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Ladies and gentlemen, good day, and welcome to Mankind Pharma's Q1 FY '24 Earnings Conference Call, hosted by Kotak Institutional Equities. [Operator Instructions] Please note that this conference is being recorded.I would now like to hand the conference over to Mr. Alankar Garude from Kotak Institutional Equities. Thank you, and over to you, sir.
Good morning, and good afternoon, everyone. On behalf of Kotak Institutional Equities, I would like to welcome you all to the first quarter FY '24 earnings conference call of Mankind Pharma.I would now like to hand over the call to Mr. Ravi Agrawal, Head of Investor Relations, to introduce the senior management and take the discussion forward. Over to you, Ravi.
Yes. Hi. Thanks, Alankar. Good afternoon, everybody. I thank you again for being with us today on our Q1 FY '24 earnings conference call. On the call today, we have Mr. Rajeev Juneja, Vice Chairman and Managing Director; Mr. Sheetal Arora, CEO and Whole-Time Director; Mr. Arjun Juneja, Chief Operating Officer; Dr. Sanjay Koul, Chief Marketing Officer; and Mr. Ashutosh Dhawan, Chief Financial Officer. We will begin with opening comments from Mr. Juneja providing an overview of the quarter. This will be followed by comments from Mr. Sheetal on business performance, followed by Mr. Ashutosh who will share some key thoughts on the financial aspects of our performance. There will be an opportunity at the end of the opening remarks to get your queries addressed by the management.Before we commence the call today, I would like to remind you that some of the statements made on the call today could be forward-looking in nature and a detailed disclaimer in this regard has been included in the press release that has been shared on our website.I now invite Mr. Juneja to share his comments.
Thank you, Ravi, and good afternoon, everyone, and welcome to our quarter 1 earnings call. Let me start by saying that we started this year with a healthy note with a strong double-digit growth in sales and profitability. If you look at our key financial parameters, the revenue grew by 18% year-on-year during the quarter, with the domestic business growing at 14% year-on-year. EBITDA grew 43% year-on-year to INR 660 crores with a margin of 25.6%, an increase of 4.5% as compared to quarter 1 last year. PAT grew by 66% year-on-year to INR 494 crores.Our Pharma segment maintained its outperformance against the IPM with the secondary sales growth at 12.5% as against IPM growth of 8.5%. I'm happy to share that our Chronic segment share stood at 36% during this quarter as compared to 34% last year. This is the highest Chronic share we have achieved in our business. And to just put in perspective, Chronic share in FY '18 was around 28%. In fact, you would be pleased to know that as per IQVIA, the Cardiovascular segment has replaced anti-infective to become our largest segment in our mix in this quarter. This is a testament of our commitment to increasing our presence in more profitable chronic therapy area.These segments have a strong growth profile given the rising prevalence of chronic diseases due to lifestyle changes and rising income level in India. This will require a more top-down approach with focus on widening our footprint in metro and Class 1 cities. I specifically mentioned, our campaign to promote DMF quality medicines in India have been truly receptive and we have seen outstanding response to this initiative. We already have more than 100 SKUs within this initiative currently and we are rapidly expanding our product offering with this very important service to the country.In our Consumer Healthcare segment, we maintained a dominant brand leadership in respective categories with 4 of our brands ranked #1 in their categories. The secondary sales have been very, very healthy across most new brands and we expect the full year growth in this business to be similar level versus last year. On the R&D front, our successful launch of Dydrogesterone reiterates our commitment to being a science-based company. We are focusing on product innovation, novel drug delivery system, strategic partnerships with innovators to strengthen our product offering that will give us competitive edge.I would like to conclude by reemphasizing our strategic priorities going ahead. We continue to remain domestic focus. I again say, domestic focus with emphasis on volume like growth through our affordability proposition. We continue to garner dominant leadership position in identifying white spaces in key chronic therapies through in-house R&D, acquisitions, in-licensed products. Finally, we'll continue to aggressively invest in marketing to create and support our dominant brand leadership across pharma and consumer business.If I just sum up my whole commentary, I'll say that certain points you must need to re-understand that Mankind is focusing only in India, number one. Number second, we have mass consumer coverage, 5 lakh doctors we cover. Important point to note that our volume growth, which is 4.3% versus IPM growth, which is just 1.4%. We're quite good in that. Chronic share of Mankind has come to 36% versus 34% last year. Cardiac share, specifically, I'd say, in Mankind, it's 13.8% versus industry's 12.6%. And of course, for the first time, Cardiac has outperformed our anti-infective segment. And market share of Mankind has grown 4.4% from 4.2%.Certain things, I mean certain initiatives we have taken. And that basically, one is that we have launched more than 100 SKUs in DMFs, which would be very disruptive in the market because seeing the in spite of branded generic in the market, we just want to create a different kind of a category, which is called DMF upgrade. Who would does not want to have international quality medicines at Mankind pricing. Whatever is available in most developed countries should be in India, that basically is our focus.With our new initiatives, we have launched insulin. And in just 2, 3 months' time, 7,000 patients basically have come on our insulin, [indiscernible]. In CNS, we're focusing a lot in respiratory. I mean if you remember very well that we took Combihale from Dr. Reddy's. That's giving us a 30% growth. If you talk about Daffy, we took from Dr. Reddy's, again, 30% growth. These are growing phenomenal. Our transplant business is also growing at 66% this quarter, first quarter. Panacea growth in the first quarter is 22%, secondary growth I'm talking about. Primary is even better. We'll always reiterate that we always outperform IPM. Our EBITDA margin would be in the range of 24% to 26%. This is what is the summary.So now, let me hand over to Sheetal.
