Viyash Scientific Limited (512529) Earnings Call Transcript
February 12, 2022
Earnings Call Speaker Segments
Ladies and gentlemen, good day, and welcome to SeQuent Scientific Limited Q3 FY '22 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 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 2022. 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 the stock exchange. The transcript for this call will be available in a week's time on the company's website. Please note that today's discussion may be forward-looking in nature and must be viewed in relation to the risks pertaining to our business. After the end of this call, in case you have any further questions, please feel free to reach out to the Investor Relations team. I now hand over the call to Manish to make the opening comments.
Thank you, Abhishek, and good morning, everyone. A very warm welcome to our Q3 and 9 months earnings call. As Abhishek mentioned, joining me on this call are Sharat Narasapur, our Joint Managing Director; and Tushar Mistry, our CFO. First of all, I will take this opportunity to wish each one of you a very happy and a prosperous new year since this is the first time we are connecting in the current year. With the third wave of COVID now largely behind us, I must admit that the nervousness that I had in late December at the beginning of the third wave is now replaced with strong optimism, especially on the business front. Coming to the business performance during the quarter. While our overall growth appears muted at 4.8% on a constant currency basis, this is largely on account of significant port congestion in India in December, which led to almost 15% of our API dispatches not making to our reported numbers. Overall, we saw a significant improvement in our API order book as well as dispatches in the quarter, which were almost at Q3 '21 level, which incidentally was the best ever quarter in terms of our reported API numbers. While albendazole continue to be subdued, our other API portfolio witnessed a 28% growth in the first 9 months. We also saw a recovery even in albendazole, with a sequential growth of 20% in Q3. This gives us strong confidence around API business being robust in Q4, with the growth momentum not only continuing, but even accelerating in FY '23 on the back of both recovery in albendazole as well as commercialization of our multiyear master supply agreement with a leading top 10 animal health company that we had mentioned, I think, in previous call. The peak potential for this product on this supply is in the region of between $10 million to $12 million. Our formulation business continued its sequential growth momentum with an impressive 18.5% growth year-on-year on a constant currency basis. Our strategic footprint in LatAm, India and Turkey continue to drive the formulations business. We were faced with extreme volatility in currency in Turkey. However, our proactive management initiatives ensured a 34% growth in the country without sacrificing on the margins. We continue to build Turkey as a major hub for our export business, and this recent depreciation makes this strategy even more attractive. Europe business also accelerated in Q3 after a period of muted growth. The industry has been plagued with rising and volatile input costs throughout the year. While the costs stay elevated, there seems to be a stabilization around the volatility. Our efforts to mitigate the impact of these costs through price increases is beginning to show in the numbers. It kind of had a very small impact in Q3, but we expect a much larger impact from Q4 as many of these price increases typically kick in, in the new calendar year. Overall, we envisage a sharp recovery in our operating margins and we expect to get closer to our FY '21 margins in FY '23 at least in value terms. Coming to a couple of corporate updates. In December, we signed a definitive agreement to acquire 100% stake in Nourrie in Brazil. This strategic acquisition is in line with our growth strategy and vision for SeQuent 2.0 and marks our foray in the fast-growing company and animal segment in Brazil. Nourrie acquisition provides us a portfolio of 23 commercialized and also a near-term pipeline of 17 products for pet and swine segments. We expect to close this transaction by end of February. Further, we also consolidated our holdings in our Brazil subsidiary to 100% by acquiring the residual minority stake. This has been effective from 14th or 15th of January. With this, now we have 100% ownership across all key subsidiaries except in Spain and consolidating over 90% of the profits of the company. Finally, as I mentioned earlier, we are confident of a strong recovery in our API business from Q4, which will drive strong improvement in our operating performance, both for Q4 as well as FY '23. I would like to end with a personal note, as you must have heard, after an exciting 8 years of leading SeQuent, I have decided to move on to the next phase of my life. I must admit that building SeQuent has been the most satisfying and enriching experience of my career. And I'm indeed indebted to all the stakeholders for giving me this opportunity. I would also like to highlight that this change will have little or no impact on the company, given the unique strength and positioning of the company in the animal health space. We have a clearly articulated vision and road map for SeQuent 2.0 under the strong guidance of Carlyle and the Board of Directors. And I take this opportunity to warmly welcome Mr. Rajaram, who has an enormous track record of performance to drive the company in this pursuit to be amongst our global top 10 animal health companies in the world. I will now hand over to Tushar Mistry to dwell on the financial performance of the company.
