Solara Active Pharma Sciences Ltd

NSE:SOLARA

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Solara Active Pharma Sciences Limited Q1 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Abhishek Singhal. Thank you, and over to you, sir.

[Abhishek Singhal, executive]

Thanks, Niko. A very good afternoon to all of you, and thank you for joining us today for Solara Active Pharma Science's earnings conference call for the first quarter ended financial year 2024. Today, we have with us Mr. Poorvank Purohit, MD and CEO, to share the highlights if 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 stock exchange website. The transcript of 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 the Investor Relations team.

I now hand over the call to Poorvank to make his opening remarks.

[Poorvank Purohit, executive]

Thank you, Abhishek. Good evening, everyone. Thank you all for joining the call today. I'm delighted to start financial year 2024 on a positive note after having accomplished many of the goals we set out for ourselves at the beginning of the previous year. Our current priorities are to stay focused and moving forward from what we had achieved in the last fiscal year. I'm also happy -- the recent news you all would have read that we are happy with the recent outcome of the U.S. FDA inspection at our Cuddalore facility with zero forestry inspectional observations. The result of these inspections demonstrates our commitment to regulatory excellence at our global manufacturing sites and our relentless focus on world-class quality and compliance.

Coming to the Q1 performance. On revenue front, we had a 5% growth Y-o-Y, year-on-year. Gross margin stood at 45.5% against 41% in the same period last quarter, quarter 1 of last year. EBITDA margin stood at INR 20 crores, 23% growth Y-o-Y before ForEx. And after ForEx, it's still a growth of 11%. We continue to work on our key strategic priorities, which include resetting and concentrating the base business, restoring R&D velocity addressing under recovery that are newly commissioned by that site and expanding into new products and geographies.

Our order book continues to be strong. We are pleased to note that increase in demand for ibuprofen as well as ibuprofen derivatives. We continue to focus on operating cost reduction continuous improvement programs and inventory management. With strong order book position, expansion in margin and reduced under recovery at Vizag, we have a visible growth momentum for the forthcoming quarters.

On our R&D, we had filed 8 market extensions, all done for existing product during Q1 2024. We continue to invest in our R&D for strengthening our generic API portfolio and plans to meet the growing demands of our existing products while as a part of increasing market share through market expansions, addressing regulatory requirements for new products.

Coming to our Vizag facility, we have received U.S. FDA and European CEP approval for our Vizag facility now. Our capacity utilization at Vizag has improved significantly in Q1 2024. We are currently in the process of qualifying regulated market customers to offtake products from our Vizag facility. I'm glad to share that one of our major customers has also received the U.S. FDA approval for its product with supply of API from Vizag.

We are working towards building new opportunities for sustainable growth. Our net -- our current assets have also reduced by INR 24 crores in Q1 financial year '24, primarily due to improved collections. And our gross debt has also reduced by INR 14 crores in Q1 2024. We are working on comfortable debt-to-EBITDA ratio in the coming quarters -- for the coming quarters. Our primary focus would be to improve cash flows by prudent application of capital. We continue to remain focused on the actions to improve profitability and are confident about fundamentals of Solara.

So now I -- we are open to any questions that we can take during the call.

[Abhishek Singhal, executive]

Niko, we're open for questions now, please.

[Operator]

[Operator Instructions] Our first question is from the line of [ Krish Kotari ], who is an investor.

[Unknown Attendee]

I have 2 questions. So one is regarding the Cuddalore facility. It is now cleared. So how many products are we planning to launch from this facility? And by when can we expect material revenues to start kicking in?

Secondly, the gross margins have come down to 45% from 50% last quarter. What was the main reason behind the same? And what's the steady state gross margin that we are targeting for FY '24?

[Poorvank Purohit, executive]

So coming to your first question, talking about the Cuddalore facility, I can tell you that we are expecting there are close to 13 approvals pending from the site. And these approvals will actually come because once the FDA does the inspection, they issue a zero forestry. And after that, what happens is, it is from official action initiative, the notification goes to no action initiative, after which we start getting approvals for product after product. And so we'll have to wait for 1 or 2 months to -- for the approvals to start getting. And then, of course, after that we can expect some sales coming from Cuddalore already in this financial year. So that's question number one.

