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Neuland Laboratories Ltd
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Ladies and gentlemen, good day and welcome to Neuland Laboratories Limited Q1 FY '23 Earnings Conference Call. [Operator Instructions]
I now hand the conference over to Mr. Diwakar Pingle from Ernst & Young. Thank you, and over to you, sir.
Thank you, Sandy. Good evening friends. We welcome you to the Q1 FY '23 earnings call of Neuland Laboratories Limited. To take us through the results and to answer your questions, we have with us the top management from Neuland represented by Sucheth Davuluri, Vice Chairman and CEO; Saharsh Davuluri, Vice Chairman and Managing Director; Deepak Gupta, the CFO; and Sajeev Emmanuel Medikonda, the Head, Corporate Planning and Strategy.
We will start the call with brief overview of the financials by Deepak and then Saharsh will give you a broad highlight of the business trends and what he is observing in the market and post this, we'll open it to the Q&A session, as with the standard safe harbor clause applies as we start the call.
With that said, I now hand over to Deepak. Over to you.
Yes, thank you very much, Diwakar, and a very good evening to all friends and very warm welcome to all of you for our Q1 FY '23 earnings call. I think that you must have seen the presentation which Diwakar was just mentioning about and those put on are despite right from now, which is uploaded both on BSE, as well as on NSE websites. As always, any comments on the content of this presentation, which we have sent will be highly appreciated and we'll do our best to give our additional data points, we can help you to analyze the data points much better. I'll briefly talk about the financials. The total income for this quarter is INR 221.7 crores as against the INR 202.9 crores in Q1 of FY '22.
While our performance has improved compared to the last year, we had expected to play better. Our EBITDA for the quarter was INR 29 crores, with EBITDA margins of 13.1%, was almost flat as we compare it to the previous year, which was 13.6 percentage and it is reduced by 230 points based on a sequential basis. I'd like to give you some context on the slight EBITDA margins on year-on-year basis. We continue to experience increased cost structure across the whole value chain, for example raw material cost, logistics, power and fuel costs et cetera.
Our external focus is more on education, excellence and also to optimize costs to ensure integration from our external events that we are facing. We have also witnessed high man power cost and other costs arising mostly from Unit 3 commercialization that we did earlier. We continue to maintain high levels of inventory to avoid any future possible disruption due to disruptions which are happening globally as of now. I'd like to share that our focus on improving the business has also led to increase in the gross margins.
Gross margin was 46.1% in Q1 of FY '23 as compared to 41.5% in the last quarter and also [ 42.4% ] on Q1 of FY '22. Also we expect this shift in portfolio to continue to drive higher gross margin. Profit after tax was at INR 9.8 crores as compared to INR 8.6 crores last year. This quarter EPS is at INR 7.7. In terms of cash and cash equivalents as on the date of the balance sheet, which is June end, it is at INR 18.1 crores. We continue to make investments in the future and also for the CapEx we have spent around INR 50 crores in Q1 of FY '23. And also if you talk about the CapEx plan, it is on track and with greater commercialization of products which is happening and also for the future commercial prospects, we expect that CMS segment will perform well and it will also help us to improve our future realization as well.
I'd like to mention that even though we have done substantial CapEx to date, our net gearing ratio continues to be low. So as of now, it is at 0.2x.
With that, I would like to hand over the call to Mr. Saharsh for his remarks and thank you very much.
Thanks, Deepak. Good evening, everyone, just like to add a few comments on top of what Deepak has already said and then maybe we can open it up for Q&A. In terms with the brand business, we did have a very muted quarter. We've done well in products like Levofloxacin, Ciprofloxacin, Sotalol, but I think the product which has been our largest in the brand segment Levetiracetam, which has been doing well for us historically. We've had challenges in this quarter. We believe that this is also because of limited customer off take, partly because of high inventories. We expect that volume should recover in the coming quarters based on what we've seen historically with the product like this.