Thank you, Manish, and good morning all. Like Manish has given insights on the operational performance, let me discuss the financial performance for the quarter. Our revenue on a year-on-year and constant currency basis for the quarter grew by around 4.8% to INR 3.5 billion. This was driven by formulations, which grew by 18.5%, whereas the degrowth in API business, driven the logistics challenges brought down the overall growth to 4.8%. While gross margins are still below our expectations, we have started seeing traction from customers to accept increased prices though in a cautious manner. We also continue to work on our cost improvement programs on input cost side. Both these initiatives should see fructifying results from Q4 onwards. Marginally higher employee costs in some geographies, elevated freight costs and one-off expenses put some pressure on our reported EBITDA pre-ESOP be for the quarter, which came at INR 337 million. ESOP cost for the quarter was negative due to the reversal of ESOP cost for Manish. As we have been pointing out on the previous calls that this is a noncash expense, wherein majority of costs are expensed in initial years of resting, tapering off going forward. PAT for the quarter came at INR 171 million post minority. The growth in PAT on a sequential basis was due to a reversal in ESOP cost. Q3 saw some significant movement in Turkish currency, which moved from TRY 8.8 to a $1 to approximately TRY 17.5 and now stabilizing at around approximately TRY 13.5. While we do have only transition impacts on the P&L, such sharp correction will have some impact on net worth as investments in Turkey get devalued at closing rates. This impact is taken to results. While we continue to monitor the situation closely, it is important to note that our position as the third largest player with local manufacturing only strengthens our position in the market. On other aspects of balance sheet, we maintained our net debt on a sequential basis. Overall working capital to remain stable as we look -- as we took some conscious measures of curtailing the same in some geographies. The put option available to Brazil minority shareholders has now been concluded, making Brazil a wholly-owned subsidiary. With this, we have now only -- with 40% minority stake in Spain and a very negligible one in Sweden. Overall, I'm very optimistic for the coming quarters as input costs are rationalizing and the demand environment has improved. We believe we have bottomed out in terms of margins, and we will see improvements in all the parameters of the coming quarters. Finally, I would like to inform that Christensen, our IR partners, have been acquired by EY and on account of conflict of interest and as EY are also auditors, the contract with Christensen has come to an end. They were very value partners in our IR program, and we shall miss their insights going forward. We shall keep the investors updated on new partners moving forward. That concludes my opening remarks, and I would request the moderator to open the floor for Q&A. Thank you.
Prasanth, can we take the Q&A, please?
[Operator Instructions] The first question is from the line of [ Sanam Jain, ] individual investor.
Good morning. This is [ Sanam Jain ] here. Congratulations on a decent set of numbers. So I had 2 questions for the management. Number 1 is we are saying in the investor presentation that 15 percentage of our API dispatches is stuck at the ports. So is it likely to spill over to Q4, right? This is most likely deferred revenue. That's question number one.
That's correct, [ Sanam. ] That is not recorded as revenue and will be recorded in Q4.
Okay. I understand. The other thing I wanted to ask, based on the investor presentation, is in a regular year that is not affected by COVID, what percentage of our API business is contributed by the albendazole molecule?
About 1/3 of our API revenues is contributed by albendazole, and this is split for both -- because albendazole is both human and animal health product. This is the combined sale, which I'm referring to.
Okay. And WHO remains our big customer as far as this molecule is concerned, right?
That's correct. That's where there was a demand lag because if you recollect, which we had mentioned, that the schools in Africa are closed, and therefore, there was nothing WHO could do to distribute the product. Now that the schools have reopened, the WHO demand is coming back.
Okay. So to what I understand, schools in Africa are now open, right?
That's correct.
So -- have the WHO released the dispatch orders? Or what is the current position now vis-a-vis the last quarter?
That's why -- see WHO does not release orders on us because we are an API supplier. WHO releases their orders on the formulators. But the reason we are building -- we also mentioned that there was a -- about 20% improvement in albendazole in Q3 versus Q2, and we are also seeing a strong demand for Q4 and thereafter. So obviously, the real change is around the WHO-related demand, which is driving this growth or recovery of this sale.
[Operator Instructions] The next question is from the line of Prashantkumar Hazariwala from Solitaire Financial.
Congratulations for a good set of numbers. It's a good comeback from the quarter 2. And so my question is you have mentioned something multi -- with the top 10 animal partners to do something, right? So what will be the quantum for this contract per year?
No. So I think I've already given that number, that at peak, we expect about between $10 million to $12 million of revenue, incremental revenues from that agreement and a significant part will also occur in FY '23. So obviously, it will not be peak in FY '23, but it will be a fairly significant number in FY '23.
