Viyash Scientific Limited (512529) Earnings Call Transcript

Thank you for joining us today for SeQuent Scientific's Earnings Conference Call for the Fourth Quarter and Financial Year Ended 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 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 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, and good evening, and a very warm welcome to all. I would like to thank you all for joining us for the earnings call for the fourth quarter and full year financial year '20. I also would like to apologize once again for this rescheduling, which we had to do from 3:00 p.m. to 6:00 p.m., which was purely on account of technical challenges that we faced in uploading the results on the website -- on the stock exchange website. I hope all of you are safe and chill and hearty in the confines of your home. Joining me on this call are my colleagues, Sharat Narasapur, our Joint Managing Director; and our CFO, Tushar Mistry. I'll start with a brief overview, followed by the highlights of our financial performance for the quarter and the full year as well as the other corporate development, post, which, we shall open the call for a Q&A session. This time is different from the previous quarters and the interactions that we have been having in the past primarily for 2 reasons: one is external and faced by all of us, the COVID pandemic and its impact on the world; and the second is internal at Sequent, which is going through an ownership change, something that I will touch upon later in the call. Given the recent development, I presume there could be a few new participants in the call today, and I will take a few minutes to set the stage on how SeQuent reached where it is today before talking of the business. Stepping back to 2014, Sequent was a INR 400 crore company with 2 distinct businesses, human APIs and animal health business. We also had a small specialty chemical business then. Our strategic call was taken by the promoters to create the first powerhouse of animal health business from India, giving birth to Alivira, our animal health focused vertical. This was followed by a series of structural moves in the animal health space, including investing in a new veterinary focused API facility adviser and the strength of inorganic acquisitions across the world in select geographies of Europe, Turkey, India and Latin America to build a strong foundation of formulation business. Along the way, we divested our noncore businesses to channelize our energy on core business. The specialty chemicals business was sold in 2014, while the human API business was demerged into Solara in early 2018. We are now a pure-play animal health company, with an annual turnover in the region of INR 1,080 crores, or $165 million, making us the largest in India and as we speak, the 20th largest animal health company across the globe. We have a track record of consistent performance over last 12 quarters, ever since we became a pure-play animal health company. I will now spend some time on how the company has coped with the COVID challenges. While we did give some of detailed business update to the stock exchanges on April 8, 2020, on the COVID impact, I would like to take this opportunity to reiterate a few points. Pharmaceuticals and animal health industries, which we cater to, has been categorized as essential industry across the globe. And hence, we are generally exempt from the lockdowns that have impacted most industry. Further, within the animal health industry, we cater to the production animal segment, which is not a discretionary spend and hence, we see little impact on the demand side of the business as well. In response to the evolving COVID-19 pandemic and related execution challenges, we put in place a business continuity plan to deal with the challenges across all operations. As part of the plan, manufacturing operations across locations worldwide are working with reduced staff, while all nonessential employees are working remotely. We made alternate logistic arrangements for both men and material across all facilities to ensure continued operations as well as supplies to our customers. The swift implementation of business continuity plan allowed us to shield our operations in India, specifically, from significant disruption in a very challenging environment. All our global businesses also showed great resilience during these times, with facilities in Spain, Turkey and Brazil also operating at normal levels, while all non-manufacturing staff work from home. We did, however, face some shortfall in Germany as our QC -- quality control staff struggled to make it to the factory. As a result of some of these proactive measures, we could largely achieve our plan for the quarter. Sales of goods worth approximately INR 8 crore, which we could not ship to our customers, even though ready at our end. Let me now turn attention to our performance for the year. We set out a target of -- for ourselves when we started the year to grow the revenues in high teen and increase our EBITDA by about 200 bps. I'm pleased to state that, despite the various challenges in the last quarter, we saw a growth of 16.5% in constant currency terms as far as our top line is concerned. While our API business grew 21.2%, our formulations business recovered quite smartly in the second half and grew at 14.1% for the year. Turkey and Latin America stood out with growths of 67% and 26% in their respective geographies. We also had a strong second half in Europe driven by our nutrition facility in Spain. Overall, we feel good about the way the revenue growth has panned out, which clearly demonstrates a well-diversified portfolio mix