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Solara Active Pharma Sciences Ltd
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And thank you for joining us today for Solara Active Pharma Sciences Earnings Conference Call for the First Quarter ended Financial Year 2021. Today, we have with us Outgoing MD, Mr. Jitesh; MD, Mr. Bharath Sesha; and Mr. Hariharan, the CFO, to share the highlights of the business and financials for the quarter. I hope you've gone through our results release and the quarterly investor presentation, which have been uploaded on our website as well as the stock exchange website. The transcript for this call will be available in a week's time on the company's website. Please note that today's discussion may be forward-looking in nature and must be viewed in relation to the risks pertaining to our business. After the end of this call, in case you have any further questions, please feel free to reach out to the Investor Relations team. I'll now hand over the call to Jitesh to make an opening remark.Over to you, Jitesh.
Thanks, Abhishek. Good afternoon, everyone. Welcome you all to first quarter FY '21 Solara results. I hope all of you are keeping safe and healthy. As you may have already read our announcements and in line with our communications last year, I finally step -- formally step aside from my role at Solara to pass on the baton to Bharath, who now takes over as the new Managing Director and CEO for Solara. I feel delighted to be part of this exciting journey at Solara, a company that we set up from its beginning and have transitioned to a global API platform, which is unique and highly adapt to serving the global markets. This evolution has been exciting. And I believe in the short period, we've had significant outcomes and many first for us as a company. The incident related to Cuddalore OAI status has been an unfortunate one, in otherwise, a very successful track record of previous audits of Cuddalore as well as our other facilities. We are closely working with the U.S. FDA on the CAPAs, we have submitted, and are confident on the reclassification of OAI status. My colleague, Bharath Sesha will update in detail during his note. Over the last 8 months, I've been working along with Bharath, and now it gives me enough confidence that Bharath is on top of things, and he, along with the leadership team, are well equipped to take Solara to newer heights. I feel it is important for me to express my gratitude over this earning calls as I sign up this exciting and remarkable journey at Solara. I must thank the founders and the Board members who repost their trust in me in driving outcomes for Solara. I also take this opportunity to thank my colleagues for working with me to deliver on the commitment. Clearly, a bright future lies ahead of us in Solara. And I firmly believe that Bharath and his team would continue to deliver and continue to create value for all our stakeholders. I wish the best for Solara as they embark on the next phase of growth and success. Thank you, and over to you, Bharath.
Thank you very much, Jitesh, not just on my behalf, but on behalf of everyone at Solara, your efforts in building Solara into a global company and do this in a very short time is very greatly appreciated by all of us. I also want to extend my personal gratitude and thank you for guiding me through this period of transition. Hello, everyone, and thank you for joining the call today. Needless to say, all of us are living in what I would call unique times, things that we have never experienced before. I wish you good health, safety, not just for you, but for you and your loved one. Coming to Solara, I'm delighted to state that Solara has made a really strong comeback from a very challenging quarter in Q4 FY '20. Some of the reasons why we made this very strong comeback are, first and foremost, our passionate and engaged employees who show exemplary skill and commitment to meet the needs of customers even in these tough times, but not to forget the societies at large. We have delivered our highest ever quarterly EBITDA, EBITDA percentage and PAT in the history of the company. An EBITDA of INR 863 million, a margin -- EBITDA margin of 24% and a PAT of INR 423 million. This, despite a very tenuous start to the quarter where we had to take shutdown across all our facilities in keeping full adherence to government regulations and guidelines. We've also used the opportunity of this quarter to further cement our differentiation in the minds of our customers, particular to do with supply reliability. If I were to talk about some of the underlying performance drivers that led to this quarter, there has been a very robust demand for our base products, but also a strong growth and acceleration in growth of our new products. Our new products contributed 11% to our revenues in quarter 1, which was an improvement from quarter 4, where it was around 7%. Solara's business model has always been one of working with our customers strategically, working on a long-term basis, creating mutual value. Now we see that strategy is yielding tremendous results across markets as we gain more share of wallet of existing customers and our reliability and working on a strategic basis is helping us win new customers with our products. The market leadership that we have in many of our base products has been reinforced in the last quarter as our customers have trusted us to deliver an increasing share of their needs. We've also focused on portfolio maximization, and we've extended some of our existing products to new markets. We also mentioned that the cost improvement mindset that we have in Solara is pretty much in our DNA. And there has been a strong delivery of cost improvements, efficiency-related initiatives continue to support our growth and our profitability. Our plans to file 10 new DMFs this year is very much on track. Let me also talk a little bit about our CRAMS business, as we've been mentioning it every quarter. Our pipeline on the CRAMS business continues to grow healthily. Our current pipeline has grown by about 20% in quarter 1 FY '21 compared to this quarter 4 FY '20. And we start to see some big wins coming in through the CRAMS pipeline, and this is going to build a very strong foundation as we build our CRAMS business in the future. Let me also share with you that the Phase I of our Vizag expansion is complete. It's a greenfield facility that we have built in record time, and it's going to be a multipurpose state-of-the-art facility in Vizag. As we've announced in our press release, Phase I, Solara would have an access to additional 3,600 tonnes per annum of Ibuprofen capacity, taking our total capacity across the company to 8,400 tonnes per annum. Also delighted to