Viyash Scientific Limited (512529) Earnings Call Transcript

The next question is from the line of Bharat Sheth from Quest Investment Advisors.

Congratulation, sir, on excellent performance. So sir, I mean, the way you are saying, I mean, this with Carlyle, new promoter coming in. So medium term, our strategy remains the same for next 2, 3 years. Post that, they -- we'll have some kind of a change in the strategy. Is that fair understanding?

No. That's not a fair understanding. What we are saying is, see, fundamentally, given the nature of industry we are in, pharmaceutical or a regulated industry, any action that anybody takes will take minimum 2 to 3 years to fructify. So even if there is a -- first, we are not looking of a change of strategy. We are only looking at broadening our vision or enlarging our vision, which may entail certain bolder steps. So if we were looking at U.S. acquisition, if on our own, we could have looked at a $10 million or $20 million transaction. Obviously, with Carlyle, it gives us the ability to look at a bigger transaction. So that's the kind of changes I foresee with Carlyle coming in the picture. And anything that we undertake with -- under the new shareholding structure is, therefore, what I'm saying is any changes will only impact medium to long-term and nothing in the short to medium term, given the nature of the industry we are in.

Okay. And sir, any strategy to enter in the Chinese market?

[Foreign Language]

[Foreign Language] With the change -- I mean Carlyle taking over it, so we were looking for 2 markets, U.S. and China?

Yes. So this is, again, part of the work that we are doing with Stonehaven and based on what comes out of it. Because, honestly, we have no expertise or knowledge of that market and will be guided by Stonehaven and/or Carlyle Group on our strategies for China simply because it is the second largest animal health market in the world.

And sir, the kind of growth we are looking at, so what kind of CapEx we have to incur for next couple of years?

So there are 2 elements to our CapEx, which we have been guiding to. One is our expansion at Vizag plant, which we are scaling up. The first phase will be -- is running a little late, but should be completed sometime in early Q4 of the current year. And the second phase will be completed next year. Between these 2 phases, we will be good enough to deliver our business requirements as we foresee for next 3 to 4 years. And collective investment will be about $10 million in this. In addition, we are looking at an expansion at Bremer for our injectable footprint that was more to do to cater to the U.S. market. That is 1 project which is running late because of the current situation in Europe. Because it entails or involves the cross-border execution of project, and that is something we have deferred by minimum 6 to 9 months, and it'll have a total CapEx outlay of about EUR 3 million.

Okay. Sir, with the kind of, I mean, guidance you are giving on the top line and EBITDA margin, so when do we expect to cross 20% of ROCE and ROE?

So I think on ROCE front, if you do our first half annualized, we are already touching 20%, and we certainly obviously would like to improve from there and not allow it to dip. ROE, honestly, we haven't done any calculation yet, but we will look into it. But as far as returns are concerned, we are highly motivated by that aspect of business, and we continue to track our business on the right way.

Okay. And sir, last question on my side. What will be the -- ETR will be there for next 2, 3 years?

Yes, Tushar?

So ETR, we have been guiding at around between 18% to 20% kind of ETR. You see in the first half, the ETR is slightly higher. But that is purely because in some geographies, we pay taxes in advance and wait for the assessments to get over and get those credits back. But due to the current situation, some of those would be delayed in the current scenario. So we will see a year of abruption here, but on a long-term basis, we should remain within 18% kind of tax rates.

The next question is from the line of Aakash Mangani from BOI AXA Mutual Fund.

A lot of the questions that I want to ask have already asked. So I have a few additional ones. Could you just talk about the CDMO opportunity in a bit of detail? You mentioned in the PPT that you tied on with a particular animal health plan? Would you just talk about what sort of market that is that we can explore over the next couple of years? What are the players in this market who are doing a sizable sort of revenue? And what sort of profitability versus segment operator, some broad strokes there could do? That's the first question.

