Eris Lifesciences Ltd

NSE:ERIS

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to Q4 and FY '22 Conference Call of Eris Life Sciences. We have with us on the call today Mr. Amit Bakshi, Chairman and Managing Director; and Mr. V. Krishnakumar, Chief Operating Officer and Executive Director. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. V. Krishnakumar, Chief Operating Officer and Executive Director of the company. Thank you, and over to you sir.

[Krishnakumar Vaidyanathan, executive]

Thank you. Good afternoon, and welcome to our fourth quarter conference call. I'm Krishnakumar, and I'm happy to connect with you today. At the outset, I'm delighted to inform you that Eris has entered the elite club of Indian pharma companies to have crossed INR 400 crores of profit after tax in just 15 years from inception. There are less than a handful of pharma companies in these categories. We have delivered an EPS growth of 14% in this financial year on the back of a 21% EPS growth, which we delivered in the last financial year. This represents a compounded annual growth rate of 18% over the last 2 financial years.

Now let me take you through the financial and business highlights for the quarter and the year. As per AWACS, the Indian pharma market grew by nearly 4% in quarter 4 of '22, acute therapy grew at 5.5% as COVID and other infections started waning. Chronic and sub-chronic therapies grew by 2.6%, which is the third quarter in a row of good growth, compared to the long-term average quarterly growth rate of 10% to 11%, which the chronic segment has seen for the longest period of time.

In comparison, I'm happy to share that Eris grew at 9.2% in quarter 4 of this year. Our core cardiometabolic franchise, which is 60% of our business, grew at 14.1% in Q4 compared to a market growth of 2.8%. VMN, which is our third largest therapy, has grown at 8.6% in FY '22 versus the market growth of 12.2%. CNS, which is 8% of our business, grew 33% for the year compared to a market growth of 9%, so nearly 4x of the market. And women's health, which is again a very fast-growing segment for us, grew at 24%, 25% for the year compared to a market growth of 13%.

When we compare from the pre-COVID base, Eris has grown at 3x of the Indian pharma market. That is Eris has grown at a CAGR of 9% compared to the pharma market CAGR of 3%, excluding COVID medications. On this basis, Eris continues to feature among the top 10 fastest-growing pharma companies in the IPM when you take it from pre-COVID levels.

At the start of the year, we had guided for 3 key product launches and 10 total new launches for FY '22. In line with our guidance, we have launched 3 key products: Xsulin, which is our brand of human insulin; Drolute, which is our brand in the fast-growing Dydrogesterone market; and Linares, which is our brand of linagliptin, a commercially attractive opportunity with the DPP-4 inhibitor segment in oral diabetes. All these 3 key launches happened in quarter 4 of FY '22.

In addition, our power brands in diabetes such as Glimisave, Zomelis and Gluxit continue to enjoy dominant market position in their respective segments. On the back of our strong position in the oral antidiabetic market, this year marked our entry into insulin through a joint venture with MJ Biopharm, in which Eris holds 70% of equity stake. Through the formation of this joint venture, we've reached an important gap in our diabetes care portfolio and are well positioned to leverage the market opportunity in insulins, analogues and GLP1 inhibitors.

By way of detailed financials, our consolidated operating revenue for quarter 4 stood at INR 306 crores, which represents a 10% growth over quarter 4 of last year. The consolidated EBITDA for this quarter was INR 97 crores, which is a growth of 2.5% over Q4 of last year. As I mentioned, Q4 of this year has been a very heavy investment quarter for the company in terms of strategic new product launches like Drolute, Xsulin and Linares, as well as the launch of a dedicated insulin division with a field force of 200 personnel. The impact of all of which is reflected in the Q4 EBITDA margin.

Consolidated profit after tax for quarter 4 stood at INR 80 crores, which represents a growth of nearly 17% over quarter 4 of last year. Consolidated revenue for the year stands at INR 1,347 crores and has grown by 11% over last year. Consolidated EBITDA for the year is INR 485 crores, which represents an EBITDA margin of 36% and an EBITDA growth of 12.6% over last year. Consolidated profit after tax for the year is INR 406 crores, which represents a year-on-year growth of 14.3% over last year.

Our stand-alone YPM grew to INR 5 lakhs in this financial year FY '22, up from INR 4.5 lakhs in FY '21. Our business model continues to be cash accretive with a consolidated operating cash flow of INR 378 crores in FY '22, which represents 78% of EBITDA. As guided by our dividend policy, in FY '22 we have declared and paid a dividend of INR 6.01 per share, which implies a payout ratio of 20% of consolidated net profits.

FY '23 represents the start of an exciting period in the diabetes space in terms of molecules losing exclusivity and hence, a deluge of new product launches. We expect to launch more than 15 new products in this financial year, including 5 to 6 significant new products.

