Viyash Scientific Limited (512529) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the SeQuent Scientific Limited Q3 FY '20 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.

A very good afternoon, and thank you for joining us today for SeQuent Scientific's Earnings Conference Call for the Third Quarter ended Financial Year 2020. Today, we have with us Manish, SeQuent's Managing Director; Sharat, Joint Managing Director; and Tushar, CFO, to share the highlights of the business and financials for the quarter. I hope you have gone through our results release and the quarterly investor presentation, which have been uploaded on our 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 the risk pertaining to our business. After 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 Manish to make the opening comments.

Thank you, Abhishek. Good afternoon, everyone, and thanks for joining us on this call. As Abhishek mentioned, I'm joined by our Joint Managing Director Sharat; and our CFO, Tushar on this call. I'll start with the highlights for the quarter and the 9-month period as well as give you a brief overview on the development, post which we'll take the questions from all of you. Our third quarter performance is a good reflection of our journey towards growth and profitability. The quarter turned in strong performances across all financial metrics, be it revenue, EBITDA, PAT, ROC as well as free cash flows. The revenue for the quarter stood at INR 317 crores, this compares to the INR 271 crores that we did in the corresponding quarter of the last year, and exhibits a constant currency growth of about 21.5% as well as a reported growth of 17%. Interestingly or importantly, the growth was led by formulations business, which outlines our API business during the quarter. On a year-to-date basis, our revenue stood at INR 879 crores, reflecting a growth of a little over 19% on constant currency basis. We reported an EBITDA of INR 48.4 crores for the quarter, reflecting a growth of 36.5% coupled with the margin expansion of 200 basis -- 220 basis points, showcasing our significant operating leverage in the business. On a year-to-date basis, the EBITDA stood at INR 125 crores, with a margin expansion of 200 basis points. Profitability for the quarter, net profit after tax stood at INR 20 crores, reflecting a 56% growth over the corresponding period of previous year. And on a YTD basis, stood at INR 53 crores, again, reflecting a growth of a little over 68% in the period. Animal health industry is characterized by strong cash flows once you hit an inflection point. Our recent performance is reflective of the same, and we have delivered stronger operating cash flows of almost INR 46.5 crores in the quarter. Formulations, as I mentioned a bit earlier, with a growth of 22.5% was the key driver for this quarter, with our performance in all key markets exhibiting good growth. Turkey grew almost 150% on a constant currency basis for the quarter with regulatory headwinds completely behind us. Europe is back on growth track after a subdued first half, growing at 7.5% on a constant currency basis, while Latin America grew at 28.2%. We expect the momentum in Europe to continue in the rest of the year and going forward, on the back of new launches as also easing of supply chain -- supply chain challenges, which we face with our key supplier in the first half. In Latin America, we had strong growth in both Brazil and Mexico, which are our key markets in the region. Even emerging markets reported a strong double-digit growth, excluding the India formulation business, which continues to see economic headwinds. Our new R&D center is now functional at Ambernath in Mumbai, co-located with our manufacturing facility. The state-of-art R&D facility is spread over 3,200 square feet, has capabilities to develop 8 dosage forms and can handle both R&D and pilot batch manufacturing, with special focus on injectables. We have also established capabilities for ecotoxicity and bioequivalence studies for animal health in India and remain on track for our first injectable filing in the U.S. by the end of the current quarter. On the API side, the growth momentum continues with a growth of 19% on constant currency basis and 30.1% on a YTD basis. Our fixed asset turnover for the API business is now at 2.3x, driven by our focus on regulated markets or regulated customers as also high-value products. Top 10 customers now constitute 56% of our API business for the 9-month period. As mentioned earlier, the quality of business is also reflected in strong cash flows from operations, and we generated over INR 46 crores in the quarter as we delivered both strong growth and simultaneously delivered a 15-day reduction in our working capital cycle. This has resulted in our net debt reducing to INR 234 crores for the -- at the end of the period, a drop of INR 40 crores over same time on September 30. On the balance sheet front, the metrics continue to improve with the return on capital employed now at 14.1% compared to low single digit, about 3 years back, and our net debt-to-EBITDA dropping to 1.4x. Actually, adjusted for liquid investments in our balance sheet, the net debt-to-EBITDA is as low as 0.55. We are pleased with the performance of this quarter, and results are the continued reflection of the strategy that was formulated a couple of years back, backed by relentless execution. We are on track to meet our full year aspirations of high teen revenue growth and the 200 bps EBITDA margin expansion. With these few words, I would like now to open the floor for questions.

