Caplin Point Laboratories Limited (524742) Earnings Call Transcript

Ladies and gentlemen, good day and welcome to the Caplin Point Laboratories Limited Q1 FY '26 Earnings Conference Call hosted by Dolat Capital Markets Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Zain Gulam Hussain from Dolat Capital Private Limited. Thank you and over to you, sir.

Thank you and good evening, everyone. I, Zain Gulam Hussain, on behalf of Dolat Capital, welcomes you to the Q1 FY '26 Earnings Call of Caplin Point Laboratories Limited. We thank Caplin Point management for giving us this opportunity to host the call. Today, we have with us senior management of the company represented by Mr. C. C. Paarthipan, Chairman; Mr. Vivek Partheeban, Chief Operating Officer; Dr. Sridhar Ganesan, Managing Director; Mr. D. Muralidharan, Chief Financial Officer; and Mr. M Sathya Narayanan, Deputy CFO. I will now hand over the call to the management for the opening remarks. Over to you, sir.

Thank you, Zain, and thanks to Dolat Capital. Welcome, everyone, to our earnings call to discuss the results of Q1 FY '26. Please note that a copy of all our disclosures are available on the Investors section of our website as well as on the stock exchanges. And also do know that anything said on this call, which reflects our outlook for the future or which could be construed as a forward-looking statement, must be reviewed in conjunction with the risks that the company faces. The conference call is being recorded and the transcript along with the audio will be made available on the company's website as well as the exchanges. Do note that the audio is copyright material of Caplin Point and cannot be copied, rebroadcasted or attributed in press or media without specific written consent of the company. I would like to now hand over the floor to our Chairman for his opening remarks.

