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Solara Active Pharma Sciences Ltd
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Ladies and gentlemen, good day, and welcome to the Q2 FY '23 H1 Solara Active Pharma Sciences Limited Conference Call. [Operator Instructions]. Please note that this conference is being recorded.
I now hand the conference over to Abhishek. Thank you, and over to you.
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 2023. Today, we have with us, Jitesh, Solara's MD; and Hari, ED and CFO, to share the highlights of the business and financials for the quarter.
I hope you have gone through our results release and quarterly results presentation, which have been uploaded on our 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 to the Investor Relations team.
I now hand over the call to the management to make the opening remarks. Jitesh, over to you.
Good evening, everyone. Thank you for joining the call today. I'd like to start off with sharing good news that we have received CT approval for manufacture of Ibuprofen from our Vizag site, which is in addition to our Pondicherry site. We also received approval for Ibuprofen BMS from China for our Pondicherry site, making a total of 2 products approved by Chinese authorities. This is our first step towards Vizag being qualified for regulated markets. We've also amended our U.S. DMF to include Vizag site as an additional site for ibuprofen with one of our major customers filing PA S application. We expect a prior approval inspection by U.S. FDA in the next financial year.
We have initiated validation of new products from Vizag site, which shall be filed in second half of this financial year. Coming to the Q2 performance, we had a steady performance during the quarter, with Q2 revenues at 342 crores, which is greater than 85% of our historical run rate. I would like to reiterate that our cost correction strategy is in action now. We continue to focus and build on the actions that we have initiated in this fiscal year to get back to growth, both in terms of revenue and margins, improving our cash flows and strengthening our balance sheet.
The first one, revising the base business growth and profits by bringing back the momentum we had on customer centricity by better networking and continuing focus on operating cost reduction, continuous improvement program and efficient inventory management. With improved business margins in Q2 FY '23 and along with our actions taken in H1, the stage is set for a stronger bounce back in the second half of this financial year.
Rekindling the R&D focus by adding 15-plus new programs for the year and we are on track to file 6 new products in this financial year, and adding more high-volume products under the cost improvement basket. We have filed 8 new market extensions for 9 of our existing APIs for Q2, taking the total to 9 new market expansions for 10 of our existing APIs for H1, enhanced capacity usage at Vizag by supplying validation qualities to our customers.
Although our greater focus will be on regulated markets, we are tapping opportunities in markets with no regulatory binding, and we are applying certain product supplies from Vizag to markets where there are less regulatory binding from Q3 of this financial year. And this will help to reduce the under recovery at Vizag. Our Vizag strategy is playing to plan as stated at the opening of my speech, as one of our customers has already filed the PA S for the U.S. FDA, and we have received the CEP approval for manufacture of Ibuprofen.
We have invested on [indiscernible] capability at the Vizag site, which is a unique capability added for one of our ongoing product validations.
Coming to an update on the [indiscernible] site -- in the last quarter, I mentioned we had 11 pending approvals from our [indiscernible] site. Our customer has filed 1 of our polymer products, taking the total to 12 pending approvals from U.S. FDA.
Our focus market Latin America, specifically Brazil and China has also seen traction. We secured a major order for one of our key products from Brazil, for which the delivery will take place in Q3. With this, our total number of filings in Brazil is 2, and the target is to file 3 to 4 products in this financial year.
On Transcon, we have had good inroads in the U.S. market with onboarding of our [indiscernible] for North America. We will see traction of these efforts in FY '24. Meanwhile, the RFPs we have submitted in first half of this year, we are hoping to win some in the second half of this financial year. With the focus on all the actions above, we are confident that in outgoing Q4, we will return to our historical revenue run rate of minimum INR 400 crores per quarter with mid-teens EBITDA margin and turning PAT positive.
I now hand over to Hari to take us through the financials for Q2 FY '23. Thank you.