It will come into '23, right?
That's correct. Prashant, we can't hear you properly.
Prasanth, can we take the next question?
As there is no response from the current participant, we'll move on to the next question from the line of Bharat Sheth from Quest Investment Advisors.
I mean, is the 15% of API, which will be -- could not be dispatched because of congestion at port. So absolute amount is approximately how much?
I mean, it's very mathematical. It's upwards of INR 15 crores. But I would just want to clarify, it is not dispatch. It was dispatched from the factories but it was stuck at the port for lack of vessels.
Correct. And second question is that you said that in FY '23, we can expect to reach FY '21 margin in absolute term or I mean a percentage, if you can just clarify a little more on that.
Yes. So at this point of time, I think we have fair confidence to meet the absolute numbers. But as the year rolls by, I mean, how that confidence moves further. And so obviously, as a percentage, it will be lesser, but we would be covering a significant part of the lost ground.
Okay, okay. And second thing, pertain to the same thing to Tushar. So Tushar, how much debt because of -- would be on account of reduction of up course earlier, we were looking and now which has come down significantly in this quarter. So this one ESOP cost, which we write off that is a onetime or so cumulative impact, if you can give a little more color?
Bharat, we refer a onetime reversal. So it is an impact, full impact taken in Q3. Going forward also, Manish will not be a part of this cost.
Yes, I do understand.
Yes.
What will be the Q4 ESOP cost roughly?
About INR 78 million.
And that will again come down significantly from -- in FY '23? Is that fair understanding that run rate?
FY '23 for the ESOPs that are already granted to other employees, the costs will come down. It will taper down, as I mentioned earlier. But if any new ESOPs are granted, to others, the cost for that can build up.
Approximately, absolute for full year will be how much?
For next year, it is difficult to mention at this stage. We will revert on this once that clarification -- that tariff comes up.
Sorry. So coming back to Manish, so after factoring this, we are talking of maintaining say EBITDA in somewhere near range of FY '21 or without that?
No. So Bharat, we always talk of operating performance, which is pre-ESOP because that's what we directly control. ESOP is something which is technically in a way, because it is a noncash cost and it has a lot of accounting and somebody else may join and all those things come in. So we are only referring to pre-EBITDA cost.
ESOP.
Pre-ESOP cost, sorry. Pre-ESOP cost.
Okay. Fair. And thank you and wish you all the best Manish-ji in your new endeavor.
Thank you, Bharat-ji.
[Operator Instructions] The next question is from the line of Rushabh Doshi from Proinvest Nirmiti Investment Advisors.
So my first question was like a lot of things have changed in Turkey. And as investors, what we see is that they lack some basic stable policy or the way business should be done. So what is our current stance on Turkey because what I see is that we are working very hard, but the currency depreciation it just pulls us down back again. So what is our view going ahead? Are we going to make incremental investments or we might think of exiting it in the near future?
And Rushabh, what is your second question? If you can ask that also so that I can respond comprehensively.
Yes. So my second question is more to do with our API contract with one of the top 10 customers. So is that going to start in Q4 or Q1 in the next financial year? And just one last bookkeeping question. Our CCR to EBITDA ratio has been -- it's been one of the great in the Indian industry. So in this year, what would that number look like? So these are the 3.
Tushar, you would like to respond to the third one first, and then I'll give the answers?
Yes. So the EBITDA to cash conversion that we used to have earlier prior to FY '22 was upwards of 75%. But current year, we are seeing that pressure on EBITDA to cash conversion. Current year, we should come down below 40% is my estimate at this point of time. FY '23, we should again see this cash conversion going up in the quarters to come.
You're taking the reported EBITDA or the adjusted one for ESOPs?
This is pre-ESOP because as I mentioned, ESOP is a non-cash item. I'm taking pre-ESOP.
Correct, correct.
So coming to your other questions, and I'll again take the second question first, which is about the commercialization of the new contract. So it should start -- it will start in next year. Probably towards the end of Q1 or early Q2 would be the first supplies against that contract. And that's why I said we will not hit the peak for the next year. Peak will be somewhere in FY '24. Coming to your main question on Turkey. See, I think this is a very broad question. And the recent hiccups is nothing to -- Turkey by itself is one of the very important animal health market. It's amongst the top 10. Turkey is a big exporter of animal health products for the region. And we have a strong position there with local manufacturing. It's also a highly injectable-based model that we have in Turkey with the EU-approved facility. So in our scheme of things, the recent event actually makes Turkey even more attractive, not only from local market perspective because many of our competitors there are importing products and that, obviously, this depreciation makes it even more difficult for them to make them less competitive. That is one part. And the second part is because we are also developing Turkey as a hub for exports, this depreciation actually works better for us, making it even more competitive. I must say that today the cost of manufacturing in Turkey is actually significantly lower than in India. And so therefore, Turkey is actually playing out very well for us. Our outlook for Turkey has not changed. We look at Turkey as a business, which is both Turkey and export markets, and you will see significant growth coming from Turkey on our business. Does that answer, Rushabh?
