Suven Pharmaceuticals Ltd

NSE:SUVENPHAR

Earnings Call Transcript 2024-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the Q4 and FY '24 Earnings Conference Call of Suven Pharmaceuticals Limited. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Ms. Cyndrella Carvalho, Head, Investor Relations at Suven Pharmaceuticals Limited. Thank you, and over to you, ma'am.

[Cyndrella Carvalho, executive]

Thanks, Darwin. Good evening, everyone. I welcome everyone to our full year FY '24 Earnings Conference Call. Let me take this opportunity to introduce you to our management team present here with me today. Mr. Annaswamy Vaidheesh, Executive Chairman; Dr. V. Prasada Raju, Managing Director; Dr. Sudhir Kumar Singh, Chief Executive Officer; and Mr. Himanshu Agarwal, Chief Financial Officer.

Let's dwell into the key highlights of our progress during the quarter, and then we will open the floor for Q&A. Over to you, Vaidheesh.

[Vaidheesh Annaswamy, executive]

Thank you. Good evening, everyone. We extend a warm welcome to all of you on our quarter 4 FY '24 earnings conference call. In the course of the last 8 months, we have set up the business well for both mid- and long-term growth. Key highlights of the progress made include we augmented the team and processes across commercial, R&D, operations and M&A. We assess the strengths and gaps in the business, which has formed the basis for the strategic road map, we have laid out for Suven, extensive customer interactions across multiple forums to strengthen the relationship and elevate us to the strategic partner of choice for customers.

I'm so glad to inform that we had a successful completion of FDA audit at our Pashamylaram facility, and other regulatory agency audits along with multiple customer audits and outlining the strategy for the platform on working towards building the pipeline.

FY '24 was a perfect storm with a global slowdown AgChem destocking, COVID flush out and commodity pricing. However, we think most of the headwinds are behind us fully other than AgChem destocking. We feel very confident about accelerating this journey given the positive macro tailwinds, the capabilities that we have built and the gap filling we have done so far we'll continue to do going forward.

I will now hand over to Dr. Prasada, our Managing Director for his thoughts.

[Vetukuri Venkata Naga Kali Vara Raju, executive]

Thank you, Vaidheesh. Good evening to everyone. We have a positive outlook for FY '25 and midterm to long-term growth. We derive confidence from the favorable industry environment lifted by the increase in the clinical pipeline and China Plus One dynamics. This is evidenced by the uptick in RFQs and inquiries for laterals and commercial products from both existing and new customer relationships.

Our team has been proactive, demonstrating our unwavering commitment to building robust client relationships and expanding our market reach. This proactive engagement with our key customers is a testament to our customer-centric approach, which we believe will lead to a significant growth from both existing and new relationships.

On pharma CDMO, we have grown 9.4% year-on-year ex-COVID base and expect to accelerate that further going forward.

We have now 13 intermediates and 7 molecules in Phase III compared to 10 intermediates and 5 molecules as per our last conversation we had post-merger announcement update. Similarly, our RFQ inflow and the conversion is more than doubled compared to the previous years. Our strategic intent on lateral wins and commercial molecules under patents is not just a plan, but a reality. This shift in focus is already translating into more inquiries, indicating more robust and healthier pipeline.

We are confident that this strategic intent will make us more relevant and closer to our partners, business initiatives and enable us to offer our expanded services, leveraging our proven delivery capabilities. The increased inquiries for commercial molecules, which are under patent further reinforce our positive outlook and potential for accelerated future growth.

On Specialty Chemicals CDMO, as mentioned earlier, we have recrafted our spec chem service line as a new strategic business unit with a much higher focus in line with our customer expectations and business needs, we have started investing in people who are domain experts, including operating partners, moving towards dedicated facilities and initiatives towards driving continuous improvements, including automation and EHS best practices. The spec chem softness, as our Chairman has mentioned, continues to -- continues with expected for recovery in second quarter of FY '25.

Let me hand over this to Dr. Sudhir for latest updates on key initiatives. Thank you.

[Sudhir Singh, executive]

Thanks, Dr. Prasada. As Dr. Prasada has mentioned, we have continued to meet our customers multiple times. The feedback has been very positive about Suven's capabilities. Currently, we feel good about the strategic nature of the building.

