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IPCA Laboratories Ltd
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Ladies and gentlemen, good day, and welcome to the Ipca Laboratories Q3 FY '23 Conference Call hosted by DAM Capital Advisors Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nitin Agarwal. Thank you, and over to you, sir.
Thanks, Mike. Good afternoon, everyone, and a very warm welcome to Ipca Labs Q3 FY '23 Earnings Call hosted by DAM Capital Advisors. On the call today representing Ipca Labs Management, Mr. A.K. Jain, Managing Director; and Mr. Harish Kamath, Corporate Counsel & Company Secretary. I will hand over the call to the Ipca management team to make the opening comments, and we'll open the floor for questions. Please go ahead, sir.
Good afternoon. Thanks, Nitin, and DAM Capital for organizing this call. Good afternoon to all participants, and thanks for taking out time and joining us for Q3 FY '23 earnings call. Today's earnings call and discussions and answers given may include some forward-looking statements based on the current business expectation that must be viewed in conjunction with the risk the pharmaceutical industry business faces.
Our actual or future financial performance may differ with what is projected and perceived. You may take your own judgment on information given during the quarter.
Domestic formulation business has delivered 9% growth for the quarter from INR 645 crores to INR 702 crores. First 9 months of the year, the domestic business has delivered a growth of around 10%.
In segment, both Rheumatoid Arthritis and Osteoarthritis continue to lead the business with 15% growth for the quarter. Cardiovascular and Antidiabetic segment growth has been lower at around 2% for the quarter.
Anti-malarials continuously in the last 3 quarters continued its decline. Even in this quarter, it has declined by almost around 26%, anti-malarial domestic business. And overall, for the -- all 3 quarters, this business is declining by almost around 37%.
In spite of all that, we have continued to improve our market share in Indian pharma market. In the last 5 years, in 2018, our market share was around 1.85%; '19, it became 1.61%; '20, it became 1.76%; '21, it became around 1.77%; '22, it has become 1.86%. So on a continuous basis, we are improving, not only improving our market share, we are also improving our rank.
We were 21st company. Now we are a 17th company, as per the IQVIA numbers. We have 5 brands in top 300 brands and all 5 brands in current year has improved its further ranking. Zerodol-SP 17th rank brand now, with 9 rank jump over last financial year then -- last calendar year.
Your Zerodol-P is 57th rank with 6 rank jump over last year. Hydroxychloroquine is almost around 132 rank with 14 rank jump over last year. Zerodol TH is 264th with 38 rank jump over last year. And Folitrax is 284th rank with 33 rank jump over last year. So all 5 top brands have jumped the rank in the current financial year, overall.
These numbers are based on IQVIA trade audits mid December '22. We are consistently outpaced industry growth in the last 4 years with highest growth in top 30 companies. With 3 rank gain over previous year, Ipca is ranked now 13th in acute therapies and 1 rank gain over the Chronic segment. Now we are rank 18th in Chronic segment.
In mid December '22, we have outpaced the industry in both acute and chronic growth as part of the IQVIA numbers. With addition of almost around 1,500 reps in the current year, we hope that we will continue to improve our penetrations in the market and further improve our market share in domestic market.
Most of the product where the Enelium pricing was to announce is already announced and published now. We expect almost around 15% reduction in the control segment, scheduled product pricing in the whatever -- we have almost around 104 SKUs on which the prices was to be announced and everything is announced now.
The price reduction is in the range of around 15%. And with almost around 12% price rise which will happen in April, probably for next financial year, the overall reduction in scheduled formulation prices would be almost around 3% to 3.5% in between.
By and large, the impact of these price reduction will happen only for the -- maybe around 3 to 4 months, in the month of February, March, then April is going to be the major. By the time, the new prices will come. So from May onwards, I think overall reduction will come down to, but Q4 impact will be full.
Overall, our scheduled formulations, your contribution to the overall business has gone down significantly now because one is anti-malarials, which are mostly scheduled formulations, that has declined and also because of this reduction in pricing and all.
So overall, your scheduled formulations are now contributing only 17% of our business. So rest of our product portfolio is not covered under scheduled. It's all non-scheduled formulations.
On export branded formulation market, this quarter, we had delivered growth of around 17% from INR 109 crores to around INR 125 crores. For the first 9 months, the business growth has been around 11%. And I think for whole of the year, we should be growing in excess of around 17% to 18%. The fourth quarter growth will be further significant in the -- your promotional market segment.
Market like Latin America, Middle East, Africa, Southeast Asia has delivered better growth for the quarter. CIS has delivered around 11% growth for the quarter. The generic export business, including institutions, has delivered 14% growth. And excluding institutions, the growth in generic business has been around 6% for the quarter.
After first 2 quarters of decline, because of various issues which were facing -- industry was facing, lower demand of API, price reduction, nitrosamine impurity, Azido impurities, all these issues, and therefore, business of active pharma ingredient has declined in first 2 quarters.
API business this quarter has delivered around 4% growth to around -- from INR 310 crores to INR 322 crores. For the first 9 months of the current year, the business has declined by around 7% from INR 1,084 crores to around INR 1,004 crores. But most of these declines will get covered in the fourth quarter of the current financial year.
We hope that probably there may not be any decline in the API business in the current year. So there may not be a growth also, it's going to be a marginal side. And all the ongoing issues like nitrosamine impurities or Azido impurities and all the [indiscernible] the regulators were facing, all those issues are now -- seemed to have passed, there are no issues left of that nature now.
