Viyash Scientific Limited (512529) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Viyash Scientific Limited Q1 FY '27 Earnings Conference Call hosted by SeQuent Scientific Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand over the conference to Mr. Abhishek Singhal from SeQuent Scientific Limited. Thank you, and over to you, sir.

Thank you, Pari. A very good evening to all of you and thank you for joining us today for Viyash Scientific Limited earnings conference call for the first quarter of financial year 2027. Today, we have with us Dr. Hari Babu, Managing Director and Group CEO; Mr. Rajaram, Executive Director and CEO, Animal Health; and Mr. Ramakant, CFO of the company, to share the highlights of the business and financials for the quarter. I hope you've gone through our results release and investor presentation, which have both been uploaded on our website as well as the stock exchange website. The transcript of this call will be available in a week's time on the company's website. Please note that today's discussion may be forward-looking in nature and must be viewed in relation to risks pertaining to our business. At the end of this call, in case you have any further questions, please feel free to reach out to the Investor Relations team. I now hand over the call to Dr. Hari Babu to make his opening remarks.

Thank you, Abhishek. Good afternoon, everyone. Welcome to Viyash Scientific Investor Call for Q1 FY '27. Thanks for taking the time to join us today. I'm happy to say that Q1 FY '27 is again a very good quarter for us. And it shows that not a 1-quarter story, but a company which delivers consistent results quarter after quarter. Our integration is now complete. This will be one of the few successful integrations you can find in the industry and that too in record time period. Starting with the quarter performance. Revenue from operations for Q1 FY '27 was INR 946 crores, grown by 20% year-on-year. EBITDA was INR 205 crores, grown by 59% year-on-year, with EBITDA margin at 21.6%, expanding by almost 530 basis points over last year. Profit after tax was INR 79 crores, which has more than doubled year-on-year. Our EBITDA to PAT conversion is showing good improvement both year-on-year as well as quarter-on-quarter. Our balance sheet continues to show improvement. Net debt has come down to INR 86 crores and net debt-to-EBITDA is now 0.1x versus 0.24x last quarter and almost 1x a year back. So in 4 quarters, we have gone from a leverage combined entity to a company which is virtually debt-free on a net basis. This gives us tremendous opportunity with respect to brownfield expansion as well as exploring inorganic opportunities. Coming to segment performance. Our animal health formulation business continues to grow very strong across all regions. And we believe the growth will continue with our continuous focus on new product launches, geo extension for our existing products to other countries, expanding R&D and accelerating new product development. We continue to invest in expanding our manufacturing operations. We are also seeing strong growth in domestic market as well, up to 60%. And here, we are looking to expand our field force and product portfolio further to grow aggressively. Coming to human formulation. Our U.S. business has grown 60%, showing results of our efforts to moving towards backward integrated, more complex products. That is now translating into real growth along with profitability improvement. API revenue has been broadly flat quarter-on-quarter due to timing issues on account of raw material price volatility as customers were in wait-and-watch approach. As all you guys know, the war is continuing. Nobody knows when it's going to end. During the June, most of the customers wanted to wait and see how it's going to work out. But now we see good traction. A lot of orders are coming back, and I can see this quarter is going to be the best quarter for API for us. Coming to where we are investing for growth. We have signed SPA for BioForLife acquisition in Italy, and we are expecting to close the acquisition in the next few months. This is on fulfillment of certain conditions as per the agreement. This acquisition, as I mentioned on previous call, aligns with our focus on companion animal as #1 strategic growth area for the next 5 years. BioForLife gives us direct market access in Italy, one of the largest companion animal markets in Europe. It comes with a companion animal portfolio of about 85 products, which can be extended to our core markets and sales force with about 85% vet clinic coverage in Italy, plus strong local talent. Combined with our BI partnership in India, which is now scaling up our own R&D and manufacturing investments in companion animals, this is a very meaningful step in building the entire companion animal platform across the world. On farm animals, we are focusing on filing the white spaces in our current portfolio as well as expanding the market for existing products to other geographies. We want to focus our new product development on molecules, which have potential across multiple geographies. For human formulations, as I mentioned earlier, we'll continue to focus on first-to-file opportunities with focus on -- more on high-potent complex formulations with fully backward integration support on key molecules. In API and CDMO, focus is on day-1 launch, complex molecules, expanding our CDMO business to create differentiation. We have strong relationship built with innovators across human as well as animal health, strong credentials in manufacturing, which helps us create a mutually beneficial partnership models on the CDMO side. So, to summarize, Q1 FY '27 shows continuity, sustained double-digit revenue growth, EBITDA margins around 20%, 22% as indicated earlier, balance sheet now strong as ever in the history. With this platform and this balance sheet strength, we are very well positioned to keep investing both organic in R&D and manufacturing, and selectively inorganic wherever we find the right site, while maintaining the discipline on margins. With that, I will now hand over to Ramakant, our CFO, to take you through the detailed financials. After that, we'll be happy to open the floor for questions and answers. Thank you.