On the specialty side, we've recorded good growth, which is very encouraging, products like [indiscernible], Sotalol, Mirtazapine and Paliperidone have done well for us and that is something we are excited about. These have also helped us maintain healthy gross margins. With regards to CMS, we've clocked around INR 69 crores, which is a growth of over 50% year-on-year basis. Here, I'd like to point out that our CMS pipeline is growing strongly with the number of molecules moving to commercial stage. We've seen traction across the clinical life cycle. We've also added 3 new projects in the early stages of the quarter. We've also seen an exclusive development product for a customer both commercial this quarter. The cumulative impact of the developments lead us to believe that they are half injured for higher and mostly CMS revenues in the future.
In terms of the business we've already mentioned, we're working closely with a lot of biotech companies many of them are US based and our ability to complete challenging late-scale products is what sets us apart and establishes us a highly regarded CMO. As a result, we've been putting a lot of effort into accelerating the completion of our project and although we have been making steady progress over the past several months, we do continue to take delays in execution for a variety of reasons. Our customers do understand and comprehend the complexity of this project and they continue to be very supportive of us as we work towards scaling on these new chemical entities.
I'd like to also say that Unit 3 is scaling up successfully, some of our important late-stage CMS projects are also being ramped up over there as we can see. As these products came up, Unit 3 usage has also been rising up rapidly and consequently as Deepak has also remarked, Unit 3 has also contributed to rising operational expenses. We also continue to see good traction with both GDS and CMS customers that could help us drive growth in long term. The potential for the CMS project, especially in Unit 3 for both development and commercial which have been evident in the revenue this quarter as well as for specialty GDS business, gives us the confidence that the long-term business prospects remain intact. And while the results of the quarter have not been encouraging, we expect to be back on track for growth this year. We have some of our partners that I wanted to share, maybe we can now open it up for Q&A and Diwakar and then we'll be happy to answer more questions. Thanks.
[Operator Instructions] The first question is from the line of [ Keshav ] from RakSan Investors.
Sir, in our presentation, we mentioned about delays arising in CMS due to technical complexities. Can you shed some light on the same, what challenges we are facing over there? And has that led to any delays in delivery from our end?
Yes, thanks for your question. I think the complexities are quite varied, I think as the molecules we are scaling up our APIs in Phase III going into commercialization and typically, when we are scaling up these molecules, there are lot of restriction in terms of our ability to treat the process. There are lot of descriptions on what kind of analytical method can be used. There are lot of restrictions on specification, there are also restrictions on what kind of documentation is needed, what kind of data needs to be generated. So when we are scaling up these molecules, there are several restrictions that apply towards the scale-up. And obviously, the scale-up is also successful when we are able to achieve the yields and the costs that are targeted in the project.
So sometimes when we are scaling up these kind of molecules, we are also referring to the original process that maybe the innovator may have developed and sometimes there are minor variations that might come out between the process that we are scaling up versus what the innovator may have originally designed. So these result in certain challenges either on the chemistry side or on the analytical side or on the engineering side. And those are things that sometimes require us to pause the project, go back to the lab, do some studies and then come back and implement it. And sometimes, they could add to delays and in a project that is like a Phase III API or a new API that is going into validation, a difficult project from start to finish takes a year.
And these kind of challenges could potentially add several weeks to the delay. So these are just broadly some of the challenges we face in the API scale-up space, particularly from a CMS perspective.
But, sir, there's no delay in delivery process, right, because they are pretty time-critical molecules.
Could you repeat that question?
So we haven't faced any delays in delivery of the product, right, it's just at the lab end we are facing some complexities because for Phase 3 I reckon may be time critical they require it at a particular time. This will eventually lead to delaying delivery of the material also because when you are having to go back to the drawing board or you're having to go back to the lab, you are actually pausing the campaign in the plant. And once you fix it, then you go back to the plant, so typically it will result in a delay in the campaign.
And I think that's -- absolutely, there will be a delay in the campaign, but at the same time, as you probably know, our customer priority is, their programs, their projects are also undergoing change based on the priority. So what we're ensuring that delays from our end are really not impacting the time lines of our customers, but we're going to make sure that we adjust ourselves to still keep the customer programs on schedule and that is where we've been successful.