This quarter, material cost to total income ratio has come to around 34.13% as against 32.46% in third quarter in last financial year, an increase of almost around 1.67%. Largely, the cost inputs -- input cost rise was there mostly in the solvents or maybe aluminum foil. But ongoing China COVID issues and higher input got converted at lower API prices -- higher cost inputs got converted at lower API prices. That has resulted and KSM price trends are also towards decline. And therefore, whatever KSMs we are holding, because of price reduction, this impact is there. But we don't foresee that our gross margin in time to come, we will be able to go back -- gross margin is not a concern for us. It's a short-term issue.
For the first 9 months of current year, our gross margin is at around -- sorry, material cost ratio is around 33.88%, marginally higher than 33% in last financial year. The price softening trend, we hope to improve our gross margin in coming quarters.
The other expenses include your ForEx loss of almost around INR 16 crores for the quarter as compared to a gain of around INR 10 crores in last financial year. Apart from above, your other expenditures have largely gone up because of higher promotional costs in the post COVID era and large addition of medical representative additions of almost around 1,500 is also contributing to the higher cost. With their becoming productivity next -- productive in next financial year, we hope that this ratio will also get corrected.
Our fourth quarter growth is expected to be almost around 10% to 12% range. And we expect that much better growth will come from branded promotional market. Generic formulations and API business, all 3 will contribute better growth.
EBITDA margin for the fourth quarter may get further impacted due to the change in the schedule pricing and price reductions, which will get some impact during the fourth quarter of the year. But we are confident that in the next financial year, our margins will certainly improve. Having given the broad numbers and guidelines, I request now participants to ask questions.
[Operator Instructions] We have the first question from the line of Kunal Dhamesha from Macquarie.
The first question is on the MR addition. I think till last quarter, we were at 1,200. Now, we have said we're at 1,500, so are we done with that addition? Is the incremental cost already baked into quarter 3 number?
Yes, that number is done now, almost around 1,500 people are added. There are certain vacancies, but broadly, it's done now.
And sir, if that is done, why we are not able to see the jump in the employee expenses? Because I believe the fixed salaries would be part of employee expenses, right, and the allowances will be part of other expenses?
Last financial year, our business growth in domestic was significantly higher, almost around 28%, 29%. And therefore, our incentive payment last year was very, very high. It was much, much above normal incentive because on incremental sales, people get much higher incentives. And this year, the overall growth numbers are lower. And therefore, incentive payments are also lower. And that is offsetting the -- your this...
Increase?
Increase in the cost. So overall, it's appearing that overall manpower cost has gone up by 13%, but -- in fact, excluding incentive, it's on higher side.
Okay. Perfect. And secondly, if I look at on a 9-month basis, our margins have kind of compressed by around 650 basis points, that excludes any ForEx loss or gain from both payers. Now can you kind of provide some kind of clarity in terms of what are the major drivers, one being the MR cost, but how much impact that is already baked in into this 9 months. Similarly, let's say, power and fuel cost increase, which are the major drivers of the 650 bps and which of them you see reversing over the next year?
Number one was material cost. Practically, it's around 1%. It has gone up 0.89%. And second head has been the personal costs, which has moved by 0.72%. The major increase has come in the -- manufacturing of our expenses, which is almost around 4%. So that is major increase.
Material costs front, we are not worried now because overall, there is a softening trend, and by and large, all the old KSM inventories, which were being more particularly in API and API business cost flow and so -- and particularly also the certain inventories, which got stuck up because of nitrosamine which was at -- their procurement price of KSM was much, much higher compared to the current prices.
So practically, the 70%, 80% at higher prices. So that has also not only increased the material cost, it has also depressed the margin because KSM prices has come down. So that has happened in many, in fact, KSM price and KSM prices are soft.
So overall, material cost ratios are going to be soft. And I think overall margins will improve. Personnel cost is higher because the number has moved up in current year, and that has resulted in 0.72% kind of overall increase in personnel cost.
As far as manufacturing and your other expenditures are concerned, by and large, on manufacturing side as against our growth of, let's say, around 9%, 10%, your overall increase is around -- 13% is the increase in manufacturing side. Largely, the power tariffs were not increasing for last 2 years during COVID time.
So most of state boards have increased the power tariffs. Energy costs continue to remain very high. I think overall energy cost number increase is almost around 45% for current year. So that has been very high because all the coal and your other fuel -- furnace oil and all that we buy for energy, that has been at a very, very high level. Analytical cost has also moved significantly because now a lot of batches need to be tested for nitrosamine test and so many other tests are introduced in various. So testing costs are significantly plus this year also a lot of work has been done to reestablish the [ mess-up ], but more particularly for all those kind of testing.
And since a lot of work has come at the same time. So a lot of work also needs to be given outside because everything cannot be done in-house at a single time. So even that cost has been high.
Then travel costs mostly doubled. That's one other cost. Shipping costs in first 2 quarters was very, very high. But from third quarter onwards, the shipping cost has started coming down. Then it's the promotional cost. The major impact during the year has been the promotional cost.
And practically, that has moved up by almost around 50% in the current year. So that is a major impact. It's also addition of the people and also various activities, which we wanted to do as a company on various therapy areas and all that, those activity was not there in last 2, 3 years, and a lot of those activities was done, and because of that, the promotional cost is on a higher side.
And that is the major contributing factor for this. With the productivity additions and with people becoming productive, these costs will come down. Energy costs, we are not seeing much of a trend in further reduction, but if petroleum product cost comes down a little bit, then probably that cost may come down. But overall, there will be a reduction in the cost because of higher productivity additions and also material cost softening and all that. So with that, the margins will improve.
And would you be comfortable providing any broad range in terms of EBITDA margin improvement for next year?
I think it could be remained in the range of around 21%, yes.
We have the next question from the line of Cyndrella Carvalho from JM Financials.
Sir, in terms of the Enelium impact that you mentioned, have you taken in this quarter already or some of it will flow in Q4 as well?
