Solara Active Pharma Sciences Limited (SOLARA) Earnings Call Transcript
May 12, 2023
Earnings Call Speaker Segments
Ladies and gentlemen, good day, and welcome to the Solara Active Pharma Sciences Limited Q4 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Singhal. Thank you, and over to you, sir.
Thank you, Lizann. A very good afternoon to all of you, and thank you for joining us today for Solara Active Pharma Sciences earnings conference call for the fourth quarter and full year ended financial year 2023. Today, we have with us Jitesh [Audio Gap], Poorvank, CEO; and Hari, ED and CFO to share the highlights of the business and financials for the quarter. I hope you've gone through our results release and the quarterly investor presentation which have been uploaded on our website as well as the stock exchange. The transcript for this call will be available in a week's time on the company's website. Please note that today's discussion may be forward-looking in nature and must be viewed in relation to the risks pertaining to our business. After the end of this call, in case you have any further questions, please feel free to reach out to Investor Relations team. I now hand over the call to the management -- to Jitesh to make the opening remarks.
Thanks, Abhishek. Good afternoon, everyone. Thank you for joining the call today. I'm delighted that we concluded fiscal year FY '23 on a positive note, having accomplished many of the goals we set for ourselves at the beginning of the year. Specifically coming to the Q4 performance revenue front -- coming to the performance for FY '23. On the revenue front, we had a 5% growth year-on-year. Gross margins stood at 50.3%, EBITDA at INR 51.5 crores. When we started the financial year, we had set forth key strategic priorities which included resetting and concentrating the base business, restoring R&D velocity, addressing under-recoveries at our newly commissioned Vizag site and expanding into new products and geographies. We are pleased to report that we are trending positively towards a broad range of outcomes, and our performance in FY '23 is indicative of the company's efforts to rebound. Coming to our base business. Base business has shown strong growth momentum in second half of FY '23 when compared to the first half. Regulated market revenues stood at 72% during Q4 F '23. Our base business has achieved EBITDA margins of 19% during the quarter 4 FY '23. One of our key achievements is securing Ibuprofen DMF approval in China. We believe we are the first company outside of China to achieve this milestone. Sales have already commenced. We continue to expand our Ibuprofen franchise across regulated market geographies and branded customers. Our non-Ibuprofen business consists of key products like Sevelamer Carbonate, Praziquantel, Sapropterin, Succinylcholine Chloride and many others, where we are one amongst the few regulated market players. We continue to expand our portfolio on polymer-based chemistry with the addition of 3 products. Secondly, on our R&D, we have filed 3 new U.S. DMFs in Q4 taking the total to 5 new products filed in FY '23. We continue to expand our geographies for our existing products. In quarter 4 FY '23, we have done 3 market extensions for 3 of our existing products, taking a total of 12 market extensions for 15 existing products during FY '23. The investments we have made in new products since the inception of Solara are yielding us the results. New product revenues contribute 14% of the total sales. We continue to invest in our R&D for strengthening our generic API portfolio and plans to meet the growing demands for our existing products as part of increasing market share through market extensions, addressing regulatory requirements for new products. Coming to Vizag. We have received USFDA and European CEP approval in FY '23. Our capacity utilization at Vizag has improved in Q4. We have completed one of the key backward integration programs for one of our APIs. We initiated supply of APIs from Vizag, which started -- which commenced from Q3 FY '23. We have got commitments from our key customers to qualify Vizag, which will enhance capacity utilization in second half of FY '24. Out of the 5 new U.S. DMFs filed in the last financial year, 3 are from Vizag. Fourthly, our efforts on the CIP has already given the results, but the full realization of the work which we have undertaken in the last financial year will flow through from Q2 of FY '24. We expect the momentum to carry on for the goals which we have set to bring the company back to historical growth rates. With this, I now hand over to Poorvank, our CEO.
Thanks, Jitesh. Good afternoon, everyone. I'm excited to be part of Solara 3.0 growth journey. The second half of financial year 2003 (sic) [ 2023 ] has brought in more confidence in the fundamentals of the business. Our margins have risen, and we are working towards building new opportunities for sustainable growth. These improved financial results are a testament to the hard work and dedication of our employees and the strength of our product portfolio. Moving forward, we'll continue to focus on outcomes that deliver value to all our stakeholders. I would like to talk primarily on our focus areas for growth for future. Number one, we will be very strong -- we'll see a strong growth in the base business and new products by foraying into new geographies. Secondly, we will have new capability addition. Third, we are talking about CRAMS big time in terms of business growth through low molecular weight peptides and material sciences. Fourth, as Jitesh already mentioned, we are talking about enhanced capacity utilization at Vizag. And last but not the least, we will continue to focus on cost improvement programs and backward integration. With this, I now hand over to Hari, our Executive Director and CFO, to take us through the financials for Q4 financial year 2023.