Yes, yes, partially. But are you not afraid of investing more in Turkey that things would backfire moving ahead?
No, we had already fully invested. I don't see we are -- I don't think we are increasing our exposure in Turkey, but we are leveraging that exposure even better and even more. So finally, in business, if you start reacting to these kind of things, then you can never build business. We build an animal health business when nobody envisaged from India. We've got into Turkey and Brazil, which very few Indian companies dare to do. And these are highly performing outcomes for us. So I take it as an opportunity and not act like an investor. We are eventually in creating long-term sustainable, valuable business, and I believe Turkey is a very important element of that in the business that we are in.
[Operator Instructions] The next question is from the line of Vishal Manchanda from Nirmal Bang.
Sir, if I look at LatAm performance, it has improved significantly on a quarter-over-quarter basis. It's almost up 30%. So can you share what has driven this performance?
Yes. So Vishal, we have been consistently outperforming in LatAm, largely in Brazil. As we add more products, commercialize more products and also gain more accounts in the local market. So I think there is no particular reason and that you'll not see fluctuations in our Brazilian business. Quarter by quarter, every quarter, they have been growing, and this outperformance continues. It has been one of our star performing businesses. We had bought this company from bankruptcy. And you can -- if you look at the, I think, 5-year track record from -- I don't recollect the numbers, but we have 5x of where we started from. So there is no particular reason. It's a superior execution that the team does there.
Right. And there is no inorganic component to this. So it's entirely driven organically the quarter-over-quarter improvement?
Absolutely. The only inorganic will start showing up in Q4. And that too, it's a very small one.
Right. The Nourrie acquisition.
That's right.
Yes. And sir, on the gross margin part, can we expect that to come back in the next quarter around similar levels as you were doing in the past? Or it will take some more time to be normalized?
We expect a recovery. Can we go back to that level immediately? It will take time. I don't think it can be done in a year because the costs stay high. Globally, every commodity price stays high, and it is difficult to pass on all the costs to the customers, okay? But we will make a reasonable journey during the year.
Got it, sir. Okay. And sir, just a broader question. So if you look at SeQuent formulation business, so in terms of the -- can you give a number as to what number of molecules we would be covering out of the total number of molecules that would be approved for animal health and have patent expired if there is a number that you can share on that?
I don't think I have a number because nobody even knows the total number of molecules in animal health. But if I were to make a wild guess, it will be between 15% to 20% of number of molecules. This I'm talking from a formulation's angle and not from API angle. API will be less than 10%.
Okay, okay. And there is an opportunity for you to kind of -- so you are working around adding molecules or you are working around making some existing molecules more widely available. So what's that you would look at making existing molecules more widely available or adding more molecules to the existing pie and getting deeper into existing geographies?
So Vishal, it's a mix of both. So animal health, that's why I keep saying it's a very dull and boring industry. There are no big ticket items to go after. You have to do everything to get your growth going. And that's why it will be deeper penetration as also enhancing the basket and partly get into new markets. So it's a combination of all the 3 that will drive our growth. But the good thing is it is a sustainable growth and a profitable growth. That's the beauty of this industry.
[Operator Instructions] The next question is from the line of V.P. Rajesh from Banyan Capital.
My first question is with respect to the margin guidance that we have talked about a few quarters ago that this business could be in mid-20% kind of margin in the long term. How does that stand now given the disruption we saw this year?
No, I don't think this year has changed anything in terms of our business outlook, it is also the dynamics of the industry. So there has been abnormal cost pressures this year. It is not limited to us. I think it's all across. We are living in a hyperinflation economy at this point of time for various reasons. I think over a medium term period, we have no reason to believe that we will not be at the levels that we had envisaged earlier. Probably it will be a year or 1.5 years later.
Okay. That's understandable. So are you saying that cost pressures will come down incrementally from here as the supply change that we stored or are you saying that we will grow so much faster that we can make up for that? What are the levers that will bring it to that potential trajectory?