Good morning, and thank you, Rajeev. Welcome to today's investor call. I'm delighted to provide you an update on our domestic business with a specific focus on our Consumer Healthcare segment.Let's begin with our domestic business revenue, which reached INR 2,419 crore in the first quarter of financial year 2024, reflecting an year-on-year growth of 14%. According to IQVIA, our secondary sales growth for the quarter was 12.5%, outperforming the industry 8.5% growth by 1.5x. It's worth noting that our historic annual growth performance has consistently been 1.3x to 1.4x the industry growth rate. Additionally, IQVIA reports that while we maintain our market rank of 4th in value terms, our market share increased to 4.4% in quarter 1 financial year '24 from 4.2% in quarter 1 financial year '23.When we consider CVM, we find we have maintained our second position during the quarter by value. I'm also happy to share that Panacea revenue showed a healthy growth of 22% year-on-year during the quarter as indicated by IQVIA. The price and volume growth metric showed we continue to significantly outperform the IPM as far as volume growth is concerned. According to IQVIA, Mankind volume growth for this quarter was 4.3% as compared to IPM growth of 1.4%. This represents an outperformance of 3.2x. This success can be attributed to our wide distribution network, large field force and strong presence among more than 5 lakh doctors, making us the industry leader.We firmly believe that volume-led growth reflects the superior quality of our sales since it is driven by prescription and is, therefore, more sustainable. Our prescription share reflects this well, 15.4% during this quarter as compared to 15.1% at the same time last year. In fact, our subscriber penetration has also increased from approximately 81% in quarter 1 financial year '23 to around 83% in this quarter.I'm delighted to share the remarkable progress in our business strategy, particularly in expanding our presence in Chronic segment. This quarter has been expectional. Our Chronic share is now at all-time high of 36% within the company. Significantly, our chronic business has experienced a phenomenal growth of 17% this quarter, outperformed the IPM growth of 10% by an impressive 1.7x. In our Consumer Healthcare business, we probably announced that we achieved revenue of INR 208 crores in the first quarter of financial year '24, representing a growth of 8% year-on-year and 37% quarter-on-quarter.Our key brands, Prega News, HealthOK and Manforce condoms have witnessed substantial growth in secondary sales with a remarkable year-on-year increase of 30%, 23% and 11%, respectively, during this period. Over the longer term, our compounded annual growth rate has been strong 22% from financial year '21- '23, and we are confident of sustaining strong growth in this segment as we surge ahead. These achievements are testament towards seeking dedicated efforts and the effectiveness of our approach. With our team passion, commitment and customer-centeric approach, I am confident that we will continue to thrive and achieve new milestones in coming quarters. We look forward to our customers' continued trust in our products and affirm our dedication to improve their lives.Now, I will hand over to Ashutosh, who will provide further insight into our financials. Thank you so much.
