Neuland Laboratories Ltd

NSE:NEULANDLAB

Earnings Call Analysis

Neuland Q2 FY24 Earnings: Strong Growth and Stability

Neuland Laboratories reported a total income of INR 20 crores for Q2 FY '24, marking a 43.2% increase, bolstered by CMS segment growth. EBITDA for the same quarter reached INR 140.3 crores, with a margin of 33.4%, up by 980 bps, reflecting high-margin CMS traction and rigorous cost optimization efforts. The company's gross margin improved to 59.8%, with net profits of INR 89.1 crores, and earnings per share at INR 69.4, thanks to a strategic focus on internal cash flow generation, resulting in H1 FY '24 free cash of 128.8 crores and a net debt position at a negative INR 39.4 crores. The growth narrative is supported by a robust development pipeline, particularly in later-stage Phase II projects, offsetting a slight drop in specialty revenues. Neuland emphasizes a customer-first strategy, aligning investments in operations and capabilities to bolster their market position amid a promising business outlook with a strong medium-to-long term pipeline.

Robust Growth and Profitability Amidst Market Volatility

The company delivered an impressive quarter, revealing a striking 43.2% increase in total income at INR 20 crores compared to the same period last year. This surge stemmed primarily from the Contract Manufacturing Services (CMS) segment, underscoring the company's years of strategic efforts. EBITDA soared to INR 140.3 crores, marking a significant margin expansion to 33.4%, a 980 basis points leap from Q2 FY '20. Such margin enhancement is attributed to the pivot towards the lucrative CMS business coupled with rigorous cost control measures. Gross margins climbed to 59.8%, a notable improvement year-over-year and sequentially from last quarter's earnings. Furthermore, the company's earnings per share (EPS) reached INR 69.4, as profit after tax almost doubled to INR 89.1 crores, reinforcing the company's burgeoning financial stature.

Achieving a Net Debt-Free Position Through Operational Efficiency

The focus on internal cash generation has fortified the company's balance sheet, reflected in the generated free cash flow of INR 128.8 crores for the first half of the fiscal year. The strategic debt reduction has resulted in the repayment of INR 17.3 crores in term loans, ultimately transitioning the company to a more-than-zero debt entity with a net debt position at negative INR 39.4 crores. Additionally, a reduction in the working capital cycle amplifies the company's refined operational execution.

Maintaining Equilibrium Between Growth and Profitability

The company has vigilantly balanced growth aspirations with profitability safeguards by persistently concentrating on cost efficiencies and smooth operational flows. This vigilant approach is poised to leverage opportunities that can pivot the company to larger scales over an extended timeline.

Strong Business Fundamentals with a Focus on Customer-Centric Innovation

Operations during the quarter proceeded without abnormal deviations, reflecting the soundness of the company's business model, which is oriented towards CMS and specialty Generics and Derivatives Strategy (GDS). With a track record of successful molecule commercializations and more prospects in the pipeline, the business exhibits resilience. Despite market funding challenges impacting some emerging projects, the company garners new customers with late-stage assets, projecting a robust pipeline and the anticipated commercialization of additional new chemical entities. The specialty segment showed promise with revenues from prominent molecules like paliperidone, and the growth trajectory appears promising for the upcoming horizons.

Investment in Future Growth with Consideration for Capital Expenditure

The management is intentional about optimizing cash reserves to support future growth endeavors. Regular capital expenditures are projected to hover around INR 100 crores to INR 120 crores, demonstrating the company's intent to sustain its developmental momentum. The CMS business has reportedly outperformed, which could recalibrate the revenue distribution between CMS and GDS, hinting at a potential 60-40 to 40-60 split moving forward.

Prospective Continuity and Expansion Capabilities

The company expects a recurrence in its business, with yearly orders being reasonably projected. Looking ahead, 2 to 3 molecules are anticipated to advance to commercial status within the next couple of years, enhancing the company's commercial footprint. Furthermore, there is an opportunity for capacity expansion at Unit 3, which has additional room for growth, bolstering the company's production capabilities.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Neuland Laboratories Limited Q2 FY '24 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ravi Daishi from EY. Thank you, and over to you, sir.

[Ravi Udeshi]

Thank you, Aman. Good evening, friends. We welcome you to the Q2 and H1 FY '24 Earnings Conference Call of Neuland Laboratories Limited. To take us through the results and to answer your questions, we have with us today the top management from Neuland Laboratories, represented by Mr. Sucheth Davuluri, Vice Chairman and CEO; Mr. Saharsh Davuluri, Vice Chairman and Managing Director; Mr. Abhijit Majumdar, CFO; and Mr. Sajeev Emmanuel Medikonda, Head, Corporate Planning and Strategy. We will start the call with a brief overview of the financials by Mr. Abhijit Majumdar and then Saharsh will review broad highlights of the business trends and what he is observing in the market. [Indiscernible] open up the call for the Q&A. As usual, the standard safe harbor clause applies as we start the call. With that said, I now hand over the floor to Abhijit. Over to you, Abhijit.