Moving on. In line with our inorganic growth strategy, which we have articulated to you, Eris has today announced the acquisition of 100% equity stake in Oaknet Healthcare, a dermatology-focused domestic formulations company. As Oaknet becomes part of the Eris Group, it brings with it a well-established portfolio of brands in dermatology and women's health, both of which are areas of strategic interest for us. Oaknet had a revenue base of INR 195 crores for the year ended March 21 -- March 31, 2022. The Eris specialty franchise will get a significant impetus with the acquisition of Oaknet. Along with Oaknet, Eris has now present in 87% of the chronic market, which is worth INR 55,000 crores. With a leading presence in the major chronic therapies in the market, namely cardiology, oral diabetes care, insulin, neurology CNS and dermatology.

Oaknet has near 100% coverage of approximately 11,000 dermatologists across India with a 60% penetration. Oaknet derived 43% of its total prescriptions in dermatology from dermatologists, compared to 38% for the market, which suggests that Oaknet has a very strong specialty franchise. In addition, Oaknet is very strong in medical dermatology, which is curative, and in a tropical country like India, will always remain the bedrock of the dermatology business.

This acquisition also gives us an opportunity to scale up the cosmetology franchise, which is largely driven by dermatologists. The deal brings marquee brands like Cosvate and Cosmelite into the Eris portfolio. Four out of the top 5 derma brands of Oaknet are ranked within the top 5 in their respective segments.

We've already seen that Eris is in a high-growth phase in the women's health category with a 24% year-on-year growth in FY '22. The addition of Oaknet will give us the opportunity to cross-sell the Oaknet portfolio as well. The acquisition will be completed by way of a share purchase agreement, as a result of which, Oaknet will become a wholly owned subsidiary of Eris and will be renamed as Eris Oaknet Healthcare Limited. The total consideration payable for the stake is INR 650 crores, out of which INR 300 crores will be sourced from internal accruals and INR 350 crores will be financed by borrowings. We expect the transaction to achieve financial closure by the end of May 2022.

We have created significant value from our acquisitions of the Strides domestic business and Zomelis brand through multiple levers, including brand growth, launch of line extensions, expansion of field force productivity and significant cost reduction. As we integrate Oaknet operations, we expect significant value creation levers to come into play, through new product launches in medical dermatology as well as cosmetology, expansion of field force productivity and other operating efficiencies.

Our 2-year outlook on this business is a revenue of INR 250 crores, along with an EBITDA of INR 50 crores, which represents a 20% EBITDA margin. This is our target for financial year '24. We expect this acquisition to strengthen our foundation in the domestic market, along with therapeutic diversification, and we are confident that the deal will create value for our shareholders in the long term.

Our growth in FY '23, as well as over the next 3 years, will be led by growth in our power brands portfolio, leveraging patent expiration opportunities and through scaling up our insulin and Oaknet businesses. We are also exploring some interesting in-licensing opportunities on which we will keep you updated. In FY '23, we are targeting an organic revenue growth of 15% and a combined revenue growth of 30%, including Oaknet. We are looking at an organic EBITDA growth, excluding Oaknet of 15%, and an organic EPS growth, excluding Oaknet of 11% to 12% in FY '23. A higher magnitude of depreciation will come to play in FY '23 on account of the commissioning of our new manufacturing facility later this year.

FY '23 will also be a heavy year in terms of investments being made, including the insulin business, the scale up of Oaknet, field force expansion in our cardiometabolic business, landmark new product launches, the commissioning of our new manufacturing facility and the implementation of SAP/S4-HANA. These were the highlights of the quarter. We are now happy to open up for questions.

[Operator]

[Operator Instructions] We'll take our first question from the line of Amey Chalke from Haitong Securities.

[Amey Chalke, analyst]

Yes. So firstly on the Oaknet acquisition. Basically, this is around INR 190 crores of revenue of portfolio. However, there is only 1 large [ going ], which I can observe, which is around INR 40 crores -- INR 40 crores to INR 45 crores in revenue side, which is also not very sizable in revenue where we could clearly call it as a large gap.

This, basically, also reflecting the profitability of the company, which is substantially lower than our -- Eris profitability level at this point of time. So I really wanted to understand the rationale behind this acquisition with respect to these points. And also, if you can talk about the Clobetasol market where the alternate has large franchise basically, and why this particular molecule and not any other molecule in this [ space ]. Yes.

[Amit Bakshi, executive]

Yes. So I'll take it one by one. So if you go through the financials, you'll find that the gross margins are in excess of 73%, which we believe can be expanded this year itself and can, over a period of time, reach 76% to 78%. Why I say that, one of the levers there is that there is a lot of price increment headroom, which is available in these Eris leading brands.

So when you have a 73% to 75% of gross margin, it is the line items in between which basically affects the EBITDA. And generally, the most important factor there becomes productivity. So the low EBITDA is on account of low productivity rather than low gross margins. So we have our idea around productivity. We want to increase this productivity to a reasonable level. We look at it -- we can see a 5-lakh kind of productivity over a period of time, but that is something which is possible.

So as soon as the business starts attaining productivity, the EBITDA margins can swell. And if you remember, we took Strides when there was almost no EBITDA. And now we can assure you that Strides EBITDA is in line with the company's EBITDA. That's number one.