Thanks, gentlemen. We are pleased to announce our FY '23 financial results, and key results are as follows. The revenue for FY '23 is at INR 1,466 crores, growth of 14% year-on-year, while gross margin year as a whole stood at 46% and operating EBITDA INR 226.8 crores with a 15.5% margin. And our reported EBITDA at INR 150.7 crores, growth of 63% over the last year. As Jitesh and Poorvank rightly pointed out that our corporate course correction strategy has already started giving results and they are very visible from our FY '23 performance. The corrective actions have resulted in many positive outcomes during FY '23 that reduced under-recovery of -- at Vizag, regulatory approval for Vizag site, reduction in the net current asset, reduction in the gross debt level and improved financial ratios. Our net current assets have reduced by INR 63 crores to FY '23 primarily due to the reduction in inventory, GST and our gross debt has been reduced by INR 23 crores in FY '23. We are working to achieve a comfortable debt to -- net debt-to-EBITDA ratio in the coming years. And our primary focus is improving the cash flows through the prudent application of capital. We continue to remain focused on the actions to improve profitability and very confident about growth prospects of Solara. Thank you.
[Operator Instructions] The first question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.
Sir, just on gross margins. Firstly, is this to do with better realization or with the lower raw material cost, if you could explain that?
No, it's a combination of the product mix and the CIP program. From the raw material sourcing point of view, it's more or less been the same over the quarters.
We've not witnessed -- so just a clarification. So we've not, in the past, witnessed steep rise in raw material prices, and so -- and so subsequently, now we are not seeing the slowdown. More or less, we are stable in terms of the raw materials price. Is that a way to understand?
Yes, Tushar.
Okay, that helps. But on -- like on the other API companies, at least the ones -- I mean there has been a good amount of offtake in 4Q, in particular and so has there been any, let's say, sort of a rebuilding in terms of the inventory to normalize inventory in the channel sort of thing? Or it's more of steady state for your products?
The inventory level -- depending upon the product growth, our inventory level has -- we have considerably reduced the total inventory compared to the last 1 year. And we expect that there is a procurement plan and production plan has been normalized so that we don't -- just-in-time concept we have introduced. And we don't -- we like to reduce our inventory level and working capital in a phased manner.
Understood. And just secondly, sequentially, we're seeing some dip in sales, so -- and subsequently, how to look for FY '24, if any competitive guidance we would like to give in terms of revenue as well as margins.
We won't want to say right now, but the focus is in terms of -- as I've been always saying in all the previous calls that we want to bring back the company to historical levels. So year as a whole for FY '24, there will be improvement in sales as well as in terms of the EBITDA. But at some point, we'll be happy to communicate in terms of the growth plans what we have.
The next question is from the line of Dhruv Maheshwari, an individual investor.
My first question is, it is good to see reduction in under-recoveries of the Vizag plant. By when are we expecting the plant to break even? And what is the targeted capacity utilization for the plant over the next 12 months?
So with the -- we have just -- as Jitesh has indicated that we have the USFDA approval and EU approval for the facility. And we are in the process of qualifying many customers who take the product from our sites. H2 onwards, there'll be substantial improvement in capacity utilization of Vizag plant and during the year -- Q4, yes. And in FY '24, the capacity utilization will be more than 60% in Vizag.
Got it. My next question is can you give us an outlook for the revenue growth and the EBITDA margin over the medium term?
So this goes back to the previous question, what Tushar had asked, right? Year as a whole for FY '24, you will see a growth in terms of the revenue and the EBITDA. In terms of the guidance, what I can definitely tell you is we are very upbeat in terms of Solara returning its -- to historical levels, and you will see this from the second half of this financial year.
Just to add, Jitesh mentioned, we have noticed in the current year FY '23, there has been a substantial improvement in EBITDA, and we've grown our EBITDA by nearly 63% and revenue growth by 14%. So just to give the indication that what corrective action put has resulted in FY '23 good performance. So just -- so we are tracking the same line for FY '24, and we then see those good positive results FY '24.
[Operator Instructions] The next question is from the line of [ Siddhant Choudhary ], an individual investor.
