Piramal Pharma Ltd
NSE:PPLPHARMA
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Earnings Call Analysis
Q2-2024 Analysis
Piramal Pharma Ltd
The company has indicated optimism about continuing their momentum into the second half of fiscal year 2024 (H2, FY '24), with an expectation to end the financial year on a positive note. They have implied that revenue growth is projected in the high teens, with EBITDA margins expected to improve materially year-over-year in H2. While specific numbers on margins were not disclosed, the discussion suggests that the company anticipates improved operational leverage, which would enhance margins compared to the first half of the year.
Margin sustainability is a key focus for investors, particularly in light of the most recent quarter's 14% margin. Executives explained that this was influenced by inventory changes, among other factors, which could cause some reversal in the following quarters as more inventory is sold. However, other factors contributing to margin improvement, such as cost optimization and operational excellence initiatives, are considered sustainable going forward.
The company faced challenges in the previous year due to a biotech funding crunch, but has since recalibrated its customer base to include a healthier mix of big pharma and biotech companies, benefiting from acquisitions of biotech by larger firms. This diversification, along with ongoing funding for clinical work in later phases, bolsters the company's performance and outlook, with growth observed from both emerging biopharma and big pharma clients.
The company's portfolio includes both innovation-driven and generic work, with innovation-related activities constituting about 45% of the business in fiscal year 2023. This segment spans development, on-patent commercial work, as well as on-patent formulation and discovery work. The generics branch of the business encompasses formulations and active pharmaceutical ingredients (APIs), with some products made to order for customers and others owned by the company. The balance between these two areas is expected to remain roughly the same in the future.
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Ladies and gentlemen, good day, and welcome to the Piramal Pharma Limited Q2 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Gagan Borana from Piramal Pharma. Thank you, and over to you, sir.
Thank you, Nirav. Good morning, everyone. I welcome you all to our post results earnings conference call to discuss our Q2 FY '24 results. Our results material have been uploaded on our website and you may like to download and refer them during our discussion.The discussion today may include some forward-looking statements, and these must be viewed in conjunction with the risks that our business faces.On the call today, we have with us Ms. Nandini Piramal, Chairperson, Piramal Pharma Limited; Mr. Peter DeYoung, CEO, Global Pharma; and Mr. Vivek Valsaraj, CFO of our company.With that, I would like to hand over the call to Ms. Nandini Piramal to share her initial thoughts.
Good day, everyone, and thank you for joining us today for our post results Q2 and H1 FY '24 earnings call. We have delivered a healthy performance in the first half of the financial year with a 14% revenue growth accompanied by over 300 basis points improvement in EBITDA margin. It is also satisfying to note that this performance has been broad-based with our CDMO business returning to mid-teen growth and the CHG business and India Consumer business maintaining their steady growth.Healthy revenue growth along with our cost optimization initiatives are helping us deliver better profit margins, as a large part of our cost is in the CDMO business is fixed in nature. Historically, our H2 has been better than H1, both in terms of revenue and profitability, and we expect the same trend to continue with a strong H2 more specifically Q4. We expect high-teen Y-o-Y revenue growth and material improvement in EBITDA margins in H2 versus last year's H2 and deliver a robust performance for the financial year.During the quarter, we also successfully completed our rights issue with 128% subscription. A significant part of the proceed from this rights issue have already been utilized to pay down debt. As a result, our net debt is now down to INR 3,823 crores, which is a reduction of INR 958 crores compared to March 2023. Going forward, we would be working towards a further reduction in our net debt through our internal accruals.On the ESG front, we released our sustainability report for FY '23, which details our progress on integrating sustainability in our operations. Sustainability for us is more than just being compliant with regulatory norms and standards. We're working diligently to minimize our resource consumption, conserve biodiversity, provide a safe workplace for all employees, deliver quality products and services, promote diversity and inclusion in our workforce and enhance the quality of life of the communities around us.We have taken a target to reduce our greenhouse gas emissions by 42% by FY '30 compared to FY '22, which is in accordance with the 1.5 degree trajectory suggested by SBTi. We have also taken targets in other areas, such as waste management, water stewardship, gender diversity, health and safety, automation and digitization and customer satisfaction on which we are progressing well.During FY '23, we increased the share of renewable energy -- in our -- renewable energy in our operations, saved fresh water by promoting recycle and reuse, through planted more trees across our manufacturing sites to conserve biodiversity. We increased women's participation in our workforce, had zero fatalities and ensured a best-in-class quality record with 36 successful regulatory inspections and over 100 customer audits.Moving on to business-specific highlights, starting with our CDMO business. In our CDMO business, we witnessed good momentum and order inflows in quarter 2, FY '24 as well. The development and more specifically, new commercial orders received in H1, FY '24 are higher by over 40% compared to orders received in H1, FY '23. The order inflows over the last 3 quarters have helped improve the revenue visibility growth for FY '24. Further, the recent order inflows have a higher quotient of innovation-related work with a good proportion of commercial orders for non -- on-patent molecules.Our CDMO revenues from innovation-related work have grown at 17% CAGR in the last 4 years and now account for about 45% of our CDMO revenues compared to 35% in FY '19. Similarly, our CDMO revenues from differentiated offerings like ADC peptide, high potent APIs, sterile injectables and development of on-patent API have grown at 19% CAGR between FY '21 to FY '23.Our generic API business, which has a soft demand in FY '23 is also seeing a year-on-year pickup in demand. Given the pickup in the CDMO business, we've also seen an improvement in EBITDA margin driven by revenue growth, favorable revenue mix, normalization of raw material costs and cost optimization initiatives. We are also pleased to note that we earned our first revenue milestone, as a newly expanded Grangemouth facility in quarter 2, FY '24. Post the expansion, we now have 5 suites compared to 3 earlier. The expansion strengthened our presence in the antibody drug conjugate market.In terms of regulatory compliance, 5 of our CDMO facilities, which contributes to about half our CDMO revenues have successfully completed U.S. FDA inspections in the last 12 months.Moving on to our Complex Hospital Generic business. Our inhaled anesthesia portfolio continues to deliver healthy performance, mainly led by strong demand for Sevoflurane. We maintain our leading position in the U.S. Sevoflurane market with a market share of about 44% compared to 30% about 3 years back. We are also progressing well on our capacity expansion plans for inhalation anesthesia to meet global demand. We're setting up a manufacturing line for Sevoflurane in our Digwal plant to cater to the growing demand of emerging markets. We are also expanding our Dahej plant to increase our key starting material capacities and to have a higher degree of vertical integration.During the quarter, our inhalation anesthesia manufacturing facility at Bethlehem underwent an U.S. FDA inspection. We received 2 observations, both related to system improvements and none to data integrity. We are currently addressing these observations and look forwarding to closing them at the earliest to ensure full compliance with the U.S. FDA, the GMP standards.In the Intrathecal segment, we continue to command the leading market share in the U.S. Our brand Gablofen continues to be the #1 ranking Baclofen pre-filled syringe and vial brand in the U.S. with a market share of 76%. In the injectable pain management segment, our brand Fentanyl is the #1 ranking brand in its representative markets of Japan, South Africa and Indonesia. While we focus to further strengthen our positioning in our existing product portfolio, we're also building a pipeline of 28 injectable products, which are in different stages of development. The addressable market size of these products is about $2 billion.Moving on to our India Consumer Healthcare business. Our ICH business delivered a year-on-year growth of 13% in the H1, FY '24, aided by growth in our power brands and new product launches. We continue to invest in media and trade spends to drive growth in our power brands. Promotional spends during H1 FY '24 was 14% of our India Consumer Healthcare revenue.Our power brands grew 14% during quarter 2, FY '24 and contributed to 42% of our total consumer healthcare sales. Our key brands such as Littles and Lacto Calamine grew at about 24% and 19%, respectively, in quarter 2 FY 2024.We have also increased the pace of new product introduction in the new recent years. Over the last 3 years, we have launched 100-plus new products in the market with a healthy [ successful ]. During quarter 2, FY '24, also, we launched 7 new products and 2 new SKUs. New products launched in the last 24 months contribute to about 16% of our consumer business.Our sales in our e-commerce platforms are growing well. We now have a presence across 20 e-commerce platforms, and our own direct-to-consumer website, wellify.in, which is seeing an encouraging response. During the quarter, our e-commerce sales grew at about 34% year-on-year and contributed to 16% of ICH revenue.To summarize, I would like to say that we have delivered a healthy performance in the first half of the financial year with a broad-based revenue growth and Y-o-Y EBITDA margin expansion. We expect to better this in the second half of the financial year. Historically, our H2 has been better than H1, both in terms of revenue and profitability. We expect a similar trend to play out this financial year as well.Our CDMO business has returned to mid-teen revenue growth on the back of continued order inflows, especially for a differentiated offering and innovation-related work. Our inhalation anesthesia portfolio has also seen a healthy demand. Further, our India Consumer Healthcare business is delivering a good growth delivered driven by our power brands. We continue to maintain our best-in-class quality track record and are taking multiple initiatives in the areas of ESG. We hope to continue our momentum in H2, FY '24 and end the financial year on a strong note.With this, I'd like to open the floor for the Q&A.
[Operator Instructions] The first question is from the line of [ Aditya from AL Investments ].
Very good set of numbers. Ma'am, I have a few questions. One is related to margins for this quarter, right? We have done 14% margin. But if I see it is mainly coming from the change in inventory. So is it kind of a one-off? Or is it sustainable? That is my first question.And the second question is related to how much, I have seen that you have mentioned the innovative pipeline is picking up. So for this, what is our target to achieve in innovative CDMO?And the third question is, if I see complex hospital generics, there is a drop on quarter-on-quarter. So are we losing the momentum here? Or are they still good to grow 15% to 20% on complex hospital generics? These are my 3 questions.