I think most of the impact is going to come in Q4 because price announcement started late -- in late December and -- so December impact is, I would say, that's very marginal. It's -- most prices have started getting announced in early December and then I think it has now completed. I think -- so we have almost 104 SKUs which are in price control.
All product prices are announced. 10, 12 prices are announced yesterday only. So all those price announcements, I would say that I can give the number now, we have worked the numbers. It's around INR 70 crores reductions on an annual basis as far as Enelium portfolios price reduction is there. And it's working out to be around 15% of the Enelium product sales. Out of which, let's say, 12%, as I have always said -- around 12%, we will get the wholesale price increase.
So overall impact will be 3%, 3.5%, not more than that. And that too, it will remain for 3 to 4 months because we are now keeping very low inventories of products. And so hopefully, we will be able to do a faster implementation. So it's only going to be, say, your January, February, March and April, that's -- these are the 4 months in which the impact would be there. And thereafter the -- and our Enelium contribution has also come down. Now it's only 17% because largely anti-malarials are in big way in price control.
And our anti-malarial business has gone down. And with that, overall, your Enelium contributions stood -- overall, say, business is only at around 17% now as on, let's say, January end. So overall, say, 87% -- 83% of our portfolio is out of price control, I would say that. And -- so it's -- those impacts are going to be marginal now.
Sir, in Q4, we'll see some impact on the overall gross margin because of this?
That's not -- yes, Q4 will be the highest impact because Q4 will be -- all 15% kind of impact on Enelium product would be there.
Right. And sir, we've not been because of benefit -- because of the price cut in the INR 70 crores number that we are seeing, right?
That INR 70 crores is for full year. I'm taking full year basis. And in Q4, the impact maybe a little more also because of the trade inventories in the market also. Trade will ask for credit notes. And we will have to give them credit notes. So we are in process of verifying as and when the prices are announcing, all these fields are verifying all the stockiest inventories and other things. And all those credit note business will also be there in the fourth quarter. So fourth quarter impact would be greater for industry.
Right. Right, sir. Noted. And sir, if we look at our India domestic business, our Zerodol franchise continues to do well. But are there any other segments or specific therapies which are kind of impacted our overall growth?
The cardiovascular business, which we want to grow fastest. In fact, as far as industry numbers are concerned, they're looking at that -- we are, in fact, in Chronic segment, we are having jump of 1 rank, but our overall growth in Cardiovascular segment in current 9 months is only around 4%.
So it's a low number. It should be -- we expect it to grow much faster. So that number is lower. Anti-malarials has declined by around 37%. But our other segments like -- and anti-bacterial this year has declined by -- because last year, we had almost around 100% growth because of COVID issues and others.
On that, there is a very marginal decline, say, on anti-malarial in -- anti-bacterials in first 9 months, we did a business of INR 134 crores as against INR 143 crores. So there around INR 10 crore decline.
So it's not significant as far as -- in spite 100% growth in last financial year. In fact, that is building base for our future growth also in anti-bacterials. Our CNS business is growing by around 18%. Cough and Cold, despite last year's significant business, we have growth of around 10%.
Derma is growing by around 18%. Neuro is growing by around 13%. Ophthalmology portfolio is around 17% kind of growth. So by and large, these newer therapies are also doing very well for us, yes.
And sir, on the cardio, diabetes, the segment is also now growing and highlighting so what is our strategy here? What are we trying to play to gain higher share and faster growth?
As far as this segment is concerned, now we have very good recognition in that marketplace with whatever work we have done in the last few years on our CTD range and other range and we have added 2 more divisions in Cardiovasculars in current financial year.
In fact, one of the reasons for a little lower growth is also because of the addition of people because doctor product relationships and all get disturbed and all that. So that is also one reason for lower growth, that is around 4%. But with addition of these 2 marketing divisions in cardiovascular and the addition of products, we will certainly have a much higher growth in time to come in cardiovascular.
We have the next question from the line of Dheeresh Pathak from White Oak Capital.
Yes. Sir, for the domestic business, the Cardio and Diabetes and the anti-malarial portfolio has not done well. So what would be the -- for the full year last year, FY '22, what would have been the sales in the domestic business for these 2 therapies?
I'll give you the number, just a minute.
Yes, Dheeresh, anti-malarial last year was 5% of my domestic business and the cardiovascular and antidiabetic was 17%. So both put together around 22%. Out of that, 17% portfolio is growing at 4%, only that 5% portfolio of anti-malarial, they are degrowing at around 35%.
Okay. Okay. But you're saying ex of this, the balance 80% -- 78% of the portfolio is growing at mid-teens, right? Because you said Pain and Rheumatoid is growing at 14%, 15% and then you listed Opthal, Neuro, Derma, everything going at mid- to high-teens?
17%, 18%. Yes, yes. So other therapies are growing definitely anywhere between 12% to 20%.
So sir, what are we doing to increase the growth? Because Cardio and Diabetes that covered market would not have grown at 4%, right? Have you lost market share? What is...
In fact, we have increased and that our rank has jumped in Cardiovascular side. That's what I said in the opening remarks as far as that our -- your -- on Chronic segment, overall, our rank has also jumped. It's now become 18th company in Chronic segment. We were 19th earlier -- a year earlier. So compared to market, we have done better and compared to market...
So why is the market only growing at 4% in those molecules?
It's only because of your digitalizations in current year, certain lower-end products -- because the product reshuffle has happened. So with that there is a -- all those markets get disturbed. Whenever there is a realignment in business and all that, some disturbance happens. And this is the year where we have added 2 more cardiac divisions and reshuffled the products and all that. So there is a suffering on that account, yes.