Sir, my first question is we have seen consistent sequential improvement in gross margin over the last 4 quarters. So is this number of 50% margin a sustainable number going forward?
Yes. For the year as a whole, yes. But quarter-on-quarter, there'll be plus and minus. But for the year as a whole, yes. And because of the various product mix as well as some of the products where the supplies happens during the second half.
Got it. Another question. We have seen that our working capital have decreased 25 days in last financial year, that is FY '23. So in your opinion, how much further can we reduce this in the next financial year?
Actually, the number of days is 200 days plus, and it will come down to 150 days by FY '24.
[Operator Instructions] The next question is from the line Subrata Sarkar from Mount Intra Finance.
Sir, just two quick questions. First, on the CapEx, sir, if you can give some guidance on the CapEx side, like for next year and maybe for next 2 years, how much CapEx we are planning to do or most of the CapEx is done? Number one. Second, from a -- for our Vizag facility, like what is our peak revenue which we can achieve? And like what kind of capacity utilization we are expecting for next year? And generally, how much time we are expecting for ramping up of the Vizag facility? This is the initial question.
From a CapEx point of view, we will have our maintenance CapEx so -- and then there is a growth CapEx. Growth CapEx is concerned, we have made all those investments and we are only focusing in terms of better capacity utilization in Vizag. But yes, there will be a maintenance CapEx across the plants for compliance, and that could be in the range of INR 70 crores to INR 80 crores total for the year. And from a Vizag revenue perspective, right? As Hari mentioned earlier, like once the customers take the validation batches and the capacity utilization will only increase in the second half, we'll be able to then guide you what is the peak revenue we are looking at from the Vizag point of view. There's a lot of work in progress right now.
Yes. Sir, just a backfill question, like how much we have spent total in Vizag? And what kind of asset turnover generally like is optimal for this kind of a plant?
You see, we are always aiming to improve the fixed assets turnover ratio, right? And from a plant-wise, we don't give any specific numbers, and that includes even the investment. But you will see the revenue growth over the next years. The major revenue growth is going to be coming from Vizag.
So we are not disclosing how much we've spent on Vizag facility also?
Correct.
Okay. No issues, sir.
[Operator Instructions] The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.
Sir, just one more from my side, this China approval, like especially for the commercial part, what will be the time line?
Your question is related to the approval, what we got for Ibuprofen in China, correct?
Correct, correct.
Yes. We already have the approval and we have already commenced commercial supplies.
Okay. So any sort of market size highlights for this product in China currently?
We are also assessing the market size in China. They say it's substantial, and there's not -- the market, what is described in the IMS is different than what's the actual ground reality. So we do hope that we will have a substantial market share in China over the next few years.
And just lastly on this, so the formulator will have to participate in tenders using your DMF and then -- and that is how we'll get the business or we already have the -- I mean, since you've already commercialized. But just a clarification on there, we already have a good amount of order for the coming year or it's more like a few months more?
Well, so we have started getting the orders. And as I said, for our -- it is just not one customer. At least we have a couple of customers, and they are also preparing for the launch quantity. So the substantial requirement -- the jump in the requirement is going to come in the next financial year.
And this is from Vizag facility?
This is from -- right now from our Pondy facility, but we are also qualifying -- we are adding Vizag as an additional site. So that process will also be completed in this financial year.
[Operator Instructions] The next question is from the line of Utsav Jaipuria from DAM Capital Advisors.
So my first question is regarding your pipeline. Can you give some more color on the upcoming launches in FY '24, '25?
So from the pipeline perspective, one of the key actions what we are taking is the reclassification of the Cuddalore OAI. And in the last couple of investor calls also, I mentioned that we are -- there are 11 new approvals which are pending just from the Cuddalore site. And out of those 11, at least 3 are very significant in terms of both revenue as well as our EBITDA margins. And this -- the momentum in terms of the new product filings which we have again reinitiated in the last year, for those, we will start seeing commercial revenues in second half of FY '25. Typically, we've had at least 3 to 4 new product launches every year. And that momentum will carry on from FY '25.
So sir, these 11 new approvals that you mentioned, so which therapeutic area would these be in? And if you could give a broad color on the end market size for these molecules?