Thank you, doctor. Good afternoon, everyone, and thank you for joining us. I'm pleased to present the financial performance of Viyash Scientific Limited for the first quarter of FY '27. We have started FY '27 on a strong note with continued momentum in revenue growth, significant improvement in profitability, and sustained expansion in markets. Our performance reflects the benefits of the initiatives undertaken over the past few quarters across businesses, along with continuous focus on operational efficiency and disciplined cost management. Revenue from operations stood at INR 946 crores, registering a strong 19.5% year-on-year growth and a 2.9% sequential growth. The gross margin improved to 54.1% compared with 51.9% in Q1 FY '26, representing an improvement of approximately 220 basis points year-over-year. Adjusted EBITDA increased by 59.2% year-on-year to INR 205 crores with EBITDA margin expanding to 21.6% compared to 16.2% in the corresponding quarter last year. Profit before tax increased by 132% year-on-year to INR 112 crores compared to INR 48 crores in Q1 FY '26. Profit after tax increased by 115% year-on-year to INR 79 crores compared to INR 37 crores in Q1 FY '26. Our finance costs declined to INR 12.5 crores from INR 20.4 crores in Q1 FY '26, reflecting the benefits of our continuous focus on balance sheet strengthening and debt reduction. Pursuant to the composite scheme of amalgamation and upon receipt of necessary approvals during the quarter ended 30th June, company has granted INR 1.3 crores employee stock options, representing 2.8% of post amalgamation paid-up share capital of the company. This has resulted in an incremental expense of INR 19 crores for the quarter ended 30th June 2026. Profit before tax of INR 112 crores and profit after tax of INR 79 crores for the quarter ended 30th June '26 are after considering the expenses on account of these additional employee stock options. We remain encouraged by the strong start to FY '27 and continue to focus on disciplined execution and capital allocation to deliver sustainable and profitable growth. With that, I conclude my opening remarks. Thank you for your attention. I would now request the moderator to open the floor for question-and-answer session.

Pari, we're good to take questions.

[Operator Instructions] The first question is from the line of Naman Bagrecha from IIFL Capital Services Limited.

I have a couple of questions. Starting with the EU region, if we look in terms of the Y-o-Y growth on constant currency basis, EU revenue has been largely flat. Anything to highlight over here? And what would be the outlook?

Raja, you want to explain? EU region, actually Q1, it's showing 13% year over. That is in actually, can't...

So in terms of the EU or constant currency, if you took EUR 16.8 million would be sales figure versus 1Q FY '26, there is EUR 62.9 million. On a euro terms -- EUR terms, what leads to that?

Yes. But actually, if you look at the -- the fourth quarter tends to be a little bit more of a management of how the sales have gone because on a full year basis, if you look at it, the growth will be closer to 20% for the EU region. So some of it is more a bit of phasing between one quarter and another quarter. But by and large, we are growing volume over there. And the volume growth in that market plus the pricing growth should get us back to the levels at which we have typically been, which should be in the -- closer to the 18%, 20% growth. So this is more a question of how the quarter-on-quarter looks. But really, the way to look at some of these businesses on a year-to-year basis because EU is a set of markets where one market may in one particular quarter show a little bit of a lower sales than the other quarter.