Encouraging the discussions with 3 major innovator companies recently initiated are moving forward in a positive direction. On the ESG front, we eagerly anticipate the release of Suven's ESG report in the coming quarter, reaffirming our commitment to sustainable business practices.

We are pleased to announce that our Pashamylaram Unit 3 site has been awarded the EHS Excellence award by the CII. This serves as a testament of our dedication to maintaining standards in environmental health and safety purposes. Additionally, during the quarter, we were honored with the International Safety Award from the British Safety Council for the same recently [indiscernible].

Our new Genome Valley R&D center has been inaugurated recently with the presence of senior executives from a leading global pharmaceutical company. The new block in Suryapet is undergoing validations on track for commissioning.

Handing the call to Himanshu Agarwal, our CFO, to update you on the financial performance.

[Himanshu Agarwal, executive]

Thank you, Sudhir. In FY '24, Suven generated a free cash flow of INR 307 crores. And now our cash and bank balance at the end of the year stood at INR 824 crores. Overall, the company revenue declined by 21.6% for the full year.

However, adjusting for the COVID as well as AgChem, the business has grown at 16.2% in the current year. Even the pharma segment, adjusting for the COVID base has grown at 9.4%. While we are experiencing certain inventory destocking in the Pharma CDMO, which is leading to order delays, we view this as temporary in nature.

Our reported EBITDA margins at FY '24 stood at 39.4%, reflecting the investment that we are making in the business aimed at steering Suven towards growth. If we adjust the onetime costs in FY '24 of $211 million, which includes the onetime inventory adjustment of INR 13.4 crores, which I had talked about in the previous quarter, the ESOP charges of $20 million, the M&A expenses and other costs of approximately $57 million, our adjusted EBITDA margin for the full year stands at 41.4%, and the adjusted PAT margins stand at 30.4%.

In terms of the update on the proposed merger with Cohance, we have received approvals from the stock exchange, and we are currently awaiting approvals from SEBI before the approach NCLT. We understand from Cohance investor presentation that has been updated on the Cohance at site that Cohance, achieved and adjusted EBITDA margins of 31.2%, with an absolute revenue of INR 1,341 crores.

The Cohance business has grown at a CAGR of 13% over the last 5 years. The CDMO business of Cohance has continued its growth streak with a full year CAGR of 30% and the year-on-year growth of CDMO at 20%.

I would now like to hand it over to Dr. Prasada, for comments his on Cohance's business performance as has been mentioned in the Cohance investor presentation, which is updated on their website.

[Vetukuri Venkata Naga Kali Vara Raju, executive]

Thank you, Himanshu. As per our review of the Cohance's investor presentation, we understand that on the progress in the ADC segment, the ADC platform continues to grow significantly by its commercial products, therapy expansion and market registrations. Several other new products continue to be in developmental phase with innovator customers. Cohance is also expanding its R&D pipeline of new designer payloads and adjacent payloads, which are in advanced stage of development, which organically will enable the expansion of payload market coverage. On the non-ADC CDMO, one product is progressing well in Phase III.

In the API Plus business, the down cycle seems to be behind us and the Cohance expects to return to healthy growth rates through market and customer expansion supported with new product introductions, ending March of '24 five new product validations have been successfully completed by Cohance. Overall, while this year has been muted given the macro, we continue to be excited about growing the combined platform by our CDMO focus, we expect to see growth both in revenue and EBITDA for full year of '25 with growth accelerating in FY '26.

At a combined platform level, we look forward to doubling the business over next 5 years organically and adding further growth traction from M&A opportunities over a similar time frame. As mentioned, we anticipate growth in the second half of FY '25 and Suven closing the financial year with good year-on-year growth, both on revenue and EBITDA. Further growth acceleration expected from FY '26 onwards.

[Cyndrella Carvalho, executive]

Now we request the operator to open the floor for Q&A.

[Operator]

[Operator Instructions] The first question is from the line of Jatin Chawla from RTL Investments.

[Jatin Chawla, analyst]

My first question is on your comments that you are seeing increased traction because of China Plus One dynamics. Now is there an acceleration in this in the fourth quarter after discussions on the biosecure Act? Or you've seen this solid traction throughout FY '24?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

Jatin, throughout the FY '24, we have been hearing, but we started getting the positive signal more from Q4 onwards.