Thank you, Sheetal. A very good afternoon and I would like to thank everyone for taking out time and joining us on this quarterly earnings call. I hope all of you would have received our financial results and the press release. Let me give you a brief on the financial highlights for the performance during Q1 FY '24.The revenue from operations increased by 18% year-on-year basis to INR 2,579 cr as compared to INR 2,180 cr in the previous period last year. EBITDA has shown a growth of 43% year-on-year basis to INR 660 crores with a margin of 25.6% as compared to INR 460 cr with margins of 21.1% last year in the same period. There is an increase in the margin of 4.5%. This increase of 4.5% is largely driven by 2.8% increase in the gross margins from selective price increases, which we have taken in the previous quarters, stable API prices and the favorable sales mix changes.The gross margins are now at around 68.2% level as compared to 65.4% in Q1 last year and these margins were 67.2% in Q4 FY '23. The R&D expenses for the quarter was at 2.1% of sales, which has been within the range of 2% to 2.5%, which we had communicated in our last interactions. The depreciation and amortization expense for the quarter were at INR 87 crores as against INR 78 crores last year in the same quarter. Our tax rate for this quarter was at 20.9% as compared to 21.6% in FY '23. The PAT for the quarter was at INR 494 crores, representing a growth of 66% Y-on-Y basis and 68% on quarter-on-quarter basis with diluted EPS of INR 12.1 per share of [indiscernible]. The cash EPS that is the EPS adjusted for noncash items like depreciation and amortization was at INR 14.3. On a trailing 12-month period, our net working capital days were at 39 days as compared to 45 in FY '23.The CapEx, including capital work-in-progress was at INR 111 crores in Q1 FY '24. The cash flow from operations has shown a significant increase to INR 488 crores as compared to the negative INR 161 cr in Q1 FY '23. The company has a healthy net cash position of INR 1,727 crores as compared to INR 1,366 crores as at 31st March '23. The return on capital employed ex-cash basis and return on equity ex-cash basis has shown an increase to 28% and 25%, respectively on a 12-month trailing basis as compared to 25% and 23%, respectively in FY '23. For FY '24, we expect to incur INR 550 cr to INR 600 cr in the CapEx. The EBITDA margins are expected to be in the range of 24% to 26%, as mentioned in our previous interactions.With this, I would like to conclude our opening remarks, and we will now be happy to address any questions that may have, please. Over to you.
Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Kunal Dhamesha from Macquarie.
Congratulations on the fantastic set of numbers. So, the first question on our profitability guidance that we have guided for 24% to 26% for this year. Would you be able to provide some guidance, let's say, 2 year, 3 year down the line where we see because, obviously, we are growing very fast in the chronic therapies. And generally, that is where [indiscernible] in terms of profitability could happen. So, any color there would be helpful.
So, as we mentioned that the guidance is 24% to 26%, and there are operating leverages, which are available. And we are quite hopeful that going forward, we should be able to maintain and increase our EBITDA margins from the existing levels.
Would you provide some color as to -- obviously, we have pricing, [ weather ], et cetera, but let's say, between pricing, operating leverage, which could be the driver which could be the major driver for us, let's say, not for FY '24, but beyond FY '24?
So Kunal, there is increased focus on the chronic business, as we mentioned. And as you are aware, the chronic business has higher gross margins. So, as and when the share of the chronic business continues to increase and it is outperforming the IPM, we expect the gross margins to go up from the current levels. Also at the same time, we've launched about 10 to 12 new divisions in the last couple of years, where their productivity is less than the average productivity of the established division for Mankind. There we expect the operating leverage to improve upon, which will enhance our margins further.
Kunal, I'm Sheetal. If you see historically, in financial year '22, our chronic share was 32%. Now in first quarter, it is [ 36% ], with a jump of 4% on chronic share, so definitely going forward, it will outperform the market and EBITDA margin improvement.
Mr. Kunal Dhamesha, I'm so sorry to interrupt, requesting you to please speak a bit louder as the management can't hear you well.
Sure, sure. So, just a follow-up on that. We have been telling that our chronic could grow very fast. And I think we have done that in the past. But let's say, over 2, 3 years, would you have any internal expedition as to increase our chronic to certain level as a business mix?
So, what business aspiration, aspiration is become the most admired, most respected institution. I mean that's it. We basically believe in good Karma, good working, and we've always believe in the past as well. Rest is in front of you. It's always good to have good people with leadership, good processes, right products. So, when we mix up all these 3 things, four things, I mean good things really happen.
And my last question is on the MR side, how many people would we have employed right now? I think earlier you used to give that in presentation or I might have missed it.