No, no. Sir, you have anyway grown better than the market. I'm saying why is the market in those Cardio and Diabetic portfolio is not growing more than 4%? [ Something ] you've done internally, right? What has happened to the market overall?
Market overall, let's say, there -- probably in Chronic segment, people were keeping one is higher stocks. The people buying because of COVID times and all 6-month stock, 1-year stock. There are -- many people were buying that way.
So those demand has now -- is normalized. So now buying is on a normal pattern. So that could be 1 factor. Second factor also could be that a lot of the people who are in old age and all that and taking so many medicines, they also disappeared from the market. So that's also maybe 1 factor, which -- because a lot of old people have died, which are using a lot of cardiovascular drugs -- significant amount of cardiovascular drugs.
So post COVID also, that also may be one of the impact could be there in this market because we have never seen this kind of growth in Cardiovasculars and Antidiabetics for last 15, 20 years. This market has been significantly moving up. It's only the current year that your market itself has not done that well.
Which are the main molecules that were presented in Cardio and Diabetes?
We have present, let's say, on Diabetes all the main kind of molecule, like, say, we have sulfonylurea. We have all these newer drugs.
Metformin, is the newer ones also you have...
Metformin we're not marketing as an individual -- single drug, but we have these newer product portfolios. And like gliclazide we have, glimepiride we have.
Vildagliptin we have.
Vildagliptin, we have. Yes.
Okay. And in Cardio?
On Cardio side, we are on beta-blockers, and we are also there on chlorthalidone. And now the newer molecules whatever has come in the market, we have introduced at the same time.
Okay. And sir, last question, could you say the 21% EBITDA margin for FY '24?
Yes. That's what I've talked, yes.
We have the next question from the line of Amit Kadam from Canara Robeco Mutual Fund.
Sir, I have 2 questions. One thing in your opening commentary you mentioned that you have -- because of API prices, my gross margin had impact. So just wanted to understand, ex API, our gross margins would have done better or -- has it done better with -- at least sequentially?
If you exclude API business, definitely, yes.
Okay. And then just wanted to understand how the -- like now the prices are for the overall API basket, how are export numbers are looking forward, especially like the regions like U.K., the ROW? And then just your early commentary on how we need to look at the tender business going forward in FY '23? That's it.
I had already said that your ROW markets, we are doing well. I think for first 9 months, we had 11% growth. This quarter, we had delivered 17% growth. Fourth quarter is going to be much better. And overall, I think branded promotional market for the whole of the year would be growing around -- the fourth quarter is going to be significant.
The growth may come to around 15% to 16% for the whole of the year for -- in the branded promotional market. In most markets, we are doing better now. All these issues of whatever COVID related issues and all that are not there.
As far as your institutional business is concerned, the -- probably it's going to be in the range of INR 300 crores to something plus. We expect one more product approval that could have a scope of almost around INR 50 crores, INR 60 crores addition in the business.
But with that addition, I think the institutions may reduce the buying of your [ scale]. That's what we are looking at. And so overall institutional business, I'm not giving much bigger number. I think overall may remain between INR 325 crores to INR 350 crores, that's the kind of number could be there in institutional generic business.
And sir, on the API part...
Yes, Amit?
Sir, in the API business, has the drawdown in terms of like the price coming -- like going down, so has that stopped?
No. Prices now -- there is no -- as such dropping has already happened because whatever KSMs, the trend has gone down, that -- with that prices dropped, already happened there. We are not seeing now further decrease in -- overall in the prices. And we are also not seeing further KSM prices further going down. With that only now, let's say, with the demand picking up, KSM prices will also start moving in next year a little bit. And API prices will also move in line with that.
Okay. But how the market has behaved in last few months, just to understand where it's getting settled?
Most, I think API players had poor businesses in first 2 quarters. We also had a decline in the API business in first 2 quarters. This quarter, we had done better, around 4% growth. In fourth quarter, we are looking at much better growth.
Overall, I think we will have some recovery in the API business in fourth quarter. Currently, we are at around 7%, 8% kind of decline in API business. I think that may entirely get covered in fourth quarter. That's what we are looking for.
So probably there may not be a growth. We may be at -- last year, we did almost around INR 1,300 crores, INR 1,311 crores kind of business. We may be more or less at the same number, more or less in API businesses.
Good ground will be getting covered. And all those issues which are what the regulators were looking for Azido, nitrosamine impurities and all those products, every product that needed to be tested for all that and revised matter needs to be worked out to test every product and all that. We're all filing things in various markets on that.
All those works are now done. So there are no those disturbing factors and all those excess inventories in the market because developed markets were definitely carrying higher, higher inventories of API and higher inventories also of the generics. So those also inventories are -- have now getting depleted and all that. So probably API business will also have a good recovery in the next financial year.
Okay. Sir, next year, FY '24, on this particular base, would you need for any new product launches and new geographies will be -- because we have an expanded capacity available. So on that, can we see that organic growth to [ Q2 ]?
The expanded capacity, by and large, don't know what's happening. We have, I think, lined up almost around 11 to 12 product validations at Dewas and each product validations take almost around 2, 3 months' time. So most of the time will be going in filing. And I think filings will start somewhere in, I think, in early next year, beginning, filings would start. Thereafter, the inspection should happen of that plant. So because -- for a filing unit to have 6-month stability and then your -- the dossier compilations and then filing.
Some of the regulators may come early, some regulators may come late. So hopefully, next year, some at least a few inspections should start happening from -- of that site, and we should start getting approval. Post that, the business would increase.
So right now, I don't know, we are not in our projections, we are not adding any kind of business increase coming from Dewas plant because all the -- some of those kind of production may happen and we may sell in domestic markets and all because there, you will not need any kind of approvals because all those approvals are already in place, licenses and other things. Even GMPs are in place. So that's not an issue at all. But your developed market business will only start after the inspection of the plant.