say that we have now very firm customer interest and contracts for the volume of Ibuprofen that we will be making in Phase I at Vizag. We will be servicing our global customers from Vizag as and when regulatory and customer audits, which are normal, are completed. So we hope this site to have full capacity in the next 12 months or so when all these customary regulatory audits and customer audits are completed. There is a Phase II for Vizag, where we will cater to both large volume and niche APIs. And the way we have designed the facility makes it adaptable to have efficiencies, expansion and flexibility. This will enable us to have a multipurpose API block that can cater to both small and mid-volume APIs. We are targeting to file on DMF, new DMF this year from this block in Vizag. We also have space to expand further, and we can build additional blocks to get into new growth opportunities that we may have a new product filings that we may do. We do have an ambition for the Vizag side to become a flagship facility in the time to come. Let me also mention here an update on the Cuddalore inspection. As we have announced before, the U.S. FDA classified Cuddalore under OAI Official Action Indicated. Post the inspection results coming to us, we set up a dedicated team of both internal and external experts which are working on a mission mode collaboratively with the agency to resolve the observations. I want to reiterate that Solara is strongly committed to address the observations raised by the agency, and we continue to be committed to the highest level of quality and compliance And want to again reemphasize that our quality systems are robust. The observations that we have from the FDA does not have an impact on any other APIs, which we manufacture or supply from Cuddalore. With the favorable macros that we continue to see our strong performance-driven tailwinds that we experienced, I see Solara continuing its momentum in the coming quarters. And we can reconfirm our guidance of over 25% year-on-year growth in revenue and EBITDA for FY '21. I now request Hari to share some details on the balance sheet and key ratios of the quarter.
Thanks, Bharath. Good afternoon to all. We noted that our financial ratios have continued to improve on back of our consistent and performance barring one-off over Q4 occurrence, which is a very unique one. We'd like to share that there is no outstanding of any ICDs as on our books as of 30th June. This is in line with our commitment given in the last quarter call. This has been received with interest and the same has been kept in our fixed deposit. Our net debt as of 30th of June is INR 592 crores after adjusting the cash in -- of INR 115 crores. While our net debt-to-EBITDA ratio is comfortable at 1.7x, our annualized return on capital employed is in the high teens. A further infusion of capital INR 288 crores via subscription to the warrants from our anchor investors, promoter and TPG will take place in the month of September. And this will give a fresh equity infusion and also it reduced net debt to the INR 300 crores level in quarter 2. With a healthy balance sheet and a fresh capital -- infusion of capital and abandon opportunities, Solara is positioned exceptionally well for the future. Thank you so much for all your support.
[Operator Instructions]The first question is from the line of Ashwini Agarwal from Ashmore Investment Management.
Many congratulations to Jitesh, Bharath, Hari and the rest of the team for such a wonderful set of numbers and the commentary, I wish Jitesh the best in whatever he chooses to do next and I for one will miss him, but Bharath welcome and good to hear your comments at the open. Two or three big questions. One is that while margin performance has been strong and your outlook is pretty strong, I mean, on the revenue front how would you provide more insight into the quarter gone by? I mean, was it more price led, was it more volume led? What would be your estimate of revenue lost on account of shutdown, is there an efficiency loss that you are experiencing because of social distancing at work etc. If you could provide some insights, please?
Ashwini, thank you very much for your kind comments. So let me address the first question on revenue. So as I'd said earlier, because of the COVID related shutdown that we had to take in the early part of the quarter for about 3 weeks, we were in a mode of allocating our capacity to products which gave us a higher margin. So there was definitely a focus on gross margin, led growth in quarter 1. So that is one of the reasons why you would find that probably our margins are solid and some of the consequences of that, of course, is that the product portfolio takes more towards those type of products. In terms of how much time we lost, as I indicated earlier, there was about 3 weeks of production stoppage in quarter 1. And then if I were to address the question you had, are we finding any inefficiencies because of social distancing, et cetera. We have actually managed that quite well. We don't see any inefficiencies. We have taken care to make sure that all the norms that need to be followed at our facilities and our offices are all as per guidelines issued by the government. So, so far, we have not seen any impact in terms of efficiencies or inefficiencies, let's say, that have crept in because of these steps that we have taken to keep our employees healthy.
So it's a portfolio reallocation of sorts at your end where given the capacity constraints, you focus on more profitable products. How is the order book looking? I mean are you -- do you have visibility for the next 3 quarters of close to peak production? Or how are things looking at this point?
So there are a couple of factors that are driving a very positive momentum for us in the coming quarters. First one is that if you look at the strength of general demand that we see and that I mentioned in my opening remarks about our existing customers really appreciating our differentiation and supply reliability, and we are able to increase our share of wallet there. But also the growth that we are getting with the newer products and newer customers, we see quite good solid demand picture for the coming period, Ashwini. So we see a robust demand picture going forward. And also just to point out on the revenue side, Vizag is still not factored in. And as we have already shared with everyone that we will see that kick effect of revenue happen in the second half of the year. So if I were to take into account the fact that we did not produce or shipped for 3 weeks in quarter 1, and Vizag will come on stream, and we will start seeing the impact of that in the second half, I see that we should be well on track to meet our revenue guidance.