Thank you, Jitesh. We are pleased to announce our quarter 2 FY '23 results. Key highlights for the quarter are the following: our revenue is INR 342 crores, which is about 85% of our historical quarter-end rate. And as it is indicated in Q3 and Q4 will be at the historical trend rate. Our gross margin stands at 42.2% compare to -- included by 270 basis points over Q1. And operating EBITDA at INR 526 crores with a 15% margin.
Reiterating at the fact that we are looking on various actions to improve the EBITDA and mainly due to the under recovery of Vizag, we seek approval received from CEP approval and other new product validation and the generic product being built for the nonbank market, will be upon the under recovery of Vizag in quarter 4 of the current financial year. So that we become the normalized activity.
As indicated by Jitesh, we have identified key focus areas working on these areas, which will result in improved second of this financial year. Our immediate priorities was offset under recoveries in the Vizag and achieve a breakeven profitable growth in near term. And during the current quarter, we have initiated actions pertaining to regulatory inspections, which was delayed due to the cold for a long time.
In H1, we reduced the debt by INR 4 crores, and we are working to achieve the comfortable debt-to-EBITDA -- net debt-to-EBITDA ratio for the end of the financial year. Our net current assets were reduced by INR 63.8 crores, mainly due to the infinity reduction and the government report of GST funds. Our focus is on improving our cash flows with prudent application of capital. With a clear focus on the actions to improve profitability, we remain confident about our growth prospects of Solara.
Thank you so much.
Can we open the Q&A, please?
[Operator Instructions] We have our first question from the line of Rohan John from ICICI Securities.
So I have a few questions. So first of all, the sequential improvement that you have seen in the regulated and other markets, I see it is quite low for this quarter. So what will drive the growth going forward in the coming quarters?
Yes. So the growth that we have seen in the coming Q3 and Q4, the demand for our base business, that's coming back. And what we have seen in the H1 is not what we are used to have from a historical point of view. So in the second half, we are definitely seeing the demand for our key products coming back. That's one of the key drivers of the revenue growth.
Now the second question I had was, so is it related to the gross margin? So if I see currently, the gross margin for the half year is around 42% and you had initially guided to around 50% for the year. So do you still maintain this guidance? Or do you want to -- are you going to revise it?
Yes. So we did mention that with the actions what we have taken in H1 and the demand is coming back for our key product, the second half of this financial year, especially the outgoing Q4, we will be at closer to that 50% gross margin.
And then another question was related to ibuprofen, which you have got in China. So when will we start shipping and what is the potential revenue from this opportunity?
So there won't be specific revenues for a product, but the commercial supplies will only happen in 2024 because customers have to take the allocation larger. They have to do their own regulatory submissions.
And then also the ibuprofen is set to be manufactured in Vizag, right? So could you give us some time lines as to when will you reach a bit when the plant will be EBITDA neutral? I think you have to near term, but if you could give some time lines.
Yes, so we are aiming for Vizag under recoveries to be net from the outgoing Q4.
And the last question which I had was listed with the CRAMS revenue. So if I see currently, it stands at around 5%, if I'm not wrong. So do you see it getting more contribution in the revenues, or do you see it at the current levels?
So we want CRAMS to be definitely a bigger piece than being a single digit with the head of CRAMS for North America has come into the picture. We have seen a lot of traction in the last 1 month. So we are quite upbeat about the CRAMS business. But yes, we want to grow this business and not just maintain it at 5%.
We have a next question from the line of Palak Deka, an individual investor.
Just one question on the revenue side, sir. So when do we expect to hand back to a quarterly run rate of INR 400 crores?
So while we are aiming for -- we are confident that from Q4, but internally, with the green shoots we are seeing in some of our base business, maybe it could even advance from Q4 to Q3 itself.
[Operator Instructions] We have our next question from the line of Sumit Gupta from Motilal Oswal Financial Services.
Just need to have a clarification if there's any schedule of the U.S. FDA in especially at the Vizag facility. So if you can give any color on the market size of the product, which has triggered the inspection.
So the product which has triggered the Vizag inspection is ibuprofen, but there are a couple of other products which we are doing validations which will also help in figuring. So with this trigger, we are expecting the U.S. FDA approval or the inspection for our Vizag site in the next financial year, probably sometime in the second half of next financial year.
