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Marksans Pharma Ltd
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Ladies and gentlemen, good day, and welcome to Marksans Pharma Limited Q4 and FY '22 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions]. Please note that this conference is being recorded.
I now hand the conference over to Mr. Rohan John from ICICI Securities Limited. Thank you, and over to you, sir.
Thanks. Good evening, everyone, and welcome to Marksans Pharma Limited fourth quarter and FY '22 earnings conference call. We have the senior management, Mr. Mark Saldanha, Founder, Managing Director and CEO; and Mr. Jitendra Sharma, Chief Financial Officer, participating in this call. I thank the management for giving ICC Securities an opportunity to host this call. Over to you, Jitendra sir.
Thank you, Rohan, and very good evening to everyone, and thank you for joining us for Q4 FY '22 earnings call of Marksans Pharma. On the call today, we will discuss our operational and financial highlights for the quarter and year ended March 31, 2022. On this call, our discussion will include certain forward-looking statements. These estimates reflect management's current expectations of the future performance of the company. Please note that these estimates involve several risks and uncertainties. We do not undertake any obligation to publicly update any forward-looking statement, whether as a result of new confirmation, future events or otherwise.
Moving on, we have Mr. Mark Saldanha, Founder, Chairman and Managing Director from our management team. To start the call, I will request Mark sir for his comments.
Thank you, Jitendra. Good evening, everyone. I hope you and your families are safe and doing well. It's my pleasure to welcome you to the Q4 FY '22 earnings calls. Let me try and keep the remarks short so we have more time to take your questions. FY '22 was a challenging year for the industry. We witnessed continuous impact on geopolitical crises, supply chains and inflationary headwinds across our key markets. COVID resurgence in China, input cost pressure and increased freight costs didn't make it any easier.
The pricing pressure in the U.S. continued in the high single digits during the year, impacting our generic U.S. business. These developments impacted our gross and EBITDA margins. However, despite these challenges, we had a decent revenue growth in the year, led by North America and Australian market. We have also started passing our -- the price increases to certain of our customers. The development of our Goa factory, which included the addition of a new manufacturing line is on schedule and expected to start by the end of this calendar year.
We expanded our portfolio in this quarter by launching 3 new products in the U.S. and 12 in the U.K. We're also strengthening our R&D capabilities and have a strong product pipeline in the near term. We plan to launch several new products in the next 2 years. I would like to reaffirm that a forward integrated business model, which has a significant global presence is quite unique. Our business model has evolved over the period of time from 100% CRAMS driven to 100% own IP-driven forward integrated business. We have emerged as spine manufacturers and marketers in U.S., U.K. and Australia. We have established a strong presence in these countries with our front-end distribution capabilities. This is obviously supported by low-cost manufacturing base, which we leverage out of India.
We also pride manufactures of soft gels products from India. We are expanding our manufacturing capabilities and taking new steps to backward integrate into API manufacturing of our core molecules for captive consumption, and our aim is to become a fully integrated company with our own API, formulation manufacturing and our own forward integrated marketing into the biggest markets in the world.
With this, I would like to turn it over to Jitendra, our CFO, who will give you an update on the financials before we can take your Q&A. Thank you.
Thank you, sir. Let me start with the financial highlights for Q4 followed by FY '22. Operating revenue was at INR 418 crores, an increase of 26.6% compared with INR 330 crores last year. Gross profit was at INR 206 crores in Q4 of FY '22, increasing by 1.5% year-on-year. Gross margin stood at 49.4% in Q4 of FY '22. EBITDA was INR 63.6 crores. EBITDA decline was due to continued input cost headwinds and elevated freight and packaging material costs. Our depreciation increased on Ind AS 116 series accounting. We have taken a few large warehouses in U.S. and U.K. on lease and have created a lease liability and right of usage -- use of assets, providing for additional depreciation of INR 12 crores in Q4 of FY '22 with a total depreciation charge of INR 21 crores in the Q4. Our profit before tax was at INR 52.6 crores. The profit after tax was INR 29.7 crore for the quarter. There was a consolidated tax provision. The consolidated tax provision included a deferred tax provision of INR 7.8 crores on account of capital leases, property and equipment.
