Fredun Pharmaceuticals Limited (539730) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Q1 FY '26 Results Conference Call of Fredun Pharmaceuticals Limited, hosted by Kirin Advisors Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to [ Ms. Chandni ] from Kirin Advisors. Thank you, and over to you, ma'am.

Thank you. On behalf of Kirin Advisors, I welcome you all to the conference call of Fredun Pharmaceuticals Limited. From management team, we have Mr. Fredun, Mr. [ Rakesh ], Mr. Gajanan and Mr. [ Khanjan.] Now I hand over the call to Mr. Khanjan. Over to you, sir.

Thank you, Chandni. Good morning, everyone. Thank you all for joining. I'm happy to welcome you to the Fredun Pharmaceuticals Limited Q1 FY '26 Earnings Conference Call. Let me start by briefly introducing our company. Fredun Pharmaceuticals Limited is a diversified pharmaceutical company with a strong presence across India and 52 international markets. Over the years, we have transited from an OEM manufacturer into a holistic health care company with offering across branded generics, nutraceuticals, cosmeceuticals, animal health care, and mobility aids. Today we have over 1,200 products under registration domestically and internationally and 697 products already registered. We operate with a manufacturing base in Palghar, supported by a contract manufacturing at 37 additional locations across India. We have built a large and scalable product portfolio and are continuing to expand across the key therapies such as antidiabetics, anti-infectives, and cardiac care with a growing footprint across Africa, Southeast Asia, CIS countries, and Latin America. Fredun is the only player in India to have a patent of bone graft. The first quarter of FY '26 has been a strong one for us, a reflection of our consistent focus on execution and our shift towards higher-margin verticals and pet health care. Key financial highlights for Q1 FY '26. Our revenue grew by 52% year-on-year to INR 1,19.86 crores. EBITDA grew by 62% to INR 16.99 crores with a margin expansion to 14.18. [Technica Difficulty ] Net profit rose by 64% to INR 6.77 crores. EPS grew by over 63% year-on-year, reaching INR 14.33. In terms of business momentum, our order book currently stands at over INR 200 crores, providing a strong visibility for the upcoming quarters. At an industry level, the environment continues to be supportive. The global generics market is expected to grow exponentially in coming years. Indian pet care industry is also projected to grow at over 17% CAGR, driven by rising adoption, better awareness, and evolving consumer needs. Fredun is strategically aligned to this higher growth segments. Our new age business; pet care, nutrition, mobility, and wellness are expected to grow at 35% to 40% CAGR, and we are focused on building long-term value in these categories. Our goal is that by FY '29, our entire revenue will be driven by our vintage generics business. By FY '32, we aim for over 51% of our revenue to come specifically from new age business. A key focus area for us is building a complete pet care ecosystem. Under our Freossi brand, we offer a full range of products from MCHC-based nutraceuticals, grooming solutions, and functional food to pharmaceuticals and diagnostic services. In Q1, we took a major step by acquiring One Pet Stop, a tech-enabled doorstep grooming platform, which complements our existing offerings and help us serve the urban pet owners more holistically. We also launched India's first 24x7 dedicated pet diagnosis center equipped with CBCT imaging and advanced ultrasound, a move that positions us uniquely in the organized pet wellness space. Over the next few quarters, we plan to expand this network across major Indian metros. We believe that this integrated approach across human and animal wellness will help Fredun create a sustainable differentiation in the market. We have made a good start to FY '26 financially, operationally, and strategically. We remain focused on scaling our branded portfolio, deepening our presence in India and the key global markets and building strong verticals in pet care, nutrition, and wellness. Thank you once again for being with us today. We look forward to your questions. Thank you.

Should we begin with the question and ans session now?

Yes, sure.

[Operator Instructions] The first question is from the line of [ Surabhi ] from NV Alpha.

So I want to understand more on your generics business. Firstly, the split between domestic and export and also which therapies you're more focused on in the branded generics space? And the other thing, if you could give a split on of your total revenue pie, what comes from branded generics and what comes from pet care, nutraceutical, and other segments as well?

So I'll answer your first question. You guys can hear me, right?

Yes.

I'll answer your first question. The generics division was started in order to offset the OEM manufacturing because we have a very clear target that by Jan 2029, every single product that comes out of our ecosystem should be Fredun branded. Having said that in mind, all our products that we have raised in generics in India have to be launched in phases and together. Generics cannot be in quanta. We have to have a basket of at least 350 products across 15 to 20 therapeutic segments together. Right now, in terms of the distribution, about 25% to 27% of our entire sales is exports and the remaining is in India through third-party distribution and local sales. We tend to add -- we are in process of adding more therapeutic ranges and to create a basket of around 500-plus products and envisioning the GX business to cross around INR 250 crores to INR 300 crores in the next 8 to 12 quarters.