[Jatin Chawla, analyst]

Got it. Got it. That's very useful. And these RFQs that you're receiving, are they largely from the large pharma players or also the smaller and the biotech firms?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

Jatin, we are primarily with large biopharma companies, and we are with large innovative farms only. No small biotechs and medium biotechs.

[Jatin Chawla, analyst]

Got it. And as we look to kind of further build this platform out, are you looking to target some of the smaller biotech firms in that space? Or would you largely focus on the larger pharma players only?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

Our primary priority is to form with our existing large pharma companies. Step 2, we prefer to add a few more large pharma companies. Step 3, based on the nature of the product and unique therapy, we might selectively take an opportunistic call on some of the biotech firms. Today, we are primarily focused on first 2 phases.

[Jatin Chawla, analyst]

Got it. Got it. And on the Pharma CDMO side, is there any way you could split the revenues into development and commercial because commercial tends to be more sticky. So one at least get a sense of what is recurring in nature.

[Himanshu Agarwal, executive]

So Jatin, I mean, our business is more on the commercial side. However, as you would understand, this is a proprietary financial information, and we would not be really comfortable giving a split of this information.

[Jatin Chawla, analyst]

Got it. No problem. But just one last question. On the AgChem side, what is giving you the confidence that you will see a recovery in the second half of the financial year. Are you seeing anything on the ground which is suggesting that? Or this is just -- you're expecting a normal cyclical recovery?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

Based on the interactions from the customer, whatever signals that we've picked up made us to believe this.

[Jatin Chawla, analyst]

Okay. Okay. And on the spec chem side, on the Suven kind of stand-alone, any increase in the number of molecules that has happened or likely in the next 12 to 18 months?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

That's the view that we have it, Jatin. And just to add to the point, after a long gap we have also started getting new RFQs also in the spec chem space. These are all the 2 evidences that we have.

[Operator]

The next question is from the line of Saurabh Kapadia from Sundaram Mutual Fund.

[Saurabh Kapadia, analyst]

Sir you mentioned the doubling of revenue...

[Operator]

Sorry to interrupt, sir, but you are not quite clearly audible. I request you to please speak a little louder and closer to the mic.

[Saurabh Kapadia, analyst]

Sir...

[Operator]

Sorry, you are not audible again, sir?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

Saurabh, are you there?

[Saurabh Kapadia, analyst]

Yes.

[Operator]

Saurabh, please go ahead.

[Saurabh Kapadia, analyst]

So my question was you mentioned about doubling of the revenue in the next 5 years. So in order to...

[Operator]

Sir, sorry to interrupt once again, but the line for you is breaking up in between. May I request you to please move to an area with better network, sir.

[Saurabh Kapadia, analyst]

My question was now you are talking about doubling of the revenue in the next 5 years. So what kind of investment you are looking in terms of CapEx to have that kind of a revenue?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

So with the current view we have up to 1.5 to 1.6, whatever the current investments that we have already committed, we don't seem to be requiring any additional CapEx, Saurabh. However, 1.5, 2 years down the line, again, we calibrate whatever is needed for the future expansion. Otherwise, enough capacities are already available to have at least 1.5 to 1.6x.

[Saurabh Kapadia, analyst]

Okay. And secondly, in terms of new RFQ, what you're getting, is it for the existing chemistry of Suven or is this new chemistry maybe of Cohance and how we are looking at in terms of chemistry wise, new policies what you are developing?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

So it is predominantly with the proven chemistry and scale-up capabilities as an organization, we have it for several years. It is only just a question of having more traction of more number of RFQs inflow to us. And of course, it is not just a number of RFP inflow, Saurabh. There is also very encouraging conversion is also happening.

[Saurabh Kapadia, analyst]

Okay. And in order to solve these new molecules, do we need to invest more on the R&D side? Will it be our CapEx on the investment in R&D will go up?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

So if you can recollect our previous calls, that was the first decision we have taken when we took the charge in September of last year, and we have decided to invest in R&D as we are speaking, as Dr. Sudhir has mentioned, it has become real, and we have a state-of-art R&D facility spans across 25-plus thousands of square feet in Genome Valley. It is operational already. R&D scientists, as you understand, it is based on the need we keep adding the resources as well. In the budget itself, we have added a few resources already. It has been very well thought, Saurabh.

[Saurabh Kapadia, analyst]

Okay. And lastly, in terms of margins, how we should look at, at least for FY '25, you mentioned there will be growth or stand-alone entity, but how we should look at the margins for next year?

