Laurus Labs Ltd

NSE:LAURUSLABS

Earnings Call Analysis

Laurus Labs Q1 FY25: Growth and Stability Amid Strategic Investments

Laurus Labs saw a modest revenue increase of 1% in Q1 FY25, achieving INR 1,195 crores. Oncology APIs experienced a 120% year-on-year growth, while ARV APIs maintained steady demand. Gross margins remained healthy at 55%, with EBITDA at INR 171 crores. The company prioritized several clinical projects, expecting improved performance in H2 FY25. Key investments were made in expanding manufacturing capacities and advancing cell and gene therapy technologies. Despite lower asset utilization impacting EBITDA margins, the outlook for the remainder of the fiscal year is positive, bolstered by firm project pipelines and strong RFP momentum from major pharma and biotech clients.

A New Journey Begins

Laurus Labs is embarking on a pivotal journey, marked by a rebranding effort aimed at reflecting its commitment to enhancing global health through innovative chemistry. The new tagline, 'Chemistry for Better Living', encapsulates their mission and broader vision in the pharmaceutical and biotechnology industry, emphasizing their transition from a generic-focused company towards becoming a diversified Contract Manufacturing Organization (CMO).

Q1 FY '25 Performance Snapshot

In the first quarter of FY '25, Laurus Labs reported a modest revenue growth of 1%, reaching INR 1,195 crores compared to INR 1,182 crores in the previous year. This flat revenue growth was largely due to the prioritization of resources for clinical phase projects, which, while critical, did dilute immediate commercial outcomes. The gross margin remained robust at 55%, underscoring the company's ability to effectively manage cost pressures and maintain profitability amid challenging market conditions.

Sector-Specific Developments

Laurus Labs saw remarkable growth in its oncology APIs, posting a robust 120% increase year-on-year, with revenues climbing to INR 120 crores. Additionally, the company's ARV segment demonstrated resilience, contributing approximately INR 550 crores to the total revenue, signifying stable volume retention despite fluctuating market dynamics. Notably, sales in other API segments, including cardiovascular and diabetes, grew moderately by 6%.

Outlook for H2 FY '25

Looking ahead, Laurus Labs has indicated a stronger performance anticipated in the latter half of FY '25 due to scheduled project deliveries for key late-phase NCE projects. The management reiterated its confidence in delivering significant value over the next six months as operational efficiencies improve and previously allocated resources to high-value projects begin to yield returns. They expect to enhance their capacity for various CMO services and secure additional contracts, which would lead to revenue growth.

Investment and Capacity Expansion

Laurus has also committed substantial investment towards significant capital expenditures (CapEx) of approximately INR 1,800 to INR 2,000 crores over the next two years. This investment primarily targets the expansion of development and manufacturing capabilities within the CDMO sector. The firm is expanding its oral solid dosage manufacturing capacity from 10 billion to 13 billion tablets, reflecting growing client demand and strategic partnerships.

Financial Metrics and Guidance

The company reported an EBITDA of INR 171 crores, translating to a margin of 14.3%, which aligns with prior-year performance. However, the management noted that they expect cumulative improvements in the EBITDA margin, aiming for approximately 20% as capacities are fully utilized and efficiencies are realized. Furthermore, the net debt currently stands at INR 2,633 crores, with a target of reducing the net debt-to-EBITDA ratio to below 2.5x by the end of March 2025.

R&D Investments and New Opportunities

R&D expenditure rose to 5.4% of sales, marking a 35% increase year-over-year, showcasing the company's commitment to innovation, particularly in high-margin areas like gene therapy and personalized medicine. Laurus Labs is focusing on filing new applications and patents for future opportunities in various therapeutic areas. The total pipeline now includes 62 products currently under development, indicating a proactive approach to capturing future markets.

Market Dynamics and Strategic Future

The management highlighted strategic collaborations that include significant boosts to production capacities in response to anticipated market shifts, particularly spurred by the U.S. Biosecure Act which is expected to prompt supply chain diversification away from China, favoring Indian manufacturing capabilities. As such, Laurus is positioning itself prominently within the global supply chain, with plans to enhance its footprint in both developed and LMIC markets.

Earnings Call Transcript 2025-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to Laurus Labs Limited Q1 FY '25 Earnings Conference Call, hosted by Antique Stock Broking. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Monish Shah from Antique Stock Broking. Thank you, and over to you, sir.

[Monish Shah, analyst]

Yes. Thank you, Seema. Good evening, everyone, and welcome to Laurus Labs Q1 FY '25 Earnings Conference Call. Today, we have with us Dr. Satyanarayana Chava, Founder and CEO; Mr. V.V. Ravi Kumar, Executive Director and CFO; and Vivek from the IR team. On behalf of Antique Stock Broking, I thank the Laurus management for giving us the opportunity to host this call. I would now like to hand the call over to Dr. Satya for his opening remarks. Thank you, and over to you, sir.

[Satyanarayana Chava, executive]

Thank you, Monish, for the introduction. Thank you all for joining us on our Q1 FY '25 results conference call. We are pleased to have the opportunity to update you on our progress and answer every questions. As we continue to grow and innovate, we're embarking on Laurus' most significant rebrand initiative in a decade, making the start of our new journey towards expanded horizon.