[Operator Instructions] The first question is from the line of Alankar Garude from Macquarie.

My first question is on the formulations business. We delivered a very strong growth in this quarter, 22%, but feels like it's largely being driven by the Turkey business. So can you just comment on whether this kind of a growth rate is sustainable? And the second part to this question would be, can you throw some light on the slowdown on the domestic business as well, that could be helpful?

Yes. Thanks, Alankar. See, we have been guiding a mid-teens to high-teens growth on our formulations business, and you should see our performance in formulations business on a 9-year -- 9-month basis in that light. So we have delivered about a 15% revenue growth. You would be cognizant of the slowdown that we had faced in Europe in the first half, which is now back on track. So collectively, we stay confident of delivering mid- to high teens formulations revenue growth in years to come. Certainly, you will see moderation in Turkey going forward and acceleration in Europe going forward.

And sir, on the India business, any comments on the slowdown? What exactly are you seeing in the market? And are there any signs of a turnaround?

So it's a difficult question because, obviously, as an economy, we haven't seen such bad days for many decades now, in a way. Having said that, in the context of our overall business, of course, India is very, very small, less than 5% of our revenues. Now coming to specifics, we have kind of [indiscernible] negative double-digit performance in India in the last 9 months. However, we are seeing green sprouts already. Poultry business is already back on growth track. And in our cattle business, you would have noticed that there has been recent meat price hikes. Now that is a very important element for the farmers' liquidity. And we do foresee that the cattle business will also be back, if not on a positive track, but certainly, on status quo going forward.

Understood, sir. Secondly, you have been guiding for a high teens top line growth, and 150 to 200 basis points EBITDA margin expansion over the medium term. And I think it's been almost 7, 8 quarters now that we have delivered that. So if I just look ahead and think about maybe the next 3 to 5 years, would it be possible for you to replicate this kind of trajectory in both the top line as well as the margins?

So clearly, the business plan that we are working with certainly indicates in that direction. In the first 2 years, we have been always guiding that API will be driving our growth at a global level and formulations will be catching up in the last 3 years of our business plan. But all in all basis, we are fairly well placed to deliver the numbers that we have been talking about.

Understood, sir. And final question from my side. Now if I just look at the net debt right now, INR 234 crores, and if you adjust for the investments in the group companies, the net debt is almost 0. So with the business also throwing in significant cash, what would be our plan next? Whether we look out for any acquisition -- a major acquisition or a series of acquisitions? Or maybe try and think about increasing the shareholder payout?

I think it's a very recent good problem that we are faced with. So 1 year back, we had never anticipated this kind of problem that the business will be generating this kind of cash. Obviously, while it was in the plan, it was yet to be reflected in the numbers. So it's a good problem to have. Certainly, inorganic is a key element of our strategy, and we will be continuing to look at such opportunities. Having said that, we will also be working on a revised dividend policy because, clearly, there is a need for -- I mean, there is certainly an enhanced ability to distribute dividends, and that will be certainly looked at.

[Operator Instructions] The next question is from the line of Vishal Manchanda from Nirmal Bang.

Congratulations on a very strong performance. Sir, the EBITDA margin this quarter of around 15.5%. So can you -- can we take these margins at base margins going forward? So kind of, will the company build up on these margins? Or will there be volatility, so margins going down on a quarterly basis, seasonally type?

So Vishal, there is a bit of seasonality in the business. So you'll see about between 100 to 150 bps margin fluctuation across quarters, but that is all within a narrow range. If you look at a 9-month basis, it's now a little over 14%, I think -- yes. And we are confident of -- I mean, rather than giving a quarter-on-quarter guidance, I can tell you, on a full year basis, we are certainly working towards delivering at least at 150 to 200 bps margin improvement year-on-year, at least in the next 2 to 3 years.