between products and geography. I'm not going to call out the Q4 numbers, as it is already in the investor deck, as also on our website. But suffice to say that performance in Q4 mostly mirrored our full year number. Operational excellence has been at the core of our strategy ever since we embarked on this journey of consolidation. I'm extremely delighted to state that we have been able to achieve the guidance of improvement in EBITDA margins by 200 bps on a year-on-year basis. While the year-end EBITDA stood at 14.9%, a 210 bps improvement over the last year, the highest ever EBITDA of 17% in Q4 keeps us confident for the future. Portfolio mix, scale and right markets were key variables that drove the margin. Even though we are conscious or cautious about the environment we are operating in, we expect the momentum to continue in FY '21. We expect to maintain robust growth in both LatAm and Turkey, while Europe is rebounding. And we shall also benefit from the launch of the new injectable in the second half. We shall continue to adopt a cautious stand in emerging markets where we believe collection risk would be a significant variable. API continues to grow, well supported by focus on regulated markets and regulated customers as well as high-value products, which continue to drive our fixed asset turns for the business, which now stands at 2.5x on Q4 annualized basis -- 2.7x on Q4 annualized basis and 2.4x for the full year of FY '20. This quarter, we achieved actually the highest ever API sales as well, in spite of losing out on about INR 8 crores of revenue. Our contribution from top 10 customers is close to 55% of our API sales, while our top products contribute close to 88% of our API sales. We now have 26 commercial APIs, along with 19 U.S. filings and 11 CP approvals with about 14-odd products in the pipeline. On the formulation side, we recently filed our first injectable for the U.S. market. As you all know, we are targeting about 10 new filings in the U.S. for the next 3 years, and U.S. will be a market that will be increasing -- that we will be increasingly looking forward to make our presence felt. Overall, we believe we are in a strong position on the formulation side of business, too, and this will drive the business momentum going forward. The ratios on the balance sheet continue to improve as well, with our ROC, or return on capital, employed now very close to 15% as compared to 3 years -- 4 years back -- 3% 4 years back. That's almost a 5x jump in 4 years. Our net debt to EBITDA is at 1.23% compared to 3.75% in FY '17, a 3x improvement. Cash from operations improved to INR 127 crores during the year as compared to INR 2 crores in FY '17, and the net debt to equity finished the year at 0.29%. You would also notice that our net debt is moving in the right direction and is reflective of the strong cash flows that we derive from the business. In effect, all the ratios are moving in the right direction and this, again, is a testament to -- testimony to the single-minded focus and relentless execution of the management team.backed by unflinching support from the promoters to execute the strategy. You would notice that the audit report carries the remark around physical verification of inventories in Europe. This is on account of the inability of the respective auditors to carry out such verification at the peak of COVID pandemic in those territories. However, the auditor has been able to carry out alternative procedures in India, as guided by the Indian regulatory body. Such alternate procedures were not available for the auditors in those geographies. However, as a pharmaceutical organization, we have complete internal control on inventory management, and we see no challenge around this once the verification is undertaken. Recently, Animal Pharm Awards recognized Alivira as the top company from India, Middle East and Africa. This global recognition does provide us both impetus and motivation to continue to do well. This brings me to address an important corporate action that all of you might have seen and would be eager to ask questions about. Global investment firm, The Carlyle Group, has entered into a definitive agreement with the existing promoters of SeQuent Scientific to acquire a majority stake and up to 74% in the company, including 26% -- up to 26% equity shares from public shareholders. This is an inflection point in the journey of the company, as SeQuent can now leverage Carlyle's global network and resources to move to the next orbit of growth and innovation. Carlyle is no stranger to the Indian health care market, with a history of investing in the health care sector, both in India and globally, fueled by deep understanding of the market and an ability to create value through its operational expertise and close partnership with management. This transaction is their largest control deal in India and is reflective of their confidence, both on the sector as well as the business model of SeQuent. I believe, with Carlyle as the new promoter group, we are well poised to the new phase of development together -- where we, together with Carlyle, will work to grow the company into one of the top global animal health care companies. I take this opportunity to place on record my sincere thanks to Arun Kumar and K.R. Ravishankar, our current promoters, for their vision and support, which took SeQuent to where it is today, which is India's largest animal health company and also amongst the top 20 global animal health companies in the world. We are confident of threading the path of continued growth to the benefit of all stakeholders. With those few words, let me open the floor for questions and answers.

