Viyash Scientific Limited (512529) Earnings Call Transcript

Good morning, ladies and gentlemen. Welcome to SeQuent Scientific Limited Q3 FY '21 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.

Thanks, Lisa. A very good morning, and thank you for joining us today for SeQuent Scientific's earnings conference call for the third quarter and 9 months ended financial year 2021. 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've gone through our results release and the quarterly investor presentation, which have been uploaded on our website as well as stock exchange website. The transcript for this call will be available in a week's time on our 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 the Investor Relations team. I now hand over the call to Manish to make the opening comments.

Thank you, Abhishek. Good morning, friends, and a very warm welcome to all of you for this Q3 FY '21 earnings call. I do hope you are all keeping good health and doing the right things. Joining me on this call today, I have with me my colleague, Sharat Narasapur, our Joint Managing Director; and also Tushar Mistry, our CFO. I'm sure you would have received the earnings release and the investor deck that was released last night, late in the evening and has been uploaded on both the stock exchange websites as well as our own website. Q2 was a new chapter in the history of SeQuent, where there was a seamless transition to the Carlyle Group as new promoter, and also a broad basing of the Board with the addition of certain industry global stalwarts. While Greg Andrews with strong commercial background joined our Board in Q2, Q3 also saw induction of Dr. Fabian Kausche, who is a R&D and a technical veteran in the global animal health landscape. We shall certainly be benefiting from both their expertise as well as their reach in shaping our next phase of growth strategy. We also appointed consultants, both Stonehaven and PwC, to help us rationalize our costs as well as help us chart our next growth strategy. While there were a host of initiatives being undertaken to move the company into the next orbit, what remains constant amidst all of this is our singular focus on execution. Q3 is yet another quarter and our 15th consecutive quarter since becoming a pure-play animal health company of consistent performance with a revenue growth of 15.2% on a constant currency basis. The growth was driven by both the API as well as the formulation segment with each of them growing at 20% and 13%, respectively. The performance is again a strong validation of our unique business model as well as the industry that we straddle. This growth in formulations was despite a strong headwind of an operationally challenging environment in Europe due to the second wave of COVID. Dwelling deeper into individual geographies, the key drivers for this quarter were LatAm, Turkey and India, with LatAm growing at 87% and Turkey growing at 18%. Market share gains in existing portfolio as well as new launches were the key drivers for this growth. India has now emerged as an important market for us and is a key market after Spain, Turkey and Brazil. Our business in India has more than doubled in last 9 months as we integrated the Zoetis portfolio in our own product offering. Within Europe, we were impacted in Spain and in Germany, even as we did well in Benelux and Sweden. Overall, on a 9-month basis, our European business grew at 2.7%, slightly ahead of the industry growth rate. We expect our European growth to accelerate hereupon as we gain traction in our recent launches, which is Citramox LA, our first long-acting development, as also Halofusol. Tulathromycin launch has been also done last week or actually at the beginning of this week and would start reflecting in our numbers from the current quarter. We continue to stay cautious in the emerging market and stay focused only on secure payment business in the region. As we have been guiding, our API business continues to drive our overall growth, and we delivered our highest ever quarterly sales of approximately INR 130 crores, reflecting a 20% growth over the corresponding quarter, and this is on the back of our deepening association with leading global animal health companies. We have now completed the debottlenecking project at Mahad to enhance capacity and also are operationalizing the first phase of Vizag expansion in the current quarter, both of which will help us maintain the growth momentum, not only in FY '22 but thereafter as well. We continue to make progress in our new product development across both APIs and formulations, and the recent CEP approval of Diclazuril makes us a formidable holder of IPs in API business, both across U.S. and EU markets. The quarter was also significant for our Turkish operations, as we consolidated our ownership and transitioned to the new management team, simultaneously maintaining the growth momentum. The quarter also saw us restructuring our balance sheet with the repayment of most of our debts in India, and the benefits of these initiatives will start reflecting from Q4. Financially, we have improved across all our key parameters right from EBITDA margins, which is now in excess of 18%; PAT margins or net profit margins, which are now tending to get into double digits; as well as continued debt reduction, driving a strong balance sheet, including all balance sheet ratios with ROCEs now reaching 20%. In the last call, we had appraised you on the appointment of Stonehaven Consulting to help us formulate our growth strategy for the next phase. Recently, we have also hired PwC to help us strategize operations for efficiency and for cost. I'm happy to state that both the projects are moving in the right direction and should be completed by end of Q4. We are enthused by their feedback on the strength of our business model as well as some of the additional growth engines that are being identified, which shall have a meaningful impact on SeQuent over the next few years. It is a matter of great pride for us that we were recently recognized for the second consecutive year by IHS Markit animal pharma as the best company with headquarters in India, Middle East and Africa for 2020, a strong testimony of our consistent outperformance since becoming a pure-play animal health company. All in all, we stay wedded to our culture of strong execution and, while being cautious, stay confident of both our road map and deliverables for the rest of the year as well as our medium term. I would now hand over the call to Tushar who will run you through the detailed financials. Tushar, over to you.