The next question is from the line of [ Subramaniam K from Alpha Invesco. ]
Sir, I wanted to understand about the CMS segment. Overall, we had a more than 50% growth year-over-year for this particular quarter. And in the commercial segment, we had almost doubled. And in the development, we had almost a 30% increase in revenue. Sir, can you break down how the growth will be in the each segment? And what's the margin in the each segment?
So I think broadly your analysis as it reflects the growth has come in the overall CMS business, it has come both from the baseline business, as well as from the development business. I think the baseline business is driven by one of our CMS molecules that has been doing well over the last year or 2 and I think the volumes are continuing to increase. There are multiple products in the baseline, but the growth has been driven by one particular molecule.
On the development side, there have been multiple molecules, as we've been mentioning in our comments over the past several quarters, there are several molecules that Neuland is actually going through Phase 3 into commercialization, some of these molecules are going through various phases. And whatever revenues we are recognizing in those projects, which are not yet commercial, but are getting scaled up, those are categorized as development revenues. So it's not necessarily triggered by one molecule, but it is triggered by multiple molecules that are not yet commercial. And yes, so that's kind of how we would analyze the numbers.
Okay, sir. Okay. So regarding the margin, so whether the margin differs in the commercial and development?
So I think it's -- I think every molecule has a different margin profile to various dynamics, but broadly speaking, development projects tend to have higher margins than commercial molecules, but there are always different cases.
[Operator Instructions] The next question is from the line of [ Amey from Haitong. ]
I just have one question to the management. In the commercial side, we have added 3 new products, at least what you showed on the PPT. Is it possible for you to give further color on these 3 new projects on the commercial side?
So Amey, I think over the last one year as you rightly pointed out, that we added 3 products more in terms of development to commercial. Of them, I think 2 are entries where we are part of the NDA, we are part of the File D which one of -- which is anti [indiscernible] from each segment and we other -- broader therapy area. And the third molecule is something where we get custom development for a customer who is now commercialized the products with their set of customers. So these are the 3 molecules which I really talk about without giving of more information in line with [Technical Difficulty].
Just one follow-up, what are the time -- probably time line for the monetization from the commercial side?
I think the way we measure the business, Amey, is when we start calling it commercial, it means that the molecule we are -- the validation is over and we are ready to start commercial supplies. But as you know, in many of these molecules they have a life cycle, right? When in the early stages of commercialization, the volumes are typically low. After 1, 2 years, maybe they start picking up, years 3 to 5 is when they typically see. That's the only information we can give because each of these molecules has a different profile and we really don't have specific molecule level clarity, which we can share in terms of how they will grow. But once they become commercial, the idea is that the volumes will start picking up.
So these are recently approved molecules or these are molecules which were already approved, but we got the contract now?
So Such-ji told you about 3, 2 of them are new chemical entities, which have been recently approved. One is a older molecule for which Neuland has actually adapted technology and has scaled up. So 2 are new and 1 is old.
So at least that the older molecule, we should be able to get the sales up quickly, right, because it is a old molecule already market has...
We have an indication of how the volumes are likely to pan out. It's just that we would not -- going to product level explanation of how we expect the volumes to fare.
The next question is from the line of Ramesh, individual investor.
Can you hear me? Hello?
Yes, sir, we can hear you. Please proceed.
Yes, I have couple of questions. Number one is you're saying your CMS segment is growing, but if you see over the last 3 quarters, the CMS segment has not been growing at all, it has been coming down [ 20 ] years. If we see the growth as compared to last quarter, last year, last quarter, same time then it's probably mostly because of the base effect we had this each supply chain issue at that point of time.
So how do I read as an investor in terms of how it's growing in the sense there because the GDS is not growing, the CMS, as I see is not growing. So where is it -- I mean, as an investor, where do I look for actually in terms of the growth? I mean I understand CMS would -- should be a growing segment, but it's not so virtually. That's number one. Your debt moment are also -- I mean, I don't know, I would not use the word erratic, but the net debt movement also is completely like one quarter it goes up, the other quarter it goes down.
