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Indoco Remedies Ltd
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Ladies and gentlemen, good day, and welcome to Indoco Remedies Limited Q3 FY '23 Earnings Conference Call hosted by JM Financial Institutional Securities Limited. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Ms. Cyndrella Carvalho from JM Financial. Thank you. And over to you.
Thanks, Sukhusi. Good afternoon, everyone. I'm Cyndrella Carvalho, on behalf of JM Financial, welcome you all on the Q3 FY '23 earnings con call of Indoco Remedies. At the outset, I thank the management of Indoco Remedies for giving us this opportunity to host the call. I'm looking forward to have an insightful interaction on the earnings with the management.
Today from the management team, we have with us Ms. Aditi Panandikar, Managing Director; Mr. Sundeep Bambolkar, Joint Managing Director; Mr. Pramod Ghorpade, Chief Financial Officer.
I now hand over the call to management for the opening remarks. Over to you, Ms. Aditi.
Good afternoon, Cyndrella, and thank you. Good afternoon, everyone. And considering that we are meeting for the first time this calendar year, we are wishing all of you a very happy and healthy 2023.
3 quarters of financial year '23 are behind us. This year was always going to be very challenging for all businesses and for pharma in particular, both the head and the tailwinds of COVID have receded. Geopolitical events continue to disrupt macroeconomic factors globally. And in India, inflation and the consequent repercussions of it are having some or the other impact on business. In these very challenging times, it becomes all the more imperative for us to focus on fundamentals.
I'm happy to share good performance by India business this quarter despite respiratory and anti-infective, which are key segments for our business, which do not contribute in Q3 and have not contributed greatly, we have still delivered a 13% growth in sales. Our subchronic segments like stomatological, GI, vitamins, minerals and nutrients have all supported us well. New introductions like Noxa, Dropizin, Subitral continue to add value, while Noxa maintains its position as a market leader in the Ozenoxacin segment.
In the international business, a robust growth in U.S. and a good growth in Europe on a Y-to-Y basis has helped the company record close to 18% growth in revenues for the third quarter ended December. Across Indoco, our journey of super transformation continues. Post the SAP S4 Hana implementation in a record time of 7 months, digitization and digitalization of the Indian sales function has started with the field sales officers been given Apple iPads for detailing to doctors. Since time immemorial, doctors have depended upon medical representatives or field sales officers to stay updated on new treatment options available to them.
The digital initiative will allow our sales persons to provide the most updated information to doctors as and when they need it. I'm confidence that our people will use this advantage to the fullest and help us garner greater market share in India for our products.
Some of you must be aware that the much awaited FDA audit at Plant I was concluded a few days ago in Goa. While we have been issued 9 483s, I feel confident that our technical, quality, compliance and operations teams will work closely with the regulators to resolve the issues identified and further improve upon our quality management system.
Recently the senior and second tier management teams at Indoco met for a strategy conclave. I feel very confident now of delivering on the big hairy audacious goals we have set for ourselves over the next 5 years. It will indeed be a very exciting time for us, and I look forward to sharing small and large success stories with you in times to come.
In the Board meeting concluded this morning and ESOP or Employee Stock Option Plan covering several [ Indoco-ites ] holding key positions in middle and senior management of the company has been approved. I feel this will further motivate them to contribute their best and participate in the company's success in the years to come.
This is all from me. I now hand over to our Joint MD, Mr. Sundeep Bambolkar, who will share highlights of the financial performance of the quarter with you.
Good afternoon, all the participants. Hope you and your family members are all safe and healthy.
Let me first begin with the business highlights. Net revenues of the company grew by 17.8% at INR 410.6 crores compared to INR 348.6 crores same quarter last year. For the 9-month period ended December '22, revenues grew by 9.8% at INR 1,210.10 crores as against INR 1,102.4 crores. EBITDA to net sales for the quarter is 15% at INR 61.7 crores compared to 21.1% at INR 73.4 crores. EBITDA for the 9-month period is 18.2% at INR 220.1 crore compared to 22.4% at INR 246.5 crores.
Other operating income includes exchange fluctuation, gain/loss and export incentives. Exchange fluctuation includes mark-to-market impact; and second, realized/unrealized exchange fluctuation. In Q3, net amount on these 2 components is a loss of INR 14.03 crores. MTM gain has reduced because of substantial swing in foreign exchange rates, particularly the British pound and euro. EBITDA without other operating income for the quarter is 17.9% at INR 73.6 crore compared to [ 18.4% ] at INR 64.3 crores.
EBITDA for the 9-month period with other operating income is 15.8% at INR 191.6 crores compared to 19.8% at INR 218 crores. PAT to net sales for the quarter is 6.8% at INR 27.9 crores compared to 9.5% at INR 33 crores. For the 9-month period, PAT is at 9.6% at INR 116 crores compared to 10.4% at INR 114 crores.
Earnings per share for the quarter is INR 3.03 compared to INR 3.58. For the 9-month period, earnings per share is INR 12.59 compared to INR 12.39. We continue our super-transformation journey. And with the adoption of the new technologies, we recently went for Ariba, the electronic platform for procurement, has also introduced iPads to our sales force. Now on the Indian pharma industry, the Indian pharma market is valued at INR 46,840 crores and has registered a growth of 11.6% during the third quarter of FY '22, '23, against similar third quarter last year. During this quarter Indoco has registered sales of INR 312 crores with a growth of 10.5%.
On the IPM, Indoco ranks at 28th position in the third quarter with a market share of 0.67%. The source for this is AWACS, April to December '22.
Domestic formulation business, revenues from domestic formulation business for the quarter grew by 12.2% at INR 203.6 crores compared to INR 181.5 crores. Major therapeutic segments, namely cardiac, vitamin, mineral, nutrients, and stomatology performed well during the quarter as compared to the previous corresponding quarter for the last financial year. For the 9-month period, revenues grew by 0.3% at INR 612 crores as against INR 610.2 crores. On the international business front, revenues from international formulation business witnessed a growth of 30.10% at INR 186.10 crores compared to INR 143 crores for the same quarter last year. For the 9-month period ended December '22, revenues grew by 24.7% at INR 537.5 crores against INR 431 crores. Revenues from regulated markets for the quarter grew by 39.5% at INR 151.7 crores as against INR 108.7 crores for the same quarter last year. For the 9 months period ended December '22, they have grown by 28.3% at INR 447 crores against INR 348.4 crores.