[Operator Instructions] The first question is from the line of Manish Gupta from Sequent Capital. The next question is from the line of [ Rajesh Kumar ], an individual investor.

I have 2 questions. The first question is based on the COVID situation that is evolving, how do you see the situations for API as well as formulations in terms of the working capital? Are we seeing any stretch on the working capital cycle?

What is your second question?

And the second question is related to the formulations in the European business. Are we expecting any --Jan to March quarter has been excellent. It's been a wonderful work done in that area. Are we seeing any challenges or, let's say, any COVID-related issues in the first quarter of the new financial year, which is April, May, June.

Okay. So let me address the demand side of business and its potential impact. So basically, as I mentioned earlier, we are in animal health and within that, production animals and within that, also a generic company, which fundamentally offers a better price proposition to the customers. So as we speak, not only for Q4, but even Q1, we see our business to be certainly on -- in the normal course of business, both in terms of order book and also working capital management. We are not seeing any challenges, thus far. Having said that, it's an evolving world, and it's very difficult to predict the future because every country is struggling to kind of respond to this challenge. So the way I look at it is we are taking one quarter at a time. As we speak, Q1 looks good. We shall evaluate the year as it rolls by. As a company, we are extremely cautious on the cash flow management. That has been our single-value strength as a company, I would like to believe. And there is nothing we will allow to take risk on those counts. So we are very cognizant of collections and cash flows, and that is also one of the reasons why we are playing very cautious on the emerging markets.

Okay. Understood, fairly understood. Just a follow-up, if you would please allow me.

Yes, [ Rajesh ].

Would there be any impact on the new launches? Let's say, I know it's a little forward-looking statement, so please feel free to disregard this question.

I don't see any reason for any change at this point of time.

Okay. And any disruptions in terms of intermediate supplies from China?

None at all. We have been very proactive in this regard. Second, our dependence on China is very limited, especially on the API side of business. So certainly, again, I would like to reiterate that we do not foresee any challenges to the business.

The next question is from the line of Alankar Garude from Macquarie.

Sir, my first question is on our medium-term goal where we had said that we are targeting high-teens growth and margins about 20% in the next 3 years. So with this COVID-19 situation, and even otherwise, are you sticking to this goal? And secondly, if you could also provide some idea as far as the FY '21 outlook is concerned, that would be helpful.

Yes. So Alankar, this one is a very difficult question to respond because nobody can predict the world as we see it today. I keep getting a new update from all the management consultants every week, and they are very different from each other. Having said that, given just the nature of industry and the strength of our business model, currently, we do not believe any reason to change our medium-term objective. So we stay confident of largely achieving the medium-term goals. Having said that, for the current year, I'm looking at business one quarter at a time. Q1 certainly looks robust for us, despite the peak of the challenges. And I do believe, again, as we roll forward, things will get better and not worse from here.

Understood, sir. And secondly, I wanted to ask you on the Carlyle deal. Can you throw some light on whether Carlyle has any investments on the animal health side anywhere else in the world? You mentioned about them having presence on the pharma side, I think. So firstly, that. And secondly, how can they help us grow further from these levels and help us achieve our objective of being amongst the top players globally within the animal health space?