[Abhijit Majumdar, executive]

Yes. Thank you very much, Ravi, and a very good evening and warm welcome to you all for joining our Q2 and H1 FY '24 Earnings Call. I will briefly talk about the financial count. The total income for this quarter is INR 20 crores as against INR 2.93 in Q2, an increase of 43.2%. This was largely driven by growth in the CMS segment and reflects our efforts over the past several years. In comparison, our revenues in Q1 FY '24 was INR 65 crores. Our EBITDA for the quarter stood at INR 140.3 crores with an EBITDA margin of 33.4%, an increase of 980 bps over Q2 FY '20. The EBITDA margin has improved due to both a shift towards high-margin CMS business and a strong emphasis on cost optimization. This is in comparison to an EBITDA of INR 99.3 crores and an EBITDA margin of 27.2% in Q1 FY '24. I'd like to state that the overall operating environment still continues to be unpredictable. However, we have observed some stability in terms of input costs over the last 4 quarters. We have been able to effectively mitigate the unpredictability associated with input costs through diligent management of our operational costs. This strategic approach has strengthened our financial resilience and enabled us to navigate challenges more effectively. We remain committed to maintaining our dedication to operational efficiency and cost improvement programs to sustain our progress in this regard. As we have consistently said in our previous earnings call, please measure our performance over a yearly and a larger time horizon as our revenues and EBITDA margins will fluctuate on a quarter-on-quarter basis based on business mix, which is dependent on the order influence project execution. Now coming to specifics. Our gross margin was 59.8% in Q2 FY '24 compared to 56.2% in Q2 FY '23 and 55.2% in Q1 FY '24. This gross margin, as always, includes manufacturing and other costs directly attributable to the product. The profit after tax was INR 89.1 crores as compared to 38.3 crores in Q2 FY '23. This quarter's EPS is at INR 69.4 per share. On cash, we continue to focus on internal cash generation to gear ourselves to support future capital spends. We generated a free cash flow for H1 FY 128.8 crores. We have utilized part of this cash surplus to bring down our working capital debt to 0 and we paid INR 17.3 crores of term loans. Consequently, our net debt position stands at a negative INR 39.4 crores, which means we are now more than a 0-debt company. We also reduced our working capital cycle 202 days in Q2 FY '24 compared to 118 days in Q1 FY '24. We continue to invest in upgrading our facilities and have invested INR 43 crores and CapEx during this period. We would like to add that we continue to be mindful of balancing growth with profitability by continuous focus on cost control and efficient operations in order to be able to capitalize on opportunities, which will bring us greater scale over the long term. With that, I would like to hand over the call to Saharsh for his remarks. Once again, thank you very much.

[Saharsh Davuluri, executive]

Thank you, Abhijit. Good evening, everyone. I'll add a few comments on top of what Abhijit has said, and then we can open to Q&A. So as I reflect on the quarter and the first half of FY '24, I realize that while financial metrics reflect an improved quality of business that we've been striving to build, the operations have been conducted like any other quarter. Having said that, this quarter validates the quality as well as the underlying strength of the Neuland business. I must add that it reflects our business development, R&D, quality culture and manufacturing and execution engine. There is also a consequence of the natural transition of our CMS business, where we have seen a few molecules scale up into commercialization phase over the last 2 years and maybe a few more waiting in the pipeline. As I have stated in the past, we had been transitioning from a model that was predominantly composed of prime APIs into a CMS and specialty GDS focused business. We have seen both the potential of our CMS business as well as the impact of that specialty GDS products like paliperidone in the current performance. As we had mentioned in the recent past, the business does not have any significant one-offs even in this quarter. However, as always, I would like to emphasize and reiterate that the nature of the business is lumpy and the growing scale will not necessarily change the inherent qualities. In terms of the details, the growth of the business is coming both from commercial products as well as projects under development. The significant revenue from development is due to molecules that are very close to commercialization. We believe that the analytics that we have been sharing over the past few years gives sufficient color and depth. Hence, given the sensitivity and confidential nature of the CMS business, I would not be able to talk or answer any specific questions on customers or molecules. From a market perspective, you probably already heard this before. We've seen that there has been an impact of funding crunch on early-stage projects as well as projects with [ lead ] clinical data. However, we are seeing new customers come in with later-stage assets that is Phase 2 and later, continuing to look for reliable API partners. You will see this demonstrated in the increasing number of Phase II projects, which are part of the pipeline that we have shared in the investor presentation. We hope that this pipeline will give us continued success in commercializing more new chemical entities in the years to come. Our business development team stays focused and continues to pursue such high-quality projects to add to this pipeline even as the internal R&D, manufacturing, quality and project management teams work on delivery of the existing projects as well as building agility so as to respond promptly to changing customer needs. On the GDS side, even as there has been a slight dip in specialty revenues this quarter, growth is on the expected lines on a half yearly basis. The Specialty segment in H1 was driven by revenues from paliperidone, apixaban and donepezil. The prime segment contribution was primarily arising from mirtazapine and the growth of the [indiscernible] business. In terms of the overall business, there is a positive outlook with a healthy pipeline in the medium to long term and optimism about future prospects. While there may be fluctuations at a quarterly or even at an annual level, the business itself looks very promising across the horizon. Neuland's commitment of putting the customer at the forefront of its operations remains unwavering. To align with this commitment, the company will continue to invest in its operations by establishing both new capacities as well as new capabilities. These investments are made with the goal of furthering Neuland's leadership position in key molecules and becoming the preferred partner for both existing and potential customers in the development and manufacturing of new molecules. This customer-centric approach is a central part of Neuland strategy for growth and success. So having said that, I will now request Ravi to open up the floor for Q&A.

