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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 Q3 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.
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 third quarter and 9 months ended financial year 2022. Today, we have with us, Raj, MD and CEO; Bharath, outgoing MD and CEO; and Subhash, ED and CFO, to share the highlights of the business and financials for the quarter. I hope you've gone through our results release and quarterly presentation, which have been uploaded on our website as well as the stock exchange's 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 if you have any further questions, please feel free to reach out the investor relation team. I now hand over the call to Bharath to make the opening remarks. Over to you, Bharath.
Thank you, Abhishek. Good afternoon, everyone. It's a difficult day for me personally. As you've read probably by now in the press release, I have decided to step down from my position as MD and CEO of Solara. As with these decisions, it was not an easy one to make, especially given that we are navigating some marketing use difficult phase, while I'm fully confident that we will be moving into a normalized situation. I'm very, very confident that with the timely leadership of Raj, Solara is poised to regain its momentum and get back on track to reach its long-term aspirations. When I first came to Solara in December of 2019, the word COVID was unknown to this world. In the period that I have been here, we have navigated 3 COVID waves and uniquely challenging market situation. We have commercialized our flagship site and initiated a strategically important merger. All of this was possible due to the fantastic employees of Solara and the amazing partnerships we have built with many business partners across the globe. These are the foundations of all that we do and all that we will do. I'm also very proud to say that more than 500 million people globally every year in formulations with Solara ingredients, and we enabled a healthier tomorrow for them, that is what drives us every day. I could really appreciate the support and guidance from the Board of Solara who have been great partners and a special word of appreciation from [indiscernible] Founder from whom I've learned so much. I want to end by saying the Solara best days are ahead, and I'll be cheering for Solara no matter where I am. Thank you so much now. I'd like to hand you over to Raj.
Thank you, Bharath. I would like to appreciate your contribution and pace on the call, the effort that you've put in for the growth of Solara and wishing you all the luck for your future endeavors. Good afternoon, everybody. Thank you for joining the call today. On behalf of Team Solara, I wish you and your loved ones good health and wellbeing. Before we dwell into the business, I would like to share that Solara has now reached nearly 100% vaccination -- for the first dose, it was 99.6% versus the second dose, we continue to adhere to all the safety and health protocols for [indiscernible] any impact of COVID and the result managed. Let me start on the [indiscernible] context for our reported Q3 numbers. In the last several months, multiple products experienced continued demand shift, especially in the regulated markets. Our efforts to grow in the less-regulated markets led to increase dues of channel partners. However, significant pricing pressure in these markets, coupled with our need to profitably grow has meant that there is a stranded inventory across the value chain. To ensure profitable growth and stable margins in the medium term, the strategy for us to limit sales wireless channel model and moving customer sales, direct channel in sales process has been taken. We will continue to make direct channel sales virtue on the history of the relationship with us. To the extent, we have taken a onetime impact in Q3, both the top and bottom line by calling back some of the channel inventory. Though there was no need to take it back.We expect the situation has bottomed out on the demand side and the prices will normalize over the next few quarters. Raw material and logistic costs continue to be volatile leading to additional renewal margins. I want to now talk about the Q3 performance and give you a flavor of the underlying drivers. On the little factors, 3 molecules such as Ibu, [indiscernible] has seen a decline in Q3. However, most of the other regular molecules, business has remained steady. We continue to gain momentum on new product valuation and filings, thereby securing the key influence of our growth strategy. The CRAMS business has been trading well, and has grown well with our year-on-year sale of 43% growth. Ibu performance was muted as the market demand was the lowest we have seen in recent years. We understand that the destocking process across the value chain will mostly conclude the first half of FY '23 and the situation will likely normalize thereafter. Also the delayed approval for Molnupiravir and demand decline for colchicine, the core product portfolio was unable to fill the revenue gap we had anticipated. In light of all these on the onetime [indiscernible] impact, the financials of this quarter are under revenues of [ INR 105 million ] and EBITDA of INR 940 million negative, leading the tax negative of [ 31,339 billion ]. We expect business recovery from Q4 and normalize for growth momentum starting from H2 FY '23. Coming to a [indiscernible] of this quarter's performance. [indiscernible] challenges in terms