And last question is on CRAMS. You made a small reference to the fact that CRAM's revenues grew by 20% in Q1 quarter-on-quarter and you're confident of growing this. I mean, what are the plans? I mean, you had been looking at opportunities for inorganic growth I'm dovetailing this into Hari's comments saying that the money that comes in from warrants will probably go towards reducing the net debt. So have you kind of given up the inorganic growth opportunities and build this business organically?
So 2 clarifications before I answer the question. First, I'd said the pipeline has grown by 20%. So the size of the opportunities that we have in the pipeline has grown by 20%. That's the first. The second, Hari's comment was more to say that with the inflow of capital from the other investors, the net debt at that time will be there. Of course, we've not given up on inorganic. So let me address both questions. I just wanted to clarify that, Ashwini. So let me address both questions. On the CRAMS piece, we see -- we're starting to win some big contracts, which I mentioned also in my opening speech, and our size of our inquiry basket or the opportunity pipeline increasing also shows that we are starting to gain credibility with some of the bigger customers. And that's very crucial, as we all know, for the CRAMS business to grow. We also know it's a long-cycle business. So from the time we get an opportunity to the time it comes to fruition, it is a period of a few months. And so we're in that process of engaging with our customers. COVID is not helping because a lot of this has to do with visits and discussions around scientific lines so we are on track. It's an incubation business. I mean, for us, that's how we look at it. It's tracking really well. The opportunity pipeline is going in a positive direction. We're having the right discussions with our customers. So we see it trending in the right direction, and we hope that it will continue to do that in the coming period, and we see that as being growing at a very healthy clip over the course of the next coming years. And then coming to the inorganic question, that is still our strategy, and it's very clearly articulated also, and we continue to reemphasize, we are looking to make an inorganic move. And of course, the capital will enable that opportunity to come to fruition. And that is still the plan, that is still the strategy. We are continuing to look actively for inorganic growth in the CRAMS space.
The next question is from the line of Madhu Kela from MK Ventures.
Hi, Bharath and the team, a fantastic show. I'm glad to be part of this company. Bharath, if you can just give us a little longer -- medium, longer-term view on your CapEx plans? And how do you -- what kind of CapEx is possible over the next 2, 3 years? And when do you think the company becomes FCF positive?
Maybe, Hari, you can address it, and I'll add color to it.
Kela, Hari here. See, the -- we have already started putting around INR 250 crores in our Vizag facility. And the last year, we spent around INR 165 crores of that balance and some of will be spent during the current year in Phase-I expansion and for all other units we are marking around INR 100 crores CapEx on that for every year, around INR 40 crores is for the maintenance CapEx and balance INR 60 crores for the debottlenecking and capacity expansion in the each unit. And you know that recently the government has announced that various incentives teams for the API industry and various product making as far as the KSM making. And we want to take advantage of that, and there is no restriction on the CapEx among quarter, we have a good free cash flow generation from the business. That will be used for the expanding the facilities on need basis on the Capex.
So this is what I'm asking that when do you seeing the company because given you have such strong numbers from EBITDA, when do you see the company...
It's ongoing activity, Madhu, and there's no specific gain for the because based on the business days and new products, will we keep on investing. And so each unit has got capacity to increase and also, we have got additional land in Mysore and where we are currently that unity is having only the -- making the intermediates, we can expand the capacity there. We have got a -- it depends upon the growth opportunities, and there's no restriction on any for us. The business of growth, we are willing to invest any money on that.
Yes. Hari, is it fair to assume that our absolute debt number will not rise over the next 3 years, and we'll be able to fund the CapEx based on our cash flow?
Correct. Yes. We don't expect that any increase in the debt compared to the current level.
My last question is, are you guys looking at any inorganic opportunity in the near-term in the next 12, 18 months, wherein you are pursuing some target for acquisition?
As Bharath indicated that we are looking at opportunities inorganic opportunities in the CRAMS plus other business area. Once an appropriate decision is made, and we definitely will come back to the market to inform about that.
But will that mean the debt will go up because of the inorganic acquisition?
It will be within that approved limit of -- in case that they are inorganic opportunities is -- it will be on a self reliant basis, only that the investment will be made. So that they're able to support the additional EBITDA and additional interest payment for that support in case it's a good acquisition.
Thank you. The next question is from the line of Bharat Hegde from Motilal Oswal.
I wanted to ask on Ibuprofen overall, what is the demand of the industry and your capacity addition or anything else would impact the prices in Ibuprofen?
It's difficult for us to give a comment on the overall demand. Our capacity, we have stated also that it is with the addition of Vizag. It is now 8,400 tonnes per annum. Our Ibuprofen presence is very strong. We're one of the global leading players there. And our business is based on long-term contracts with big customers. So we're very confident of our Ibuprofen position in the market, and we are very confident that we will continue to see that business grow in a profitable basis.