[Himanshu Agarwal, executive]

Well, Saurabh, we have shared the margins in terms of what we've kind of delivered during this year. I think there are 2 aspects that we have to. As we said that we are expecting to grow the business in FY '25, right? So therefore, we will have a base effect of higher revenue coming in. Obviously, the cost is normal growth in line with the revenue growth. So we do expect the margins to grow from what we have reported in the current year.

[Operator]

[Operator Instructions] The next question is from the line of [ Vanathiyan ], an individual investor.

[Unknown Attendee]

I would like to know whether -- along with the acquisition of Suven Pharma, the Casper Pharma also was being acquired by Advent. Am I right?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

So this was a -- if you really look at the chronology of the events, Casper acquisition has happened by even prior to Advent acquisition of Suven. That's how it has to be looked at.

[Unknown Attendee]

So was that a part of the advance acquisition also or was it not? It was my query actually.

[Vetukuri Venkata Naga Kali Vara Raju, executive]

That is also included. It came along with the Suven acquisition, because Casper is an integral part of Suven.

[Unknown Attendee]

Then I have a question associated with because Mr. Jasti had told that around INR 300 crores, INR 350 crores. So we would be deriving it over a period of 3 years after the acquisition of Casper, any progress has been made on that front?

[Himanshu Agarwal, executive]

So currently, we are focusing on product filings and approvals as we are speaking today and combined at an overall formulation level, we have 22-plus ANDAs already approved. 7 of them are coming from Casper, another 4 are underpinning for approval. As you understand, this business takes time. In the next 1, 1.5 years, we see the complete uptake of the revenue.

[Unknown Attendee]

Okay. And 1 more -- the last question, please. This doubling of revenue is it a combined Cohance with Suven, you combine this one and then you double it up? Or is it only you're talking of the Suven revenue, which is being double -- which is being doubled in the next 4 to 5 years, please?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

Base is at a combined level.

[Operator]

The next question is from the line of Ritu Kumari from LK Investment.

[Ritu Kumari, analyst]

Yes. Hello. Can you hear me?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

Yes, please, ma'am.

[Ritu Kumari, analyst]

I just wanted to know what is the M&A focus that we have? What are the gaps that you think we need to fill? Can you please elaborate on the M&A strategy?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

Ma'am, during our last call also, we did mention this. Our primary intent is to ensure the Suven growth has to be accelerated. To do that, we have recognized some opportunities of technology platforms. As we are speaking, we are constantly scouting for a meaningful technology platforms, which will enable the Suven's growth journey.

[Operator]

The next question is from the line of Rashmi Shetty from Dolat Capital.

[Rashmi Sancheti, analyst]

So on your API segment, while I understand that FY '24, the API sales were lower compared to FY '23, that is what I've seen from your presentation. I just want the -- like what was the rate variance versus the volume? Most of the other peers, they are also talking about that there was a negative rate variance in FY '24 in high double digits. However, the volume growth was pretty high. Sir, if you can give about the Suven, it would be helpful, Suven plus Cohance.

[Vetukuri Venkata Naga Kali Vara Raju, executive]

Rashmi, ma'am, if we understand your question, you are talking about rate variance?

[Rashmi Sancheti, analyst]

Yes. So I'm just talking on the pricing front in the API segment. If I'm correct, that whether the pricing for FY '24 versus FY '23, if we compare what was the decline in the pricing? And what was the volume growth in FY '24 over FY '23 only in your API segment?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

Okay -- it was -- I'll just try to simplify, Rashmi ma'am, if it is okay with you. We see close to around 4% to 5%, not beyond because it's across various products. The price correction has happened up to a 4% to 5% level.

[Rashmi Sancheti, analyst]

Okay. And sir, what is your volume growth? On an average, what was your volume growth?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

Volume growth, again, it's a factor of customer and market. We might not be able to corroborate that, but definitely price level for our select range of molecules around 4% to 5% of correction has happened.

[Rashmi Sancheti, analyst]

Got it, sir. So this 4% to 5% you are talking mainly as the value growth or just for the pricing sense?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

Pricing ma'am.