Our new tagline, chemistry for better living reflects our dedication and purpose in leveraging scientific innovation and chemistry to enhance the quality of life for people around the globe. And I'm confident that the new identity will reinforce our global positioning as a provider of manufacturing as a service in the pharmaceutical and biotechnology landscape.

We have begun our FY '25 on a positive note, sustaining momentum in our key CDMO clinical projects and demanding resilience in our financial health.

We are leveraging power of our wider and sustainable technology platforms and commercial excellence to advance our partner pipeline projects and maximizing the impact of our robust integrated model in delivering long-term stakeholder value.

We are currently engaged in delivering multiple RFPs, involving multi-step complex chemistry, large-scale biocatalysis using in-house manufactured engines for our partners' chemical programs.

I would say we have imported a large opportunities ahead of us. And we are highly focused on realizing them starting second half of this financial year. We have invested significantly towards expanding our development and manufacturing capabilities for the last few years.

And this has been painful because of significant deleverage, but we believe this will be very rewarding and will significantly support another transition at Laurus of converting from highly generic-focused into a well reflected and diversified CMO-focused company.

Our commitment to disruptive technology in cell and gene therapy space, continued to do well especially enabling broader access to innovative cell therapy product, NexCAR19 patients in needs. In gene therapy, we're actually progressing on the construction of GMP lab with focus on manufacturing GMP viral vectors and gene therapy products.

Moving on to our financial results. Our Q1 results demonstrated continued strong resilience in financial health, reflecting robust business quality across divisions despite pricing pressure in generic APIs.

I would also say that Q1 has been largely unexpected lines as we prioritized a lot of resources towards delivering several clinical phase complex projects. The performance is expected to pick up through second half.

For the quarter, we delivered a flattish revenue growth of 1% and achieved a revenue of INR 1,195 crores. Strong growth in oncology APIs and firm demand in the ARV portfolio was offset by slightly sluggish performance in the CDMO division.

Gross margins were strong and maintained above 50% range, while EBITDA margins remained subdued at 14% due to lower asset utilization and dilution from investments in growth projects and new initiatives.

I would like to share key updates on various business divisions. In the CDMO division, we continued operational commercial improvements and recorded a sales of INR 214 crores. Revenue is on experted lines, driven by significant resource allocation to various clinicall phase deliveries. This also reflects growing customer confidence in our wider technology platform and capabilities like hydrogenation, flow chemistry, biocatalysis and large commercial capacity.

For the full year, we remain committed to a healthy growth outlook, which is supported by scheduled project deliveries for key late-phase NCE projects in the quarter four of this financial year. Momentum in RFP continued from big pharma and large biotechs. And we are also increasing our business development efforts towards securing early-stage projects to widen the project pipeline.

As mentioned earlier, we are working on over 70 active projects, ongoing commercial supplies for about 10 products, including APIs as well as several advanced intermediates. Key CDMO focused growth projects is progressing in line with plan. Animal health facility under early ramp-up phase. Commercial validations are going on.

Crop protection ingredients facility qualification target by end of FY '25. R&D central commission in the next month, which will further expand our R&D capabilities to support new business opportunities. Our focus continues on leveraging significant scientific overlaps and build diversified revenue stream from customers.

In the generic API division, revenues from this division are at INR 664 crores with a 10% growth, supported from strong oncology delivery and firm demand in ARV volumes and growth in other APIs.

ARV APIs retained volume, led stratergy...

[Operator]

Ladies and gentlemen, please be connected the line for the management has got disconnected.

Ladies and gentlemen, thank you for patiently holding. We have got the line for the management reconnected. Sir, please go ahead.

[Satyanarayana Chava, executive]

Thank you, sorry, for the disconnect of the line. I will continue giving the progress on our generic APIs, especially the ARV APIs. ARV APIs has retained its volume led steady momentum and reported revenues of INR 400 crores. The current order book for our product basket looks encouraging, supported by additional supply contracts secured through successful tender wins by our customers.

We continued to maintain a leading market share in the fast line HIV treatment. Oncology APIs reported a Q1 sales of INR 120 crores, 120% growth year-on-year. We have completed validation of new oncology products at our Vizag site with increased batch sizes and currently waiting for regulatory approval for our customers.

We believe our portfolio breadth and capacities aligned with ongoing positive market dynamics would continue to support additional volumes in this division on an annual basis.

Other API segments, which includes cardiovascular, diabetes and asthma, we reported sales of INR 144 crores, growing 6% year-on-year. Sequentially, sales declined by 24%, mainly due to timing of some GMO contract delivery schedules. We are working towards expanding CMO engagements and remain committed to long-term growth with a clear focus on cost leadership in select high-value APIs. During the quarter 1, we filed three DMPs all in non-ARV category. With this, a total number of DMFs filed to date is 86.

In the generic formulation space, we reported overall revenues of INR 274 crores for Q1, decreasing 4% over the last year. On a sequential basis, revenues decreased by 1/3, mainly impacted by global agencies buying pattern in ARV formulations.