Just a small follow-up on that. The entire generics business is branded generics, correct? There is -- or is there OEM manufacturing here as well?

No, no, no. It's all under our brand. It's all under our brand.

So out of the INR 450 crores…

Yes, most -- every product is branded generics, only generic-generic generally technically does not exist. But I get your question. Yes, it is under our Fredun brand only.

And out of the INR 450 crores in FY '25, around INR 250 crores to INR 300 crores would be from branded generics and then would be the other segment?

Yes. So for us, we don't break up in that sense. How we break it up is new age business and old age business. So around INR 350 crores is our vintage business. The remaining INR 100 crores, INR 110 crores comes from our new age business. In the new age business, we have started this generic line. The remaining products also. So Fredun Gx is a brand. It is not generic division. So the Fredun Gx does around -- did around INR 55 crores to INR 60 crores of business last year. So that we are planning to take it to around INR 85 crores this year and then about INR 150 crores the year later. So in terms of a long-term target, we are looking at around INR 250 crores to INR 300 crores of revenue within the next 12 to -- around 12 quarters from the Gx line, from the Fredun Gx brand. The remaining products are also, some are exported, some are sold locally, some are through different distribution channels. That are, of course, all generics because in India, even Sun Pharma and Cipla all only make generics, but they have, what you call, the Fredun brand name, and it does not go under Fredun Gx. Fredun Gx is a specific brand, which we have started about 2.5 years ago in order to penetrate the local Tier 2, Tier 3, Tier 4 distribution markets in India and to reduce our dependency on OEM and third-party manufacturing.

So what percentage of our manufacturing is own manufacturing versus what percentage do we outsource? And when you say INR 250 crores, INR 300 crores of branded that includes the pet care or like pet care comes under the new age…

No, no. That INR 350 crores of branded Fredun products are allopathic formulations. About INR 30 crores is pet care, about INR 16 crores to INR 17 crores is nutra, about INR 9 crores is cosmetics, and about INR 6.5 crores is dermaceutics, about INR 18 crores to INR 19 crores is around our mobility and the new segments. So that is how we are breaking up. So the whole business, we are metamorphizing from a contract manufacturing company with our own brands and exports to actually having our own branded lines in India with different divisions, which we also have a base in our exports market to offset the MOQ and the economies of scale.

And in the export market, I'm guessing it's mainly African like or very semi-regulated areas…

East Africa, South Africa, Southeast Asia, CIS countries, Latin America.

So any of these are tender based, out of the 27, is anything on tender?

Tender-based, no. But in India, about around INR 18 crores to INR 25 crores annually is institutional sales. This year, we'll do -- end up doing around INR 35 crores, INR 35 crores to INR 40 crores.

And if I can just squeeze in one more. What is the strategy for the new age, the Gx line? Like I -- because anyway, it would be a brand…

The strategy for the Gx line is to have -- the strategy for the Gx line is very simple and succinct, to penetrate in Tier 2, Tier 3, Tier 4 cities, to have a product portfolio which is vast and varied, which we can manufacture ourselves where we have control over the pricing. And we -- our unit pricing comes low because we have one of the largest capacity of plants in the country. Hopefully, within the next 2 years, we'll have one of the largest plants in the country for a single location. And the 37 locations that we have added recently in the last, say, 1.5 years or 2, those will help us create portfolio of products, which we cannot manufacture under one roof. And those -- that basket in addition to it will give us a good base for penetration within the country.

[Operator Instructions] The next question is from the line of Kushal Kasliwal from InVed Research.

So Fredun, basically, this is your first con call. I just wanted to understand the business model. The previous participant has already asked the overall split in the business. So just wanted to get a sense on where your focus will be going forward? I mean, pet is something which is pretty hot. But do you only plan to focus on pet care business? Or it seems like your new age business, which is the generic line, is also a focus area. So just wanted to get a sense of where is the future growth heading towards? This is my first question.