Yes. So Aakash, as I mentioned in one of my earlier responses, we are very new to this business. And we are yet to scope out contours of this business. So give us some time before we can come out with the guidance. As far as the opportunity is concerned, it's not a very well-defined industry per se, separately from human pharma. So currently, most of the work -- CDMO work for animal health business is undertaken by companies who do both animal health and human pharma work. But going forward, there is a need of segregation. And that's what we are getting kind of feelers from our customer, and that was the reason for this foray. So -- but give us some time before we can come back to you with a more specific answer as we are currently engaged both in learning this business and also engaged with Stonehaven in sizing this business.

Okay. The next is on this injectable generic that you plan to launch in Europe. You mentioned that there are 13 other competitors in the market right now who filed for the generic version. A couple of quarters back, you had mentioned there were 2 or 3 competitors. So does that mean that the profitability that you had envisaged, the pricing that you have envisaged earlier could be materially lower because of the hypercompetitive activity that we may see in the segment?

Yes. So if you would read our earlier commentary, I've been always very clear that this particular molecule will be a game changer in animal health and may not be as big an opportunity as people may think it is. So in a way, we have proved right given the number of competitors. Having said that, it was -- we have never taken it as a big part of our business plan. Because for us, it was a learning exercise. I and most of us come from human pharma so we are aware of the hyper competition that exists. And anything big always attracts much attention. So in our business plan, to be candid, it does not make much of a difference. We had kept very small numbers for ourselves. But yes, it will be a good breakup call for many of the animal health guys who are not used to seeing such kind of competition.

So when you say game changer, I mean, if you're not building in a lot of revenue from this particular line of business, game changer in what sense? In terms of focusing your abilities to your partners that you also have it and you also sort of get the technology in place to compete with the biggies? I mean could you elaborate on that.

Yes. No, all I was saying this product will be a game changer for the industry in terms of how competitive dynamics play out. It was not a game changer for us. Having said that, it has demonstrated our ability because this was our first filing in Europe from India. And we've got a DCP approval in 11 months, which is a very good reflection of our development as also our regulatory capabilities. So for us, it was kind of a validation of our capabilities. And for the industry, given the size and scale of the molecule, it was kind of effectively a new learning of seeing hyper competition.

Okay. Lastly, it's been a couple of quarters since Carlyle has come onboard, I think. And we've got a new board in place, congrats on that. So what are they now looking out for from an annual milestone point of view has? What are the kind of things that are expected out of the current management in terms of deliverables? What has changed? What are we emphasizing on? Some flavors you could talk about.

Yes. No, so I just needed to correct. It is not a couple of quarters, it's been a couple of weeks. Carlyle has been onboard, I think, from some early September. So it's still...

I mean the transaction -- sorry, I mean the transaction was announced, I think, 2 quarters back.

Yes. So transaction was announced, but they took charge of the company only from 8th of September or so, somewhere around that when they took the majority stake. So it's still early days. It is still honeymoon period as I would like to believe. So we are yet to gauge each other. We just completed our first Board meeting today with the new Board, which includes both Carlyle nominees as also certain industry stalwarts. Clearly, as a management team and as also the Carlyle shareholding team, all of us are excited by the unique opportunity that we are sitting on in creating a global animal health business from India. But you'll need to give us some time before we can share the Vision 2.0 as far as SeQuent is concerned. I can assure you, it will not be very different, but a little bolder than what we were in the past.

[Operator Instructions] The next question is from the line of Sharan Pillay from Allegro Capital.

I had a couple of questions. First one was in terms of the key injectable that we had. So when you're saying that 13 to 14 approvals across Europe, are you expecting 13 to 14 competitors on the day 1 launch? Or do you expect this to be sort of spread out across a few months or a few quarters?

Difficult question to answer. Because, obviously, we don't know how competitors are working on it in that sense. So when we say 13 approvals, it doesn't mean all companies have approvals in all the countries. It can be country-specific approvals or can be multi-country approvals as per their strategies. Also, some of them are linked with common manufacturing. So there are going to be challenges. None of us know how many products will be there on day 1 of the launch. But having said that, it will be certainly far more competitive than any other product that has genericized in the past.

Okay. Perfect. My second question is in terms of the CDMO business. Earlier, maybe a few quarters ago, we had mentioned that we had initiated our first few contracts and had a proposal for around a dozen products that we were under -- that we were evaluating. I just wanted to ask again whether you've added any -- you've received any proposals or initiated anymore contracts? So what's the strategy so far?