Kunal, this is Sanjay Koul. So we have MR count of around 11,000, that's excluding the managers, 11,000-plus. It excludes the managers and that is the number we have at present.
I have more questions.
So, the exact count for the quarter for the MR is 15,400, which includes the managers as well as the MRs.
[Operator Instructions] The next question is from the line of Amit Kadam from Canara Robeco Mutual Fund.
Sir, my first question is...
A bit loud. Hello? Please be a bit louder. We can't hear you.
Okay. I'll try once again. So, this first question is on the consumer business. This quarter, we clocked 8% kind of a growth. Historical growth has been quite higher than this. Can you throw some light on this? How do we look this segment going ahead? And what has led to that 8% thing? Was it something like a high base of last year, something like that?
Amit, I mean, so we always believe that everything has to really happen and really or 2 years, 3 years like, quarter-to-quarter, it's very premature. I mean, having said this, last year first quarter base was very, very high. And last year, it was a negative kind of a quarter. And last year was -- we had a growth of 25%. That's one reason. But we are very confident that whole year we will be doing as we have done in the past. We're very sure about this. Our major products, main products are performing very good, growth is around 18%.
And then how do we see this...
If you look at the country phase for the consumer business, so that has fared very well. So that has been more than the industry average. It's only the primary sales, which is reflecting lower because of the high base. But on secondary sale basis, all the key brands, they have done fairly well.
So, do you want to guide something on this? Like based on your historical growth rate, should we for the year be upwards of 20%?
Amit, we can't hear you very well. You have to be a bit.
Sir, I am asking you, like, can you guide something for this year, like based on our historical run rate, like for this FY '24?
Same like what we did last year. Approximately same like that, like last year. So that's the guidance.
We will be similar to those levels of last year, which was 17% last year.
Sir, second question is on the working capital. We saw a remarkable improvement there, almost like we have dropped to now 40 days. What has led to that particular thing? And how do we see this thing going ahead for the full year?
So historically, if you see that our working capital days have been closer to 40 days. So, we have been able to bring it down to our historical levels. For the last year and the year before, there was a spike because of supply chain and other issues. So, now we are back to our historical level of what it is. We have been able to bring down inventory back to our normal levels, historical levels.
And just third question is on the -- you touched about insulin and your early success into it. So, can you just throw some light on what kind of opportunity? What kind of maybe sales what we can garner in this particular market and what kind of opportunity we can see in this particular segment? Yes, that's it.
We launched this insulin, I mean, only in the month of May, right? These are very initial days. But every month, we are adding around approximately 2,000 patients. In the insulin business, the number of patients you add, that becomes your revenue going forward. So, if you -- and as per if you compare with other companies, adding 2,000 patients every month, it looks quite good to us.
And how do we see this thing going ahead? Like the way we have...
So, we already have said that our focus is towards chronic side. Anywhere we get a possibility towards chronic side, we go for it. And we -- as you can see yourself that chronic share is continuously increasing. So, we are quite optimistic that we'll be quite good in this. And more of possibilities will come in different collaborations as well.
[Operator Instructions] The next question is from the line of Nikhil Mathur from HDFC Mutual Fund.
Sir, the question I have is that the exports business has seen a dramatic jump on a Y-o-Y basis from INR 51 crores, the company is now at INR 160 crores. So can you highlight what has driven this?
As we mentioned in the past also that we continue to file differentiated products into the U.S. These differentiated products bring us some good opportunities. But having said that, our focus continues to always be on the Indian domestic market and we'll continue to leverage that.
Sir, does this jump has anything to do with the shorter scenario that we are seeing in the U.S. because of various reasons? Does it have any role to play here?
It's not because of the shortage scenario, it's just because of the differentiated products that we filed, as we mentioned, there are certain ophthalmics, injectables and certain products which are backed by our own API, which is leading to this phenomena.
So you see this run rate maintaining for the ensuing quarters and the same can be extrapolated to coming years as well? I mean growth should be built on what the run rate is in this particular quarter. Is that how we should look at?
It's very difficult to predict the U.S. market like this because you know how volatile it is. So, it will be very difficult for us to predict how the runway would look like. I mean -- but having said that, there will be a few months of opportunities that we see going forward.
And sir, just final question tied to this. Sorry to harp on it a bit more. So, now we are looking at exports at around 6% of total sales versus 2% last quarter. Although, there can be quarter-on-quarter variations, so, I'm not trying to replicate the same mix for the coming quarters as well. But would you like to give some medium-term guidance as to what kind of exports to domestic revenue mix we are looking at, let's say, 3 years out, 5 years out?