of continued demand shift as well as the raw material price volatility. Volume decline return on metrics in this quarter. Due to this and the lack of OpEx leverage, margins were affected. Input cost pressures from critical raw materials, ASM, installments such as [indiscernible] coupled with logistics cost increases, further added to the margin pressure. [indiscernible] possible on both these aspects, including the short-term inventory builder in key raw materials and optimizing logistics [indiscernible] business vary a couple of products is trending well. The business in the past for sustainable medium-term growth with consistent expansion on EBITDA. We have continued our organizational excellence initiatives and continue to see OpEx performance getting more efficient in the quarter. The [indiscernible] ramp-up in Q1 FY '23. The [indiscernible] indication [indiscernible] will be operationalized in Q2 the sale [indiscernible] FY '23. Our CRAMS business is having a good year and our margins tend to be much higher than our generic business. We added 4 new customers and also [ good ] customer traction and higher sort of business growth in this particular section. We expect that we will have a year with fast growth to the CRAMS segment. In the CRAMS -- we've been focusing a sign to [indiscernible] capabilities. Two new proof of concept technologies this year will ensure that the growth in continue to the next year. Our regulated filings are on flat -- at around 10% for the current year. We are [indiscernible] in the unique situation and the demand that performance is expected to be transitory. We are confident that we will be on track to deliver on our long-term goals. On the merger, we have track [indiscernible] exercise of enterprise synergies, including manufacturing, R&D efficiencies, procurement [indiscernible], processing opportunities and OpEx efficiency business productivity. The other process besides going as planned along the pipelines communicated last time. We can share updates in the coming quarters. Full integration benefit we expected the next [ 12 months ]. Requesting Subhash to share some details on the balance sheet and key ratios.
As communicated by Raj, revenue declined due to continued demand softness in Ibu replacing some of the key products and delay in approval and low demand of COVID portfolio has impacted revenue of this quarter. In addition, as we had found in previous calls, we have shifted towards our -- we have shifted our sales as the sales policy towards direct customer sales for a better margin realization. To implement that strategy, we took a strategic call to significantly limit our standalone engagements while there was no obligations to take back the standard inventory. But through the best course of action as demand recovers and to ensure we have a control of price realizations in coming quarters, we felt it the right appropriate for us to take back this inventory and start controlling our destiny because we are seeing our demand revival happening and channels being carrying an inventory was creating this conflicting situation of price, they were offering lower price. So we find the right thing for us to pull it back and have a control of the situation and start at a much better pace where we can meet the price realization and recovery much faster for us. That has led to onetime sales impact in quarter 3, which will get normalized in quarter 4. Turning to working capital. Our working capital is up by INR 306 million during this period. It basically mix of COVID portfolio, we have started seeing improvement in receivable -- receivable down by INR 2,240 million revenue increase of inventory of INR 1,785 million primarily led by lower sales as well as the inventory return what we have took in this quarter. We expect to take 1 or more -- 1 or 2 more quarters to bring inventory to normalized levels. Actions are already in place. A lot of actions are currently in education space, so bring the inventory and our working capital at a normalized levels. The company is working on rightsizing the working capital, taking various initiatives like adjusting production in line with demand. COVID inventory expected to be sold in quarter 4 and focus to improve the sales mix from distributor to end customers in 11 market. All the actions, what we saw, we will see [indiscernible] in quarter 4, partially in quarter 4 and full impact in the next quarter coming. CapEx for the 9 months is INR 1,775 million, continues to reflect our focus on growth-led investment at [indiscernible] at 1.3. The higher working capital has a result of net-debt up from INR 6,915 million to INR 8,912 million. Over the course of last quarter, the overall trends are expected to normalize over the next couple of quarters. With this, I hand over to moderator to open the forum for Q&A.
Vikram, can we take Q&A please?
[Operator Instructions] We have a first question from the line of Kunal Randeria from Edelweiss.
I didn't completely understand what is the strategic change that you had done that has led to such a decline. So did you stop selling to all your clients in both regulated as well as developing markets.
So this is more related to our stocks that we have and business with our channel partners. Since the demand was less, the channel partners have also started immediately and this led to a consequent pricing issue, which is also completing the company. So we have taken back the sales from the channels partners. This is not affecting the regulated markets or the regulated customers.