[Operator]

[Operator Instructions] The first question is from the line of [ Mit Katrodia ] from Nivesh.

[Unknown Analyst]

First question is, company has mentioned about INR 43 crores of CapEx for the future capital risk, but the kind of capital [indiscernible] we have now and also considering the business is exhibiting free cash flow and the balance sheet we have. If you could provide some guidance on your future CapEx plan or if not CapEx, then what is the changing of the management to be next level growth for the Neuland?

[Abhijit Majumdar, executive]

Could you just repeat the question a bit? We couldn't [indiscernible].

[Saharsh Davuluri, executive]

Speak a little slowly, please.

[Unknown Analyst]

Okay. So basically question regarding the future CapEx plans? And if not CapEx, so what is the thinking of the management for the next leg of [indiscernible].

[Saharsh Davuluri, executive]

Yes. So as we have consistently said in the past earnings call, our focus on cash, right? As we kind of look at cash and optimize so that we have the cash for our growth opportunities. The second is what we have consistently said is, as and when we start allocating capital for growth, right? So we would come back to our investors on our plan from an execution perspective.So you could see some action in the next 2 or 3, 4 quarters. But they need to be kind of placed to the board, they have to be discussed internally. So I'll just leave it at that.

[Abhijit Majumdar, executive]

I think from an overall number, I think the regular CapEx will be about INR 100 crores to INR 120 crores. If there's any additional opportunity for additional business, which has a certain level of certainty, then this number could go up or down based on that.

[Unknown Analyst]

And second question is a very good percentage of contribution by CMS molecule in all of your top line. So seeing this kind of jump from 45 percentage to 55 percentage for this quarter, what can be the share of CMS molecules going forward for the full year, considering the visibility that you have?

[Saharsh Davuluri, executive]

I think it goes without saying that the CMS business has outperformed our expectations as well. But frankly speaking, the CMS business is really a function of how the drug is doing and how our customers are -- how much API are they procuring. So I think it just happens that the CMS molecules volumes have picked up and have gone beyond our expectations.And I think that has resulted in the CMS actually contributing to more than the GDS. But I think for us, it's very difficult to answer that question directly because both businesses are very independent of each other and both have their own potential. It's just that the GDS business was a rigid side of what we expected to do and the CMS business did a lot more than what we expected it to do. I mean it's part of the business. So I think how would this be extrapolated is very difficult. I think we'll have to watch the next few quarters. And I think we will have to more importantly see how specific molecules do. But yes, I think approximately somewhere between 60-40, 40-60, I think it's -- beyond this, it's very difficult for us to pinpoint.

[Unknown Analyst]

Next question. In the revenue from development as there is a big almost double kind of jump in the revenue for this quarter. So are there any 1 or 2 specific molecules contributing? And if yes, then as you mentioned in the initial remarks that these molecules will get commercialized in upcoming quarters. So basically, I want to understand the potential of these molecules, how much times of revenue they are generating, commercial fees like 2, 5, 10. What kinds of revenue they're going to make.

[Saharsh Davuluri, executive]

I think I'll just be brief in the interest of time. The molecules, their upside potential is something that we don't believe is valuable to disclose because it's hard for innovators, innovative molecules for us to cap or to be able to estimate that how much they will do. I think there is definitely potential for growth. There are more molecules as well. But yes, I think the salience we have disclosed in the [indiscernible] clearly tells you how many are in commercial versus how many are in development. So I'll just keep the response, please.

[Operator]

[Operator Instructions] The next question is from the line of [ Ravi Singh ] from [ Neuomata ].

[Unknown Analyst]

Congratulations for consistently beating our expectation [indiscernible] sequentially. So my question was related to that development, the CMS revenue part. So you said that one molecule, which actually had offtake for new engineered commercialization. So that has an offtake. So just I wanted to understand that whether we have catered to full order side of that particular molecule, if this is a part of a bigger order we have in hand for that particular molecule in development.

[Saharsh Davuluri, executive]

I think with regards to the commercialized CMS molecules, the orders would come across the year. And typically, I think because these are molecules that are still under patent, I think there is a visibility that we get from the customer in terms of how much API they need over the years.And as we get closer to the period, which is on a rolling quarter basis, we get confirmed orders. So at this point of time, it's safe to assume that every year, we will have orders. It may not happen in equal proportion every quarter and then again, depends on a molecule to molecule basis. But as I had indicated in our opening remarks, [ there are no ] onetime orders. So I think we can also feel reasonably confident that all this business that we are seeing is having a degree of recurrence. And it may not be identical every quarter, but it will have a set pattern of reference, especially the commercial loans.