Strategic JV with KRKA has been incorporated and progressing well. Over the medium term, JV focus will continue on delivering synergies and enhancing product portfolio.

Meanwhile, the -- to meet the near-term needs of our partner, we have extended our existing CMO collaboration to include additional oral solid dosage manufacturing lines at our existing Vizag site. These expanded lines to go on stream in the next 18 months.

Coming to LMIC business, overall market volumes are largely remained stable, partly supported from stable pricing trend over the last 2, 3 quarters.

To continue to pursue optimization program to counter any pricing impact, we believe the impact in ARV franchisee are broadly stabilized and are expected to stay in this stage.

Coming to the developed market, we continue to perform well across our broader portfolio despite higher competitive intensity. During the Q1, we filed one dossier in the U.S. and obtained four final approvals, three in the U.S., and one in Europe.

In U.S., while the price pressure had continued, we are working towards increasing the volume share on selected products. Also, we expect to see the benefit from recent ANDA approvals in the next couple of quarters, supporting our anticipated full year utilization pick up. Cumulatively, we have a total of 41 ANDAs filed to date. Of this, we obtained 21 final approvals and 14 tentative approvals so far.

We continue to have a diverse portfolio and pipeline, including products franchisee compressing of ARV, cardiovascular, diabetes, CNS and gastro. We have a total of 62 products in R&D pipeline, either under review or under development, having a significant endorsement market value. On R&D front, the overall R&D spending to sales for Q1 FY '25 was at 5.4% increased by 35% year-on-year. Higher R&D spend is in line to enhance our pipeline and includes spends towards additional initiatives in cell and gene therapy assets.

We continue to invest in portfolio with product-specific approach based on complexity and scale economics. In the bio division, we reported a sales of INR 43 crores. Sequentially, sales have recovered strongly due to customer orders. The growth was led by diversifying application of our CDMO services.

We've initiated discussions with several strategic customers for long-term collaborations. We continue to grow our enzyme engineering and production for small molecule, clinical and commercial projects, which will augment our pipeline using green chemistry for sustainable manufacturing.

Our plan to build larger fermentation capacity in Vizag has broken ground and we're accelerating efforts based on availability of support services like ETP and other services. And we also wanted to utilize this facility for GMP pharmaceutical manufacturing. We expect this facility to be commissioned by June 2026.

Let me share brief on our quality side as well. In quarter 1, the company underwent 32 quality audits by multiple drug regulated agencies and several customers.

Company has successfully passed audit inspections without any critical findings. This includes successful U.S. FDA inspection of our two large API manufacturing facilities, Unit 1 and Unit 3 in Paravada, Vizag, which has recently received EIR.

In summary, our R&D led commercial strategy is delivering on compelling growth projects. The confidence is strong and also growing, but we are taking the right steps to best position the company for value creation this year and take the company well into the future. With that, I would like to hand it over to Ravi to share financial highlights.

[Vantaram Venkata Kumar, executive]

Thank you, Dr. Satya, and very warm welcome to everyone for our first quarter of FY '25 earnings. Total income from operations are INR 1,195 crores, against INR 1,182 crores year-on-year, which is a flattish. As Dr. Satya explained, quarter 1 is largely unexpected lines, has a lot of resources are prioritized towards delivering several clinical phase projects. And the performance is expected to pick up mostly from H2. This was we already indicated in our previous call, supported by on-hand orders for project deliveries.

Gross margin maintained at healthy level at 55%. This is due to product mix and some of the cost savings what we have achieved in the raw material price negotiation. Our EBITDA for quarter 1 is at INR 171 crores at 14.3% is in line with the previous year -- quarter-on-quarter, but we expect to like improvement in the second quarter -- second half.

Our diluted EPS for quarter 1 is at INR 0.23 crores. Our RoCE was at 6%. Of course, so whether the lower revenue and lower profitability [indiscernible] may not be look so -- looks comparable. On the CapEx front, we invested close to INR 125 crore in this quarter. And our net debt stood at INR 2,633 crores.

And going ahead, we remain committed to delivering on our FY '25 growth outlook and we will prioritize investment into high value business segment to try medium and long-term growth. This is the focus will also continue to improve on our working capital efficiencies.

We can refer our IR presentation for more details. If anything or additional information you need, please contact our IR, we will provide. With this, I would request moderator to open the lines for QA.

[Operator]

[Operator Instructions] we take the first question from the line of Sajal Kapoor an Individual Investor.

[Sajal Kapoor]

Dr. Satya, in one of the slides -- I mean, there was no slide number. So I don't -- I can't refer to the slide number because there wasn't any. But in one of those slides, it was mentioned that out of the 28 customer audits conducted in Q1, how many were CDMO client audits out of these 28 that happened in Q1? And what are these customers looking for? I mean, what draws them to Laurus when there are so many other CDMO companies in India?

[Satyanarayana Chava, executive]

Thanks for asking that question. I would say at least half of the audits are done by CDMO customers. Some of them are periodic audits because they have to do audits in a stipulated time frame. And some of them from new customers, which we are onboarding.