Thank you, Manish, and I wish everyone a very happy new year. While Manish has given you insights on the global business performances, let me provide some insights into the other financial aspects for the quarter. In the current quarter, that is, Q3 FY '21, with a revenue growth of 13%, we saw EBITDA growth of 34%, which represents approximately 290 basis points over improvement -- improvement over last year same quarter. On a YTD basis, we saw revenue growth of 15.5% with EBITDA growth of 42%, representing approximately 325 basis points improvement over last year. Our profit after tax has grown 83% for Q3 FY '21 to INR 372 million and 66% for 9 months FY '21 million to INR 878 million. Our performance for the current quarter includes certain onetime expenses amounting to approximately INR 38 million, largely towards consultancy costs for strategic assignments, as mentioned by Manish. These costs shall continue in the current quarter as well. Further, as you all are aware, the export incentive scheme, MEIS, has been withdrawn and the new scheme RoDTEP has been introduced -- is under implementation. We saw some impact of this change in the current quarter, which shall continue until the scheme is rolled out. We also undertook significant restructuring of our balance sheet and repaid all our term debts in India. While the current quarter saw only a marginal reduction in finance cost, as we recorded some prepayment-related costs, we expect our interest cost to less than half this -- from Q4 onwards. Our cash flow generation remains robust and has resulted in further reduction of net debt, which now stands at 0.6 to EBITDA. With such momentum in our cash flows, we expect to be net debt free within next 15 to 18 months. We stay extremely focused on the productivity of our capital employed and are happy to see ROCEs progress from 7.8% in FY '18 to over 21% in the current year. Structurally, we are managing risks by ensuring that all debts in respective countries are either local currency debts or are naturally hedged with their cash flows, thereby reducing the impact of uncertainties on the P&L. As informed during our earlier call, our effective tax rate stayed higher than the earlier guidance given due to the delays in assessments in certain geographies because of the COVID situation. This should normalize once the situation stabilizes. During the quarter, we consolidated our holdings in our Turkish and Netherlands subsidiaries by acquiring the residual minority stakes. We hope to continue on this consolidation exercise for the remaining businesses with minority interests. With growth in business, we are mindful of increasing needs for working capital requirements, and we continuously monitor the scene to ensure optimum utilization of capital. We have been able to drive growth without any increase in working capital, leading to an effective reduction in working capital needs. On the operations front, we have now extended our SAP systems to our Spanish operations as well. With this, over 75% of our global operations are now under SAP. The other European operations shall be covered within the next 6 to 12 months. Overall, we stay well on track for meeting both the operational and financial objectives for the year. With this, we can now open the session for Q&A.

[Operator Instructions] The first question is from the line of [ Akash Jain ] from [ MoneyCurve ].