[Unknown Analyst]

Okay. So my question was related to that particular molecule because we have other molecules also. I can understand that we will keep on getting orders for different molecules. But anyway, second question was related to that Unit 3, what kind of utilization currently we are standing at?

[Saharsh Davuluri, executive]

Yes. So I think just to top off that second -- first question you asked, we have -- I think we have disclosed that we have several commercial molecules right now. I think about 5 or 6 of them contribute actively to our commercial business on CMS. So we have multiple molecules, which is the short answer, but not every molecule contributes equally.Therefore, the surge in the business or the growth in the business is also clearly indicating that new molecules are contributing more. With regards to your second question, I think we're at about 60%, 65% utilization in Unit 3. But I would also like to add to that, that unit 3 has further headroom for more capacity because the site itself has -- is a large enough campus where we can create more facilities. But in terms of the current installed capacity, we are at about 60%, 65% utilization.

[Unknown Analyst]

And that unit can -- when we can expect peak revenue, including that expandable capacity there?

[Saharsh Davuluri, executive]

I think it really depends on how the molecules phase out -- scale up. So I think we are constantly reviewing our capacity situation. And I think the benefit we have is because we already have an operational unit, we will be able to create capacity within, say, 12 months from decision making. But I think we will disclose as we create more capacity. But at the moment, there's nothing much I can indicate as when we will be creating or-

[Operator]

The next question is from the line of [ Ishmohit Aroda ] from [ SARK LLP ].

[Unknown Analyst]

Just a question. In the next 6 to 12 months, are we expecting any more molecules to go from [indiscernible]. I think last [indiscernible] mentioned 2 more molecules might come to commercial in the next 6 to 12 months?

[Saharsh Davuluri, executive]

I think, again, it's going to be difficult for us to be very specific for the time period you asked. I think if you go back to the investor calls that we've had, even 2, 3 years ago, we've maintained that we had a pipeline of 5, 6 molecules, which were one step away from commercialization.I think in the last 2 years, 2 molecules have become commercial. I think in the next 2 years, maybe 2 or 3 more could get commercial. But I would not dwell into further detail with regards to 6 months or 12 months. But yes, you can definitely expect some more commercialization in the next couple of years. But the time lines would be very difficult for us to indicate.

[Unknown Analyst]

And second question is, any teaser that we can [indiscernible] sustainable state right now in terms of the sustainability [indiscernible] momentum?

[Saharsh Davuluri, executive]

Can you repeat that, please?

[Unknown Analyst]

Second question was, are there any teasers that we are seeing to the sustainability that we are seeing in the CDMO growth over next 2, 3 years, like in terms of basically the funding time for biotech in the U.S.

[Saharsh Davuluri, executive]

I think the funding situation, I think for the molecules that are getting commercialization, I think although we work with biotechs and we keep saying that, the biotechs, which have commercial molecules have adequate funding. So we don't see any challenges in commercial supplies, getting any kind of restrictions due to biotech funding. I think early stage, yes, there is definitely a funding challenge. But I think our business model is such that it's not really impacting us that much.

[Operator]

The next question is from the line of Sajal Kapoor as an industry investor.

[Sajal Kapoor, analyst]

Neuland's current form is akin to that of Indian cricket team, which keeps surprising on the upside, especially the team volume. Coming to my questions, some of the major participants in the European API market have lately acknowledged that new competitors are coming from India. EuroAPI and others have also issued a warning regarding their profitability projections. I know you have had 200 prearranged meetings and over 50 walk-ins and recently concluded Barcelona [ PPHA ]. So what is the take on the ongoing supply chain rebalancing, please? And I've got another question.

[Saharsh Davuluri, executive]

Hopefully, our performance of the Indian [indiscernible] accounting [indiscernible] at the late stage. But that aside, I think there's definitely a lot of buzz of Indian CDMOs in the global marketplace. And I think, yes, we've seen in the press about EuroAPI and some of these guys mentioning skepticism. But I think our take on it is that this is a very vast space, a 60 billion, 70 billion space where no player is more than 2 billion, 3 billion in terms of size.So for us, we feel like we are swimming in an ocean and we hardly see any competition. Even in the CDMO space today, in fact, Sucheth and I were just talking to one of our Board members. If we take our top 10 molecules, none of the 10 have overlapping competitors. If I take the pipeline of the new projects that we are doing, which we have projects which we have received in the CMS business, no 2 projects have the same competitors in the bidding process. There are so many different players, there are Indian players, there are European players. So for us, it's very difficult to gauge. At the end of the day, we have a healthy pipeline, and that pipeline is enabling growth for us, and we have control on what actions to take in order to keep sustaining that growth, but-

[Operator]

Ladies and gentlemen, we request you all to please remain connected it seems that we have lost the line for the management. Please remain connected while we reconnect them. Thank you. Ladies and gentlemen, thank you. [Technical Difficulty]

[Operator]

We have the management line reconnected. Sir, over to you. Please repeat your question.