[Sajal Kapoor]

And is the intensity increasing? So what was the number, let's say, two years ago versus today. I mean, do you see an increase in customer visits, customer audits and above and beyond the RFQ. So you mentioned RFQs are coming, but our customers actually traveling to India and physically seeing the facilities and the infrastructure?

[Satyanarayana Chava, executive]

I think there is a significant increase in visits, followed by the quality audits, followed by safety audits and then they roll out the RFPs. So to get an RFP, we have to go through a long process.

See, no big pharma, no NCE customers would like to give an RFP and a project without their commercial team visiting, without their quality team visting, without their EHS team visiting. They can give pre-clinical projects, but when we are talking about late-stage clinical programs, I think their audits are sometimes multiple days, sometimes involving multiple facilities also.

[Sajal Kapoor]

Yes, understood. And on the bio -- Laurus Bio slide, it's mentioned that initiated discussions with several strategic customers for longer-term CDMO collaboration and question really is why are customers interested in Laurus Bio given that R2 is fully booked and new capacity will only come online when R3 goes commercial. So when there is no capacity available, how can we engage in discussions, three years in advance because R3 going commercial lines, give or take, three years away, right?

[Satyanarayana Chava, executive]

24 months away, we are also building fermentation capacity at Vizag also, which will come a little earlier to R3. And the long-term contracts are -- customers who are willing to sign long-term contracts are visiting right now because they are running their projects currently at R2. It's not that we are bringing a new customer for R3. Actually, the customers who are using R2 for pilot scale of their programs are talking to us for the large-scale manufacturing in R3.

[Sajal Kapoor]

Right. You mentioned Vizag fermentation, but that's under -- that's the GMP fermentation and that's under Laurus Generics, if I'm not mistaken. That's not under Laurus Bio, correct?

[Satyanarayana Chava, executive]

No, it is not Laurus Bio. So we -- there are two programs initiated when compared to the last two quarters right now. Because of the higher demand of GMP intermediate manufacturing in our generic product and also some enzymes, which needs GMP manufacturing will be -- anything related to GMP manufacturing and which involves organic solvent usage after fermentation, those will be done at Vizag.

And the fermentation, which doesn't involve any GMP steps, doesn't involve any use of organic solvent will be done at R3. I think that is a very easy answer why we are keeping R3 under Bio umbrella and another facility under Laurus umbrella. So we want to segregate GMP manufacturing and non-GMP manufacturing.

[Sajal Kapoor]

Understood. And then lastly, very quickly, on the OpEx side, during the AGM that was conducted a few weeks back, you mentioned that today, 80% of the scientists are on the CDMO side as compared to only 20% a few years ago.

If I look at our scientific count, so 2019, we had about 200 scientists in the Synthesis division or the CDMO division versus today, we have no less than 800 give or take. And -- so that's a fourfold jump in five years. And now we have got this new Genome Valley center coming up, which will add to our OpEx fixed cost further.

So it's kind of nearly fivefold jump in our scientists on the CDMO side, which is giving a significant high OpEx fixed cost, right? I mean, you mentioned H2 is when we see the benefits emerging. How confident are we that we are not misallocating capital or we are overestimating the demand coming on the CDMO services?

I mean, is the customers giving us enough assurance that gives us the confidence to increase -- fivefold increase in the customer -- in the scientists on the CDMO side?

[Satyanarayana Chava, executive]

This is a very great question. So as we mentioned, a lot of resources that we allocated currently for the late-stage projects for Big pharma. So if you are putting resources on a Phase I molecule with 30 steps and it will take away 100 scientists, the outcome may be questionable. But currently, we are taking very minimum early-stage projects so that we don't put resources on projects with uncertainty associated with that.

So most of the resources are happening in projects with Big pharma, with oncology, most of the -- some of the projects in oncology, some of the projects in rare diseases with high dosages. Our expanded R&D capabilities will augment our ability to take early clinical projects, as we mentioned in Investor Presentation. We want to not to neglect increasing the funnel by taking more rarely stage projects.

[Vantaram Venkata Kumar, executive]

But Sajal ji, actually, we have not increased 5-time resources. So the resources, I think, if I'm not wrong, maybe 25% to 30%, but what Dr. Satya said is reallocating some generic [indiscernible]. Because of the new R&D, yes, it will be done, but your productivity also will improve.

[Operator]

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

[Tushar Manudhane, analyst]

Yes. Sir, firstly, how much of the ARV sales for the quarter?

[Satyanarayana Chava, executive]

About ARV -- APIs around INR 400 crores and formulations INR 552 crores.

[Tushar Manudhane, analyst]

Overall INR 552 crores?

[Satyanarayana Chava, executive]

Yes.

[Tushar Manudhane, analyst]

And so the reduction in the year -- so basically trying to understand the jump in the gross margin when the custom synthesis sales has been lower and even the formulation sales has been lower on overall business. If you could explain the sharp jump in the gross margin and customized gross margins.