Question number two, with respect to gross margins, I would not say that our gross margins have actually come down. Of course, as you are talking about quarter-on-quarter basis that it has come down from 50% to 45%, It is primarily basically the gross margin primarily depends on the product mix, the geography mix. Our regulated market sales was down from 72% to 68%, which actually led to lower gross margins. But in the second half of the year, we -- I think we would continue to maintain that. And our objective would be to get to 50% gross margin on a consistent level basis. Even for the last financial year, you would look at the gross margin, primarily it was at an average of 45%. It was only in Q4 wherein most of the company would show a higher revenue, primarily on account of year closing. That is the time when actually the sales -- a lot of regulated market sales also happened for us during that quarter, which resulted in higher gross margin.

[Operator]

[Operator Instructions] Our next question is from the line of Shantanu [indiscernible], who's an investor.

[Unknown Attendee]

I have a couple of questions. The first one is, could you give us an outlook in terms of overall top line growth that we are targeting to achieve in the medium term? And what are the key growth drivers for us?

[Poorvank Purohit, executive]

Okay. So [ Shantanu ], I can talk about currently the fundamentals of the business. I think we are very strong with respect to the fundamentals of the business. I can tell you from this fact that our order book has actually doubled from the quarter of last year. And primarily, we are looking at with -- of course, with Vizag being operational, we have U.S. FDA approval, we have CEP approval. Secondly, we are pushing most of the customers to the Vizag facility. Number three, our Cuddalore facility getting reclassified.

Now those are big drivers, which actually allows us to have -- if you look at our guidance that we have given in previous calls, you would realize that, of course, we are talking about strong fundamental going forward, which will display in the growth. It is difficult to talk about number at this stage, but that's -- we are very confident about achieving -- going to a significant level. So say, for example, a double digit, which we had actually commented in previous call. So that is something we are talking about in the -- going forward for the coming quarters.

[Unknown Attendee]

Got it. My next question is, we have historically used to have EBITDA margins in early 20s, which have come off in the recent years. By when we can start seeing margins edging towards historical levels? And what would be the drivers for that?

[Poorvank Purohit, executive]

So basically, yes, I think historical levels, we are pulling back because I think, one, what happened in the last couple of years, the demand was actually down, which actually allowed some of the products, especially ibuprofen to come down. But we see that demand coming back. We see a lot of traction with existing customers. And there are also a lot of new customers, which are entering into this space. So we do see a strong visibility and -- for the coming quarters.

And definitely, like I already mentioned, if you look at the historical levels also, the numbers that we are talking about for the current quarter are actually a depiction that the company is quite stable right now in terms of achieving to those levels. So that's what I can comment. And if you look at the historical levels also, I think when we would have been at a historical high also, I think the last -- the quarter actually signified that we are very much in line with what we had projected at that time.

[Operator]

Our next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.

[Tushar Manudhane, analyst]

Yes. Am I inaudible?

[Operator]

Yes, sir.

[Tushar Manudhane, analyst]

In the presentation, there's a mention about the demand increasing for ibuprofen and its derivatives. Can you elaborate on this, please?

[Poorvank Purohit, executive]

So there is a -- so if you look at the ibuprofen demand, so because of our existing set of customers, actually we were not able to -- so there was a -- so we were not able to fulfill those requirements because Vizag was not qualified. And because now we would be able to cater, so in any case, customers are going to other competition. Now with the buyback facility also qualification in place, we would cater to larger demand.

Number two, also we would -- not only on the existing set of customers, we would be able to expand our wallet share with the new set of customers also. And because we have some good traction from some of the global big businesses, which we had not tapped, so that is where we are going to see some bit of traction coming from both ibuprofen and derivatives. And that is something for us to see in the coming quarters.

[Tushar Manudhane, analyst]

And with respect to this customer who's got USFD approval for the APIs -- for having an API for Vizag side, so can you quantify how much business is possible or when will this business start for us?