[Ravi Udeshi]

So no, that's not -- you don't need to repeat the question.

[Davuluri Rama Rao, executive]

I was answering the question. I was saying that I think European API companies or various Indian companies and vice versa as well. So I think it's a healthy competition. But as Harsh rightly said, the CDMO business in terms of the market is so huge that there is a lot of opportunity out there.Now the key for Neuland and since we have a lot of interested stakeholders on the call as well is to make sure that Neuland doesn't get confused with other CDMOs in terms of what we do as an organization. I think for us, going forward, the team has to be very clear about what is it that we can do and what we cannot do and make sure that we carve out that brand and image with our customers so that we have those long-term relationships. And that's what Neuland has all been about and we keep saying and you're referring to CPHI. One of the things we always talk to our stakeholders is that we've hardly lost a customer in the last 2 decades. So I think customer is a center of our focus. But I think point is valid is we have to look out for our European competition as well.

[Sajal Kapoor, analyst]

That's helpful. And second question is a press release on peptide building blocks was issued in January 2009. So could you please provide the performance evaluation of this optionality after 14 years in terms of learning and measurable outcomes.

[Saharsh Davuluri, executive]

I think the peptides press release you're referring to, I think it indicates our entry into the peptide business, which was a very organic entry. We started off making these fragments because those were technically closer to what we did as a company. The idea was to climb up the value chain, getting to making more complex fragments, make building blocks, so to speak and supply them do peptide CMOs who actually make the final peptide APIs.And the idea was to further climb up the value chain, getting to making NCE peptide APIs and also in parallel start making generic peptide APIs. I think in a nutshell, that was the plan. I think in terms of where the journey has landed across the 15 years, I think the straight answer is that we've actually made that progression. We started off making building blocks. We then got into making peptide fragments working with European peptide CDMOs supplying them the fragment. Then we started working with innovators making peptide APIs, MCs. And then we also started developing peptide general APIs as well. But I think what you're probably hinting at, which is the report card, I think it's fair to also admit that the business itself has not contributed significantly to us. I would probably attribute that to 2 things. One is, yes, could we have put in a greater emphasis in terms of development capabilities and maybe develop more molecules. I think the answer to that is definitely yes. But more so, I think in terms of -- if you look at the table of molecules that we consistently publish, out of the 80-odd projects that we have, we have at least about 14 or 15 peptides. But none of them have actually made it into commercial and become successful commercially for us. Had that happened perhaps it would have been a different story altogether. But having said that, we don't want to sound like we have given up on peptides as well because we're working on some exciting peptides, both in the NC space as well as DMS for generics. But I think the music will be heard when we actually start seeing the business come in. Until that time, it will be kind of like a lot of lead indicators that we will be giving to you in the form of commentary. But I think Neuland is a serious player in peptides. But unfortunately, only time will tell how good our efforts have been.

[Davuluri Rama Rao, executive]

I think we mentioned something on there, the fact that we have innovators coming to us for their peptide APIs. It's a marker of our capabilities on that point. When that actually translates into commercial revenues and impacts us significantly, I think that is more how we market, how the products move to the pipeline. I think that is not in our control.

[Davuluri Rama Rao, executive]

And also from the generic side to, I think we have made significant progress on a number of molecules that we commercialized and we are ready. I can now state, but I think the commercialization, I think it depends on the molecules and the customers that we are partnering.

[Saharsh Davuluri, executive]

I think another qualitative addition to the question is, if you take big pharma as a category, I think most of our investors are aware that we are not very strong on big pharma. We work more with biotech. But you will find it interesting that for peptides, actually, we work with big pharma because their typical suppliers don't work on peptides as much. So we actually have 2 European big pharma working with us only on peptide project. So that's also perhaps an indicator that we are a serious player in peptides. But yes, I think I would also admit that in terms of our revenues, they are not still a dominant contributors with us.

[Operator]

The next question is from the line of Sachin Jain as an industry investor.

[Sachin Jain, analyst]

My question is since last 2 years, you've built now almost INR 500 crores CMS business. And along with the journey, you have built a defensibility project management capabilities and scientific capabilities. And now I believe all building blocks are in place and probably now [indiscernible] for your capability. Now can you help us how you as a management see next 5 years, some qualitatively, how CMS business unfolding from here? Maybe some expirations? How do you see -- can you give some color?