So you mean on a -- every year, 150 to 200 bps improvement?

That's what we have been guiding to. And this is something which we also have been delivering for last 11 quarters consistently.

Yes. Sir, second, in Latin America and emerging markets, where we believe the margins are lower than the rest of the business, so are we still in the single-digit EBITDA range there or have we progressed to the double digit range?

It is very difficult to give segmental margins because there is a lot of [indiscernible] cost and the R&D cost, and where do you allocate that is always a debatable point. Other than -- the only broad guidance, which we have been always mentioning is that Turkey is our out performer in terms of margins and formulation side. Rest other businesses, to some extent, are still subscale. So we do believe margin improvement in all geographies, other than Turkey in a substantial way as our new formulation pipeline kicks in.

So -- but can we -- is it fair to say, Latin America and emerging markets would be kind of at the lower end in terms of the EBITDA contribution compared to other geographies?

It will not be a fair statement. I would -- I mean, both these markets are significantly profitable. Once we hit the inflection point, is all I would say. I won't like to get into market-by-market profitability. It'll be something not appropriate because we do not share that information.

Okay. Sir, just one more question related to the API business. So basically, there has been continuous growth in the API business for you. So going forward, can we continue to build this growth without capacity expansion, say, the next 1 year and we can see -- can we still see growth on this business without capacity expansion?

Yes. So I'll give you a holistic response and then ask Sharat to give a little more detailed response from really the right technical perspective. But at business level, we are certainly well equipped to deliver FY '22 business plan that we have on API business without any expansion. However, thereafter, we will need investments to deliver '23 and '24 plan. So that's -- '22 to '24 plan. Having said that, I think you have to plan investments ahead of the curve in business. So Sharat, if you can respond to this?

Yes. So while we have covered in terms of capacity for FY '22, in next 3 years, significantly, we'll be adding capacity, about 33% up from what it is at Vizag basically because most of the growth is going to come from Vizag, and today we have a capacity of 225 kl there. So another 125 kl will be added, for which we have already started the actions.

Okay. So you have started investing in those capacities now?

Yes.

Yes. We are just starting. We are just starting.

Okay. And just one question related to the injectable filing that was recently done in Europe. So what is the Europe sales for that injectable? I know you have kind of given that number earlier, so I was just trying to recall that number.

So it's -- about 25% of the global sale of that product are from Europe. Just to give a little more update on that, while we started with EU filing for that, given the Brexit scenario, we have also completed a separate U.K. filing for that product, with the U.S. and Canada filing imminent for this quarter.

And within Europe, would U.K. be a larger market? Is that so?

See, typically, U.K. is in the big 4 of Europe. So to that extent, it's an important market. And fortunately or unfortunately, now you need to file separately given the Brexit.

Okay. And sir, could you give any sense on what competition can we see in this product once it is open for generic?

It's a $350 million product. Very few products in animal health are of this scale. So we do foresee competition. Clearly, not -- it'll never be in line with what we foresee on what happens in the human pharma side, but we do expect between 2 to 4 competitors for this product. Another thing to be noted in animal health is, generally, people are not there on day 1 of patent expiry. So again, the numbers, which I'm referring to may not happen on day 1.

So they'll gradually build up?

Yes. That will gradually build up. Also -- sorry?

Patent expiry happens in?

Yes. So in Europe, it is December 2020, and in U.S., it is a couple of months after that. The other thing which, Vishal, of course, you are very familiar is that the price erosion in animal health is also very limited as compared to human health.

So -- but are the market shares also kind of -- so in human health, we do -- we see companies taking larger market share, generic players. So would that be the case in case of animal health? Or we would see lower market shares? And how -- so what could be the time duration of kind of in those market shares?

Yes. So clearly, you start from 0 when you launch and you have to build up your market share. So it's a slow and steady progress. I think typically, model-wise people look at between 5% to 25% over 3 years.

Okay. So for each player can do between 5% to 25%, depending on his distribution strength?

And also depending on the competitive -- I mean, number of competitors.