[Poorvank Purohit, executive]

So I think we are waiting for -- so we had a discussion with the customers. So they are yet to confirm that because they've got the approval. And as you know, U.S. market is dynamic. So it would be based on -- it would be awarded based on certain requirements. And so they are working out the demand. So ideally, we should be able to pan out the plan, of course, going forward. But they -- as they know that Vizag is already qualified, so we are gearing up for that. So we are trying to see, and we get that -- we can try to maximize that.

[Operator]

[Operator Instructions] Our next question is from the line of Aniket Kulkarni from BMSPL Capital.

[Aniket Kulkarni, analyst]

So the company mentioned in its latest filing the succession plan has been created post the exit of [indiscernible]. So could you speak a bit about this plan? I mean what management and structural changes are taking place internally that will put the company in a better position in the years to come?

[Poorvank Purohit, executive]

Sure, sure. So of course, I was talking about Mr. [indiscernible] resigning. Of course, as this is a new development, we did have a discussion and we have already formed a committee. So some decisions are being taken on identifying the right director who would be applicable for this position. And I think in the next 1 or 2 months, we should be able to. So then we would be having the next meeting. Next call next time, we would have everything in place. But that plan is already in place, and there are several corrective measures that we are taking that into account. So that is clear.

[Aniket Kulkarni, analyst]

All right. Second question was how do we rate crude oil prices to the gross margin for us? Like what happens if, say, crude goes back to 100. So will the improvement in supply chain issues versus pre-COVID time still pertain to gross margins that we have?

[Poorvank Purohit, executive]

Can you -- so can you repeat the question? I think we...

[Aniket Kulkarni, analyst]

Am I audible?

[Poorvank Purohit, executive]

Yes, yes, audible.

[Aniket Kulkarni, analyst]

Yes. So my question was, how do we relate crude prices to the gross margins for the company? So what happens if crude goes back to 100. So will the improvement in supply chain issues versus pre-COVID times still help in protecting the gross margins that we have?

[Poorvank Purohit, executive]

See, I think to protect the gross margin, so gross margin is a function of various factors. So we are not only dependent on the crude pricing. I think a lot of solvent prices are there. So there are a lot of other factors, especially if you talk about the ibuprofen per se. So there is IBB, all this. So actually, we have a lot of cost improvement programs already in place to generate that level of crude so that the margins do not get impacted. So of course, it will not affect in the long run because I think we are broadly stable. If everything gets affected at the global level, then, of course, our company will not be an exception in that case. But I can tell you that we are trying to protect our gross margin, and that I already mentioned in the beginning of the call then how we get to the gross margin levels -- higher gross margin levels. And that would be our aspiration also and growth prospects that we want to get to a gross margin of 50% or higher.

[Aniket Kulkarni, analyst]

Okay. All right. And just a final question. By when should we expect the rights issue to be completed? And can you elaborate what will be the proceeds be used for -- of the rights issue?

[Poorvank Purohit, executive]

So on the rights issue, we expect the proceeds to be completed by September. And you will -- so basically, it will be notified to SEBI, and then we would be -- a letter of offer will be released. So we are already in the process of launching that. And I think by end of September, we should be good to go. I'm talking about -- so that time line -- by that time line, we should still be able to do. And then I think we'll get some sufficient time to the shareholders to offer them.

[Aniket Kulkarni, analyst]

So is there -- I mean, can you give any sort of range like what will be the money be used for? I mean for debt reduction or any other CapEx or something like that? Can you just elaborate?

[Poorvank Purohit, executive]

So what I can tell you now is we have formed a committee for the rights issue and the decision is being taken at the director's level. And I think we are coming with a lot of things, not only this. I think a lot of things will be clear. We will be filing with the exchanges specifically in the next, let's say -- it's a time line, but I can say in the 4th to 6th week, everything would be clear on this.

[Operator]

Our next question is from the line of [ Chinmaya Bahaldwa ] from [ Badrinath Family Office ].

[Unknown Analyst]

Am I audible?

[Operator]

Yes, you are.

[Poorvank Purohit, executive]

Yes, please go ahead.

[Unknown Analyst]

Okay. So we've had a challenging couple of years behind us, and we've been focusing on becoming better addressing these challenges. You've told us now that you've got a stronger order book right now than we've had in this point last year. Could you share what's happening that led to this, both on the demand side? Like what's the landscape in our market and the states as well as within the company? What has gone right?