Yes. So there are a couple of areas wherein they can certainly add value. First is, of course, Carlyle has fairly strong health care practice around the world, significant investments on the pharma -- pharmaceuticals and health care side. And they do have some investments on the animal care side, not so much in direct pharmaceutical side, but more on the nutrition side of business, including, I believe, some stake in a very big CPE group in China. So there are -- as they have explained us, we are looking at 2 or 3 areas of contribution. One is fast tracking our growth in U.S. and also China, which is the second largest animal health market in the world. So while we had our own plans for U.S., clearly, Carlyle can help us faster that. And while we had no plans for China, clearly, again, Carlyle can help us build up a plan for China. The other element is vaccine. Again, on our own, there was nothing we could have gone -- or done to build that technological gap, but we believe, with Carlyle's expertise and global network, we will be able to do that. So these are the couple of areas where I believe Carlyle can add very clear value to our growth platform.

Sure, sir. And finally, one last question from my side, sir. If I just look at emerging markets performance, specifically in this quarter, it's almost a 15% decline. And even in constant currency terms, it's a pretty sharp 13% decline. And I think in your opening remarks, you also mentioned about being slightly cautious over there. So can you just highlight what exactly are the issues you are facing in these emerging markets?

Yes. So for our piece, emerging market includes India, wherein we do have a business. And just for information, our India business did about minus 25% in Q4 simply because there is no money available to collect. So selling is very easy, but money is not available to collect, and that's not a space we want to get into because, for such a small business, if we get into collection issues, I think it will not be good for the organization. So we have chosen to take a step back. And unless the collection concerns are addressed, we will not take aggressive stance in these markets, including the other emerging markets, which are also oil dependent. Now with the global crash in oil prices, obviously, we will -- we do expect payment challenges even in those countries. So we will certainly follow a wait-and-watch policy as far as emerging markets are concerned. Having said that, our dependence on this business is very limited.

Right, sir. And just one quick follow-up. When you said collection issues, specifically in India, who will be the counterparties?

This is like a pharmaceutical business, so you have to deal with stockist and retailers.

Right, right, right. Understood.

Yes. And the final consumer is farmers, so you can understand the rural distress that we have in our country today.

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

Sir, I have a question pertaining to this injectable launch that is scheduled in FY '21 in Europe. So would this launch happen pan-Europe? Or would this kind of be a staggered launch first in specific geographies and then other geographies?

So it will not be certainly pan-Europe, but it will be definitely in the key geographies of Europe. So we have undertaken a decentralized procedure for this, or DCP, with some 10 or 11 countries, which are critical and relevant for this product. So that's how we have gone about it. And obviously, it will be a single approval. And therefore, the product will be launched in all those geographies.

So each individual approval will come at a separate point in time, but it will be -- it will come in the second half of FY '21. Is that correct?

No, no. The approval will be single approval. It's a DCP procedure, as it is called in Europe, which is slightly misunderstood because it is one approval for the countries we participate in, okay? So approval will come in one shot. The launch will be based on the patent expiry. So the patent expedition date is also, of course, common across Europe. So somewhere in November or December is when we expect to launch the product, end of November.

So you will be launching in all those 11 territories that you've applied for in the fourth quarter of FY '21. Can that be a fair assumption?

That's correct.

And so will France be also one of those territories where you would have applied for approval?

That's correct.

And since you don't have a very significant presence in France, so would this approval kind of help you build a presence or it will be kind of still difficult for you to launch this drug in France? And will France be the largest geography on this product?

No. France is not the largest geography for this product. So certainly, in all the countries where we have our own front-end, we will be launching through our own front-end. In some markets, like France, wherein we are just -- we are at a very early stage, we might look at an option of launching ourselves and also appointing a larger company as a distributor.

Okay. So you partner that product in geographies where you don't have a strong presence.

Absolutely.

So there will be some distribution fees that will -- but it should not be significant. Is that...

Yes. I mean, fundamentally, it will be in our interest to maximize our revenue, which is what we will do.

Okay. And any sense of competition that you're expecting, what sort of competition would come in?

So it's difficult to predict at this point of time. But having said that, it will certainly have handful of competitors because no generic animal health company, products-wise, can ignore this product. So I do foresee between 3 to 4 companies, more or less, at the time of launch.

Okay. And would this product have any complexity, which will reflect the competition to an extent?

Irrespective, animal health industry is not as competitive as human pharma. And plus, it is an injectable. So obviously, you'll need injectable capabilities for you to be able to launch this. So that further restricts the competition.

