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Solara Active Pharma Sciences Ltd
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Ladies and gentlemen, good day, and welcome to the Solara Active Pharma Sciences Limited Q2 FY '22 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. Abhishek Singhal. Thank you, and over to you, sir.
Thanks, Vikram. A very good afternoon to all of you, and thank you for joining us today for Solara Active Pharma Sciences Earnings Conference Call for the second quarter and half year ended financial year 2022. Today, we have with us Raj, Executive Director and Vice Chairman; Bharath, MD and CEO; and Subhash, ED and CFO, to share the highlights of the business and financials for the quarter. I hope you've come through our results release and quarterly investor presentation, which have been uploaded on our website as well as 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 will 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 with the Investor Relations team. I now hand over the call to Bharath to make the opening remarks. Bharath, over to you.
Thank you, Abhishek. Good afternoon, everyone. Thanks for joining the call today. As always, I want to start by wishing you and your families a lot of safe health and happiness. Before I go to the business aspects, I would like to share with you that I'm very proud to say that 100% of our employees and our contractor partners are now fully inoculated with the first dose of the COVID-19 vaccine, and more than 67% of our employees and contractors are already inoculated with the second dose. We continue to adhere to all safety and health protocols, and we will pay close attention to make sure there is no impact of COVID on our operations business and, above all, our employees and their families. Let me go to the business axis. The business outside of ibuprofen has done well and is trending in the right direction. So what I would like to do is to address the ibuprofen business conditions upfront and then move on to other performance drivers. I would like to start by framing the context of our ibuprofen business, so we're all on the same page in terms of the context in which we operate. We have, at Solara, nearly a 3-decade legacy in this business, in this product, in this molecule. It is underpinned by strong customer relationships, long-term contracts and cost leadership. During the up-cycle of ibu prices, we have made a conscious choice not to ride the upside on pricing with strategic customers. In prior calls, I had emphasized this, and I said at that time that we expect this to stand us in good stead when the business cycle turns in the other direction. In the last quarter, we've seen some of the benefits of the strategic approach from a pricing perspective as our key long-term customers have not given us the same price erosion that is seen in the broader market. We've been able to mitigate, to a large extent, the pricing challenges on ibuprofen particularly with our strategic customers. The other key business characteristic of our ibuprofen business is the nearly 60% of our product that is made in our Pondicherry facility is underpinned by long-term contracts. So the current challenge on ibuprofen for Solara is mainly due to demand and a demand drop situation. A key factor behind [ a threat ] in demand on ibuprofen is to do with the fact that the prescription and OTC sales have fallen significantly as the general need for pain or flu medications has dropped. This impact is potentially due to the fact that there are better social norms on masking, social distancing, et cetera and also that there is limited resumption of day-to-day activities for their -- very limited resumption of day-to-day activities in the prior couple of quarters. This impact is especially pronounced in the regulated markets. To put it in perspective, the regulated market demand for ibuprofen, we estimate, has dropped by more than 14%. And it's very, very safe to say that this is neither sustainable in terms of this level of speed drop nor is it normal. Many of our strategic customers reacting to this situation have asked for us to defer shipments of ibuprofen in the quarter. As we have indicated in our presentation, we see a deferred demand in the order of magnitude of 600 to 650 metric tons just in quarter 2. We anticipate the de-stocking process across the value chain to continue albeit with less intensity for at least another quarter, and we see that the normalization of demand of ibuprofen will happen in the next 3 to 6 months. Now acting with alacrity to this situation, we have repurposed our buyback facility. And as a reminder, we had indicated that our sales won in buyback facility was dedicated for ibuprofen. We have repurposed this facility as a multipurpose plant, which will be able to make multiple products while preserving the capability to manufacture ibuprofen as the demand recovers. Let me reemphasize. The situation on ibuprofen demand, we believe, is transient, and we don't see any long-term impact on ibuprofen demand worldwide. I need to point out again that Solara continues to maintain our share of wallet with all our key customers, and we are very well positioned to benefit when demand recovers. Also important to note that we see strong traction on our ibu derivatives business. As we all know, derivatives are various sorts of ibuprofen, which provide different patient benefits. And this, for us, is an added competitive advantage and will enable us to come faster into normal demand situation for ibuprofen. While all other levers of our business continue to do well, the strong headwinds in ibuprofen have impacted our results this quarter. Our revenues currently stand for the quarter at INR 4,049 million and an EBITDA of INR 736 million, the EBITDA margin of 18.2%. That has led to a PAT of INR 297 million. The continued pressure and volatility on the raw material prices have also impacted our margins. We have seen some raw material prices escalate to extremely high levels in the quarter. This situation is still not abated, and we see some continued RM cost challenges still playing through. In addition to this, there has also been, as you all know, a worldwide increase in logistics costs, and that has also had an impact on margins in quarter 2. At Solara, we are taking all measures possible on both of these aspects, including strategic buildup of short-term inventory on key raw materials at attractive pricing and optimizing logistics costs wherever possible. While the situation with regards to ibuprofen demand and the raw materials is less than optimal. I'd like to emphasize, we have done very well in all other parts of the business. A few salient points to consider. Molecules other than ibuprofen have performed well in the quarter. We've seen an expansion in the EBITDA margins for these molecules, and this is not in a one-off