So I'm not able to fed them this figure also in terms of the net debt movements, it's [ 214 ] from March '20 and it has come down and then again it has gone to 212 and then again come back to 160 now. I think so I had asked you this question last quarter also that while the debt has gone up, now the debt has come down also and that's net debt, obviously, I'm not talking about the debt closely. So again, that's another question. And the last part is, how much depreciation of your third Unit plant is still pending for to be incorporated. So these are my 3 questions. Thank you.
Okay. Thanks for your questions, I'll answer the first one and then ask Deepak to answer the second and the third. I think with regards to your observation about the CMS business, I think it's absolutely valid. I think the business has been volatile in many ways. Yes, with regards to Q1 of FY '22, it is showing 50% growth, but if you sequentially look at the last 4 or 5 quarters, it actually doesn't indicate a growth not so consistently at least. I think the way I would look at it or rather explain it is, our CMS business comprises of both baseline business, as well as a development business.
Today, Neuland is kind of in a phase where we are moving from development projects and we are moving our development projects into commercial projects. So as Sajeev had answered to the gentlemen earlier also, we had talked about some molecules which have been commercialized in the last one year. They are molecules which are likely to be commercialized in the next 12 months as well. These molecules are not yet consistently on a quarter-on-quarter contributing to the baseline revenue of Neuland.
With regards to the development revenue, the development revenues are fairly volatile because depending on which quarter we execute a project, the revenues of that particular quarter go up or they don't go up. So we have been experiencing over the last 4, 5 quarters situation where we are converting development projects into commercial projects, commercialization has happened. More importantly, we are also executing and continuing to execute more development projects. So from a progress in point of view, we are seeing healthy progress in development projects. We are also seeing a good conversion of development projects into baseline projects and we are also seeing revenues from that. If you look at it from an average quarter-to-quarter basis, it does show inconsistency, but the way I would look at our CMS business is look at it from a fairly long perspective, look at it over a 15-quarter period.
And if you look at it over a 15, 20 quarter period, you would actually see that there is progression. And as I had also mentioned in the opening remarks, we are still in the early stages of our CMS business, where commercialization has still not happened yet. And as and when more molecules get commercialized, that's when we will actually start seeing more consistent performance in terms of the revenue.
So I think that's kind of how we would look at it. If you look at it from a slightly broader horizon like 3 to 4 years, you will be able to see growth. You will also be able to see from the disclosures we've made that the number of projects have been consistently increasing. You will also see that molecules have been consistently moving from development to commercialization and we have been very consistent in what we have been sharing.
I think at this point of time, that's the only information I think we can share. And I think our expectation is that this part will take us towards higher growth in CMS. So I think that's how I would look at it and maybe I'll ask Deepak to answer the second question.
With respect to the net debt, so, yes, it has substantially come down from INR 212 crores to INR 160 crores. So this is because of better cash flow that we have generated in this quarter, mainly coming from higher valuation from the debtor, as well as we have received advances from the customer for certain CMS project. So overall, we have repaid more than INR 45 crores to INR 50 crores debt back to the lenders, so this has helped us to improve, basically the improved leverage that we have taken it. So that is with respect to the debt.
And with respect to your second question about how much is the remaining [ USD ] asset that needs to be depreciated. So as of June end, roughly around INR 225 crore of block needs to be depreciated over a few years' time, definitely, it's like spread across 7 years from now. So still really new in our portfolio and we see that investments happening in the last couple of years [indiscernible], so still INR 225-odd crores needs to be depreciated over the [indiscernible].
[Operator Instructions] The next question is from the line of Keval Ashar from DSP Investment Managers.
Hello, am I audible?
Yes, sir, you are audible.
So just a few questions. So first is, sir, you've mentioned that in FY '22 Annual Report that you will be also focusing on GDS segment for the growth this year. But this quarter, we are under performing GDS, so sir just wanted to understand, have you lost any customer or there were delays in the orders for us?
