Viyash Scientific Limited (512529) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the SeQuent Scientific Limited Q4 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 fourth quarter and full year ended financial year 2022. Today, we have with us Mr. Rajaram, 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 website. The transcript of this call will be available in a week's time on the company's website. Please note that today's discussion may be forward-looking in nature and must be viewed relation to the risks pertaining to our business. After the end of this call, in case if you have any further questions, please feel free to reach out to the Investor Relations team. I now hand over the call to Mr. Rajaram to make the opening comments.

Good morning, everyone, and a very warm welcome to our quarter 4 and full year '22 earnings call. Joining me on this call is Mr. Tushar Mistry, our CFO; and Sharat Narasapur, the Joint Managing Director. I'm really happy to address this forum for the first time in my capacity as the CEO and Managing Director. 6 weeks into this role, I'm really excited to be part of the journey at SeQuent, and I'm really looking forward to building this company with the team here as the major global health, Global Animal Health company. First of all, I would like to start off by expressing my gratitude to my predecessor, Mr. Manish Gupta, the former Managing Director and CEO, who has led and grown this company into such a fine institution. We are today the largest animal health company from India, and we are currently amongst the top 20 animal health companies in the world. And that's something to be very proud about. We have a presence across 100 countries. About 2/3 of our revenue comes from regulated markets. Our strategic capabilities include a formulations business, which has a front-end presence in key animal health markets of Europe, Brazil, Turkey. And at the same time, we are the only company in India to have established a U.S. FDA-approved greenfield veterinary API facility. So this is a very unique combination that we have. The major credit, of course, I must say, for the company's significant achievement goes to our more than 1,900 talented colleagues operating across multiple geographies who have been instrumental in this phenomenal journey of the company. But as outlined throughout this year, the company is now entering its next phase of growth, which we have headlined under SeQuent 2.0. And under the SeQuent 2.0 strategy, we envision a bigger, bolder and a more ambitious organization that is focused on growing penetration in existing markets as well as expanding our scale in newer high-growth geographies. Coming to recent times, last year were certainly filled with multiple challenges. We have emerged stronger as an organization, and we are progressing well on our strategic plans. No doubt there are uncertainties relating to geopolitical issues in Europe. There have been sporadic COVID lockdowns, inflation is a worry and the ongoing disruptions in supply chain continue. Nevertheless, we are very confident of the underlying strength and the performance of our business. If I look at some of the numbers that we have released, our API business generated nearly INR 127 crores in revenue last quarter. And this is the highest revenue that we have registered in any quarter in the history of our operations. In this fiscal, in fact, the API business has now clocked INR 430 crores in revenue. And we have begun to successfully complete our customer EHS audits. There have been no critical observations in these audits. Facilities, which are there in Mahad, have received the relevant ISO certifications for EHS. We have also successfully commercialized 3 new APIs. We have submitted 1 VMF filing. And if you look at an aggregate level, our progress report depicts about 24 USVMF filings and 11 CEP approvals. Our other investment, which is in Germany, the U.S. FDA upgrade has resumed after a stock which had happened in recent times because of COVID, and that's progressing well. And if you come to our formulations business, it continues to build on the momentum that it has started on last year, and we see some good growth coming in that area as well. I'm glad to report that the business has delivered heavy growth in line with the strategy, which was outlined last year. And if you look at it at a constant currency basis, the formulations business grew 13.5% and has registered INR 980 crores in terms of revenue. This top line has been boosted by excellent performance in our LatAm business anchored in Brazil, which grew by 42.1% and we've got a much higher contribution from the India formulations business where we've crossed the milestone of INR 100 crores in revenue, clocking 30.5% in growth. As far as Turkey is concerned, despite difficult macro environment conditions, our plan continues to remain on track. And we do see the strategic advantage ahead, both as a home market for Turkey as well as a beachhead for exports from Turkey. And this effort on a constant currency basis, we are seeing that we have registered a revenue growth in Turkey of 17.6%. And therefore, really, if you put all the operations of SeQuent together, we have crossed INR 1,400 crores with the revenue crossing 7.2% last year. As we progress further, a key component of our SeQuent 2.0 strategy is really to consolidate our acquisitions, which we have, and we achieved another milestone there by picking up 100% stake in Nourrie, which is now a fully owned subsidiary in Brazil. And this acquisition will enable us to scale up as Nourrie provides a portfolio of 23 commercialized and also a pipeline of 17 products for pet and swine segments. So we are optimistic about the growth prospects because Brazil is the fastest growing animal markets, especially in the companion animal segment. As we build upon the SeQuent 2.0 strategy, we are now also significantly enhancing our capabilities, be it in R&D, in key account management and related areas. And in this journey, we are very fortunate to have the help of global experts in animal health. And I'm really, really excited about the potential of this company and the opportunity to take it to the next level. So at this stage, I will invite Tushar, our CFO, to share his comments on the financials. Over to you, Tushar.