[Saharsh Davuluri, executive]

I can definitely give you a sort of a vision of what we have for the CMS business, maybe not in a quantitative way. The kind of traction we have built for ourselves and more importantly, the credibility we have built for ourselves as you had acknowledged in terms of building strong R&D project management, execution skills in the plant level, quality culture.I think those have helped us, coupled with a strong working relationship with a biotech. I think these have been factors that have really built this healthy pipeline. Now when you look at the landscape, innovation landscape today, I think still 70% of the new drugs, which are small molecules are being developed by biotech companies. So I would definitely say continuing this path is front and center a priority for us. We would want to work with more and more biotech companies. We would want to be a part of as many Phase III commercial launches as possible. But at the same time, we recognize that for us to be able to expand the basket of customers. We would also have to create the right kind of capabilities, create the right kind of capacities for that. So I think we're actively exploring what we can do. I think the gentleman earlier was asked about peptides. So for example, having peptides as a capability helps in work on more CMS projects. So that's a very good example. Having these related molecules as a capability and to work with more innovative companies. I think as we speak, we are also evaluating what are the other adjacent areas that we should be looking at? Should we look at different kinds of the medi-carbohydrate chemistry. Should we look at maybe high potency. So I think these are questions that we are trying to answer. But I think it would be safe to assume that we want to be focused on this human health care biotech space. But as we create larger facilities, I think, obviously, we would also want to align better with big pharma and try to create more value for them as well. I think the next 5, 7 year plan is more focused on that. And then I think beyond that, we'll have to look at what else we can do. Anything you want to add?

[Davuluri Rama Rao, executive]

So I think that's kind of what we think. In terms of numbers, I think it's really difficult because we are definitely doing better than what we expected. I think quantifying it from an investor perspective really doesn't make any sense because it's like the world is your oyster. So it could become as big as you could want.

[Sachin Jain, analyst]

And then my second question to Harsh. Now almost I see 2012-2013 balance sheet and now I see a balance sheet, which probably a business which is growing cash and our products INR 200 crore annually. Would that mean you will become more aggressive in terms of capability acquisition of CapEx? Some color [indiscernible] earlier participant, you said probably the next 3 to 4 quarter you would make a call. But some qualitative indicators how you're thinking about your CapEx plan, acquisition plans? And looking at the balance sheet where it is today?

[Saharsh Davuluri, executive]

I just kind of shared the management intent over there. I think we had -- I think Sucheth I had explained this in the previous investor call as well. I think what we have achieved now, not just in terms of numbers or business mix is we have established a certain level of credibility with our customers in terms of what Neuland can do.This is not just for the CMS business, but even if you look at the specialty API business. I think the customers we work with really value the work we do. And one of the main advantages of this platform that we have created is that future investments will be made based on certain shared visibility that we get from our clients. This is a very important concept or a theme that we want to weave into our future planning. And what that really means is we may not necessarily go into creating a lot of capacities or even capabilities without having that support our guidance or assurance from our customers. I think that is the position we have earned ourselves into, I would say. And therefore, I would probably say, yes, we will have to allocate capital for growth. We will have to create capacities, but they will be done in conjunction with our customer needs. And therefore, you will not see a situation where we will create maybe a 1,000 meter facility and then wait for 4 years to fill it up with products. We may start creating production blocks based on certain visibility we are getting from the customers we are working with. And that kind of capital allocation is what we feel will help us keep that ROC high, and it will help us keep making those necessary investments. I think that's broadly the theme of how we are looking at growing the business. So there is a little bit of conservativeness in it, but we also think it's not necessary to go and create huge capacities without any visibility from the business side.

[Operator]

[Operator Instructions] We have the next question from the line of Rohit Ahuja as an industry investor.

[Rohit Ahuja, analyst]

So I have the 2 questions. One is from sort the CMS segment and one is for the GDS segment. So in the CMS segment, I want to know that one of our client [indiscernible] which are, I think, a detected production block in our one of our manufacturing unit for the [indiscernible]. So I want to know that if this kind of capacity that we create in our plant, that is also fungible across the product. And how the -- and recently, we have at the CPHI Barcelona, how is the thing were that as I have seen, we have the various [indiscernible] there. So how is the thing going there? How the image or the brand Neuland is now [indiscernible] compared to these various previous years. So this is my question one.And second, my question is on the GDS segment. So is that true that now you can only file a U.S. DMF if you have a valid customer or on the customer request? Because we have a healthy pipeline of the molecules which have the U.S. DMF [indiscernible] going off in the next 3 to 4 years. And also as per our annual report, we are going to 5, 6 year CMS every year for the next few years. So is that -- can you correct that? Can you explain about that.

[Davuluri Rama Rao, executive]

Rohit, I think in terms of being consistent with what we have said in the past, I don't think we want to answer like product-specific questions or product-specific questions when it comes to our CMS business. I think we have already shared a lot of color on that. And when it comes to the GDS business, I think a lot of our work that we do is the products that we select and the products that we own is on the basis of our understanding of the products of the market, which we have developed over a period of time. And we consistently see that we have customers who are in those therapy areas and in the U.S. market come to us for those products. I hope that answers.

[Abhijit Majumdar, executive]

We always have a customer for a DMF that we are filing and the capacity that we create is always fungible.

[Operator]

The next question is from the line of Sanjaya from Anpersand.