We have the next question from the line of Surya Patra from PhillipCapital.
Sir, if you can give us an understanding whether the high cost inventory is likely to sustain for what more period? So whether it will be depleted in the coming quarter or it will take a few more quarters to deplete so that some sense on the margin front that we will have?
I think most of the inventories are now depleted. It's only better off, let's say, for fourth quarter, I think will -- some more will go. But except one particular KSM, there -- of anti-malarials, where I think compared to the market, I think current pricing, my overall -- your procurement average price may be around $30 to $40 higher because we were the early one to do the tie-up and since the procurement did not happen so prices has -- it's more particularly for artemisinin and the prices have dropped to around $140 or so. My average holding maybe at around $180. So that's only the KSM where it may have some impact for the next 6, 8 months, but not -- 6 months, I would say. But all others have normalized -- will normalize in this quarter. Yes, next quarter. Yes.
Okay. And sir, if you can give some sense about the promotional spend during this 9-month period? Or directionally, how much that it would have gone up versus last year?
I think almost it's around 40%, 45% that has moved up compared to last year. And more or less, these numbers would remain at same level in next year. So with increase in the business, the promotional costs will not go up.
That will add to the margins now. And a lot of these people added -- there also this marketing cost or promotional costs have gone up. But whereas it has not added to the productivity to that an extent. So that will also help in building the margin. Yes.
Sir, about the revised or the new process about the sartans after the impurities issues that you had filed. Sir, any update on that? So have we started seeing some recovery?
No, we are back on normal business, both Valsartan as well as Losartan. There are no pending issues, Surya.
All approvals are received.
Everything is in place. There is no issue.
Okay. Okay. Sir, you have provided some update about the Dewas. But if you -- means, sir, since some time, we have not heard about the Nagpur site, which was expected to be in for KSM or intermediate site. So if you can give some sense about it?
Nagpur, let's say, I think 2 months back, we have got the final clearance from the government on environment side because they have put earlier one condition that you need to get a forest department approval. And it took almost around 1, 1.5 years' time to represent and see to it that the forest clearance is not required for this site. And -- which finally your Environment Ministry in Delhi has accepted -- the Maharashtra Government's recommendation that this site doesn't need any kind of forest clearance because there are certain parameters defined that it has to be in that much kilometers from all these wild life and everything. So it doesn't fall in that category, but it has taken almost around very long time because forest is the multi, multilayer kind of approval, so they're most stringent approval.
So it took a long time. And finally, we got. We are working on some kind of slow chemistry projects, which will be put at Nagpur. But because of these delay, 1 particular product which we were to transfer to Nagpur that we are putting at Aurangabad. So that plant is already ordered. So that is not going at your Nagpur, it is going at Aurangabad.
Probably, it's only in the next financial year, something would happen on that. So right now, we are only at basically drawing board stage, not on -- not finalized any kind of CapEx on that front right now.
Sure. Sir, just last 1 question. So this taxes -- tax rate that we have guided, so I think we are currently at a much higher level than indicated tax rate levels for the current year. So how should we be building that for next year?
See, the tax rate now from 18% has moved to 25% because our opting for that method. And now because of all these judgment of Supreme Court and also last budget revision for [indiscernible] all the promotional costs. So that is adding almost around 3% to 4% kind of additional tax. So tax rate is likely to be in the range of around 29% to 30% kind of rate.
We have the next question from the line of Kunal R from Nuvama.
Sir, the testing cost of the APIs that you spoke of, is it restrictive to sartans or other products also? And is it an ongoing expense?
It is not only for sartan, most of the other APIs also. And more or less, that cost is now already -- I don't think going forward, there would be anything of that nature.
If you see, nitrosamine is one kind of thing, which is to be tested for all APIs, including our anti-malarials and everything, all generics, all your formulations and all APIs, everything need to be tested.
And it's in part per billion. Somewhere it's maybe around 30 part per billion, somewhere 15 part per billion. So everything has to be done. And it can come from anywhere. It can -- it may not be layering your product, but it may come from water, it may come from anywhere. It can come from any kind of excipient, which is being used.
So a lot of validations need to be done and see to it and all these numbers have to be filed with regulatory. It's a huge amount of work industry has done in last financial year. On API, intermediates, formulations, excipients, everywhere it needs to be tested because all the new standards are set. So that was a very, very tough work, which industry has done in last year. It's a big, big...
Exactly, sir. But sir, if it, let's say, it comes from water also that means it has to be an ongoing thing, right? Because...
Testing are going to be ongoing. But not...
But initial testing, method validation, development, that takes a lot of time and a lot of money. Routine -- once it becomes a routine part of your process of testing, then there is not much issue.
Because when you establish, you have to -- so many components you need to test. But once you are final product, finally, everything is okay, then only our final product testing. Otherwise, there are 10 components and all 10 components need to be tested. But -- suppose in final product, let's say, it's coming in the range or lower than that range, then subsequently, it's only 1 test.
[indiscernible] validation, both are very big project. Yes. Establishing the method of testing, method of -- is a very big subject and then validating that.
Right, sir. And I assume this -- all the manufacturers would be going...
Yes, yes, everybody has done that. Everybody, every formulation that's -- it's a big, big exercise, yes.
Got it. Got it. And sir, maybe some on a slightly longer term, maybe a 2- or a 3-year kind of outlook, maybe some aspiration guidance for generic export and API, you would like to share?
Like I said, as we have already talked that we are already talking that from here onwards, our API business should double. Formulations, we are continuously doing very well in the market. We are growing around 1.5x the market growth. And with that -- and domestic because with the addition of people and all, we should continuously add to the market share.