I mean while the export business is growing, but the revenues from the domestic business would contribute more than 90% going forward.
And one final question, sir. The growth has been pretty strong in domestic despite various secondary agencies reporting data, which was looking a bit underwhelming. So -- and then I think the season picks up in 2Q itself. So, can it be safe to say that 2Q is likely to be better than 1Q and the agencies were not properly able to capture the data. Would you like to call out what's the reason there?
So, if I understood you correctly, Q2 always is a bigger quarter in comparison to the first quarter. So, it is solely because of outbreak of basically infections in quarter 2. So, it is always a bigger quarter in comparison to the first quarter.
The next question is from the line of Harsh Bhatia from Bandhan AMC.
I hope I'm audible.
It's not audible.
Requesting you to please speak a bit louder, sir.
Yes. Is this better?
Yes, sir.
Just to expand a little bit on the human insulin product [indiscernible] I just want to understand the go-to-market strategy as a whole.
Repeat again. We missed the first part.
Just to understand a little bit more on the human insulin product, [indiscernible] that you launched in May. Just to understand a little bit better in terms of the go-to-market strategy, the pricing aspect because this is a little bit more concentrated market as a whole because you have MNCs operating at that level, right? So, maybe your views on how you're looking at the market. I understand that it's just been 3 or 4 months since the launch period, but maybe a little bit more color would be helpful.
See from the last number of years, our expiration was and is to become a leader in chronic side, whether it's say, cardiac side or diabetes side or respiratory side or anywhere. Anywhere there is a lifestyle disease problems you are supposed to be there because that gives us consistency, more profitability and whatever number of prescription you add, that gives you growth. So, keeping the same in mind, we have launched and it's basically insulin Glargine, not the regular insulin. That insulin basically we have launched. And as the name -- I mean, as our penetration in the bigger cities, top most doctors, I will not say bigger cities, top of the top doctors is increasing. The response is coming very good.
And this initial response of...
You all know that India is the epicenter for diabetes. So, we feel that we should be very, very strong there. Keeping the same in mind that we took this PanaceaBecause they have products like Glizid. That's one of the reason.
And also on the insulin front, we are also conducting clinical trials on the [indiscernible]. And those trials, we expect them to be over in the next 10 to 12 months. So, we're looking forward to launch the [indiscernible] version also next year.
And the 7,000 patients would be a blended mix of metro, non-metro or the primary orientation would be from non-metro as of now?
So, it's always a mix, always a mix. I mean but I would definitely say that more towards metro side?
And on Panacea Biotec, are you giving out the current quarter run rate because we have given out the growth rate number. At the time of acquisition, the annualized trend was somewhere around INR 200 crores to INR 250 crores. But what would be the current run rate -- quarter run rate?
So if you talk about Q1, as per IQVIA, the secondary number is INR 75 cr for Q1.
The next question is from the line of Bansi Desai from JPMorgan.
Congrats on a good set of numbers. My first question is on the impact of Man on our brand, Codistar, which we had in the month of June. So, if you can just call out what could be the potential impact there? And did we see any write-offs pertaining to that brand in this quarter?
So, what we have done basically, we are building a portfolio in dry cough with a very, very innovative product that we acquired from Panacea. So, we are basically -- we have already launched Dextromethorphan and combination in adults, in pediatrics. And also, we have basically acquired a very innovative, mouth disintegrating tablet from Panacea last year and that also is a game changer. So, we are promoting very aggressively these prescription-driven brands to doctors and we believe in the coming months, this business is going to grow substantially.
Just to close the loop on this with regard to the write-off, it has been negligible in this quarter. It's less than INR 10 million.
And so fair to assume that a large part of this brand revenues should be kind of recouped with sales growth in other brands?
In the long run. Yes.
And my second question is, Rajeev, you've spoken about having this DMF grade APIs. So, what is the longer-term plan here? Do you see this increase materially going forward as a percentage of our sales? Do we see more and more APIs which are of this quality? And if that's the case, how should we think about cost of manufacturing these?
So till now, we have introduced 101 products in DMF. So, our objective is to introduce 15 to 20 brands every quarter. So, that is what we intend to do and these products are mainly from semi chronic and chronic therapy areas. I hope I answered your query.