Thank you. Good evening and welcome to our investors call. You are aware that the geopolitics seems to be overwhelming economics. In future, many countries may focus on their individual interest. It is time for companies to look at things in different ways to generate a new perspective on the prospective matters. Our perspective, as you all know well, is the concept of mastering the mundane. We are consistently performing with focus and dedication in Latin America, which will be explained by colleagues in detail. The second one is stick to the basics. Our basics is always the concept of catering to the bottom of the pyramid. We also went for a mix of investments in products in Latin America with the acquisition of channel partners that really help the company to reach the eternal cash flow and profits. Now you are aware of our liquidity and the liquid assets. The recurring successful pattern of our business encouraged us to move from smaller geographies to the bigger geographies such as Chile, Colombia and Mexico and shortly, we will open up our office in Brazil too. We are not interested in vanity metrics. We always look for the metrics that actually match our desired outcome. Coming to the U.S.A. business. The tariff is currently not applicable to generic medicines. We sincerely hope that this is not going to happen and there is no such thing as American quality at African price. The world is moving towards protectionism, which we also understand. Hence our investments will first go to countries where we are doing exceptionally well now such as Guatemala and we are doubly sure that we will also do well in countries such as Mexico and we will start our factories in the next 2 to 3 years. The volume and value will be high because of the population in Mexico and also the health care budget, which is big and the private market is at least 3x to 4x bigger than the Central American market where we are doing business currently. Why we may not invest in U.S.A. in the near future? Our volumes are too low compared to the $18 billion worth of generics that are being exported from India to U.S.A. Number two, starting a factory in U.S.A. will take 3 to 4 years for completion and the operating cost will be 5x to 10x higher than India. We'll invest in U.S.A. the day we understand that our 20% of products gives us the 80% of the business. Then it becomes easy to manufacture only the 20% rather than manufacturing the entire 100. Further, it may not be easy to replace India and China in generic business, especially India when it comes to formulation. It will definitely lead to scarcity. Innovation is true is needed, but invariably to help the rich and famous. The creamy layers are just for profit not for the interest of the people especially the [ GOP ]. Now let me highlight my recent Chinese visit, which took 3 weeks for me actually to stay in various cities of China and I have been to 2 to 3 trade fairs for a new knowledge. China has moved from imitation to innovation. Probably they understood imitation has more limitation, then moved to innovation. Another thing that I found in China is that even the start-up and midsized companies manufacture biosimilar and peptides, which is not the case with other countries. And China has also gone into actually nutraceuticals and [ alternative medicine ], which is nothing but functional food from PCM and which is similar to our Ayurveda. The estimated business of nutraceuticals in India will be in the region of $30 billion. However, there is no big brand except 1 player called Himalayas, which you are also aware. Many of us will buy the dietary supplement via Amazon. It is made in China, packaged in U.S., sold in India and also other countries. Ours is one of the few countries where the social media can influence Main Street to Dalal Street. It also helps actually business. It also at times hurts the business. Our focus in China is to go for another asset-light model with value-added products. We have planned to go for biosimilars in bulk and peptides, we already started manufacturing one of the peptide for formulations. When we bought this peptide, 1 gram was costing $500. Very recently I found the same quality, the price has come down to $100. And we went for some associates, in fact we shortlisted some associates and these associates will do the manufacturing and we will control the regulatory and marketing. And we also found that the availability of containers and lead time from China to Latin America is much easier compared to other countries in Asia. We are currently expanding our presence in 2 major cities in addition to the office which we have in Shijiazhuang and the increase of Chinese staff also will help us to do the follow-up work. Our Latin American regulatory team will inspect the facilities and decide whether the facilities are suitable for in-demand inspections, which alone can take us to the countries like Mexico and Brazil. Current 30% of our outsourcing is coming from China and we would like to increase the complex products and biosimilar to peptides for our ROW market. Further, we will continue to prioritize our own primitive products as these primitive products actually cannot be replaced by biosimilars and peptides. We will continue to catch up to the bottom of the pyramid. Altogether, it's totally a different segment and let us focus on the value-added products such as monoclonal antibodies, which will be brought in as a finished product actually for the ROW market. As I told you, later we will bring it actually and do the fill finish for the bigger geographies and for Latin America. Finally, dietary supplement is also known as nutraceuticals. This I have seen actually in a very big way in China. The future is for dietary supplements. You know how important is diet. Probably after the diet, dietary supplement is equally important. And now that China is moving towards dietary supplements in the form of PCM infused with tea, PCM infused waters, L-Carnitine with black coffee and many other products, which I may not be able to disclose due to business reasons. We already started shortlisting the products and we are in the process of completing the entire thing in the next 6 months. After that, we'll have to decide where exactly we'll have to do the packaging and get into the market. The business in addition to what we are doing in the form of manufacturing and then expanding to various factories, we'll also go for factories, as I told you, in Mexico. The reason being that it will help us in the form of 15% price advantage in the tender business. And GP factory will help us to increase the liquid orals which of course is cost effective when we manufacture in the local areas. Otherwise, we'll have to transport water from 1 continent to that continent. You are aware that today's news is to stop the real war with the introduction of tariff war. So although generic product is exempted, we don't know whether it is ill conceived or well conceived. Thank you very much.