Thanks, Raja, and good morning to everyone. Moving on from the operational updates, coming to our financial results. In year-on-year terms for the quarter, our revenues are at $3.8 billion, which is up by 11.7% in constant currency terms, boosted by recovery in API business, which delivered its highest ever quarter. EBITDA pre-ESOP is at INR 386 million with a margin of 10.1%. While margins continued to be affected by macro factors with continuing impact on input and logistic costs, current quarter also [indiscernible] utilities across geographies. There have been also a few one-off cost impact, which include a write-off of validation mergers of $21 million, onetime higher power charges in Germany of $7 million and onetime settlement cost of $19 million. We continue to monitor the cost situation very closely and implementing cost control measures across geographies. ESOP costs across quarters haven't been stable on account of changes in management. However, we expect this to stabilize in the range of approximately $85 million to $95 million per quarter based on fresh [ terms ] to new employees. Current quarter also saw a consolidation of our Brazil business and the follow-on acquisition in Brazil. Current quarter results account for full consideration of Brazil business and -- full consolidation of Brazil business and 1 month operation of Nourrie, the recently acquired. Coming to the annual numbers. Our revenue is up by 7.2% in constant currency terms at INR 14.1 billion. Growth was largely driven globally by formulation business in Brazil and India. The EBITDA pre ESOP is at INR 1.4 billion with a margin of 10.1%. Current year saw significant volatility in Turkish lira, which moved from USD 8.32 in March '21 to USD [ 14.62 ] in March 22. While this volatility has impacted production in net worth by about 797 million. We continue to hold a very strong leadership position in the market, which reflects in our constant currency growth in our Turkish operations. We believe that this adverse conditions can be an advantage due to our local manufacturing capabilities as the importers tend to do heavily on account of [indiscernible]. Our net debt increased by INR 913 million, primarily due to the debt raise to fund Nourrie acquisition and also for consolidation of minority stake in Brazil. The acquisition also resulted in increase in intangible assets to tune of about [ $228 billion ]. During the quarter, working capital went up as we built inventories in some geographies, which were hit by volatility in currencies. We believe we are well invested in working capital to take care of any future volatility in currencies and prices and expect to remain at similar levels in quarters to come. We continue to invest significantly in CapEx program to accelerate our growth. In FY '22, we incurred CapEx spend of $313 million. And in FY '23, we'll continue with our expansion plans in [ South East Asia ]. That concludes my opening remarks on financials, and I would request operator to open the floor for Q&A. Thank you.

Operator, can we take up Q&A, please.

[Operator Instructions] The first question is from the line of Praful Kumar from [ Dymon Asia ].

Sir, broadly, in terms of, say, 1- to 3-year period, what is the strategic plan in terms of geographical growth? What are you looking at in terms of growth margins, gross margins from here? And how do you build this?