What I'm trying to reconcile is -- so CRAMS has done very well, right? You have shown -- and I think, 70% to 74% growth or something. And CRAMS, last year was 10% of software sales, which basically is as CRAMS has grown, the API business would have gone down by around 85%, 90% or something like that. I mean there was so much inventory in the channel that you had to take such a large amount back -- I mean, [indiscernible].
So it's not just a channel sale inventory. It's also that the demand for Ibu had come down substantially. And we also did a conscious call not to compete with the channel partners and rather prefer to take a hit so that we have demand suppletion in the current quarter and the next quarter. Otherwise, the conflict with the competing channel partners, which has our own product would have actually prolonged the problems of longer term.
Sure. I'm sorry to probe it a bit more, but saying Ibuprofen would've been what 30% of software business, right? I mean so it has to be a lot of other molecules also. So has the -- I mean, pricing gone down in a lot of other molecules also?
There is an impact in a couple of other molecules where the price work has gone down and because of the COVID scenario, offtake of these molecules from regular customers to also come down substantially.
Sure. Okay. So in your presentation, you have mentioned that you are getting some inquiries on Ibuprofen going forward. Would just like to understand like at what price is it now coming? Is it substantially lower than what it was, let's say, a year back or so?
Yes, I know pricing has come down substantially, but it was also double value in terms of raw materials that has also gone up. Sales has also come down. That's why the margin effect is much more visible. If it is only sales is like coming down, if you're not going to ask that, but even the raw material size increase will also be substantial.
Okay. Let me [ article ] for clarity of everybody. Let me just make the revenue decline more, I'd say, clear. So we all understand what happened. There are 3 things which has impacted our revenue in this quarter. One, the Ibu demand definitely we are seeing a softness of Ibu demand , which we spoke even in our earlier communication also. Normally, we do sell it if we see our capacities and most of you have -- are aware of. In policy itself, we have a capacity of every quarter, roughly our annual capacity is around [ 5,000 plus ].Every quarter, that's what value used to sell. But this quarter, because of the demand softness and we decided to go soft on less regulated market to correct the same. Our demand of Ibu -- normal demand of Ibu is still much, much lower. We sold almost 1/3 of normally what we used to sell in Ibu. In addition, we also decided to reset our sales policy to go with direct customer approach, reaching out to end customers to have a better control of sales realization and also ramping up in much faster. That also has an impact and that call for sales return or I'd say the expected sales return of around INR 120 crores, INR 130 crores expected sales in terms what we have taken in this quarter. Third thing, I think as we all know, they were just expected -- there was a delay in some of the COVID [ therapy ] approval, we were expecting in quarter 3 end, which got delayed towards last part of the December and that sales could not get completed in the same quarter. That was a third impact of revenue decline. Has this 3 not played around, we would have been on a normal sales trajectory -- but it was good for us at this point of time to reset our sales policy, reset our go-to-market approach to ensure -- we don't continue to get our mix coming quarters, continuing with the same policy. So we felt it prudent, let's go back, taking control of our destiny. Let's make sure our revival is much faster rather than going to a slow revival process and competing to the channel in, with our own products in the regulated market.
Okay. And just one more before I get back in the queue. Regarding Bharath's resignation, is it something because as been in the works since the Aurore deal? Or I mean, is it something that [indiscernible] the surprise.
Let me answer that, this is Bharath here. I think we've been working very closely. Raj and I, over the last few months, ever since he joined the Board of Solara. So it was not explicitly planned during the deal. But I think over a period of time, we've been working very closely together. As I said, I also stated in our press release, I'm leaving to pursue opportunities outside the company. But I'll leave with full confidence and full optimism for the future. And that's kind of the process that we went through over the last few months.
So for several more questions, I'll join back.
[Operator Instructions] Next question from the line of Mitesh Shah from ICICI Securities.
Can you guide us that how would we see the revenues in Q4 and the year after in FY '23? I know that you said that -- like in this channel, the inventories, which you have paused that will completely returning back to Q4 or it will take time? And the other question, how the scenario we can see in next quarter and then after?
