kind of volume in these unpredicted times.

Yes, there are only 2 or 3 big players in this contrast media if you take the major [ by-products ]. But the opportunity is very high. Entry is difficult. We already entered, so -- and we are seeing more and more. When iodine was $15 or $12, people did not mind without investing into heavy recovery the contrast media.

Finally, when it goes as injectable to the end user, the contribution was very less. Today, the iodine [indiscernible] $65 to $70 a kilogram. I think people need to make sure that they are [indiscernible] and recycled, recovered and to the base. So this is where we are good at. We've already installed plans to recover and doing it, and we're doing it. So we are seeing good growth in this business.

[Alankar Garude, analyst]

Sir, just one follow-up on this because most of the key players in the market right now also control the end consumer channel. I mean they also are present on the devices front, so to that extent, is that an additional entry barrier for someone like us who is not present into devices?

[Murali Krishna Divi, executive]

See you also want to see the growth of it in every market. The -- just with whom you are referring to, probably, they are linking it to be equipment supplier. And the same thing is being general size because people are looking at less the price pressure. They are putting price pressure on the existing suppliers. And they finally understood that unless you bring down the price to excess, we will not be able to sharpen the pencil in what we should be charging to these patients. It's coming to that. That the contrast media plus whatever is the imagined cost of the equipment in the hospital, the total lease package is 2x number of rupees or x number of dollars. That is pictured.

So if the contrast media price goes up, we cannot afford that between where the generic player now is having a role or requirement, and we are seeing the encouragement from the wholesalers and [indiscernible] companies that are coming to play the generic role.

[Alankar Garude, analyst]

And just a quick second question. Any possibility of getting into biologics anytime in the near future? Or you would be ruling out that possibility altogether?

[Murali Krishna Divi, executive]

I think we mentioned again and again, we are not averse to biologics. We looked it a long time ago. But we have looked at peptides. We are very strong in the peptide building blocks. We look at oligonucleotides. We can make -- we made all the building blocks or even the sugar molecules. But we were not in the monoclonal antibodies, and we are not looking at that as an opportunity now because there are good opportunities with the volumes we have built. With the multipurpose equipment we created, I think there is still enough opportunities in our field.

[Operator]

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

[Damayanti Kerai, analyst]

Sir, my question is on generic pricing challenges you mentioned for your customers. So in current inflationary environment where, on one hand, we are seeing higher raw material prices and, at the same time, your customers are also getting squeezed on prices, so as an API supplier, do you have any scope to pass on cost of higher raw material prices to your customers?

[Murali Krishna Divi, executive]

Yes. In the long-term contract, what we have -- or even generic customers, that's the build -- in-built mechanism for the compensation. But of course, there's also 10%, 15%, 20% business. They just would like to see whatever is the best price they can get best with.

So there, yes, there is competition, and there will be price pressure. But again, they are short-lived [indiscernible] in the price. When the raw material price goes up by another 10%, they will be out of business. But as people know that we would want to be in the dosage form, they want an assured supplier, reliable supplier shipping on time. This is where we have a lot of credibility in the products that we play.

So we are -- yes, we are seeing price pressures because of, as Nilima mentioned on the transportation costs, energy costs, port conditions, the containers not being available, and all this is one -- as one thing.

Second thing, what is the demand by the end user that's the patient? So with the pandemic we have seen in the last 2, 3 years, that certain therapeutic segments, they did suffer. People did not use pain killers. People did not use not life-threatening therapies. People spend money on what is required to go through the pandemic. But now we are seeing, again, lifestyle medicine demand going up. So I think it will be positive in the next 1, 2 years. It should be in line.

[Damayanti Kerai, analyst]

Okay. Sure. And sir, my second question is you mentioned most of the capacity or all of the capacity which you've built is multipurpose and then the products which we generally target have long shelf life. Maybe, the COVID-related products might be exception. But just a clarity, are you still supplying molnupiravir API or PAXLOVID API or these have dried up?

[Murali Krishna Divi, executive]

First of all, we are bound by confidentiality agreements, both by the big pharma. Neither we can talk about the volumes, not talk about the product. This product is still happening. The innovator announced are the 2 products in the anti-COVID. They announced that Divi's is going to be one of the suppliers.

We will supply as long as the need, yes. We will manufacture as long as there is the anti-COVID products. I think I mentioned a while ago that it will never become 0. There will be manufacturing, and there will be supplies. Is it going to be a 20%? Or is it 100% or 10%?

But you are right, what I said was that the equipment where we made these anti-COVID drugs or where we are making the anti-COVID drugs even now are producing multipurpose equipment. And if the campaigning doesn't need any more for 3 months, 6 months, we will immediately switch to another product, either for the big pharma or for our own generic. It could mean capacity will never be wasted.

[Operator]

The next question is from the line of Dharmil Shah from Marcellus Investment Managers.

[Dharmil Shah, analyst]

Most of the questions have been answered. I just have one question left on the tax rate. So if we see Y-o-Y, tax rate has come down to around 21% from 25% in FY '21. So any specific reason for the same, sir?

[Nilima Motaparti, executive]

The 2 new [indiscernible] that have -- that we have been expanding has [indiscernible] operational [indiscernible]. Majority of the tax expenses that we have seen is from there.

[Dharmil Shah, analyst]

Okay. This is mainly because of the incremental sale on this, the 2 new [ extra ] limits?

[Nilima Motaparti, executive]

Yes.

[Operator]

I now hand the conference over to Mr. M. Satish Choudhury for closing comments.

[M. Choudhury, executive]

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