Viyash Scientific Limited (512529) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Sequent Scientific Limited Q1 FY '23 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 First Quarter Ended Financial Year 2023. Today, we have with us Mr. Rajaram, Sequence Managing Director; Sharat, Joint Managing Director; and Mr. Raghavendra Rao, CFO, will 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 for this call will be available in a weeks' 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 Mr. Rajaram to make the opening comments.

Thank you Abhishek, and good morning everyone. A very warm welcome to our quarter 1 earnings call. Joining me in today's call are Mr. Sharat Narasapur, our Joint Managing Director; and Mr. P V Raghavendra Rao, who has recently joined the team at Sequent as the Chief Financial Officer. A very warm welcome to him. Mr. Rao comes with a very enviable track record of senior leadership experiences, a large part of which were spent in leading pharmaceutical companies. Over the last 3 months, I have had the opportunity to take stock of our businesses, met several customers and engaged with employees across many locations. And I am more than ever convinced that Sequent has a very unique sustainable long-term opportunity, and our strategy will position us well in the fast-growing animal health industry. Our business this quarter has demonstrated enormous resilience in the macro environment, which is affected by geopolitical issues, inflation, recessionary pressures, and of course, volatility in certain currencies. Coming specifically to our quarter 1 results. The results are a mixed bag, impacted by a few one-offs. In quarter 1 our momentum in the API business was impacted because we had an exceptional one-off fire incident at our Vizag facility in May 2022. There were no injuries or any impact on people. And while this would not impact our business over the financial year, it did have an impact in the quarter as the facility was closed for operations for a brief period. And I'm really glad to inform you that the entire team worked day and night and the factory has resumed normal operations since early July. We have made significant investments to bring the facility back on track in record time. And in fact, we've used the downtime to strategically upgrade our infrastructure and processes to match the highest global standards. In this quarter also, we have submitted a new VMF filing. And currently, we have a total of 25 USVMF filings and 11 CEP approvals along with a robust near-term pipeline. Our other strategic manufacturing facility for APIs at Mahad has received the ISO certification for 14001, which is for the environment and 45001, which is for health and safety, which is a further validation of our team's efforts to maintain the highest standards on the AHS front. Coming specifically to our formulations business, we had a healthy double-digit revenue growth in constant currency terms. In fact, all the markets within the market, of course, in constant currency terms did very well. And while the volatility in the exchange rates has had an impact, our in-market share positions has grown much stronger. Our Latam business, led by Brazil, has really gained strength, and we have completed the integration of our recent acquisition of Nourrie, which gives us a strategic entry platform in the companion animal segment in Brazil, which is amongst the fastest-growing segment and Brazil is also the fourth largest companion animal market globally. Of course, the hyperinflationary pressure in Turkey remains a challenge, and the detailed impact of that on our financial results has been laid out to you in our quarterly results presentation. Our formulations business in India has also maintained a growth momentum, and we're very confident of the opportunity that the Indian market presents. So overall, while the start of the year has been impacted by one-offs, we remain very confident and we are on track to achieving our strategic objectives. I will now hand over the call to our CFO, Mr. P V Raghavendra Rao to give us an update on the financial performance.