Okay, let me take that question. Q4, If we should talk about -- in fact, I just spoke about Q3 had this onetimer not been there, we would have been around INR 400 crores plus. Now we feel we have done the right thing which was supposed to do in Q3, now we are still where we are ready to take off. Other thing, if I just talked about a couple of things, we are seeing it [ hyper ] revival. In fact, the order book, what we have at this point of time, visually in the order book, what we have this point of time is almost -- or at much higher level what we used to have, in fact, in the last 2, 3 quarters. The traction or I say the number of inquiries has gone up very, very high -- so we do see now things on Ibu front getting revived and we are getting back to our normal level of Ibu, that's what the impact in Q4. And all our early fine or directing us towards that given us a lot of confidence, making sure -- giving you confidence this is expected to happen in Q4. Our CRAMS business is doing well and that continued to perform very well in this quarter. Other thing which is giving us more confidence, especially, I'll say, some of the COVID portfolio delay, which we have seen, now we are expected to move the materials within this quarter. All these things which I just spoke about, bring a lot of confidence. Now we from this quarter onwards, we can be or we will be pre-COVID level in terms of our top line is concerned -- no sorry pre-Q3 levels, what the revenue that we're stocking will go back to a similar level from this quarter.
Got that. And what about the margins you see in raw material and transportation issue. How about the margin and the pricing in Ibuprofen as well?
Since [indiscernible] margin profile, between Ibu or non-Ibu Non-Ibu business continues to grow on the margins that we were doing before Q3. So it's higher margins which have come down, basically because of the demand surge, softness in the market. That's one issue. Second, a slight rise in 2 critical KSMs. So we have to see the pricing stabilization in the Ibu raw materials. We hope to see some amount of consistency coming in this quarter. But in terms of demand stabilization, we see some stabilization happening in this quarter 4.
[Operator Instructions] We have next question from the line of Nitin Agarwal from DAM Capital.
Now given the disruption which is there in H2 and partly, it was there starting from Q2 onwards. It's very difficult to -- it is difficult for us to look through in terms of how we should look at the potential of the business. So while I think you're not in the process of giving guidance in a generic sense, can you just help us guide a little bit now in terms of what is the revenue potential of this business as it stands today, the COVID uncertainties around the portfolio with Ibu demand uncertainties being there. In terms of a broad range in terms of where can the business be from a top-end next year before, and then kind of grow or make it a base to grow on to from there on.
Okay. In terms of next year, let me -- okay, let's not give it proper number at this point of time for next year because we are still in the stage, we are forming above our profit plan for next year. But generally, if we speak about I mean if I talk about how the trajectory looks from here. We are already, as I spoke, we are already at INR 400 crores, INR 450 crores as a normalized revenue for this year when we exit from this year.Now we do have new products which are coming and adding to our next [ PSDs ] whatever we launched in this year last year. Now they are in ramp-up phase and that's where it's going to give us a ramp-up. Also, with our merger now coming to a stage where actual, I'd say, leverage is will be the people to both the sides. That will be a rather quick or I'd say, a very quick ramp-up of revenue, which is going to add to our overall growth for next year.
So I think I'll take the question to 1 more level as well. In the non-Ibu business, we are defining our customer concentration for the new product. So we hope to get a significant traction of penetration for the non-Ibu products -- that will give us a fairly good reasonable sustenance. And on the Ibu sector, what we're trying to do is consolidating the quanta of sales in terms of quantity, pricing in the market scenario. So what we are trying to do is to see that our quantum of sale goes back to our pre-Q2 -- pre-Q3 levels, and that consistently what we expect come back into the [indiscernible]. CRAMS will continue to grow, and we hope to see better traction for next year also.
I sorry, just try to summarize it from my understanding. Are we looking at a INR 400 crore -- at least a INR 400 crore quarterly run rate annualized starting Q4 onwards and running into the whole of next year. Last year upside from the new launches, plus whatever upside comes through from the road merger. Is that the right way to look at it?
Okay. That's the best way to look at it.
That's helpful. And secondly, from a gross margin perspective, we are now in the context of where we are, what do you think at a range is the gross margin for the business?
No. In fact, the range what we even earlier talk, we will continue to have a gross margin in range of around 50 to 54 [indiscernible] . And that's what we spoke all the time and we are confident once this raw material volatility settles, which we expect to happen soon, we will be back in our normal ratio gross margin.
Which is 50% to 54%. Subhash that's 50% to 54%.
50 to 54, I'm giving a range.
50, so 5-0. Okay. And...
And depending on Ibu pricing, yes, we do see some quarters may have a challenge on -- because Ibu pricing will take some time to reach to a normal level. So first couple of quarters, we may see some challenge, but if we are looking at midterm scenario, this is a range which is definitely achievable for us.