Revenues from U.S. business for the quarter grew by 22.8% at INR 60.3 crores against INR 49.1 crores. For the 9-month period, revenues grew by 35.9% at INR 194.5 crore as against INR 143.1 crores. Revenues from Europe for the quarter grew by 58.5% at INR 86 crores as against INR 54 crores for the same quarter last year. For the 9-month period, revenues grew by 23.4% at INR 238.4 crores as against INR 193.10 crore. Revenues from South Africa, Australia and New Zealand were at INR 5.4 crores, flat compared to the same quarter last year. For the 9-month period, they've grown by 16.3% at INR 14 crore against INR 12.10 crore.
Revenues from emerging markets for the quarter were flat at INR 34.4 crores. For the 9-month period, revenues grew by 9.5% at INR 90.5 crores against INR 82.6 crore. Revenues from API business added INR 16.2 crores against INR 19.7 crores and for the 9-month period, they're at INR 47.8 crores compared to INR 50.3 crores. Revenue from AnaCipher CRO and Indoco Analytical Solutions for the quarter grew by 6.4% at INR 4.6 crores against INR 4.4 crores and for the 9-month period, they're at 15% at INR 12.5 crore against INR 10.9 crores.
That's all about the business highlights for the third quarter. And I now request participants to put up their questions. Thank you.
[Operator Instructions] We have our first question from the line of Aditya Khemka, InCred Asset Management.
Aditi madam, can you just talk a little bit more about the big hairy audacious goals that we have set for the organization over the next 5 years? And in that context, the ESOP plan, so about 3 lakh odd shares to be issued under ESOP plan. So who are the employees who are entitled for the ESOPs and if you could just lay out a few particulars in that sense.
Yes. Thanks, Aditya, for that question. Yes, the BHAG or big hairy audacious goal, as I might have said in the last call towards the ending, the organization is aspiring to get to a INR 5,000 crore top line number soon. And all activities across the company from a sort of broadening vision of middle management, getting their participation, even ESOP is part of that. All of those have started. And we feel very confident because at Indoco today, we have several verticals, all of which have many potential areas of growth. And based on the strategic initiatives that are planned, I feel very confident we will be able to achieve the numbers we have set out for ourselves.
Coming to the ESOP plan, more than 60 employees at the level of general manager and above across several functions, and key functions like research, marketing and other important functions in the company have been identified to receive, both for AVCs and above, which is a very senior level of management and [ RFQ ] plan for which 0.5% of the share capital has been reserved. And 1% of the share capital has been reserved for offering ESOP plan, that is to employees of GM and above. I feel very confident with this that our people will feel motivated and participate in the growth story of Indoco.
So this INR 5,000 crore top line plan of the aspiration, it is over the next 5 year. So are you talking FY '28, '27? Which year are we talking about?
Yes, '27, '28.
'27, '28. Okay. The second question that I have is on the export business. So I think, Sundeep Sir maybe able to answer that. Sundeep Sir, sequentially in the U.S. business, we have seen a decline in our rupee revenue. Whereas we were under the impression that there has been some gain in market share in Brinzolamide, and there has been a launch of Combigan. So could you just throw some light as to what has happened there, exactly why have you seen a decline in U.S. revenues?
Yes, yes. Aditya, this has nothing to do with any loss of market share. As you know, right from 18th December onwards up to 5th of January, all our frontend partners were closed for celebration of Christmas and New Year and every dispatch to regulated markets needs a documented okay from the frontend partner. So as a result, some of our dispatches have got delayed. And I think we are well -- extremely well in control of the situation, and we will bounce back in the fourth quarter.
Aditya, if I can also comment, our international business today is a composite of a portfolio mix, as you're aware. So we have sales, we have milestones, we have profit share, and we also have dossier income. So as far as the sales to U.S. are concerned, even on a Q-o-Q basis, we are in a better stage. It is only certain milestones against other dossier income, which must have not fallen at this point exactly for earning because of which it appears like this.
So Sundeep Sir, at the beginning of the year, I think the guidance that was given to us for the U.S. revenue was roughly in the ballpark of INR 300 crores, if my memory serves me right. And what we have been able to achieve in the first 3 quarters is less than INR 200 crores. So would you like to sort of revise the guidance here? Or do you still think INR 300 crores is a doable number?
Yes, yes. We will go as close to 300 as possible. There have been some challenges. Two of our approvals, which was supposed to come during the year, have got postponed. One of them is the modified release cardiac product; that has got postponed. And one more important product has got postponed. So as a result, substantial revenues have got postponed for the next financial year. However, we are not revising the guidance given drastically downwards. But I think I'm confident that we'll do somewhere between INR 280 crores and INR 285 crores in spite of these 2 getting delayed.
Have we launched Combigan during the third quarter? Does the product sales in 3Q FY '23 include revenues from Combigan?
We just launched it. We launched it in mid to end of October.
Mid to end of October. So it does include a month or 2 revenue from Combigan sales.
Yes, about 6 weeks of revenue, not much.
And I'm assuming there is no profit share yet coming in, in this number from Brinzolamide.
No, not yet.
So Brinzolamide, probably the profit share, as you said in your previous calls, the profit share will fall in the fourth quarter.
Yes, yes.
That is likely, right, okay. Okay. And the next question I have is on the cost aspect of it. So when I look at the gross margins, and I understand your gross margin gets fairly swayed by the ForEx income and ForEx loss that you report above the COGS. So even if I cull out that number, if I just look at your gross profit, excluding COGS, excluding ForEx gains, what I notice is that our FY '21 and '22 -- I mean, our FY '21 gross margin, excluding ForEx, was actually way higher than what we have done ever in our history.
And since then we have been kind of on a sliding more where the gross margins are consistently sort of coming off. I mean if I were to just give you some numbers and I -- and I'm excluding your ForEx gain here. So your FY '21 gross margin was about 71%, excluding ForEx gains. The same number for FY '22 was roughly 69.5%. And that same number for FY '23 in 9 quarters seems to be about 68%. So from 71% to 69.5% and then to 68%. So we are losing 150 bps every year for the last 2 years now, '22 and '23. What explains that? And do we ever envisage going back to gross margins you were doing in '21? Or was that an aberration, the '21 margin?