Summarizing our FY '22 results our revenue was at INR 1,490 crores, representing a growth of 8.3% as compared to FY '21. From a geography perspective, U.S. North America was the highest contributor at INR 635 crores, witnessing 8.5% growth from the year FY '21. EU and U.K. formulation market recorded 4.7% growth at INR 609 crores. Australia, New Zealand formulation market recorded 22.9% growth at INR 179.8 crores, whereas the Rest Of World recorded 7.3% increase in the sales to INR 66.9 crores in FY '22.
The gross profit was at INR 774 crores in FY '22 compared to INR 781 crores last year. EBITDA was at INR 258.9 crores as compared to INR 339 crores in FY '21. EBITDA margin was at 17.4% in FY '22 as against 24.7% in FY '21. PAT stood at INR 186.8 crores in FY '22. The EPS for the year stood at INR 4.51. We continue to invest in capacity expansion with our CapEx being at INR 46.3 crores in FY '22. Our R&D spend in the year was INR 30.2 crores. That is around 2% of the sales, and we expect R&D spend to increase to 4% to 5% of sales over the next few years. We launched 12 new products in U.K. region and 3 new products in the U.S. Our pipeline for next 3 years remains healthy with more than 76 products out of which 34 products are in U.K., 32 in U.S. and 10 are in Australia and New Zealand. In the U.K., out of the 34 products in pipeline, 8 of them are planned to file in FY '23. In addition to these products, 16 products are already filed and awaiting approval in U.K. markets.
Talking about the U.S. region, out of the 32 products in pipeline, 27 are in OTC and 5 are in Rx. We continue to remain debt free and our cash and cash equivalent in the books was at INR 349.3 crores. We have seen continued increase in input cost pressure during the last year. Given the current uncertain macro outlook, we remain a bit cautious. However, we are positive about the business prospects over the medium to long term.
With that, I would like to now open the floor to question and answer. Thank you.
[Operator Instructions] The first question is from the line of Vijay Nah, individual investor.
Congratulations for the [indiscernible] despite a lot of challenges. But I'd like to know is, what were the challenges which have affected the cost, and which of these cost increase have been passed on to the consumers, such as logistics, the raw material price increase and the effect of the China lockdown?
This is Mark Saldanha. So the challenges that we've explained are multifold. One is, obviously, the China lockdown which has a cascading impact on all input cost of raw materials, excipients, chemicals that go in to manufacturing of products. With the war in Ukraine and all these embargoes happening in Russia, obviously, the oil prices are not getting any cheaper. So this has basically had an impact on freight cost, which has gone up tremendously. And obviously, any items which are derived from oil derivates have also increased, a lot of our packaging cost has increased. So overall input cost on to our product has gone up.
We are working into basically passing on whatever cost we can with the price increase to our customers. But that said and done, while last year was more of a pandemic status quo, today -- this year the world is just coming out of a pandemic. So there has been a correction in distribution channels in certain markets -- in our key markets. And this basically, when there's a change in the distribution channel and inventory depletion is happening, pricing pressure is also there from -- because there's more of supply and less of demand. Definitely, there is pricing pressure that one has to take into account. But that said, 2022 has been a challenging year for different reasons than 2021. But all said and done, we have kept our market share. We are growing in terms of sales and in terms of our revenue. There has been pricing pressure on the bottom line, but we are still holding strong in certain other areas.
The next question is from the line of Rajiv Rupani, individual investor.
My question was on the warrants issue to OrbiMed and to you, Mr. Mark. So the amount to be raised was INR 93 crores, and it goes on 20 July '21. So almost a year has passed. So when do you propose to pay the full amount and convert the warrants into shares?
Sir, the warrant -- at the time of warrant issuance, the 25% money we have received upfront. Now warrant is convertible anytime in the next 18 months' time. So in terms of the fund requirements, like we have completed one acquisition in Dubai. We are looking at like a few more opportunities, and we do have a CapEx plan also. So exactly in terms of the time lines, we are looking at somewhere in this year, the conversion will happen and the balance money will come in.