[Operator Instructions] The next question is from the line of Sachin Kasera from Svan Investment.

Yes. Congratulations for a good set of numbers. Two, three questions. One on -- yes, on the API side, I'm a little confused, to the previous query, you mentioned that in FY '22 we don't need to do any major CapEx and then after that for '22 to '24, we need to do some investments. And Mr. Tushar subsequently mentioned that we are already in the process of increasing capacity of 225 to 350. So are we referring that the 225 to 350 we'll not until any major CapEx, or this 225 to 350 is for the plan from '22 to '24?

Sorry, I think the -- because there was a small mistake, which I had made in mentioning the year, so we are well covered for FY '21 from our current capacity of 225 kiloliters, okay? The new CapEx and expansion plan, which Sharat referred to, is for FY '22 to FY '24 requirements, okay? That will entail increasing this 225 kl to 350 kl reactor capacity, and that is what we have just about initiated.

Sure. And currently, sir, what is the type of utilization then we would be running at this 225 kl, it would be like 65%, 70%, 80%, it would be net [indiscernible] of now?

Yes. I think 65% to 70% is what would be a fair indication.

And what is the peak that is achievable? Is it like 85% or we can go as high as 90%, 95% in this business?

Yes. Sachin, this is a very tough question in the industry because if you don't have any changeover of -- these are multipurpose plants. And if you do not have any changeover, then even 100% is possible, like we do in our Mahad facility for [indiscernible]. But given the scenario in Vizag wherein we have more products and different sizes and different requirements for different customers, I think somewhere between 80% to 90% would be a fair peak capacity estimation.

Sure. Secondly, sir, while for the 9 months, we reported a 30% growth in API, for the current quarter, the growth is around 17%, 18%. I understand the base is now starting to catch up. So while continuing to show strong growth, should we now moderately grow expectation from API from the 30% to 40% that you were showing a few quarters to more 15%, 20% type of a band. Is that a fair way to look at next 4 to 6 quarters?

So clearly, yes, we have been always guiding to high 20s -- I mean, upwards of 20% growth on our API side of business on a long-term basis. And that's what we should -- we are confident of delivering. But clearly, yes, I think the current rate of 30% plus will moderate going forward.

And sir, this Turkey, for the 9 months itself, we have seen a 66% growth. And you said that is one of the most profitable markets for us. And while we have seen improvements a little bit in terms of the gross margins, but going by the type of growth we have seen in Turkey, I was probably hoping that there could be some more expansion on gross margin. So are there some markets where we've also seen some impact on gross margins, which is negative part of the benefit of higher revenue share from Turkey?

Yes. Sachin, we have been guiding this also earlier that clearly there were pressures in Europe, especially because we were not getting certain injectable supplies from one of our core suppliers who had certain suit-related failures in manufacturing. Now clearly, again, injectables for Europe is also higher margin compared to the other products that they sell. But that clearly reflects. So all in all, while we have improved our margins, if Europe would have performed better, the margin improvement would have been even better.

Okay. Sir, one question on the overall margins. For the 9 months, you have delivered 200 basis point margin expansion. And in the presentation, you are mentioning that -- for the full year, we're looking at 200 basis plus. So are we hinting that looking at Q4 being a much stronger quarter for the company?

[Foreign Language] Sachin, why? See, we can broadly maintain that it is around -- in that region only. I don't foresee -- I mean, it's very difficult to predict the future.

Okay. But I understand, sir, because our delivery has been so good that investor expectation is always higher from the management.

See, earlier, we were saying 150 to 200 basis points. Now we are narrowing towards -- more towards 200 basis points, is all we are saying.

And sir, is Europe then -- for how are we looking next year? Now we can start looking at it, but you mentioned that emerging market, LATAM, Europe are slowly getting back on track. So after some difficult 4, 6 quarters, are we looking these markets doing much better in FY '21?

Certainly. I think what we have delivered in Q3 in Europe should be the kind of growth rates we foresee going forward. See, Europe can never be a very high-growth rate market, you have to understand. It's a very stable and mature markets. Even 7.5%, 8% is more than twice the growth rate of that market. And that's what we aspire in a branded generic market.