And my last question is on the utilization of cash that we are going to accumulate over the next few years. We are generating almost INR 2,000 crores plus of cash from operations, while our CapEx needs are closer to INR 500 crores, INR 600 crores per annum. So, how should we think about deploying this excess cash that we'll generate over the years?
So at this stage, we would like to be a bit conservative with regard to the cash aspect. So, the first priority is that wherever any good opportunities are available with regard to M&A piece, so definitely, we will be utilizing the cash towards that. And CapEx also around INR 500 crores to INR 600 crores is what we are planning for this year and we will take a view like in the next few quarters with regard to the dividend payout as well.
And on the M&A bit, would you be open to acquire brands in the consumer health care space as well to grow that business?
There are 2 sides, I mean, we are absolutely delighted. One is consumer side, the second is chronic side. 2 places, we're very, very reopen. We have said in the past as well.
[Operator Instructions] The next question is from the line of Neha Manpuria from Bank of America.
Just going back on the export number. I see in the presentation that we have mentioned there is certain one-off opportunities to the U.S. Is this what you're referring to in terms of discontinuing for a couple of more months or quarters? Or is it truly a one-off? And if you could quantify that if it's meaningful?
It would be difficult for us to quantify these numbers. But yes, I mean, this will continue for the next few months.
And second, if I were to look at our costs, both on employee and other expenses, we seem to have seen a fair bit of increase quarter-on-quarter. In the employee cost, do we have any one-off -- I mean, nonrecurring payout, et cetera, during this quarter? And therefore, what is the normalized level we should be assuming? And similarly, on the other expense, what's the level of spend that we are looking to incur as we focus on expanding chronic and the consumer health care business with the growth aspiration that we have.
So, with regard to the employee cost, if we compare, so we have added close to -- on a year-on-year basis, if you compare, so we have added close to around 1,000 people. Having said that, the MRs addition has been less than 5%. That's part one. With regard to the one-off, we have launched the ESOP scheme. So, in this quarter, there is an impact of ESOP cost, which has come in as compared to the previous quarters. And with regard to the other expenses, you have seen a spike because we are investing into new businesses as well. So that's also getting reflected in this -- in the other expense also.
So sir, on the other expense side, as a percentage of revenue, what would you consider as being -- given the investments that we have planned, what would be an ideal level of investment from another expense perspective?
So just to -- instead of getting into a quarter-on-quarter's EBITDA...
For an annual, sir.
We have given a broad guidance that our EBITDA margins will be in the range of 24% to 26%. So, we will be able to maintain our costs within that range so that we are able to maintain that margin of 24% to 26%.
[Operator Instructions] The next question is from the line of Rahul Jeewani from IIFL Securities.
Sir, can you talk a bit about the seasonality, which you typically see in your India business? So, why 2Q, 3Q would be stronger quarters for us, but do you see a significant sequential decline in fourth quarter?
Mr. Rahul, this is Sanjay Koul. In the last 5 years, our chronic contribution has -- if we talk about -- talking about Mankind, it has increased from 28% to 25%, with increasing contribution of chronic in the next 5 to 6 years, impact of seasonality will be reduced to some extent. Having said that, if you ask me this year, yes, there will be definitely some impact of seasonality on a quarter-to-quarter basis. Quarter 2 is always going to have more impact of seasonality as compared to quarter 3, quarter 4.
But if you look at our track record, I mean, first 6 months are always 51%, 52% versus second 6 months are 48%, 49%. That is how we maintain it. So, if you just see as a whole year, first 6 months, 51%, 52% and rest is last 6 months -- the last 6 months. That is how we are doing from the last couple of years.
So that seasonality would imply that the second half margins also would tend to be on the lower side versus the first half margins?
As chronic sales increases, I mean that impact goes down.
So, it will be in proportion to the sales seasonality part. But having said that, since the chronic portion is increasing. So therefore, this seasonality impact is also weaning away.
Also in the second quarter, the sales of the anti-infectives go up, where the gross margins are lower, whereas in the latter half of the year, the sale of chronic products is more. So, it doesn't have a negative impact on the gross margins and the profitability as a whole.
And just on the gross margins, can you talk about the differential in gross margins between the domestic and export business? And why I asked that question is had our export business not grown to the extent which it did during the quarter, would our gross margins would have been higher given that the chronic revenue share has also increased to 36%?
So, Rahul, we have shown a betterment in the gross margins. So, there has been an improvement of 2.8% over the last year.