Okay. So with respect to the margins, there are actually 3 components to it. One of them, as you pointed out, is related to the inventory. So you would see that the other expenses line is actually higher in terms of growth and the corresponding credit for that resides in the inventory that has no impact on the overall EBITDA margin.The second is last year, we had higher than normal provisions for inventory in one of our businesses. And the third is there is also the benefit of various cost optimization and operational excellence initiatives, which are helping the overall operating margins and the gross margin in particular. So all this actually driving the overall margin enhancement.And this -- a large part of this, of course, is sustainable only to the extent of inventory, this will get reversed off in quarter 3 and quarter 4, as we sell more, but the others are all sustainable.Moving on to your next question on complex hospital generics, actually, if you look at it, you should look more at the H1 growth. There is a bit of lumpiness in the sales last year, especially on between quarter 1 and quarter 2. But on a H1 basis, the growth is 13%, which is a reasonably good growth for the business.
And in terms of balance between innovation work and kind of generic work, I think, we do see that, that trend is picking up over the next few years, and we would like to continue to see that. I don't think we have a particular target in mind. But we believe that the innovation work and specialized work will help promote a healthier margins going forward.
So the current quarter margins, whatever we are having for 14%, it is sustainable. And for the second half, what -- what are the expected margins?
I think we've expected we'll see revenue growth in the mid-teens going forward, but...
High teens.
High teens going forward. And we will see our EBITDA margin actually improve considerably, as we get operating leverage. Historically, our H2 revenues and EBITDA margins have been obviously much healthier than H1, and we expect to see that same trend continue.
So what would be the margin [Technical Difficulty] figures, it would be 16% to 18% or more than that?
So Aditya, we're not calling out the margin. I think you will be able to make that guess. As we mentioned that we'll have high teens growth in H2 in revenue, and that will lead to operational leverage, and yes, definitely margins will be better than what they are in H1.
Okay. So basically, the revenue guidance is 15% to 18% over full year and margins would be up 15%, correct?
So we are not calling out specific number on the margin. We still say that it is going to be high-teen growth, and accordingly the -- our margins will improve materially Y-o-Y in H2.
Thank you. [Operator Instructions] Next question is from the line of Vivek from DSP Mutual Fund.
Congratulations, and it's good to see the company get its mojo back. My question was on the overall environment. Last year, the narrative seemed to be more around biotech companies facing trouble and a slowdown in the CDMO business, but this year, there's been a sharp bounce back. So could you tell us about the nature of the customers? Are they better funded, bigger customers? Or how is the industry moving? That's my only question.
So I think last year, we did have a tough year, I will say that. And the biotech funding crunch I think, still is kind of part of the macro environment. I think what we have seen that some of our biotech customers were bought by big pharma, and we've rebalanced a bit to big pharma. So overall, I think if we look at -- we have a healthy mix of customers between biotech and big pharma. And we actually -- so I think we're doing reasonably well. And lastly, I think there is funding still if you have proven clinical work. So especially Phase II, Phase III, things that are in the pipeline are getting funded. And so, we expect to see that continue.
I would just add one line, which is that we've seen -- we continue to see growth in both emerging biopharma and large pharma. But we have seen a little bit more growth in the recent period from large pharma for the business, Nandini mentioned. But we are still obviously targeting both segments.
Thank you. Next question is from the line of Ranvir Singh from Nuvama.
Congratulations for a good set of numbers. A few clarity on CDMO side, can you give the split between innovation-related revenues and then with API-related revenues, that is one?And secondly, if you could give the revenue from the JV during this quarter?
Okay. Our innovation-related work is about 45% in FY '23 for the entire business. That would include our development work, on-patent commercial work, as well as on-patent formulation and discovery work. Our generic business is both formulations and API. Some of it is made -- I mean, some of it is made directly to order for customers, as well as some is owned by us. So -- but I think that balance, while we haven't released FY '24 numbers, right now, it would be approximately the same.
And Ranvir on the question on the JV revenues, let me just clarify that the JV revenues are actually not part of the financials per se. What we have is a one-line pickup of the profit after tax, which comes as associated income. So the overall revenues do not include the revenue from the JV, in case that was the confusion.
Hello. Ranvir, may I request to unmute your line and go ahead with your follow-up question, please. Ranvir, can you hear us? Due to no response, we move on to the next participant. Next question is from the line of Yasser Lakdawala from M3.
Hello. Congratulations to the team on a sort of great performance. I had a...
Yasser, sorry to interrupt you, you're sounding a little distant.
Yes. Just a minute. Hello.
Yes. Go ahead.
Yes. Congratulations to the team on a sort of great performance. My first question is, could you possibly outline a debt reduction road map for the next, say, 3 years to 5 years? We've had, obviously, post the rights issue, we've done, we've reduced the leverage. What would be our sort of long-term sort of road map regarding debt reduction?
Yes, Yasser. So from where we stand today, as a first step, same will be to bring the debt down to less than [ 3 ]. And as we keep growing EBITDA further, we will use the incremental cash flows to keep paring down debt. So one step at a time. The first step is, we are currently higher than [ 3 ], and our aim will be to try and bring it down to less than [ 3 ], and then start looking at incremental cash flows to pare down debt thereafter.
And regarding the cash flows, I think we generated almost like, I think, INR 500 crores of operating cash flows this first half. What would be the quantum of CapEx. We see ourselves sort of undertaking over the next, say, 2 years to 3 years, based on the order inflows you're getting from some of the innovative customers, our CapEx requirements in the complex injectables, how do you see sort of our cash flow being deployed there versus we get a better understanding of what can be used for debt reduction, et cetera, right? So if you could help us there.