So I think, Keval, to answer your question that it comes to the GDS business, overall, it is more in terms of certain customer products, we do not -- we see that they have issues in terms of that inventory, but we do not -- we have not lost any customers. We see the -- their interest in the products like even as Saharsh has mentioned during his opening comment, even though levetiracetam do well this quarter. But over a period of time, we see that there are orders and our customers lead the product, I think with respect to this quarter, a product where we do, but we see that coming back.
And over a period time, we see that we give -- each specialty products will also do well and we are quite excited about the products which Saharsh had mentioned with you is Apixaban and Paliperidone Palmitate, as well as [indiscernible] which are doing very well that we have seen customers do launches for novel forms. So I think overall, the GDS business is expected to grow, but I think this quarter declined around 7%, but that was basically because of the reasons which are more with respect to timing.
Okay, sir. Understood. The next question is that if I heard it right, you mentioned that we need INR 50 crores of expenditure in quarter one. So what was the expenditure for? Second is, the total expenditure we've done in Unit 3 till now and the third is how much CapEx are we doing this year and in coming years, how much CapEx year-on-year do we plan to do?
Deepak?
So in this quarter, we have done a CapEx investment of INR 15 crores and Unit 3 out of this INR 15 crores is roughly around INR 2 crores, that is your current question. And with respect to how much CapEx we'll do? So we'll stick to what we said earlier like this year we'll be spending close to INR 70 crores to INR 80 crores in the CapEx investment for the full year. So out of that INR 15 crore is already kind of taken care in this quarter.
Understood, sir. Understood, understood. And another question is, sir, you mentioned, Saharsh, specifically you mentioned that now we are in a growth trajectory, we plan to grow this year as well. So sir, last year, we had a base of INR 951 crores of top line in FY '22. So this year, if you can give any guidance for the growth in top line in FY '23.
So I think the -- Keval, I think what we have said in the past and over a period of time, I think we have targeted around 15%, maybe 15% to 20% of average growth over a period of time. I think, we have also observed that over FY '21 and FY '22, we have actually stagnated, we have not grown at all. I think the comment I was making, I think is really to indicate that the way things are shaping up and I think the way this year is and how the future is, having the data all these metrics on the CMS and GDS side, we expect to get back on track with regards to that growth path that we have been talking about.
But I think having said that, as you know, we don't give guidance, so we've not really be in a position to give guidance either for FY '23 or for the near term. But I think at least we see that the period of stagnation that we went through, we will break away from that and we should get back on track for growth. I think that's kind of how we would clarify that.
Okay. Got it, sir. Got it. And the last question from my side is that since, sir, you mentioned that 15% growth we target in medium-term, so CMS given the lower base compared to our other 2 segments as a percentage of revenue. So if we grow our overall revenue at 15% at what rate do we expect CMS to grow in mid-term, sir?
So I think CMS being the smaller business, I mean it contributes to only about 30% of our overall revenue. I think it's growth is expected to be at a higher rate. But we really would not be able to give you any kind of a breakdown. I think mathematically, it will grow at a higher rate than what the average growth rate of the organization is going to be. But we don't want to give more color to it than that.
The next question is from the line of Aditya Khemka from InCred PMS.
Sir, I understand the gross margins this year, obviously about this quarter, obviously, you had a favorable mix, you had more contribution from CMS relatively versus GDS. But can you talk a little bit about your input costs, how they have behaved quarterly, let's say, 4Q '22 versus 1Q '23, are you seeing some cool-off in the spot prices, how much inventory of high-priced raw material do you have? And when does the lower spot price raw material procurement translate to lower cost for you?
So Aditya, overall, it's no secret like on a input point of it investors are impacted by the sole...
Sorry to interrupt, sir, sir, your voice is not coming clear, please come closer to the instrument.
Is it better?
Yes, sir.