Okay. There are limited companies with injectable capabilities in the animal health care.

Yes.

Sir, during the quarter, we have seen a strong margin expansion at the gross level. So how -- is this on account of the API sales becoming more prominent during the quarter?

So it's really a mix of API sales and also Turkey business firing because Turkey is also one of our better margin business and so is our API business.

Okay. So we can -- this gross margins at 50%, it should be around this number, closer to this number going forward.

The idea is always to make it better, but difficult to predict exact numbers. But given our focus on regulated market and better price -- higher priced products, my belief is we will be improving our gross margin as we build our business.

And sir, on the exchange loss of INR 6.5 crores, how would you explain that?

Yes. Tushar, if you can respond to that.

Yes. So as you know that we operate into multiple geographies. Some of the geographies have currencies, which are pretty politicalized, like Brazil and Mexico. Due to this COVID-19 pandemic hitting during the month of March, by the end of March, this currency has moved very -- in a very volatile manner and they depreciate more than 25%. And we had certain creditors sitting on the balance sheet on dollar terms, and this -- it was on account of that. While having said that, the way these geographies manages, they peg their prices to dollar -- to the dollar movement, and all their selling prices will undergo change for the market, but that will be all prospective. So on a near-term perspective, the impact will be all absorbed in the -- positively in the financials. But for the quarter, there is an impact that has hit us.

The next question is from the line of Mr. [indiscernible] from [ Rakhi Investment Managers ].

Manish, I wanted to ask you that we have a working capital of about INR 300 crores for this year. Is it possible to give a small breakup between the 2 businesses, formulations and API? I wanted to understand which business is more heavy on working capital.

I don't have this handy. Maybe Nasser, we'll have to connect again on this. But at a broad level, the working capital across both the businesses are not very different in terms of number of hits.

Okay. Second question, sir, this INR 400 crores of API business, which has grown at 20% Y-on-Y, what sort of capacity are we sitting on to take it to what sort of revenue over the next 2 years?

Yes. So at a broad level, we have -- we are targeting similar growth rates in the medium term. In terms of capacity, we certainly do have capacities to cater to FY '21 requirements. But as we speak, we are working on an expansion plan, and my colleague, Sharat, can provide more color on that, which will be useful for fulfilling the demands from FY '22 onwards? So Sharat, if you can give some color on the expansion that we are undertaking.

Yes. So this expansion is basically at our Vizag site, wherein, historically, we had already the construction of the civil building ready. So what we are trying to do is equip them and also build a couple of clean rooms, and this should be ready by December of this year. So there has been a small impact due to COVID. We are slow at the moment, but we will go ahead with that. We'll have to go ahead. So in terms of capacity, our plans are quite clear.

And lastly, on the API side, again. Manish, has there been any one-off pricing advantages that we have seen in the API business last year because normally, a lot of API companies enjoy some pricing advantages, which disappear later?

Not really. So if you look at our business model, we do not have large products, and we are not a commodity API player. We are fundamentally multiple products with multiple customers, and regulated market is our strategy. So we are not working or seeing any one-off kind of thing in our API strategy. These are all long-term arrangements because even qualifying our API takes a couple of years.

Okay. So out of INR 400 crores, what would be the maximum contribution from a single quality? I think the only big molecule, which we have is albendazole, which is, of course, a product which goes for both human and animal health properties, and that is doing well as well. And that, where we have taken about a 20% capacity increase, which has also helped us grow that business. I don't have offline numbers, but my guess is it will be accounting for 35% to 40% of our -- no, sorry, about 25% of our API is 25% to 30%.

Next question is from the line of Manish Gupta from Solidarity.

I had 2 questions. The first one is, can you provide some color about how the opportunities for our API business has changed based on whatever we read in the press between what's going on between the U.S. and China? So that was the first question. The second question was that is our formulation business globally, does it have any advantage at all with our India back end? And I had a third question as well, which is that, I guess, you said that we are a generic player. But as we are trying to build our front-end in many markets, for example, the U.S. and all that, at what scale in these markets will the bottom line start contributing meaningfully to the business?