So what we're going to do is that on Ibu, we are adding a lot of new customers. So what we will do is ensure that the company capacity declines and link the pricing to the market synergy the way it happens. But in terms of capacity utilization, we expect it to be completely back to plan. That's the effort we're putting on ibu.
And Raj, you also had the backward integration on Ibu commentary. What is the status on that?
We have been some inductors in this quarter with the new facility, but I think we expect to commercialize in Q1 FY '23. So that will help us to have some impact leverage on that.
Improving the margins for Ibu business.
Sure. And lastly, from a business mix perspective, I mean, as our [indiscernible] dependence and Ibu has caused challenges for us this year, along with the dependence on the COVID portfolio, given the fact that the COVID portfolio is fairly uncertain to call in terms of its longevity, I mean how are we looking at -- when you look at the business between non-Ibu, non-COVID portfolio, how do you see -- what proportion do you see that business should be -- would sort of settle down to going forward?
No. In fact, if we see COVID, as you said, it's a seasonal, if I call it. It's not it's not a linear every quarter business. So we also are, I'll say, covenant of that part. So in our plans for next year, we are restricting our -- the contribution of technical business, what do you call, to limited numbers. We are not expecting -- or we are not building a very high contribution coming from practical business. But non-Ibu is from the place where we are seeing or we are expecting a lot of growth to come in next year, primarily contributed by the new products that we have launched or what we just commercialized those ramp-up is going to help us to grow that business very, very fast.
While Ibu will continue to be a very important product for us, we would definitely see a progress away as all the non-Ibu businesses will see a steep growth. That's what we're aiming for. We don't want to let go of marketing issue in the product. We also suffered for that. But our focus will be a deep dive on all the non-Ibu business to grow -- to make it grow as much as possible in every territory.
And once the ibu demand comes, we'll be back, then there is no stoppage for us. But we are taking this time to make us more officiate and making sure we run faster in this difficult time and a more efficient and leaner.
So one of the other things we have done as risk mitigation is, we are also trying to focus on cutting on our OpEx costs, which will help mitigate the Ibu margin loss. And this OpEx reduction that we're working on will give us probably some amount of comfort in terms of this mitigation of the margin loss.
And the last one, when you think would be in a position to share some more details around the Aurore contribution and synergies?
In fact, we are just waiting shareholders' approval once we have in place after that, we will start sharing our own performance as well as consolidated numbers. So we expect that to -- we expect that to be somewhere in quarter 1 next year, we should have that in place.
[Operator Instructions] We have next question from the line of Aejas Lakhani from Unifi Capital.
Yes. Sir, I'd like to understand that when we had the second quarter call, which was in the middle of November, you have clearly stated that there is a deferment of shipments of Ibu of almost 600 to 650 metric tons. There was destocking with less intensity. Normalization was likely to happen in 3 to 6 months. That was clearly what the management guided the Street or informed the Street. So what I understand, I'm really perplexed and quite, of course, disappointed is an understatement to make. But the fact of the matter is that in November, and if you looked at when we had the call, 15th November or tenth of November, you had already started to implement this to win to feel the need to communicate to the investor community regarding this change of heart or change in policy that you have?
See, I think at that time when we communicated was more about the regulated market sales and the softening of demand in that. But we -- really, we don't expect the amount of hits that we had on the product sale in the less regulated markets in the other markets because of -- the competitor on product, what we have versus the inventory in the market and the pricing is significantly getting affected. And it's a sudden cost probably less than our sales in the restated market because they're competing with our own material. But the moment we saw that it was still not shopping. We really want to prolong with vessel, we decided to called out the material to [indiscernible].
Because even in last quarter's communications, we have indicated, in fact, our strategy to move from I say distributor net sales to direct customers net sale. That's the time we -- I say, as a company, we decided to change our strategy for the sales policy. But we were still expecting -- we'll able to coexist and they will able to liquidate their inventory and we're able to move forward with our direct sales thing. But over this course, what we realize, it's actually creating a conflict because finally, 10 customers, if both of us are trying to reach to the same thing. And that -- it was good for us to remove that conflict. So we can take control of the situation has run faster. That was a [indiscernible] take a course correction. Second thing, also, we do indicate it, we expect our quarter 3, quarter 4 to be difficult quarters. Yes, the magnitude is something which is much higher than what we expected. But yes, the difficulty of quarter 3, quarter 4 was challenging. Quarter 3, quarter 4, we started anticipating even in that call also.