Okay. No, just saying that it's no secret that because of this whole Russia, Ukraine conflict is bringing a lot of volatility, especially in the pricing, not so much on the supply of raw materials. On a net basis, we estimated that the impact for this year alone was almost to the amount of about INR 45 crores, taking the spot prices into consideration. Notwithstanding that, we've taken lot of corrective and preventive measure, so that we can mitigate a lot of this impact by working with our customers, getting price increases wherever we can and also taking aggressive steps inside to reduce our cost. So our goal is and that's what we've said today in the release to our result as well that even though Q1 saw an impact of -- a significant impact from the pricing in spite of a favorable product mix, for the entire year, we do expect our performance to be as per expectation, so those are roughly the contrary that was going on.
Right, right. No, I get that, by only -- the only thing I wanted to understand was that are you seeing any decline in the raw material prices at the spot market? Or are the raw material prices still as elevated as they were at same 4Q?
See as of now like an even split we've seen softening of prices to certain solvents and certain raw materials, whereas for some of the other raw materials which has actually gone up. However, for the whole year compared to where we were at the beginning of the year, we still expect maybe a 20% to 25% softening of the prices.
Okay. And that's for all your raw materials as a basket, that 20% to 25% decline in prices?
Certainly.
Okay. And how much inventory of raw material do you normally maintain in your business across the 3 segments, which is specialty, prime and CMS?
About [ 20 billion ], I think that's how much [Technical Difficulty]
30 days.
30 days what we remain basically.
Okay. Understood. Now coming to the prime API segment, right? So in the prime products, you obviously mentioned a few products which did very well for you, but at a basket level, the prime did not do well for us. So can you name a couple of products which did not do well because they must have done really bad from the overall segment to decline despite some of your larger products doing well for you in the basket.
I think Saharsh mentioned this in his opening, but our biggest impact on the price segment was levetiracetam. Levetiracetam is also our largest product in the prime segment and that has what impacted our performance. We believe it's a combination of a reduction in demand, as well as some inventory buildup at our customers end. However, when they run the market for future requirement, we don't see any significant alarm. But as far as Q1 is concerned, the biggest impact was levetiracetam, followed by another product of ours called Mirtazapine, but we do see the demand coming up.
I think Mirtazapine has been -- our limited stem has been our largest product over the last 3, 4 years. And I think even a 15% decline in volumes on Mirtazapine actually has had an impact. So I think frankly speaking from GDS point of view, I think other than the hidden 11% which we believe and we hope is temporary, there is nothing else that causes concerns at this point of time.
Sorry to harp on this, but I have a follow-up on this. So levetiracetam the hit will be temporary only if it's driven by an inventory buildup at your customer level where he's sort of rationalizing this inventory. But if it's driven by competitors getting more aggressive or lower pricing and competitors gaining market share from you, then it may not reverse? My concern on levetiracetam is that DVs in their remarks historically have said that in this particular molecule, they have backward integrated a lot, they've increased their volume production. So you see my concern there, right? So which is why I'm sort of trying to get more sense from you as to whether levetiracetam volumes will ever bounce back? Or what are we perceiving as inventory correction is actually a shift in market share from us to our competitors?
Aditya, we think that see your concern is very similar to our concern as well. So our response is stemming from 2 factors and this doesn't take away from dilution. One is when we saw a decline in volume for levetiracetam, we got in touch with our customers, we pull the data from the market. We analyzed the market share of all the companies out there. We mapped it to the customers that are buying from us and customers that are buying from our competition. We look at the export data and we also got feedback from our customers, whether they have any incremental inventories or have they lost market share.
So our response is often stemming from a fairly detailed analysis from our end as to what's going on from this product and that with the primary response coming from. Notwithstanding that, your observation is absolutely right, levetiracetam is an extremely competitive API because of the share size of this API. Levetiracetam approximately is a 3,000 tonne API globally. And the good -- the bad part is that it's highly competitive. The good part is also that there is enough market out there for strong player such as Neuland, [ Reddy ] and a couple of others to gain market share as well.