Thank you, Chairman. I'll give a quick update on the Caplin Steriles business specifically. We are seeing good progress with both top and bottom line in Caplin Steriles. Some of our recent launches such as an injectable emulsion product and emulsion ophthalmic bag products, et cetera, are really helping out boost our bottom line. We are glad to see good growth in both our B2B and B2C businesses. It's important for us to focus on both because we have expanded capacity so that we can adequately focus on both channels. Our reduction in milestone income has been adequately compensated by an increase in the profit share especially from our ophthalmic range. We're also pleased to inform you that our Caplin Steriles USA label has reached profitability within the first couple of quarters of launch. In fact I don't think we'll need to infuse any more funds from the parent company into Caplin Steriles or Caplin Steriles USA. So under our label, we have so far launched around 21 products with another 15 launches planned in the coming quarters. It's a healthy mix of bags, emulsions, vials. So that should keep us very relevant to all the large and small buyers of the U.S. We have around 38 ANDAs approved with another 13 under review. We are actively working on a large pipeline of products, which includes prefilled syringes, bags, complex generic vials, et cetera, where competition is few and far between. But we're not going to be focusing only on complex products because typically what does happen is we focus on products that move on a day-to-day basis. So we want to have a good enough portfolio that caters to all and sundry products that get used in the hospital. When it comes to GLP-1 products, I'm sure people have questions on that. We aim to launch this in our current Latin American markets during the first wave next year with some amount of differentiation considering we're going to be catering to the bottom of the pyramid. In addition to U.S., we have also filed many good products in Canada, Australia, Saudi, UAE, South Africa, et cetera and we can start to see some good progress coming from that next year. Finally, as Chairman also discussed, we are strategically looking at some locations where potentially some onshore manufacturing can happen. This is a moving piece as we speak. So as and when we have some information, we'll keep everyone updated. We understand that these are turbulent or sometimes even confusing times, but we are confident that as a company, we are well diversified and well catered that we will be one of the last ones or we will be one of the least ones to get affected with any kind of eventuality. We have been a company that's been catering to the bottom of the pyramid with affordable products with very high quality products. We simply don't foresee a world where that will be threatened. Thank you and I will pass it on to our CFO to give a little color on the numbers before we can open up for questions.

Thank you, Mr. Vivek. Good evening all for taking time off to attend our investor call for FY '25-'26 Q1. Results are there with you for some time now. I'd like to give you some key points. Before that, we are very glad to inform that we have begun the year well and very happy to inform that we have performed well better than many of the peers whose results have been announced thus far for the current quarter. Overall revenue growth is at 11.1% ROW. That is the parent business giving 7% and U.S., as Mr. Vivek put it, has given 37%, which is remarkable growth albeit on a low base. The INR 533 crores what we have achieved in the current quarter is the equivalent of 2018 full year revenue, which was at INR 540 crores. Contribution margins stand at 61.1%, highest thus far aided by product mix though we have been saying that it's sustainable at about [ 50% ], which we will hold on to that. Increase in gross margin of 2.1% is [ flowing ] up to the PAT level. That is 26.2% to 28.1% is PAT that has grown. So thanks to judicial monitoring of expenses sustainable at 26% again. PAT of INR 151 crores surpassed 2018 full year, which was at INR 145 crores. Growth of 20.1% in PAT when the revenues have grown 11.7%. This gives us the color of the business, which Chairman explained. And our CF was at INR 118 crores. As Chairman put it, we have some things. A few of them I would like to mention for the benefit of the investors. Our liquid assets is at INR 2,207 crores with cash and cash equivalent of INR 1,237 crores. And year-on-year, we have a target of accruing INR 300 crores, which will enable us to meet CapEx requirements and build reserves for the future. Second one is inventory closer to the customer. As Chairman put it, we have acquired our channel partners about 4 years back and 56% of our inventory is positioned in our warehouse very close to the customer. This has enabled us to cash on certain demands which are sporadic in nature, especially in generic market, and really maximize our gain. The realizable revenues of this inventory in warehouse and transit would be around approximately INR 800 crores. So that means this gives us an opportunity to tide over any temporary issues in terms of transit or any other issues that we may face. Combination of asset-heavy manufacturing facilities and asset-light outsourcing model is one of our great strengths. We have invested about INR 700 crores in the last 5 years to create state-of-the-art facilities for future readiness and exploring regulated markets. Asset-light model, which is mainly outsourcing out of China and Indian manufacturers enabling sustained growth and enable cash generation. So cash that generated has helped us invest without borrowing. We have 0 borrowing and no finance cost. So parent company has handled new ventures and invested INR 500 crores out of this INR 700 crores in subsidiaries. The projects out of internal accrual also gives us the flexibility to dynamically rearrange and prioritize projects in the current scenario. Because we have been having certain projects depending on the priorities and then the geopolitical level and whatnot, we are able to quickly realign. Had we borrowed, this flexibility would not have been available to us. We are answerable to somebody. These are some of the points from me. So we are open to answer any questions. Over to Mr. Vivek.