I was referring to quarter-on-quarter, that adjusted for the COVID provisions of last quarter. If you see our gross margins have remained broadly flat quarter-on-quarter despite some sort of an [indiscernible] chronic revenue share. So, would export business be a lower gross margin business for us? And if you can quantify what is that differential?
So directionally, yes, export business do have a lower gross margin as compared to the domestic margin or if you compare it to the chronic margin. As we said that the focus is on the domestic piece and to structure the business in a manner and we are confident of maintaining the gross margin around 68% level. So that should give you the confidence that whatever is the mix changes, on an overall basis, we are confident of maintaining it to be around 68%.
Also to reiterate that more than 90% of the revenues would come and still come from the domestic business. So, the margins of the export business become insignificant and don't have an erosion effect upon the domestic business margins.
And the last question from my end would be of the ESOP scheme, which you referred to. So, can you quantify the costs, which we will have to incur as in which we have incurred this quarter and what you need to incur over the next 2- to 3-year period?
That we can share with you after the call.
The next question is from the line of Kunal Dhamesha from Macquarie.
So, the question on our campaign on the DMF Grade Quality, how that campaign has kind of moved for us? What is the response from the healthcare practitioner? Are we seeing whatever new product launches we have done, probably, is that a metric that you would track that growth in these products are 2x, 3x or whatever that be versus the normal product launches? Any color there would be helpful.
Kunal, very interesting question, but that's my favorite side. We are very, very sure that going forward in coming years, DMF will disrupt pharmaceutical market, because who does it want to have international quality, purity, 99% plus purity drugs, I think Indian price and -- forget Indian prices, Mankind prices. So, this basically helps our marketing team a lot in penetrating, entering top most doctors' chambers. And again, I mean, Sanjay has already mentioned that first target basically was going for chronic and semi-chronic products.We are very hopeful. And it has also been mentioned that every quarter, we wish to launch 50 to 20 new DMF SKUs. So, you can imagine yourself, how bullish are we. We're getting industry response. We ran a campaign on Burj Khalifa. That really shows our seriousness for this DMF, that really shows our conviction in DMF. But we see in future that on one side, branded generic means DMF brands in coming years. That's the kind of the confidence we have got.
So sir, I understand that at this point, since you have just launched the campaign, but would you kind of at some point, would you start sharing probably the uptake or the revenue from that bucket, I think that would help us understand the impact in a much better way.
So Kunal, I think these are still early days on the DMF. We just started with [indiscernible] and we are in the process of launching the products, more and more products every quarter. And I think at an appropriate time, we'll take a call if we wish to disclose the revenue separately or not.
Kunal, this is Sheetal this side, if I just add. Right now we are the first company [Technical Difficulty]. Even the most of the doctors are not knowing what DMF is. So, a lot of marketing campaigns we are doing, so in [Technical Difficulty] will come. People will know, our customers we know, then definitely, the impact would reach. Awareness is important right now about DMF.
It would be very difficult to quantify this as well because some of the old brands or SKUs, they get converted into DMF. So that's also -- already they have sales. So, how much incremental is coming because of this particular action. So that is difficult to quantify or break it into that because there are multiple factors which go for the increase in the sales.
So that was, again, my next question because Sanjay sir said that we are in the process of launching [ 10% to 15% ] DMF products every quarter. So, my question was probably how many of that would be an existing products and how many could be the new product, not on a quarterly basis, probably a yearly basis, 2-year basis?
So see, it will be 80% to 85%, our existing range being getting converted into DMF and new products in chronic and semi chronic, we will surely bring in DMF. That will be around 10% to 15%.
The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.
Sir, just on this Dydrogesterone plant, as is been highlighted that it would be commercialized in first half FY '24, the operational cost is more or less there in this quarter itself in terms of expenses?
No. Currently, we have -- it's forming part of capital work-in-progress, so of the Udaipur plant.
So, how much this will get added as in the coming quarters?
So, in terms of CapEx spend till now we have spent around INR 310 crores on the Udaipur plant, which will be getting depreciated in the subsequent quarters. From this quarter, we are hopeful that the commercialization and the capitalization will be getting completed. So, it will be coming in the depreciation.
And on the operational cost side, sir?
So on the operational cost side, the plant where Dydrogesterone is being currently manufactured, it will be transferred to the new plant in Udaipur. So, we don't see a significant rise in the OpEx cost.