[Rashmi Sancheti, analyst]

Okay. And sir, how do you see this in FY '25, whether the pricing will remain here only at the stabilized levels? Or you feel that there could be -- the pricing will go up in the second half of FY '25. Anything you want to talk or related to the APIs in FY '25 for your business?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

Rashmi, if you look at the broad industry prospects, you might be seeing a lot of pricing pressure for commodity APIs, as you understand, the Cohance's portfolio is little curated and a niche. It doesn't have so much of a pricing pressure. However, what we see in coming years is going to be other way around, there can be a possible pricing appreciation.

And in general, the pricing is also a factor of markets. And as we are speaking, our market expansion is on the more pharma emerging markets where the pricing will be much better than what it is today. Combination of both, we feel the price appreciation will be better than the current baseline what we have.

[Rashmi Sancheti, analyst]

Okay, got it, sir. And the second question is on the comments which you made that there are increase inquiries in the CDMO segment, especially which you have seen in quarter 4, are the inquiries related to more developmental projects, which are in earlier phases or is it more related to Phase II and Phase III pipeline?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

It's a combination of both, but more importantly, very exciting the laterals have actually come in and some of them are Phase II and beyond.

[Rashmi Sancheti, analyst]

Got it, sir. And one last question, if I may. In the CDMO segment, earlier we said that we are actually revising the cliental of Suven Pharma. So how many new clients you have already revived and how many new are getting added, if any clarity if you can give on that part?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

So our current objective is, Rashmi, to form with existing customers. However, during our last call also we did mention one of the relationship is becoming more strategic partnership, more number of us RFQs are coming. That's the view that we have.

[Operator]

The next question is from the line of Chirag Dagli from DSP Mutual Fund. Yes, please.

[Chirag Dagli, analyst]

Sir, like you have given in your presentation pipeline -- Phase III pipeline intermediate for Suven. Similarly, can you share for Cohance as well? I don't know if this covered in the Cohance presentation, but I'm sorry, if you can repeat this.

[Vetukuri Venkata Naga Kali Vara Raju, executive]

So we haven't covered this as such because it's at a different broader base of the business, but we will share that in the coming quarters.

[Chirag Dagli, analyst]

Understood. The kind of traction that we are seeing in the Suven business, your Phase III pipeline has almost doubled, right? If I just look at the number of intermediate pharmacies in FY '23 to [ '30 ] similar traction has been seen in the Cohance CDMO piece as well.

[Vetukuri Venkata Naga Kali Vara Raju, executive]

Absolutely. There are 2 parts to it. One is on the non-ADC as well as ADC space as well. More specifically on ADC space, it's almost doubled. 2 commercial 2, 2 more new products have come in. We are slightly constrained with the obligations of the innovators, otherwise, you must have picked up. We are also working on few designer payloads, exclusive to few clients. And we are also expanding to a new payload business, which is an adjacency of coming from topoisomerase to [indiscernible]. Otherwise, work is happening. We see the same traction all across the platform.

Just to give a prospect as you understand, between last year to current year, the number of clinical products in pipeline are increased by 16%, standing at 22,600 approximately, which has also been seen by the industry Chirag. That's an additional insight for you.

[Chirag Dagli, analyst]

Understood. Understood. And in terms of the reaching of the clients, on the -- are we now reaching out to clients as a merged entity or that is still pending we are still reaching out separately. Just some color around operationally? Is the merger happening or we wait for the legal merger to happen before we reach out [indiscernible]?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

So it's currently a conscious positioning is happening, Chirag. Conscious position is happening. And as we are speaking, some of the competencies of the -- mutually, from Suven to Cohance and Cohance to Suven customer also wanted to do that. So consciously, the cross-pollination is already started.

[Chirag Dagli, analyst]

Understood. Fair point. And sir, on the agrochemical piece, while you said that things should improve, the way -- how should we think about -- we are at [indiscernible] as far as the current run rate for the second piece is concerned. And this is coming on the back consecutively off a very high base. So the earlier peak for us to reach that -- was there any one-off in that earlier peak that it will be difficult for us to reach that peak back. Some color around that was some inventory seen in that earlier peak, et cetera. Just how should we think about growth of this low base that we are witnessing in FY '24. Is this going to be a more linear recovery or if this is going to be a non-linear recovery? Just how are you thinking about this?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

There are 2 comments, Chirag, it's a very valid point. If you look at the journey from FY '22 now, the base started from INR 309 crores and the [indiscernible]. If you look at the composition, dominance of 1 or 2 products are there today, which is getting nullified with multiple number of products. Today, the pipeline is better, which is one important factor.