Just another question. On the profitability EBITDA margins. If you see, you also commented that your margins -- you had higher-margin products in the first quarter. So are you expecting over the rest of the year, the EBITDA margins and EBITDA to go down a little bit as compared to quarter 1?
So if I were to talk on a gross margin basis, as I said, because of the portfolio choices we made with limited capacity. I mean, we're talking in the order of magnitude of plus/minus 2 percentage points on a gross margin basis. So that's kind of the range that we are talking about. The structural fundamental issues are still strong, but that's the variation level that we would see if the product portfolio normalizes to a typical one.
Thank you. The next question is from the line of Rahul Veera from Abakkus Asset Management.
Just wanted to understand, Sir, usually, we've seen that ibuprofen keeps moving around $12 to $18, depending on the demand supply mismatch at any particular point of time. So at $12, what would be the gross margin or we can expect from this product?
So actually, we can't typically answer on that level of detail. Hari, do you want to add?
Yes, that's what, I am alluding to what you say. The product wide details, sorry, we're not able to share at this point. And being a long player in Ibuprofen, and we have 30 years of manufacturing experience. And also we are very strong in costing them from process on that. So we'll be most competitive in the marketplace.
Right. So I just wanted to understand, like, because of there were like IOL has come up with the capacity in the last year. This year, we are coming with the capacity. Overall Ibuprofen demand supply over the past 10 years has been plus or minus 2% growth at max. And with only one of the competitors' plant going off, largely the delta of pricing has been on that. At $12, it's been very difficult for anybody to make huge margins on this. It's not been a very high gross margin product overall. So this was understanding the overall investments that we made, what kind of payback can we expect from this product?
So again, not getting into the financial particulars of this. But generally, again, to reemphasize our positioning on Ibuprofen is based on long-term contracts with customers who have also very secure needs in terms of volumes, et cetera. #2, we're also a leading player on Ibuprofen derivatives, which is a market segment that's fast growing. Across many of the regulated markets where we have a dominant presence in terms of our customer share of wallet. So we are very confident, and we're very clear about the fact that we are able to add value to our customers on ibuprofen portfolio that we have. And we don't see any reason to kind of see this trend go anywhere different in the coming years.
Okay. So Sir, after Ranitidine, do you think Ibuprofen will be one of our largest product in the top 3?
So again, we don't particularly get into product level details. It's one of our key products, that's all I can say.
Thank you. [Operator Instructions]. The next question is from the line of Kunal Mehta from Vallum Capital Advisors.
I wanted to understand, this year, you said you mentioned as we missed at least 20 days of production. So I'm presuming that the volumes would have been lower by at least 12% to 15%. So I wanted to understand that the price, the margin improvement which we have seen, is the price increase across the portfolio? Or there are certain products where there has been a larger than proportionate increase in prices?
So certain products, where we've seen pricing -- positive momentum on pricing with our customers.
Understood, Sir. And second question is on the Vizag facility. You have Phase I coming online in the next few quarters. I wanted to understand what was -- what is so absolute tonnage across all products, what is the net addition to capacity in Phase I? And just a kind of quick question on this one that I'm sure right now, the plant is under qualification for the developed markets, especially for your U.S. players and European clients. So you would be getting to a DNS registered in NDAs. So could you please give us an understanding of what products are you going to file to go into partnership with the customers from the side, are going to do the base business products which you have and then you would add new products in Phase II? Or are these also going to be new products, completely new product range which we are looking at?
So Phase I is Ibuprofen in Vizag. That's our greenfield facility. So in Phase I is what we have now started the validation for Phase II will be the facility which will cater to multiple products, both large volume but niche APIs. The design is adaptable, as I said earlier. So Phase II, we will expect to validate that somewhere towards the end of this calendar year. So that's kind of the plan. So end of this calendar year, early next year is when we will validate Phase II plant. For now, the Phase-I is the Ibuprofen greenfield facility that we are in the process of validation. And to your question on regulatory market sales, as I had indicated earlier, the time lines for customer/regulatory authority have come and visit and audit the facility is a little bit tougher question mark, given the COVID situation, but we anticipate that in about 4 quarters, the site should have most of the customary regulatory and partner approvals for qualification completed.
You are referring that for Phase I?
Yes, Phase I.
Okay. And Phase I is only ibuprofen. Right, Sir?
Correct.
Okay. And Phase II, the direct market approval would be 12-months from the validation completion. So that means we're looking at FY '22 calendar year revenues starting to come in from Phase II?
Yes, from FY '22. Having said that, some of the products that we will -- we are still finalizing the product portfolio in Phase II. It will be new products and some of the existing products that we may do a site transfer. So the qualification time lines depends on those things. But you can say that FY '22 is when Phase-II will start contributing revenue to the company.
The next question is from the line of Aditya Shrimankar from Equisearch.