And another question is just to know if any shortage of the ibuprofen that has triggered the inspection, if there is any shortage of it.
We don't see any shortage of Ibuprofen. But yes, our growth in ibuprofen is coming by -- because we have added some new customers and new geographies. And that will also help in terms of Vizag site, where we are also talking to our customers to qualify Vizag also. So we could have both the sites go beyond Vizag and meet the demand growth for ibuprofen.
And sir, how big can the opportunity be from the approval of ibuprofen ABI for China and over what period of time, like you said for FY '24? And is it fine?
I think we're still working on that. Give us some time, we'll get back on the size of the opportunities. Definitely, China is a large market for ibuprofen, so we are working out with our customers now because it took us nearly 3 years to get this approval. So it's a tough regulated market. So now with this approval in place, we are working with our customers in terms of what is the business potential.
And sir, one more question. Can you explain the improvement in the gross margin, given that the share of regulated market is almost similar sequentially? We are at 66%, so is that the same base case improvement -- base business?
So, we had a good product mix of our current base products, and that has led to also an improvement in the gross margins.
Sir, final question is are you seeing normalization of inventory with respect to ibuprofen? And just to understand the pricing of products on a sequential basis.
The pricing is pretty stable on ibuprofen and on other key APIs also what we manufacture. And the inventory level of ibuprofen for us, as I said, in the first half, also, we have seen a decent demand. I will not say a great one versus what we are expecting in the second half. The inventory levels are not a concern at all.
We have our next question from the line of Nitin Agarwal from DAM Capital.
This line is disconnected. We'll take the next question from the line of Mitul Jain, an individual investor.
My question pertains to the Vizag facility. So as you reiterated that will be breakeven accredited by Q4. So by when do we expect optimum utilization of Vizag facility? And what is the peak asset plan that we can expect? And what are the further CapEx number which you are planning to incur for this facility? Those are my 2 questions.
We don't expect major CapEx in Vizag facility because most of the CapEx we have already incurred. And if we take -- because it -- we got just see if approval to take another 1 year for us to reach a full-fledged operation by just capacity utilization. So then by end of FY '24, we're fully potential of this capacity that will be achieved.
[Operator Instructions] We have a next question from the line of Nitin Agarwal from DAM Capital.
Just 2 questions. One is, a, on the debt levels which are there. We still have a fairly high level of debt versus our -- given our EBITDA levels. So how are we thinking about a reduction in debt levels over the next couple of years? And what kind of levels do we -- do we see this reaching to -- lowering down to as you go forward?
Our debt level or the term loan only on part close we are having and that we expect that every year, we repay around INR 100 crores debt and term loan internal accruals. The term loan is especially for Vizag and once it is fully operational and it is subsidized. This working capital at the core that is also pretty line with the current inventory and debt level. And we planning on slight reduction in the debt by the end of the current financial year. But in terms of EBITDA, net debt to EBITDA will be around -- announced within a couple of -- by FY '24, we'll be reaching that normalized position.
And what would be the normalized position? Sorry, if you can repeat that.
2.5x.
Sorry, sir, I think your voice was breaking when you were saying that.
Around 2.5x.
2.5x EBITDA by the end FY '24. And sir, secondly, on the CRAMS business, you talked about RFPs, you're participating in RFPs, but what is the nature of typically client -- businesses that we're chasing, -- these are largely late-stage contracts or these are early-stage contracts in terms of -- I mean, these are basically the life cycle management contracts and molecules are in late stages of the technics of the patent lines. So that's the nature of the contracts typically?
Yes. I mean on the CRAMS business, it's a mix of both on the early stage, it's also in the late stage. Then we also have businesses where we are also supplying the key intermediates because the regulations around the intermediates also have significantly changed from U.S. FDA. So it's also a combination of both.
But do you have the bulk of the RFPs as an industry perspective, bulk of the RFPs that you're typically seeing are getting floated by companies, what is the typical nature of these RFPs? I mean, what kind of products are companies really putting out RFPs for?