Thanks, Raja. And a very good morning to everyone. I am happy to address this forum for the first time in my capacity as a CFO. I am excited to be a part of Sequent's journey and look forward to begin this company as a major global animal health company with the team here. I will now briefly update you on the key metrics for Q1 FY '23. Our total revenue for Q1 stands at INR 3.4 billion, which is up by 12.8% Y-o-Y in constant currency terms. On a reported basis, the growth is 6.5%. The major driving force of the growth has been recorded from our Formulations business, with a strong 19.5% Y-o-Y constant currency growth. However, on a reported basis, Formulations business grew at 7.9%. The Latam region continued its growth momentum, delivering 17.3% growth. Even in the face of market challenges, our India business has grown by 4.7%. The contribution from the formulation business stands at INR 2.4 billion. As mentioned by Raja earlier, we witnessed a fire incident at our Vizag facility in the May month. Consequently, our API business was affected and operations will hamper for a few days, registering lower-than-expected revenues of INR 888 million for API, which is down by about 5.9%. The input costs for both API and Formulations have stabilized to some extent, albeit at a higher level. And also for some specific operating expenses like utilities and raw materials. However, the inflationary pressures continue to sustain owing to elevated price levels. Travel related costs have climbed back to pre-COVID level with easing of travel restrictions and increased vaccination coverage experienced in most geographies that our businesses operate in. EBITDA excluding ESOP costs stood at INR 201 million, while the reported EBITDA came at INR 110 million, after considering the non-cash ESOP cost of INR 91 million. Margins continued to be affected by macro factors, like inflation with our key input material, disruptions in supply chain, fuel and logistic costs are under stress. I would now like to address the situation in Turkey. Due to continuing inflationary in Turkey, which have exceeded 100% over the last 3 years on a cumulative basis, accounting under Ind AS 29 on hyperinflationary economies have got reversed. Accordingly, the financial statements of subsidiaries in Turkey has been prepared in accordance with Ind AS 29, which has impacted the consolidated tax by about INR 9.4 million. On the balance sheet side, we have witnessed a slight increase in the working capital from Q4 FY '22, as we build strategic stock for some of our key products in line with our plans. Increase in net debt is on account of Nourrie acquisition and reduction of investments owing to MTM of [indiscernible]. I would like to conclude my remarks by stating that this quarter has been challenging due to the incident at Vizag, loss reported separately as exceptional items and also extreme currency volatility. The team is extremely focused on execution on both business and cost trends. Thank you, and we can now open up the floor for Q&A. Thank you very much.

Can you take the Q&A, please.

[Operator Instructions] The first question comes from the line of Vishal Manchanda from Systematix.

With respect to the API business, so the current quarter was impacted by the fire incident, but do we expect to kind of make up for it in the subsequent quarters? So is the run rate going to be higher than and will hit the annual targets that you would have set for the API business?

Thanks, Vishal. Yes, as we have said earlier also, it did impact this quarter, but we expect to recover that over the next 3 quarters within the financial year itself, yes. So that will be -- it will spill over into the next 3 quarters, and we'll be recovering it. Fortunately, for us, the demand continues. The customers are there with us, and we've been able to recover the plant quickly. So we should be able to cover it up in the next 3 quarters.

Okay. And second, on the CDMO opportunity. Has that come into the numbers or that's yet to start coming into the numbers?

So I think that's something we've spoken about earlier that the CDMO piece will be a bit more back-ended towards for FY '23, and we'll get its full realization more in FY '24. So we -- that continues to remain as per our plan.

And do you expect to add more molecules during the year to the CDMO business on the API side?

Certainly, but I'll invite my colleague, Sharat, to speak a bit about that.

So as we speak, we have added already a molecule [indiscernible] pipe and we are continuing more discussions with the customers. So we hope to add a couple of molecules by end of this year.

And with respect to the capacities on the API front, we have adequate capacities for the next 2 years? Would that be fair to say?

Yes. We will have adequate capacity. And we also want to take continuous debottlenecking and [indiscernible]. So that's a ongoing exercise.

Okay. And just on the gross margin. So is there a way we can bring that back to the same old levels? Or this would kind of be around the current levels, around 42%?

So certainly, as we've given a guidance before, we have clearly to reach back to better margins than we are today, it will take us some more time. But very clearly, we are looking at improving the margin as the outside situation improve. But also importantly, we have initiatives and projects in the company, which are designed to improve our margins. Margins are a function both of the mix that we have, as well also of the prices and the costs. And on all 3 initiative -- areas, we have initiatives in place.

[Operator Instructions] The next question comes from the line of Ashish from IIFL AMC.

Sir, I believe Turkey is the most important market for us. And even in terms of profitability, it's one of the best place -- segment for us. So what's your view as far as these -- our business in Turkey is concerned, do you think there could be some more write-offs? And what is the behavior, how are the distributors behaving? Any more color on this market would be helpful?

Look, thank you, Ashish for asking this questions. Turkey is one of our important market, it's a market where we have a strong business in terms of both market share, as well as the portfolio which we cover. And on the demand side, we continue to see strong demand for our products, and as well as our competitive position is just getting stronger over there. Having said that, there has been a particular situation in Turkey in recent times, where the currency has impacted the business. So we are taking all the necessary steps, which are there in order to de-risk our business over there. More specifically, in looking at more exports out of Turkey and looking at instruments which are required to manage the currency risk, as well as also look at the management of working capital over there in terms of distributor credit, in terms of supplier credit, et cetera. So there's a whole set of measures, but there is still a substantial amount of uncertainty around the currency and volatility over there. And some of it is reflected into a very specific case of accounting this year. And therefore, we will be watching it carefully along with all the initiatives. But we are also going to be very disciplined in the way in which we are going to invest and grow in the market. So we certainly are not going to be reckless in our growth ambition over there. So we have a strong position, but we will wait for some more stability over there before we commit more. Did that answer your question, Ashish? Hello?