[Poorvank Purohit, executive]

Okay. So when I talk about the -- so basically, as you have seen numbers when you talk about the COVID levels and numbers, right now, what we are trying to do is, of course, we have had -- we know that ibuprofen was one of the things and then we have been focusing on derivatives. But we also see a lot of traction on a lot of other products that we have actually filed in the last couple of years. And we see a strong visibility because what happened at Solara was there was not enough market expansion, which was done for the existing set of products and also for new products, which were actually launched on the R&D pipeline.

So we are trying to optimize the market expansion because there were a lot of big customers we should not have, so we are trying to get into there. And we see a strong visibility on each of the products and which is being monitored very closely. That's why we are talking about a very healthy order book. And the order book has actually doubled from the last year when we did not have visibility. So when you are talking about visibility of a couple of months on the order book, which is -- it is actually a good sign for the business of our size wherein we are actually looking at a visibility on a long-term basis. And that's why we are confident about the forthcoming quarters on that account.

[Unknown Analyst]

Okay. And on that, if you're talking about the market expansion strategy, could you share what exactly goes into your decision-making calculus to choose these particular products? Do you look at the competitive landscape from India? What internal discussions or what strategy do you use to arrive at a choice for your product mix?

[Poorvank Purohit, executive]

So I think if you look at our list of products, we have -- historically, Solara have roughly close to 95 DMS already filed in the U.S. And when you're talking about 95 DMS filed in the U.S., it shows a bigger chunk while, of course, we have already spoken about 2 products, 3 products. But all these products were not fully marketed to their scale to the size of the market, which were already developed. So while I'm talking about existing set of products, these products are already there in the pipeline. But if you want to make those products signed, you -- as we are into the B2B business, we have identified the top customers globally. We have approached them. The discussion engagement is on. There are some -- so what happens is you get into engagement, then samples, plant validation by its quantities. And then the qualification actually starts. So we have some good levels of engagement on some of the other products, which allows us to bring that confidence on the existing products and new products.

[Unknown Analyst]

Okay. I have one last question before I jump into the queue again, which is, could you just share with our new plant, like you've been calling it in under recovery, but could you share the story of what happened since it was commissioned to where we are right now? Like operationally on a day-to-day basis, what are we seeing in the plant and what needs to be done before we gain traction?

[Poorvank Purohit, executive]

So I think one of the important points when we talk about the plant was primarily on account of -- actually, when we were actually -- when we talk about the Vizag plant specifically -- just one second. So when we talk about the Vizag plant specifically, there was already under recovery. And what happened was we were not able to do that during the COVID time. And as this plant was commissioned, a lot of customers are not very keen on qualifying Vizag as a site, because when you are qualifying a particular site, it requires physical audit at the plant. It requires a lot of resources to be deployed when people were not sure about the COVID times.

So when the proved time actually went off, the push from the company came that we had to start looking at under recovery and start making the plant more profitable. It is then at that time that we have started looking at switching the customers from our existing head of plants to the new plant. And I think we are the only company, which cannot offer one of our products from both the manufacturing plants. That's where we see traction coming, and it's a bigger plant. So we would be able to see a lot of traction coming from the new plant now.

It is fully operational, and we are seeing -- if you look at our guideline for -- in the previous calls, we have said that you would see the revenue coming in Q3, Q4 onwards. But we have started demonstrating that under recovery -- less under-recovery now. We have started demonstrating that from Q1 onwards, which itself is a very healthy sign about the business. So which shows that, of course, we are -- we started picking up and there are some of the markets wherein we have started supplying from this facility. And we would also see a regulated market coming from -- a regulated market revenue coming from this site in the coming quarters.

[Operator]

Our next question is from the line of Thomas Priju from Alchemy Capital.

[Thomas Joseph Priju, analyst]

I have 3, 4 questions. The first question was, if I heard right, did you say that in 4 to 6 weeks, you all would be providing details of the rights issue?

[Poorvank Purohit, executive]

Yes, we would. You can take the time line of end of September, we should be ready with that. That work is ongoing, and we are very actively pursuing that. We should be able to come out with the details by end of September.