Aditya, let me answer this first. Maybe Sundeep will add something later. For one thing, this time period, which you talked about, '21 onwards, has been a very difficult period for us, everybody in the pharma industry, because of the increase in the cost of goods, which you are aware of. So part of the reason for margin to have been lower than earlier is that a full impact of correction in the cost of goods has not come in, one. B, if you look at the nature of our business, contribution of India business to the top line over the last couple of years is lower than it was before. So now the international business is doing better than before and their contributions have increased. But U.S. is yet to fire completely for us to get returns on the investments. So this is a typical phase where probably the contract manufacturing businesses of Europe and their contribution to the whole top line is -- which doesn't have a very great margin element attached to it. We're getting repercussions of that.
Also, like I explained before, the portfolio of, and the business composition you have to think of because in these 2 years, our collections against licensing out income and milestones, they have been going down primarily because we are now keeping the IP for ourselves from when we used to sell it out to other partners and collect more earlier. I think this is better for us in the longer run. So you may not see that because that is also considered a component of sales at Indoco, okay? So that is the reason.
But coming back to how fast and by when you think we will recover. This quarter, the entire profitability, which has got impacted by the MTM losses of about INR 14 crores has created quite a slide in the numbers, and people must have wondered what it is. So I just looked at the YTD performance on that front. And if you look at our YTD performance, if you look at the earning that has come from an exchange gain on YTD basis, we are now equivalent because this year we have gained INR 24 crores as against last year INR 26 crores, up to 9-month period. You must also remember that the last year's 9 months included a first half year, which had very, very low expenditure for India business. So quite frankly, I think it is very important for us to stay focused on fundamentals of how we grow our sales, whether any specific costs, which are really operationally sort of part of our sales, have they shortened by any -- for any reason on a QoQ basis or a YoY basis? Those are the areas we should look at to annualize performance.
This is what I see. Sundeep, you want to add something?
Yes. I just wanted to add, Aditya. What we expected about the procurement side that the purchase of API and high consumption packaging material and other costly excipients has got delayed, the benefits accruing out of that. And we are seeing those benefits coming in just now towards the end of December, beginning January. So the effect of it largely will be seen from Q4 '23 onwards. And that effect, as you know, the material effect of it is quite substantial. So yes, I agree with you that margins were a little downside, but we should be recovering from Q4 onwards.
Sundeep Sir, my question actually -- yes, sorry, I just want a clarity on this. Can we do that? And then I'll go back in the queue. Thank you. Actually I understand Aditi Madam's explanation. The only cross question I have there is that I'm looking at margins, excluding the ForEx gain and losses. So therefore ForEx gains isn't really what is impacting. Actually, as you said, what is impacting is the raw material prices and the packaging costs. But what I had expected was that this year since we were taking price increases in our India portfolio, we would have gained some of the lost margin back. But that just doesn't seem to be the case that the numbers certainly mean because the numbers seem to…
Aditya, you've taken around, our net-net price growth comes to somewhere between 5% and 6% for India business. And like I said, India business contribution to the top line this quarter in particular has been the least over the last 4 quarters.
We have our next question from the line of Sudarshan Padmanabhan from JM Financial PMS.
Madam, can you please help us understand the other operating income in terms of your hedges? I mean, normally, how much do we hedge and how does this entirely take this on a quarter-to-quarter basis?
Yes. See, the hedging policy is that we hedge currencies to the extent of 55% to 60%, all the 3 currencies, U.S., euro and GBP. And our median rate for hedging of U.S. is 81.79, Euro is EUR 93.09 and GBP is 105.83. So the policy is very, very clear and largely hedging of these 3 currencies has stood us in very good light so far.
And if I look at the previous quarters, I mean, the other operating income was close to INR 28 crores in the previous quarter. So apart from [ NPM ], what are the other elements that we book, I mean, if you can take it down, say, for the second quarter and the first quarter this year?
Yes, there is a small amount of export incentive, which has started trickling in now with the ROE [ PPT ] coming back.
What is called commonly as RoDTEP, that has been reinstated to the extent of 2.5%.
But it is largely the exchange only.
It's largely exchange only. That's why we have suffered a loss this quarter, due to the MTM.
That is notional actually.
Notional, yes.
And sir, I think when you're talking about gathering momentum in the next 5 years as far as [indiscernible] is concerned. One is [indiscernible] that the U.S. is still not optimal and there can be operating leverage on account of that. I mean we are also seeing the extent of other costs not being as comfortable as what one would expect. So I mean, I'm just not looking at, say, next quarter or the next couple of quarters. But assuming 3 years and 5 years now, I mean, today, if you're looking at our gross margin, I mean, we are anywhere between 68% to 70%, which means that a large part of the cost is primarily the non-gross side. So to that extent, as the sales go up, say, the next year and the next couple of years. Can you give some color with respect to how do you see the margin trajectory in the next few years?
Yes. So while I may not be able to give you exact numbers on the margin expansion. Let me tell you a little bit about what is happening across the organization for better efficiency, which is going to result in margin improvement, okay? So let me come to the India business first because that is still the largest single component for us, which is close to 55% this quarter. And in India business, as you know, our largest fixed cost is by way of the people and their salaries. Incentives in India is, of course, variable. And we have around 2,300 people in the field. Over the last year, various initiatives taken by us, which include call-to-call reporting, which has improved disciplined working of and eased working of the field staff.
We have, as I already said, just started with a digital option in field. And going forward, there are several initiatives lined up and several [ MIS ] we are looking at where we can factually measure performance of not just field staff, but even managers in the field. I feel confident, because of this, our return per man will really grow from here. For the YTD period, our PCPM for people on payroll, not the number that we should have on payroll, is close to 3.9. That we have done for the -- for a very long time. However the vacancies and people who're not on payroll, they do impact our sales indirectly. So several initiatives in the India business have been taken because of which the per man return will go up. And when that happens, margins on India business will also go up.