The line of Ashish has been disconnected. So we will take the next participant. The next question comes from the line of Aditya Khemka from InCred Asset Management.

So firstly, could you give us a sense of where we stand on the ability to pass on to consumers in terms of the cost inflations that you are facing. In the last con call, we were discussing with you about the split of your Formulation revenue into, let's say, branded generic and unbranded generic. Any thoughts, updates on that would be very helpful.

Okay. So there are 2 parts to our prices, one is on the API side and the other one is on the Formulations. When it comes to API, Aditya, between 65% to 70% of our business is actually in regulated markets, and they are with large sort of multinational customers. And over there, we have long-term contracts. And as and when the contracts complete their period, we renegotiate our prices, and that would be something that we would be passing on. So there is an ability clearly to pass on. Of course, there is always a 30%-odd, which is the spot business in API, which sometimes gets competitive depending on where we are. But for that's fortunately on the API side, a large part of it is the regulated markets. Coming on to the Formulations part of the business. We have in most of our markets now, a substantially strong branded product business. And therefore, over there, we've been able to pass on price increases. Of course, like for example, in Turkey, we've been able to pass on a lot of price increases. Of course, the currency situation does not help us, but we continuously do that. In Brazil, again, we've been able to systematically pass on the price increases. But wherever our customers on the other side are large central buying agencies even for branded generics, it takes a little longer some time to pass on the price increases. But we are seeing that in all markets, there is now slowly an ability to pass on price increases. And we're doing it very systematically -- obviously, one portfolio product at a time. But I think that now with the inventory levels getting more stable across the market, we should be able to systematically pass on price increases.

Just a follow-up on that. I just cannot understand that while we face inflation across our products at the same time, why is it that we want to pass on the pressure to the clients in a systematic slow phased manner? Specifically, that could have been the case had there been a lot of competition and the competitors weren't passing on and we were scared of losing market share in the sense that our product will become dearer versus the competitor. So that to me is the only reason why we would do it in a more phased and systematic manner rather than contractual obligations, which I understand in the API space there are. So can you talk a little bit more about why we are choosing to go through a phased systematic route and not an immediate price hike because our input costs have gone up immediately?

It's a good question. Listen, there are 2 components, in certain markets where you don't have a very high inventory, you can pass on the price hikes fairly fast, right? But in many of these markets, distributors tend to hold significantly higher amount of inventory. And over there, it takes more time to pass on some of the prices. So it's more about really on the cycle with which the inventories are managed and your ability to pass it on there. So that's largely. And again, it's a lot of markets like, particularly in countries like Brazil, et cetera, there are a lot of contractual purchases which happen from large firms who purchase some of our medicines. And over there, as the contract expire, we renegotiate and we pass-on on that.

Understood. And on the API side, you said you had long-term contractual agreements to your purchases. 2 questions on this. So are we to understand that while we enter into long-term contract selling agreements, we don't enter into long-term contractual buying agreement because you are facing raw material inflation immediately, but we are expressing our inability to pass on immediately there? And secondly, what is the average tenure of the selling agreements that we have in this API business?

So I will -- it's not that we are bound by that. We do have interim price increases, which are there. And it again depends on the inventory level, which the customer is connected -- has, but I'll ask Sharat to explain that a bit more to you.

Yes. While the contract may be long-term, but then there is a opportunity...

Sharat, you aren't audible, you are a bit away from the mic. Would you mind speaking closer?

Yes. Can you hear me now?

Yes, Sharat.

So while the contracts themselves are long term, but then there is an inbuilt provision of looking at the prices based on the market conditions. And that happens at a frequency of every year or if the prices are going beyond a certain limit. So I would say that there is always an opportunity, but there is a periodicity with which we can do it. And so the contracts have been entered recently. So it does take some time, while the conversations are always on, particularly on the price side and everyone is aware of it.