Yes. I'll ask my colleague, Sharat, to respond to this because he's the one driving it.

So the first couple of projects which were initiated, they have rectified in terms of award. And out of that, one product is already delivered. And the other one, we are on our way to deliver. But there is a portfolio of 10 products, which we are working on. And out of that, 3 are almost confirmed, and rest of them are still the due diligence is on. So that being the status, we see a very good traction there, but it's too early to say. We are in our infancy in that part of the business. We need to see how it tracks.

Okay. Yes. And just a follow-up on that, are we seeing a greater amount of inquiries coming? Or what's the status in terms of client engagement that's taken place?

No. See, as Manish was describing the whole CDMO business in animal health space, it's just a start. And there is one company which is very keenly working. But we expect that the others also will follow this model sooner or later, just for the reason that the contract manufacturers who are manufacturing for them do both animal drugs as well as human drugs. And in future, there is a separation or segregation, which is required. So we see that happening in the near future.

Okay. Okay. I understand. Just one last question in terms of India. We had said on last quarter that we were facing some issues in terms of collection from stockist and retailers, et cetera, and had expected it to improve in Q2. Has that improvement taken place? Or is that still something that we are dealing with at the moment?

No, no. We were not facing any challenges, but we were being cautious in terms of the amount we were dispatching. We have always been -- I mean for us, cash comes first. So we are a very disciplined company in that respect. And that has been our strategy and has worked out well for us. The only person with white hair in our company is Tushar Mistry because he doesn't allow us to do anything without collecting first.

The next question is from the line of Aakash Jain from Finkurve.

Manish, 2 questions. One is just a quick follow-up on the earlier question in terms of the India business. Like, you rightly said, we were a little cautious of the India market given the credit scenario. Are -- is the business now completely back to normal? Or there's still some way to go before we can say that things have normalized completely in India? So that's the first part. The second part is on the rising cases of COVID in Europe. And if I'm not mistaken, we really did not have that much of a disruption when the first round of cases happened in Europe. So can you please share a little bit of what has happened earlier and how worried are you about rising cases now in Europe? Because now we have sort of an understanding of what happened earlier so we are probably better prepared as well.

Yes. So your first question was around India, and I can certainly say that India is almost back to normal. We are more of a rural kind of industry. So we were obviously off the ground much earlier than the rest of the country. But certainly, India business is more or less back to normal, excepting for the travel part because the field force still cannot travel freely, and they have their own ways of contacting the doctors and the customers. That is as far as India is concerned. Your second question was on Europe. Certainly, the second wave of lockdown is less severe than the first phase. So it's more like a nighttime curfew, but traveling, otherwise, within the cities and all are allowed, Again, at the cost of reiterating, our animal industry comes under essential industries and therefore, does not get impacted by any lockdowns or restrictions. So excepting for the straight cases that we will face in our own operations, which may have an impact, otherwise, we don't see any challenges.

Okay. That's very helpful. The acquisition that we have completed in Turkey has the benefit of minority interest been completely absorbed. Or what was the -- is it only for part of the quarter that we could get the benefit of the consolidation from Turkey?

No, the acquisition has been completed only in early November. So consolidation has not been undertaken in the last quarter financial results, excepting, I think, the liability part. So Tushar, if you can explain?

Yes. So on the financial -- on the P&L front, the minority for Q2 still has the minority for Turkey. But what has been accounted is the liability for acquiring that stake because agreement was already entered by that time. And the liability for that was recognized. The consolidation of the minority stake at the P&L level will start happening from November onwards as Manish is saying.

And like Manish said, we sold the stake in Strides, but we still continue to hold some stake in Solara, right, if I am not mistaken?

Yes, that is right.

And is there a plan for that as well in the sense in the near future? Or that is something that you'll wait and watch?

Wait and watch.

[Operator Instructions] The next question is from the line of [ Raj Rishi ], an individual investor.

Can you just elaborate on the India advantage in the sector?