[Thomas Joseph Priju, analyst]

Understood. The second question is, historically, we have done well in products like ibu, gaba, et cetera. What's the strategy on extending the product basket? Any color you can provide on how we are planning to expand the product basket on the API side?

And secondly, on the CRAMS side, I think as of now, we may be some 10%. What's our strategy to get better CRAMS business if on both these fronts you could provide some light.

[Poorvank Purohit, executive]

Okay. So your first question is with respect to products, how we are actually getting into the products, right, if I understand correctly.

[Thomas Joseph Priju, analyst]

Yes, how to -- and also I can understand you're doing well and how good it is, but also any strategy to expand the product basket to your R&D.

[Poorvank Purohit, executive]

So in terms of the product basket, if you look at, I think in our past guideline, we have also focused on some of the polymer-based products. We have also focused -- so there are -- so we are planning to get into several products. So while we are trying to get full optimize, full value out of the existing set of products, we are looking at different chemistry capabilities, which also includes apart from the -- being strong in the chemistry, we are also looking at volume and chemistry.

We are also looking at some of the high-potent API capabilities also, which could be a part of the strategy going forward. And that is how we are actually looking at. As our scale is big, we would primarily look at both where the gross margins are higher for particular products as well as high-scale products, which actually allow us to take the company to the next level. That's how we are looking at existing as well as new products. So that's on question number one.

Question number two was...

[Thomas Joseph Priju, analyst]

On the CRAMS side.

[Poorvank Purohit, executive]

CRAMS side. So on the CRAMS, we are actually at 5% of the revenue as of now, but CRAMS will continue to be a focus of the company. And even if you look at our -- if we talk about -- we do have a plan that we want to expand our reach to various customers across geographies. So looking at the CRAMS, we would try to strengthen this going forward. Right now, we are at 5%. But yes, it requires a significant amount of time and investment in that capability. Until that time, we would definitely focus on the specific products which allow us to grow.

Because I still feel like -- I already mentioned this during the call that we have close to 95 DMS filed, and I'm only talking about the U.S. And if you talk about the market extension, so there is still a lot of juice left in the company to capitalize on the existing set of products while we also focus on new products, which are the products wherein we can -- actually, we already have anchor customer, and then we can start getting into those capability -- set of capabilities. This is going to be the strategy going forward.

[Thomas Joseph Priju, analyst]

And the last 2 questions is, assume Vizag is used only for the regulated markets. If you are able to reach that sort of a scenario, what's the maximum sales you can do from Vizag on the CapEx that you have done so far? That is one, to see how much operating leverage is possible in that plant.

And secondly, when would we -- I can understand last 1.5 years has been a rough tine. So -- but when would you be in a position to give sort of some sort of firm guidance on a 1-year and 3-year trajectory from both a top line and EBITDA perspective?

[Poorvank Purohit, executive]

So what I would like to say here is that we are, in any case, trying to focus on the fundamentals, trying to bring that stability to the company, work on these product level on the gross margin basis and continue to improve quarter-on-quarter. And that would be the idea. Talking about Vizag specifically, we do see a better utilization. I can talk about our utilization and a couple for Vizag.

We talk about specific numbers only once we start publishing those numbers in the coming quarters, and we do see that we would be fully operational in the, let's say, next 18 months, probably. And that is something I can talk about. But yes, I think Vizag is something we are actually focusing on going quarter-on-quarter and looking at it very closely so that we are able to drive revenue from that side. This is what I can comment right now. And of course, we can continue to discuss it during the call.

[Thomas Joseph Priju, analyst]

Lastly, we see speak at this point in time, you are very -- are you very confident of the business trajectory for the rest of the year and going forward?

[Poorvank Purohit, executive]

See, I strongly feel that I would like to focus on the fundamentals without commenting on numbers. But so -- but definitely, I feel confident about the fundamentals of the business because when you look at fundamentals, you broadly look at 3, 4 parameters. You look at the healthy order book. You look at traction with customers. You look at the current market. You look at how you're placed against competitors. And that's why I see a strong trajectory, of course, in the coming quarters and years. That's for sure. So I remain strong on the fundamentals of the business.

[Operator]

Our next question is from the line of [ Shantanu Maheshwari ], who's an investor.