So even if the share price is below the conversion rate, the warrants will be converted into shares. Am I correct? Am I reading this correct?
Yes, that is correct.
My next question is you had guided for INR 2,000 crore revenue target in the next few years. So how much time, is it one year, 2 year, 3 year, 4-year, 5 years? But when will you reach the target?
So we have present -- we have always projected that within the next 3 years, we will touch -- we are on part of touching INR 2,000 crores, and we are pretty much on target.
Okay, and the next question is, earlier, you had guided for EBITDA margin of 23% to 25%. And this in Q4, our EBITDA margin was 15%. So going forward, in the next year, due to the challenges, will our EBITDA margin be 15%, 17% totally?
See, for the current year, looking at the existing scenario, definitely, the margins are under pressure. The input costs have not started coming down as yet, though they have stabilized a bit, but still they are on a higher side. Similarly, on freight costs also we are not seeing any reduction -- immediate reduction. So we believe that this year, the EBITDA margin pressure will continue, and we are expecting the EBITDA in the range of 17% to 20%. The FY '22 overall EBITDA was 17.4% and we expect EBITDA to remain between 17% to 20% of this year.
And my next question is your plan to incur a CapEx of INR 200 crores and CapEx already incurred is INR 46 crores. So as we've talked about backward integration and manufacturing our own APIs. So the current CapEx of INR 46 crores, is it for APIs and the balance amount will be for our own APIs? And then by when do you propose to do this?
The INR 46 crore CapEx was mainly to formulation manufacturing facilities across the company. So we have 3 plants: 1 in India, 1 in U.K. and in U.S. The API CapEx basically is planned. And the INR 200 crore CapEx plan basically will have both formulation, as well as API capabilities. And it will basically -- like we are in the process of like identifying various targets basically, so far as the formulation manufacturing capacities are concerned. So we are looking at acquisitions. And this money will go towards that -- mainly towards that.
And the last question. Will we be debt free going forward for the next 2, 3, 4 years?
See, we are not averse to debt. We are debt-free as of now. I think with the kind of overall cash integration and cash in the books, there is no need for immediate debt. So we don't plan to raise debt in the short term. But in longer term, we may have some debt in the book. But again, like we basically don't plan to go, say, beyond one EBITDA at any given point of time. But there are no short-term plans for raising debt.
The next question is from the line of Piyush Oswal from Piyush Oswal and Associates.
Congratulations on the wonderful performance. I just wanted a clarification on the credit receivables are constantly increasing. Any specific reasons for that?
So the receivables have increased during the year, basically, which is in line with the increase in the sales. And we have also, like in certain geographies, a few customers, we have increased the credit period due to the current -- the market situation out there. But the overall average receivable levels are around 90 days, which are in line with the overall industry standards. And we are regularly monitoring the levels. We don't see this to further increase.
[Operator Instructions] The next question is from the line of Manoj Matthew Jacob, individual investor.
Congratulations to the team. My first question is recently in the paper, it appeared that Marksans had acquired some land in Madhya Pradesh for setting up a factory, is that true? And second, what about the API because after the 2020 results, I remember Mark saying that we'll be setting up the API within 2 years map or within 18 months. So if you look from 2020 March, it's now almost 2 years.
So just to answer your first question on Madhya Pradesh, yes, we have applied for allocation of land out there in Madhya Pradesh, so that's true. That's again a greenfield project that we are exploring. With regards to API, we have started working on R&D and our own DMS in terms of multiple products, really 6 or 7 of them are actually working. Our aim was to do inorganic strategy but identifying companies and just working on valuations of those targeted companies was taking a bit longer. 2020, obviously, API had -- API companies had crazy valuations. So consummating or finding the right partner was a bit difficult. Now that the reality has seeped into 2021 and '22, we are still exploring that. Nothing concrete has come on to that, but at the same time, we are working on organic strategies and R&D is near completed on quite a few products and we are hopeful that in -- by the end of 2022, we may have few DMS file with our own API.
With your own API, so it's inorganic?
