Viyash Scientific Limited (512529) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to SeQuent Scientific Limited Q2 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek. Thank you, and over to you, sir.

Thanks, Sagar. A very good morning, and thank you for joining us today for SeQuent Scientific's Earnings Conference Call for the second quarter and half year ended financial year 2024. Today, we have with us Mr. Rajaram, SeQuent's Managing Director; Sharat, Joint Managing Director; and Saurav, 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 uploaded on our website as well as the stock change website. The transcript for this call will be available in a week's time on the company's website. Please note that today's discussion will 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 Raja to make his opening comments.

Thank you, Abhishek. Good morning, everyone. A very warm welcome to all of you on this call for the quarter 2 earnings call for the financial year '23-'24. Joining me on this call is Mr. Sharat Narasapur, Joint Managing Director; and Mr. Saurav Bhala, our newly designated Chief Financial Officer. A bit about Saurav for whom this is the first investor call here at SeQuent. Saurav brings with him a wealth of leadership experience in finance and operations across pharmaceutical, chemical and FMCG sectors. Saurav was with the Godrej Group for 16 years with the last 5 of those as the CFO for Astec Lifesciences, which is the NSE listed chemical manufacturing entity of the Godrej Group. On the same note, I would also like to extend my thanks to Raghav, our outgoing CFO, who had to relocate out of Mumbai for personal reasons. And his contribution to the company has been invaluable, and we thank him for his service. Moving on to the performance for this quarter. So in the last earnings call, I had shared with all of you about the various initiatives around costs and commercial excellence across both API and formulations that has either been implemented or were in the process of being implemented during the last few quarters so that we could meet our priority of profitable growth. I'm really pleased to share that we are progressing well towards that goal and the results of those initiatives are beginning to reflect in our financial performance. Before diving into the specifics of our performance, I would like to briefly touch upon the macro environment, which is relevant to us given our geographical spread. Across all our markets, inflation remains at elevated level. While on one hand, this is putting pressure on the end consumer demand, it will be beneficial for companies which are competitive in costs and have a strong franchise of quality customers. So we see our company getting ready to win in such an environment. We also see some green shoots of recovery in demand and this is evident in the sequential growth witnessed in some of our formulation markets. These indicators, along with the reshaping of our operations on ground, seem to indicate that we should see momentum early in the next calendar year, which is our last quarter of this fiscal. As I have explained before, our industry has 2 segments: medicines for production animals and medicines for companion animals. While the production animals business globally was impacted by high feed costs, input costs and issues related to war and farm productivity, there seems to be some softening of input costs of late, which would help in the revival of demand in a couple of quarters. At the same time, the demand for companion animal medicine is beginning to accelerate, and we too, as a company, are reshaping our portfolio to meet this trend. While Saurav will talk in detail on the quarter financials, let me share some headlines of our overall results and also give you a sense of the direction going ahead. Our overall revenues in the quarter have come in higher, growing at 3.8% sequentially and 2.5% year-on-year. We must note that this is after the discontinuation of some of our less profitable operations in Europe. Thus, the growth of the retained and continuing business is higher and will begin to show an annualized positive impact by the end of the year. We are also progressing well on our plans, which have been designed to help us deliver consistent quality profitable growth. And during the quarter, our EBITDA margins pre-ESOP cost has expanded by 480 bps to 7.6%. This is in line with the direction we have given during our earlier calls on profitability. Starting with the performance of our Europe operation. The actions that we have taken in the Europe market have begun to give positive results and these are reflected in the margin expansion we are seeing in this quarter's financial results. The portfolio reshaping, which involved exiting certain unprofitable businesses and increasing our focus on growing certain attractive product lines, is now largely complete and this positions us well for the next leg of growth. We are on course to build a strong portfolio in phytosolutions and gut health products as we expand these launches to other markets outside of Europe. In Turkey, we continue to deal with high inflation and currency devaluation, but I'm pleased to share that the price interventions that we put in place in quarter 1 has started to yield results, and these are reflected to some extent in our quarter 2 financials. Turkey is one of the leading markets in the world for animal health and our company has a strong presence there. We continue to take proactive measures both on cost excellence and further price intervention given that we are inherently strong in that geography. We are also launching new products and injectables for ruminant animals later in this year. Of course, we remain cautious until the current economic initiatives stabilize. The formulations business in India has remained steady with sequential growth on the back of new products as well as expansion of the team on ground. The year-on-year decline is mainly on account of a high base quarter last year due to the breakout of the lumpy skin disease in quarter 2 '23 and also a short-term nonavailability of one of our key product lines this quarter, which will be restored by the end of this year. Coming to our API business, we are midway through the implementation of Project Pragati, which is a comprehensive cost improvement and commercial excellence program. The business has seen a healthy margin expansion this quarter on the back of the initial work. During this quarter, our Visakhapatnam facility underwent a USFDA inspection at the end of which we had 1 procedural observation and response to which has been shared. The USFDA audit completion will continue to strengthen our presence in regulated markets while also opening new opportunities. This is truly a good achievement for the company. While we make continuing progress on operational and cost excellence, the market demand continues to be a bit erratic due to pricing pressures and high inventory levels amongst some API customers. In line with our priority of high-quality revenue, we will remain disciplined in these kinds of situations and await a gradual pickup in volumes towards the start of the calendar year in 2024. Before I hand over to Saurav, I would like to emphasize that in spite of a volatile environment globally, we are beginning to see sequential and profitable growth in most of our markets. While our priority this year is more focused on margin improvement, the foundation for acceleration has been set, and we are well positioned for acceleration on the back of these operational improvements. On the M&A front, we will continue to look for appropriate assets and partnerships. We believe that on the API side as well we must keep our options open for inorganic growth to build scale, enhance backward integration across promising products and accelerate investments towards R&D, talent and infrastructure in API. I'll now hand over to Saurav for more details on the financial performance.