Number two, you are right about the clobetasol market. Look, what we tend to forget a little bit is that India is a tropical country. Therefore, the basic infection, so the bedrock is dermatology, curative dermatology, which is skin infection, atopic dermatitis, so on and so forth, psoriasis. Now while these old products, these products getting out of use is very, very difficult, in my opinion. And what it also does is what cosmetology doesn't offer the use of a wide range of prescriber base. That is a high price point products.

But if you see -- if you go through the product, there are very few prescribers. Here, as KK told you in the opening call, we have almost 60% penetration in the overall population of dermatologists. That is a good point to start. So is Clobetasol something which we can look at 15% year-on-year growth, the answer is no. The good thing is we can look at 7% to 9% of price rise for the next 5 years. That's the kind of headroom the prices do have. But from an organic unit perspective, no. But then it gives you a very solid bedrock in entering dermatology for other products, the newer dermatology products and also cosmetologies to be built upon them.

[Amey Chalke, analyst]

And the second question is related to insulin. I guess you have already garnered Carone plus sales in the first quarter itself. So wanted to know how has then the reception, and any few learnings from this launch. And also the outlook, if you can provide on this insulin portfolio.

[Amit Bakshi, executive]

So I think we should be closing into INR 20 crores in the first full year of launch, which, to my mind, would be a record of sorts. We just looked into numbers. We couldn't find anybody in the first year getting there. So I think that would be a record of sorts and that is playing out very well.

As you must be informed that there has been a 10% price hike, which has been given to the DPCO product. So once the new batches come in, we will be incorporating the price hike also. That price hike will significantly improve the gross margins also. We will continue to launch newer products. In human insulin range, as of now, we are launching a disposable pen in the month of May. So that will be our entry to disposable pen market, around INR 200 crores, INR 250 crores, recent market.

So we are happy with insulin. The real fun and the scale-up will happen when the new earnings will come. But first year, we think that we will be able to garner close to INR 20 crores of sale on around 140 people division.

[Amey Chalke, analyst]

Just a second question related to insulin. Like what is our offering exactly when we go to the doctor? Is it the pricing? Or anything else, which is apart from the product, in terms of, like, any device or anything which you try to sell it basically when you go to the doctor?

[Amit Bakshi, executive]

So Amey, it's a little technical. But since you've asked, I'll be happy to answer you. Look, what we have -- our gain in this market is using insulin and CGM together, so you get a little bit of a pump effect. If you use the CGM while initiating the patients and you monitor the glucose and then adjust your insulin levels. So typically, we have seen global data in that there needs to be 10 incremental usage, dosage of insulin to get to the controlled level. But without having -- running something like a blood CGM, there has been a hedge in the physician's mind to get right there for the fear of hypoglycemia.

So our #1 offering is usage of insulin with CGM, and try to make it even more comparable to our insulin pump. So that is where the whole game is. So we are initiating a lot of insulin pumps -- sorry, I'm sorry, CGMs with the usage of insulin. So combining technology with insulin is the way forward globally. And because of all these patient care initiatives we had, we had an advantage of going there. We are working and talking to people to get in more technology on insulin. Insulin, to our mind, will sell more with better technologies than the product itself.

[Operator]

We take next question Tarang from Old Bridge Capital.

[Tarang Agrawal, analyst]

A couple of questions from my side. One, how many additional MRs do you think you'll be onboarding in your [ Maritime ] cosmeto franchise. Given the GCs and the business, the forecast for '24 seems a little conservative on the EBITDA? That's number one.

Number two, I mean, KK guided a 15% growth in revenue and consequently, a 15% growth in profitability, operating profits for FY '23. One would have presumed profitability to grow much higher given the GCs and given the price increase that the franchise can take. So what is driving significantly higher costs in FY '23 over FY '22 above the EBITDA levels? Thanks.

[Krishnakumar Vaidyanathan, executive]

15% growth guidance on top line and EBITDA. Organically, that is being provided for, the Eris business, excluding Oaknet, right? That's the first clarification. And we have provided an EPS growth guidance of 11% to 12% for the same business, which is the current Eris excluding Oaknet.

And I will answer your question on EBITDA growth being in line with top line growth, and why is EBITDA growth not faster. I would like to reiterate that FY '23 is a year of monumental investments for the company. I mean we have not seen so many categories of investments coming together in 1 year in a long time. So we have guided to 15 new products for the launch -- 15 new product launches for the year, including 5 or 6 major launches. So this has its own impact on marketing and promotion.

Then we have the insulin business, which is scaling up, right? Because we have created a 200-strong field force only in February-March time frame. So the full cost of the 200-member division is going to come for the first time in this financial year, and that's a significant number. So that will be the second item.

Thirdly, we have the new manufacturing plant at Gujarat that is going to get commissioned in September-October time frame. So the operating cost of their manufacturing facility are going to be sitting in our accounts for at least half of the year.