In the last 4 years, we have added a significant market share from 1.58% to 1.86%. So we will continue to do that. And the first time I think in current year, we will be crossing, I think ROW market business of around INR 500 crores.
And at that level, we should continue to grow around 15% to 16%, 17% on ROW market business. So overall, the growth is -- in time to come is going to be good. But overall, we will give the guidelines in our overall budget for the current financial year is finalized and maybe at around the time first quarter results and all -- our annual results around that time, we will give the guidelines for the next financial year.
Understood, sir. And just as 1 follow-up to this. If you talk of API doubling, what would be the main driver, maybe -- would it be new products? Or do you believe there is a lot of headroom for existing ones?
Even in the existing product, there is a lot of headroom. So it will be both new products as well as volume growth in the existing products.
Plus capacity additions and new product.
Got it, sir. Got it. So I assume demand is not a concern for you. It's just...
It is not recorded, no.
We have the next question from the line of Nikhil from SIMPL.
Two questions. Sir, like last quarter, and this was an industry phenomenon in API that the KSM prices were high, but the API prices have fallen. As a result, the profitability in API business has been impacted. Now during the call, you mentioned that the API prices have fallen, but they are not falling anymore. And the KSM prices have also fallen, but not falling too much.
That is right, yes.
So if you look at the profitability of the API business, based on the correction in the KSM prices and everything, are we back to the normal profitability or is it...
No, no, not in the third quarter. See what has happened, actually, whatever KSM you purchased at higher prices, they got converted into API, which got sold at a lower price. So that was going on for last 2 to 3 quarters. Maybe some pain will be there in the fourth quarter. But from the next financial year first quarter onwards, everything should be back to normal.
Okay, sir. The net profitability on API should be back to what it was in...
I mean say the gross margin on API business will improve.
Okay. Fine. And this 12% price increase on the Enelium which we mentioned is the API price increase, which the whole industry will take?
Yes.
And last question, sir, like if we look at last 1.5 years for Ipca, the cost pressures were too significant. So prior to like in around '21 -- second half of '21 and all, we were close to a 24%, 25% kind of EBITDA margin. And then there was a high freight cost and then the API cost increases and the testing increases, all of that has impacted very badly and this quarter was a first quarter, do you think from here on, with the cost pressures and everything getting normalizing on freight and power cost and everything?
Can we come back to what we were doing at around 24%, 25% on a longer period, not in next 2, 3 years, but is the business still able to maintain that 24%, 25% or do you think it could be a different task?
See, last 2 years, there were also benefit of COVID business, correct? Because of that, margins were very, very good. But having said this, now Mr. Jain has already explained. This year, there is an unusual, one is increasing the people, expenses, energy cost as well as increase in the material cost, correct?
So these 2 things are taking away around 5% to 6% of my margin. As we progress, our business will grow because of addition of the people. This material cost, whatever, 1.5%, 2% negative is there, it will become positive going forward. And as the people will become productive, even the other expenses portion where we are today, 4% increase is there, that will also become normalized. So going forward, definitely, margins should improve.
The current year, even Dewas plant, let's say, all costs are debited to P&L account, there are no business. It will -- all cost only because till the time we start filing and getting approval, it's depreciations and all your people cost, testing costs, all the energy for everything is debited to P&L account, and there are no topline coming from that plant. So it's only validation mode.
So it's a 1 year, 1.5 years that pain is there in pharma industry everywhere. So that is also getting debited to P&L. It's not only people costs, it's also the plant and capacity cost is also adding to the overheads, yes.
Okay. And last thing, any -- what would be CapEx guidance for next year, '24-'25? Any large CapEx or we would just look at utilize -- improving...
No, the INR 200 crores is our depreciation and maybe INR 400 crores to INR 500 crores level will be the total CapEx, including routine maintenance CapEx.
So only new projects what we -- projects we have is biotech project, which is coming up in MP, where we have around INR 150 crores kind of investment. So that will be commissioned next year. We have almost around 5 products in pipeline now, 2 around clinical stage now. So we are building the capacity for biotech projects.
This INR 500 crores was cumulative for 2 years?
Yes, yes.
No, no, it is each year.
Okay. Annually. Okay.
Annually, yes.
We have the next question from the line of Tushar M. from Motilal Oswal.
Sir, just extending the discussion on this biotech. So what sort of projects are we working on...
Sorry to interrupt, Tushar, your audio is not very clear. If you would go off the speakerphone or come closer to the mic?
Is it better?
No. It is still pretty muffled.
Is it better now?
A lot of disturbance, Tushar.
I will come back in the queue, maybe.
Okay. Yes.
We have the next question from the line of Dheeresh Pathak from White Oak Capital.
Sir, on this ForEx loss and gain that we show, what is the underlying nature of the -- underlying reason for this? Can you just explain like which currency is it linked to and which market is this operation linked to? What is it?
By and large, all these forward contracts, let's say, we have today not much of ForEx liability, but we have assets in terms of bills outstanding and all that. So your realizations at lower prices and forwards readjustment is all debited to P&L account. If you look at current year, we have realized gain of -- realized loss is around INR 6.68 crores, unrealized loss booked in account is around INR 35.22 crores.
And overall net loss because of ForEx is around INR 41.9 crores. If you look at other breakup of that INR 41.9 crores, that INR 21 crores is only account of your -- INR 10 crores is around -- INR 10.73 crores is on account of packing credits outstanding which are -- which were repriced in the books and foreign currency loans, your ECB is around INR 10.3 crores.