But sir, then what you're trying to tell us is in the November 11 call, you've been called this out very -- you didn't quantify the impact being so significant for an investor -- and it's very difficult to patent in just 45 days of the call that you have had that all of this really transpired, it's very hard for an investor to really digest this information.
I think we took this call in December because we saw a substantial price drop in our own customers that we sell regularly, and that's an metical not to offer anymore. And it's also cost towards the end of the month, and we decided to probably call that because the fall in pricing was pretty steep, and we were working on a disadvantage the continuing sales policy.
And sir, what is the quantum of inventory that you have called back, can you quantify that?
Yes. I, in fact, mentioned in my earlier trading, we have a sales return or I expect it sales return of around INR 120 crores to INR 130 crores..
Next question from the line of Bhaskar Bukrediwala from Arthya Investments.
Just building on to what the earlier participant mentioned and your reply on that, which you said that we took this call in December. The question is a basic question on investor communication in a world of today where every small order by companies are being reported on exchanges. And sometimes they are not even material, something which is as strategic as important, and I'm sure that this will bring in a lot of positivity to the company also. So it was not necessarily a negative thing for the company right? While you could company not sort of at least sensitize the investors through a press release on the exchange, saying that we are taking some strategic initiatives and that may have some near-term impact on revenue without quantifying it. What stopped the company and as the whole December went , the whole January went, what stopped the company in a simple normal communication on that?
So this is Bharath. Let me respond. I think the feedback is well received in terms of communication. But once the decision was made for us to sit with our channel partners, understand what's really the value in the value chain, how much has been spoken for buying customers, how much do they have a generally stranded inventory and the various discussions around it where not something that we could get done very quickly. So having made a decision, it took us a process of various discussions over a period of time before we could assess the total impact of this. While the feedback on investor communication is well taken and well noted, and we will act on this going forward. But in this case, it was particularly a tricky situation because there were multiple data points that needed to be collated. We needed to make sure it was genuine. We need to make sure this is really the right call for the business. We need to make sure that there is something happening in the channel that they're not loading inventory on to us, which they couldn't sell. It is genuinely something that is stranded. So all of this is pretty drawn out process. And that's why we didn't want to rush and communicate something which is not fully quantifiable, which is not fully understandable from the investor perspective on what really is -- we also wanted to assure the investors, this is a onetime. So we wanted to be more safe in this and take a little bit more time. Having said that, your feedback in terms of more timely communication is very taken and well received. We hope that we'll never again be in this situation. But if ever there is going to be a chance, we will make sure that we are communicating appropriately. Thank you so much for the feedback.
And as Bharath said rightly, since it was much I'd say detailed granular discussion with a lot of channel partners, that's what now giving us a lot more confidence, we have a control of the situation. And we will do better from here because had been done at a very super efficient level, then the confidence what we are talking for quarter 4 would not have been there.
Sir, I think I understand when you make a big strategic move and there are a lot of things to grapple it. It is very easy for us investors to sort of criticize, but I think businesses are never easy to run. The whole point was very plain and simple that you are a large company with a lot of people, large admin staff, a lot of Investor Relations people. I mean it just needed -- one good day to [indiscernible] and use the right communication to the small press release to the issuant, that's all. I don't think it would have taken a herculean amount of effort to do that. If it would have been a small organization, still understanding you are INR 2,000 crore revenue company and some stalwarts on your Board. So for a company of that structure, I was really surprised to see this very, very surprised element company. But nevertheless,I hope that...
I think feedback well taken. We'll ensure we act on this side and make sure we have a better -- I'd say a proactive communication on this side. We'll make sure that happens.
Sir, if you can allow me just a couple of questions. On the business side, that would be great. So one question is on the gross margins, you mentioned that 52% to 54% is what we will manage and maintain. But just a question, again, given that you are sort of shifting your business to more direct rather than through channel, I'm assuming that you -- some bit of channel margins will now get sort of flowing to you and some parts will possibly help build their competitiveness through better pricing to the customer. If that is the case, shouldn't the margins expand and particularly more so as your CRAMS and the non-Ibu business builds up, which I'm assuming we'll probably have slightly better margins than your Ibu business.