Okay. So first question, China and U.S., too early to predict based on the recent development, but some of the movements we have been seeing over last 1 or 2 years. So clearly, just like we were derisking ourselves from China, many of the bigger companies have also been doing that. And this was one of the reasons why our API business has been growing because companies are looking at second options for all their key APIs. Also I think the bigger benefit we are enjoying is from the segregation of animal health businesses from the parent human organization, so the likes of Merck and all somewhat making it a separate vertical. And Zoetis, Elanco having created separate companies. And therefore, we are seeing a fairly good traction on our API side of business. I can only give you some color on what things we see changing in the last couple of weeks, which is where -- and I don't know whether it is right or wrong, we are seeing that some of the Chinese employees, who were marked on e-mails, has no longer been marked on those e-mails by our customers. So I definitely foresee some kind of move that is happening towards derisking from China internally across all the global companies. Your second question was on formulations and the India back-end advantage. The only back-end advantage, which we see is in the R&D side of business as far as animal health is concerned. We do not foresee much advantage on manufacturing side of formulation simply because of too many formats and too few or too little volumes in animal health. So India advantage really comes in when there are volumes. That does not really work in animal health. But on the R&D side, clearly, there are India advantages, and that's why some of our value-added products, especially injectables, are all getting developed in India. The third question was the scale and when do we see the scale benefit on the formulation side of business. I think we are still 2 years away, and the scale advantage will start showing up when our value-added products start getting launched. The first one gets launched in Europe in the -- towards the end of the year, but the first commercial benefit in U.S. is at least 2 years away. So the formulation business will drive our margins only from FY '23 onwards. And most of our margin expansion between now till FY '22, I foresee, would be coming from the API side of the business.

The next question is from the line of Sachin Kasera from Svan Investment.

Three questions. One, what is the CapEx plan for the current year?

I can give you a 2-year CapEx plan. We would be spending about INR 90 crores between India and Germany for expanding capacities at Vizag and also the injectable capacity in Germany.

Okay. And is there going to be any maintenance CapEx included on this INR 90 crores for the next 2 years across other sites?

This largely includes the maintenance CapEx as well.

Okay, okay. So does it mean that the net debt, which has seen a reduction of around INR 30 crores, INR 35 crores this year, we could see further reduction in the next 2 years?

Absolutely. Unless we do any inorganic strategy, the net debt should keep coming down.

Okay. Secondly, sir, now that we have this investment in Solara and in Strides, and now that we are no longer part of that -- going to be part of the group, so what is the strategy on the investment in Solara and Strides? What's the change in management?

Yes. So we have been always mentioning and maintaining that these are treasury investments for us and will be used as growth capital going forward, and that same situation stays. We shall use it as a growth capital as and when required and as and when, when we feel the pricing is right.

Okay. Sir, this European injectable launch, any sense which quarter we could look at? Is it like first half or second half? What is your sense on the likely time line launch?

No. So the European launch will happen in end of November or early December kind of launch based on patent expiry. And the U.S. launch will be another one year after that.

Yes. Okay. Sir, you mentioned in one of your opening remarks that with the entry of Carlyle could help you in terms of the U.S. market. So you had also mentioned that you are looking at sort of some part of them doing an inorganic front-end acquisition in the U.S. So does Carlyle coming in helping way of accelerating that or getting a more suitable candidate, if you can just comment on that?

Yes, absolutely. I think that goes without saying that -- see, when Carlyle brings in is a lot of [ benchmarks ] around managing partners, and these are ex-CEOs of various pharmaceutical companies, including animal health companies. So the network that Carlyle brings to the table is very different from what we had in the past but more importantly, even the check side. So if you look at, historically, all our deals were very, very small. And it was purely coming out of our ability to take risk and our ability to write the checks. Now that certainly will change because Carlyle, while they bought the company for our business plan, but they definitely would add to this business plan to accelerate it further and faster. So I clearly foresee that whatever we were aspiring to do, both in terms of scale and also speed, Carlyle will fast track that.