[Satyanarayana Chava, executive]

Sure. So the gross margin improvement is based on, one, is the product mix. We have a significant increase in our oncology sales. And also, the gross margin in APIs also increased because of the favorable pricing mechanism from ARV, API RMs. And also, the process improvements done in some of the key large volume APIs. These three factors led to the improvement in the gross margins.

[Tushar Manudhane, analyst]

Oncology proportion has been largely stable, as a percentage of sales maybe in fourth quarter or even in, let's say, earlier quarters as well?

[Satyanarayana Chava, executive]

Yes. This significant impact came from raw material cost, reduction in the overall large volume APIs, supported by the process improvements what we have done in the previous quarters also came in the Q1.

[Tushar Manudhane, analyst]

Got it. So secondly, on the long-term CDMO agreement that we signed in FDA. So two questions, how much CapEx will be required, while this would be funded by the customer. And this is for patented product or a generic product?

[Satyanarayana Chava, executive]

There's additional CMO contract we are signing is to give additional manufacturing lines in our oral solid dosage firm facility in Unit 2 for our partner. Currently, we do about 2 billion tablets contract manufacturing there. And our partner is asking for additional capacity. So we are adding several lines. And eventually we will give additional 3 billion tablet capacity over a period of time. And most of the CapEx will be funded. Funded In the sense, they will give advance and we will install the capacity. Yes.

[Tushar Manudhane, analyst]

So would this be for again the generic products or for a patented product?

[Satyanarayana Chava, executive]

These -- mostly this CMO contract is generic formulations. Yes.

[Tushar Manudhane, analyst]

And lastly, on this fermentation facility at Vizag. How much investment would be there and over what period of time?

[Satyanarayana Chava, executive]

We expect about INR 200 crores investment into Vizag. And we expect it to be ready by mid of 2026.

[Operator]

The next question is from the line of Mr. Balaji Boina from Kotak Securities.

As there is no response, we move on to the next question from the line of Krish Mehta from Enam Holdings.

[Krish Mehta, analyst]

My first question was on the leverage in terms of net debt to EBITDA. So as the capacity utilization will increase actually over the next 3 or 2 years, how do you see this ratio settling in terms of it being 3.3x and slightly elevated at the moment, but how do you look at it on a steady state basis?

[Vantaram Venkata Kumar, executive]

Krish, actually can you just speak little louder and can you repeat your question, please?

[Krish Mehta, analyst]

Sorry, I just wanted to ask on the leverage ratio in terms of the net debt-to-EBITDA being elevated at 3.3x. So as the capacity utilization increases gradually, how do you see this settling?

[Vantaram Venkata Kumar, executive]

I think it could be, net debt by EBITDA is because of lower EBITDA. I think by -- as we indicated, like the full year basis, actually, we'll be definitely an improving. As we indicated before, we are targeting to make it more -- less than 2.5x by end of March '25.

[Krish Mehta, analyst]

Okay. That's helpful. And I wanted to ask a second question on the mix in terms of the ARV and non-ARV. So given that in Q4 and Q3 of last year, we were around 50% and has gradually come off a bit. How do you see this mix if you look at, say, from a 1- to 3-year basis going forward?

[Satyanarayana Chava, executive]

I think as we mentioned in previous calls, the overall ARV franchisee will remain, give or take INR 100 crores -- around INR 2,400 crores, INR 2,500 crores. That's the range we expect despite of how much effort we put. Because we don't want to invest more in ARVs, APIs want to -- because our most of the investment going in other areas.

So even in Q1, you might have seen our ARV contributed INR 550 crores out of INR 1,200 crores. So INR 650 crores came from other APIs -- other businesses. So as we grow in other businesses, especially what we are saying, our Animal Health case is going on stream. Our crop Science ingredients facility going on stream next year. Most of the clinical programs late stage will deliver second half of this year and the commercials kick in next financial year.

So gradually, we expect the revenue contribution coming from ARV, APIs and formulations. The quantum will remain same, but the percentage will significantly come down over a period of time. We don't want to comment the percentage, then you can gauge what is our top line. So we want to leave that space open.

[Operator]

The next question is from the line of Jeevan Patwa from Sahasrar Capital.

[Jeevan Patwa, analyst]

Yes, sir. So first question is on the one of the slides where you mentioned that we have done some INR 2,600 crores CapEx. So out of that INR 2,600 crores CapEx, how much is currently being utilized, how much has not been utilized?

[Satyanarayana Chava, executive]

Mr. Jeevan Patwa what is happening in the current capacity utilization, which we have built for CDMO projects. We are not utilizing a full capacity. Suppose we are doing 20 chemical steps in a project, we cannot do all 20 steps at a time because the project is not commercial. We do step 1, step 2, step 3, step 4. So most of the facility, which we do this complex chemistry, maybe if you see the reactor operation, it could be between 10%, 20% no more.

But the facility looks like fully occupied, but the actual utilization will be very, very marginal. So going back to your question this INR 2,600 crores investment, about 3/4 of that is done for CDMO.

[Jeevan Patwa, analyst]

Okay. Got it. Got it, sir. And second part is, so we are actually saying last two years that FY '25 is the year one should be watching out for. But the first quarter actually doesn't look like the quarter.