Yes. And Sharat, if you can also address our procurement of raw material practice. Like we are being considerate with our buyers and cognizant of the inventories that they're holding, why aren't our suppliers doing the same favor to us?

Yes, even on the procurement side, we do have contracts. So for the perennially produced products and where there is a contracted quantity, we also go back and have the contracts and they are in place. So that advantage we take. But then if you look at -- there is a certain percentage of contribution, I mean, 40-60. So if you look at the commodities, solvents and other things, the volatility has been really high. So that's something which we'll have to deal with.

All right. And just one last question. Can you let our Formulation and API revenues into buckets where we have the ability to pass on immediately or with a lag versus buckets where we won't have the ability to pass on at all because the buyer is large, concentrated and essentially, there's a lot of competition, therefore, we can't really pass on the price.

I don't think we can sort of get into that degree of specifics, but you should broadly look at it that our API business has about 65% to 70% is regulated markets. And that's the piece which Sharat spoke to you about. And that's pretty much, I think, should help you make some conclusions on that. But beyond that, I don't think I can sort of split the numbers further to you. I mean definitely on a separate chat in our office or something we can catch up, and we can take you through the details in more, yes. Next question. Hello?

Next question comes from the line of [ Vikas, FQ ].

It's, in specific to the fire incident that happened in Vizag, could you please specify that what could be the top-line and bottom-line impact in terms of absolute terms and in terms of EBITDA margin, EBITDA percentage because of this incident that were contributed to lower numbers?

So look, I think we've said one is that we expect there to be no impact on it as far as the full year is concerned. And therefore, that should pretty much tell us that we don't expect an impact either on the top-line or on the planned EBITDA over the course of the year. More specifically, on the quarter, I think we're expecting to get about INR 14 crores to INR 15 crores would have been the kind of top line that would spill over into the other 3 quarters, yes. But over the course of the year, we don't see any impact on that. In fact, we started covering some of it already in this quarter itself.

The next question comes from the line of Ashish from IIFL AMC.

Any more color on Nourrie acquisition. So is there an opportunity to cross-sell? And given that this will be our first entry in companion markets, how do you see these things panning out? And would the companion segment have higher profitability versus the non-companion market?

So we're just completing the integration and in the first quarter. So I think the integration has gone well. Right now, it is more additive. But as we go along, we think that this gives us a good entry into companion animals and I hope we'll be able to share more with you about the performance of it in some time. But more specifically on companion animals, this is clearly an area of focus for us, as well as the way -- direction in which the growth of the animal health industry is happening. And we -- the Brazilian one is our first sort of entry into that area. We are looking at expanding our portfolio in some of the other countries where we're already there, more into pet animals. And I think we'll be able to talk to you more about it in some time as these businesses begin to ramp up. But right now, it is tracking on plan as far as the integration is concerned, and we should get some better results to share with you in maybe 2 or 3 quarters, yes.

Okay. So by quarter 4 of this fiscal, you expect this -- the consolidation to happen, right?

So I think the consolidation and integration has already happened for Nourrie. But it's really -- it's an acquisition, which is now got integrated. But how it -- how we are able to leverage it and grow further, that is something which I think in -- towards the end of this financial year, we should be able to share with you on how the performance is.

Okay. So lastly, some point in time we were expecting though around 15%, 16% or to that extent, even 18% EBITDA margins. So given some upfront construct time and how the portfolio shapes up for us, would you be still pretty comfortable guiding on that number like 2, 3 years down the line?

Well, certainly. I mean if you -- that is a reasonable sort of number to aim for. And that's something that we would be aiming for in the time frame, which we've indicated, yes.

Sir, lastly on this Albendazole, how the price is now? And is the market back to normal now, because we had seen sort of a spike in between? Any color on this would be helpful.

So I'll give you an opening thing. First of all, I think our WHO supplies, which were there, that part of the market has come back and our customers are still taking our product. And so that part of it more or less stabilized. Then the rest of the market, which is really the use of Albendazole for animal health, we are seeing a demand, which is more or less stable. It is competitive, however, in terms of pricing on that part of the segment.

[Operator Instructions] Next question comes from the line of Haresh Hindocha from SVS Securities.