So INR 21 crores is on account of loans. And INR 20.86 crores is on account of your balances, let's say, against the import of material on outstanding payments and better realizations on bills, but on forward side, there is a loss of INR 48-point crores and -- INR 40 crores is higher license. So overall, INR 20 crores on -- INR 21 crores on trade account and around INR 21 crores is broadly on loans account, that's a more breakup.
But sir, on the asset side also, we'll be benefiting, right? Because the realization will book at the higher exchange rate in the revenue line item, right?
That's what I said, the realization higher is INR 40 crores and forward gain loss is INR 48.84 crores. And on import side, there are around INR 10 crores loss. So overall, it's -- around INR 21 crores is on account of your business transaction.
And on INR 21 crores is more or less around same level is on account of outstanding loans because it's realized loss is INR 6.68 crores. Unrealized loss booked in books is around INR 35.22 crores. And we don't create a reserve kind of things that when the contract gets -- your contract gets mature and we debit instantly to the P&L account.
Understood. Sir, on this artemisinin did you say that you will still have loss on the -- so for last 2, 3 quarters, we've been having this, right? So why is it not running -- why is it not rolling over? Because how much inventory do you carry off the KSMs and for artemisinin?
Artemisinin, normally, it's a seasonal product. So normally, you don't carry the inventory, but you sign contracts though it's seasonal. It comes in the agri season, you need to do the contract for the entire year.
Your contracts are at higher price, not that you are carrying inventory at higher price. So those contracts you are to honor. It's not that we are keeping every inventory in pipeline because when your agri output comes, around that time, you need to do the contracts.
This particular product, as you know, the price varies. It is an agricultural commodity. History is from $140 to $800, just imagine, the fluctuation in the price of this commodity.
This year because of tenders there was lower procurement from the authority. So prices have gone down. There are only 3, 4 manufacturers and your contract has to be with only with them because they are all WHO prequalified, again, suppliers of artemisinin. Everything comes from China. 95% of that comes from China and only 3, 4 manufacturers.
And sir, if everybody is having the same higher cost of agri...
I'm the largest consumer, that is the issue. Unless I...
What happens that -- suppose your procurement price and now open market prices have gone down. So opportunity to procure at a lower level is -- suppose you are selling API, market would be pricing those API sales at the current artemisinin price.
It doesn't happen -- doesn't matter as far as your anti-malarial formulation business is concerned. But when you do the API business, yes, it matters because we will do the pricing based on the -- not my procurement price, but market price and then sale price, otherwise I'll not be able to sale APIs.
Okay. And sir, apart from the artemisinin, the other KSMs you carry for like 3 months?
No, no, there are no other KSMs.
No KSMs...
No. Like you said, now you're explaining that we are carrying higher priced KSM and the API prices have come down, that is what right now API gross margin?
No, no. That is what happened till Q3 end. As we speak now, there are not many KSM left out now. See, from procurement to utilization, there is a time gap because every stage you have to carry inventory. We are backward integrated. So right from intermediate, we manufacture API. That is why our inventory of KSM in few material is higher than average.
Plus these all -- no, certain inventories were stuck up, which was at much, much higher price. [indiscernible] $9, it was double the rate earlier. So my procurement of those which because of 6, 8 months, all these issues, approvals and all that, a lot of those inventories are now getting disposed off. That's a major issue.
We have the next question from the line of Saion Mukherjee from Nomura Securities.
Sir, on EBITDA margin. So there has been a lot of volatility in the past. I mean before the U.S. FDA issues happened, we were at early 20s. Of course, it went up last year and now it has come down and you're guiding for '21 next year.
What's your assessment from a, let's say, 3-, 5-year perspective, where do you see as the business normalizes, the EBITDA margin you think would sort of settle at?
I think from next year onwards for the next 3 years, I would see that not significant expansion will happen in field for size. And therefore -- and businesses will improve. So overall margins from that level will further keep on rising, maybe around 1% every year or so for the new few years. Yes.
Okay. Sir, you made a comment around Enelium 100-odd SKUs which have come under price control or the prices were revised, right? So since the revisions just happened and there's an annual income impact of INR 70 crores, this API increases would be allowed in these products within a few months? I mean this will get negated? I mean is there a visibility on that?
1 April, yes.
Okay. There's visibility on that, okay.
Yes, yes. There is pretty visibility for that, yes. It's...
So whatever price on 31 March, whichever product, you can increase to that extent. It is simple.
Okay. There's no ambiguity. Okay. Great.
No, there is ambiguity.
Okay. Okay. Okay. And sir, on U.S. FDA, we haven't heard much. So I'm just wondering if you have any interactions on why the FDA is -- I mean, where are we on the remediation and any progress there and why we have not seen much progress on...
From our side, remediation work, everything is complete. We are just awaiting inspection, and we are in dialogue with...
See, Office of GMP inspections -- GMP has given in writing that we are nothing -- we don't need anything further from you. It's -- and we have responded to the inspection team. Now inspection, when they schedule, you say, it's another team, which we are regularly taking, but they don't tell that when they will come for inspection.
So they have their own priorities and subsequent. But we are certainly in the -- because now there is absolutely nothing is asked by FDA as far as -- or they don't need anything from our side as far as remediation part and all those issues are things so fast.
It's only they need to now schedule the inspection, that's all. That's not done by the GMP department. That's done by the inspection department. So we are in touch with them, but we don't know when they will come. That's -- and they don't tell that when they will schedule. We are sending another reminders to them.
Sir, when was the last set of queries you had from the GMP department?
I think a year back and final clearance has come 6 months back, that they don't need anything further from us. Yes.
Okay. Understood. Okay. Okay. Okay. And sir, can you also give us -- you mentioned about this biotech project, some CapEx you are doing. So if you can give some details of what are the products? What kind of -- what is your overall thought process on this project?
I think it's too early. We will not like to talk of products right now. Yes.