Second, whatever the big product has a bit of challenges of destocking and having a little bit of adverse impacts on the overall uptick of the product, which is also coming to a normalcy. So combination of situation becomes normal, coupled with wider basket of products makes us to believe that it will come back to the growth trajectory.

And we are having a very close engaged conversations with our partners. And we also have decided that it is not just one more service line item for us, it has to be a separate strategic business unit. We are also getting one more senior leader who can actually take up this business as a BU Head. And all these things are actually giving more confidence to our partners also to see us as a part of their new product pipeline as well.

[Chirag Dagli, analyst]

Okay. Just lastly on the merger, while you indicated 12 to 15 months of February 2024, when you announced in terms of the deal milestones, if it's just timing that it is going to take? Are there any specific issues that you witnessed in consummating the...

[Vetukuri Venkata Naga Kali Vara Raju, executive]

As of now, it's on track, Chirag. However, I would request Himanshu to elaborate anything.

[Himanshu Agarwal, executive]

So Chirag, I mean we are progressing in line with what we had estimated. And I think we don't sense that the estimated time lines is going to overrun. But having said that, it is a regulated environment, and we do need regulatory approval.

So -- and there is all initiatives and full steam ahead in terms of getting the merger approval. We are more keener than anybody else to get the merger and get the synergies because that's -- as you recollect, during the merger presentation also, we had mentioned that the entire drive for merger is because the customers are seeking it. I think you also asked a question about how we are approaching the customer. So yes, we are very, very keen in terms of progressing the merger. And we are quite confident that we should be able to reach in the stipulated time that we have mentioned.

[Chirag Dagli, analyst]

I also want to just give a comment. Thank you for indicating the consolidated pro forma numbers for us, how do you look and providing a 5-year history for that, very helpful, it was a long way in our decision.

[Operator]

The next question is from the line of S. Ramesh from Nirmal Bank Equities. SP651939624 Thank you, and good evening.

[S. Ramesh, analyst]

So in the fourth quarter, gross margins have improved, but your EBITDA margins are down. So barring the impact of the option expenses and employee cost, what is the reason for the increase in employee cost and the other expenses? And is that something which will possibly even out? Or is it something which we should assume will be the trend for the next 4 quarters?

[Himanshu Agarwal, executive]

So first, Ramesh, we don't look at our business on a quarter-to-quarter basis. I mean I think as you understand that we are a lumpy business. And the fact is that it's best to look at our business on a yearly basis. because it's basically a long-term business.

Having said that, I mean, I wouldn't really read on the quarter 4 margins. I would kind of draw your attention back to the FY '24 margins. And I think what I said in the previous response also that we are growing the business, and our expectation is that the growth will be faster than the expense growth.

I think Dr. Prasada has also mentioned in various communications that we are investing in the business, and we continue to invest in the business because, for example, we talked about our strategy business unit, we converted for spec chem. And that will require investment because I think that's the way we expect that the customers is designing of the business and the focus that we require in the business.

And so yes, the employee cost will increase. We are expanding and adding high-quality manpower, which is so very required for this business. I think we've already talked in the previous conversations also about a very, very strong commercial engine we made and that comes with the cost. So yes, I mean, I think the net answer at a summary level is that margins will remain healthy, and we continue to invest in our business for a progressive growth.

[S. Ramesh, analyst]

Okay. So if you look at the history over the last 5 years, after '21, you've kind of grown for 2 years and then your numbers have gone back to where you were I think in -- say in '21. So what's actually -- apart from the headwinds, most of the industry has faced in FY '24. Is there any companies [indiscernible] client specific factors, which has actually dampened your performance in '24?

And what is the time frame over which one can expect that growth phase to come back, say, to take a 2-, 3-year view. And secondly, what is the reason for the sharp increase in net debt-to-EBITDA between FY '23 and '24, for Suven, key ratios as per the Slide 27. And when do you see this net debt-to-EBITDA ratio being brought back to something reasonable?

[Himanshu Agarwal, executive]

I think 3 points, Ramesh. One I think we have in various earlier conversations, mentioned about the COVID sale. And I think the COVID sale has had a huge base effect. If I talk about the AgChem stocking and the impact of the destocking that we are facing in the business. That's, an industry-wide phenomena, which is there. So I think that's part one to the question that you have.