So there are 3 or 4 things because, again, there are no straight answers. One is, obviously, we are passing on the cost increases. And while it takes time to get adjusted or expected, but it is going through. Second is we are also working on our own cost efficiency programs because whenever you face pressure, that's when you tend to also look within on how -- what you can do in terms of your process efficiencies. And there is a very proactive program that we are running around that. And the third thing is while the costs have gone up and there was immense volatility around the costs. But at least now it has started stabilizing. It's not coming down, but it has started stabilizing. And once you have stabilization, you also have a better ability to predict. The last 9 months, our challenge was where to even peg our prices. So it's a combination of all the 3, which is giving us the confidence of recouping our margins.
Understood. And my other question is that the change of guard in the top. Does this change anything in terms of our exploration and strategic road map to get to, let's say, top 10 animal health care companies in the world or in terms of any other major strategic shift that one can expect?
No, I think SeQuent is an institution. We have a very clearly articulated vision for SeQuent 2.0. It has nothing to do with the CEO or MD, it's a corporate vision. So for me, I do not believe there will be any change. It's only a change of individual.
All the best Manish for your next career aspirations. Look forward to interacting with you then.
Yes, thanks, Rajesh.
[Operator Instructions] The next question is from the line of [ Varun Pinto from Value Educator. ]
Am I audible?
Yes, please.
So my first question is about the Germany facility, the Bremer facility. So what is the status of that satellite? Have we finished like -- have we gotten any update from the U.S. FDA on when they will be visiting?
Yes. And what are your -- what is your second question so that --?
So my second question is about Turkey. So what regions are we look -- what countries are we looking to export from like the Turkey facility? Is it just like the Middle East and the Eastern Europe and Europe countries or like anywhere else as well?
Yes. So I'll again take the second one first because that's much easier. So Turkey is a EU-approved facility, and it is a comprehensive facility across 8 manufacturing formats, including injectables, orals and liquids. So we are targeting both EU or rather, I would say, ex-U.S., everything else is being targeted from Turkey. While Germany is being developed only for the U.S. market in the strategy going forward. Now coming to Germany. This is the only project which we kind of got derailed because of COVID. So we had to undertake a scale-up of the facility for U.S. FDA and also upgrading for the FDA. This project was to start about 18 months back, but there was nothing we could have done in last 18 months. As we speak, the project will be taken up from April this year and the facility will be ready to be offered to U.S. FDA by end of the current year. So that's the current status. We expect inspection next year.
All right, sir. And about the CapEx for next year, could you give us some details on that?
So again, I think we have conveyed that in the past, we are envisaging an investment of a little over INR 100 crores over the 2-year or 18-month period. This will spread between Brazil, a very small bit in Brazil, but in Germany, in Turkey and in India. And it will be in the region of, as I said, a little upwards of INR 100 crores over next 18 months.
The next question is from the line of Chintan Chheda from Quest Investment Advisors.
Sir, my first question is on the API business. So excluding albendazole, we've shown a pretty strong growth this time of 28%. So can you just throw some more light like what has led to this kind of growth?
I mean, that is part of our business strategy. It is -- see, if you recollect, our focus is on regulated markets and regulated customers. And once we are part of their file, and more and more customers are putting us on their formulation, this growth is -- that was also one of the reasons why we had been guiding to upwards of 20% growth in our API business. So there's nothing -- there's no reason. It is part of our business strategy, and we are uniquely positioned in this space with the only U.S. FDA-approved vet API dedicated plant, and also a portfolio of 30 commercialized APIs and all the big companies already are existing customers. So they are -- we are actually penetrating deeper and deeper with them.
Okay. So how many molecules we would have added in the first 9 months?
We, I think, have done 3 filings, 3 new APIs have been commercialized. But see, none of this really matters from a current year revenue perspective because what we have filed this year is not what has changed the growth. What we had filed 2 years back is what is reflecting in our growth this year. Our current filings will only start reflecting in our performance maybe between 2 to 3 years down the line because formulator has to take those APIs and then validate using our API.
Yes. So annually, we can expect 3 to 5 filings every year or that number can go up also?
No, no, that's correct. I think 3 to 5 -- animal health is a very definite world. It doesn't have the number of molecules that you see in human pharma, okay? So I think we are very happily placed with 3 to 5 APIs each year.
Okay. So once this albendazole stabilizes, we expect 20% plus growth on this business, API business?
Absolutely. You'll start seeing it from Q4 itself. That's what I've been escalating too.
Yes, I got that. And sir, secondly, my question is on the Nourrie acquisition. So how does it complement or add more synergies to our existing business in Brazil? Can you throw some light on that?