trend. If you were to look at the medium term of the last 2 to 3 years, we've seen a consistent growth and expansion both on revenue and on EBITDA for molecules other than ibuprofen. Our operational excellence initiatives continue to deliver, and we see a lot of opportunity to continue to enhance this and get more efficient as the quarters go by. As I mentioned earlier, in record time, we have repurposed our buyback facility to a multiproduct facility, and we've already commercialized a couple of products from here, and we continue to have the capability to make ibuprofen here in this facility as and when demand recovers. The backward integration for ibuprofen is on track, as I had indicated in the last call. We will be operationalizing it in quarter 3 and the scale-up will happen in quarter 4. The market share that we have gained in the less regulated markets has continued to improve. While historically, this segment of the market has not been our focus, our renewed efforts to balance our revenue for a few products across all markets are taking hold and getting answered well. Another bright spot for us in this quarter has been our CRAMS business, which is having a stellar year. We've grown more than 40% year-on-year, and our margins are much higher than in our generic business. What is particularly pleasing in the CRAMS business is the business build metrics such as inquiry conversion ratio, the ticket size, new customer additions and customer stickiness were all at record levels in quarter 2. Our momentum on CRAMS will continue, and we will have a year of record growth with solid margins in this business vertical. Our DMF filings are also on track to meet our commitment of 10 to 5 DMFs in this year. And as I have been updating you regularly in these calls, our proof of concept for 2 technology platforms, which are both enablers for generics and for CRAMS business are on track to be completed by the end of this financial year. All in all, I have shared with you a picture where the execution of our strategy is going exceptionally well. However, we are dealing with a very unique situation with regards to global ibuprofen demand, which is under significant stress. However, as the situation remedies in the next 2 to 3 quarters, we will be well on track to deliver on all our long-term goals. I would now request Raj to get his perspective on how we are addressing the future opportunities at Solara.
Thanks, Bharat. Good afternoon, everybody. While we have seen a muted performance in the last quarter, as Bharat just outlined, we focus a lot of our actions and strategic areas of developing non-ibu product portfolio, CRAMS business and new customer additions across the board, both in ibu, ibu derivatives and non-ibu products as well. And these are giving us additional customer base. We are working on anchoring customer partnerships, especially in regulated markets, while leveraging market leadership in niche product variants. Our R&D velocity continues to improve, leading to the development of new products and market extensions filings. We have been following into new technologies, and this will yield several new streams of future business potential. Differentiated product offerings, coupled with speed to market, this is what we're aiming for. In the CRAMS business, we've been focusing on science-based differentiation by our additional capabilities. On technology and transitioning from incubation to fast-growing businesses, we are leveraging existing innovator customer base for rapid selling. From an operational focus standpoint, the multiproduct subsidy at Vizag is ready. And during the course of this month, we are starting validations of a couple of products. helping us to probably trigger the regulatory inspections, which have not been happening for quite some time because of the COVID conditions. This multipurpose product facility will help us cater to increase future demand, cost efficiencies and increase the number of validations that we do as we go by. We're also making good headway in implementing manufacturing and improvement programs, leading to better utilization of capacities and lower OpEx. We have taken aggressive targets and are streamlining our operations. As we continue to navigate through the current situation and work towards accelerating all the levers of our strategy, we remain confident in delivering long-term value to our stakeholders. On merger, we have significantly completed our excise of identifying synergies, including manufacturing, R&D efficiencies, procurement, cross-selling opportunities and OpEx efficiencies such as productivity. The implementation will begin in coming quarters, and the full impact will show in the next 12 to 14 months. Thanks a lot. We'll place Subhash to share some details on the balance sheet and key ratios.
Thanks, Raj. As communicated by Bharat and Raj, we continue to see demand pressure on some of our base products and shift our share of business towards LRM markets. In fact, contribution from LRM market went up from 20% to more than 60% in Y-o-Y basis in quarter 2. This has resulted a change in our key financial ratios. Let me talk about a couple of them. Our working capital is up from INR 1,335 million from INR 6,517 million to INR 7,852 million. mainly contributed by inventory, which is up by INR 1,246 million, up from INR 3,706 million to INR 4,952 million. primarily led by rebuild of inventory as planned for expected COVID-related business, increasing key KSMs and raw material inventories to offset the volatility in prices as well as uncertain environment because of [ China ] situation, and partly defer of take of contractual quantity by few customers. So all these three things have impacted or led us -- led the increase in inventory level at Solara. Other things, which coupled by shift of business from regulated market to less regulated market has an impact on our receivables, which went up from INR 6,297 million to INR 701 million. The company is actively taking initiatives to right size the working capital, taking various initiatives like adjusting the production in line with demand, COVID inventory expected to be sold in quarter 3 and focus to improve the sales mix from distributor to end customers in LRM markets. With all the actions already planned, the above trends are expected to normalize over the next couple of quarters. The increase in working capital had an impact on our overall debt level, which is -- which went up from INR 525 crore or INR 5,250 million to INR 6,915 million in the course of last quarter. CapEx for the year stands at INR 1,166 million, continued to reflect our focus on growth-led investment. Asset turns are at 1.7x. Net debt to EBITDA stands at 2.1x and debt-to-equity ratio -- the net debt to EBITDA stands at 2.1x and net debt to equity at 0.5x. With this, I hand over to moderator to open the forum for Q&A. Thank you.