Yes. So in order to answer your question, I would like to say that for us, we didn't start pet because there was a craze in the market in the last 3, 4 years. Pet has -- we have developed products for pet care years ago, in fact, decades ago because we are a very strong tech-based company. Both the promoters, my parents, were PhD research scientists. So they have developed a lot of products, but I did not feel the time was opportune. In the last 4, 5 years, the time was opportune. So we launched those products, and we have got tremendous success. Plus the marketing channels that we have used to penetrate into the Indian market is very different from the others. So therefore, we have got very good traction. Pet care, yes. Why? Because we are the only pet care company right now in the country, which has allopathic formulations, nutraceuticals, functional foods, herbals, diagnostics, and medical devices such as bone grafts, all manufactured under the same roof. That gives -- including grooming products. So that gives us a very good control over our products, that gives us control over our quality and allows us to do further R&D in new age products. Some products which we are launching in the next quarter or in the next 2 quarters, which are in Stage 3 and Stage 4 trials right now, are also very new to the Indian or even the Asian market. So we are very strong in what we are doing for pet. Including the diagnostics, our -- we are the only pet diagnostic standalone center in India right now, which runs 24/7 and has a full-time anesthetist. This is in line with our goal for pet care for our company that by 2032 no pet in India can be born or die without using a Freossi product. That is our vision and our goal. And we are -- therefore, we are in all segments. Luckily, we could be in all segments because of our manufacturing prowess and capability to manufacture those products in our blocks at our locations. So pet care, yes, definitely is a good vision. Dermaceutics and nutraceuticals is also a very strong vision-driven division for us because we are already exporting specialized nutraceuticals, specialized dermaceutics in our export markets. So we have got good hold over those products. We know what sells. We are also doing OEM for many manufacturers, many brands for dermaceutics in India for quite some time. So we know the market. We have known the terrain quite well, and it allows us easy foray into this demographic. So nutrition, dermaceutics, and pet care is our goal. Fredun Mobility has done phenomenally well. In fact, from October 2023 to this year, this year, we'll end up doing around INR 35 crores of branded mobility products like [indiscernible], they are doing. So they all at one level go hand-in-hand. For many, the distribution channels are also the same. So it becomes easy for us to market them also. So the new age business per se will be our focus. And the reason why it is our focus is because the vintage business is going to grow around 15% to 20% year-on-year for the next 7 to 9 years. The reason being we have another 1,290 registrations in the pipeline. Those 1,290 registrations will have fruition within the next 3 to 4 years. Even if 10% of those registrations yield continuous orders and even 10% of those yield bumper orders, we are still set for an easy growth of around 15% year-on-year. So the runway for what we used to do is set for the 9 year -- next 7 to 9 years. Therefore, we can focus on our new age business and create brands which we have already got traction for.

I think -- thanks for the detailed answer. So I think you have already kind of given a guidance or aspiration where we want to head in terms of our new age business. Within new age, we -- you already told that Fredun Gx is doing roughly INR 50 crores, INR 60 crores this year. Next year is INR 85 crores. Next to that is roughly INR 150 crores is what we are targeting. On an overall business level, could you give like an aspirational guidance or maybe a realistic guidance for the next maybe 2, 3 years in terms of top line margins? Can you just help us there?

What I can tell you is our target for the next 3 years is to -- 3 to 4 years is to double our revenue and to double our PAT from where we are right now. So we are looking at somewhere around INR 800 crore plus top line with a INR 90-plus crore PAT kind of thing after a few years. And we are -- in process, we are also going to start eliminating low-margin products, which don't yield results and keep on creating efficiencies, cost efficiencies by increasing our capability in order to manufacture. In the next -- as I said earlier, in the next 18 to 24 months, we should be one of the largest plants in the country for a single location, and we are on route to that. We are almost there. So as a vision, top line is the target. Bottom line is growing consistently. And considering all our guidances which we have given since 2017, touch wood, we have achieved them, some have been overachieved, and we hope to do the same in the coming years.

I just missed your last point. You're saying INR 800 crore top line, INR 90 crore PAT in the next 3, 4 years. Is what you're saying?

Yes. So we are looking at -- yes, that is our target.

INR 90 crores PAT you are saying, this is almost 3x. Got it.

Because we are looking at a 10% to 11% PAT kind of scenario.

So you are expecting a slightly higher EBITDA and PAT margin.

The new age business is all higher gross margins of above 50%. So once those start reaching cost efficiencies, profitability will start building in.

The next question is from the line of Dixit Doshi from Whitestone Financial Advisors.

So as you have explained in detail about the different division and your vision towards the different division, I just have a couple of questions. Firstly, on -- if you can mention that how much is our inventory and receivables as of June?

So right now, our inventories will be in the base of around INR 200-plus crores. And in terms of -- in July, our receivables are around -- in fact, 31st July, our receivables will be under INR 100 crores.