Just one point. All these raw material price increase, currency issue, everything, there is a time lag in passing on the price increase, et cetera. Can you just tell me when will be your first normal quarter in this year?

I think it's quite a right question to ask, especially in this quarter...

Yes. Because in last 3 quarters, the company has been -- I mean, from somewhere to nowhere. So can you just explain to maybe because we can understand for a quarter or so, but it's already been 3 quarters that every quarter the company comes out with some new issues. So can you just tell me, because all the companies are passing on, it's a routine, it's a currency issue. Everyone has the same issue. But I think we are taking much more time. So can you just tell me when the first normal quarter, is it in this financial year?

I think let me just firstly react to that. I think it's a fairly incorrect conclusion that the company has had this issue for the last 3 quarters. If at all, I think the very fact that we are a diversified company has helped us manage when we've had one odd part of the business impacted by currency. We've had an API growth, which has been of very high order. There have been times when that part of the business has had a pressure. We've had good growth coming in from some of the other parts of the business. So I'm quite surprised with you concluding this. It is true that every quarter we transparently will share what might be some extraordinary events, but that should not be considered to be something that's reflecting the performance.

Maybe I'm wrong. So when will we have a normal quarter?

I would say that it would be around, it has -- there is no such thing as a normal quarter in a business. I mean every quarter will have surprises. Yes, this particular quarter for us, we have had an extraordinary impact of fire, so there's 2 incidents which are over here. One is the currency impact, which has happened because in a specific market, accounting standards require us to trigger classifying it for hyperinflation, right? That's what has happened. And of course, there is an incident of fire. But the fact that you will have raw material increases, decreases passing on pricing, that's in the normal course of business, which will happen. And you would have seen across all companies will have this issue, and we are able to pass on our prices where required. And we are able -- because we have to look also in the context of our top line that we are growing our Formulation business almost at 19% in constant currency within the market. We are growing our API businesses, but for the fire incident, if you look at year-on-year, we would have grown this business closer to about between 10% and 14%. And I think you should look at our business on an annual basis on a year-on-year business because it's a best way as to look at how we are performing. Yes, the EBITDA margins have been under pressure like it's been for many companies in this industry. But because of our portfolio, we continue to maintain that we will come back in the second half of the year closer to the guidance that we've been historically giving, directionally, we will be there. So I would be quite surprised if you're concluding that we've had 4 quarters of uncertain performance. That's not true at all.

Mr. Haresh, we request that you return to the question queue for follow-up questions as there are several participants waiting for their turn. Next question comes from the line of [ Jagbir Singh from Share Capital ].

My question is regarding to the EBITDA margins and the profitability. In the last 3, 4 years, company never give the respectable -- respected EBITDA margins or profitability, we have -- the last caller asked the question, we have some other issue every time [ per q ], so we have any guidance for the FY '23 or FY '24 or the reasonable EBITDA margins or the profitability?

Thank you for asking this question. I think it will help me clarify again. I think our general guidance, and we've been indicating is that, look, we want to improve our EBITDA margin between 100 basis points and 150 basis points every year and that we would like to grow the company in the mid-teens. Now that's the broad sort of direction we have given. There has been a bit of a rebasing because of a series of things which have happened internationally, whether it was COVID, whether it was other incidents, which have impacted everybody upfront. And therefore, while we may have delayed the time frame, we continue to maintain that we will grow our business in EBITDA terms between 100 basis points to 150 basis points of the year and that we will grow our top line in early teens, okay, or mid-teens. So that remains, and I can sort of say that that's not something that's going to change. Now coming more specifically on what's the nature of our business. We have 2 types of businesses. One is the API business, which is one which we are building with increasing our pace of regulated market customers, and that's sort of trending in that direction. The second is our Formulation business, which often requires us, even if we make a good gross margin to invest in the long term. And some of those costs keep coming in as we begin to expand our market. So as we enter new markets, even if the margin is good in terms of gross margin, we invest on the field, we invest in promotion. And that part of it is an investment which we are making. And therefore, the Formulation business, depending on the growth of it will begin to pay off. But sometimes often the mix that is there. But I think you should look at the overall direction of the organization, which is to give anywhere between mid-teen kind of a growth and 100 basis points to 150 basis points of EBITDA incrementally every year. And we expect that as we sort of end this year, we will be far closer to the kind of levels that we have indicated earlier.