And last but not the least, we are taking up SAP S/4 HANA implementation. It's not a major amount, but it is still a finite expense item. So despite all of these costs coming into the P&L for the first time in this financial year, we are still confident of delivering EBITDA growth in line with top line growth, and that is something that is going to happen because a lot of the new products that we launched in the last 2, 3 years, they are scaling up very admirably.

For example, Zomelis will be INR 100 crores franchise this year, right? And Gluxit should be a INR 50 crore franchise this year. So because of the scale up of products and consistent growth, the YPM will improve, right? So whatever acceleration and EBITDA is brought about by the YPM-improve will be partly nullified by the investments during the year, which is why we are guiding to 15% EBITDA growth on our top line of 15%.

As far as Oaknet is concerned, we have not provided any guidance for FY '23 yet. We have shared numbers of, at present in the financial year '22, Oaknet had an EBITDA margin of 10%. And that does not worry us too much because, as Amit said, Oaknet has a gross profit margin of nearly 75%, which is fantastic because our consolidated gross profit margin is 81%. So after -- of the plethora assets that one sees in the market which come up for acquisition, 75% gross margin is really a fantastic number. So we will bring operational efficiencies on there. We will bring YPM productivity, field force productivity initiatives. We will bring in new product launches. And we are confident that we can take this from a 10% EBITDA margin business to a 20% EBITDA margin business in 2 years. So our FY '24 guidance is 20% EBITDA, because the starting point is 10%.

As far as the numbers for FY '23 are concerned from Oaknet, as you might have known, we have still not closed the deal. It will take us some time to do that. So by the time we come back to you next quarter, we will have a very clear view on what FY '23 numbers will be for Oaknet, and we will give you an update at that time.

[Tarang Agrawal, analyst]

Correct. Just to follow-up, I mean -- so I understand this glide path from 10% to 20%. But I was just wondering that -- just wanted to get a sense on the incremental number of MRs that are likely to be added to achieve the revenue and operating profitability threshold that you're guiding for.

[Krishnakumar Vaidyanathan, executive]

So currently, the business has 650 MRs.

[Amit Bakshi, executive]

And we're not planning to add any.

[Operator]

[Operator Instructions] We'll take the next question from the line of Anubhav Aggarwal from Credit Suisse.

[Anubhav Aggarwal, analyst]

Just checking if you guys can hear me?

[Krishnakumar Vaidyanathan, executive]

Yes, Anubhav.

[Anubhav Aggarwal, analyst]

One clarity on this gross margin, 75% EBITDA margin, 10%. Other than productivity, is there any line item which is really depressing it? Like, for example, in dermatology, is there sampling strategy used by the company or something like that? Or is it only productivity? .

[Amit Bakshi, executive]

No. No, there's nothing else which we could see. In fact, the FRS is the limit control. The debtors days have been around 25 days. So the 2 things which we need to worry about is the FRS and the debtor days on the quality side. So both of them are okay. But this business has been on around 700 people last year. So the productivity in one of the business is very, very low, which houses 300 people, which is gyne plus-plus.

So that is the point -- that is the soaring point. If you take that out and only focus on more derma product, the productivity is quite high. So the EBITDA margins would also be better there. So there's only one piece which is putting it down.

[Anubhav Aggarwal, analyst]

Yes. So actually, a good point. That was my second question, is like when you took the Strides portfolio, you pruned down the portfolio significantly. As I see this split of this portfolio, derma is big, even women's health is not a very big portfolio. It's small at about INR 20 crores. No big brand exists in the rest of the portfolio. Do you think it's worthwhile to even consider this sort of portfolio?

[Krishnakumar Vaidyanathan, executive]

So our #1 good news is that last year, we gave a breakup of CNS and nutraceuticals this way. But internally, the way we have shaped up, the gynecology business did around INR 77 crores last year, the division. And we are in line to do INR 115 crores this year. And the major impact there had been a product called Drolute, which we are looking at around INR 35 crores in this year. So there has been -- and we had a very good campaign in the last couple of months.

So it just comes at the right time. We are having certain possibilities in our portfolio, and we were looking at how do we take it forward, because we have decided that this would be our -- after cardiometabolic, it will be the biggest franchise over the next 3 to 5 years. So it just sets in well.

[Anubhav Aggarwal, analyst]

Sorry, I did not follow. Which product you're saying is so good in Oaknet portfolio, which will fit very well, which is a gap in your portfolio right now?

[Krishnakumar Vaidyanathan, executive]

No, no, no. So what I was saying is, look, Oaknet is now 100% subsidy. And if you read the slide, we say that there is a cross-selling opportunity. So internally, this year, we have seen a very big jump in the gynecology business. We did INR 77 crores last year, and we have taken a INR 115 crore target for this year, which has actually happened because of launch of Dydrogesterone in Eris. So we were trying to increase people in Eris in the next year any which ways, because the productivity does allow an elbow room to add people. So this division and our brands, we will have a little of cross-plays there.