So Yasser, and let me talk about FY '24 to begin with. So in the first half, we have spent about [ 40 billion ]. And in the second half, the CapEx is likely to be anywhere between [ 50 million to 55 million ] for this particular financial year. Going forward, we'll come back with a more specific guidance maybe towards the end of the fiscal, as we take stock of what are the requirements from customers for the next fiscal and come back with something later. But for now, this is where we are heading for.
That would be fantastic. Just a broad level question. You mentioned the -- you mentioned the biopharma buyouts of our emerging biotech customers. So I wanted to sort of understand how does the pipeline work flow over to you? Like does that transaction -- M&A transaction enable you to tap into their other assets as well? Or can you mind them for other lines of business as well? Like if you could just give us a qualitative insights on the conversations that happen at that level and give us a better understanding of how this plays out?
Yes. So the first -- that's a great question. I'd say the first thing that typically would happen when one of these transactions were to occur is that the acquiring company would look to understand the supply chain that they acquired through the transaction. And if they aren't already one of our customers, or if they are a customer, but not for that type of offering, it's a great opportunity to introduce them to what we have to offer. And so, there may not be an immediate benefit from, let's say, cross-selling opportunities. But in almost all instances, it provides the window to introduce another side of ourselves, and we have seen that to be beneficial in most cases, where we can introduce or reintroduce ourselves to a much larger customer. So we generally view these events as positive events for us.
Yes. And relating or sorry for that. Relating to the peptide sort of CapEx that we've done with the -- at the [indiscernible] facility, this entire space is sort of seeing a lot of interest, especially when it comes to GLP-1, GIP. Where are we in sort of on our journey of supporting potential sort of innovative sort of molecules there? Are we seeing any traction on that side? Are we providing any sort of base level sort of support? If you could give us some qualitative understanding there as well because from our understanding of the space, I think -- like I think GLPs have like 20 druggable targets in the human body and it becomes a very exciting area for -- for incremental sort of research dollars. So if you could help us understand that, that would be great?
Let's say from a background, this capability we currently have at that location is really the peptides and not oligonucleotides. That being said, within the peptide area when we acquired it was predominantly a generic play. We have invested significantly in the people, the processes and the facility to allow us to be more suited towards the -- what we would call the services segment, which would be the on-patent area, and we've seen some very recent favorable traction with customers, as we look to add that additional offering along with our new capabilities.And so, we would be seeing the mix from the on-patent and the services area in the area of peptides become an increasingly -- an increasing contributor and more important to that location, as we go ahead. So we find this to be a more rapid grower, higher margin and a higher ROCE addition to our portfolio. And as the services mix increases, we think that could only become better.
Thanks a lot for that, Peter. One final question on the India consumer business. How is our sort of profitability trending in that business? And if you could just sort of highlight like our say, median sort of outlook on getting that towards company-level margins maybe in the next, say, 3 years to 5 years?
So I think we -- as we reach our kind of INR 1,000 crore kind of target, we expect to see steadily improving profitability year-on-year. So right now, we would be in single digits. But you would kind of -- it's not a hockey stick, it would be incrementally growing every quarter -- every year.
Thanks a lot, Nandini, and really glad to see the business sort of turnaround and deliver to its potential and congratulations once again.
Thank you. Next question is from the line of Sanjaya Satapathy from Ampersand.
Congrats on great set of result again. So my question is that on your deleveraging plan, which you have highlighted, is it going to be predominantly internal accrual or you have some kind of asset monetization possibilities available with you?
So at this stage, it's primarily going to be internal accruals, not really looking for any asset monetization. As you know, our EBITDA takes growth, we'll have more free cash flows to look at deleveraging the balance sheet further.
And sir, I understand that while you are facing capacity constrained on certain part of the business, there are other part, where the utilization is much lower. Can you just highlight, which one are those and how those segments, which are lagging behind will also recover going forward?
So if you look at it, and we've explained this broadly to say that we have more capacity in our formulation facilities versus our API facilities. And we have done capacity investments in those API facilities, where we've had those challenges, and where we thought we had the highest potential for growth and where there was a market demand. So that's where we've done our investments.In formulations, we will see some steady increase in the capacity utilization, as the years go by. But predominantly, I think our investments have been put in the direction of APIs, where the demand has been higher and where there was a need for putting in investments.
Thank you. [Operator Instructions] Next question is from the line of Harsh Shah from Dimensional Securities.
My question is more on the macro scale. If I do a very back of the envelope calculation between our India business and overseas business -- overseas business, I would [ gather ], is mainly complex generics and the CDMO part of it. So our asset churn is pretty low on the overseas side, maybe around 0.5x, 0.6x. So just wanted to understand, and the ROEs is -- I would guess, it would be in the negative territory. So just wanted to understand what are the levers for us to, you know, really wrap up the overseas business. So if you look at mid-teen kind of ROE or ROC for this business, the overseas part, just try to understand, what is your road map and what are the levers that the company has?