This one question we have responded to multiple private equities who are engaged with us that there is not a India cost advantage sector. And that is -- it's India or the management team's knowledge arbitrage sector that we are working on. So excepting for our API business, which certainly is India cost arbitrage and more than cost arbitrage, the technical knowledge arbitrage of India. But otherwise, it's fundamentally a knowledge arbitrage business. And you'll see in our own unique business model, all our formulation units are actually not in India.

Okay. Okay. So in India, you just had the API part, right?

That's correct, from a manufacturing perspective. But formulation R&D is in India, a big part. And of course, a large part of management think tank is in India and also in Europe.

Okay. Okay. Just share this perspective, if you can, like, is it reasonable to expect a 2x, 3x kind of revenue in this regard from the company, given what the opportunity you see and your skill set?

In what period of time?

In over a period of time, you can say, over a period of time, say, 3 to 5 years. Can you share some perspective? Like is it possible to grow like 3x in 5 years, 7 years? Does that opportunity exist? And do you have the skill set to tap into it, like if you can share a perspective?

So I'll split my response in 2 buckets. Certainly, as an industry, there is a huge headroom for growth because we are still expecting the entire spectrum as far as the industry is concerned. Having said that, it's a branded generic industry. And therefore, market share gains are always slow and steady. So it's not something that I throw -- we throw some money or hire more people and then we can double our sales and all that kind of thing. So trying to grow too fast is sometimes dangerous in this industry. Given that in a branded generic industry, unless there is a consumption, the material will otherwise come back over a period, and that too as an expired material. So that's why you will notice that we have been always guiding to a mid-teens growth and not a very substantive growth or -- because even growing at that rate, we are more than double -- growing double at the industry growth rates, and which is what we are targeting. The third element, of course, is acquisitions. And that is something which can certainly help us scale faster. And there will be obviously an added area in the next phase of growth, given the Carlyle expertise.

The next question is from the line of [ Raja Mohanty ], an individual investor.

Yes. And congratulations, Manish, to you and your team for steering SeQuent in such a consistent and predictable fashion with robust outcomes. My query is, first, with Carlyle. You have indicated to capabilities being bolder and bigger in initiatives. Congratulations on the Stonehaven initiative. Though it is early days, apart from bigger acquisitions, which could be driven by Carlyle, would we see a further meaningful increase in filings as compared to the past as we have seen animal health is a small per product industry? Also trying to understand whether we could head towards market leadership and some formulation products over the next 3 to 5 years?

Yes. Certainly, I think our next phase of engagement, both with Carlyle, the new Board as well as Stonehaven is towards identifying more opportunities. And while acquisition is one part of it, obviously, the engagement is way beyond acquisitions and looking at both products and/or markets, and also the connects of Carlyle team. So certainly, you will see a small incremental increase in all the areas that we are focusing on, be it on the API side, be it on the formulation side, be it number of products. And finally, of course, the acquisition. So clearly, there would be some inputs and value-add that we should derive from our engagement with Carlyle Group, as also the larger Board, as also Stonehaven as far as these are concerned.

Okay. So apart from the acquisition, there exists the possibility of the company growing at the top line higher than the mid-teens that it has promised, apart from the acquisitions, too? Because you will have more filings and, in all areas, you'll be having incrementally more impetus post Carlyle?

That is correct, but I must warn you that none of this can fructify in the next 2 years.

Understand that. On the Stonehaven front, by when would you expect an output in the form of a report? Hypothetically -- and hypothetically, even without any change in management, what was the previous estimate of, say, breaking into the top 10 from the current top 20? By that and putting together the boulder initiatives with the new management, we could surmise the new time frames in terms of possibilities of you reaching the top 10 within what time frame?

A difficult question, but let me try to address it. On our own business plan basis, we were targeting to get into top 15 in next 4 years' time. Clearly, the gap between our current stage versus top 10 is very, very different. I mean there is a huge scale difference to get into the top 10. And on our own, we had not envisaged that. Now as far as Stonehaven is concerned, it's between 4 to 5 months engagement. So sometime towards February or March is when we will have a better visibility in terms of the way ahead. And that is the time when we'll be able to give a better answer to your question in terms of whether it is worth even chasing getting into top 10. Because while scale is good, it is not necessarily the best for the shareholders and which we will be -- I mean the good thing is that Carlyle is a shareholder. They are here for obviously making money. So in a way, their interests are aligned with the rest of the shareholders.