I think I must first congratulate you. I think the numbers have been really good last -- especially last few quarters, especially on the margin front. I have 2 specific questions, Manish. One is on the margin side. So clearly, you had guided long-term guidance of improvement in margins year-on-year, but we seem to be doing better than that. Is it fair to assume that a bit of it is basically coming from a higher API mix and API is more profitable for us at the moment than formulations? The second question is on the formulations side, right? Do you think the second lockdown impact on the business is more severe than what we saw in the first COVID wave in Europe? And in Turkey, specifically, you have done very well. But there has been a huge negative impact on currency on our numbers. So is there a way to better manage currency risk as far as Turkey is concerned?

Yes. Thank you, Akash. And if you allow me to permit -- if you permit me to give a slightly longer answer, especially on the margin front, it will be better because giving a yes/no answer does not make sense. So if you look at our margins, we have been guiding to a margin improvement of 150 to 200 bps over a medium term as we've been doing in the past. This is conceptually based on 2 aspects of our business. One is a typical pharmaceutical business requires front-loading of investments, and secondly, given we are in animal health, which is a branded generic industry, it is also a higher fixed cost business because of field force requirements. Clearly, both these aspects suppress margins in the early phase of business, but also facilitate margin expansion as you scale up. And this is what we have been alluding to when we have been guiding on those margin improvement. This year, we certainly have performed ahead of our margin improvement guidance, and this is coming from increasing scale of our business across 3 areas: one is API; the Turkey business, which is an injectable business; and Brazil. All 3 businesses are doing extremely well and, obviously, yielding the margin expansion. This has been further facilitated by the inflection point that we have reached in India. And you will see that 100-odd percent growth that we have seen in India, obviously, makes our margins fairly attractive in this market as well. So all in all, clearly, this is not a flash in the pan. It is built around the way we have structured our business. And we do feel confident of margin expansion even going forward. The other way of looking at it is that Zoetis, who is the industry leader, commands an EBITDA margin of mid-30s, and we are currently at halfway level of that. So even if we were to consider Zoetis as an outlier, we still have a fair headroom for growth and have sufficient firepower in our business model to expand margins before we hit a plateau. Having said that, I do believe that going forward, our margin expansion should moderate, and I would probably guess 100 bps margin improvement from here on. Your second question was in terms of impact of COVID, especially the second wave. Clearly, the second wave is far more intense. I think people were not -- I mean there were -- acceptance of first wave was very easy in terms of lockdown, but the second wave of lockdown has been far more difficult. In Europe, we have manufacturing operations in Germany and in Spain, while conceptually or -- these operations are not to be impacted, but there are always certain difficulties of operating because there are a lot of women who work, when the schools are shut, they are not able to come to office and all that. So all in all, our manufacturing operations did suffer some slowdown and -- which we are now seeing easing out as Europe opens up. So clearly, we did see some impact of that in Q3 in Europe. Your last question was on Turkey. Turkey, in a way, is a star performer in our portfolio. It's a difficult market, which not many people can understand, but we have done very well for us. The currency has been swinging there. But if you would notice in the last 3 months, they have taken significant corrective actions, including freeing up the interest rates. So one of the big wins was the current President was controlling the interest rates and was not allowing it to move in line with the requirement, that has been freed. And therefore, you will see that actually Turkish currency now not only has stabilized but is strengthening against the U.S. dollar. So I don't believe there should be any impact of currency depreciation going forward. But more than that, what Tushar alluded to in his commentary, structurally, we have also derisked ourselves by having local borrowings rather than dollar borrowings in that geography. Does that cover your question, Akash?

Yes, yes, in a very good detail, and thank you for the detailed reply, Manish.

Yes. Thank you.

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

Congratulations on a very strong set of numbers. Sir, my question is, in your opening comments, you alluded to an API, I couldn't gather the name and -- wherein you had some specific comments. Could you kind of reiterate what it was?

No, I didn't mention any specific API at all in my opening comments. We only talked of overall growth in our API business, which has been growing faster than our overall growth with a 20% growth in the quarter.

Okay. So will this growth rate -- so kind of your capacities would have now been fully utilized. So -- and you have just pointed that there has been debottlenecking done. So how much should we expect that to add to the numbers?