Rather it will be beneficial on the gross margin or the cost of goods sold.
And so this quarter would have had some impact of these lower prices on account of [indiscernible] as well?
No, I mean as you're aware, Mankind from a portfolio of the products, we are the least affected in terms of the [indiscernible] products. So, the impact is very minimal.
And given that this dydro OpEx is not going to be significant while this could add for sales, your exports is any which case ramping up, given that 2Q is going to be much better as it has been historically. So, if I sum up these things, 24% to 26% EBITDA margin guidance seems to be conservative. Any comment on this? We are already at 25.6% EBITDA margin for the first quarter.
I think the reason here is that because of the seasonality impact of Q2 going up and the sales of anti-infectives rising and which has slightly lower gross margins and then the chronic sales increasing in the second half of this year, I think we would like to be consistent with our gross margins, the guidance which we've given. The next question is from the line of Nithya from Bernstein.
Just a couple of questions for me. One, bookkeeping question. So, when you talk about DMF Grade, are you referring to U.S. DMF Grade? Are you referring to specifications as laid down by the U.S. FDA? And the second is U.S. DMF Grade API, I'm sure, are more expensive. So, are you looking at the new products, therefore, being margin dilutive?
We missed the last part of your question.
So, the question is U.S. DMF Grade API is more expensive than, let's say, a non-U.S. DMF Grade API? And therefore, is your incremental sales, therefore, margin dilutive for you? And to what extent?
So, what we are referring to here is the U.S. DMF and the European CEP Grade APIs. Yes, the cost of these APIs is slightly higher than the cost of the non-DMF rate. So in certain products, there is a decline in the gross margins by 1 or 2 percentage points, but we are compensating for that decline by way of price increase which the government allows to the tune of 10% year-on-year. But there are also certain products, which we are manufacturing in-house, the APIs and filing the DMFs of those products. So, I would say there is not much of a cost impact on the DMF Grade products that we're using.
The next question is from the line of Neelam Punjabi from Perpetuity Investment.
My question is on the previous participant's question on Dydrogesterone...
Please be louder. We didn't hear you.
Sure. So, is this -- is my voice more clear now?
Yes.
So, my question is on the Dydrogesterone API. Could you please highlight what the potential of Dydrogesterone globally in terms of capacities in terms of tonnes? And what is the annual capacity of Dydrogesterone that we are putting up?
So, we have a capacity of Dydrogesterone of manufacturing 400 to 500 kilos per month. So that would be approximately 4.5 to 5 metric tonnes annually. And the demand for Dydrogesterone globally is somewhere around 4 to 4.5 metric tonnes. And this demand is increasing because this molecule is growing across the globe. And as and when new entrants are also launching, the market size is increasing, which we've seen in India itself.
So our capacity of 400 to 500 kilo per month is on the expanded capacity, right?
Correct. The current capacity that we have. I mean the infrastructure that we have is capable of going up to 400 to 500 kilos a month. Our current capacity is in the range of 200, 250 kilos per month.
[Operator Instructions] The next question is from the line of Alankar Garude from Kodak Institutional Equities.
Sir, first question is, has there been any impact of the FDC ban on Codistar in this quarter?
I think this question has already been asked and answered, but there has been no impact as such on the Codistar band. I mean we are negating the impact of Codistar by launching newer products in the similar segment under the brand of Codistar itself in the form of dextromethorphan and also the tablet that we acquired from Panacea. So, we see in the next few months, this impact will get negated.
And the second question is, can you talk a bit about the trade generics business? I mean, how seriously are we approaching this particular vertical? How big is it for us right now? What's our approach?
So, I mean, we are quite serious in this. Our trade, [indiscernible] would be doing around -- last year, it did how much? INR 200 crores. Hopefully, this will do [ around INR 250 crores to INR 260 crores this year ]. But we have long-term reason for launching that product, that going forward, can we ship those some products will become used to customers have it to build [indiscernible] side. That's basically more intangible long-term plan.
And have we invested in terms of any field force dedicated to this or the numbers are quite small at the moment?
Yes, absolutely.
So, it's close to around 200, which are sales force for this business.
Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for their closing comments.
Yes. Thank you, everyone, for joining us on the conference call. We really appreciate you taking out time for our earnings call. And we look forward to interacting with you going ahead as well. Thank you.
Thank you. On behalf of Kotak Institutional Equities, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.