[Sanjaya Satapathy, analyst]

Congratulation on great set of results. So my question is that is there any kind of a seasonality to your number? And of course, you have given some numbers getting to the stage 2, which has doubled. So how will that kind of feed into your numbers in the future, if you can just help us understand that.

[Davuluri Rama Rao, executive]

So there's no seasonality as such, Sanjaya, as we've mentioned in the past. We do expect quarter-to-quarter volatility just given the nature of the business and what our customers require in terms of deliveries, [indiscernible] from us. Apart from that, we've also mentioned in the past that not only just a quarter to quarter, but some of our sales cycle and manufacturing campaigns are so long that some of that volatility can even spill into the next year as well. So it's just a question of the nature of the business rather than seasonality.

[Sanjaya Satapathy, analyst]

How about the Phase 2, which is doubling -- does that kind of give some indication of how things will evolve going forward?

[Saharsh Davuluri, executive]

I think the doubling of the revenue is an indication that new molecules that are getting commercialized are contributing significantly to the business. I think if you couple that with the other statement that we've made that this business is not onetime, it's not one-off. Also, couple it with the lumpiness comment, I think it's fair to deduce that the growth is there, and it will continue.The percentage growth or how much will it grow to is where we cannot give you any indication. But yes, I think definitely, with these molecules commercializing there is a growth in the CMS business, which will continue. But I think with regards to the quantum of the growth, I think you will have to see how things pan out. We won't be able to guide you much on that.

[Davuluri Rama Rao, executive]

If your question was with regard to the number of Phase II molecules doubling. I think that is more a testament to the attraction of the brand that we have been able to build. And that would feed in over a period of time. But what we also need to keep in mind is [indiscernible] from Page 2 to commercialization, which may be somewhere only around 1 in 4 molecules will reach there. So this is more an indicator of how attractive our CDMO capabilities are rather than just an indicator of future potential.

[Operator]

The next question is from the line of [indiscernible] as an industry investor.

[Unknown Analyst]

I wanted to have a perspective from the management on how do they see the journey 5 years, 10 years ahead? If you can share what's [indiscernible] for the company. And if they can talk us through the progression of Neuland moving from small cap company to mid-cap company and maybe at some point, a large cap company. So you want just market gaps but I'm more interested in the journey that they foresee and if the ambition is to kind of transition towards making the company at that scale and how that will unfold over the next 5 to 10 years? Has the management excited on that perspective.

[Davuluri Rama Rao, executive]

So Rahul, there's no simple way to answer this question. But typically the process that we follow as management as an organization is that we typically forecast our numbers, our future over a 5 to 7 year kind of a period because that, for us, is a realistic window without it getting to hypothetical or theoretical.Once we do that, we look at what the numbers look like, what do the margins look like, what do the growth percentages look like? And whether that's reflective of a healthy and opportunistic growth as well. If it's not, then we spend our time or energy identifying opportunities, which is more reflective of how Neuland should grow and what the aspirations of the management are. Once we have those numbers, obviously, we bring it back and look at the assumptions on what should be the capacity? What should be the people strategy, our financial strategy, all of that. So that we are very clear on what the potential obstacles, what the potential risks could be, what is our ESG strategy going to be. And we spend a significant amount of time doing that. I think with respect to your specific question about what the future could look like in terms of the market cap, small, medium to large cap. As a principle, we don't share any outlook in terms of numbers, and we continue to hold to that principle. But I think internally, we do take a very long view of the business and make sure that it is in line with how we would like to see the business overall. So I mentioned, I think, between me and Harsh in the previous call that we do have a clear set of strategic priorities, 6 strategic priorities, which tell us what we want to do and more importantly, give us clarity on the areas that we don't want to focus on in terms of specialty APIs, our CDMO business, the kind of markets we want to go after, the kind of customers that we want to go after, the quality of infrastructure, the capabilities. Each of those strategic priorities tell us where we should be putting all our energies and more importantly, not putting our energies as well.

[Operator]

The next question is from the line of Hussain Kagzi from Ambit Asset Management.

[Hussain Kagzi, analyst]

And so I had one question, and I'd like to come back to the comments you made about CapEx and putting additional capacities only when you have some visibility of sorts? And this is quite different from what conventional wisdom would kind of indicate. And so I wanted to know that is this a strategy which the company has followed over the years? Or is it an outcome of the extremely lumpy and difficult years that we have seen, say, over 2018, 2019 or even H1 of last year. And now we are quite conscious of the balance sheet or the financial stress that we would want to take.

[Davuluri Rama Rao, executive]

Before Harsh adds this perspective, let me clarify that given the nature of the business, what Harsh was saying is that the business has evolved to a point where there's certain molecules there, we can actually invest in a CapEx where we have a significant amount of visibility.Now that doesn't mean that every CapEx we do will have that kind of visibility. It's just not possible because as you know, our focus is to grow our CMS as well as our GDS business. And on the GDS side, given our strategy of being a multiproduct facility, there will be CapEx that will get invested based on our best estimate of future projections of volumes for which we will not have a signed contract or a certainty in revenue. So Harsh's point was that there's a part of the business that has evolved to the point which gives us the ability to invest in CapEx where we have that assurance. But there'll always be part of that CapEx or business, which will not have that assurance.