[Operator Instructions] We have the first question from the line of Tushar Manudhane from Motilal Oswal Financial Services.
Sir, in your opening remarks, you alluded to inventory buildup on account of COVID-related business. Can you elaborate what product -- what kind of opportunity are you seeing on this?
Can you hear us?
Yes we are able to hear you.
So sorry, there was a connection issue here. So we have basically products that are currently made, as Subhash was indicating in our multipurpose -- commercializing the multi-purpose facility on both Favipiravir and also the intermediate for Molnupiravir. Raj can add further color to this. Raj, you're on mute.
As the intermediate, we are tied up with at least 2 or 3 of the licensees. So we expect significant traction on the Molnupiravir intermediate. And on favipiravir, we have 1 or 2 customers who are selling in markets where the product is approved. So we expect significant ongoing sale of [ favi ] even after the approval of Molnupiravir. So these 2 products for us continue to be going on in the Q3 and Q4 as well for us.
Understood. And with this new Pfizer drug, do you see the [ threat for the ] opportunity?
See, a lot of people ask us the question. But even after Molnupiravir was approved or was indicated a couple of months ago in April, May, it's taken so many months for an approval. So I'm sure it will take a similar time or lesser time depending on the situation of the market for the product to get an approval, correct? So we don't know how much time that product would take an approval. Like, you've got about the Molnupiravir, 6 months from the time of indication in March or April last year -- in the current year.
Got it. And just a clarification here. So this business would be starting 3Q onwards?
Yes.
Okay. And secondly, just on the Aurore merger, I just would like to understand what has led to increase in the value as per the modified [ supposed fee ]?
Can you repeat the question? The last part was not very clear.
So your equity value, as per earlier proposed [indiscernible] was about INR 6,926 crores, which has now increased to INR 7,845 crores. Any particular reason for this?
In fact, the last valuation when it was done, it was done in April and based on prevailing SEBI price formula, the price was much lower for valuation purpose. Now the average price, which comes for this weighted average because of last 26 weeks, it's much higher. So that's where the impact of valuation becomes. But if you see number of shares issued, in fact, the number of shares issued from Solara for this merger to Aurore has come down, adjusting the value of [ PPL ]The earlier split between Solara to Aurore was 73% to 27%, which means Aurore's shareholders were getting 27% of the shares of Solara as a merged entity. Now with this proposed new modified scheme, they will be getting 24%. So overall number of shares allocated as a part of the scheme has come down by 3%. The method of valuations, the comparable method, everything of putting a valuation for this remains same. We haven't changed our -- in fact, independent value has gone ahead and followed the same approach, which was followed when we had gone with initial April approval process.
Understood, sir. And just one last from my end is about how is the -- what is the scope of increasing the asset turn or what can be the peak asset turn for the kind of products we have in the pipeline? Solara Aurore combined level?
Raj, would you like to...
Asset turns, basically, we have said that asset turns, we have guided in a 1.7, 1.9 range.
In fact, we are currently at 1.7. If you see last year, we have gone to 1.8, 1.9 also. The way we see this business, once we have capacity utilization improving and all our plants are up and running, we have an opportunity to go and touch up to 2 [indiscernible] asset turns.
[Operator Instructions] We have the next question from the line of Aejas Lakhani from Unifi Capital.
Yes. I wanted to understand, Bharat, a couple of things. One is, how do you look at the gross margins going forward for the second half of the year?
So I think we have still -- as I said, there are still 2 underlying factors that are playing through. And particularly, I'm talking about the coming few months. And one of this is the raw material pricing, which we've seen that we've been able to mitigate some of the impact by some advanced purchasing, some smart contracting. Those are still playing through. And the second is the sales mix. While I indicated earlier on some of the products, we've been able to pretty much hold our line on pricing in the regulated markets with the long-term customers. As the sales mix evolves, that will also have an impact on the margins depending on whether there is less regulated market sales. So I think these 2 are factors that we need to keep in mind. In the medium to long term, we're still confident of the 53, 55 range of gross margin. Maybe the next quarter will be a bit of a softer ratio on that, but it will stabilize as we go towards quarter 4.
Got it. Also, as per the new scheme of arrangement, Aurore will be merged for only -- the financials will be effective 1st October, right? Earlier, it was 1st April. Is that understanding correct?
That's right. Since the entire merger process is now delayed by more than 6 months from [ April ], it has moved to -- now the entire process will be starting at the fresh. We'll be filing a fresh scheme -- merger scheme with SEBI and other regulatory bodies. So we have moved the effective date from 1st April to 1st October.
Got it. And since we do not know or investors do not have any understanding of Aurore, we know that Aurore had COVID portfolio that they benefited from. Could you speak a little bit? While I know -- I'm just looking for a trajectory of how the business is doing because we do not know how to evaluate the business on a Y-o-Y basis. So could you throw some color on the same?
Yes. So we had continuous business on SEBI because there were other markets where the first clients get approved in markets like Thailand, Indonesia and a couple of other markets. There are others not approved. So we had continuous sales ongoing in the last 2 quarters as well. And as we speak in the current quarter, we have significant traction on the study. More now, we're waiting with approval. We have sent trials [ out ] to a lot of people. And we also would be continuing to have an intermediate business of this product, which we did last year also, in the current year as well.