So Harsh, if you're looking at the first half, then I think it may not be very representative of the asset [ turns ] because as we mentioned, it's H2, which brings a substantial portion of the revenues for the business and more specifically for the overseas sites. So the situation will change, as you look at the full year numbers. That is one.Secondly, a lot of investments that we did were done recently. For example, the one we did at Riverview or the one, which is going on at Grangemouth or the one we did at Canada. So all of them have become part of the denominator, where revenues are just starting to come in. And obviously, as the revenues increase, that will also help improve the asset turns. So I think -- and also if you look at some of the recent acquisitions that we did, they are also overseas. So the denominator is higher to that extent, more specifically in the overseas leading to a slightly lower overturn. And as the revenues improve, this should start showing a difference.
Actually, I was referring to FY '23 entire year's number, where the asset turnovers is 0.5x, 0.6x. So just wanted to understand what kind of asset sweating or turnover can we expect going ahead? I mean, can we see this move to maybe [ 1.3 -- 1.2 to l.3 ] kind of number?
Yes. So if you're looking at FY '23, firstly, FY '23 may not be a very representative year because we've had impact on our sales, as we have mentioned during the call in that year. And secondly, yes, we will be looking at asset [ turns ], which go anywhere between [ 1.5, 2 and even 2.5 ] in some of the sites, that would be the range, but depending upon the size that we're talking about.
Thank you. Next question is from the line of Alok Dalal from Jefferies India.
So first question on the sales guidance for the second half. Can you rank in terms of growth, which could be the fastest and which could be the slowest in terms of, say, CDMO, complex hospitals or OTC?
So if you look at it in terms of the sheer absolute value because CDMO happens to be the largest part, nearly 60% of our revenue comes from CDMO. That's where the largest value driver will be. In terms of the overall percentage, I think more or less, all the 3 business would be fairly similar, in close range in terms of the overall growth.
Okay. And as far as cost control measures are concerned, I understand the same time last year, you had initiated an exercise to control costs. So has that already started playing out in margins? Or should we expect more such cost control measures boosting the overall profitability?
So the initiatives were taken last year, as you rightly mentioned. And yes, they have started showing results. And a lot of it will actually come in H2 as well because when we sell more, they will start reflecting in the P&L. So yes, the impact of that you will see going forward as well.
Okay. And Vivek, one last point on free cash flow generation. So you mentioned about CapEx, about operating cash flow, is there room to cut down working capital? Can working capital release give you an extra free cash flow, which can be used to pay down debt?
So Alok, that's certainly an area, which can. In the current instance, one, of course, is given the lumpiness in the sales that we have, we do end up carrying higher inventories higher than normal. And of course, we are also carrying certain strategic inventories to take advantage of the prices. So if you look at the overall working capital cycle, the current at which we are operating is slightly higher and elevated. So yes, there will be room for it, and it's an area that we will be looking at.
Thank you. Next question is from the line of Tushar Manudhane from Motilal Oswal.
Sir, just on the interest cost on the [ INR 1,300 crores ]...
Tushar, sorry, you're sounding a little distant.
Is this better?
Slightly.
Okay. So just on the interest cost now that with the reduction in debt, how much do you consider as the interest?
See, there are 2 parts to it, to answer your question. Firstly, the overall interest cost for this particular quarter, if you look at it, we got just 1 month of benefit of the rights issue because the process closed end of August. So going forward, we will see some full benefit of reduction to the extent of the debt that we have reduced. Having said that, the interest rates continue to be high. They are in the range of between 8% to 9%. So overall, we are seeing anywhere between [ INR 1 million to INR 2 million ] of interest cost in the quarter at this point in time. And of course, we are looking at what we can do to further optimize this as performance improves, we'll be able to probably refinance some of them at lower rates and those are things we are looking at.
Okay. And just coming back to the asset turn given the kind of CapEx, which we continue and given the free cash flow may be post and if I even include the interest cost, will the internal accrual be sufficient to do that kind of CapEx?
So yes, in terms of meeting the CapEx requirements, yes, if your question is on debt reduction, it will happen over a period of time. So it's not going to be a dramatic reduction. But as the cash flows improve, we'll keep looking at how we can [ pair ] down debt.
Okay. And lastly, now that, there is a PBT as well. So how much tax rate to be considered?
See, the operating multiple jurisdictions, right? There is India, there is -- the -- and there North American part, there is U.K., there are several countries in Europe. The highest tax rate is in the range of 25.17%, which is there and that's what it is. Having said that, the ETR might slightly change because some of the overseas facilities have not yet turned around and are negative. So ETR might be slightly higher. But on an average, the tax rate is 25%.
And just one more to squeeze in. As I could see quarter-on-quarter, CDMO sales has been better, and I assume that is what is driving the gross margin from 64% to 66%, given that second half will further have higher...
Tushar, sorry, we are losing your audio.
Is this better?
Little bit.
Go ahead, Tushar.
[indiscernible].
Yes, go ahead.
Yes. Just on this -- as quarter-over-quarter, CDMO sales has been higher, I assume that is what is driving the gross margin from 64% to 66% for the quarter and given that second half will be further higher on the CDMO sales. So how do you think about the gross margins?
So as we responded on the first question, the -- this quarter may not be fully representative because we've had higher inventories and inventory overhead credit, as far as gross margin is concerned. Just to reiterate, no change from an EBITDA standpoint. Going forward, gross margins in the range of about 64%, 65% seems to be reasonable. That's more a normalized gross margin.