Okay. Final question. Based on the COVID experience, you have indicated to your ability to maintain a reliability, which has been noticed by your customers. Has it led to some sort of further consolidation in the industry for your benefit?

Yes. Again, it's early days. Nobody takes such decisions so quickly. Having said that, when you prove yourself as a reliable supplier in tough times, clearly, that stays. And we do foresee it -- us becoming more and more important for -- becoming more and more important for our customers as we go along.

Okay. Manish, I would like to end by really being amazed by the kind of balance you maintain and steering the ship in such a very seamless fashion. So hearty congratulations on that and keep steering the ship in this robust, predictable fashion in the future. All the best.

We will take the last question from the line of [ Niraj Mansingka ], individual investor.

I just had a question on the India's relationship that we have started last quarter. Can you give some color on the potential of Indian market? And how large it can be for you as an opportunity? And any thoughts on how you plan to achieve? And the second question is on the Vizag plant expansion. Any more color on how the expansion of Vizag and Mahad may lead to your potential addition in your new markets or opportunity in the revenues by your company?

I think your first question was around Zoetis arrangement in India, which has just been initiated. Clearly, it is an important arrangement for us as far as our India business is concerned. Of course, in a global scheme of things, it is not a very material number. So in a way, in India, we will effectively double our revenues because of this arrangement. But as I said, in the global scheme of things, emerging markets, which includes India, is not that significant and should not have a meaningful impact. Having said that, it's a step in the right direction. Because when you combine or join forces with the largest in the world, it clearly opens up a lot of new doors for you and also opens up how people look at you very differently. So that's what we will be using even as we leverage our own business through the kind of brand equity that they have in India. Now coming to your second question around Vizag and Mahad expansion, that obviously is part of the growth that we are kind of alluding to on the API side of business. We have been maintaining only 20% growth rates in our API side of business, that will, of course, over a period, entail or require certain capacity additions. And our expansions in both Vizag and Mahad are towards achieving those required volumes in fiscal year 2022 onwards.

Okay. And one last question, if I may, like you plan to sell APIs in the U.S. market and at the same time launch formulation. So how do you see the growth coming in? Because you still be competing with those players in the formulation and as well as supplying the raw materials. So can you give some color on -- about this launch, how that you have?

Yes. So there are 2, 3 aspects here, which I would like to respond with. First is cooperating and competing is a fairly accepted phenomenon in the pharma business, which also includes both human and animal health. So every Indian company or global company has both APIs as also formulations, right from DRL, to Teva, to everyone. So it's a very standard accepted model. You don't get into conflict unless you are challenging patents, okay? And there are hardly any patented products in animal health. So the conflict, if any, that exists is even more limited in animal health space. And the third is, of course, our formulation strategy is not a forward integration strategy with our APIs, okay? Our formulation strategy and API strategy is very, very independent strategy, which has been -- we have been telling this right from day 1 that we are not seeing API as a cost arbitrage strategy for our formulation business. API is a separate business vertical for us with its own growth engine. And not all our formulations that we are developing for U.S. are based on our APIs. So for us, we see no challenges and/or conflicts as far as our either U.S. business or any other market is concerned.

When do you see that scale up in the API in the U.S. market?

No, we are already seeing the scale up as far as U.S. market is concerned. We have done 20-odd filings in U.S. so far as far as APIs are concerned. Already 7 of our veterinary VMFs have been accessed by the customers. And this is a number which is growing every quarter.

May I now hand the conference over to the management for their closing comments.

Yes. Thank you very much. In conclusion, I just want to say that we stay confident of our industry, our own business plan, as also our execution capabilities and currently stay engaged with our new shareholders and experts to define a new vision for ourselves. I'll come back to you with the exact contours of SeQuent 2.0 once we are ready. Thank you, everyone. Thanks for joining us for this call, and please stay safe.

Thank you very much. Ladies and gentlemen, on behalf of SeQuent Scientific Limited, that concludes this conference. Thank you for joining us. And you may now disconnect your lines. Thank you.