So under INR 100 crores. So it has -- both has improved a lot from what -- where we were as on 31st March?

Yes. 31st March also, the -- we have to realize that the debtors, those seem higher from the last year from INR 77 crores to INR 177 crores. We also have to realize that there's a shift in the business model in terms of local sales and generics. At the same time, the last quarter itself was INR 165 crores. So the debtors have increased because the sales have increased. And inventory levels will remain high for the next 6 to 7 quarters because we have a lot of SKUs running. We have to hold inventories. We have to hold a few months of stock. But the ratios are improving for the last 18 to 19 months. Hopefully, within the next 6 to 7 quarters, our inventory will align at around 125 to 130 days. So that is not a worry for us at all. In fact, we are very confident of where we are heading. So we are very steadfast in our goal.

And in terms of receivable, what kind of days we are looking?

Receivables, see, we have to realize -- I cannot give you an absolute number. What we can say is the receivables will be in the tune of about 120 to 130 days right now because when the new age brands are going into the market, we have to give it time to the market to understand the product and accept it. We have water tight agreements with every single distributor in the country. So all the goods are one-way valve and are on solid -- not even water tight, air tight terms and payment terms. So touch wood, we have no bad debt also. So the debtors will be somewhere around 120 to 130 days going forward at any given time within maybe 1.5 years or 2, maybe it might come down to 90 days, 95 days, considering the acceptance of our brands and products and it will improve. But in Indian markets, in the distribution channel market that we have approached, 90 to 120 days credit has to be given.

And our debt equity was almost 1:1 considering the working capital loan. So till what level we are comfortable? And any plan of fundraising we are looking because we have a very high growth plan?

Yes, of course, we will definitely look for some equity and around in the coming months. But in terms of what we are doing, we don't have any long-term debt in our books. Most of the debt is working capital, and we have orders for those things. So even if we don't raise any funds in the next month or 2 months or 3 months or 6 months, it's not going to hamper our growth. In fact, we haven't raised any funds and still we have grown about 30% last financial year, including growth of profits. So yes, sometimes necessary will have to be carried on, but that's part of the game.

And just last question. So if you could -- so I missed the earlier part. So how -- what is the difference between the Fredun Gx and the vintage, I mean, is the therapeutics are different or the…

In India, most people -- in India, most people are confused by saying [Foreign Language]. Nobody makes branded -- everyone makes a branded generic. For example, an ointment, an ointment by default can never be a generic. No doctor will be able to write in a generic name for an ointment or a cough syrup or some. So many products by default are all branded. For us, the differentiation is very simple and clear, crystal clear that the new age business, which includes the Gx line, which we started 2, 2.5 years ago in order to offset the third-party and OEM manufacturing, which we do for other brands. Where we have a goal that we do not want any product that's coming out of our ecosystem, which is not of a Fredun brand post Jan '29.

So this vintage INR 350 crore revenue which we have, this will grow or, I mean, this includes…

That's what I said. I just said that it will grow around 15% to 18% year-on-year because we have 1,290 registrations in the pipeline.

Okay. So -- and this includes the OEM, I mean, for other brands which we make?

Yes. At one point, we cannot put a hard stop to our associates, which we have associated for more than 30 years. Some are associated more than 20 years. So some lines will grow and we are going to figure out ways of how we can make them happy as well. But those brands right now are going to grow.

And last thing is, you mentioned INR 200 crore order book. So if you can explain that this is firm order book. So is it like a vintage…

Yes, we always have -- our order books are always firm. We get orders from all our export markets for a 6-month period. Our local markets, we get orders now for a 6-month period, including our third-party orders. So every order that we have, we don't buffer into our system unless it's a confirmed order.

So we can say that other than the new age business, generally, we have 2 quarters' order book?

100%. 100%. In fact, we definitely grow.

The next question is from the line of Mr. Suresh Pal from KRSP Capital.

Sir, I would like to know about our -- for the last 3, 4 years, if I look at the balance sheet of the company, the cash flow from operations has been negative consistently. On the other hand, debt has been increased consistently. So any thoughts on improving our balance sheet?

Yes, that is -- this answer is in line with what I just explained to the previous gentleman that once the inventories line up days reduces and the debtors reduce, the cash flows will start getting positive shortly. So we have to wait and buckle up. It's a necessary evil that we have to endure in order to create brands in the country, which lasts for a prolonged period of time.

So in the history of the company, has there been any bad receivables or something like that?

No. With the grace of God, for 31 years of operation and we are existing for almost 37 years, there has been no bad debt.