So we have been generally guiding to around a 20% growth in our API business in the medium term. And in pharma, you always need to plan your capacities ahead of the requirement. So we are -- I mean we stay on track of kind of delivering our guidance of around 20%-odd growth on the API side of business.

Okay. And sir, you have several APIs wherein you are the sole VMF filer. So are these APIs commercialized? I think about 5 APIs is where you have -- where you are the sole VMF. So how do we understand, whether these APIs are commercialized? And how -- what could be the total addition that you could see from these APIs in your business over the medium term?

Yes. So very few of those APIs have been commercialized in U.S., as we speak, because, I mean, it's not only our API but even the formulator has to get an approval in U.S. before they can commercialize our API. So it is still work in progress. None of the APIs that we have been in our portfolio are game-changers per se because you do not have big products in animal health typically. But having said that, each of those products help us in delivering the outcomes that we have been alluding to. So this 20% growth or roundabout that which we are talking about comes out of multiple products and multiple commercialization. And what we like in our business model is we don't have the last over sixer hitters. We have more of Rahul Dravids in our portfolio. So we are happy about it. And there are no game-changers per se.

Okay. The growth that you guide in API business, would this be driven by new APIs that you commercialized or new customers? So kind of some color on the growth that you expect in the API space. Some existing APIs would contribute to that, new APIs and -- or new customers, basically? How is that going to deliver?

So I would split our entire growth into the 3 buckets, which you're referring to. All 3 will contribute. But the proportion is difficult to gauge because -- but it will be all driven by the 3 aspects that you mentioned: more customers for existing APIs; new APIS, more customers or new APIs commercialization; and of course, growth from our existing customers for existing APIs.

Okay. And sir, on this LatAm business, which was very strong during the quarter and has been -- even in the previous quarter, it has shown good growth. So what has changed there? Because that has been kind of been stagnant for a while and now it has picked up strong growth. Any color there?

We have been performing reasonably ahead of the industry in LatAm, specifically in Brazil for a period of time. So even if you look at last 3 years' performance, LatAm has been a good performing business for us. Having said that, it has really picked up in the current year, partly driven by our strategy of buying certain licenses and partly from the growth that market is seeing. So it's a collective mix of new products, which were licenses that we bought locally because anything in Brazil takes otherwise 5 years to register. So we have a different of buying licenses rather than waiting for our own development to commercialize. And that's what is yielding results for us.

So -- but you have your own pipeline of filings, too, because those will be higher-margin products, the ones that you file on your own?

No, I don't -- so certainly, the injectable portfolio that we are developing will be higher margin. But even when you buy in a license, we have a right to manufacture it ourselves. So that way margin does not differ for an in-licensed -- when I say -- it's not in-licensed product, it is a bought-out IP. So margins don't differ across this change. But yes, in our own developed products, injectables will have a better margin vis-à-vis the orals.

And you have started launching injectables in LatAm, is that so?

No, not yet. I told you that Brazil takes 5 years for registration. So there's no way it can happen so quickly.

But you would have a pool of filings there, which are already done, and so another 5 years you would have -- so every year, you would have your own approvals coming in?

Yes, in probably 2 years' time, we'll see our own approvals starting to show up. But until then also -- through a blend of IP acquisition and, of course, the overall industry growth, we will -- we are hoping to outperform the industry in LatAm.

Okay. And sir, anything on the -- so there has been an outbreak of bird flu. So will -- has that in any way impacted your business or will impact your business, poultry business?

Yes. Certainly, there will be some impact more in terms of collections rather than anything else. Having said that, I think that's one of our strengths of business model that we are not singularly dependent on any market or any particular animal. So yes, we do -- we are cautious about it as far as India poultry business is concerned. But will it make any impact on our guidance? Answer is no.