It's more on the capability what the company has, right? The product could be anything because these are products on the CRAMS side. When you are working with the innovator companies, they are in the discovery phase. So if it matches our capability both from an R&D as well as from a manufacturing point of view, then we will go ahead and evaluate and take it forward.
Right. And Jitesh, you talked about a 50% gross margin by the end of the year. How should we -- any thoughts on where -- what's your sustainable level of margins for a business given the way it is, the way you see it over the next few quarters beyond Q4?
So beyond Q4 also, we will see the same levels of the gross margins. Of course, we are working in terms of the product mix where we introduced new products and the sales of the new product validation that will help in terms of improving the gross margin also beyond 50%. But for now, I think 50% is something which is quite comfortable.
[Operator Instructions]. We have our next question from the line of Anish Kara from VT Capital.
I just wanted to understand what are the utilization levels that for the first half and where you think they will leave for the second half just for the Vizag side?
Overall capacity, depreciation is at about 75% currently.
So it's at 75%. And where do you see it going in the next half?
No, as we see the demand for the key products coming back and also Vizag also has to go through the full cycle of inspections from other regulatory bodies then of course, this percentage will only improve.
Okay. And on the ibuprofen side, I mean how much of the difference in the average selling price are you seeing in North America and Europe as compared to the less regulated markets?
No, we don't give any market specific pricing guidance.
Okay. Also from your tone it seems we are not seeing as much demand on the ibuprofen side as we would want to. So then what is the reason for qualifying an additional facility at Vizag when we could also be supplying some of our existing sites to regulated markets as well, right?
No, what I said was we are seeing growth of ibuprofen coming from new geographies and new customers.
Okay. Got it. Also, how much traction are you seeing on the CRAMS side with respect to China-Plus-One model? I mean you're hearing about it from a lot -- a long time. But on the ground, what is the reality according to you?
On the ground reality, of course, China, you have from reputed companies also who are there in the CDMO space. Now yes, this China-Plus-One policy has always been there. But overall, I think it all comes down to what efforts we make in terms of breaking through with the new customers and with the existing customers, right? And with that kind of a traction and we are developing a team around it on the business development side. So with that approach, we are quite confident that CRAMS will be a sizable portion of our business as we look in the next 3- to 4-year horizon.
We have a next question from the line of Rohit Suresh from Samatva Investments.
Sir, I just wanted to know, there was a BSF facility that was supposed to come up in Germany. Has it come up? Or if you could just highlight something on that?
No idea. We have no validated information around that.
So in Europe, there's no major manufacturer of ibu. So how is our market share in the European regions? And how do you see it going forward?
So again, I will not be able to quantify from a number perspective, but I can confidently say from a regulated market perspective, Solara has a good market share, a sizable market share in the regulated markets for ibuprofen.
Sir, and just one last question on the non-ibu part, so what are your plans for the next couple of years? And in terms of your total revenues, how do you see that part moving forward?
On the non-ibuprofen business on the base business, we are pretty solid with what business we have with our existing customers and markets. What's important is that we also are doing this, and that's why I said the market extensions for our current products, we are looking at newer geographies. So we will see even growth coming from our non-ibuprofen based products. So focus in terms of newer geographies, which really we did not have in the past like Brazil or China, that will drive the traction for the non-ibuprofen APIs too.
[Operator Instruction] We have our next question from the line of Sumit Gupta from Motilal Oswal Financial Services.
I just want to know the target net debt to EBITDA by FY '23, sir.
This financial year?
Yes,. and the next also.
This will be around -- equal to 5x, at that range. Debt to EBITDA is 5x, sir, current financial year and they're working for 2.5 to 3x by end of this financial year.
[Operator Instructions] As there are no further questions, I turn over to the management team.
We can just take closing comments from Jitesh, please.
There are no further questions, over to the management team.
Thank you, everyone, again for joining the Solara Q2 FY '23 call, and we look forward to interacting with you for the next -- for the Q3 call. So thank you, everyone.
Thank you. On behalf of Solara Active Pharma Sciences Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.