For I say mid-to-long term, get both, I'd say, contributor or levers what you spoke will definitely help us to expand margin. short to midterm, yes, because we have a pricing channel, especially in Ibu. So that's what we are guiding it. I'll say the right level of margin because we see a challenge in the short term, but mid- to long- term, your points are very well there and we have an opportunity to expand the margin.
So over a long term, you're saying that both on ibu and otherwise our gross margins should expand [indiscernible] 23 years.
In the long term, yes. I agree with you.
Okay. Okay. Sure. And last question, so what we also understand is In Ibu, there is a lot of supply that is coming in the industry. So even if demand had to revise, which, like you said, is revising, what's your thought on the supply that is coming in and the impact that it could have on your utilization, overall industry utilization and pricing.
Yes, it is definitely a matter of concern in terms of material coming into a because additional capacity and imports both. But I think we are also trying to make ours 1 of the few people who are vertically integrated in manufacturing. -- to sustain this competition. So that's why our Ibu backward integration strategy with IBB and [ IDAC ] will help us to sustain this competition. And we also expand our derivative sales there. We are one of the few companies or entire derivative portfolio on a portfolio. And we're doing increase of derivative sales, and we do not want to give up here this pricing pressure. That's the reason the backward integration pressure will help us, too, ensure that our capacity [indiscernible] strategy works out in this process. Is there is a pressure that could come to the market? Yes, it is going to come. We're not going to deny that.
And just one last question. You mentioned that your strategy would be to reach direct, so that applies for both Ibu and non-Ibu business?
Yes. See, the channel part of the person what we see in India and slightly in European parts will be different where the margins are fixed. It's not buying or mediate the channel partners are helping us to do a sale and take a commission. So that strategy would still continue. The concept of selling to a channel partner outside and they selling the product would probably be minimal to us. We will do that only with historical channel partners and the relationship is very good and stable.
Okay. Would you be able to quantify the quarterly business broadly normalized debt without getting into nitty-gritty of each quarter the sales that was happening through this mechanism where you would sell to the partners and they would in turn sell it to the pharma companies? What sort of broad revenue would that have been contributing to?
No, actually, I put a slightly different manner. For a long term, when the Ibu market was in shortage, there are a lot of our capacity being focused on the regulated markets. But when the demand softening happens, we look at all the other markets and that's when the channel partner role became more prominent. So I think from a historical perspective, do not have the continued relevance from that perspective, what it is.
Okay...
Sorry to interrupt. Would you like to come back in the question queue? We have next question from the line of Tushar Manudhane from Motilal Oswal Financial Services.
Sir, apart from this 1.2 -- INR 120 crores sales because maybe that adds up to the existing sales of 100%. That is a total of 250 whereas the quarterly run rate was about 400. So still, there is some gap there. What would be the reason for that?
No, in fact, Tushar, apart from sales return, as I spoke, we haven't gone sold Ibu in this quarter because we are making sure we correct our asset distribution portfolio and product. And instead of selling it to channels, we reach out to end customers. Since the demand softness was there. So we have not gone and I'd say, bid additional stop or additional Ibu in the last quarter. Normally, we sell around to the tune of our conical capacity of around 1,500 ton kind of a capacity. Last quarter, without any adjustment, since we decided not to go through channel and also to focus on profitable sales -- we've gone and restricted ourselves, our sales only to that pocket and then demand softness of this Ibu also continued even in last quarter. So our sales practically was 1/3 of normal what we used to sell of Ibu. That was another piece, which has impacted the underlying sales, what the number normally used to be. And thirdly, what we talked about is COVID delay approval, that had some impact. And the small -- or I'd say, a couple of products impact of like [indiscernible] which has seen some softness in the export market that impacted that also gained more so to do with, I'd say, since there was a -- I'd say there was a high sale in previous few quarter because of COVID so inventory with end customer is normalized. But the last quarter, we have seen the last leg of that sale impact, that should come back to a normal level. So these are the 3 things broadly if I talk about.
What are the 2 products which you named? Just 2?
We talked about [indiscernible].
Now secondly, if it was more to do with whatever inventory was there in the system, either your Ibuprofen, that was the main issue for fall in prices. Has this lower action or any demand getting stabilized -- just trying to understand how this change in strategy actually helps if it was more to do with the inventory in this...