So even last quarter, we said that all bad quarters are behind right. But Q1 is again, I don't think it's a good quarter again. So anything -- any color on this? Are we still think that FY '25 will be the big year or you think '26 will be the big year now?

[Vantaram Venkata Kumar, executive]

Jeevan ji, we said our H2 will be better. Actually, we have indicated H1 will not be that great, and H2 will be definitely better. That's what we indicated. And frankly speaking, this quarter 1 is in line with our internal guidance.

So we are in line with the thing. And FY '25 definitely will be a good year. But we indicated FY '26 will be the much better year because some of the assets which we've invested like animal health, et cetera, started yielding results.

[Jeevan Patwa, analyst]

Sir. And we have done a lot of work on the CDMO. So we talked about a lot of processes that we have developed by catalysis, continuous flow chemistry and all that. So -- and we are talking to a lot of big clients since last few quarters.

So anything where we -- so any color on any large contracts or anything which is under negotiation under -- in the last stages or final stages. Do you see any -- so how do you see that?

[Satyanarayana Chava, executive]

What we can say, we have utilized our Biocatalysis expertise and we are making enzymes and using in the late-stage clinical programs. That's the one good thing. And second, when we are saying continuous Flow Chemistry, we have delivered registration batches for an API. I would say we have completed registration batches on API. Delivers will happen this quarter, using continuous Flow Chemistry.

So we are demonstrating our capabilities, which are going into the registration files of our partner products, large-scale Biocatalysis, large-scale continuous chromatography, large-scale continuous manufacturing. These are going into our partner products. And we are also adding continuous manufacturing in [indiscernible] also. We are expanding our capabilities. This will go into the files once they get approval and then the commercials will kick in.

[Operator]

[Operator Instructions] the next question is from the line of Bharat from Quest for Value.

[Bharat Sheth, analyst]

Sir, In annual report, I see that there are 17 Para 4 and 11 FDF opportunities. May I know when can we expect the revenue from this Para 4 and FDF?

[Satyanarayana Chava, executive]

It will come from FY '20 -- the major will come in FY '29, not before.

[Bharat Sheth, analyst]

And this question is more on a macro level. I want to know your opinion on this Biosecure Act in the U.S. Do you see supply chains shifting away from China for the innovative CDMO? And may I know which country will benefit most from this shift? And do you see any supply chains shifting to India?

[Satyanarayana Chava, executive]

I think because of the Biosecure Act, people will diversify their supplier base. That's for sure. And India is likely to get benefited from this. And it's not going to be knee jerk reaction. Nobody is going to shift in two months. So they will take their own time. They visit, they audit, and they give a small project and then increase the collaboration over a period of time.

I think in the long run, it will benefit. But in the short run, it is not going to happen in one quarter or in two quarters. It will take its own time. But in the long run, it is a definite step -- good step towards the CDMO opportunities for the Indian companies.

[Bharat Sheth, analyst]

And sir, you guided that the ARVs in total would be around INR 2,500 crores. And for FY '25, also the guided margin was around 20% EBITDA. Are you still content of achieving these two guidances, sir?

[Satyanarayana Chava, executive]

Yes. Yes. Broadly, yes.

[Bharat Sheth, analyst]

Okay. And regarding the new CapEx in FDF, that is funded by customer. I just want some clarity on this one. So are you going to expand the unit 2 from 10 billion to 15 billion Or is it Unit 2, 10 billion itself so you're giving some [indiscernible] to this new customer.

[Satyanarayana Chava, executive]

We plan to expand. That current 10 billion is not enough for our products and the partner products. So partners need certain type of equipment, certain type of technologies. So we're buying partner-specific equipment and installing. That is an expansion. So in 18 months, our capacity at Unit 2 is going to be 13 billion tablets, not 10 billion.

[Bharat Sheth, analyst]

Okay. So 3 billion for this new customer and 3 billion for a joint venture and the rest would be used for ARVs and our general?

[Satyanarayana Chava, executive]

Yes.

[Operator]

The next question is from the line of Rishabh [indiscernible] from Sacheti Family Office.

[Unknown Analyst]

Hello Sir, am I audible?

[Satyanarayana Chava, executive]

It will be good if you can speak little louder.

[Unknown Analyst]

Alright. So I wanted to understand, in the annual report you have mentioned that there will be pricing headwinds in some parts of the API portfolio. So need some light on the reasons for this? And how long will this continue? For this, how it impact on margin this will cost...

[Vantaram Venkata Kumar, executive]

Rishabh, sorry, we are able unable to hear clearly. Are you using a headset?

[Unknown Analyst]

Yes, I'm using my headset only. Am I audible now?

[Operator]

Sir, you will have to switch to your handset.

[Unknown Analyst]

Yes, headset only.

[Operator]

Sir, could you please take off your earphone and speak through your handset?

[Unknown Analyst]

Yes. Sure. Am I audible now?

[Satyanarayana Chava, executive]

Yes, better.