See, what I can tell you is when I say it's significant, right, at least those 2 out of those 3 are polymer-based products. And the market size, one of them, it is like a global requirement so it's not just dependent on the U.S., we have initiated the efforts for Europe as well, but U.S. market alone for -- once we get the approval, that could add at least $5 million just for one product. And the other one would be about another $4 million to $5 million. So these 2 products itself will give us $10 million in terms of new revenues coming out of our Cuddalore site. And this is -- one of our specialization is in the polymer-based chemistry because what we look at is more from a therapeutic. We look at the complexity of the product, whether it is in the process manufacturing or it is in the polymer.
So typically, how many players would there be in these markets, in these polymer-based products?
In the polymer-based chemistry as a pure-play API company, right? There are only two companies who have current approved DMF and selling polymer-based products and one is Solara.
Okay. That's great. Secondly, so for API companies have reported very strong export sales during the quarter. And our growth has been relatively muted when compared to them, so is there any reason that you could point out particularly for this?
Your question is related to our regulated market sales only being 72%?
Yes.
So but historically also, our -- when we say regulated markets, right, when we classify this into North America, Europe and then in Asia, we say Japan, South Korea, these are some of the regulated markets. And this percentage has been historically around that much, 70% to 75%. We have a very small presence in semi-regulated markets. And that is also very important for us because it's not a spot business. It's a long-term customer relationships, what we've had. So our regulated market business will be at 75%. And once the Vizag and the Cuddalore approval comes, that 75% can become 77% or 78%, but it will be around that range only.
So when do you expect the Cuddalore facility to be approved?
See, as per the GDUFA III guidelines, you could -- our company can write to the USFDA for -- asking for reinspection of the facility, and we have done that. And we are hoping now in the recent waves, we are seeing many companies who are in the warning letters. Their warning letters have been clear with the FDA inspecting, that gives us a positive outlook that we could have inspection probably in this financial year itself, if not in the first half.
The next question is from the line of Dhwanil Desai from Total Capital.
Sir, my first question is on balance sheet, right? So for FY '24, how do we see the debt reduction so from INR 1,000 crores, both short term and long term put together? How are we looking at from FY '24?
There will be margin reduction in the net debt compared to the current level and we don't expect any substantial reduction because we are reserving the funds for the growth also. So whatever the funds we generate will be -- we'll balance between the debt reduction and the fund allocation for the growth CapEx. From INR 1,000 crores, we expect that there'll be around 10% reduction in the debt level.
And of course, our net debt to EBITDA, if you compare the FY '22 to FY '23, it's been a significant reduction. We were at 10% plus and now we are at 6%. And our aim is always to bring it down. And you will see that the net debt to EBITDA also will be going down in FY '24.
Right. That's primary because the EBITDA will go up.
Right, yes. That's right.
Sir, second question is -- so you indicated from H2 onwards, we will kind of strive to go back to earlier levels at which the company was operating. So are you talking more from a volume perspective or absolute top line perspective? Can you throw some light on that? And also, you can tie in that with the gross margin levels. I think we have always operated around 49%, 50% kind of gross margin. We are already there. Is there any scope for further improvement in gross margin from here?
So year as a whole, right, we are aiming at maintaining at 50%. And this -- and as I mentioned, we are just waiting for these new product approvals to come. I mean, just to give you a flavor of it, if the Cuddalore reclassification happens, at least we can see one of those two key products on the polymer side. We could have a good amount of sales in the second half. And there, the gross margin levels are anywhere between 55% to 55%. So we are focusing on all these polymer products and the new products will definitely have a higher gross margin. But when you look at weighted average of the existing and the new products, it will be at about 50%. The other part is the CRAMS business, of course, comes with a significant higher gross margin compared to the generic API business, right? We are making efforts in terms of the CRAMS. We did see a growth. But a growth of something which we are looking in terms of the significant growth in CRAMS will only come in FY '25 or FY '26 because we are seeing now when the commercial supplies takes some time in terms of the revenue as well as higher gross margin. But for -- at least for FY '24, the year as a whole, we are confident to be that closer to the 50% level.
Question on whether we are looking at going back to earlier volume levels because the reason I'm asking this question is that of the Board because of the RM price correction, the [ PPI ] prices have also gone down. So realization also would not be the same. So... [Technical Difficulty]
Sorry to interrupt, Mr. Desai. Your audio is breaking up.
Is it better?
Please repeat your question.
Sir, my question is that we indicated that we would want to go back to the earlier levels from second half onwards. So are we talking in terms of volumes because realizations year-on-year at least would have gone down because RM prices are corrected and combined with the [ PPI ] prices also would have corrected. So some guidance on that?