I think the other part, which is there is, I think we did mention that we have around INR 800-plus crores of cash in the balance sheet. So I think that's the other aspect that has to be covered in terms of when you're looking at the various ratios.

[S. Ramesh, analyst]

No, I'm just looking at the net debt-to-EBITDA ratio, given in Slide 27. So that must be adjusted for the cash, right? So it's increased from 0.7x to 1.8x. This is net cash, okay. So normally, we put. So this is a net cash ratio. So I can correct it. So that we -- normally, we take cost fee figure as net debt. Okay. Fair enough.

So if you look at the overall product mix, will CDMO remain the dominant segment? Or will you see some increase in spec chem and agrochem, say, in the next 2, 3 years? How do you see that? And how do you see the return ratios in the acquired entity, Cohance catching up with the Suven ratios because Cohance seems to have lower return ratio. So how do you see that improving, say, in the next 2, 3 years?

[Himanshu Agarwal, executive]

Let's -- again, I think dissect the subject. You have multiple questions. I think what we need to first understand is that for us, we are creating spec chem as a strategic business unit. The direction and the need for creation of a strategy business unit is because we do believe into that business unit. And therefore, we would continue to invest for growth in that. During our merger exercise, we had mentioned that we are creating multiple engines of growth -- and therefore, all engines of growth will eventually fire.

And in our commentary today, we have said that other than AgChem destocking, we are not sensing that any BU will not fire. So all these deals filing, and we are expecting and experiencing expect the growth to come in FY '25 onwards.

[S. Ramesh, analyst]

Yes. And on Cohance, how do you see the balance sheet ratios improving?

[Himanshu Agarwal, executive]

See, I think, again, these are 2 very different business -- so it is -- I mean, I would say that it would be almost like comparing apples and oranges. So we want -- I think it's a very, very different business. So don't -- I mean, I would assume that both the businesses will improve, but not that A will reach to B or B will reach to A.

[Operator]

The next question is from the line of Gagan Thareja from ASK Investment Managers.

[Gagan Thareja, analyst]

I hope I'm audible sir.

[Vetukuri Venkata Naga Kali Vara Raju, executive]

Yes, please, Gagan, please go ahead sir.

[Gagan Thareja, analyst]

Sir, the first question is while you've given the profit contribution from Cohance. Is it also possible to give the operating cash flow and the free cash flow contribution from Cohance for the year?

[Himanshu Agarwal, executive]

Gagan, I believe it is there in the presentation. Can I request you to please look at the presentation. We have also analyzing the data from there. But you understand that and I think we can send it across later. I don't have an offhand recollection on which page it is.

[Gagan Thareja, analyst]

Okay, because he was unable to find any cash flow contributions related to Cohance. What I could find was that the net working capital on Cohance has increased, and so also it would seem for Suven. If you could give some idea of how to think about working capital for the year or years ahead?

[Himanshu Agarwal, executive]

Yes. So certainly, that's -- see, on a working capital basis, I think -- there is work as we speak, on the working capital that is actively being [indiscernible] management. I mean that's what we have seen and learned from Cohance's management. I believe that the ratios will improve over the period.

[Gagan Thareja, analyst]

Can you enumerate it, I presume Cohance this year was 180 or 180-plus days of working capital. What sort of cash conversion cycle are you sort of looking at after improvement perhaps next year and there after?

[Himanshu Agarwal, executive]

I mean I would not be comfortable at this point of time to indicate a number, right? I think let's wait for 6 months to see as to what kind of numbers are delivered by the business.

[Gagan Thareja, analyst]

Okay. And you indicated that over the next 5 years, you think the combined entity can double on the top line. Is it possible to segregate the growth outlook for Suven separately and Cohance separately, when you say doubling in 5 years, you are essentially talking of a 15% CAGR. Do both businesses grow at the same pace? Or do they grow at separate paced?

[Himanshu Agarwal, executive]

We expect similar kind of growth ratios between both Cohance and Suven. The reason being Gagan, pipeline of Suven as well as Cohance and the right inputs to deliver the growth has been factored. Hence, One of the important aspect is we have multiple engines of growth. All multiple engines of growth will have to grow disproportionately to what we have today.