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

Congratulations on a stellar performance in this trying time. Manish, I have a question, I mean, from a little midterm perspective on the top line. Earlier, we were, I mean, guiding mid-teen kind of performance. Now with API expected to grow 20% in some of the formulation, for which we have got approval as well as -- I mean, geographically and [ GOT ], so would you like to revise our midterm guidance on the top line growth? That is one. And EBITDA, I'll take it up later.

See, Bharat bhai, this industry grows at between 3% and 5% across the world. So we are very happy with the guidance that we have given. It is not an easy guidance to even deliver over a period because there's always some pluses and minuses across the geographies that we are operating in. So I don't think we are looking to revise guidance any which way in the medium term. We are expecting mid-teens revenue growth with API growing faster than our formulation business in the medium term. There may be a couple of outlier quarters in this, but overall, at an annual level, you will see that kind of growth for us.

Okay. And this year, on EBITDA side, we have already, I mean, reported, for 9 months, 3% higher than -- a little more than 3%. So full year, the same kind of a guidance we'll -- do we expect? And then in midterm, again, we are now from -- revising 1.52% to 1%. So that -- does it factor because of the ESOP charges that we will be taking?

So first, yes, this year has been good for us. And as I mentioned in the previous question, there was somebody else, I think, to Akash, that it is driven by a couple of reasons with our scaled-up business in API in Turkey and Brazil and of course, India reaching the inflection point for us. To that extent, therefore, we believe we need to moderate our margin expansion going forward and which is why I said that FY '22 onwards, maybe instead of 150 to 200 bps, we should be looking at about 100 bps margin improvement. Having said that, this does not include the charges that may come on account of ESOPs because that is not determinable at this point of time and will be a noncash charge.

I do appreciate it will be a noncash charge, but -- whereas, I mean, in P&L when EBITDA comes. So...

It will have its own impact, but what I'm referring to is our operating performance without considering the P&L impact of the ESOPs.

Okay. Fair. And I mean on the -- our midterm, of course, you said that after 2 consulting firms come back, then we'll give midterm kind of revenue goal, 500 million or kind. So anything would you like to share at this point of time or post Q4 only midterm growth of -- hitting a target of 500 million?

Yes. I think middle of May would be a good time to meet up on that. So maybe either as part of our annual results or we will organize a separate investor kind of communication once we have all clarities, and we have alignment with the Board on the new plan.

Is it fair to assume -- correct that even that will also include Carlyle growth perspective on the -- for our company because of -- currently, we don't have a presence in the U.S. and China?

Absolutely. That's why I mentioned, while we are working with consultants, eventually, we will be aligning it and taking the blessings of our Board before we come back.

Okay. Fair. And one question for only Tushar...

Sorry to interrupt, Mr. Sheth, may we request that you return to the question queue? [Operator Instructions] The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.

Sir, just 2 things to check. One is the emerging markets has been dragging in terms of year-on-year growth. So where do you think this gets stabilized?

Sorry to interrupt, Mr. Manudhane. Sir, your audio is not clear.

Am I clear now?

Sir, can you use the handset mode while speaking?

Am I clear now?

Much better. Thank you.

Yes. Sir, just on the emerging market business, while this has been a drag on the overall revenue growth, where do you see this getting stabilized? Or maybe you're not taking a reversal in terms of growth?

To be candid, I don't have an answer, Tushar, for that because predicting global economies and the payment situations in various geographies is very, very difficult at this point of time. So rather than trying to drive that business, until there is a stability there, I don't think we'll change that market as much as we would like to. Having said that, I do believe that the worst is over. Crude oil is already going up. Most of the economies are bouncing back. So I do believe, I think, the worst is behind us as far as emerging markets are concerned. And irrespective of the outcome in that market, I don't think it really plays out in our overall growth strategy.

Understood. And just on the gross margin front again -- so basically what is it that is driving the gross margin? So how is the volume and the pricing scenario shaping up both year-on-year as well as quarter-on-quarter basis?

So Tushar will have a better answer to it. But from a business angle, see, animal health does not see the price fluctuations that you see in human pharma, and we do not have that flexibility of changing prices if there is a shortage and all. Protein markets around the world are reasonably stable under all environment. And therefore, I mean, none of our margin changes are driven for some price increases or anything. Of course, business mix has its impact. And Tushar, if you can elaborate on this.