[Anubhav Aggarwal, analyst]

So -- understood. So you're saying that you can improve productivity because -- and you needed people, but -- okay. So this is true about gyne. What were the other anti-infective portfolio of the company or, let's say, gastro product, et cetera? Are those meaningful areas that will continue? Or you may not continue.

[Krishnakumar Vaidyanathan, executive]

We are not disrupting it on above, the way disrupted the whole Strides team now. Because while we would take the Strides deal, we were very clear that what we want to get out of that is around 35%, 40% EBITDA over a couple of years. Here, we are focusing on the overall expansion of revenues. So we are not disturbing the apple cart, if you can call it an apple cart.

So we are not talking about tail brands being pruned off. They have their own life over a period of time, tail brands do have problems. But we are not pruning them off, we are only adding. So that is the reason we are not saying that we will pull off anything. The rest of brands will remain in there. We're not reducing the numbers. So there is no disruption in the entirety.

[Amit Bakshi, executive]

I'd just like to weigh in here. The company, on its own, has been doing a lot of pruning over the last couple of years because they had a very small franchise in cardiology, cardiometabolic and some other brands. So there is a lot of rationalization that they have done on their own. And so the focus will be on expansion and growth.

[Anubhav Aggarwal, analyst]

But just one clarity. Out of 650 reps, almost 350 are for derma. Right now, 300 is for rest of the portfolio. So then the productivity is not too different across the 2 portfolio, right? Yes, derma is like almost 60% of the revenues here, but not too different, right?

[Krishnakumar Vaidyanathan, executive]

No, derma houses around INR 122 crores, if I'm not wrong.

[Anubhav Aggarwal, analyst]

Yes, but supported by 350 reps, right?

[Krishnakumar Vaidyanathan, executive]

Yes. And one of the other division houses around INR 68 crores.

[Amit Bakshi, executive]

Yes. So the derma productivity is like 3 lakhs, and the other division has a productivity of 1.5 lakhs. Correct.

[Anubhav Aggarwal, analyst]

Okay. And just a clarity on the prescriptions. Let's say, if we concentrate only on the dermatology portfolio of INR 122 crores there. Roughly, what percentage of prescriptions are coming from the specialist dermatologists versus GP sales?

[Amit Bakshi, executive]

So that's the breakup which we gave.

[Krishnakumar Vaidyanathan, executive]

Yes. So 43% of the prescriptions are coming from dermatologists, that is specialists. Whereas for the market, 38% of the prescriptions come from dermatologists. So Oaknet has a better skew in favor of specialists compared to the average derma market.

[Anubhav Aggarwal, analyst]

And in terms of statewide service, is it, like, a national player or like SKU sales coming from certain states?

[Amit Bakshi, executive]

So like every businesses, there are SKUs and there are certain markets which are not doing well. So give us some time to get on greater details. But the first look sales, like, East and North aren't better, and West and North are.

[Krishnakumar Vaidyanathan, executive]

West and South.

[Amit Bakshi, executive]

Sorry, West and South are not there in the productivity as of yet.

[Anubhav Aggarwal, analyst]

And just, sir, one clarity on the guidance given for ex-Oaknet, basically the base business of Eris. So effectively, 15% guidance means we are talking about adding close to about INR 200 crore incremental revenues. Out of this INR 200 crore revenues, can you just talk about the products that you have not launched so far? What kind of contribution you are assuming for them in this guidance? Will it say INR 50 crores kind of number, INR 70 crores? What's the sense?

[Amit Bakshi, executive]

Anubhav, that would be quite detailed. I don't think we'll be able to do that on the call. But largely, we say 5 to 6 very significant products. One of them, we just launched right now, which is called Zomelis team , which is DARPA and linagliptin. But the total, I can tell you, from a INR 200 crores, the new product will be very sizable. But clearly, to put it that way, we have not done that.

[Anubhav Aggarwal, analyst]

So just to get the idea, 5, 6 launches, I think that will be largely public knowledge. So let's say sitagliptin, I'm assuming Valsartan, Sacubitril and Zomelis which you launched, so these 3 will be out of the 5, 6?

[Amit Bakshi, executive]

So yes, Zomelis' team would be there. Sita would be there. A combination of sita would also be there, and there will be more. There are a lot more. What I can tell you, look, the future is sita, a DPP-4 and an SGLT2 combination. So that will happen in 3 to 4 of starts, right? Plus there will be certainly some more products with DARPA, in closing. So if you look, everything would be -- we had -- they say 15, but 6 of them are very significant. When I say very significant number, we have talked about this. We think INR 350 crores and INR 6,800 crores. That is where we said significant, very significant.

[Operator]

We'll take our next question from the line of Tushar Manudhane from Motilal Oswal Financial Services.

[Tushar Manudhane, analyst]

So just on this Oaknet , in terms of the revenue growth for next years. Leaving aside the cross-selling and on the existing product, like, for example, in case of diabetes, there's a good clarity in terms of the molecule, new molecule itself coming to the market. So that way, is there any growth potential on the derma side? Or rather, which kind of new molecules you intend to add in the derma space?