Yes. So I think if you recollect, I mentioned that there is a portfolio of 17 near-term products between swine and pet animal segment. Now the swine segment is where we are currently strong in, swine and poultry. So obviously, a part of this additional 17 products, which are in swine segment, will add wings to our existing business. And of course, the rest -- the second part is we get a foray into the pet animal business, which is currently small in Nourrie. But with the execution team that we have in -- leadership in Alivira, Brazil, certainly, the growth will be far better than what Nourrie could do in the past.
To just understand more on this opportunity. So what could be the size of the companion market in Brazil. And what are the top 3 players?
No, I think this is -- obviously, it is strategic information. We are happy to have a separate conversation around it. But Brazil, just for information, is the fourth largest companion animal market in the world. And it is the fastest growing in that segment across the world.
Got that. And sir, one more question is on the German facility, now what is the total CapEx that you are planning to do? And what would be the asset turn on that CapEx?
So our total investment -- additional investment is in the region of $6 million, which will happen in this project, which covers both hardware and software. Asset turn currently is negligible. I mean it is -- currently, it's good, but with this new investment, initially, it will be very low because the FDA approval and commercialization only will trigger growth there. So initially, the asset turn will be low. But once the approvals start coming through, it will be one of the biggest drivers of our growth in year 4 and 5 of our strategy.
Okay. And sir, lastly, what can be the expected tax rate for FY '23 and '24?
Tushar?
It should remain within this 20% range.
20%?
That's correct.
[Operator Instructions] The next question is from the line of [ Arvind, ] individual investor.
Sir, first up, a clarification question. So first is, the new MD, CEO will join in. So there is not going to be any major ESOP costs associated with him, right? Because the way the account or the ESOP charge will see a sudden increase post the joining of new -- would it be a right assumption that there could be a jump in the charge from INR 78 million number that you indicated?
I think this is a matter of NRC to decide. I don't think we'll be able to give clarity on that because once he joins based on what NRC decides and it will also require shareholder approval. So once all things are known to us, it will be properly accounted. But right now, we do not have any visibility around that.
Okay. So second question is WHO you indicated that the revenue should start flowing in. Is it possible to indicate it indirectly how big is the WHO revenue for us? I know you don't have a direct revenue, it's via formulators, but how big it could be? Generally, in a normalized year, it is 10%, 20% or it is more probably?
No, no. It is not even, say, one, precise number is very difficult to give because even we don't know that. But roughly about less than 10% or above 10% of our API sales might be linked to WHO, supplies of albendazole.
Yes, I was thinking about 10-odd percent. The second question is on Brazil and Turkey, now these are the markets which are generally very volatile as far as currency is concerned. So when we look at translated growth in INR terms, even if you do very well over there, so generally, it has a volatile impact because we have seen this happening across various other companies who have exposure over there. The translated growth is generally very volatile. So how do you look at it? Because when you look at the rupee term growth, how are you looking at Brazil and Turkey in that sense or even LatAm as a whole, I would say, and Turkey. Is there any thought process you can help us understand? I understand your business case is very strong and which I agree with you.
Yes. So, see, we obviously monitor both constant currency growth or the reported currency growth as well as the local currency growth. Both for us are important growth parameters. And we always have a budget around it in terms of if there is a dollar price in our internal monitoring as well. Now let me respond, see Brazil was extremely volatile, maybe 7 or 8 or 10 years back. But if you look at the last 5-year track record of Brazilian currency, once they got it right, it is more or less in line with the Indian currency behavior. So there is a small depreciation every year, but largely how Indian currency behaves as well against the dollar. Turkey, it was -- it is the other way. It used to be fairly stable, but last couple of years have been volatile. Probably the volatility has peaked this year. I believe there will be elections soon in Turkey. And again, see, eventually, nobody -- no country can afford these kind of volatilities. And if you go to Turkey, you'll see it's a highly throbbing economy. So all in all, from a monitoring and measuring performance perspective, we monitor both. Are these economies not vibrant? Answer is they're highly vibrant and consuming economies, which is what is important for us, very big animal health markets. And with a long-term view, I think this all balances out. Hello, [ Arvind? ]
[ Mr. Arvind, ] does that answer your question?
Hello?
Yes, [ Arvind, ] does that answer the question or you have anything more?
Yes, yes. So you answered this part, there is one more question, if I can squeeze in. With respect to this new contract that you indicated with among the top 10 animal health, which is going to start this year. Now can you just remind us the nature of this contract? Why I'm asking is that we were looking at using this as a base and expanding on that, trying to add more clients or more regions, et cetera. That was our initial thought process. Now where are we in that? And what is the delay that we are seeing because of this entire disruption that has happened?