Secondly, if you look at the product mix for India, if you look at the performance of the current set of products, around 50% come from pure acute therapy. Another 13% comes from pure chronic. And the remaining is subchronic. And if you look at how the growths are coming in, last year was a one-off year because acute did very well. But otherwise, the fastest-growing is the subchronic followed by chronic and then acute. Now when this happens, your return for prescription also increases. That in turn causes PCPM. And all other cost gets spread.
So I there feel India business will get profitable in the years to come. In addition to that, several initiatives are being taken to look at the -- many of our products, which have a very good sort of potential with direct-to-customer and direct-to-consumer kind of potential. And we are looking at various initiatives in the supply chain itself based on which I feel confident that we will be able to grow those products.
Coming to international business, as we already discussed, as the contribution of U.S. to the entire international business starts going up and coverage of operational costs is -- happens, you'll see a very different picture. Plant I which we -- which I spoke of earlier, we just had a U.S. FDA audit. As you all know, we were not able to supply additional products to U.S. from that plant for the last almost 4 years. And that has meant that the highest margin business, which is the U.S. business, pitiful, I mean. I think YTD basis we must have done only INR 6 crores from that site. So you can imagine, while all preparatory work to move business manufacturing and supplying to Europe to Baddi where batch sizes are much bigger, efficiency is much better. All of that is in place, but were not executed for want of FDA to allow us to make more products.
So when all of this you look at and the fact that even when it comes to commodity manufacturing, whether it's for Europe or U.S. or the backward integration that we are doing, incidentally we won a tender on allopurinol with Germany, probably it will come in next quarter when we talk about it. We just got cleared by New Zealand for allopurinol tender. We are backward integrated on allopurinol, and we are also supplying allopurinol in U.S. So there are good kind of collaborative consistencies that are happening across many aspects of the business, and I feel very confident on account of all of this, the margins will go up.
And just one final question before I join back is on the India business. We have been taking a lot of strides in terms of equipping [indiscernible] the business, the division and several initiatives. I mean, with respect to prescription, I mean, are we seeing incremental prescriptions leaning more towards Indoco versus what we used to, let's say, years ago?
Yes, certainly. If you look at our ranking on prescription perspective, we are ranked 20th in the industry today and growing faster than the industry on both fronts, the prescribers, that is the prescription base, and the number of prescriptions. So from a perspective of how many doctors write our products as well as how many products or prescriptions are given by each doctor. We have now actually reached a very important milestone of 1 million prescriptions on an annual basis. And that puts us at a very high level on the generation of prescription front. Of course, since much of these prescriptions are for acute, 50%, it doesn't translate into the kind of top line it should. But it's a very, very steady and disciplined kind of return for our legacy products. There were -- there was -- in the second quarter this year, there was a time when Cyclopam, which is such an old legacy antispasmodic product was growing by 60% on prescriptions. I think that is a really great achievement for our acute therapy division.
And when I say contribution of chronic, chronic sort of almost stays the same, it is simply because acute is also growing as fast for -- on that that very high base. So the health of India business on prescription front is much better, even our dental portfolio, which is least dependent on prescription for return. Even there we have seen substantial growth. So that's the answer. I hope that satisfies you.
We have our next question from the line of Mitesh Shah from Nirmal Bang Securities.
My first question is regarding the EU. EU has shown the strong sequential growth of around 15%. What is the major reason as you said that U.S. are facing some supply constraints because of the client are enjoying the holidays. What is the reason for strong growth for EU?
Yes. See, all the traditional products as well as the new products which we have introduced have shown very good demand across Europe, Germany, Spain, U.K., everywhere. So that's the reason the business has shown consistent growth. And I clearly remember in the first quarter, this question had come up and I had assured the analysts and fund managers that Europe will do consistently in this year, and that is happening now. In fact, like Aditi mentioned earlier, all our high-growth, fast-moving and voluminous products, we are transferring them to Baddi I and Baddi III where batch sizes are large, there's much better control on efficiency. And in all our plants, we are going in for higher automation to bring down the casual manpower. So you will see international business profitability going up consequently.
Regarding your aspirational target of INR 5,000 crores, can you bifurcate between the geography and how much you're expecting from the domestic or the international market? And the -- do you have factoring the competition going forward in the U.S. market as well in these expectations?
So I will not give you an exact contribution wise thing, so let us surprise you a bit. As we go forward, we'll start calculating EBITDA right away based on geographies, so we will wait. And you'll be pleasantly surprised. I will only say that.
Coming back to your question on competition in U.S., today, Indoco is at a point, at a very good position, I would say, where we have a kind of business in U.S., which is a composition of various kinds of models. So while we sort of contract manufacture after collecting licensing out dossiers or our ANDAs, we contract manufacture for some very large pharma. We also participate by way of cost and profit share with some very big generic companies. And then there are some products which we have gone on our own, although not with our fronting.
So as we balance all of this, we are somehow therefore able to better manage any kind of impact of drop in prices in U.S. as of now. Added to that, a large part of our sales to U.S. comes from the very difficult to manufacture and develop products in the sterile space, be it injectable, be it ophthalmic, where the kind of price pressure we are looking at in solid orals has not been there simply because if you open the FDA site at any given time, I think most of the shortages are in this space. So people recognize and understand that it is not possible to expect these products to be supplied at any kind of cost plus. So we have a very nice niche when it comes to U.S.
And as we go more and more by ourselves, more and more into models, whether it's cost, profit, share participation or licensing our product with a certain amount to be given against marketing. And eventually, with some kind of a front end, I feel our journey in U.S., at least for the next 5 to 6 years is not threatened by some of the things that you have…
Maybe just bookkeeping questions about what is the MTM loss or gain last year, the same quarter?
Last year, same quarter, I'll come back to you, but YTD basis, MTM gain last year was around INR 26 crores. And this year on YTD basis, it is INR 24 crores. So it changes on Q-on-Q, so it's not exactly, okay, this is -- yes, for the quarter, I can tell you. Last year it was a gain of around close to INR 9 crores as against a loss of INR 12 crores after impacting for other operational revenues. So totally it's an impact of INR 20 crores, if that's what you're asking.
We have our next question from the line of Aejas Lakhani from Unifi Capital.