Okay. So is it fair to say that the business sales momentum and EBITDA would continue to accelerate in FY '21 for Aurore as well?
Yes. So we are consolidating [ like ] last year. I think it will be -- we'll be able to maintain.
Got it. Okay. The other bit is that could you share -- or is it possible to give the CDM on -- sorry, the CRAMS number? Is it possible to call out the number for the quarter?
So I think the best way to look at it, if you look at our April presentation, we have indicated in the ballpark of around INR 70 crores is our CRAMS number [ as ] stand-alone. And I've said that we are anticipating a growth of somewhere around 40-plus percent for the year. So roughly if you do the math its around that. In the first half of the year, we've grown roughly at 40%, but it's not like half and half. So I would say look at it from an annual perspective. FY '22, you can take into account 40-plus percent growth on a base of somewhere around the INR 70 crores range.
Got it. And currently, could you also speak a little bit about -- in terms of what was -- from your INR 1,600 crore Solara sales last year, what was the entire COVID portfolio in terms of if it is possible to quantify as a value? And how do you look at it for '22?
So in FY '21, we hardly had any products that were core COVID products. So we have virtually no sales that came from core COVID products in FY '21.
Okay, okay. And the same for Aurore is a different story, but that's already quantified. All right.
We have the next question from the line of Alankar Garude from Macquarie.
Sir, if we assume say $12 per AG pricing for ibuprofen, the impact of the deferral, which you mentioned, comes to about INR 55 crores, INR 60 crores. So is this number broadly correct? And do you expect this quantum to come down in subsequent quarters?
So I think $12 is roughly the average price across regulated and less regulated, maybe a little bit lower than $12. so I mean, I would say broadly there, maybe be a bit upside there to what you're saying. Your calculation in terms of the deferred demand then comes to around the same numbers that you indicated, Alankar, yes. So as I said, the coming quarters, there will be [ still ] de-stocking that will happen. I mean quarter 3, so the quarter that we are in. Intensity may be a bit lower. I see some green shoots. I don't want to call them green shoots yet, but some initial signs that some of this inventory de-stocking maybe coming closer to an end. As we approach Q4, we would be probably getting back to restocking. So that's, kind of, how we see the picture now. So quarter 4 is when we will see the normalization process begin.
And sir, just one follow-up on this. If you see gross margins, they are down [ 260 ] basis points sequentially. How much of that would you attribute to ibuprofen?
In fact, although we don't talk to category basis gross margin, but the drop is mainly contributed by ibuprofen as we talk about rest of the business actually are performing better than the last year, what we delivered. So both put together, majority of this impact is coming from ibuprofen, both from, I say, from a front-end pricing as well as raw material impact.
Understood, sir. Sir, secondly, you had mentioned in the last call about a much improved second half. Now I think -- so Bharath just mentioned about ibuprofen recovering gradually third quarter and then normalization process from the fourth quarter. So would you be revisiting your guidance for FY '22? And also given that Aurore, the merger, has been delayed by 6 months? And can you just reiterate the long-term guidance as well?
So the long-term guidance, absolutely, we can reiterate. We are well on track for that. We see everything trending in the right direction. On FY '22, as I have alluded to earlier, there is this uncertain picture in terms of the restocking and the normalization of demand. So it would not be prudent on our part right now to give any further indications of what FY '22 could be. But again, reemphasizing, the long term, we don't see any risks to what we had indicated earlier. We are trending all in the right direction. So that's how I will see it.
And on Aurore side, as Raj communicated, we do see they will be -- [ from H2 ] they will be able to perform or they will be delivering in line with expectations. So we don't see a major impact coming from that side.
Okay, sir. And one final question from my side. You've spoken about Vizag Phase 1 being repurposed. So does this mean that our ibuprofen capacity is lower than what it was, say, till last quarter? And so basically just taking whether this is a temporary strategy until we get the [ USFD ] approval. And can you comment on Phase 2 as well?
So no, absolutely bang on. It is a strategy or I would say a tactic that we have employed to make sure that we are able to address any potential under recoveries that will happen in Vizag. In terms of the broader story on Phase 2, we will continue to have it as a multipurpose facility. And that is also what our plan is in terms of going forward.
And as Raj indicated earlier, this is -- we have just converted into a multipurpose. Whenever we see a demand revival of ibu, we can switch part and continue to produce from this front.
Okay, sir. And Phase 2 is already done, right? The facility is ready or the work is still yet to be done?
No, we expect Phase -- ibu Phase 2 facility -- or I'll say multipurpose Phase 2 facility to be ready by end of quarter 3 or early quarter 4. It's almost ready, just last few legs of the work which is pending in that subsidy.
And Subhash, sir, is it possible to comment on the extent of under recoveries from this [ plan ] currently?
It has -- I'll say some of the under recovery would not like to quantify. But with our efforts of, I'd say, putting other product like COVID-related product, and there are plans to transfer some of the other products in this facility. So in stores, we continue with our part of making sure we minimize our under recover from this.