I have a question regarding raw materials.I know you've already answered this question that you guys have had a better product portfolio sales. So last year, the gross margins were 50%, and this year, in Q4 of FY '20, it improved to 54% and now it's at 63%. So I wanted to know what -- if you do an apples-to-apples comparison, have the raw material prices moved in any way for the products that we sold?
In Q1 of last year, our gross margin is 54%, 54% -- nearly 54.3%. And the current quarter it is on 57% and it is due to the operational improvement and product mix mainly.
Okay. So there's been no change in -- not much change in the raw material prices?
Yes.
The next question is from the line of Ashita [indiscernible] Dron Capital.
Congratulations on a great Q1. In your opening remarks, you guys alluded to the fact that about 11% of your top line was contributed from new products. So in this context, what is your definition of new products? When you say new, does that mean they were commercialized in the past 12 months?
So our products that we have commercialized in the last 3 years is what we call new products typically, so where the filing has been done, and we started a commercialization process.
Right. Okay. And I have another question regarding API prices. Could you just shed some light on if you've seen any increase in API prices in Q1, and if those and as the price volatility persists in this quarter, if you could just comment specifically on Ibuprofen and Gabapentin, please?
So as I said, our ibuprofen business is on the strength of long-term agreements we have with customers and what we have in terms of strength of demand from them. So there is always price volatility in every product. We see that we're in a strong position regards to our long-term agreements and our customer relationships. So we're looking at that as the way that we stably build this business. On the general API price volatility, I mean, there are, of course, every quarter, there are variations in pricing that we experience across our portfolio of products. As I alluded to earlier, some of our products, we see some pricing strength in this quarter, and that's driven by demand and also capacity. So we continue to see those trends for some of these products in the coming period.
Right. So this includes products such as gabapentin as well, right?
Again, not going into specific products. So I'm just saying generally that we do see this trend pricing power and some of the products that in our portfolio.
Right. Okay. Just I more from my side. You had mentioned that you're targeting about 25% Y-o-Y top line growth, right? And please correct me if I'm wrong, but I heard that you mentioned that the Vizag facility will only contribute to the revenues from FY '22 so where exactly is this extra revenue coming from? Is there some unused capacity in the remainder of the plants that haven't been utilized completely yet?
So let me clarify. FY '22 is Vizag Phase-II. Phase I, we expect will start contributing revenues from the second half of this year. So that's what we think will also add a boost to our revenue growth.
Okay. And so the INR 250 crores of CapEx you have done for the Vizag facility, that is for Phase I -- that is Phase I and Phase II combined?
Yes. It's Phase-I and Phase-II combined.
The next question is from the line of Viraj Mahadevia an individual investor.
Just at a very high level, I was trying to understand how you are doing such exceptionally strong margins in products that are generally viewed as more commoditized, right? So Ibuprofen, et cetera, are not generally very high-margin products. So what do you think has been sort of your secret sauce or winning secret here? Is it process improvements? Is it the structural changes in the market? Is it better pricing? I mean, what is happening? And how are you generating these disproportionate margins?
So overall, our margin profile is impacted by 2 strong and significant actions we've been taking, and we continue to take. And they are already what you had said and indicated in your question. So one, on the pricing side, of course, we see stability and growth in pricing in some of our products. And that is driven by, again, what I said earlier is that we are allocating capacity to those products in the quarter 1. That drove some of the margin improvements. Second, the cost improvement focus that we have in Solara is pretty much part of our DNA, and we've consistently delivered yield efficiency improvements, OpEx improvements across quarter-on-quarter. And that still continues to be the engine that continues to motor on with good speed and momentum. So on the cost side, we continue to see positive actions, and we continue to see and implement those -- and on the revenue side. We see pricing power in some of the products. We see pricing strength in some of the products. So of course, both put together is what's driving the margin performance that you had asked about.
Understood. And typically, in these product categories, has China been typically a large -- any benefits or tailwinds coming in from sort of China plus one sourcing from our end clients?
So on a general basis, this trend is very visible and accelerating. And we see definitely conversations with our customers who are looking to de-risk their supply chain. Multiple geographies to source from, and that is driving quite some traction for some of our products. So generally, that trend is visible and accelerating. And of course, we have seen that impact also with Solara. So for sure, that is a trend that is happening.
Fantastic. And just last point on housekeeping. Good to see on Page 5, you highlight that the ICD has been cleared. So I guess, good to see that from a shareholder point of view. Regarding the pledge shares of the promoter group, when can we expect those to be cleared as well to remove any kind of overhang out there?
Actually, as a company, we cannot give an answer for that, and it does be -- we don't get much detail about that. We just get the information. It's a promoter office only, you may have to contact regarding that. It's not a function that we control.
Sure. I mean I think it is awkward for shareholders to reach out to the promoter office given that you all represent the promoter and the company. But nonetheless, thank you. Thank you very much. All the very best. Thank you.
The next question is from the line of Ranvir Singh from Sunidhi Securities.
Sir, question relates to your raw material but tough products, just wanted to understand the level of integration. So we are -- whether we are integrated up to KSM level or we are still importing KSM from other countries, specifically China? So are there -- if you could give some insight on this prospect?