No. So I think, [ Arvind, ] this is the second contract which we are referring to. What you are referring to is the first one, which we had announced about 18 months back, okay? This is the second contract. This is a supply agreement. It's a product which is developed by us. It is our IP and it is a commercial supply agreement. While the first one, which we had talked of in the past, was both a supply agreement and also it had an element of CDMO. So the second one, the one which we are talking about driving growth for FY '23 is not a CDMO part of business. It is a supply agreement, purely backed by our IP.
Okay. Now how are you looking to build on this. Now you have 2 contracts over a period of 18 months, which is a very good thing. But from here on, how should we look at it? Can the size of the contracts go up or can you be deeper into this client on similar nature of contracts?
Absolutely. It is both, not only the product -- I mean, we may start with, say, 5 tonnes 1st year, 10 tonnes second year, 20 tonnes third year. So that is one. Second is number of products getting into that contract as you build relationship and they develop confidence in our supply chain or in our ability to service them. This is the only way to grow the business and that's what we are good at.
So my question was when can we start seeing that impact. Because it's a long time to develop the process. So where are we in that process? I was trying to understand that.
Yes. [ Arvind, ] that's why, see, when we talk of 20% growth in our API business for the medium term, it is all stemming from these. You forget this year. This year was the exception, where then we'll end up with a flattish API revenue. But otherwise, we have been consistently growing at close to 20%, and we continue to maintain this forecast in the medium term.
This is helpful. Just one clarification. Turkey, can you just indicate what were your average exchange rate for the quarter? And where it is and how should we look at for Q4, it will help us to understand the extent of impact sequential, positive impact that we could see from that.
The average exchange for Turkish Iira...
And how do you look at Q4 or current rate?
Yes. So average exchange rate for Q3 was 7.2% for the quarter. That is Turkish Iira to INR. With the current levels are at around 5.5%.
Calendar 5.5%, but what was your Q3, I missed that. Sorry for this.
7.2%.
7.2%.
7.2% for Q3.
Okay. So that is an immediate impact that we will see sequentially?
Yes, that's correct.
The next question is from the line of Bhavesh Gandhi from YES SECURITIES.
Just 2 questions. First on Turkey, given the local currency growth that we had, we would have some element of market share gain. And as you alluded, competitors are facing pressure because they are importers. So going forward, is this sustainable or once the currency stabilizes and the competition is again on its feet, we might see some of this ebbing away in terms of growth? And second is on the pets business, if you can provide an update for India and some of the other select geographies? And when can we expect them to see -- to move the needle in terms of revenues?
Yes. So Bhavesh, Turkey, again, let's not look into what is happening now. But if you look at a 5-year picture for us, it has been a consistently outperforming business. That further gets strengthened by what has happened in the recent past in terms of currency. So I do not believe or I have a very strong belief that Turkey will continue to outperform even faster going forward rather than slowing down even if the others get back. Actually, we have not seen the impact of that in the sense that the weakening -- they were carrying inventories. So their struggle will be in FY '23, not in FY '22, as they import new products with a fresh currency rate. So I expect actually a very strong performance in Turkey in FY '23 and thereafter. Now coming to -- what was your second question?
The pet business, sir.
The pet business, yes. So strategically, you will see that we have chosen only 3 markets for pet business, which is India, Brazil and Turkey. In India, we launched our own products a couple of months back. It's not a great time to get into a new business because doctor connectivity is very difficult to establish in the current environment. So I expect minimum 12 to 18 months before it starts making some contribution to our numbers, meaningful contribution to our numbers as far as India is concerned. Brazil, we have chosen an inorganic route. So you'll see a very small delta in Q4, with some reasonable numbers starting from next year. As far as Turkey is concerned, we are still evaluating. The reason is simple because based on our India experience, we know establishing a doctor contact or connect at this time is not so easy. So we would rather wait for the environment to improve before we launch.
Can I squeeze in one more?
Yes, please go ahead.
So just on the product supply to the top 10 animal health, if you can just elaborate what is the nature of this contract since we own the IP, so is it a combination of transfer pricing plus profit share? What is the nature of the contract?
No, it's a standard supply price contract. I mean, there is a price with the flexibility to review the price every year in terms of if there are any cost pressures. There are certain minimum volume obligations and forecasting and all that. It's a very typical supply contract. Let's see the key in these supply contracts is when you get into their file or their regulatory approval, you are there for good, unless you goof up.
Okay. And just a follow-up on this. So we presume would we be the primary suppliers? Or just like in human pharma, you have a primary and secondary backup. So where are we placed in this? Are we the primary or the secondary supplier API?