Is there any seasonality in terms of whether 1Q is lower versus, let's say, 4Q...

Generally, third quarter is better.

So we generally have a peaking around third quarter -- third quarter. It's also a question of some businesses are -- which are tender-linked or some of them are linked to outbreak of vaccination-related issues. So you could have a bit of a movement on that. But yes, you tend to have a higher sort of growth coming typically in quarter 3, a little bit in quarter 1, yes, than in quarter 4. But you're really talking of growth. So from a growth point of view, if you look at it quarter-on-quarter, it is more a question of phasing of what was last year, same quarter versus this quarter. But there's nothing which indicates that we are -- this is anything which is disturbing. It's more like a steady volume plus pricing plus foreign exchange growth, yes.

So, actually, I was comparing it on a Y-o-Y basis in the non-systemic on-quarter basis. So Y-o-Y also, it is flattish in EUR terms, if you look.

Y-o-Y as in you're saying on FY...

1Q FY '26 versus 1Q FY '27.

In constant currency...

Yes, yes, yes. That's what I'm saying. So on the quarter very specifically, it's more a function of the phasing of what kind of contracts may have been there in the respective 2 quarters. The way to look at it is really on a full year basis, which is when you will have some movements between different quarters. And so EU continues for us to be a market which is closer to an 18%, 20% kind of a growth.

So 18%, 20% kind of growth on a INR basis, right? Or group are of...

Yes. On an INR basis, on an INR basis.

And also, as you know, a few of the European countries, we started building last few years. But our major countries like Spain is doing extremely good. But a few other countries like Brammer, Benelux, where we are building. So that's taking some time, but we are very confident this year, we'll grow much better.

Got it, got it, got it. And in terms of the emerging markets, emerging markets have actually surprised positively in terms of growth this quarter. I mean, we were looking at more of a mid-teens kind of a growth first on a constant currency, let's say, if on a dollar terms, it has grown almost around 23-odd percent. Do you expect this momentum to continue? Or what were the drivers of such a strong growth?

So emerging markets, mainly Turkey, Brazil, we have a very strong product pipeline, of course. So a few launches also happened last quarter. And both countries started growing volume because from last year, we are seeing the volume growth. Earlier, Turkey used to be only pricing increase, but last few quarters, we see good potential to grow in volume. So looking at the volume, looking at all our product launches, we are confident to go close to that. That's how we see. Both markets are doing extremely well. These are the 3 countries: Turkey, Brazil, Mexico. So all are doing extremely good on this business.

Got it. Got it. If I may, I mean, there are a few couple of questions. In terms of, let's say, the U.S. business also has seen a very strong growth, while -- I mean, albeit on a lower base. Anything particular to highlight why it was such a -- I mean, almost around 45% Y-o-Y, 6% on a Q-o-Q basis in dollar terms?

So as I mentioned earlier calls also, Viyash have been trying to restructure a little bit last 2, 3 years. So post COVID, we struggled a little bit pricing issues since we had manufacturing in the U.S. That's how we started moving volume products to India and also a couple of products we try to fully vertical integrate. So those actions happened last year, a couple of products started shipping from India with our API. That's where margin profile improved. And also we are able to maintain our market share. And last year, of course, we had one good launch. We're able to make good. Still we are having 50%, 55% market share. So these are the few things: changing the strategy, moving volume products to India, fully integration with APIs and adding a few new products. And R&D also stepped up actually. Our R&D revenue also is slightly improved. So all these actions actually worked out very well this year, and it's going to work on that. But if you ask me, is it going to 60%, the answer is no. So -- but it's pretty stable. We have very confident now actually to grow this business on that. Because all -- most of the products, whatever we develop or commercially launch goes with fully integrated thing. And all volume products, we tied up with Indian manufacturers strategically. So we can say strong growth potential in this business as well.