My first question is the following, that Sundeep Sir, you educated us that Brinzolamide, when we sell through the partner, typically it's a 2 quarter lag and that's when we get the revenue, sorry, the profit share from the agreements that we have. So if you could speak a little bit more on why the deal because you seemed very confident in the last quarter about Brinzolamide profit share kicking in from this quarter. And also is it fair to assume that you've now called out the U.S. revenue at around INR 280 crores. So given the run rate where we are, whatever incremental that we get, say, the profit share, a bulk of that, say 90%, 95% will flow through right to the bottom line. Is that broad understanding correct?
And also, as you mentioned, the average rates, right, of U.S., euro and GBP earlier. If you see the fluctuations of all these currencies in the last quarter and compare it to the quantum of the loss versus the revenue realized, it's almost 9% to 10%. So the INR 13 crores, INR 14 crores that you're talking about and the revenues from the regulated markets are whatever, INR 140 crores, it's 10% of that. And the swings have not been so drastic as the quantum of this 10%. So could you please quantify all of this?
Yes, coming to the question specifically on the currency loss, at the MTM loss. These figures are given to us by the bankers, the mark-to-market losses. So we have very little say in it. And as Aditi mentioned to you that in this quarter, last year, we had a profit of INR 9 crore against a loss of INR 12 crore about this year. So INR 12 crores plus INR 9 crores, INR 21 crores is the impact we have had this year. And that primarily happened because of euro and pound, 2 currencies. So that is about the MTM part. And about Brinzolamide, Brinzolamide supplies have now smoothened out totally. And always there is a lag while sending us the profit statement. So for the quarter ended December, the profit statement will come only by end of January or 1st week of February. And that is when we will realize the profit share of Q3.
Another thing I may want to add, which you might have missed, I explained earlier. Our U.S. business, in particular, comprises of commercially manufactured product sales and also of services income, which includes sale of dossiers or out-licensing income or collection of certain milestones. Now that part of the business is actually -- has actually shrunk as a percentage of total sales. And this is with the correct intent because Indoco couple of years ago was licensing out everything. Indoco today would prefer to keep the IP for ourselves. So this is a kind of an intended kind of a shrinkage of service income, which, as you know, is having much higher margin than commercial sales. But over a period of time, we will get much better returns from this portfolio. I hope that explains.
Yes, madam. Could you quantify what is that out-licensing income, which was there last year around this time and which is absent or even the quantum which is not there?
Yes. Roughly we used to do around INR 20 crores every quarter last year, if I'm not mistaken. Yes. One second. Just give me a minute. I'm getting the numbers out. Which has come down this year, so there is definitely a gap of around INR 5 crores this year on YTD basis on account of income from dossier sales. Yes.
So basically, you've chosen to retain those dossiers, which otherwise you were out licensing?
Yes. Yes. You will see that eventually coming to profit for the organization.
Right. No, I get you. Madam, could you also quantify what is the capital employed today in the U.S., Europe and India, just these 3 broad geographies? Or even if you could give it of India geographies and international geographies?
Right. So like I said earlier, much of the infra costs go towards Europe and U.S. business. Again, we have steadily moved how -- where we use our infrastructure. So the plants in Goa are now slated for use to U.S. So it's difficult to quantify because they were used for Europe earlier. But the Baddi plants are going to be used for Europe. The Aurangabad plant is used for emerging markets. Goa, all the 3 sites will be -- we want to use them only for U.S. Once that happens, much of the issues you see today with profitability, et cetera, will get corrected. So the gross block, if you want to know, Goa I, II, III together today is around INR 440 crores. It's difficult to put it to any one geography because it was used much of it for Europe earlier. Now it will be used in future for U.S. And the Baddi sites, between them is INR 120 crores, which will now be used for the European business.
Coming to India business, we make products for ourselves as and when there is capacity available and if there is a complicated product, which we should make ourselves. But otherwise, we outsource manufacturing. So our costs for India business are largely related to the fixed costs associated with the field. And there, as you know, because of inflation and other things, we've had to give decent prices every year, whether our volumes grow or not.
And Sundeep Sir didn't answer that question on the incremental profits from Brinzolamide flowing through to the profit. And just wanted to add one query there that you seemed very confident of this profit share and I understand that it's a complex situation with the partner and it's subject to sales. But does that -- I mean, does that confidence continue for the profit sharing to come through in 4Q? Or are there is and buts also that could sort of play out in the fourth quarter for the profit share?
Yes. I'll just maybe give some more clarification on Brinzolamide because I think all of you are very eagerly waiting for us to succeed with that product, and so are we. So there are various volume fill strengths for Brinzolamide as a product. And the largest market is with a product of a fill volume, which is yet to get sold in the U.S. market, although we have supplied it. So that is why the lag is coming in. We had some challenges here in the manufacturing plant. I don't know how many of you are aware, but a lot of ophthalmic products, U.S. FDA is now declaring them as medical devices and not as formulations simply because of the complexity of the container closure systems, the complexity of manufacturing.
And having had our first warning letter at plant II on those issues itself, we are exceedingly careful when it comes to being on the compliance side and we bend backwards. On account of that, both Teva and us have been exceedingly over careful in supplying products to the U.S. market. That has resulted in a delay in supply of a particular strength. And that's why I think when you look at Brinzolamide, you look at the whole market. When we say the supply and sale has started, it is actually in the smaller market. So the real returns are yet to come from both sale as well as margin.
There's another point, which I would like to bring to your attention. There was another product in partnership with Teva, which was due to be launched in the month of November end, and that got delayed.
So you're talking about Combigan only, right, sir?
No, no, no. Not Combigan. We haven't given out the name of that product. That has got delayed. So the milestone attached to that product should have easily come in before 31st December of about INR 10 crores. That has got delayed into April. So these are dynamic factors which are beyond our control. But we would like to assure the street that we are firmly in control of the situation as far as the business is concerned.
And sir, could you respond to the incremental profits flowing through to the EBITDA line?
On Combigan?
No. On Brinzolamide, which you're expecting in the fourth quarter, the deferral that happened.
We'll wait for that to happen. As you might have seen, our past commitment might have put us in a position today where a kind of a delay in accruing those may look like an inefficiency for the organization, which is beyond our control, really, many external factors. So we will be the -- you will be the first one we will share with the moment it starts happening. We're keeping our fingers crossed for the next quarter.