[Saharsh Davuluri, executive]

So I think Sucheth answered it, but I want to have a satisfaction of clarifying myself.

[Operator]

Ladies and gentlemen, it seems that we have lost line for the management once again. We would request everyone to please remain connected. Hello.

[Saharsh Davuluri, executive]

So I was just clarifying that the decision to make CapEx investments based on visibility that we get from customers is actually a position of privilege that we have put ourselves over the years of building this business. So I think that's something that I would like to reiterate. It's not necessarily something that comes out of the past being or the past difficulties of going through CapEx programs.And also, as Sucheth said, there is a GDS business. There is also basic R&D. There is a lot of new capabilities which don't necessarily require a customer sponsorship. So when you look at capital investments in a business like ours, one area where you need the customer visibility is the capacity creation. But if you're looking at creating more R&D labs, you're looking at creating a pilot plant, you're looking at creating scale up facilities or even a GDS facility, then those are investments that the company would have to make on its own. So I think the point that was being made earlier is that Neuland, we will not probably undergo a huge CapEx spend with low business visibility. We will be prudent in terms of what investments we make. But having said that, I think as management, we alone can realize how -- what infrastructure is needed, and we will not necessarily wait for a customer to come and sponsor CapEx for us. So I think between what Sucheth said and I said, I hope that clarifies and it helps you understand how Neuland looks at CapEx. It's not necessarily coming out of any cost strain or concerns.

[Operator]

The next question is from the line of [ Yashay Lakavala ] from M3 Investments.

[Unknown Analyst]

Congratulations on great performance. A question on your CMS business. If you could probably highlight some qualitatively. So what are the nature of the projects and molecules you're working on? Are they sort of large volume, small volume sort of in sort of production style? Or are they more chronic sort of are they in like niche oncology or rare disease areas? If you could just highlight something qualitatively so we get a feel of the customers that we are sort of working with and the long-term sort of trend that's happening in the NCE space would be really helpful.

[Saharsh Davuluri, executive]

Sure. Maybe I'll just give some high-level facts about the CMS business. If you look at, say, the 7 or 8 of our commercially -- commercial APIs in the CMS business. One thing is that they're all with biotech companies. The other thing I would say is that they are a mix of chronic and acute therapies. I would also say, again, we have a mix in terms of range. If you look at some of the smaller volume products, backside is maybe 10, 20 kilos with annual requirements being in tens of kilos or hundreds of kilos.The larger products on this list would have batch sizes of anywhere from 500, 600, 700 kilos with an annual requirement of 100 tonnes. So I think our CMS business is fairly diverse in that sense. But yes, I think the basic commonality is that it's biotech. I think incidentally, many of the molecules are also in the CMS therapeutic area, but doesn't -- it's not like we are CMS specialists and therefore, we have those CMS molecules. I think it just so happens to be that way. I think in terms of how we intend to -- if you look at this portfolio itself, we don't necessarily see success coming out of acute therapies or chronic therapies or CNS diseases or anything like that. But what has mattered, is it a molecule is having multiple steps of synthesis if it has some cost of goods challenges, if there is -- the basic supply chain is originating from India. I think these are 3 or 4 factors that drive an innovator to Neuland.We've seen even -- like just to give you examples of molecules that don't fit our pipeline and we've not been successful. You take very high-value therapeutic areas where the innovator needs only 2 kilos of API a year, and it's a multibillion-dollar drug. So the API sells for like tens of thousands of dollars a gram. In those kind of cases, maybe the innovator is kind of comfortable with a European or in-house manufacturing. So other than that variable, there is a cost of goods challenge wherever there is a challenge of complex chemistry, multiple steps and life cycle management is important. I think that's important. I think one other common thing about our CMS pipeline qualitatively is, and we had mentioned this earlier, is the patent life. I think we did have 1 or 2 molecules whose patents have expired and they don't contribute anymore. But now the pipeline that we have, the patent expiries only start after 2030. So the other comfort that we draw from our payments pipeline is that next 7 years or so, we should continue to see the exclusivity benefit us. So I think these would be some of the highlights qualitatively that I can share without getting into any specifics. And they're all within health care. That's one thing I didn't mention.

[Operator]

Ladies and gentlemen, due to [ positive ] time, that would be our last question for today. I now hand the conference back to the management for their closing remarks. Thank you, and over to you.

[Davuluri Rama Rao, executive]

We'd like to thank you for taking time to attend the call and asking questions which draw greater insight about the business and the future. While we would have liked to have answered everyone in the queue, we hope you understand the constraints on time. Having said that, please reach out to Ravi if you have any specific questions. We would be happy to answer them to the extent possible. Once again, thank you for your time. We look forward to meeting you again and have a good evening.

[Operator]

Thank you very much. Ladies and gentlemen, on behalf of Neuland Laboratories, that concludes today's call. Thank you all for joining us, and you may now disconnect your lines. Thank you.