So Bhavesh, you always start because it's an old product. They are already sourcing from somebody. We start as a secondary. And then you claw to become a primary based on your superior supplies. So which is what is going to happen in this case also. I think the difference, of course, one more difference a little more competitive, and I wouldn't dwell into it much is that we are uniquely positioned in this molecule, given the supply chain challenges of this molecule.
The next question is from the line of [ Nirwan, ] individual investor.
I have 2 questions, sir. The first question is regarding the API revenues for this financial year. In the last con call, you had mentioned that you expect to end the year flattish compared to last FY. So given that INR 150 crores is pending, what is your confidence on that? And second is, can you elaborate a little bit more on the erosion in shareholder equity due to the Turkey business? Like what kind of assets have been impaired for this equity erosion to happen?
Yes. So I'll answer the first and Tushar the second. So as we had indicated that we will be ending the year fairly close to our last year's API numbers. We stay reasonably confident of that. Say for any logistical challenges, we should be fairly close to that number. We are fairly confident based on the order book and the dispatches because that's in our control. So we are very confident of that. So say, for any logistical challenges, we are well placed. Now coming to the currency.
So on the reduction in the -- our network, first thing, let me clarify that this is on account of impairment. Impairment is a different terminology all together. This is on account of transition of the Turkish balance sheet from Turkish lira to INR. So whatever is the difference in the exchange goes to the reserves. And the impact of that has reduced the reserves to that extent. So we don't see any impact due to impairment on this account as of now.
Okay. So it is because the reserve, the valuation of the reserves have gone down, right?
Yes, that's right.
Okay, understood. And one more follow-up question, Manish, you mentioned that albendazole was 30% of the API portfolio approximately. So if I compare the last FY Q2, Q3 API numbers with this FY numbers and considering you clocked in 25% to 28% growth in your other API buckets, is it fair to assume that albendazole sale had almost gone down to 0 in quarter 2, quarter 3? And therefore, how do you see this pickup happening in quarter 4, like are we going to come back to the full 30% value? Or is it going to be closer to 15%, 20%? Like I'm just trying to get a sense of the scale of the comeback because in the last quarter con call also, you had mentioned that you were expecting from this quarter, things to improve, but it seems that it hasn't improved much.
No, first, I want to clarify that it has improved in Q3 and say for the logistical challenges if you adjust that 15-odd percent, you will see that actually, there was a significant improvement in our API business. But unfortunately, for lack of vessels and whatnot, we could not recognize those revenues. That is one. Secondly, I think the problem with these numbers is you look at it quarterly and for the numbers that I'm alluding to are the annual numbers. API business is a B2B business. You can't kind of replicate it on a quarter-by-quarter basis. So albendazole maybe 30% in 1 quarter, maybe another number in another quarter. So look at it more holistically and whatever numbers that we are talking of are more at a full year level and not at a quarter-by-quarter level.
[Operator Instructions] We will take the last question from the line of [ Rajiv Venkatesh, ] individual investor.
I have a couple of questions. So Zoetis brings our customer -- they have been very rampant on the growth prospectus from China and Europe. But in our investor presentations, I don't see much growth from Europe. So I just wanted to know what is your thought process on this? And my second question is on the China swine market issues. So are you directly marketing our formulations or still applying to the formulators there? I just wanted to know what exactly is the thought process over a period of time, especially in China?
Yes. Thanks, [ Venkatesh. ] See, we do not have a China strategy, and we have been very clear about it. We have 0 sales or exposure to China. We do buy from China, of course, but we don't sell anything in China. This is something where then we actually expect Carlyle to play a role. And unfortunately, obviously, because of COVID, we have not been able to make progress. Can we ignore China? Answer is no. It's the second largest animal health market in the world. So there is something that we need to eventually play out. Coming to Europe, I think it's inappropriate to compare us with Zoetis because we are totally different companies. They are an innovative company. We are a generic company. They are more in pet animal segment and that's what is giving them confidence to grow there. We are more in the large animal business that's something which is stable. There are a lot of complexities around it, and especially for a smaller player today, right now, given the COVID scenario wherein you can't go and meet the doctor so easily, therefore, our growth is challenged. As the world opens up, you will see a recovery, both driven by new products as also enhanced customer connect as the years go by.
Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments.
Yes. Thank you once again for joining this so early that too on a Saturday morning. And we do hope we have been able to answer most of your queries. If we have missed out any of your questions, kindly reach out to our team, and we shall get back to you offline. Thank you, and have a good weekend.
Thank you. Ladies and gentlemen, on behalf of SeQuent Scientific Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.
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