Madam, and the 20% guidance on EBITDA stage.
We are, right now, I think I'm very confused with the return without operating income. But it looks to me like this quarter, without the other operating income impact, the standalone this quarter, we did close to 18%. And standalone last year, for the same quarter, we did 18.5%. So actually we are now level, if you ask me. What would have seemed like 21% last year was actually 18.4% without the other operating. So if you stay with consistency of performance, we are already delivering what we did last year, but we hope to further improve it. The last quarter is generally a big one for both India business as well as emerging markets. Both are very high-margin businesses for us. Let us see if we can improve this. We'll definitely be trying.
And if you remember, during the first quarter this year itself, we had said that we will try and protect the EBITDA. Our words were very, very clear. Of course, we are trying to improve it further. But definitely we will do as good as what we did last year.
We have our next question from the line of Rashmi Sancheti from Dolat Capital.
One question on Europe. Since the tender of Germany and the German tender for allopurinol has already got over in December month. So how do we see growth for FY '24 and FY '25? Are we going to get the renewal of the contract? If yes, what would be the size? And what could be the sales that we could generate for next 2 years?
Yes. Rashmi, it's this way that currently we are still supplying right into January '23. The supplies are for the old contract. And we have just got news in December that we have won the contract again for another 2 years to the extent of 90.5% of the total market. So that being the case, about INR 65 crores to INR 70 crores would be the value of allopurinol Germany per year for the next 2 years.
And apart from this, any other tenders that are on a verge of getting renewable this year?
We are -- we have applied for 2 more products, but there's no guarantee that we will win it. We are, however, very, very optimistic because of our backward integration. The APIs are also manufactured by Indoco, and that is the reason for our optimism.
So then how do we see the growth from here on? Do you think that we would still continue with that 20% sort of growth in '24 and '25 also?
Yes, Rashmi, we are very confident of 20% growth for Europe business. In fact we are controlling some aspects of what we do for Europe, which are on the lowest margin side, possibly a product like paracetamol. But like Sundeep explained earlier, by moving it to a site when that site has become 3x the earlier that site in Goa. And there is a much better control on overheads, et cetera. I think even that product will do better than it did last year. So various initiatives are being looked at as we prepare for next year's budget. And I can assure you that 20% is a done thing for Europe to grow.
And in the U.S. business for FY '23, currently we have not booked any profit share from Brinzolamide till date, right? Only in FY '23?
I'm sorry, what was the question?
In FY '23 YTD, till now we have not booked any profit share from Brinzolamide.
That's true.
So you're saying that the entire profit share would come in quarter 4?
Based on the sales. I explained here that there is one particular strength of fill volume, which has gone from our side or is going just now and which will be further sold. So I think when you look at the market share of Brinzolamide of Teva, et cetera, you're looking at the whole market. Just to tell you that there has been some delay on account of a caution from our and Teva's side based on certain happenings with the container closure system. And it has not just impacted us. It has impacted many people in this industry. So there has been a delay; that is for sure. And we expect profit shares to come in as and when as the sales happens.
And madam, on Combigan, I mean, sales would incur in quarter 4. I understand that. But the profit share from Combigan would only come in FY '24. That is what you are…
Correct.
Perfect.
So there is a lag of 1 quarter for that particular product or it is like, again, 2 quarters or 3 quarters lag?
So like I said, it all depends on how much they sell per quarter, right? So our transfer is not their sale. It has to further be sold by them, after which the discounts and everything happens, when the profit shares get calculated, then it comes back to us. So we'll share it with you as and when it happens. We'll be most happy to.
We have our next question from the line of Punit Mittal from Global Core Capital HK Limited.
My first question is with regard to the aspirational target of INR 5,000 crores. What would be the CapEx required for that kind of top line? And what are your internal ROCE targets for these CapEx?
Yes. So that's a very good question and very interesting one. Already at Indoco, several initiatives have been started to increase capacity at various plants. As you know, today, we have 8 manufacturing sites, of which 5 have U.S. FDA approval. And we -- while there are several solid oral sites for the company, there is only one sterile unit. So there are a couple of things happening here. One, we are increasing capacity at that site by adding additional packing lines, which is not going to be a very big CapEx, but it will be a substantial one, all the same. And in addition to that, the company is definitely having on the drawing board a second site for sterile. And we are very confident that these investments will have a good breakeven in the years to come. So they are being planned.
As I said earlier, the lower-margin manufacturing of solid orals to Europe on contract, which is one of the smallest, which still continues to be a substantial business for us. That business is being moved to the Baddi site so that more capacity at U.S. is freed -- at Goa is freed for U.S. I don't expect to add any capacity further for the European business, but definitely for U.S. as and when there is a need, we may expand. This is the plan. And most of this will happen over the next 3 to 4 years. So it is not going to be a sudden shock in 1 year for the company.
But can you actually -- it will be very helpful if you can quantify in the sense that currently if we see that the gross block turnover is about just over 1. Now naturally some of the capacities, plant's capacities are not fully utilized, so you will ramp up those things and optimize those plants. But what would be the CapEx requirement? And second, again, what are your -- I'm sure you must have ROCE targets on these CapEx. What are those targets?
Ideally with the U.S. business kicking in, we expect to do much better on return on capital over a period of time. Roughly looking at the kind of investments we made in the past and our understanding of what is needed for the future, I think one can expect an investment of close to INR 300 crores to happen further to support the increased share coming from U.S. Today our ROCE is at 13%. And I think we will be able to [indiscernible] anywhere between 10%, 10.5% at the point where we do INR 5,000 crores.
We'll move on to the next question from the line of Aditya Khemka from InCred Asset Management.
Aditi Madam, you said ROCE will be how much by the time you achieve INR 5,000 crores? I missed that number.
Around -- today it is around 13%, and we can go up to 15%.
15%, okay. And you said, what was the total gross block in the 3 Goa plants put together?
Around INR 440 crores.
Around INR 440 crores. And if it is all dedicated to the U.S., then your revenue in U.S. this year is going to be ballpark INR 300 crores. So your asset around on the U.S. is like 0.7x as at this point in time?
Right, because today it is not entirely for U.S. Yes.
Exactly. I know that. But once you shift the production for Europe to Baddi, then this is what we are left with.