So look, thank you for the question. I think we have outlined in recent times SeQuent 2.0 strategy. I think there are 2 components to it. On the API side, we are clearly looking at strengthening our presence in regulated markets and 1 of which is, of course, the entry into the U.S. market. And that's why we are 1 of the few companies which has a U.S. FDA plant in Vizag, and that's 1 area which, of course, we will be strengthening from the API side, but the focus is going to be on regulated markets. As far as the formulation business is concerned, we are strengthening our current presence. So we have a location in LatAm, which is there in Europe and of course, in Turkey and India. And these markets would continue to remain our focus. These are also the large markets for animal health. On the other question, which you asked about what's the sense on how in 1 to 3 years that we're going to do on some of the financials? I think we've generally been giving an indication that we would be growing in early teams as far as the top line is concerned, and we would be expanding our margins. But that's something that has to play out given the circumstances that are there at a macro level right now in the country, but definitely in the long term, the intention is to expand our margins as well as we get on to double-digit growth consistently.

Understood. And sir, last question would be on the India piece. How do you look at it over the next 1 to 3 years -- that -- because that's done really well. What's the outlook on the India business?

So the India formulation business that we have is a combination of 2 operations. There are products which we make ourselves and there are those that we distribute for 1 of the large companies. Definitely, India is a growing market, and it remains 1 of our top priorities on the formulation side. So we do see a double-digit kind of growth, which should remain in India in the near term.

[Operator Instructions] The next question is from the line of Aman Agarwal an Individual Investor.

Hello. Good morning, and thank you for the opportunity. Sir, I understand that the rise in debt is due to acquisitions. But going forward, what level of debt to equity company is targeting to maintain?

We are currently at about 0.3 to 0.4 kind of debt-to-equity -- net debt to equity. We don't expect any significant rise from this level -- is what we expect because whatever we have to do, we have already done in FY '22. We don't expect any significant right from this level going forward.

The next question is on the Goodwill and the intangibles. Can you please tell something about the amortization schedule for the increased Goodwill and the balance sheet?

Yes. So Goodwill is subject to improvement. We don't do amortization of Goodwill. Goodwill is tested for impairment every year, which has been carried out in the current year. And there has been no impairment of any of those investments so far. We are all -- in all our geographies we have strong positions, and we are operating stronger deal. So that's why there has been no reason for any -- any of our investments so far.

The next question is from the line of [ Karan Agarwal from Edelweiss Capital ].

A couple of questions from my side. In SeQuent 2.0, there is a thrust on being a value leader in animal health. If you could expand on it in terms of where you're trying to target yourself? That's number one. Number two, if you could give us a sense on how big are your addressable opportunities in Europe and Brazil? And pardon my ignorance, I mean, does this business work on a route of administration or a particular therapeutic segment? And if so, how are you planning to get to that? These 2 questions from my side.

Thank you. So let me answer the first question on how we are looking to become a value leader. Clearly, there are -- the entire generic space is a continuum. Where you move from unbranded generics you're moving towards the more specialty generics. And that -- the journey we are on really is to move to more specialty. And that's both a question of -- that currently that we are in -- indications that we supply for as well as the formats in which we deliver those. And therefore the -- we clearly are building a position in injectable, which is 1 area acts on which you look at value leadership. And the second, of course, is looking at those molecules are available for higher value addition and not where you're 1 or 2 players who are likely to be available. So it's really moving up the generic chain. From currently the kind of sort of broad-based generics we have to the high value-added specialty generic. Both in terms of the choices we make in R&D as well as the kind of product formats we deliver it in. And then, of course, there is the third angle, which is really on value addition that you can make in the area of application of those generics for us. So that's really the 3 pieces, which we are working on. Towards that, we are obviously also working with the top animal health care companies who are there at the leading edge of innovation and giving us an opportunity to at some point of time becoming partners with them. The second area, which -- question which you asked is in terms of how the market is divided. At this point of time, it seems to be reasonably basic unlike a human pharma market. It's still about companion animals and about cattle, and the feed animals at 1 axis, that's the -- it is more -- I would say, sharper segmentation coming as far as the animal -- companion animal segment is concerned. And that is where you are having some degree of differentiation coming in terms of where it is administered by the veterinarians, whether it is -- and the diseases which are used. But on the other side, in terms of the feedstock and the cattle usage, it is still largely through large farms and holdings and through organized, whether it is government or large farm application of the benefit. So that's pretty much the way in which the delivery happens.