Thank you, sir. We can open up the floor for questions now, please.

[Operator Instructions] The first question is from the line of CA Garvit Goyal from Nvest Analytics Advisory LLP.

Congrats on decent execution in the quarter. My first question is on the geopolitical event. Considering these kind of events are happening and are growing exposure in the U.S. where there is a rising risk of tariff on pharma. So how Caplin is going to mitigate the same and do you think like is it going to result in any slowdown in our growth in the near term at least?

In general, it's better to cross the bridge when we reach there because he has not announced it and it's not going to be that easy for him to announce this one. If he wanted to do it, he could have done it also, isn't it? And then second issue is if you look at our business, especially the bottom line, it's not very high. It is easy for us to handle that kind of profitability with 1 more country or 2 more countries in Latin America or even in West Africa. So it's not going to affect our growth. As you know well, there are 3 stages for any company; growth, status quo and decline. The decline and status quo will not happen, definitely there will be growth. In a worst-case scenario, there will be a slowdown on the top line not on the bottom line or cash flow.

Yes. In addition to Chairman's quote, please note that our business in the U.S. today, over 90% of our business in the U.S. is B2B where we supply to the larger companies and distributors that buy our products and then sell to other buyers in the U.S., right, to wholesalers and hospital networks and things like that. So technically, the tariffs don't fall on to us. It's actually paid by the person that is going to be importing the product into the U.S., number one. Number two, remember that whatever tariffs that happen happens to everybody not just 1 company. So while there may be some amount of realignment that we'll need to do when it comes to Caplin Steriles USA, that is still about 5% of the business only right now. So like Chairman said, I think we need to cross the bridge when we get there. There is also I think a lot of information available online. There is something called the Section 232 investigation that is going on, which will probably be concluded sometime in the future, after which the Trump administration will take a call we suppose. But again, it's anybody's call and nobody really has the right answer to any of this at this moment.

So 1 more thing I would like to add. I think I've seen the news in the media that 30 companies are the one who control I think 80%, 90% of the business, which is happening in U.S. and we are not part of those 30 companies. So the impact will not be that severe to us. When a company goes to the extent of selling 50%, 60% of their business in U.S., then it's not going to be that easy to wriggle out and create another market. I hope you would agree with me.

Understood, sir. And that means for now whatever the rate that we are growing, we will continue that, right?

Yes, please. Yes, definitely.

Yes. One other information also just top of my head. In fact when the tariffs were first mooted out, we started doing a little bit of a study as to what our portfolio looks like and how this can be replaced by onshore manufacturing. So we are in a position where less than 10% of the products in our portfolio currently has U.S. manufacturing. So that gives us a little bit more comfort level that even if tariffs were to apply, most likely it's going to be applied to everybody that's on the market because, like I said, 90% of all the products in our portfolio are not really manufactured by others in the U.S. at this point. So how that will change in the future is anybody's guess. But once again, goes back to our original statement that we will be one of the last ones to get affected or the least ones to get affected.

I also would like to mention that in course of my speech, I only said we are not going to focus on the vanity metrics. Top line is vanity, bottom line is sanity and cash is king. Yes, please go ahead.

And secondly, on our CapEx side, our OSB facility, last quarter we mentioned the timeline as Q4 FY '26 and now it's Q3 FY '27. It's a big change. So can you please explain some reason for it?

Are you talking of our onco facility?

This is the oral solid facility. So basically let me just explain, right? So over the last 3, 4 months, you can all imagine that we needed a very careful wait-and-watch approach, right? And we need to understand what would be the right strategy for us and where we would be utilizing our next round of CapEx, where we'll be utilizing our cash in the next level of projects that we need to be putting together. Should it be in India? Should it be closer to the market? Should it be actually at the markets? All of these things, I think it's a very dynamic environment that we are all living in and we need to make sure that we take the right decision because typically what happens is these CapEx take about 3 to 4 years to complete all of the validations and then churn out product from there. So we don't want to hurry and then make a mess of it or we don't want to hurry and then get to a situation where we leave it half done and then we need to move from there. So I would say that we are adequately covered. In fact one other big advantage that we have is we've been able to connect with a lot of Chinese and also a couple of Indian companies that have the necessary approval and scale that is available for us to do contract manufacturing for OSD products. So I would say that even if it gets delayed by a further 1 year also, we're not going to be affected by that delay.