Aditya, I'll just come in here. Our plant I, for example, is supplying only glimepiride tablets to the U.S.
Eventually that capacity -- full capacity of plant I is available for U.S.
Yes.
What I'm getting to is that whatever revenue you make from Goa plant, we will shift that revenue to Baddi because Baddi has that incremental capacity which you can use to cater to the European market. So the long-term plan is that all of the Goa I, II, III will be for U.S.
Right. But it is only for the increase in sterile manufacturing capacity. Solid orals we are not going to need.
Correct.
So that's what my question was. So if in oral solids, let say your revenue today is X. With current capacity, what revenue can you do in the U.S. for oral solids through the Goa existing infrastructure?
Total revenue from the gross block, if you go by at 15% today, would work to I think INR 1,000 crores, INR 1,500 crores, yes, INR 1,50 crores.
INR 1,500 crores, and that's including oral solids and sterile from Goa?
Yes.
So till the time you reach INR 1,500 crores in your U.S. sales, till that point in time Goa, other than a few packing lines, wouldn't need any material CapEx.
Kind of, yes. Possibly a little bit in sterile because you know, it takes time to build a plant, then get it approved. So we may not wait to lose opportunity, okay?
Secondly, on the comment that you made that now U.S. FDA is looking at ophthalmics as a medical device due to the -- obviously, the process of making the product and the dispensing of the products through the containers. Does that change the approval pathway for how FDA treats ophthalmic ANDAs? Does it make it tougher, easier? Could you just comment on that?
Yes, sure. So Aditya, fortunately for us at Indoco because our first brush with FDA of not so favorable kind happened on a latanoprost packing material issue. So at Indoco, as part of remediation action itself, we had got to the level of compliance and sort of creating dossiers for our packing materials, et cetera, as per U.S. FDA expectations. So what we are seeing now is whatever we were doing has now become a requirement. So we are well sort of qualified in that manner. We will not need to do much more. We already have work done on almost all our ophthalmic products on the container closure system because we had issues with them. Yes. So that is all right. And I don't expect -- actually this is favorable for manufacturers like us because every time a container closure system manufacturer who makes small changes in his material of construction or his molds and not report it to FDA or to us, it directly or indirectly impacted our product quality. So now we will have to do it through a regulatory pathway. So we stay protected actually as a consequence of this.
Just one last question, if I may. On the India business, though, so this year, I think now, Aditi Madam, your budget would be what, around INR 800 crores, INR 810 crores million for FY '23 on the India business?
We are already at INR 613 crores, Aditya, and we have been consistently doing more than INR 200 crores. In fact our third quarter, we've done INR 203 crores, which is almost equivalent to what we did in the second quarter, which we never do. And looking at the changing product mix, there is no reason why we cannot still go after close to INR 830 crores.
INR 830 crores. So your fourth quarter, you're saying, which is generally seasonally the worst quarter for you. You're saying the fourth quarter would actually do INR 220 crores?
Yes, because the product seasonality has come down, as contribution to the wholesale.
So you're saying you can do INR 220 crores in the fourth quarter basically.
Correct.
And that's going to be sort of a sustainable change in the way you do India business because these product introductions that you are doing are not one-off introductions. These are sustainable product streams.
Correct.
And for FY '24, madam, given that you're not expanding field force, what sort of growth in India business do you aspire?
So Aditya, we'll talk about it when the time comes. But surely as part of this big aspiration, you will have to agree that all INR 5,000 crores is not going to -- when we get to INR 5,000 crores, India will not stay at INR 800 crores. I hope you agree with that. And the contribution of India business may not stay at 50%, but it'll definitely go up. So there are plans of some kind of restructuring, there are plans of looking at, as I said, direct to customer. And there are plans of using these change to model in supply chain to our advantage. So you will see a lot of change in the way India business operates, and I'm very confident we'll do well.
So just to check what you said. So you said when you reach INR 5,000 crores eventually, India business will be more than 50% of the top line, is it?
No, I didn't say that. I said that it will not stay INR 800 crores.
Yes. But what would the mix be like between exports and India?
That's, like I said, let me surprise you. Safe to say that we will ensure that even if India business does not contribute 50% of top line, the other business contributing largely to the top line, which will be U.S., will deliver on similar margins as India or more.
We have our next question from the line of Punit Mittal from Global Core Capital HK Limited.
That's fine. My answer -- my question has been answered.
We have our next question from the line of [ Mit Shah from Prospero Tree ].
I just have a simple question about the inspection that was conducted in the Goa plant. So what is the status as of now? And how would it impact on the supplies and the revenues from that facility?
So this was an inspection for a site, which we were actually waiting for the auditors to come in. Current supply to U.S. from the site is very small. YTD basis we must have done around INR 6 crores on that site. So dependence on that site for U.S. is not very high. Also there is -- even if we had a warning letter earlier on this site, there was no stoppage of manufacturing supplies on that site. So as regard to the audit or any sort of outcomes of the audit, it is not going to change in any way the current supply to U.S. What we are actually hoping is once we are able to resolve this, we will be able to get more approvals in the future, and that's what we are hoping for. Yes.
We have our next question from the line of Vishal Manchanda from Systematix.
Madam, are we expecting an inspection on Unit 2 sterile facility anytime now?
So typically they come every 2 years. And from that aspect, because of COVID they've not come in. So we should expect it. Also within plant II, there is a plant III in the same FEI number, where we have certain PAS as in prior approvals. So we are expecting them to come for that. So they would come in, I guess. It's part and parcel of our business now.
But how do we ensure like because sterile is a much more important facility for us in terms of growth in existing revenues? So like we have received 9 observations at Unit I. How do we ensure we come out clear out of -- come out clear for Unit II and Unit III?
Yes. So I think it's best on such calls to not give any assurance that we will come out clear or not. But I can tell you one thing that the way we work at Indoco now, because of the learning of the past, is that there is a lot of overarching done. So whatever improvement issues must have come up in plant I as part of these 9 observations, they are rolled out to all our sites. So I don't expect any of those points to again come up at the other site when they walk in, okay?