Right now, it's organic. But inorganic, if anything comes through, then you will be -- I mean, everyone will going to be the first to know.
Okay. And second -- the last question may I. You have taken additional lease capacity in U.S. and U.K. That means you plan to stock more over there.
Yes, these are the warehouses, which we are using to keep our stocks.
No. Apart from existing warehouses, you plan to stock more by taking new warehouses. Am I right?
Yes, that is because of our increased demand and the inventory cycles servicing our customers. And again, the ways in terms of COVID that comes, go. So we're just trying to preempt and ensure we have enough of stock. The logistic time lines have gone crazy earlier, shipments from India to U.S. for 21 days, today it's about 60 days. So this has prompted us to have better inventory out there to avoid any stock out positions.
[Operator Instructions] The next question is from the line of Shatayram, individual investor.
I have 2 questions. One is the access health care that you are in the process of acquiring, if you can slightly elaborate on what is our plan with the targetization.
The second one is API, you are planning for core molecules. How many you can say that core molecules built on the current business? These are the 2 questions.
So the acquisition in Dubai, basically, it's a virtual company, marketing solid oil, I mean formations basically in UAE. We are looking at Dubai as a port of entry into Middle East. So we have a few geographies that we will be expanding from this base and moving on. Again, this is a very niche therapy, but we do see a lot of value addition coming there into such arenas, wherever the disease niche. Dubai basically for us is a platform for distribution in the Middle East.
The next question is from the line of Manoj Matthew Jacob, an individual investor.
Mark, I remember one more that you had said that in 2023 or 2024, Marksans will have a unique product, which is maybe second in India to international markets.
Would you repeat that? Unique product or...
Unique product for either U.S. or U.K. market, which will be the second company in India to offer that.
So I don't recap that statement per se.
It might be the loratadine software. We have a couple of products.
We have a couple of products where we are first to file uniquely positioned in terms of being the only generic item in the U.S. But these are pretty niche molecules, but it gives us a space and identity to be created. We are working on one more molecule which, again, hopefully, 2024, should see the light. But again, we are basically into a generic phase. We don't do our own NDA. So we are into a generic space, but we try to basically identify molecules where we could have that early launch and early time scales from that angle. But again, we are not into drug discovery or basic research to come up with anything which is patented as of today.
The next question is from the line of Yogesh from Arian Capital Markets.
My first question is on depreciation, if I would have missed it in the earlier call. So it's -- it has -- depreciation and commodization has increased by about 100% to INR 21 crores for the quarter. So just wanted to understand that. And would this be the run rate going forward quarterly?
Yogesh, this is Jitendra here. So as I mentioned in my opening remarks, actually, we have adopted Ind AS 116 while consolidating the U.S. and U.K. balance sheets into the Indian parent company balance sheet. So we have taken warehouses in these geographies, wherein we have provided for lease liability and a corresponding right-of-use assets. So in Q4, we basically provided for the depreciation for the whole year on these assets. So basically, there was an increase of INR 12 crores in depreciation figure. Now in the current year, it will basically come as a quarterly charge of INR 3 crores every year. So definitely, the depreciation will increase, but not to this extent.
And just wanted to ask on the finance. So that has also increased on a quarterly basis at -- from INR 1 crore to approximately INR 5 crores. So what would be driving that number?
Which cost?
The finance cost is about INR 5 crores for Q4 versus INR 1 crore in Q3. So -- and it was even like INR 3.10 crores in last year's Q4 FY '21. So the increase in finance costs, what would be driving that?
See, the finance cost basically includes -- we have a working capital facility, though we don't use it. But then we keep paying, like, say, the processing charges. We opened a lot of LC, so LC opening charges we paid to the banks. Since we are not utilizing the limits, we have to pay some commitment charges to the banks also. So basically, the finance cost includes all these bank charges. And we also have a preference shares of INR 5 crores, where we pay dividend. So that dividend amount gets into the finance charges.
Sure. And one on the inventory days. So for FY '22, there has been a jump in inventory days or more about 95 days, it was around 80 days a year. So any factors deriving that jump in the inventory days for FY '22? Sorry, not in the -- sorry, not the inventory, debtor day.