Correct. I would like to mention here that my recent -- I in fact told you about the recent trip to China. There are plenty of companies who have completed the entire facility. They also registered some of the products, but they have not been in a position to do business. China is very good in terms of hardware. When it comes to regulation and marketing, they are very keen to associate with some Indian company and we have been having an office for the last 18 years. Hence, we are in a position to reach to many companies. I have found as the CEO has told, it is better to delay rather than hurry up and invest your money. which is not a real asset-light model. We have to go for asset heavy when it is needed. And when there are opportunities to go for asset-light model, if you look at all the big companies like multinational, they prefer to go for generic outsourcing. If it comes to innovation or incremental innovation, they think of their own. So it's not the facility which is going to give us the returns. It's the business model and the number of registration. Today, we're getting lot of dossiers from the Chinese companies and some other -- even 1 or 2 other companies from Turkey also they showed their interest to associate with us. Hence, we are focusing more on North and South America. After the announcement of Trump of course although we are sure that it's not going to affect us, we don't want to be judgmental. Our focus will be much more on Latin America because we know it is a market, especially the bigger geographies like Mexico, Brazil, Chile, Colombia; then smaller geographies where we are expanding into in the form of Paraguay, Uruguay. These are capable of giving us the best of the best business for our company.

Understood, sir. And lastly, on GLP-1 side. So can you spend 2, 3 minutes on explaining the opportunity for Caplin in this particular area and how exactly are we going to capitalize that?

So in Latin America, if you see, we already have a wide portfolio of antidiabetic products. So this will be an add-on to our portfolio. But the truth is this is a product that has had a lot more visibility in the larger markets such as U.S. and Europe, et cetera. So for us, it's important that we launch this because of the fact that it's a good portfolio of product, but also the trust that Caplin as a brand has built up over there puts us in a very good position to make this successful. Now the differentiation in how we formulate the product in terms of usage, is it going to be a pen device? Is it going to be something else that we are going to be launching in the market is where we need to be a little bit creative around. But if you ask us what will be the market size and all of that, it's a difficult question to answer because there's been a lot of shortages. There's been a lot of new products that are entering the market. Even now I think a very small percentage of the population that's supposed to be using it is still using it, right? So we would probably know a lot more after we have launched the product next year.

The next question is from the line of Aryaman Agarwal from [indiscernible].

I was seeing in the previous presentation that you were mentioning about M&A opportunities and I wondering if you're still looking out for those opportunities or anything in the pipeline?

Yes. So the question was about any potential M&A opportunities? Are we working on anything right now?

The acquisition, yes, definitely we will be interested if it is meaningful. When there are opportunities in the form of acquiring the product, that will be our first choice. The reason is currently we are not in a position to understand the geopolitics and geoeconomics. And if we acquire a product, then what will happen we'll be in a position to understand whether we can market these products in U.S. or in Latin America or in other markets. If you acquire a facility, unless you have the right people to manage and also without even understanding what will happen in a deglobalized world. As I told you in course of my talking, many more countries will also follow the path of protectionism and at that point of time is when one has to look for acquisition. Now as I told you, we will go for facilities in 2 countries. These countries are Mexico and Guatemala. And that itself will make us invest money in such a way that this will help our business in the long run.

Got it. And what sort of growth rate can we expect going forward from here on in terms of your bottom line?