[Amit Bakshi, executive]

So look, we can do a lot, but how much we do , it will have to take a while. If you ask me the possibilities, the possibility of this new-age derma, the possibility is total cosmetology. Because, as I said, the bedrock is the dermatology prescription, even for cosmetology business. So we will assume that from the probability point of view, there is the entire new-age dermatology, the antifungals with combinations and there is cosmetology.

But we will have to see how much we can chew. So that is something which we will figure out over a period of time. So we'll need at least 1 quarter more to get a little more detail on this.

[Tushar Manudhane, analyst]

Okay. And just on the guidance, with respect to the organic growth of 15% in top line as well as 15% in EBITDA effectively, it implies 36% EBITDA margin for FY '23 on an organic basis. Wherein for the fourth quarter, we are at 32%. And the opening remarks did had comment on in terms of higher spend on the promotional front, given the pace of new launches going to happen for FY '23. So still, you think you will be able to maintain 36% EBITDA margin for FY '23?

[Amit Bakshi, executive]

Yes, we think that's the reason we have put it there. The reason is very simple, the new brands which were launched in the last 2 years and are now scaling up. So that scale is very useful, as KK pointed out, that we are looking at the so many things. The idea is of INR 100 crores this year. So this would have been the shortest INR 100 crores for us. And we know that at this price point, it is quite profitable. So this is what will work to the advantage, which will nullify all that growth spend which would happen.

[Operator]

Our next question is from the line of Prakash Agarwal from Axis Capital.

[Prakash Agarwal, analyst]

My question is actually similar to the earlier participant. So my exit rate of Q4 is about 32% on [ consol ] and 36% on stand-alone. And there is a ramp-up of product launches, insulins, which are relatively lower margin product plus the 15-plus launches that you're talking about.

I understand you spoke about these recently launched products, which are scaling up. But given the costs escalation across segments, achieving 36% margin on base business, how confident you are? And apart from the new launches, what would be the other building blocks to that?

[Krishnakumar Vaidyanathan, executive]

So Prakash, KK here. One thing I would like to clarify is that starting Q1 of next year, we actually plan to start reporting segment-wise EBITDA. So that will give everybody complete clarity in terms of how individual -- each individual business is performing.

So having said that, the interplay of various factors and this is -- this was an expectation that even we had going into the year, that this is a year of such heavy investments. So can we maintain the margin? But we ran the math. And whatever, the math tells us is that we will be able to do this. So if you look at our stand-alone business this year, we had a 40% EBITDA margin.

There is nothing on the face of it which tells me that we will not be able to maintain that EBITDA. And the other aspect, which is basically the loss that will be brought in by insulin, right? Because this is, like, the first full financial year.

We have considered those aspects. And taking all of those into account, it will -- it is looking clear that we should be able to hang on to a 36% EBITDA margin on a full year basis. Now what I have still not worked out is how will this vary on a quarter-on-quarter basis because certain things happen in certain quarters. Like, for example, we have said that we are adding 170 field force in the Eris cardiometabolic divisions. Now all of that is happening in quarter 1. Similarly, we have spoken about new product launches, and we even discussed some names. So some will happen in quarter 2, some will happen in quarter 3. So what I can't clarify now is how the quarter-on-quarter EBITDA profile will vary. But on a full year basis, we should be able to be where we have guided.

[Prakash Agarwal, analyst]

Now this consol, 36% based...

[Krishnakumar Vaidyanathan, executive]

Consolidated, 36%. Yes.

[Prakash Agarwal, analyst]

That will be commendable. I mean, given the -- so many things going on in the company.

[Amit Bakshi, executive]

But Prakash, if you just look a little closer, you'll see that our gross margin has actually improved during this year.

[Krishnakumar Vaidyanathan, executive]

Yes. Stand-alone has gone from 82.5% to 84% this year. We've had around a 150 bps improvement in gross margins.

[Amit Bakshi, executive]

So it's all basically comes down to the product mix. If you have solid brands, which keep on growing -- and let me tell you, there is no better than the then productivity gain for improving EBITDA. So if we are gaining productivity, then it works out very well.

[Prakash Agarwal, analyst]

Understood. And there's also a comment on the ESOP plan. So how big it is and what is the yearly P&L impact on that?

[Krishnakumar Vaidyanathan, executive]

So we have -- this round of ESOP that has been issued, the dilution is around 16 basis points. And the P&L impact of that will be in the range of INR 3.5 crores to INR 4 crores. That has also been factored into whatever numbers we are talking about.

[Prakash Agarwal, analyst]

Okay, understood. And from the tax side, we would be starting to inch up from now only? Or it would be the fiscal '25 where you will enter the 20% tax rate?

[Krishnakumar Vaidyanathan, executive]

Yes. So we ran the math here. It will be a step jump in FY '25, and let me walk you through that. So in FY '25, we will have both the Guwahati and Gujarat manufacturing facilities operational. And based on the math that we ran, we see a blended effective tax rate of 28% to 29% in FY '25, as production from the Gujarat facility will still be ramping up. But this will come down to an 18% to 19% level by FY '30 as production from our Gujarat facility transfers even further.