Thank you, Raja. Good morning, everyone. I'm excited to be part of SeQuent's transformation journey and work closely with our exceptional team. The [indiscernible] SeQuent's position as a prominent global player in animal health sector. I'll now briefly update on the key financial metrics of Q2 and H1 financial year '24, respectively. Q2 highlights as follows: Our total reported revenue for the quarter is INR 3,460 million, up by 2.5% Y-o-Y and 3.8% Q-o-Q. Formulations business contributed INR 2,532 million to the top line, with a growth of 5.2% Y-o-Y and 2.2% Q-o-Q. We have seen a good boost in our European operations, driven by our strategic actions focused on portfolio reshaping. Europe clocked a revenue of INR 1,191 million, which is a growth of 30.7% Y-o-Y and 1.6% Q-on-Q. Our decision to implement substantial price increases in Turkey has helped us improve our margins effectively without impacting the sales much in that geography. India business clocked a revenue of INR 273 million, which is a growth of about 7.6% Q-on-Q. We faced some headwinds in emerging markets. That is basically due to unavailability of U.S. dollars to make the payments in some key markets which we operate in. Overall, emerging markets has grown by 1.5% on Q-on-Q. The API business revenue stands at INR 804 million against INR 908 million. Overall gross margins for the quarter are at 45.1% compared to 41.5% in previous quarter. Our gross margin has seen significant improvement, driven by a big shift in our product mix, various cost-saving initiatives, which we have initiated and very well-executed price increases in some of our key markets like Turkey and Spain. This demonstrates our commitment to enhance profitability and financial health of the company. In Q2, EBITDA, excluding the ESOP and FX movement stood at INR 263 million, which is at 7.6% of our revenue as against INR 150 million in Q2 financial year '23, which is at 4.4% of the revenue. Through the various operational reorganization, driven in the last few quarters, we have been able to manage our operating cost pretty well. Our total operating expense INR 697 million as compared to INR 713 million during the previous quarter. Employee cost is INR 602 million against INR 678 million (sic) [ INR 578 million ] in the previous quarter. The slight increase is due to onetime settlement initiated as a part of the overall operational reorganization process. Now I move on to H1 highlights. During H1, our total revenue is -- reported revenue is INR 6,792 million against INR 6,789 million last year H1. Our formulations business contributed INR 40 -- INR 5,014 million to the top line with a growth of 3% Y-o-Y. API business is at INR 1,611 million, against INR 1,794 million last year H1. In H1, EBITDA excluding ESOP and FX cost stood at INR 356 million, which is 5.2% of the revenue as against INR 351 million last year, which is almost on the same range, 5.2% of the revenue. Other than this, hyperinflation-related impact driven by Turkey is reflected in our IndAS 29 adjustment, which is shown in the financial also and that is INR 25 million in Q2 financial year '24 as against INR 33 million Q2 financial year '23. And for H1 '24 the impact is INR 52 million against INR 74 million last year. We have an exchange loss of INR 26 million in the current quarter, almost entirely driven by the depreciation in Turkish lira viz-a-viz exchange gain of INR 11 million in Q2 financial year '23. Our working capital now stands at INR 3,595 million as compared to INR 4,261 million as of March '23. And that is majorly driven by our focus on effective working capital management. Our net debt as on date is INR 3,591 million (sic) [ INR 3,593 million ] as against INR 3,561 million in March '23. So those are the key highlights. I thank you all for your support. And I now request for the quorum to be open for Q&A. Sagar, we can take questions, please.