So I think we have seen some green shoots in this quarter, and these are from our regular customers also. And as the October in last 30 days, you've seen a better offtake and better than expected demand at this point of time. I'm not saying the pricing is going to be better, but the demand has at least given us a feeling that yes, this could be a better quarter for us compared to the last quarter.
And the backward integration project was to come up onstream 3Q, 4Q. So that's what's the...
So the trial production is already on. Yes, by end of this month. So the trial is going on, I call it this point of time, but the commercial stage production is expected from quarter 1.
It is very crucial for us to companies that within those timelines because that contributes to our margin impact.
We have next question from the line of Manish Gupta from Solidarity Advisors.
When the Aurore merger is announced, there was a month given, which is that we are looking at about INR 100 crores to INR 150 crores of cost and revenue synergies. In context of what's happened in the recent quarter, was that a big picture number? Or do we have some specific numbers now of what synergies are expected?
That was a big picture number at that perspective going to combine it, but there's been a lot of work that has gone into that to make that operationalize. We are beginning the operational synergies as we go ahead, probably going to get reflected a part in this quarter and a part in the next quarter as well from that perspective.
So Raj, could you talk about what are some of the cost synergies that you see? I mean what's the quantum you are talking about?
At least on a yearly perspective range of INR 50 crores.
Okay. There are different part of cost synergy.
So this cost synergies is multiple buckets. But cumulative number that I'm trying to come around is approximately around INR 50 crores.
And could you share where these coming from, what areas?
See, R&D synergies together, where we are trying to make more -- the feel at 2 cases or 3 cases that we have today. And in terms of capacity utilization, in terms of OpEx reductions, in terms of manpower synergies and operational excellence, which results in specific cost across every unit. And that's a combined measure that we are looking at taking experience of each other into consideration and deliver eventually the strategy completed on both sides. And we've also done -- has been doing a lot of outsourcing. All that would also stop and a lot of that would not get into the capacity utilization at Solara. So that outsourcing costs will also come up substantially for both sides.
Okay. And is it possible to get 9 months revenue under the buckets of Ibu, non-Ibu and CRAMS under these 3 buckets?
Normally, we don't give a precise numbers under these 3 buckets. But broadly, if you see our commentary and the way we put our investors call, people -- you have a fair idea of how these buckets are, but as a company, we don't share a very precise category-wise revenue.
Yes. Subhash, you will agree that this is quite an extraordinary situation we are in right now, where there are so many moving parts, right, or write-offs and guidance and all that. So to some extent, it's you can give some directional numbers that will help because certainly to understand how different parts of the business are growing right now.
I take you a feedback, let -- so we discussed it totally and see how and to what extent we can share this information, but we'll revert back to you.
Can we take the last question, Vikram?
We take the last question from the line of Monish Shah from Antique Stock Broking.
Sir, just one question, which are these new products that we are talking about. So can you name them, which are expected to deliver better margins and growth?
It's not just a new product. It's also -- it's a combination of new products and capacity optimization of the existing products and also new markets or new city additions, the products that we are having. These products are not solely [indiscernible]. So what we are doing is to increase the basket of the statuses in various markets also. So it's capacity optimization, new products and also new business for existing products.
So you've basically converted the [indiscernible] capacity of Ibuprofen into multipurpose capacity?
Yes.
So from this capacity, basically, you will be servicing the new products. And Ibu as such going forward, it will be a reduced capacity product.
See, based on the demand, we will be able to go back for Ibu manufacturing in that side. So the flexibility is always there. But what we're right now doing is we're also using -- we will use this capacity. Part of the capacity is Ibuprofen vaccine integration. Part of the capacity is for the multiproduct facility, which is for the validation of all the new products and filings on that side. And the pure Ibu capacity for the API that is or we are now being multiple products. Some of the products are also getting migrated to some of the new products. So Solara also getting migrated there. So that it gives us better cost perspective from a new side.
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.
Thanks a lot for all of you. This is a one-off quarter. We have extremely good confidence that we will bounce back in the Q4 with a decent number. And going forward, FY '23, we will put in a lot of efforts to make that come back to FY '21 level, but that's the effort we're going to put in. Thank you a lot, and we're extremely sorry for the one-off performance.
Thanks, everyone, and stay safe.
Thank you very much, 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.