So just to recap, 28%, 29% in FY '25, going down to 18%, 19% by FY '30. Having said that, we will be able to avail of out accumulated MAT credit until the end of financial year '29. So even though the book tax rate will increase in FY '25, this will not impact our cash flows for the next 4 or 5 years after that.

[Prakash Agarwal, analyst]

Okay. Fair enough. And lastly, so we had about INR 500-plus crores cash, and we used -- INR 300 and INR 350, we are taking as a debt. So what's the plan here? Are we keeping some for future acquisition? Is the plate too full? What is the plan on the M&A side for fiscal '23?

[Krishnakumar Vaidyanathan, executive]

So there are a lot of opportunities on the table at any point in time, Prakash. And you're absolutely right, it did not make sense to completely clean up the city, that is one. Second is on a monthly basis, we expect to grow up INR 30 crores, INR 35 crores of cash as we speak.

So it is clear that we don't want to be reckless. I think we've discussed this before, we don't want to make acquisitions just because there is cash. We have taken our time to screen opportunities and all the criteria that I had outlined to you in the past, like we will only look at a speciality company, we will only look at high gross margins.

So we have put things through many of those streams, and only those kind of opportunities will go through. And this is a very exciting time for expansion, and we are going to be very, very focused on expansion over the next 2, 3 years, whether it is organic or inorganic. So you may consider this as some kind of war chest for the same.

[Operator]

[Operator Instructions] The next question is from the line of Tarang from Old Bridge Capital.

[Tarang Agrawal, analyst]

I just wanted to check what's the cost of debt and how much of it is fixed, how much of it is variable?

[Krishnakumar Vaidyanathan, executive]

Yes. This will be answered by Sachin, our CFO.

[Sachin Shah, executive]

So we're taking at 6.75%. It's variable, but my sense is it should be fixed for 1 year at least.

[Operator]

[Operator Instructions] We'll take a next question from the line of Gagan Thareja from ASK Investment Managers.

[Gagan Thareja, analyst]

Am I audible?

[Krishnakumar Vaidyanathan, executive]

Could you speak above it, please?

[Gagan Thareja, analyst]

Yes. Is it a little bit better?

[Krishnakumar Vaidyanathan, executive]

[ Not ].

[Gagan Thareja, analyst]

Yes. Sir, just a couple of questions. One, what are the controls of your arrangement with NJ Bio for the insulin deal? You'll be procuring your insulin from them? And from -- and second, again, from a regulatory standpoint, what are the approvals that MJ Pharma has for its insulin products?

[Amit Bakshi, executive]

So I'll answer the second question first. Starting 2016, MJ has been supplying human insulin, wires and cartridges to nearly 25 countries around the world. So they have approvals for India, clearly, and they have approvals for a bunch of semi-regulated markets.

[Krishnakumar Vaidyanathan, executive]

South Africa is one they got just last month.

[Amit Bakshi, executive]

Okay. So South Africa and [ PGE ] has also approved them. But our interest and our alignment with MJ is clearly for the Indian market, where the value proposition is that MJ will be doing the manufacturing and we will be doing the marketing. And insofar as the new product pipeline is concerned, including products like Glargine and Liraglutide, MJ will be responsible for clinical development and regulatory approval and commercialization. And so that's the overall controls of the deal.

[Gagan Thareja, analyst]

Wait, would it be fair to assume that gross margins here would be significantly different from your base portfolio?

[Amit Bakshi, executive]

Yes. See human insulin has been under price control for a long period of time. So human insulin is not a very exciting product in terms of gross margin. But then, human insulin is not the reason why we even got into this. The reason why we got into this whole venture is for the insulin analogs like Glargine, Aspart and Lispro, and for the GLP-1 agonist products like Liraglutide.

So once those products come into play and our expectation is Glargine, we have taken in calendar year '23 and Liraglutide in calendar year '24, so once those products come into the mix, the gross margin profile of that business will change dramatically. So that is our overall thesis on which we have gotten into this business.

[Sachin Shah, executive]

Which KK, if after the 10% price hike, the margins will be as good as the omitted parts.

[Krishnakumar Vaidyanathan, executive]

Yes, they will be.

[Gagan Thareja, analyst]

Okay. And do -- does MJ Biopharm have a WHO GMP for their facility?

[Amit Bakshi, executive]

That is right, they do.

[Gagan Thareja, analyst]

Sir, one final question. While you indicate that the diabetes portfolio, we'll see a step jump in DPP-4 and SGLT2 combinations, which will enable you to prop up your growth there. It will come at the expense of sulfonylureas, which today are the mainstay for your business.

To a certain extent, there will be cannibalization between the two. If you could help us understand how should we think of your sulfonylureas portfolio and at the same time, the transition to DPP-4 and SGLT2 could create what scale for you in that segment.