That's right. The margin for the quarter that you see slightly higher than the trend is more on account of business mix for the quarter. You should look at the 9 months margin for more better understanding of what our margins are on a steady-state basis.

The next question is from Parin Gala from SageOne Investments.

I just wanted to ask, we have an acquisition -- we were talking about an acquisition in the United States. And I wanted to know if this is the consultant that's been hired to help us in that trajectory?

No. I don't think consultant has anything to do to help us to acquire a business in U.S., but they are kind of helping us identify what we should chase in the next phase of growth. U.S. is one part of it. But the acquisition strategy will be more determined by the Board and all -- and, of course, the management team because we have to find the right target. Consultant cannot help on that.

And have we found anything in that, sir, here?

Whenever that happens, we'll definitely be informing. So we are always on a lookout. And as and when we are ready to announce, we shall come back.

Okay. Perfect. And then on the China strategy, do we have anything on that front? I know you wanted to expand our footprint in that market as well.

Yes. So that obviously will take some time to shape up because it's a new market for us, and we are relying on Carlyle's expertise as far as that market is concerned. It's not a very easy market to understand. And in the current COVID environment, it makes it even more difficult. So I think that will take much longer to roll out.

And would we say we're still about 12 months away from our U.S. commercialization?

We are still about 18 months away -- between 15 to 18 months away from our U.S. commercialization, unless there is an acquisition. You have to bear in mind because of the current COVID situation, there are no plant inspections happening. And we currently do not have a formulation facility approved in the U.S.

The next question is from the line of Siddhant Bhandari from Highwest Global Management.

So I just wanted to understand sort of the rationale behind moderating the margin expansion. I mean if I look at this quarter, the incremental margin is close to 40%, and we've had a slowdown in formulations in Europe due to the COVID second wave. So I'm just trying to piece together why margin expansion should moderate next year. That one I didn't fully follow.

Yes. So Siddhant, we have been -- in the past, we have been alluding to about a 150 to 200 bps margin improvement year-on-year over the medium term. That was taking us to be maybe early 20s kind of EBITDA margins by FY '24. Clearly, this year has been very good. And probably, we have expanded our margins in kind of double the guided factor. So having said that, that was the sole reason for moderating that expectation. It's not that we want to not overachieve that, but we don't know yet. Our own business model was built around the -- I mean the prices have not changed per se for us to make any changes to our business plan or business model. So that's why we have moderated. There's no particular reason behind it. But what we have done is -- or when I'm talking of that is, we have kept the end goal as the same. And since we have already covered a lot of distance, so therefore, the curve has to slow down.

Fair enough. So there's no change in your medium-term guidance. It's more you're saying that you want to leave some buffer and it can slow down in the next 1 or 2 years or you don't per se expect the 4- or 5-year target to change that much, right?

Yes. Partly correct.

Okay. And my second question is with respect to the Europe formulations business. Sort of what growth rate do we expect in a sort of normalized environment, so if you don't have a COVID lockdown or something of that sort?

Yes. Siddhant, see, fundamentally, Europe is the most competitive amongst all animal health markets around the world, but it is also the thought leader for the industry for animal health practices around the world. Internally, we leverage a lot from our European organization, both in terms of products and relationships that drive our growth in other markets as well as our R&D. Growth this year has been slower at 2.7%. But historically, we have been growing at a compounded between 6% to 7% in Europe over the last 3 years, almost twice the industry growth rate in that region. So I do believe that we should come back to our historical growth rates of 6% to 7% for the Q4 and also for the medium term, some of which will be driven by our recent launches of Citramox LA and Halofusol, as also the commercialization of tulathromycin that is happening as we speak.

The next question is from the line of Saket Mehrotra from Tusk Investment.

Manish, can you throw some light on why the emerging markets' growth has declined? I mean is it specific to some particular country? Or what is basically driving this decline that has happened?