So coming back to your point, there may be a decline in market share, you take a build-up of inventory, loss of market share, but our strategy over the medium and long term is to continue growing this product where we transfer all of our product, so whether you look at total in Levetiracetam, look at Levofloxacin, pretty much other APIs, they are interested to grow in volume this year that we took a beating in terms of market share and volume. But we have taken a call, reaffirm and then what is rest gain back the market share. We do the same for Levetiracetam, therefore I think your observation is absolutely right. We will see or we could see temporary setback in this molecule, but we will continue to gain market share on the long run.
And just to add to what Sucheth said, Aditya, I think it's a very dynamic market as it's not like we are waiting for the Levetiracetam business to unfold. We are also qualifying new customers. I mean, look, we are getting qualified by new customers as well. So some of these large formulation players who are very strong traditionally in Levetiracetam finished dosage, they have also been adding Neuland as an API over the last 3 months, 6 months, 12 months. So it's a very dynamic market. So it's not like we've made our best and now we are waiting for the cards to open. I think we keep getting qualified with new customers and we keep working on the process as well. And it's a very large market, no one, I believe, has more than 10% market share in the Levetiracetam business because it's a 3,000-tonne API. And even the largest players don't make more than 400, 500 tonne. So I think it's a big market. It's just important to be connected to the customers, be constantly looking at your process and be competitive.
And I think we do believe that we will bounce back, but we'll have to wait and see.
No, this is extremely helpful. Thank you so much for the color that you guys provided. Coming to the CMS business right? So if you -- so I see an expansion in the pipeline, at least in the development projects and your commercialized molecules. Can you divide your development projects into big pharma and mid and small pharma in terms of your clients? What would the split be? I mean I know you can't give me an exact number, but some sense, is it like 70% big or 70% small pharma, biotech, et cetera?
So I think we probably mentioned this in different context in our commentary, Aditya, but almost all of our business in CMS comes from small or small companies or what we call as biotech companies, so biopharmacist companies. So I think we have to categorize our top 3 segments within CMS, it would be U.S. based biotech companies, it would be European mid-size innovator companies and then it would be Japanese innovator companies, which includes Japanese big pharma.
So they are very few projects in our portfolio, which belong to big pharma. So I think that's -- I think that should give you enough color on what our pipeline is. So most of the molecules we are referencing belong to biotech companies, these are NASDAQ, you said USD 1 billion, USD 2 billion market cap companies with 1 or 2 products, that's the kind of portfolio of customers we work with.
Right. And while your number of projects have gone up, has the number of clients also gone up over the past 1 year in the development and commercial side?
Yes, so we saw null for the first half of the pandemic where we were not really able to add lot of projects. But I think over the last 6 months, we've added some interesting products, Phase 2, Phase 3 molecules, so the company has also been facilitated by their visits to our facilities and things like that. So I think things are coming back into normal. And in fact, we are also spending more or at least investing more in business development now. So we're adding more resources in business development, spending more on B2B marketing and things like that. So yes, so I think we expect the pipeline to strengthen now. It has already started in the last 6 months, but I think it will continue.
Right. And last question on your Unit 3. So I heard pre-operating expenses worth INR 225 crores yet to be depreciated, is that what I heard?
Yes, Aditya, that's right.
So INR 225 crores of pre-operating expenses, not fixed asset just to be depreciated, this is -- sorry?
For pre-op -- these are the -- this is a CapEx spend, which we have done which is yet to be appreciated, so [ WD ] of the assets which are there in the Unit 3.
Got it. Got it. And in terms of operating expenses, what would you need to be incurring annually right now?
So roughly around -- as of last year I see roughly around INR 60 crores of operating expenses.
INR 60 crores, yes, so roughly 30%. And then is Unit 3 at its current utilization breaking even for you, standalone as a facility?
It would break even in the current year as well.
Not yet.
Not yet.
So you expected break even in FY '23, is that what I heard?
That's correct.
Because everything that's being scaled up is getting scaled up in Unit 3.
Okay. Okay. So all your incremental volumes are essentially coming to Unit 3, that's how it would be break even. Got it. Sir, this is extremely helpful. Thank you for being so patient with me. Thanks for your answers.
The next question is from the line of [ P Suresh from Baram Financial. ]
Sir, good evening for the opportunity. Hello?