Yes. I would like to add a little word here. The Vizag facilty, being a new facility, the cost of manufacturing is lower than the other existing sites because they're all [ old sites ]. So for us, it will be more optimal while we transfer a few of the products from the other site into this site. One, it covers the under recovery. Two, also it makes us better margin because this site is slightly lower cost as compared to the other site for us.
And in fact, this is already complete, sir? Or it will be in progress, right, the shifting of -- okay. Fair enough. That's it from my side.
The next question from the line of Bhaskar Bukrediwala from Arthya Investments.
Sir, one question you mentioned that there was unprecedented raw material and logistic cost, while in the non-ibuprofen footprint business, the margins are fairly intact. What I wanted to understand is that when the ibuprofen demand was good and the pricing was good, you didn't take any major pricing action with your customers, and [ we're ] fairly balanced is what you mentioned. Now when things are a little rough, are your customers not willing to, sort of, support you, given that in good times you did not, sort of, took the market pricing and [ were ] more balanced? How have they reacted in terms of supporting in rough times like this?
So let me clarify that. I try to bring back in my opening address. What you said absolutely happened in terms of support from our customers. Wherever we've had long-term strategic customer relationships on ibuprofen, we have seen that play back to us in this tough time. Our price erosion or any challenge on pricing from our long-term strategic customers have been benign. We've been able to mitigate, to a large extent, what we see in the broader market in terms of pricing from our long-term strategic customers. The challenge there is not the pricing, the challenge there is the volume. And the volume is a direct linked to the end market demand. So your question is bang on. Our strategic approach, which we have believed in and which we have implemented for the last many years, is absolutely paying dividends when the market is in tough cost situation with regards to the ibuprofen.
Okay, okay. And sir, in terms of -- you mentioned somewhere in the call that this whole ibuprofen demand is more transient and not structural. So I mean, just wanted to reclarify, reconfirm that there are no other formulations or any other drug which is, sort of, impacting the demand for ibuprofen. Is that understanding correct?
Your understanding is correct. Again, I'll add one more data point to make this even stronger in terms of underpinning this substitution story. If you look at the global per capita of ibuprofen consumption, there are about 60 countries, 6-0 countries in the world, which have lower than global per capita consumption of ibuprofen today. So the potential for this market is actually higher than lower, and we have not seen any substitution effect, and I have this confirmed from all our key customers that they have not seen any substitution of the product by other competing therapies.
Got it. So just a stocking issue that is happening, which is expected to normalize in maybe a quarter or 2?
Exactly.
Okay, okay. And sir, just one last question. You mentioned that around INR 116 crores is the CapEx that you have done in H1. What would be the CapEx guidance for H2 and next year? And if you could help understand the breakup of this CapEx, let's say, between our CRAMS and non-ibuprofen generics and maintenance CapEx.
In fact, as we guided earlier, our CapEx for this year will be in the range of INR 225 crores to INR 250 crores, and we'll continue to maintain that range. The softness, what we see is, as Bharath says, situational, transitional, not as a structural. So we are going ahead and making sure our long-term growth plans are intact and we are getting ready for our long-term growth readiness. So all -- most of our CapEx, what we are putting is against growth initiative or a backwardation, and we continue to hold to our belief and we'll continue to invest on all the growth initiative that we have at this point of time.
Just one data point to add. If you look at the export of ibuprofen from India, the last quarter 2 was about 30% lower than the average of the previous 8 quarters. I'm just trying to give you an order of magnitude of why this is not a sustainable level in terms of -- no molecule can survive when you starve the market of this level of product. So that's why we've seen every data point, we see points to the fact that there has been de-stocking, continues to be de-stocking. But I just wanted to lay out another data point for this to be communicated.
Sure. Sure, sir. That's very, very helpful. And got it, sir. And next year, what would be your CapEx. This year, you mentioned INR 225 million to 250 million.
We are -- in fact, we are at a stage when we are firming our next year plan. We will have a better guidance coming in the coming quarter calls. But we -- as we explore earlier calls also, we continue to see our growth CapEx story, and we are not willing to compromise or go slow on our growth CapEx. So whenever we have a business case to support our growth, we'll continue with that kind of CapEx.
We have next question from the line of Nitin Agarwal from DAM Capital.
So 2 questions. One is, a, just housekeeping one to start with. So on Aurore, by when do you think we'll be in a position to start sharing slightly more granular details of the business financials and performance?
In fact, as we spoke earlier, the moment we have a shareholders' approval, we'll start sharing the consolidated numbers, or I said we'll start sharing the Solara as well as Aurore numbers or a consolidated number from that point of time. So we may need to wait for a couple of quarters. We expect by somewhere in quarter 4, we expect this approval to be in place.
Okay. That's helpful. And Bharath, on -- so when we look at the business today between Aurore and Solara, so the core component of the business, how meaningful is this component as -- for a combined entity at this point of time? And I guess, with COVID, eventually, at some stage, that piece of the business, sort of, slowing down. How do you see the other parts of the business are making up for the business -- the potential business now that it may happen?
See, some part of the COVID business is going to be continuous is what we feel because it becomes a regular medication to a lot of people. Stock up at pharmacies [ they have done ]. At this point of time, with a significant [ deal ] Aurore, also a lot of capacity utilization for that product in Aurore. In Solara, it's just the start now. So depending on how the approvals come from molnupiravir in this quarter, you'll see a lot of traction on that. So it's difficult to quantify how big the business would be because we have to wait and see for the approval. We are pretty hopeful that it's very meaningful for the Q4 for us.