Yes. See, the growth rate at this juncture, we don't want to tell you what would be the growth rate because if you ask me after 2, 3 years, will we be doing very well. We are very sure that we'll do very well because the markets which we are into we know the pattern. Anything which is predictable is repeatable. And most markets -- in every market, as you know, when you get into smaller to larger geography, the registration time is the most important factor. Once it's registered, we are sure that in another 1.5, 2 years we'll have 200, 250 products in Mexico itself. When that happens, we will keep the goods in the warehouse. Mexico, the local companies, what they do is they will expect -- they will somehow influence the government and make foreign companies to supply the product in 30 days. That's the reason most of the foreign companies may not be in a position to supply. Whereas when we complete the registration, we decided that we would keep the goods in our warehouse. In 1% if we don't get the tender, then we can supply the products in the private market. So this is the strategy. So we are very sure that we'll not only sell in the private market, but also in tenders. That will increase the business manyfold.

[Operator Instructions] The next question is from the line of Tushar from Motilal Oswal.

Sir, just with respect to this PFS lines, which more or less are complete at Caplin Steriles Phase 2. So while we sort of register it for regulated market, but till that time is there scope for utilizing this facility either as a CDMO and for the other markets where this GLP opportunity is opening up maybe before the opportunity in the regulated market?

Yes. So couple of points here. Number one, Tushar, is we are actually looking at launching many of our vial products into PFS products, converting them from vial into a PFS product where they will go by what we call as a post-approval supplement in the U.S. So typically when new products take about 10 to 15 months to get approved, a post-approval supplement takes only 6 months. So for XYZ product if we have a vial already or a bag already approved, our idea is to convert several of these if the case may be feasible into a prefilled syringe, number one. Number two, we are also going to be doing our GLP product for our current markets from this facility and also our [ CPO ] facility because some of the new countries that we're entering into like Mexico and Chile will require regulatory approval, which we already have from this site. Number three, I would say that when it comes to CDMO, we are always open. We are not against it. The only thing is we feel that there is adequate capacity. In fact if you read some reports, it says that there's probably overcapacity when it comes to this GLP-1 CDMO space. So I don't know how much of that is accurate, but we are open to it. We are not against utilizing our capacity for CDMO for GLPs.

Understood, sir. That's helpful. Secondly, sir, now the API facilities sort of upgraded and completed so will that start reflecting in the margins given that this is more like back-end integration products?

Over a period of time, not immediately. What we are going to do is we are going to secure our supply chain as much as possible by filing second sources for many of our key products in the U.S. and Latin America. But for it to reflect in the bottom line and stuff, I think we are still talking about some time away. I would say that at least 2 years away, not now.

Understood. Like alternate source filing typically takes 6 to 9 months or just [indiscernible]?

So we will need to do some amount of development not full scale. It will probably be a couple of months of development. We will need to do batches and then put them in stability for 6 months and PAS would take another 6 months. So typically it's 12 to 15 months for the approval to come through. There are also products where it's going to be a primary source as well. But again, we need to complete U.S. FDA approval, EU approval, whatever it is and then only go for all this. So this is, I would say, a midterm kind of a target not short term.

Understood. And just sir, lastly, if you could -- maybe I missed in the opening remarks or if you already highlighted Caplin Sterile s sales, EBITDA, PAT for the quarter.

I'll request Satya, our CFO, to take this.

Sathya here. So for the quarter, Caplin Steriles consolidated turnover is INR 108.48 crores with EBITDA of INR 27.9 crores.

And PAT, sir?

PAT is INR 7.95 crores.

The next question is from the line of Vedant from ICICI Securities.

I just wanted to know the management comments on the LatAm market performance for the quarter and how could we see this market shaping up in the coming year or 2?

Okay. See, coming to the performance of LatAm, I would actually request the CFO to give you the numbers so that you can understand that we have continued to do well in LatAm market. And the best is yet to come because we are just entering the bigger geographies as I told you before. However, I'll ask the CFO to give you the numbers.

I mean we have got the full number and also the U.S. number, remainder is all coming from the LatAm. Of course Africa has a very nominal contribution to that. So we have grown 12% in LatAm market for the quarter over the last year corresponding period. Okay? So in terms of profitability out of INR 151 crores barring those INR 8 crores from U.S.A., the rest all come from there.

Is it okay?