[Unknown Analyst]

Yes. So my question is that in the annual report, you mentioned that there will be pricing headwinds in some API portfolio. So need some light on the reasons for this? And how long will this continue, first question.

Second, how much impact on margins, this will cause and how much of this pricing impact company expects to be moderated by cost improvement measures and increase in CDMO and Biotech business?

[Satyanarayana Chava, executive]

As you have seen, our Quality business is very good, as we have demonstrated, gross margins around 15% -- 50% consistently. Despite price of APIs going down, we were able to maintain that gross margin. Because if you look at our last few quarters, the growth in CDMO revenue is not big, but we're able to maintain the margins at a healthy 50% and above.

That was primarily because of our sourcing benefits coming from the softer R&D prices and higher opportunities and higher process improvement benefits coming from our R&D efforts. These two are the main reasons we were able to offset the price headwinds in the APIs.

[Unknown Analyst]

All right. Also want to understand what are your -- any guidance [indiscernible] in 4 to 5 years?

[Satyanarayana Chava, executive]

I'm sorry, we are not giving guidance, but we are saying, as we mentioned, we are confident that the performance will certainly improve from H2, and we are very confident on delivering some interesting and large CDMO opportunities.

[Unknown Analyst]

Any outlook on agro side?

[Satyanarayana Chava, executive]

Agro, no revenues will come this year. So the facility will be commissioned only by end of this financial year.

[Operator]

The next question is from the line of Mr. Smith from RDA.

[Unknown Analyst]

As I can see, we received the patent for Ivacaftor. Are we pursuing opportunity in API market or formulation market?

[Satyanarayana Chava, executive]

We have several patents, but that doesn't mean all patents will pursue for commercial opportunity.

[Unknown Analyst]

Okay. But anything -- I mean, what is the market -- addressable market and something like that?

[Satyanarayana Chava, executive]

No, no, we cannot give product-specific guidances.

[Operator]

We take the next question from the line of Madhav from Fidelity.

[Madhav Marda, analyst]

When you speak about the CDMO or the NCE commercial CDMO launches in quarter 4 or second half of this year, does that mean that the product sort of moved through the R&D pipeline for the customer via Laurus and now it's kind of commercializing for the customer or the new launch. Is that how we should look at that opportunity?

[Satyanarayana Chava, executive]

No. We are not delivering commercial quantities. We are delivering projects for their registration purposes.

[Madhav Marda, analyst]

Okay. So this is basically after Phase III but before...

[Satyanarayana Chava, executive]

Actually not before Phase III, after Phase III.

[Madhav Marda, analyst]

Okay. So is this basically the registration batch succeed then FY '26 with the commercial volumes coming in for that particular product? Is that how we should look it?

[Satyanarayana Chava, executive]

Hopefully. We also expect the same. So the chances of success of these program is generally very high because these are in the registration phases. So we expect for complex molecules, their supply chain also needs a lot of longer lead times. So hopefully, once we deliver these registration batches, we expect some commercial quantities in next financial year.

[Madhav Marda, analyst]

And currently, I think if I understood right, from the presentation, we are supplying volumes sir...

[Satyanarayana Chava, executive]

Madhav, we lost you.

[Operator]

Sir, the line for Mr. Madhav has got disconnected.

We will take the next question from the line of Harshal Patil from Mirae Asset Capital Market.

[Harshal Patil, analyst]

So just had one clarification. For the PPDs, if I have to refer to the API PPD slide then, there's a comment which says that overall sequential decline due to timing of shipments, particularly. So is there any problem that we faced any logistical issue that we faced. And do you see this more as a transient thing or what?

[Satyanarayana Chava, executive]

No, no, that's not very -- we can't give you a specific reason for that.

[Harshal Patil, analyst]

Okay. But is it at least transient in nature. So we can expect the normalcy to be retained.

[Satyanarayana Chava, executive]

Yes.

[Harshal Patil, analyst]

Okay. Okay. That was there, sir. And secondly, with respect to the CDMO thing, definitely clarified on the NCE scheduled deliveries. But with respect to the existing supply, sir. If you could just talk a bit about the traction and what kind of improvement we could expect for FY '25?

[Satyanarayana Chava, executive]

I think our base of commercial deliveries is, give or take, INR 200 crores per quarter. That doesn't include any additional opportunities what we are delivering on what we are committed to deliver and where we have orders on hand. So once we deliver new opportunities, the value will go up beyond our regular supply.

[Harshal Patil, analyst]

And lastly, if I can just squeeze one, probably on the margins where we're seeing that the API prices are getting a bit more softer. So believe that our margin trajectory as you've guided would be maintained despite of that?

[Satyanarayana Chava, executive]

I think at least gross margin front, all of you might have noticed, last several quarters, we're able to maintain around 50% gross margin. So I think that -- we are very confident to maintain at that level. So if you look at from -- in the presentation, second quarter FY '23 to first quarter FY '25, that means almost 9 quarters -- 8 quarters, We were able to maintain around 50% gross margin.

[Operator]

We take the next question from the line of Nitin Agarwal from DAM Capital.