Yes, debtor day has gone up. As I told earlier, basically, it is mainly on account of increase in sales and also on account of increase in credit period to a few customers in the U.S. and in the U.K. We don't expect it to go further, and I think it will remain around 90 days in coming quarters.
Sure. And what would be the percentage price erosion in Q4 for the U.S. business approximate?
See, the overall price erosion for the year, we can say, is in single high digit number.
And one on -- so it's like you mentioned about the conflict in Ukraine, Russia driving the community on the prices. But will that impact mainly come in Q1 because the crude oil actually started coming up in late March and will the major impact come in Q1 FY '23 on raw material?
No, impact already there. See, there is no further increase as such. The input costs and freight costs are increased throughout the last year -- throughout FY '22 the cost was on a higher side only. And I think in the current year, we will have -- we will -- we are seeing the similar prices. We are not seeing any further increase, but then the prices which have gone up have not started coming down as yet. So we see the existing prices to stabilize, and they will remain on a higher side, but we don't expect further increase in these prices.
So the gross profit margin would be in the 50% range. It was like 53% in Q3, and now comes down around 49.5%. So would be in that range, first year -- the first half of '23, around 50%?
Yes, see, we are expecting the gross margin in FY '23 in the range of 50% to 52% -- between 50% to 52%.
And lastly, one on the effective tax rate. So there has been a jump like from 20% to 43%. So what would be that component, the increase in the effective tax rate?
See the effective tax rate on consolidated accounts was around 24.5% in FY '22. And there was an increase because of provision of deferred taxation on account of capital leases, and that amount was around INR 7.8 crores. So in the current year, we see the effective tax rate to remain in the range of 22% to 24%.
And lastly, on the -- one more on the cost raw material front. So we understand that paracetamol-related products are your major costs. So there are news there that there were some Chinese manufacturers who have restarted paracetamol-related products. So will that affect the prices? Will it lower the prices for this raw material?
Yes. We're hoping for the best now. But even for it to have any corrections, at least for the first 6 months, we don't foresee any difference. And we -- as a formulator, we need to keep inventory. So we already have a lot of raw material in transit or in stock with us, which will last us for another 5 to 6 months. So effectively, we don't see the prices correcting within the next 6 months, but we are hoping for the best.
Sure. And lastly, on the product launches. So as we know that there has been this pricing pressure in U.S. So one of the strategy would be to launch products. So if I take around high single digit of 8%, 9% price erosion in FY '23. So what would be the target product launches in U.S. which can offset this price erosion to so that the U.S. market can grow in FY '23 for our company.
Well, there are multiple things that look at the challenges to overcome price erosion but U.S. approval first has to come with, obviously, FDA approving your product. That becomes the first benchmark to get their product into the U.S. market. And once it's approved, then we can talk about the launch. And again, then after that, getting market share into a market which is consolidating due to the distribution channel deflating. So challenges are there, but we are optimistic. We have, over a period of time, gain that market identity and reliability in terms of prime manufacturer and some marketer of products in the U.S.
So we work pretty much on a daily basis, on a monthly basis to penetrate the market and to get market share. And hopefully, once the product gets approved by FDA, we do aggressively try to get market share of that particular molecule that gets approved. So as and when new products come in, we definitely see a growth in terms of revenue happening. The bottom line pressure is a different issue. The bottom line pressure is always going to be based on input costs. But definitely, the sales pressure -- in the sales point of view, we do see a growth happening year-on-year and moving forward.
So Yogesh, we are expecting 3 to 4 new launches in the U.S. in this year.
[Operator Instructions] The next question is from the line of Venkatesh Sethuraman from Wind Horse Capital.
I have 2 questions. One, given how strong OrbiMed as an investor is in the health care space. Have -- has having them as an investor in Marksans help you in any way in either understanding the market or looking at the opportunities for both organic as well as inorganic? And what sort of expertise they have provided to help you? That's one question.
The second is without getting into specifics, without divulging anything that's nonpublic, would you be able to give us an idea of what the KPIs were when they came in as an investor, where you have gone off that and what sort of corrective actions you are taking to get back on track?