I understand. My point is when you look out, say, maybe a few quarters out and this piece of the business begins to slow down, I mean, how are we thinking about making up for it?
So we have a lot of products that we are doing filings here in the current year. We've also got -- getting a lot of approvals. In fact, we got around 7 to 8 approval CEPs in Aurore itself in the last 6 months. So there are a lot of new product approvals. There is a lot of capacity that extra customer market that we're generating for even the existing products. So I think from deep dive for each product, getting additional customers to each product, plus the new filings and the approvals that are coming in. A lot of the capacity would go towards this.
So just to add one point to what Raj said [indiscernible]. See, as in every year, there will be opportunities like what we have currently in the COVID portfolio that we can benefit from because now we have multiple multiproduct facilities. But the strategic intent in terms of how we drive the business, as Raj said, is based on our filings, on the new product velocity, the R&D, the traction, et cetera. So those continue, and those are going really well and trending in the right direction. At this year, we have seen, right, the demand situation in ibuprofen, we expect that, as Raj said, meaningful contribution from the COVID portfolio in quarter 4. So I think this is always going to be the case where we will have a mix of tactical products and strategic products. We are well on track to deliver our strategic product goals and tactical products depending on the year, maybe a bit higher or a bit lower. So we need to make sure that we manage both of the cells. And what we've learned over the last few months is the agility to be able to transfer quickly and pivot to repurposing the right facility, qualifying products part. That was something that we had not had to do so far. So I think this skill set that we have developed and that's also coming from a lot of the interactions we've had with Raj and the Aurore team, it's something that's going to stand us in good stead as we go forward to deliver our strategy.
Right. And if I can just probably take one more on ibu. Now the INR 8,200 crores thereabouts capacity that we have on ibu, I mean, by when do you see in your assessment? Do you think you'll start utilizing it entirely going forward?
So I think there are two driving factors to answer this question. One is the regulatory approvals, and that's a little bit of a black box for all of us, not just for Solara. I think all of us are in the same boat when it comes to the timing of that. And the second is the overall demand recovery in the regulated markets. Because of the fact that we have also the demand not there in the regulated markets, we are able to use our Pondicherry facility even for the less regulated market. If the demand comes back strongly in the coming, let's say -- when, not if. When the demand comes back strongly, we would relook at looking at buyback for the less regulated markets production of ibuprofen. So we're playing it a little bit flexible and the fact that we have converted that facility to multiproduct enables us to have this [ strategy ].
Right. And the last one, has there been any meaningful change in the supplier landscape on ibu in terms of any new guys have come in with meaningful capacities which may have upset the landscape?
I hear the contrary. I think like every other player in the industry, I think a lot of players are hunkering down on capacity. We don't see any major investments coming. On the contrary, we see some rationalization. We hear of some rationalization happening on capacity across the world. So we don't see meaningful capacity coming on board for the foreseeable future on ibuprofen. And just one point to add is the ibuprofen derivative business, I think that's very important to keep mentioning it in Vizag. We have the capability to make a particular grade of ibuprofen, which has a strong margin profile, good growth opportunity and great customer stickiness. So I mean we're just maintaining our presence in those markets and growing it quite well. In fact, the derivative business went 40% quarter-on-quarter growth in this quarter or quarter 2. So I think those are small, bright spots that we will continue to build on going forward.
We have next question from the line of [ Branveer Singh ] from [ Sunidhi Securities ].
Sir, on ibu front, with the average price realization for us, how this average price has changed versus last year if we take all customers together?
So I think the better way to look at it is the market mix change rather than -- because the meaningful solution -- I mean, meaningful answer to that question will come from the fact that the pricing erosion in the regulated market is lower for us, much lower than the market and much lower than in the less regulated markets. The change in market mix has been material. So we've really had a much higher sales of ibuprofen in the less regulated markets. So on an average, the pricing pressure, and that we have mentioned in our commentary also, pricing pressure has come because of the sales mix, not so much from a particular contract or a particular customer. And in the regulated markets, as I said earlier, we've been able to, kind of, hold the line to a large extent on our pricing.
And how has been this change for the industry in general?
So I mean, not to put words in my competitors' mouth, but I think there has been erosion in pricing on a continual basis for the last 2, 3 quarters. And I hear anywhere between 15%, 20% erosion that's happened.
Okay. And in ibu market, you alluded the overall market demand is likely to sustain because still this is a less penetrated market. But I believe last year because the COVID induced the demand and that gives actually a hefty rise in terms of volume also and prices also. So do you believe that even the normalization would be slower [ traction ] industry growth or even the company's growth would be a little bit slower the way we saw if compared with the last 3, 4 years?