It's a mixture of revenue as well as the EBITDA. It's a mixture of both. You just can't say, EBITDA is going to increase and the revenue is going to be at new point. But the revenue also will increase. And our focus is only more in terms of how we realign our product mix where, overall, we make a 50% gross margin.
Okay. And earlier with very similar gross margin we used to make around 20% EBITDA margin. So is that kind of a realistic number to look at? Or more realistic number would be 15%, 17% kind of percent.
No. See, as I said, no, we want to get back to our historical levels. So yes, we have plans where we will be at high teens or we'll be at 20%. But this is -- it's going to take -- it's going to be a combination of just not FY '24, but it will be also FY '25 because if you look at the year as a whole -- when you look at an outgoing second half and more so with the Q4 of FY '24, then we will be in the high teens number. But yes, our focus is always to see how we can get to the 20% and then always work on improvement of the EBITDA margins. And we have done that in the past, and there is no reason for us not to believe that we cannot get there.
Just one follow-up on that. So from where we are today to where we will exit in FY '24 Q4, do we see gradual improvement moving towards that high teens number? Or will it come only in H2?
Yes, you will. The year as a whole, when you compare FY '24 to FY '23, you will see a better number in terms of the EBITDA percentage. So yes. And as I said, over the next few quarters, we'll be able to then come out and probably give a guidance as to how we are doing. Because there are some moving parts which we want to just finalize. One of them being the reclassification of the Cuddalore OAI facility then getting the new products triggered by our customers and these new products, which we also filed from Vizag. But also we will see those validation quantities going to be picked up by the customer. So all the actions, what we have -- we have already undertaken now is only about the result. And probably over the next few quarters, we'll be able to guide better. But year-on-year, there will be an improvement in both in revenue, EBITDA as well as the EBITDA percentage.
The next question is from the line of Vedant Aryan Khaitan from Konark Investments.
Congrats on the Solara 3.0 strategy and the improvement of financials. I just wanted some guidance on what really changed between 2021 and today in terms of the business because you said you have really turned the base. And how do we expect to get back to earlier levels, historical levels you mentioned?
So if I understand your question, you're asking what is going to change from 2021 to present financial year, correct?
What really changed for the dip in the financial performance? And what are we doing to get back to historic level?
So the dip in financial performance -- let me comment more in terms of what we are doing that will get back to our historical levels and from there onwards, the growth. We did mention the focus areas, right? And it all comes down to the execution of our focus areas, that is growing the existing business, the new products, the CIP plan and building our CRAMS business. I think these are our 4 key areas, and subset of that is the enhanced capacity utilization at Vizag. So we are focusing on these 4 growth pillars as we call it. And we are very confident that all the actions, what we have planned for these 4 areas, will yield in better results in the coming years. And we've already seen that in FY '23. You will see that in FY '24 as well as the years coming forward.
The next question is from the line of Ankit Gupta from Bamboo Capital.
Sir, if you can talk about how has been the movement in the realization of some of our key products, including Ibuprofen over the past year?
So we don't give specific realization product by product. But as you can see, the margin is improving, so the realization of our overall product mix is getting better.
Got it. And how much is Ibuprofen currently contributing to our top line?
Again, we don't give that number in terms of our Ibuprofen vertical how much it contributed. It's very sensitive information.
Let's say -- but if you can just give a ballpark number, let's say -- like have we reduced our dependence on Ibuprofen over the past 2, 3 years or it remains the same?
We are growing our Ibuprofen business because Ibuprofen for us is just not one product. There are multiple products in Ibuprofen itself. And our growth in Ibuprofen as well as non-Ibuprofen products both are growing at probably the -- or at the same percentage.
And so you -- like how do you see this -- the product mix changing or remaining the same over the next 2, 3 years?
No, the product mix is not going to remain the same because we are also going to file new products. So as we said, we are improving the R&D velocity and we are focusing more on the quality of filing rather than the quantity. So yes, the product mix -- it's just a funnel approach, right? Because every new product we file, then we see the commercialization happening in 2 or 3 years. So that's the momentum we are driving forward from a product mix perspective.
And my last question was for the guidance for growth over the next year or so. So how do you see the growth in the top line for FY '24 and '25?
It will be in the similar lines of FY '23 or better.
Ladies and gentlemen, that is the last question. I now hand the conference over to the management for their closing comments.
Thank you, again, everyone, for joining the Solara's call, and we look forward to our next call post our Q1 results. Thank you, and have a great day. Bye.
Thank you, members of the management team. Ladies and gentlemen, on behalf of Solara Active Pharma Sciences Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.
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