Okay. So just to summarize in terms of whether my understanding is correct. So basically, earlier the -- or let's say, for serious products, the API is now getting manufactured in India, which was not happening earlier, and hence, we saw a margin in, let's say, FY '26 versus FY '25.

Yes.

I mean, if I look at ARPU income statement and EBITDA margins have sharply improved from 1-odd percent to 34-, 35-odd percent. Do you expect this to continue this kind of EBITDA margins for this -- for the year, at least?

So we are expecting this will continue.

Okay, okay. Also, if you could highlight in terms of how has been the animal API growth and the human API growth for the quarter.

So API, as you see, it's a flat because of a few reasons. We don't see any business loss in this. So basically, last quarter, especially June, everybody expected war is going to end very soon. In fact, it stopped in a few weeks, you know that. So when the raw material prices was high in last quarter, we also increased the price. So most of the guys where they have inventory, they try to actually a little bit postpone their procurements. So it happened 1 month. But when they realize after July, now it's not going to be over, now we are getting back all product orders. And this quarter is going to be a very good quarter for API. I can see -- I think this quarter is going to be the best quarter in the history for us. We see a lot of traction, a lot of inquiries to get back this day. It's the only timing issue that few weeks. Everybody wanted to take as an advantage. So, okay, if it works, if raw material solvent prices have come down, we may reduce that. But now it's stabilized. Everybody understood, realized. So now this quarter is going to be good. So it's only timing issue, nothing wrong in the API business. And this quarter is going to be the best quarter for both animal health and human health. Of course, animal health, all vendors earlier have been talking capacity expansion, a couple of approvals. Now we have expanded capacity. We got U.S. approval also for the Vizag site. We also expanded at Vizag site, just started commercialization from July. And this quarter is going to be the best quarter for API.

Any color in terms of what would be the revenue run rate for the animal healthcare business? If I remember, we have crossed the INR 100 crore mark. This now stands at...

I said -- I mentioned earlier, we'll grow 20 plus, but we'll grow a little more than that. Alivira, they are growing. We'll grow more than 20 plus is what I can say.

Okay. One for Ramakant sir. Sir, if you could highlight in terms of how should we look at the ESOP cost going ahead, whether it should be like INR 5 crores the SeQuent ESOP plus now the valuation towards getting that 190 -- sorry, INR 19 crores kind of additional ESOP for this year, on a quarterly basis, or it will increase from Q2 onwards?

Yes. So as I mentioned, this INR 1.3 crores additional options were granted during the quarter. The charge for the quarter was about INR 19 crores. In total, ESOP cost for Q1 was about INR 25 crores. Q2, Q3 and Q4, the number in total would be about INR 40 crores. And from next year onwards, it will come down.

So next year, it's going to be flat, small maybe after completing this INR 1.3 crores. You know that why it's happened. We had ESOP scheme in Viyash. So when we merged part of amalgamation, of course, it was clearly mentioned in the merger document also. Since actually it's allotted, it's delayed. So then the share price was high. So it was at INR 230. That's the reason it's showing more, but it's going to complete by mostly this year and next year, first quarter something. But after that, it's a routine very small. We don't see any big things or onetime things after that.

The next question is from the line of Sahil Sanghvi from Monarch Networth Capital.

Congratulations on excellent set of numbers, sir. So with respect to the kind of traction you are seeing on the API side, sir, is it possible that we will exceed the 20% growth for, say, maybe a couple of quarters now going ahead? And would that mean you would do higher on the whole year basis on your high end?

So API, I mentioned animal health, okay, we are going to grow 23%. But overall, I mentioned, actually double digit, 13%, 14% this year. For mostly next year, it's going to increase. We have a few launches. But this year, we can expect double digit, maybe mid-teens, that level, together, because other API business is bigger, much bigger than animal health, but we see good traction. But human health, most of the products, big launches is going to come in future. So this year, we can expect that mid-teens 13%, 15% kind of thing, together.

Got it. Secondly, during the Investor Day, you had also alluded upon adding new tablet capacity for companion animal and building some more R&D capabilities as well. How is -- how are those things tracking -- I mean, progressing?