[Krishnakumar Vaidyanathan, executive]

I'll just provide some numbers. And then defer to Amit, who can provide you with a lot more insights. See, sulfonylurea market is not going to get replaced. This is basically about diabetes is a progressive disease, right? So in the initial year, the patient might be on 1 therapy. And then as the disease progresses, you progress to what is called polytherapy.

So you start with 1 product, then you go to 2 products, then you go to 3 products. So we don't see a scenario where Glimepiride is going to vanish from the prescription. And what does that mean in terms of numbers is that the volume growth and the value growth of Glimepiride segment will slow down. So we are taking Glimepiride at a 2% to 4% volume growth, and then you slap on some price increase, it is possible to get 6% to 8% per annum growth in Glimepiride, which is what we are looking at.

Whereas DPP-4 and SGLT2 is crazy because in the first year, the market gets created. I mean vildagliptin is seeing 50% year-on-year growth even after 2 years, right? So what happens is both segments grow, but Glimepiride grows at a slower rate. So if you look at the mix of therapy, that shifts to DPP-4 and SGLT2 over time. Those therapies become more heavy, but that is not because sulfonylureas are degrowing. Amit, would you like to add anything?

[Amit Bakshi, executive]

Yes. So technically, it's all about the first-line treatment. So Glimepiride, metformin has been a first-line treatment a long period of time. The first line treatment now is now moving to DPP-4 and SGLT2. So we will have less initiations of new patients on Glimepiride. But when diabetes become little, it becomes 10 years old, then typically, you need a sulfonylurea to get control. So as KK has actually put, we are still budgeting a volume growth of 2% to 4%, plus some price bolt-on here in there, 6% to 8% is what -- 8% is what we are kind of budgeting.

[Gagan Thareja, analyst]

And with MJ Pharma, Biopharma, is it a contract manufacturing fees plus royalty arrangement? Or is there a profit share arrangement for them?

[Krishnakumar Vaidyanathan, executive]

The profit share is automatically built in, right, because MG is an equity partner in this business. So MJ Biopharma holds 30% equity share in the venture. So it is a long-term strategic arrangement.

[Operator]

Our next question is from the line of Sonal Gupta from L&T Mutual Fund.

[Sonal Gupta, analyst]

Could you -- just 1 question. I mean, could you guide for the effective tax rate you're looking at for FY '23 and '24?

[Krishnakumar Vaidyanathan, executive]

Are you talking about effective tax rate for '23, '24?

[Sonal Gupta, analyst]

Yes.

[Krishnakumar Vaidyanathan, executive]

We don't expect it to be significantly different from what it is now, because the Gujarat facility will come on stream. So maybe it might go to 11%, 12%, but we don't expect a massive jump over where it is right now.

[Sonal Gupta, analyst]

Okay. So just to be clear, so the Guwahati facility goes, I mean, like, will not have any tax benefits from FY '25, and that's why we're going to see the jump in '25, right?

[Krishnakumar Vaidyanathan, executive]

That is right.

[Sonal Gupta, analyst]

And what's the benefit at Gujarat? What sort of tax benefit do you enjoy?

[Krishnakumar Vaidyanathan, executive]

So this is basically -- there is no special tax benefit available for Gujarat as a location. But under the whole make in India regime, we will have a tax, and tax -- effective tax rate of 15% plus surcharge in the Gujarat facility. So this is nothing special about Gujarat. This is available wherever you will facilitate up those facility.

[Operator]

Ladies and gentlemen, that was the last question. I would now like to hand the conference back to Mr. V. Krishnakumar for closing comments.

[Krishnakumar Vaidyanathan, executive]

Thank you. Thank you, everybody, for your participation on the call. By way of summary, Eris has entered the dermatology therapy through the acquisition of 100% stake in Oaknet Healthcare at an equity valuation of INR 650 crores. Eris specialty franchise will get a significant boost with the acquisition of Oaknet. The acquisition brings marquee brands like Cosvate and Cosmelite into the portfolio. We expect the Oaknet business to deliver a revenue of INR 250 crores with an EBITDA of INR 50 crores in the next 2 years, that is in financial year '23 '24.

We delivered an EPS growth of 14% in the financial year '22 on the back of a 21% EPS growth delivered in the last financial year. This represents a compounded average growth rate of 18% per annum over the last 2 years. FY '23 is the year of significant investment in terms of the insulin business, field force expansion, landmark new product launches, commissioning of a new manufacturing facility and SAP implementation. We expect our organic growth to be driven by growth in our power brands portfolio, new product pipeline, expansion of specialists and GP coverage and our expansion into newer specialties.

For the year financial '23, we are targeting an organic revenue growth of 15% and a combined revenue growth of 30%, including Oaknet. We are looking at an organic EBITDA growth, excluding Oaknet of 15% and an organic EPS growth, excluding Oaknet of 11% to 12% in FY '23. Thank you all. Have a good day, and stay safe.

[Operator]

Thank you, members of the management. Ladies and gentlemen, on behalf of Eris Lifesciences, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.