So I think we've already seen -- we've expected some sort of, let's say, recovery to happen somewhere in quarter 3. Now we're seeing maybe it's a bit longer than that. And I think it's a lot to do with the fact that it's hesitancy to restock, less to do with the fact that the demand will not come back. I think as and when things normalize, and it's all a relation of how society -- works out, goes to the gym, walks, gets infected, unfortunately. That's what happens when people to resume activities. I think a lot of those drivers are what will lead to eventually the speed of restocking. And what we see in very, very early signs that some of these things are starting to happen, particularly in the regulated markets. So yes, it's been a bit slower than what we expected. Will it gain rapid momentum? Let's continue in this space, a little bit unknown at this stage. We see some signs that things are a little bit different than they were last quarter in this quarter.
Fine. Sir, another question on working capital. So in working capital, the inventory and build has happened in COVID products. We have molnupiravir and [ favipiravir ]. So a I just want to understand because the overall demand scenario is also contracted. So is there a scope that we need to write it off going forward? Or we will be able to liquidate it in the next 2, 3 quarters?
I don't think that would be the case for us because we have specific customer requests. And as we are speaking right now, we are exporting a lot of quantity even today. So for us, we have some [indiscernible] customer profile in place. We want to have to get to look at [ writing off this maybe later ]
And the last one on Aurore acquisition because we have now split in 2 phases, that acquisition. So apart from the shareholders approval, what other approval we need to complete this?
No, it will go through a normal process of approval. As a process, it will go to stock exchange and [indiscernible] to get NOC. Post that, we'll approach NCLT between directors for shareholders and other characters approval. Post that, it will be a NCLT final approval. So it will pass through all the stages, the normal merger process go through.
So that would take at least 6 months for now?
Yes. In fact, we indicated this process to get over somewhere in quarter 2 FY '22.
We have next question from the line of Bharat Sheth from Quest Investment.
Bharath, if you can -- this year, we expect, I mean, frame business to look around 3-digit number. So if we have to take from 2, 3 years perspective, only Solara, how do we see? And what kind of a traction we are building and where do we like to be this business in next couple of years?
So I think what we have said is this year we will see somewhere in the 40% growth. And organically speaking, CRAMS should continue to grow above the rate of the company. So in the last call, on a long-term basis, we had indicated a revenue CAGR of somewhere around 25% over the next 3, 4 years. In the CRAMS business, we will grow faster than that. So you can say that we will estimate to grow on a CAGR basis over the next 2, 3 years, 30-plus percent.
Okay. And margin profile will be substantially different than our whole company level?
Yes, absolutely. So it typically is somewhere in the 5 to 8 percentage higher on an average basis over a generic CPI, generic contract, but on a broader average basis.
Okay. And one more question, Bharath, we had indicated in last call or an earlier call that we are doing some kind of a backward integration for ibuprofen and now it says at Vizag. So since we have changed this to multipurpose plants, so it will have any impact on whole CapEx scenario?
So we continue with our backward integration plans. We will be operationalizing it actually this quarter, in quarter 3, and scale-up will be in quarter 4. So there is no stopping of that because that's an essential part of our proposition to our customers both from supply reliability and from cost [ leadership ] both.
And this backward integration plant is a separate facility in the same complex in Vizag and ibu multi-purpose plant is a separate facility. So both are those independent facilities. So we have not done anything to backward integrate its strategic plan. That continue as per our plan.
But that is specifically for only ibu, correct? Is that a correct understanding?
Correct. It's the correct understanding.
And how much do you think we'll be able to save the cost on account of this backward integration? And overall, I mean, kind of some broader number, if you can share.
We would not like to put a number to the overall savings. But if you see an overall cost of ibu, it's a sizeable contribution or a material contribution, what we expect will help us to save by going to a backward integration. And also, once the demand come back, it also brings a lot of supply sustainability in terms of making sure we don't lose uncertainty of supply chain, which we have seen in last couple of quarters because of various global issues.
And this backward indication will start contributing from Q4 onwards, correct?
Correct.
Okay. And how do we see this working capital, I mean, normalizing? And when do we expect the whole cash flow which is negative that again, I mean, should be normalized?
No. In fact, what we expect all the 3 drivers or in fact the 2 drivers, whether it's receivables or inventories, a lot of actions initiative has already started on this front. What we expect since we do expect some more time to shift from share of business from less regulated market to a regulated market, so receivables expected to be at a slightly higher side what we were at 3 quarters back, but it will improve. Definitely, it will see an improvement where we are currently because a lot of focus even in less regulated markets. We are putting to move from a distributor-led market to a head customer-led market. And inventory, as we spoke very clearly, we have a plan to optimize production, cut the inventory level and go in line with the demand. Lot of forward inventory which we build. We have a clear line of sight to get this sold in this quarter. So we see all the actions what we are taking at this point of time will start showing a result in the coming quarters, not much in quarter 3. But definitely, quarter 4, we'll have more visible impact on working capital.
Okay. And last question on Aurore, we had a revenue of around INR 545 crore during the FY '21 and EBITDA of around 32%. So how much revenue will be moved out of this because of this revised scheme?
In fact, if you go through the presentation, which we have already put in on the slide, Aurore stand-alone revenue, which was -- FY '21 was INR 519 crores and EBITDA of INR 159 crores.
Excluding ATPL.
Excluding ATPL. So this is a number which we expect will be a part of consolidated entity post merger.
And after this negotiation with the minority shareholder, do we expect that also to get margin in second phase?