Got it. How big are these markets? And how big are your current addressable opportunities in terms of pipelines or the current portfolio of products that you have, specifically in Europe and Brazil?

Again, we continue -- at this point of time, we are not a large player in companion animals, which is a large part of the market. If you leave that piece out, we are pretty much there in the rest, which is about close to 60% of the market, which is the area of cattle as well as the other feeds and food animal. Now within that, I think we -- there is less data available, but I think you can reasonably assume that if you look at the top markets after U.S., the next 1 would be West Europe, roughly around the same size of about 10-odd billion. And then you have Brazil and Turkey and these kind of markets being in size, which are more likely to give out $2 billion to $3 billion odd kind of number. But there are no sort of very fixed data available on it, but that's broadly the stack rank in which it is there.

Got it. And if I may, just 1 more question. How is the distribution of -- how is the distribution for these products in the geographies that you're operating for formulations?

Two routes we have. In some cases, we have, of course, our own companies, which both manufacture and distribute, which are in Spain, in Brazil and Turkey, these are places where we have companies which with the manufacturing units. In some other markets, we purely have some sales force in some markets and in some cases we work with distributors. So it's a mix of these 3 sort of, I would say, wave which is markets where we both produce and sell and in the others, we are more distributed.

The next question is from the line of Aditya Khemka from InCred Asset Management.

Sir, if I wanted to check with you, given the cost inflation in the raw material, HCPL, solvents, et cetera, how is our pricing power in various markets, at least the larger ones that we operate in. Are we able to pass on the inflation in raw material to consumers by means of higher prices? Or are we partly absorbing partly passing on? Or are we not able to pass on? If you could just give us some sense there?

Firstly, of course, any passing on price in largely a B2B business is a delayed passing on, right? So you incur your cost much earlier, and then you were able to get into conversations and passing on much later. So that's I think the first thing to remember from a sequencing of when we will be able to realize. And then comes the question of how much of it you're able to get. I would say that we are beginning to see this more in our formulations businesses, where we are able to pass on some price increases. Not in entirety at this point of time. Again, it has to be step by step you have to take because at the other end, there is the -- we don't want to lose market share in any place. I think that's 1 thing we have obsessed about is that we want growth and we want market share. And in the short term, if it means that we say that we need to be a little stiff with our margins, we will be prepared to do that. But in this business, which is a B2B business, we should not take any chances on that. So we are very committed to holding market share. And then comes into how do we pass on these price increases. Certainly, in our API business, where we have about 60% to 70% of our business is either with long-term contracts or with regulated markets. It's a function of when the contracts sort of expire and then we renegotiate and gradually give it on. There is some appetite now for taking price increases at the customer end. But I don't think the entire increase can be passed on. It is still to be something which we will share between the 2 gradually.

Right. And is this true only for the formulation business or also for the API business? Or is the API business actually work because of some B2B?

Yes. So I think in the API business, as I just said, it is 2 kinds of businesses we have, those which are with long-term contracts with regular partners. And there one, as the contracts sort of end, we renegotiate the prices and our partners are willing to take some degree of price increase, and that's about 60%, 70% of our business. The other part of it is what you may call traditionally a spot business. And in that, it tends to be much more, I would say, price sensitive. And there, we have to be a bit careful about whether we may not always be able to buy. And that again depends on which molecule you are competing on and what's the grade of the product that you are in right now. But we see some clear indications that people are willing to take up prices at the API customer in but it is much more slower than graduate. But as I said right in the beginning, our obsession is for making sure we don't lose our customers.

And just help me understand this in a little more nuanced manner. Veterinary products across the world are branded generic side, that's what we sell. So if our brand is popular with the customer and we increased the price and you're afraid of losing market share. So despite being a branded product, does the customers generally switch between brands if the price of 1 product is somewhat higher than the other brand? Or is there a stickiness to the brand which the consumer is buying from us?