So that's how it happens. Also our quality management system, we have been really improving it over the last 5 years. So consequence of that, it's not that you will not get observations. But I think what the auditors will be looking for is to see whether the current quality management system is robust enough so that you internally understand whenever there is a glitch and then you attend to it. So the number of FARs you file, the number of recalls you do, all of that is an expression of a good quality management system. So I feel confident that we are better able to manage quality than before. All the same with the auditors walking. If there are any improvement issues, I'm sure we'll have observations. We should not be afraid of it.
And we have not seen any product recalls in the U.S. in the last 1 year. Is that…
There are on and on. All you have to do is Google us, and you'll see how many recalls. Because as I say, don't always happen because we have done anything wrong. They also happen because a container closure system manufacturer defaulted or something happened to a material that went into making the product or a leaching issue in the color of the ink used on the label. So we learn as we go. And I think we know and FDA also understands that manufacturing of sterile is a very difficult job.
And on Brinzolamide, are we completely sorted in terms of the challenges we had witnessed in the past?
Yes. Yes.
So supplies should continue normally going forward?
Yes. Yes.
And any color on the new approval that we have seen in the U.S. in partnership with Teva in terms of the size of the opportunity and the competition in that product?
I'm not comfortable speaking about it yet because it's part of our agreement of nondisclosure.
And just one final one on Brinzolamide, for the profit share to come in, is there a cumulative sales benchmark that has been set like profit share shall accrue only after a certain cumulative sales will be realized?
No, no.
We have our next question from the line of Yogesh Tiwari from Arihant Capital Markets.
My first question is if you can share some details regarding the pending approvals, if any, at the Goa plant and the Baddi plant?
Baddi is supplying to Europe just now, and we are shifting a lot of products from Goa there. So we are aware of what we're spending, maybe a one-off product in a particular European geography, especially post Brexit because you now have to have separate approval authorities coming in. Those kinds of decisions might be pending. But coming back to Goa, on pending approvals from Plant I, we have several products, 5 from Plant I in the past, which will go off patent after 2026, '27, '28, in that time period. And I'm confident, by then we will resolve issues of plant I for U.S. So we will get our approvals in time. Currently there is a product which we might have lost out on time. That we don't mind sharing with you. It's pregabalin capsules, which is already off patent. And had FDA cleared us 2 years ago before COVID, we might have been supplying that. So that is the kind of opportunity we must have lost.
Other than that, from the other plant, which is a sterile unit, there are already -- let me just come back with the number exactly. We have, in total, today, around 25 products pending approval, of which total, yes, this is across all our sites for U.S. ANDAs where 10 are old, okay? And they are a mix for both sterile as well as solid orals. Does that answer your question?
Yes, sure. And just one last question. So it's like we had a very good European business, and we also supply paracetamol in U.K. So just wanted to understand, there has been a lot of noise around paracetamol in this quarter. So how is the current demand for this drug as of now in U.K.?
Current demand you're asking about?
Yes, sir.
I think demand is consistent.
There was a certain time, I think, post COVID when there was a lot of supply and then stocking. But I think all of that is behind us now. And we have an excellent relationship with Perrigo, for whom we make this, largest partner we make it for, where a proper 6-month rolling plan is with us.
Absolutely, yes.
I don't see any concerns there. When I discussed a lot of paracetamol, it was simply to say possibly going forward, we would like to make less of it, if capacity issues come up at Baddi, okay?
Yes. So just wanted to understand like there were news of shortages of paracetamol in U.K. and France for this quarter. So is that still the situation remains the same or?
I think our partners take care of it. That is how our logistic planning works. So when we supply the stock, and that is how both the earlier Galpharm, which is now Perrigo because they acquired them, has managed to get such a high market share. It's because of the partnership and a good relationship and good working of inventory planning between both of us. So the logistics are taken care of. We have any given time 6 months -- sort of knowledge of 6-month orders, which we need. And there is consistent supply. And I don't see any problem. Let me just check. I think we are okay.
Yes. There's no problem.
Yes.
We have our last question from the line of [ Sajal Kapoor ], an independent investor.
Aditi Madam, question on our CRO capacity ramp-up, which I think is currently in progress, right? And where does it -- when does it complete and how much external sales can we generate from this, please?
Yes. It is -- the expansion is actually completed. We have added 48 beds to our earlier capacity of 98 odd. So we are close to 150 beds now. And that allows us to do many more studies.
Studies, yes.
And given that 60% of the entire capacity, the old capacity of 19 beds we were consuming, we now feel more confident to be able to generate more revenues from this business because we will be able to attend to more external customers. Does that answer your question?
That's helpful. Yes, it does. It does. And one clarification on this ROCE question, a couple of participants earlier have asked, but I'm not too sure if I'm getting the right handle on this because your response was slightly confusing, even to Aditya, you said that from 13% we'll go to 15% when we get to that aspirational target of INR 5,000 crores. I mean, my calculation today says that you are currently in above 30% ROCE as on fiscal '22, so last fiscal, if I do your total gross.
No, no. ROCE as on 31/12 is 13%. And same time last year, it was 15%.
All right. So I was looking at the standalone, right?
Yes, yes.
One second. Right. So from 13%, after all the operating leverage and everything has been taken care of, we aim to go to 15%. Is that correct?
Yes.
But madam, that's way below the industry standard, right? I mean, we are not in a commodity business. We have branded formulations, right, with backward integration into API.
I don't know which -- I mean, it's difficult to find parity at industry level on such parameters. But if I understand correctly, roughly today, it's 11.9%, close to 12% is what industry overall does unless you are purely in India business, where infrastructure investment is not [indiscernible].
And would you be open to disclose your India business operational metrics and outside India separately as a line item?
We don't do that. No.
Yes. Currently you don't do that, but in future, would you be open to that? Because our India business is at a completely different ROE, ROCE, like just about any other player.
Yes. So unless we carve it out as any kind of separate business, I don't see any reason for us to do that.
As there are no further questions, I now hand the conference over to management for closing comments.
So thank you, everybody, for that very, very interactive and interesting 1 hour 20 minutes, I think the longest call we've had for a very long time. Once again, wishing all of you a very happy new year and looking forward to many more interactions in the future. Thank you.
Thank you. On behalf of JM Financial Institutional Securities, that concludes this conference. Thank you for joining us and you may now disconnect your lines.