[Operator Instructions] The first question is from the line of [ Deenal Jain ], who is an individual investor.

My questions are regarding the API business. So API sales have been flat sequentially. When can we expect a recovery? And what will a full number look like? And secondly, how many products are in the API pipeline? And how are you expecting those to drive sales going forward?

Thank you. So, yes, the API business is clearly -- this is not the level at which this business will steady itself at the current INR 80 crore, INR 81 crore levels. As I spoke about this, this is a business which is more likely to be closer to a 3-digit level in terms of an average. And we expect that kind of a number of coming closer to INR 100 crores to be reached soon. At this point of time, some of the transformation initiatives that we have taken have indeed subdued some of these sales. In addition to that, of course, there is some pricing pressure, which is there in the market on some of our products because of which we have decided to stay away from low-margin, low-quality opportunity. I'm of the view that with the initiatives that we have as well as the visibility that we have to some of the projects and contracts, we should be back closer to a level of INR 100 crores a quarter, which is what we have indicated earlier. And we expect that to be reached definitely early next year. Coming to the second question of how many products we have in our pipeline? So I think every year, we typically file 3 to 4 new dossiers and these filings are normally in line with our R&D plan. So at this point of time, we would typically have between 3 to 4 projects, which are in the pipeline for the next year. And of course, in line with our plan to have 3 to 4 every year, further products are also under development.

Ms. [ Jain ], do you have any more questions.

No, that's it.

The next question is from the line of [ Shantanu Maheshwari ], who is an individual investor.

I have 2 questions. First is on Turkey. The Turkey business seems to have improved this quarter, given the macro challenges there, is the performance sustainable? The second one is on the India business. What is happening on the India formulations business, which is meant to be one of -- which is meant to be one of the growth-focused areas?

Can you just repeat your question once more slowly because I couldn't -- it was not very clear for us here.

Yes, I'll say that again. So my first question is on the Turkey business. The Turkey business seems to have improved this quarter, given the macro challenges there, is this performance sustainable? And the second question is on the India business. What is happening on the India formulations business front, it is meant to be one of the growth focus areas?

Okay. Thank you. That's clear, [ Shantanu ]. So on the first question on Turkey, I think the Turkish market is not completely out of the woods, but I think there's a sense of some clarity coming on both the economic policy as well the market demand. From our side, what we have done is to focus on 3 areas. The first is in the area of pricing because it's a high inflationary economy. And we have taken bold pricing decisions in that market because of our market presence and that has gone through very well. We believe that pricing will continue to be some lever which established companies like us can continue to exercise. And therefore, I think, we will be able to match much of the inflation with some of our pricing decisions. The second part of it is really on exports. We have been saying before that Turkey is a base for exports, and we are seeing increase in our exports from Turkey. And that will form a natural hedge for foreign exchange for us in Turkey. So that will take care of the exchange fluctuations which take place in Turkey. Having said that, after one initial sort of change in the exchange rate right after the election, we are beginning to see some sort of stability in the current Turkish foreign exchange situation. The third, of course, is that Turkey is a very large market for animal health. And it is important to keep innovating and launching new products. In a situation like this, the smaller players tend to fall out of the market or get impacted. And we are seeing that happen. And therefore, our market share is actually increasing in Turkey. And that is on account of some of these initiatives, but also because we are launching new products. So a combination of new product launch, pricing as well as exports, I think, will keep this business pretty steady going ahead. But of course, given the situation there, we are watching very carefully. We expect that this is a market where the results can only be positive going ahead. On the second part of your question is what's happening on India formulations. The India formulation business for us is performing well. It is a combination of 2 parts. One, is our own products and the second is a distribution business that we do for one of the largest multinationals. On both these fronts, we are continuing to grow in line and slightly ahead of the market. We are also launching new products. So that's what you're seeing in the results. Of course this particular quarter, there is a bit of an aberration because last year at the same quarter, there was a big breakout of the lumpy skin disease in the ruminant animal market because of which there was a disproportionate jump in medicine consumption. That has eased a bit this quarter. And also one of our products, which we distribute, was out of stock for various manufacturing reasons, and that is expected to come back in the next quarter end, and therefore, we should begin to see that stability. We are, of course, very confident that India will be a steady, growing market. And that's something we have said before and we continue to stay by it. We will keep our eyes open for any kind of partnership opportunities to take this business further.