Hence, this is what the belief that we have. And predominantly, it is led by CDMO from both sides. If you look at it, the gross contribution of Cohance business close to 42%, while the 5 years CAGR is 13% revenue, it is more than -- CDMO growth is more than 30-plus percent. So these are all the things makes us to believe that the both growth engines will continue to propel.

[Gagan Thareja, analyst]

Okay. If I refer back to your previous quarter's transcript, you've indicated that there might be 3 to 4 quarters of softness, and then growth will recover. While you give a 3 to 4, 5-year guidance of a 15% CAGR, from an immediate 1-year perspective, are we still looking at growth to be sort of below the mid-year, midterm guidance that you've given and then recover thereafter?

[Vetukuri Venkata Naga Kali Vara Raju, executive]

So second half onwards, the recovery is going to be seen in both the businesses Gagan,, because there are enough evidences as you understand, there is a lag in each of the businesses. And based on the view that we have. Second part of the year onwards, the degrowth challenges are behind us. It is only just growth is fully back to us and a full year basis, there will not be any challenge. And second half is the real evidence that we can see.

[Gagan Thareja, analyst]

Okay. And again, referring back to previous quarters call transcript, you indicated -- I mean, the merged entity pro forma operating margin would be mid-30s. And you indicated that you would be in an investment phase in a team building phase for some time to come, which would mean that margins would probably dip before the sort of inch up again and improve. Does that -- is that still the case? And do you feel that or perhaps the next couple of years because you'll be in a team building phase, the margins might sort of take some sort of an erosion before they come back again?

[Himanshu Agarwal, executive]

Gagan, the right way is to look at given the growth aspiration, we have indicated mid 35s or mid-30s is what we have indicated as the long-term margins for the business. We would want to stand by to that statement. That's the direction that we should look at.

[Gagan Thareja, analyst]

Yes, that's the long term. But how does it pan out over the next year, 2 years, 3 year time frame? Do you first come below the mid-30s and then go back up towards 30s?

[Himanshu Agarwal, executive]

We are not expecting that to happen.

[Gagan Thareja, analyst]

Okay. So it will sustain it where it is right through is what you're saying?

[Himanshu Agarwal, executive]

Long term, we will be mid-30s.

[Gagan Thareja, analyst]

You are mid 30s already, right, on a pro forma basis.

[Himanshu Agarwal, executive]

Yes. So we will sustain it around that.

[Gagan Thareja, analyst]

So final question from my side, this is for Vaidheesh. Vaidheesh you have a very storied past in Glaxo. Just trying to sort of get your inputs on that business was a branded generic business, and you would have -- I mean, you're a seasoned professional there. You bring superb insights from that market. I'm just trying to sort of understand how will those insights aid the growth of the CDMO business merged entity over the next 4, 5 years, how do you sort of bring to bear your experiences in this market?

[Vaidheesh Annaswamy, executive]

Thanks very much. I appreciate your sentiment. See, first and foremost, at the end of the day, every business has certain business models, certain insights, right? As long as we stay close to customers, we understand how to serve them, how to prepare yourself to deal with the customer needs, right? .

Business -- every business, whether it's a branded generic or whether it is business, I personally believe that Suven and also the combined entity is well poised for a good growth because of the fact that phenomenal understanding of customer insights are going into serving them, right?

So being an innovator company -- highly experienced innovator company, likes the idea of doing the right things, doing world-class processes. And this company is well suited, now Suven as well as Cohance is well suited to serve the needs of the innovators or the global MNCs. So that is the most exciting part, I would say, yes.

[Vetukuri Venkata Naga Kali Vara Raju, executive]

Gagan, just to close that loop with first point what you mentioned, we expect to see -- full year basis, we will continue to grow, and there are enough signs for this acceleration. And this acceleration is much better in '25, '26. That's the view that we have it on the ground.

[Operator]

Ladies and gentlemen, we will take that as a last question. I would now like to hand the conference over to the management for closing comments.

[Cyndrella Carvalho, executive]

Thank you, everyone, for joining us today and your valuable input. We look forward to our future interactions. Thank you, and good night, everyone.

[Vetukuri Venkata Naga Kali Vara Raju, executive]

Thank you, everyone.

[Himanshu Agarwal, executive]

Thank you.

[Operator]

Thank you. On behalf of Suven Pharmaceuticals Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.