R&D already initiated last quarter. We hired people also, whatever approved, and equipment also we placed out there. So coming to the manufacturing, we finalized the design. Mostly it's going to start next few weeks or next month and target to complete by January, February to be ready for taking exhibit batch. So we are on track on that. Mostly it will be done by January, February.

Got it. Got it. And just one clarification from Ramakant, sir. You -- I think what you said is the ESOP cost would be ranging in roughly INR 40 crores for the 9 months. Is that correct understanding?

Yes, yes. For FY '27, the total would be about INR 150 crores. For FY '28, it will come down to around INR 25 crores, INR 30 crores.

Remaining 3 quarters, INR 40 crores is your number. That's right?

Yes.

The next question is from the line of Bharat Sheth from Quest Investment Managers Private Limited.

Congratulations, Hari Babu, Rajaram-ji, and Ramakant-ji on excellent performance. Sir, only -- I have 1 -- 2 questions. One is particularly you stated in your opening remarks about, I mean, growing the business of high potent in human healthcare. So if you can give a little more color what kind of a current run rate is and how do we see -- what is the capability that we have and capacity also we have built up? And how do we see that high potent -- I understand it's a more complex and we'll have a better EBITDA margin also. So if you can give a little more color on that.

Sure. So high potent is mostly oncology products. We started building that capability 2 years back API. So last 18, 24 months, we build R&D potent lab, we build manufacturing, of course. We have 3 modules. And we started developing a lot of products last 2 years. That's the API thing. And started selling and we partnered also with many customers in the form of partnership or CDMO or direct selling. That's one of the core business for future. And recently, last 12 months, we also initiated formulation development and partnering in that. So as I -- like I said earlier also, we are investing on formulation, R&D, high-potent lab. It's done now. It's going to be operational. In fact, last week, we completed high potent formulation development lab. So we are -- we started actually all high-potent products formulation now. And also, we tied up with one of the strategic manufacturer who is having oncology manufacturing site. So we aligned with R&D manufacturing. We started working with partners. But these things, you have to keep in mind, it's a long term. All these products, high-potent products, unless you start developing minimum 5, 7 years yearly patent expiry, we'll not able to get the business. So most of the revenue, whatever we develop the APIs and partners, it's going to start from '29. And the big product revenue with the formulation, it starts after '30 -- 2030. So we geared up now, we have R&D, we have manufacturing, and also we have a couple of partners, but we are waiting for filing and patent expiry, most important patent expiry. We filed at least 5, 6 products APIs already. The first product we are expecting '29. If you get -- there also is opportunity for exclusivity to that product. If you are like -- if you get exclusive, that's a big thing. But majority revenues are going to be long term after fact.

Okay. So how many products shall we say in the pipeline first-to-file also which you say?

I think last time I indicated API multiple products first-to-file and a few formulation, but I don't have -- it's a number, but at least 50% of our portfolio is either first-to-file or first-to-launch.

Okay. And one more question just only for Ramakant-ji. So Ramakant, how do we see interest cost from year onwards annualized? And second thing, I understand last time, doctor had mentioned that we see depreciation side.

I can explain you a little bit. I'm also like related to finance now. So the depreciation, goodwill amortization, you must have seen every quarter, INR 25 crores. So this year, first quarter, INR 25 crores. Next quarter it's going to be INR 10 crores, so close to INR 10 crores, INR 11 crores. After that, you can see that INR 25 crores is not going to reflect depreciation. So third quarter onwards, next quarter, I think you can see INR 15 crores benefit. Third quarter onwards, the INR 25 crores is going to be PAT conversion. And the interest rates today, we are working and optimizing a lot on those things. Of course, you can see, our finance cost also is coming down continuously. We are trying to restructure [indiscernible] interest cost. Last year, we did -- SeQuent India debt we restructured. Now we are currently working with Ireland interest restructuring. So we are working various things on that to reduce interest burden as well as tax portion. I think you can see next year, it's good. But we are at par with any big company as in the interest. We are not paying too much on those things, even today. But we are going to save more on that.