So around 32% of our imports are from China. I don't know, if it is KSM, but basic chemicals. And so we are dependent upon that, and balance is about 68% of the material is procured from Indian source.
And just to add to that, wherever there is an opportunity to backward integrate strategically or get a key starting material in-house or from a source that's more local. We do that on a structural basis. We continue to do that every quarter. But as of now, this is the situation.
And as far as supplies are concerned, that supply there is move from China or during this COVID, have you faced any disruption there?
No. So we have not faced any disruption. We had acted proactively when we started first hearing about some supply chain risks in China to strategically either build stock or work with our suppliers. So we've not seen any disruption because of COVID from China. So we were in a good shape there.
Okay. Okay. And second one on balance sheet. Where we see our debt level or what's the current debt and where we see in -- by the end of FY '21?
Our net debt is INR 600 crores level. And the -- and we expect that equity infusion money coming to the next quarter. It may dip down to INR 300 crores by next quarter. But our -- there has not been much increase on a gross debt compared to that what level we are in. We are constantly reducing the term loan by repayment on monthly basis.
Cash flow is obviously getting stronger. So apart from that regulatory payment we have, absolute wise, are we going to pay off anything in addition to that, so we can see some significant reduction there?
See, actually, about 50% of around INR 380 crores is working capital, which is recurred to support the operation, and we have around INR 335 crore of term loan. And we see that the -- it depends upon the strategic decision what we'll be taking that whether we want to go for inorganic apposition for this fact we have. It will be a constant there between the effective utilities of the refunds and the return on the investment. Based on that, we'll take a decision.
The next question is from the line of Om Prakash from [ Lotus ] Capital.
Yes. Sir, what is your utilization currently? Because I think based on your gross block of around INR 850 crore, you've been doing it or of around INR 1,350 crore. So is it safe to assume that even in the fresh Capex, the asset turnover will be around 1.5x or so?
Our current capacity utilization is around 70%. And during the COVID situation we expect that the -- we -- 1.75 is our asset turnover ratio we aim at, 1.75 to 1.9.
Is it more of a function of product mix also maybe?, Typically, you can take a benchmark of 1.75 for this kind of a business?
Yes.
And based on this new trust of API by the government, is the -- are you bringing anything on the drawing board? Do you think what will be our opportunity or scope or -- and is there any possibility of you can also do some brownfield expansion in your current plan?
See, we have reviewed the entire scheme announced by the government. We are in the process of working towards that. And there are some KSMs and our own manufacturing APIs are in the list. And we are in the process of making a drawing board visibility for the same. And we have got the land in Mangalore -- sorry, in Mysore as well as in Vizag expansion, and we'll be taking a proper decision on that.
What kind -- what could be that size of opportunity?
It will take some more time. Yes, it'll take time. The government has given time within the time, we'll be making a decision on that.
The next question is from the line of Kunal Mehta from Vallum Capital Advisors.
I wanted to understand when you mentioned 70% capacity utilization you're referring to the first quarter is only, right? Not the normal capacity quarter?
It was the first quarter. That's what you was asking. First quarter capacity utilization is 70%.
Okay. And sir, secondly, I wanted to understand this whole trend of price in prices because of higher demand, so I'm sure your customers are seeing increased demand from the customer from that is why we are also seeing high -- higher volume demands for our products. So could you please give us an understanding of this trend, how do you see the agitate of these set of prices maintaining themselves. Do we expect them to be -- do we expect this price level to maintain for the next, I would say, 3, 4 quarters until they're stocking because your customer have increased their stocking requirements.
So we see now the trend is clearly showing stability of this pricing levels for the period to come. I mean it's difficult because there's always volatility quarter-to-quarter. But the strength in pricing, we see quite some visible trends for the coming period of time. What is driving this? Of course, one is stocking, but we also see is, generally, the supply chain derisking that I talked about earlier from multiple sources, giving a premium for supply reliability, increasing procurement of certain product at a higher percentage from a more reliable supplier. All of these are driving trends. So I would say there's multiple contributing factors to why we see demand strength. Some of it is very specific to Solara. I mean the supply reliability point is very specific to us. So I think that's what's driving the strength. And -- and we continue to be a reliable supplier. And so I see the strength in demand for Solara to continue as I see the visibility for the coming few months, quarters ahead.
So just a final question on my side. So do you actually expect, I would say, it has been the case in prices from China to increase business, if you are able to improve your margin, I'm sure somebody supplying to you -- so want to share of it. So do you expect pricing to -- do you expect raw material pricing to stay the same or an increase to a good extent, going forward?
Again, that's a little bit of a volatile situation, right? But what we have seen and what we continue to see is no major changes in pricing upwards from our raw material suppliers, and we don't see that trend at all.
Understood, sir. Understood. Thank you for the question. Thank you for your time.
The next question is from the line of Aman Banerjee from Indgrowth Capital.
Sir, when you mentioned that you have this 70% capacity utilization in Q1 FY '21, I'm assuming that you have excluded the 21 -- the whatever days the lockdown was there from the denominator as well. Is that a correct assumption?