Yes, sir, we can hear you, yes, yes.
Good evening for the opportunity. Sir, CMS business, this financial year, how much stand-alone, how much revenue expectation? Hello?
So Suresh, we typically don't give any guidance on what we expect to do for the year.
Stand-alone on the CMS business?
Yes, so even the stand-alone CMS or for the overall business, we do not provide guidance on how much we expect to do.
We can get your comment in quarterly results presentation. The line up -- the full year is going to reach them a target. I mean last year, sales fees unexpected, sales will continue, we will give the good number in this financials.
So what we said, Suresh, is FY '21 and FY '22, we did not have growth, but in FY '23, we expect to have growth. So we should expect growth in FY '23.
Full-year '23 can expect it?
Yes.
Sir, profit margin and we increased the OPM profit margin this year increased percentage, around 20%?
See, again, we do not give guidance on that, but I think the one comment we will make is that, as you can see, because of the improvement of the business mix -- the gross margins are improving despite raw material challenges, our gross margins are improving. However, the EBITDA margin or the PBT has not improved in Q1 because the overall revenues have still not been at a critical threshold. And what we believe is that if we are able to bring back the growth, which we do believe will happen in FY '23, then the operating leverage should ensure that we will have much better profit margins than what we are currently seeing, both at a EBITDA level and at PBT level because what operating expenses we have incurred in Q1, they are likely to be more or less similar for Q2, Q3, Q4.
But if the revenues are going to grow, then the margins are likely to improve. So that is how I would explain it, but we will not be able to guide on what is the margin going to be.
Sir, any future fund raising plans or acquisitions and the facilities and your future clients, fund raising or any acquisitions or mergers any, planning, sir?
No, plans as of now, Suresh.
Right. These facilities is enough -- improving is that?
[indiscernible] more than adequate. For the next 2 years it should be more than adequate, sorry, Suresh, your voice not coming clearly, so we were trying our best to understand and answer those question.
This facility is enough for your growing business, this facility, present facility...
Adequate for the next, it will be adequate for the next couple of years. It also depends on what kind of growth we are going to achieve. If we are going to achieve growth that is going to be more faster than adequate then we may have to create more capacity, but Unit 3 has lot of capacity headroom for additional capacity creation. So we don't expect any challenges for the next 2 years at least.
The next question is from the line of Aditya Khemka from InCred PMS.
Yes, sorry, I had just one more question. The employee expense growth that I noticed sequentially fourth quarter versus the first, an incremental INR 3-odd crores in expenses. So just wanted to understand, is this additional manpower or is it incremental bonus payout this quarter?
So actually, it's a mix of both, so mostly coming from the performance pay that we had given to the employees. And also, we have added few headcounts in this quarter, but those are very small in number actually, mainly coming from maritime fee and operate -- count increase.
Were they bonus payouts also this quarter?
So bonus payout we are approaching over a 12-month period, so in respect to the payment we make our charge to the P&L on a monthly and a quarterly basis, so that won't impact the format.
And so this is going to be like the normalized run rate? There is no lumpiness in this expense, therefore?
Correct, correct.
Understood, thank you.
We'll take the next question as the last question from the line of Keval Ashar from DSP Investment Managers.
Yes, thanks for the follow-up, so just one question, sir. So how do the size of opportunity for us in [indiscernible]?
So I think we -- typically for the CMS molecules cable, we don't -- by the contract we have with our customers, we are not allowed to disclose the names or discuss the specifics of the molecule. So we will not be able to comment on any molecule, its growth prospects or anything about it, specifically in the CMS side because of the confidentiality agreements we have with the customer.
I now hand the conference over to management for closing comments.
We'd like to thank everyone for joining us on this call. Thanks for your interest in Neuland for the questions that you asked regarding performance and also regarding the potential of our business. I think we are -- we thank you once again for your participation in today's call. Thank you.
Thank you very much. On behalf of Neuland Laboratories, that concludes this conference. Thank you for joining us and you may now disconnect your lines.