I guess on this one, and I think we know some degree of it at the end of the day, the very fact that it's a generic branded generic, there's an alternative available even if it is branded. And it depends what's the degree of premium your brand is able to command and how much stickiness is there. And so it's a bit of a trade-off around what's the pricing you can get in at the market share. You can retain. Now a lot of branded generics business in the animal health area is through very, very large distributors, right? And these are sort of negotiating chains which are there. And they are at the other end where the prescriptions happen through veterinarians as well as through other large farm institutions, et cetera. We have to sustain their business. So they do make a preference for branded generic, which is at a more competitive price for their end user, because we also have to sustain that. So it's not that just because you are branded, you can. And again, as I said in the beginning, we are more a generic player than we are a branded generic player, and we are in the journey of moving up towards becoming a branded generic player. But at this stage, we are largely a generic player. We have, of course, the origin of the Alivira brand name, which sustains such. But otherwise, it's still largely a generic player.

When you say that you are still largely a generic player, what percentage of your top line would you classify as generic? And what percentage of the top line would you classify as branded generic?

Give it to exact this thing because, frankly, in the animal health business, this line is too fine right now, unlike some of the other human pharma, et cetera.

I understand. And just help me understand the distributor dynamic as well. So generally, distributors to whom you sell, they have a percentage on the MRP as their commission. That's what they make. So generally, they would be aligned to a higher price because their commission goes up with the percentage being fixed. Is that not the case? Or why is the distributor not happy with the higher price as long as the veterinarians is willing to prescribe the [ cattle ]?

I think it's a bit too specific. But in general, when you have a price pressure in any market, I don't think distributors just opt for the higher-priced brand, right? I think they also need to sustain their volumes. And therefore, there are many other factors which play in the choice of that.

All right. I'll take this offline probably with you...

I think good to have the discussion, and it will also give me some learning because you seem to know a lot about this business.

The other way down, I'm sure. And the second question I really had was about [indiscernible].

Actually, it's not the second question, but we'll take it right now.

Sure. Very kind. So my last question for you is when I look at your capital allocation, so you said that there is not going to be any more increase in debt and the Goodwill you don't obviously amortize. Should we take that as that we will not probably do any acquisitions in the near term, at least for the next 2 or 3 years and try to sort of optimize the utility of the assets that we already have? Or can we do more acquisitions as we move forward? And the time frame I'm looking at is 2 to 3 years.

Look, we have focused on growing our business in line with the strategy which we have. And whenever there is a good opportunity, we will certainly go for it. And given our company and the backing that we have, we are certainly not constrained for any kind of resources. So right now, of course, however, whatever we do, we'll be very disciplined. And what we are saying right now is that we are going to -- in the current situation with the visibility we have, it's a very disciplined way of working. But we're not constrained to make any kind of inorganic move at all.

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

A little more, I mean, question micro related. When we expect that Europe to start delivering injectable to European market. And currently, what kind of contribution it is giving to the turnover. And once the Europe market and once we get U.S. FDA, so how will be the margin trajectory?

So I'll give you a broad idea about it. So 1 is, of course, as you know, we have a plant which we have in Germany, which was dropped in terms of functioning for a short while as far as our U.S. FDA project was concerned, because of COVID. Now we have resumed the [ U.S. FDA ] upgrade. And that, in our view, in FY '25 is when we should be in a position to begin to commercialize some of the opportunities -- the plans that we have. Having said that, we are much earlier as far as supplying from there to some of the European markets and emerging markets are concerned. So that we have already started, although on a smaller scale, but it's just that the U.S. operation is likely to be in FY '25 for this. And right now, the upgrade has started.

And what is the potential for this plant to deliver kind of once we start this EBIT U.S. approximately some kind of ballpark in top line as well as EBITDA term margin -- percentage terms?

Just let me -- just refer to [indiscernible].

Okay. Meanwhile on second question...

Yes, go on, we'll come back to you with that question that you'd deserve. I don't want to -- on the numbers.

Our Vizag plant, which is already U.S. approved. So currently, is there any contribution coming from the U.S. side? And if not, what is the potential? And where do we see by '25?