Correct.
Yes. So -- and my second question is, I didn't really didn't catch our CapEx guidance figure. So can you please repeat that again?
Just to clarify the Capex, we have about INR 250 crores for the Vizag Phase I expansion. In that, we already spent INR 165 crore in the last financial year balance we will be spending in the current year. Also all other units, INR 100 crores is our CapEx plan and 40% being for the maintenance, 60% for the debottlenecking and capacity expansion. And when there's a new opportunity that comes for anything that we have a good free cash flow in our hand, we'll be investing on the business need purpose for growth.
Okay. And given that our Phase I Vizag facility is complete, I understand obviously, it's not generating revenue as of now. So is there some -- are there some costs that we are incurring in order to -- in terms of the fixed cost of having the facility and the people and other such costs and are we passing that through the P&L? Or are we capitalizing that?
No, we are all that passing through the P&L, and it's not being capitalized.
Okay.
The reporting standard but is regularly alone is being put in the P&L, which is regularly allowed for the project, that will only be capitalized.
Okay. What would the quantum of this be, let's say, for a quarter, the costs which are not producing any revenue?
Say, that's a unit wise specific information, we'll not debut to share with you, but that's not a very -- that's a good amount of expenditure we had to infer to maintain the facility.
Okay. Fair enough. You are not able to give that information.
The next question is from the line of Amar Mourya from AlfAccurate Advisors.
Sir, last year, in financial year '20, I believe we did the CapEx of around INR 269 crore, right?
Yes.
Yes. So how much time does it take for CapEx to reach to its full utilization level, like 2 years, 3 years?
No, see out of INR 265 crores, INR 165 crores is for Vizag, balance INR 100 crores for the normal other units. And the -- every year, we'll be incurring the CapEx. There's no that for growth of the business, and for the maintenance of the asset in a good condition, we'll be incurring the CapEx on a continuous basis for the growth of the business.
So when you guide for 25% kind of a growth, I wanted to understand, do we have that capacities with us to deliver 25% growth in '21? That is basically my question.
Yes, we have a capacity to deliver that kind of growth that what Bharath indicated into the current business as well as the current investment as far as the Phase-I capacity in Vizag will be used for the growth driver for the business.
And then the Vizag Phase I will actually hit? Is it going to commission in the second half?
Second half, that's what we are aiming at it.
The next question is from the line of Himesh Shah from Capita India.
My question is on the inorganic opportunity and the money that's going to come in next month. So I didn't get the clarity on that. So are you going to pay back the debt? Or are you just going to keep the money in the bank and wait for the inorganic opportunity to come?
So there are efforts already ongoing to identify the right inorganic opportunity. And we are looking at it on 2 aspects. We are looking at it as 2 inorganic opportunity that could significantly leapfrog our CRAMS business. That's what we call the science access or we're looking at science and scale, which means that the size of the business is sufficient to add heft to us and give us differentiation when it comes to growth. So we are actively in the process of looking at an inorganic growth opportunity. So there is -- the capital that we talked about and what was mentioned by Hari earlier, is going to go into funding that inorganic opportunity that we are yet to identify, but we're working actively on so the moment we identify that, we will be using the capital for an inorganic opportunity.
So are you in talks with some companies? Or that is just trying to find out whether there is any inorganic opportunity identified?
As you would appreciate, it's difficult for us to get into that level of detail of any of these type of topics I again reemphasize that's an integral part of our growth strategies, particularly on the CRAMS business, and we continue to look at that very, very actively on an ongoing basis.
Okay. And one more question is on the guidance that you have given, 25% revenue growth guidance and 25% EBITDA, right? So you've done around 6% revenue growth in the first quarter, but the EBITDA is up around 30%. So are you expecting margins to go down in the next 3 quarters?
So as I had said earlier, it's a good question. So again, we had done a portfolio maximization in the first quarter, given that we had capacity that was limited because of the shutdown that we had on COVID-related matters. That has added some heft to the gross margin number. And also, as Vizag will kick in, in the second half of the year. So that's also going to help us with the revenue growth. So as we normalize our product portfolio over the course of the year, could be plus/minus 2 percentage points variation in the gross margin. But that's kind of the trend that we see going forward.
The next question is from the line of Alankar Garude from Macquarie.
Sir, my first question is on the Cuddalore OAI. So considering that we have had a pretty strong regulatory track record so far. Can you just throw some more light on what exactly were the issues cited by the U.S. FDA? Is there anything different which we could have done? And approximately, how much time do you think it would take for the remediation to take place?
So let me address the second part first. So we are already, ever since the notification came from the FDA, we have set up this task force of both internal and external experts. We're working on it. We had agreed on a time-bound response plan to the FDA, and we are on track to do that. And we are very confident that whatever commitments we have made to the FDA will be met on time as we have committed to them. So that process is ongoing, and we are confident that we will be able to adequately address all the issues that were raised by the inspection. So that's one. And coming to the first part of your question, as I've emphasized, again, there is none of the observations were to do with the core quality system or our compliance systems. I don't want to go necessarily into the details of the observation, but needless to emphasize again that they were to do with specific protocols regards testing, communication, et cetera. None of them were to go over the core quality systems or the compliance systems that we have in Cuddalore.