[Operator Instructions] The next question is from the line of Sajal Kapoor from Antifragile Thinking.

Just a couple of questions from my side. First is, as Viyash moves from integration now into much more complex phase of R&D, manufacturing, geographic expansion and M&A hopefully, what are the few nonnegotiable principles that management uses to ensure that growth does not compromise execution, quality and cash generation?

If I had to put it, 3 things. One is compliance; no second thought and discussion, whether it is regulatory compliance, finance, statutory or quality compliance or EHS. There's no second thought on that, the governance thing. And as you mentioned, we are actually going in multiple complex area. But in fact, it's not -- already we are in most of the things. And most of our team is very well experienced on those things. If you see, complex products like onco, we have been doing last 2, 3 years, and the entire team is very experienced. We know the market, we know the products. So that's not the thing. Then the second thing, if you see that combined company, overlap is very limited to the API. And the formulation is still animal health and human health is going to run parallelly. So these are the 2, 3 things. Compliance, we never compromise. Governance, we never compromise. Of course, the financial discipline also is most important. After seeing the SeQuent story 4, 5 years back, we know what we can do. And we can see a lot of opportunities keep on coming on M&As, but we always look at only whatever is going to fit into our strategic direction defined even our Analyst Day. Whether companion animal or CDMO or actually complex areas, we are going to stick in that. It's not just go and acquire since we -- our balance sheet is strong, go and acquire to add numbers. That's not the plan. It's only whatever is going to fit into our strategic direction, it's going to be that, whether it is inorganic or organic expansions. I hope I think I clarified your question.

Yes, yes. No, that explains. M&A is one of the key areas, obviously because if you see the history of SeQuent, the earlier management used to pay single-digit EV EBITDA for most of the acquisitions. But again, it depends on the quality and the strategic fit. So valuation alone can never be the criteria, but you answered all my questions. And Dr. Hari Babu, thank you. My second question is, given the long gestation periods and uncertainty in pharma where -- uncertainty in terms of where the downside from major capital allocation decisions can take years to emerge because the game is -- the clock speed is such that it's a long cycle game. So capital allocation today may not deliver the desired outcome or may not even signal green or red for many years. What do you -- in that context, what do you consider an appropriate level of personal economic exposure for those making such decisions? And does the current ownership, the senior management -- I know Carlyle has got significant ownership. How do you reflect that principle within the organization, not just at the senior management level, but also at the middle management level? Because whatever as a team, the decision is being made at the management level, then presented to the Board, the downside, if any, may not emerge immediately. That's the kind of question I have.

So long question. Thank you for that. First thing is, this company, whatever decision we take, decision to consider the long-term growth for the company, not based on the investor, whether the management or Carlyle or XYZ. Whatever we have been doing last 2 years investment, we never compromise on the short-term and long-term benefits for the company. So when you say the long gestation period, okay, use capital thing. When you are doing for new company, new setup, for example, if I'm doing only high potent separately as a separate vertical, okay, that investment is huge. There's a lot of risk involved in that because of gestation period is high. But in our case, if you see, today business is -- 90% is a mature business where we don't need to do too much capital allocation. And whatever we are doing, actually, if you look at existing business versus what CapEx we are going to put, it's not substantial. That it's -- the existing business is able to take care of all these things. So because of that, we have large portfolio, and we have multiple geographies, multiple businesses where there's no dependency on either one country or one product or a few products. That's where risk is already mitigated. And our also new capital allocation is not that much compared to our existing business. That's where I don't see much risk. Whatever you are putting the CapEx, whatever we indicated, I think INR 250 crores, INR 300-odd crores for a year, that's not the big looking at the company's size and business. So that's where I don't see any risk on that, one is the investor's perspective or the company's perspective, I don't see any risk on that perspective. Looking at our size, our investments...

The next question is from the line of Chintan Sheth from Girik Capital.

Sir, one question is on the minority interest. Last year, we had 18% minority share, pre-minority -- on a pre-minority profit stand. How should one look at minority interest going forward?