Thank you. Next question is from the line of Omkar from Bonanza Portfolio.
I just wanted to have, so this is part of the [ asset turns ]. What -- can you give us a blended capacity utilization, is that possible?
Sir, blended capacity utilization is actually quite difficult because we have got 17 sites and different forms. And so it is -- that number will be meaningless, I think.
Okay. And is it possible for you to give us a broad range of the EBITDA margin segment wise CDMO [indiscernible] [ CHG ] and ICH, is that possible?
No, we're not doing a segment level EBITDA margin split right now. We're looking at overall. We operate in one segment, which is pharmaceuticals. We're not getting into vertical level margin split.
Thank you. Next question is from the line of Vinod Jain from Wells Fargo Advisors.
Hello. Thank you for the opportunity. I wish to ask on the financial side, the question. You have had a situation, where H1 and H2 phenomena continues over the year, where H1 delivers much lower returns than H2. Now going forward, how do we look at it? Is this going to change? Or it will continue because it affects the annual working of the company?
I agree. It does affect the annual working. I think the challenge is, if you think about it, a lot of our customers, pharma companies that actually want to run down inventories by the end of the calendar year and then pick up inventories in the first quarter of the calendar year, which ends up being our last quarter. So I agree this is challenging, but that's kind of how the industry works. And quite often, our factories will be busy actually creating and producing in order to deliver in H1, but that only kind of shows up -- I mean, that will show up in the last quarter.
So is there any possibility of further cost reduction in the first half because the first half typically shows negative results, and that hurts overall working also of course. So...
Yes. Unfortunately, in the CDMO business, I think our costs are relatively fixed. And two is like we noticed our inventory is a bit higher that because we've kind of bought the materials and are producing in order to deliver in H2. So the kind of a factory is working, so to speak, in order to deliver.
Thank you. Next question is from the line of Bharat Gupta from Fair Value Capital.
I have just one question, and that pertains to one of the statements, which was met by the Chairman prior to the demerger. So in the pharma business, the Chairman highlighted that the margins is likely to be on the improvement trajectory and that remains to be near about 25-odd percent levels over the next 4 years to 5 years. So now with nearly 1.5 years passed by, so how do we see like are we still on the target to achieve and sustain the margins about 25-odd percent over the next 4 years to 5 years? And what can be the growth levers like likely to be there across the different segments?
So I think I would say last year, we had a tough year. So I'd say we're back on the improvement trajectory. And I think you could say [ mid-20s ] margin is something that is feasible in the next -- in the midterm. I think the growth levers would be increased revenue from our CapEx that we have invested. So as Vivek mentioned, we've actually just opened our Grangemouth CapEx. We got our first revenue milestone last quarter and would expect to see revenues from that going forward. Similarly, we've done -- brought investments in Riverview, as well as Turbhe, and Aurora. So I think we should see increased revenue coming from that as well as I think we will continue to focus on costs. But we believe that operating leverage and will help us.
Right. And just particularly with respect to the product mix, currently, if I look at the CDMO space, so innovative category constitutes close to 45% of the overall top line, right. So in order to the margins to sustain over 20%-odd, so where do we see the product mix changing over the next 4 years?
So I think, as you rightly noted, our innovative product mix is something that is been increasing over the last 3 years. We expect that to continue further. I don't think we have a particular target in mind. But I think that will also help us in creating sustainable operating margins.
Thank you. Next question is from the line of Anil, Individual Investor. Anil, may I request to unmute your line and go ahead with the question, please. Due to no response, we move on to the next participant. Next question is from the line of Sanjeev from SKD Consulting.
Sir, good morning, everybody. Am I audible? So I continue...
Yes, please.
Ma'am, I have 2 little questions. One is regarding the fact that we have added a lot of orders in this quarter. So what is the visibility of a turnover from CDMO in the next quarter? How much we are going to execute out of the total pending orders? That is one.Secondly, now with the rights issue INR 1,000 crores in our kit, the next 6 months interest outgo if you can kindly give some ballpark figure?
Yes, Sanjeev. So firstly, we've given the guidance for H2 in terms of a high teens growth, and that takes into consideration the kind of order book we have. So it's already factored and that we have a certain visibility based on which we have given this guidance.And secondly, in terms of interest cost, while we've used that to pare down debt, our debt volume has come down, but we are mindful of the fact that interest rates continue to remain high. And based on what we hear from the macro environment, it might remain at that level for some time. So currently, we said that we have about [ 11 million to 12 million ] of interest outflow in a quarter. And of course, we are making attempts, as whatever we can do to reduce the rates going forward.
Sir, can you give some figure of turnover, so that we can understand the execution that is possible for the pending orders. Sometimes the orders are being given, but the execution doesn't start with the order receipt...
So if you look at our historical performance, H2 has been higher, and that's based on the execution that has been done in H2, right? So...
I understand that you are not able to quantify. I mean, if you cannot quantify then, please say no about it. I meant a figure to be given to me about CDMO turnover that's all.
Yes. So as we mentioned, we are giving a broad guidance, we are not quantifying a number.