Yes, sorry, I didn't get a second question. Could you repeat the second question?
Yes. The second question is, when you are soliciting investment from OrbiMed you would have made a pitch to them, and you would have given them some kind of an understanding of where the business is going, and on the basis of which they would have made the investment decision. Now where have you gone right? Where have you gone wrong? Where are you off track to what you promised them? And if you're off track and what corrective actions you have taken? And if you're on the right track then what are the things that are going right for you? And as I mentioned, I am not looking for anything that's not public.
Okay. So with regards to OrbiMed we have very good meetings with them periodically, monthly, quarterly. And I do believe their understanding of this space of pharmaceutical is great. We had a tremendous value in terms of identifying targets and very fruitful discussions on their expertise and experience that they've, be it in as investors in this industry. They are working closely with us in identifying potential targets, but it takes time in terms of going through the entire process. So I do see a lot of value addition, both tangible and intangible being done by OrbiMed. So they are a fantastic investor from that point of view.
Just to answer your second question, we are pretty much on track on whatever we have committed publicly. I've always mentioned a INR 2,000 crore target, and we are pretty much hitting that objectives. And the only difference that if I could put any difference is obviously the bottom line expectation, and that is something like a force majeure where you have COVID, you have war happening, you have certain things which are beyond your control. And this is more of a global phenomenon than a company specific phenomenon.
And in terms of out-of-box thinking, corrective actions, whatever we can do within our purview, we are working on it. But whatever we have publicly mentioned in terms of both organic and inorganic strategies we are pursuing it, and we are seeing some traction, some advancement out there. But all these take some time to actually come into play, but we are quite happy with the progress, and I'm sure they should be happy. I can't speak for them. But they have a visibility on our -- quarter-to-quarter, they have a board member on the company. So they are quite interactive and they are quite involved into what we do. So I'm sure they're happy with what they see.
[Operator Instructions] The next question is from the line of Rajiv Rupani, an individual investor.
The company that we acquired in Dubai. So what was the acquisition cost, one? And how much will it add to our top line in the, let's say, in the next 3 to 4 years?
We have acquired this company for a cash consideration of AED 13 million. In terms of rupee, it will come to somewhere around INR 27 crores, INR 28 crores. The existing revenue of the company is around AED 14 million, so we have acquired them at almost around one time sales. In terms of where it can go in the next 3 to 4 years, like, of course, we are very excited with the prospects of this company, this business coming into Marksans fold. We do see a lot of potential of growth here. And we still -- we are very confident that we will see -- we will take this company to double the revenue over, say, next 2 years' time once we take over the charge of the company.
Okay. And again, a question on the warrants. So why doesn't -- why doesn't -- why don't you Mark and OrbiMed convert the warrants into sales now because only 6 months are left, irrespective you do acquisition or not or the acquisition is delayed by some time?
Again, this borrowings as -- obviously, we have a gestation period of 18 months from the date of -- that it was applied. As of today, the company does not need the funds presently. We already are sitting on a war chest, which we are using for acquisitions. And we do believe within the period of that 18 months because obviously, we don't want to request for funds too early, it may not be fair even to OrbiMed. But as and when it closer to the due date, the funds will be put -- the subscription would be completed. And in case there's an acquisition that happens and we need to ensure that we have to get the funds earlier, then we would obviously make a request, the company will make a request to convert it earlier, and it will probably have another time based on the company's need for cash to call for the funds.
And my last question, don't you think the dividend decline is too poor?
In today's challenging scenarios, we are slowly working on improvement. We are -- this is a trend that we would like to eventually keep increasing. We are quite optimistic in the future. But today's scenario, I think it is based on various other calculations that have taken into consideration that we arrived at that dividend.
[Operator Instructions] As there are no further questions from the participants, I would now like to hand the conference over to the management for closing comments.
Thank you, everyone, for taking your time off and getting on to our call. The management is always committed as always, and I hope we've met with your expectation. And please be safe and be well. Thank you very much.
Thank you. Ladies and gentlemen, on behalf of ICICI Securities, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.