So these are biosimilar products or what...
Biosimilar. Yes.
And you want to do it for the Indian market, you have a CDMO plan or...
We have taken the developed markets. We have consultations from the regulators. And all your clinical trials and everything is going to be in line with that. Indian market, you cannot make money because it has to be for global markets. Yes.
But sir, typically, the costs are very high. So if you have to run clinical trials, will that mean there would be significant increase in R&D investments over the next 3, 4 years as these projects come to clinics?
I think there are some kind of the -- each clinical trials may cost around INR 15 crores, INR 20 crores. So we have 5 candidates in pipeline. So overall cost would be going up in time to come. In current year also, our spend on biotech would be around INR 20 crores, INR 25 crores higher.
This is the R&D expense, INR 20 crores, INR 25 crores?
Yes, yes, R&D expense.
Okay. Okay. And sorry, sir, finally, if I can ask, any update you can give on your key subsidiaries, how they're doing and any material update there you want to share on the subsidiaries?
On subsidiary side, let's say, we have 1 company called Onyx in U.K., they are doing well in U.K., they're a good profitable company. This year, there was a significant expansion there on their side. So because of that, I think their profitabilities have little come down, but they are a profitable company overall. And we expect that they should be -- current year, they should be doing almost around 14 million to 15 million on kind of business with around 27% kind of overall EBITDA margins in India.
And then there is another company which we have is [indiscernible]. It's a nutraceutical marketing kind of company where we have almost around 55% stake. That company is also doing well, and they are also profitable. As far as your -- Onyx business extension further in the U.S., we have 1 small API manufacturing and contract research kind of company in U.S., small company called [indiscernible] but because of these COVID issues and all, our U.K. team could not do much on that.
So -- but we have started getting now projects there. And this year, they have reduced their losses also significantly. And hopefully, in time to come, they should do better. Only concern we have is the U.S. market, is Bay Shore, which is frontline, we are awaiting that once our FDA get clear and they get to market our products and -- until such time, there are -- they are right now procuring products from third parties and then selling.
So that company has losses. As far as the other -- another company -- associate company called Krebs at Nellore and Vizag. They have reduced their losses and I hope I think next year, that company will come in profit. The current developments, what we have on our product mix and all currently going on.
So these are the broad number of subsidiaries what we have. And Ramdev is basically -- was for -- again, for FDA-approved site. And that site anyway, we are merging with our operations and so there are a lot of our -- APIs are now under filing from that site. So that will be another site, which is FDA approved site and from there, we will -- then once our formulation facility gets cleared, that also will be sourcing API from that site also.
We have the next question from the line of Prakash Agarwal from Axis Capital.
Just trying to understand the margin bridge. I know you talked about it a little, but you are currently at 16%, guiding for 21%. I understand top line will improve marginally. But raw material, something you've been saying that it's not under your control as things come from China, et cetera. So how do you think you'll regain to that 20%, 21%, which was pre-COVID levels?
See, cost -- overall gross margins will improve because mine -- most of the portfolios are outside the price control, if not -- 83% of portfolios are price controlled. More or less, there will be no increase in the promotional cost next year. It will remain more or less at the same kind of -- some increase your business with commercial costs not going up.
It will also add to almost around 2% to the overall margin levels in the business. Gross margin levels itself will improve by around 1%, 1.5% on that because KSM prices are soft, and this was a very unusual situation in current year. So because of that, the cost is higher. And overall, our capacity utilization with businesses going up will also increase to the overall operating performance and margin. And once in the middle of the year, I think overall, Dewas, if things start on commercial side, at least some recovery of expenditure will start because currently today, all costs are getting debited to P&L account and there are no revenue coming right now because of all validation, exercise and filing is currently going.
So that will also contribute to the margin. So all those factors and -- there are no more addition of people next year. So it's only going to be a wage inflation, whatever addition. So with -- and with the people productivity increase and all that, that will also contribute towards the better sales. So it will also add to the overall margin. So all those factors will add, we'll go back to that around 21% kind of EBITDA margin.
So if I understood it correct, you are saying that 150 basis points from gross margin coming back to 65% and top line being early teens and then operating leverage cost being lower than early teens, you will see 21% margin. Is that correct understanding, sir?
Yes, yes, more or less, yes.
Okay. And secondly, if I see your emerging market business, ROW generics as well as the export formulation overall, there, in the last 2, 3 years, there were a lot of inventory stocking, et cetera. And that's why the growth has been a little volatile, not only for you, but across the pharma companies. Do you think the inventories and the demand, et cetera, have been normalized? And a company like yourself could come back to at least early teens, if not high-teens in -- both in the overall export formulation market?
Yes. Even -- let's say, even current year, I think my European business is growing by around 20%. It's only the U.K. business because of -- and the U.K. business will also grow from next year because the base will not be there of that a year back of Bristol. So U.K. will also go very well. Other markets are also growing good. We should be able to -- and ROW market will grow faster.
And API, sir?
API, we say that around next year till the time those capacities from Dewas are available and approval, only thereafter, the business will start moving faster, but it should have around 10% kind of growth.
Okay. And that high base of sartan et cetera is all behind us now. So on this base, we can grow 10% or...
There are no now those kind of issues on all the impurities and everything else, whatever work we are required to be done has been done.
Okay. And early teens is good to model in or we should look at mid-teens to high teens as the overall growth for the company?
I think it should be almost around 13% kind of -- 12% to 13% kind of overall growth.
That was the last question. I would now like to hand it over to the management for closing comments.
There is nothing further to add, unless there are questions. I think we can close this con-call. Thank you, everyone, for participating in our Q3 FY '23 con-call. Thank you.
On behalf of DAM Capital Advisors Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.