Okay. No problem. I mean there's no objection. So -- and sir, one more, sir, we have 17, 18 sites all over the world. So I mean, is there any way we can consolidate and reduce our cost of operations? Is it likely in the near future?
One of the benefits of our 17 sites is that they actually almost serve different customers and have different specialities to some extent. And customers quite often will say, look, I want it in -- for example, I want something made in North America, and are they will say, I want something made in India. So geographically, they may have a preference and they also might have a preference for the kind of team and the kind of dosage form, et cetera.So what we see is that going forward is that as revenues increase, you will get benefit of operating leverage because -- and once the sites reach a certain scale. So what you will see going forward is that the costs will form a smaller part of the overall.
Okay. And last question, generic business. I mean, sorry, innovation and patent are we also looking to register our own patent, either process patent or any such thing? Are we already registered and bought some patents? Or are we looking for that kind of growth also in future?
No. I think at this point, we have no plans to do our own products in the new chemical entity.
Thank you. Next question is from the line of Namit Arora from IndGrowth Capital.
My question was slightly medium term over the next 3 years to 5 years. So you have 3 very interesting businesses and all the engines and the foundation is in place for CDMO, CHG, and ICH. I just wanted your thoughts on -- in terms of capital allocation, as well as management bandwidth, how do you think about these 3 businesses over the medium term, given that all of them are extremely promising and all of them have a very solid foundation?
So Namit, I think we've kind of been speaking about it. Firstly, in terms of our consumer products business, as we said, is self-funding. So whatever is the EBITDA, it has generated, we've used a large part of that for our promotional investments and media investments that we have done as far as this business is concerned. Between complex hospital generics and CDMO, CDMO being the larger part and the nature of the business is such that is capital intensive, will have a higher allocation of the overall capital outlay, as it has been in the past and will continue in the future as well.
Got it. And in terms of the internal organization in order to make sure that these 3 businesses all realize their full potential, if you could just give us a flavor of how you organize internally in terms of senior management to ensure that we see the business realize their full potential?
Okay. So we have Peter DeYoung, who is CEO of the Global Pharma business. Under him, he has the Chief Operating Officer, Herve Berdou, who is based in the U.S. as well as the Chief Commercial Officer, Stuart Needleman, who's also based in the U.S. as well as a CFO. Similarly, in the complex hospital generics, you have a President and COO, who is Jeff Hampton. We announced it -- I think, we just recruited him. We just announced his recruitment in June. So he would be also based in the U.S. and you have a CFO, a separate CFO as well.Similarly, in the OTC business, India Consumer Healthcare, you have a CEO and a separate CFO and sales head, et cetera. So I think they're all -- each of the business does have separate management. But we -- yes, so we are involved quite closely also.
That's most helpful. Very appreciate your very detailed thoughts. My final quick question. Historically, the Group has had a phenomenal track record in terms of acquisitions and new building businesses organically as well over the last several decades. But I'm just -- your thoughts on -- given that organically also things are going well, so are you going to keep an eye out for some interesting opportunities in any of these 3 businesses? Or is the focus right now more internal driven and organic?
I think it's absolutely -- we always continue to look at acquisitions. But I think we also have -- acquisitions have to earn the right to kind of be invested in almost. And so depend on what the returns are, I think I would say that the first priority is for the -- until the end of the financial year, as Vivek said, we want to reduce our debt to EBITDA to below [ 3 ]. So that's the first and current plan. And then, we will also continue to look at acquisitions.
Thank you. Next question is from the line of Amit Kadam from Canara Robeco Mutual Fund.
Thanks for giving me this chance.
Amit, you're not audible. Can you please speak through the handset and a bit louder?
Yes. Is it now audible?
Yes.
Yes. Go ahead.
Okay. So then my first question is that as the business recovers and it's clearly showing in the numbers, what is still a weakening in the overall business, which warrants management attention. And that's point number one. It may be also like some kind of industry, some driving headwinds, something on that also will be very helpful.Second question is that employee cost is a significant part of our business. It's still like sequentially went up. Any ballpark maybe number in terms of like how do we build it in terms of going forward? And what will be the correct pace? So that's another point.
See, I think overall, as you rightly noted that the macro trend in terms of biotech funding is recovering, but still not back into the boom years. So obviously, that is an overall headwind for the entire business. While we have rebalanced our business a little bit between biotech and big pharma, we -- the biotechs are still a rather important component of this business because that is where innovation has been happening over the last few years. So I think that's something that is to be -- to be continued and watch out.
I was going to say from overall priorities perspective, we would say that securing the appropriate level of forward sales commitments from our customers is obviously a critical part for the CDMO and getting a lot of management attention. We've obviously seen some positive results from that, but it's a -- it's an evergreen activity that needs to be accomplished.I'd say the second thing is that we do have a small number of sites that we are focused on improving our operations in terms of OTIF and Right First Time, and those are getting our attention. And I'd say the third component for the CDMO would be on our cost program. While Vivek mentioned, we've seen some good results from that. Cost is another area that always does need attention and focus, and it's going to get our continued attention.If you look at the CHG business, we did have a period, where we had demand in excess of our ability to supply, particularly with our internally produced products, since we have an important operations and CapEx plan underway that should allow us to get more control over the critical products. Then obviously, there's commercial execution once that supply becomes more available. And then, the third bit would be on our pipeline. Obviously, growth will require some amount of execution on our pipeline products, and we want to do what we can to secure that -- the prosecution of that an eventual commercialization. And obviously, cost remains common across those. I don't know if you want to mention anything on the...