[Nitin Agarwal, analyst]

Sir, on your CapEx plans, given where your various expansion plans are, what kind of CapEx be envisage for the next 2 years?

[Satyanarayana Chava, executive]

Ravi, would you like to answer CapEx for this year and next year.

[Vantaram Venkata Kumar, executive]

This year and the next year, probably anywhere between INR 1,800 crores to INR 2,000 crores, maybe around that yes, together.

[Nitin Agarwal, analyst]

And Ravi, how would you break that up into broad segments, if you can?

[Vantaram Venkata Kumar, executive]

Gross net as I've Indicated -- sorry. Segment, the additional out of this -- I think majority goes to the CDMO. And some part goes to the FDF because of this specific requirement from one of the customer.

[Nitin Agarwal, analyst]

Sir, on this customer specific requirement, where you have been mentioned in presentation, you mentioned that CMO contract should start in FY '27. How should we think about the potential size or scale of this business?

[Satyanarayana Chava, executive]

I think these are -- we know the volumes. We know the product. We know the price. So there are no surprises on either sides. So we are putting that capacity because we know how much we're going to make on that. So it is a very stable business.

It's to -- we're building that to a generic customer. We know the markets. We know the what percentage of market share he is enjoying. So I think that is very -- going to be a very stable business for us.

[Nitin Agarwal, analyst]

And on this account, now since you're putting up additional capacity in formulations. This quarter, for example, over the last few quarters, you had extreme volatility in ARV supplies to LMIC markets. So the capacity that we have for finished formulation are the fungible across ARVs or non-ARVs or you have to use a certain amount of capacity only for ARVs only?

[Satyanarayana Chava, executive]

Formational capacity is very fungible. So we can use it for ARV, non-ARV, diabetes, cardiovascular. There are no challenges. Only the size of the batch determines which line we use.

[Nitin Agarwal, analyst]

Sir, is there any reason why -- what portion of the capacity currently be utilized for ARVs on the formulation side?

[Satyanarayana Chava, executive]

ARV, we are making about $100 million in sales on average. So why we'll lose -- allocate capacity of ARV to something else.

[Nitin Agarwal, analyst]

Sorry, sir?

[Vantaram Venkata Kumar, executive]

I think he's asking how much percentage...

[Satyanarayana Chava, executive]

How much percentage of capacity we are using for ARV? May be.

[Vantaram Venkata Kumar, executive]

60%, 70%...

[Satyanarayana Chava, executive]

Formulation-wise, maybe 25% capacity is used for ARVs.

[Nitin Agarwal, analyst]

25% of that?

[Satyanarayana Chava, executive]

Yes.

[Nitin Agarwal, analyst]

Okay. And then lastly, on the CDMO business, you obviously are into multiple negotiations. So what will be the nature of most of the business that comes in. It will be for early-stage projects? Or do you have also opportunity for certain large supply starting. Because you probably taking on some of the more commercialized products. So what -- do we have like that commercial account supplies coming through immediately? Or you'll have contract there -- you build up the relationship and then supply happen over a period of time?

[Satyanarayana Chava, executive]

In the most of the supplies what we mentioned will happen in H2 of this financial year or for registration are Phase III projects. So the certainty of those moving into the commercial is very high, and we expect some commercial orders will come next financial year.

[Operator]

We take the next question from the line of Madhav from Fidelity.

[Madhav Marda, analyst]

I was just asking that the one molecule which you spoke for will be supplying the registration batch. So if I understood right from the presentation, currently we are supplying 10 commercialized products in the CDMO division. So this one -- if it succeed, this will be the 11th product for us, which is a commercial. Is that how we should understand the business currently?

[Satyanarayana Chava, executive]

No, no. When we said 10 products commercial, those are already in our base sales. And what we mentioned the new projects, those are over and above what we are supplying commercially.

[Madhav Marda, analyst]

Sir, basically, commercial doesn't mean that it's a commercialized molecule for the customer base. That's not what you're indicating.

[Satyanarayana Chava, executive]

No, no. 10 products what we said, commercial, those are products commercialized that our customers side also.

[Madhav Marda, analyst]

Exactly. That's what. And just the other question was in the CDMO business. Currently how many of the supplies that you expect to do in [indiscernible] for like the registration which is very close to commercialization. The next 2, 3 if you could give some sense there? And how many are in late stages basically?

[Satyanarayana Chava, executive]

Typically, when people file NDA, they expect to launch in 12 months. If there are no red flags raised by the FDA or from agencies, they will launch in 12 months.

[Madhav Marda, analyst]

And for the particular project, is Laurus is a sole supplier? Or it's going to be like...

[Satyanarayana Chava, executive]

We are not asking on one project. We are talking on multiple projects. And nowadays with the global supply chain challenges, nobody is going to use only one supplier for any project. I want to be very clear there.

[Operator]

Ladies and gentlemen, we take that as the last question for the day. I would now like to hand the conference over to the management for closing comments.

[Satyanarayana Chava, executive]

Thank you for joining our conference call for Q1 FY '25 and also asking very pertinent and interesting questions. Thank you.

[Operator]

Thank you. On behalf of Antique Stock Broking, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.