Understood, Sir. And any -- so can you share the time line which you have communicated to the FDA?
So we will be submitting all our responses this month.
Okay. So more or less the final response from your side, right?
Yes.
Okay. And secondly, Sir, how important is this facility in terms of existing sales contribution as well as future filings?
So I will allow Hari to comment on the existing sales contribution. On the future filings, we always have a strategy where we look at risk mitigation by looking at alternate sites or mirror sites, as we call them. We're in the process of implementing that strategy for the key products that are made out of Cuddalore, and we will be successful in completing that exercise in the next 3 to 6 months. So beyond that, we don't see a risk at all in terms of ability to source from a lot of regulatory markets for these products. Maybe Hari can comment on the first question in terms of the sales importance of Cuddalore.
Yes. See, we don't give specific detail about the sales retail or unit by. But we've only not really suffer the U.S. market. We suffered in various markets from that facility. One of the major products, which is Ranitidine which had an issue. Other than that, there's no restriction on that. And we have continuing to sell the goods to the various customers and in various part of the world.
Okay. But any color on the percentage, any broad range that will also surprise in terms of current contribution to U.S.?
Sorry, that -- we're not able to share at this study unit wise data as a policy we have. We're not able to share that data.
Thank you. The next question is from the line of Saket Mehrotra from Beta to Alpha.
The first question is regarding the DMF filings with the FDA. So I believe as on June, we have around 86 filings. I think that puts us almost in the top quartile of API manufacturers. So in terms of the road head, how many filings are we looking at? And do we have any strategy to keep maintaining this leadership position? And the second question, I believe, somewhere you had clarified that right now, 32% of your imports are coming from China. So is there any way of reducing this? Or do you see any risk around this in terms of the ongoing crisis or the ongoing balance of power that's going on?
So on the first question, we are planned to file 10 DMFs this year, and we are on track to do that. And we will continue to do that in the following year. Again, our objective is not, per se, the number of DMFs, but the quality of DMFs. So the product selection is a very integral part of our growth story. Particularly organic growth story. So we are very focused on choosing the right products and filing the right -- in the right markets for us to enable growth in the future. So this year, as a fact that then we will do, but the quality is what we are focusing on also this year and beyond. Coming to China sourcing, yes, that's an actively monitored and managed metric that we look at in terms of import of raw materials from China. We -- wherever possible, we do alternate source from other geographies, and we've done that already for a few percentage points of our spend over the course of the last couple of quarters. We intend to continue that exercise for the coming quarters. So on an ongoing basis, we expect to risk mitigate. Now just to clarify, it could be very possible that we have an alternate source, but just from a commercial perspective, for that particular quarter, we've not bought from that source. So while 32% was the imports from last quarter, the risk adjustment of that 32% could be a few percentage points lower. Where we have alternate sources. We've just chosen commercially not to buy from that. So that will be an ongoing effort. As I also said earlier, we will look to in-source wherever there is a possibility to do so, and it's strategic for us from an API sales perspective.
Okay. And secondly, on the CRAM side, I believe there was some commentary around it beginning Q4 that you're receiving a lot of inquiries. And I believe in your Q1 presentation also, you've spoken about it. So in terms of how much of, say, this mix is say, your target in, say, in the next 5 or 10 years in terms of maybe contributing to your top line and as well as your margin expansion?
So it's an incubation business for us, as I said. So we're in the process of kind of focusing on growth here. I don't want to hazard a guess now of saying that it will be -- or an estimate to give you an estimate now. We are focused on as we should be on an incubation business of growing the pipeline, enabling our differentiation to sink through to our customers, making sure our customer base is right and making sure that what we offer as a service or a product to our customers is differentiated and something that excites them. So a lot of the attention and focus is on the building blocks right now. And our ambition is to grow to a significant nature in the coming period. It's -- I think I would desist from giving you an exact estimate at this stage, given that the stage of the business, it's an incubation stage for us.
Okay. Final question, any updates on the Ranitidine ban? Or is there any material impact because of that? Because I believe you've offset that through a mix of CRAMS and other products, but just some color on that.
So all the impact of Ranitidine was already captured fully in Q4. So there is no financial impact that we've seen from the ranitidine issues and we -- from a strategy perspective, for the capacity, we've looked at it 3 ways. So one is where we see increased growth of existing products that we are making in Cuddalore, we have used that capacity for that. Second is we've looked at new products that we could do in that facility. And third is, of course, the CRAMS business. All 3 are important levers and pillars in which we are looking at derisking Ranitidine sales from the Cuddalore facility.
Ladies and gentlemen, due to the interest of time. That was the last question. I would now like to hand the conference over to Mr. Bharath for closing comments.
So thank you, everyone, for joining today's call. And once again, from all of us at Solara, we wish you the best in health safety for you and your loved ones. We look forward to participating and joining you in future calls in the coming quarters. Thank you very much. Have a safe day and a healthy day.