Employee costs...
Employee costs, some bit of increase or variation over the quarters you will see. It's kind of stabilized now if you look at it and compare over the last couple of quarters. But across quarters sequentially, you may see some movements, but they are not very material. And it depends upon, you know, the kind of recruitment to kind of ramp up production at a particular site and a little bit of variation you will see across sites.
But still, like, can you be more clear like on this part and how do we see this thing? Because here, I see that we had like a -- like the number what we are in terms of 27% of top line is now employee cost. We used to operate at a much lower, maybe operating leverage is something, which is still yet to be played out, but that's I wanted to see because what -- from where I'm trying to come is that maybe a few years back because our resources are also internationally based, 3% kind -- 2%, 3% kind of inflation based, maybe hikes would have been a case and ballpark we could have built 5%, 6% as a -- from a -- as an incremental maybe cost going in this particular. But as the overall interest rate itself globally has moved up, the expectation for salary hikes are also up. So, just wanted to know, should we consider that like 8%, 9% as an annual increase on a base what, maybe on what we -- whatever we form in FY '24? Is that a way of building few things or how the management is looking forward because it's a significant number to our overall things -- scheme of things and bringing maybe operating leveraged things to kick in.
Amit, a couple of points. If you look at the blended rate of normal inflation-linked increase between India and overseas, it will come to about 6%, 6.5%. That's what the rate normally is. Also, if you are trying to look at employee cost, as a percentage of revenues, for our kind of business where there's so much of lumpiness, obviously, it throws very erratic numbers across quarters. And if you're going to base this on FY '23, that may also not be representative because of the kind of impact that we took on the business.So overall, I think you need to look at full year numbers this year to be able to get some idea of what employee cost as a percentage of revenue looks like. But increase will be more or less -- on an inflation-linked increase, it will be more or less linked to the 6%, 6.5%. And then, if we add people that will be around on top of this and currency.
Sure. I mean, yes, if you think about it, to open our Grangemouth expansion, we actually had to do significant recruitment in quarter 1 and quarter 2 in order to actually open it. So that is part of the increase in people that you would see.
Also, Amit, you may want to pay attention to the forex part of it. So there's about 3.5% impact that just comes in because we translate overseas in INR and there's forex impact coming in as well.
Thank you. Next question is from line of Chintan Shah from JM Financial.
My first question is, while we understand that we need overseas manufacturing presence for CDMO segment, as we intend to be closer to the partners, but for Complex Hospital Generics segment, which is more of a distribution-led business, do we really need to have overseas manufacturing facilities? Can you please help me understand?
So I'd say that the capability was actually acquired, which is how it's placed where it's at, and it has been grown organically through additional incremental CapEx in that location. And so that is given, where the asset was when it was acquired and the capability at that asset that was there, and that is going to continue for the benefit of essentially what we call largely sunk investment. And we've had very good returns from that business and very good financial profiles. And so, if you were to look at that business's financial performance, it would meet most of your target metrics.If you listen to the earlier bit of the comments, we did describe that we're making incremental CapEx investments at the moment in both our Digwal and our Dahej facilities to support that business. And that's where a significant amount of the incremental capital is going for capacities and capabilities for Complex Hospital Generics going forward.
Okay. Got it. Understood. Fair Enough. And secondly, I mean, not from a near-term perspective, but from medium to long term, which is -- once the things normalize, what sort of steady state potential in terms of ROC does the business have, if you can just maybe give a range on number [ or et cetera ]?
Sorry, was your question, what's the guidance on the ROC?
So more so in terms of the potential that the business has to deliver, not necessarily a specific guidance that we'd like to achieve. I mean, if you can just help me understand, right?
So this is ROC for the entire business or ROC only for the Complex Hospital Generics?
No, for the entire business?
See, overall, you know, as our margins improve, first of all, ROC is obviously a factor of improving the profitability. So as margins improved and move towards the range of 24%, 25%, we will see ROCs in the high-teens for the overall company.
Okay. Got it. Understand. And last question is on the CDMO side. So do we have a target for the innovative share over, say, next 3 years to 5 years that we're going to reach? And supplemented to that, would that be -- would that means that innovative business would be growing faster or would be growing a bit slow on the generics side?
So as mentioned earlier, we haven't given a specific quantified target for the innovative share, but we do expect both innovator and generic to grow. But as demonstrated in the past and based on where we're seeing the customer demand, we would expect the innovative business to grow at a faster rate than generics business.
Thank you. Ladies and gentlemen, we will take that as the last question. I now hand the conference over to Mr. Gagan sir, for closing comments.
Thank you very much. Hope we have answered all your questions. In case, you have any follow-up questions or any clarification, please feel free to reach out to me and I'll be happy to respond. Thank you and have a good day.
Thank you very much. On behalf of Piramal Pharma Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.