Sure. And just one lastly, so the Slide #11, where you have given some color on the types of filings we have in Europe, U.S. and all, so what is the type of time line launch we are seeing for this product, say, '21 and '22, that would be really helpful?

Yes. So in Europe, we are already launching our own filings. So there is -- because we already have all the regulatory framework capabilities for Europe. So European launches are ongoing. Our first EU -- U.S. launch will be in FY '22. And we -- all the filings which you are referring -- which you are seeing in those 11 products for U.S. will fluctuate between FY '22 to FY '24. And similarly, all the EU products, which you are seeing in that slide, will fluctuate between now and FY '24.

In Europe we have 26 and U.S. is 11. Correct, sir?

Yes.

Okay. And when does the API for U.S. start, sir? Does it look starting '22 or it can start in '21?

No. APIs for U.S. already started in FY '19, FY '20. In fact, we had some dip because of that 1 single company who had issues in their manufacturing plant, who are also our supplier for Europe for injectables. So this business will continue to grow going forward, but we are already in U.S.

Okay. So just last question regarding the balance sheet, you mentioned that we had a good cash flow, and we repaid almost INR 45 crores of debt. But when we see the finance cost that you reported for this quarter is higher by almost INR 1.8 crores versus the September quarter, so if you could just help us understand little bit on that front, that would be helpful.

Tushar?

So one is -- while the EBIT net debt that has come down, it is not [indiscernible]. It is always remains concerns with the cash that have increased. On the interest cost part, there is one element that we have always been referring to, that is the transmission impact of our dollar loan in Turkey, we have over $3 million [indiscernible] in Turkey. So that has an impact of about INR 1 crore in the current quarter. So on a consistent, which is current interest cost should be in the region of around INR 8.5 crores, and it is expected to decrease as we continue to replace our [indiscernible] from [indiscernible] to the better ones as the [indiscernible] of the company.

And any specific reason why we have kept the gross debt high and kept the net debt low, any reason?

No. So these lines are obviously old lines, and we are paying, as for the -- as per the payment terms. Also, obviously, there are inorganic expansion plans. So we always would like to sit on some level of cash. Having said that, going forward, we will be looking at the utilization of the cash. Sachin, the more recent problem of -- recent good problem that we discovered in our business.

[Operator Instructions] The next question is from the line of Manjeet Buaria from Solidarity Investment Managers.

This one was for Tushar. If you could just remind us about the accounting and the tax -- cash tax rates for the year?

Accounting and the tax?

And the cash tax rate, the accounting tax rate and the cash tax.

[Foreign Language] The accounting tax -- cash flow on the tax part that we have had in the -- up to 9 months is about INR 10 crores that we have spent on taxes. On an overall basis, on an accounting basis, we should be about 15% of our PBT is what we account.

So full year FY '20 would be 15% on your accounting PBT?

Yes.

Yes.

And full year cash tax would be a bit higher?

No. It would be more or less -- no, it would be lower. It will be lower.

It will be lower. And for FY '21, if you could just help us?

It will be similar scale.

Similar. Okay. And on the investments, which were referred to earlier on the call, do you have any CapEx guidance for FY '21? Or is it too early for that?

So we do have a fair bit of plan, CapEx plan. It's -- they'll be in the region of $7 million to $8 million collective over all the sites, which includes expansion at Vizag and also the expansion -- or significant expansion that we are undertaking at our injectable facility in Germany.

Okay. So $7 million to $8 million?

Yes.

Okay. And final question, Manish, was you know the market size for our injectable, which is to be launched or -- sorry, to be filed in the Q4. I think earlier, we used to mention market is of $100 million plus, then $300 million, and this time it's $350 million. So just wanted to check have I got it right? I'm referring to the older presentations or was it different?

Yes. So the $100 million which we used to refer to was the EU market of that product, which is what we had visibility around at that point of time. Now this product is obviously part of [indiscernible] annual report. And so both $300 million and $350 million are the numbers coming out of their annual report in the recent past. So as they keep operating -- sorry, their global market.