Yes. So as shareholders who have merged ALS with Solara, the same shareholders have 67% of ATPL, correct? So we are committed to making this happen as a merger with Solara. We would like to resolve the issue with the minority shareholders. And then at 67% shareholding, we are committed to our merger into Solara.
We have next question from the line of Bhaskar Bukrediwala from Arthya Investments.
One question on, sir, again ibuprofen market. So as we said that demand is expected to normalize probably in a quarter or 2. The question is what I understand is next year, there are some supplies that are further coming in the industry from a couple of your competitors. So would that worry you? Because further on a muted demand environment, if a couple of more supplies come in, do you think that this whole softness in pricing could therefore, even if the demand revise, could continue a bit more longer than what we are anticipating?
So it's a very good question. So I think there are two ways to answer it. One, given that it's a global phenomena, many of the people in the industry are reevaluating bringing on new capacities. Because it, at this stage probably, has the same concern that they would have on demand if they're going to bring in new capacity. So Solara strategy, part of the answer is that we are very comfortable when it comes to our positions with all our customers in the regulated markets. We've seen similar entries of competition before. We've held our own our contracts and our relationships even more important, are long term, in some cases, stretching beyond 1.5 decades. So our positions are well anchored. Our share of wallet continued to be very strong. So while there will always be competitors who will enter [ a fit ] we are very, very well positioned and very strong. Again, reemphasize the point I made about derivatives earlier. We are one of the largest players of the ibu derivatives, if not the largest in the world. And as and when our customers expand their portfolio and we see all the large customers continue to expand their portfolio, it is for them ease of doing business with a player who has the entire portfolio of ibuprofen. And once we complete the backward integration in the next few months, we will be probably the only player in the world at this stage who can all the way from backward integration to ibu derivatives at scale be a solution provider for our customers. There's no one else who brings that value proposition. So there is many positives that we bring many unique propositions that we bring to our customers, and we're very, very confident that these will be very strongly anchored. So we are not going to face any sort of major issues because other capacities come in.
So for you, the demand revival and given that the relationship with the customers is strong, should be a good point for you to, sort of, get back to growth. And just one last question. Sorry, I'm a little new to pharma. When you say ibuprofen derivatives, what exactly do you mean? What is that...
So there are various salts of ibuprofen, like a sodium salt or lysine salt that we make using the base ibuprofen molecule. They are used for different patient benefits. Like some can be used for migraine, some is used for dental pain. So we have derivatives of ibuprofen. We have salts of ibuprofen that are used by our customers for different indications of the patients, both in Rx and OTC. So that's what we mean by ibuprofen derivatives. There is also a direct compressible grade of ibuprofen, which we call DC ibuprofen, which brings the efficiency to our customers by eliminating the unit operations for them. So those are some of the customer benefits and patient benefits that we bring with a derivative set of molecules.
[Operator Instructions] We have next question from the line of [ Jay Ishrag ] from CSK Capital.
My question is on receivables. So you explained that the receivable situation is actually deteriorated as we moved from regulated to less regulated market. So are the terms of trade in the less regulated market have always been so bad that we've had to have a receivable of 150 days plus?
No. In fact, this is how the less regulated market operates. Solara as a company, if you see 3 quarters back, out forte was always, we are very strong in regulated market and less regulated market. We have, I'd say, much lower contribution coming from less regulated markets. Since the demand in regulated market has been a softness, we moved our surplus capacity [ order ] material to less regulated market. And quick strategy for us to enter that was to get to a distributor model so we can cater and enter into this market very fast. Yes, the way this business model operates, it always calls for higher receivables. And anybody who operate in less regulated market will have this tangible receivable. Now since we have reached out to customers established, now we are reaching out to converting more to end customers even in less regulated market so we can improve on our DSO and receivables and go back to our, I'd say, not the same level but at least a much improved level of DSO and see an improvement in working capital.
Okay. Just a continuation of that. So since we are entering relatively new field for us in less regulated market and in any case the receivable days are so high, do we expect any impairment going ahead?
You were asking if -- do we expect any impairment, right?
Yes, impairment on the receivables that we have [indiscernible].
No. In fact, all the customers which we interact or do a business, they have very, very strong financial background and with the company for long. They are not a new agent or a distributor where we've gone and started the business. They are all with the company for much longer time and participated or contributed to our growth story. So we don't see that piece coming and impacting us. It's only a nature of business, which has led us to higher receivable.
Thank you. Ladies and gentlemen, that was the last question. I would now like to hand the conference over to the management for closing comments. Over to you, sir.
Thank you. Once again, thank you, everyone, for joining the call. I want to emphasize a few key points. The transient situation that we face in ibuprofen, in particular to demand, has led to an impact on our results in the quarter, along with the impact on raw material pricing. The broader theme that we would like for you to keep in mind as we conclude this call is that all levers on our strategic journey at Solara are all intact and trending really positively, be it to do with the molecules other than ibuprofen or the CRAMS business. And we see -- and we continue to reiterate, we see very positive progress towards delivering our longer-term commitments on both revenue and profitability, as we had outlined in the last investor call. Once again, thank you, everyone, for joining. Stay safe. Take care.
Thank you very much, sir. Ladies and gentlemen, on behalf of Solara Active Pharma Sciences Limited, that concludes this conference. Thank you for joining with us, and you may now disconnect your lines.