[Unknown Attendee]

So we have marginally reduced our debt this quarter. What's our target in terms of debt reduction in financial year, FY '24?

[Poorvank Purohit, executive]

So as highlighted last time in our call, we would aim for a 10% reduction in financial year '24.

[Operator]

Our next question is from the line of [ Kiran Kumar Jitori ] from [ Usan Investor ].

[Unknown Analyst]

Am I audible?

[Operator]

Sir, may I request you to use the handset, please?

[Unknown Analyst]

Am I audible now?

[Operator]

Yes, sir.

[Unknown Analyst]

So sir, during your fundamental analysis of any company, we mostly give the most important to the management part, okay? But since last many of the quarters, you could see changes at the management level is very frequent. And recently [indiscernible] also resigned and [indiscernible] has also resigned. So I just wanted to know whether is there anything discussed on the management level about the -- all these changes or something or whether we should be firm enough that no further changes will be done at a management level?

[Poorvank Purohit, executive]

So talking about your -- so I do acknowledge the fact that there has been a lot of changes at the management level. And we are very, very -- as a company, we are quite aware of the fact that it is very important that the management stability at the top is very important for company to run operationally and functionally. And having said that, of course, there has been old management guide. But of course, like the previous management, people who had come, they had a pre-operation and they had come with a -- of course, there was -- they came for a shorter time duration, which was known to everyone.

But yes, of course, the idea is to have a stable and healthy management and stable so that we are able to deliver that growth. So we do expect no changes going on from here. And that is what we can vouch for because I think we have taken cognizance of the fact that a lot of changes have happened at the management level, which is not good for the company in the long run. So this is something we would consciously monitor and not only on creating a senior leadership team, we would also like to create a succession plan, and so all these things so that the day-to-day operations of the company are not affected at that level.

[Operator]

Our next question is from the line of [ Chinmaya Bahaldwa ] from [ Badrinath Family Office ].

[Unknown Analyst]

So in the presentation, you've mentioned that you're also working on backward integration in some of these molecules. Could you tell us what the backward integration is, which molecules in our basket and how this plays into our strategy ahead?

[Poorvank Purohit, executive]

So talking about the backward integration, of course, see, as we are into a lot of APIs wherein you already have other players in the market. So our idea and objective would be to focus on continuous backward integration because -- so that we do not have -- not only dependent from China, but also from domestic manufacturers. And this also allows us to utilize our capacity. So there are some plans, which actually allow us to be competitive. So into some of the customers, we have actually not approached because we were not competitive for them, but are objective of doing that backward integration and CIPs that we are in line with the market prices and we are able to offer that and so that we are able to engage more customers in the long run.

[Unknown Analyst]

Okay. Which plants are we going to be producing the intermediates ourselves?

[Poorvank Purohit, executive]

So intermediates, we are already prefacing at one of the plants because, generally, you do not make API without intermediates. And we do 3 steps, 4 steps in-house. But yes, I think as a part of the strategy, what happens is when you're buying a step 3, step 4, so basically, we are trying to look at what backward integration could be done or what CIP could be done now. CIP could also be in terms of usage or the yields. If we are able to improve those yields, we are able to pass on those benefits to the customers. These are some of the initiatives we are looking at because as we are in the generics business, it is very important that we focus on CIP and backward integration program.

[Unknown Analyst]

Okay. And could you share which chemistry is the most important for us?

[Poorvank Purohit, executive]

So which chemistry, if you're talking about we are into chemical synthesis APIs only. And that is -- so that will remain the focus because we are looking at route scouting. So if you get to the basics of that, you look at route scouting, you look at using the best reagents possible. So these are some of the ways that you actually look at backward integration. Then, of course, you try to make the key starting materials in-house. The third way is you try to recover the solvents possible. So we will look at all the possibilities to come to that. And this is generally same for many of the products. So the process remains same for all the products.

[Operator]

Thank you. Ladies and gentlemen, that was the last question of our question-and-answer session. I would now like to hand the conference to the management for closing comments.

[Poorvank Purohit, executive]

So thank you all for joining and look forward to our next call. So hope to speak to all of you soon. Thank you.

[Operator]

Thank you. On behalf of Solara Active Pharma Science Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.