[Operator Instructions] The next question is from the line of [ Dashrath Shah ] from [ Sabnis Financials ].

Am I Audible?

Yes, [ Dashrath ]. Please go ahead.

Yes. Yes, sir. So one of the first questions I had was there's a visible increase in gross margins during the quarter when I compare it to Y-on-Y and Q-on-Q. And so just can you give me a sense of what are the major contributors to this and what are the steps you've taken to ensure that this is happening?

So thank you, [ Dashrath ], for this question. So I think we've spoken earlier as well as in the last 2 calls that we have a few initiatives across the company to improve gross margins. And those have started now giving the results. These required some tough calls which we took in the last couple of quarters. So if I really split it into 2, the API side, we have a project called Project Pragati, which is a comprehensive cost improvement program. And that is beginning to give us results as we're getting more competitive in our product pricing in our cost structure. And that is, of course, improving the gross margins of our API business. The second part of it is really the mix of products we are selling. We are, of course, focusing more on quality customers as well as products which are the higher margin accretive. And therefore, we are seeing the second sort of lever play out now. The third is that on a formulations business, both in Europe as well as in Turkey. It is a combination of getting out of low-margin product mixes, focusing on high-margin products and also on some aggressive pricing actions given that we are in an inflationary environment. The last part, of course, is there is better management at the end of procurement. So there is some softening of prices as well, which are coming to play for us and beneficial for us. So I would say that there is a very, very comprehensive set of actions. This is in line with what we've been speaking for the last couple of quarters that we intend to take our margins by the end of the year towards the double-digit kind of a margin. And that's the direction in this quarter as well is going. Anything else, Saurav, from your side to add?

No, I think you have covered pretty much.

Next, I wanted to know are increase in employee costs. So have we have -- had some key signings or management signings or something like that?

I'll leave that to Saurav.

So, [ Dashrath ], as I also touched upon deeply in my introduction. The employee increase is onetime expenditure which we are paying to -- for all the operations -- operational reorganizations we are doing across our geographies. So this is onetime expense, which is not a normal. And going forward, we'll see all this normalizing back to the normal level. In fact, we'll see improvement going forward for the restructuring.

Okay. Next, I just had a couple of questions on strategy moving forward. So in the Europe business, you've guided that you moved out of some unprofitable businesses. So just I wanted to know what will be a long-term strategy for this continent in Europe?

So Europe for us is important, but at the same time, it is a business that we need to run profitably. So we have 2 kinds of businesses. We have our own manufacturing operation, which is there in Spain, which is an important market for us. It's also one of the largest animal health markets in Europe. So in Spain, we are having sort of restructured and rationalized the portfolio. We are now, of course, expanding with new product launches. So we continue to launch new products in Spain in the area of ruminant animals, which is production animals. And in the area of companion animals we have increased our distribution footprint. So we are now in -- distributing more companion animal products from -- in the area of pet care. And we are also there in Belgium, we are there in Netherlands, we're there in Scandinavia and we are setting up some distribution opportunities in other markets in Europe as well. So overall, for us in Europe, the first stage was to make sure we have a profitable portfolio. And now the next stage of it is, of course, to expand through new launches as well as new distribution arrangements.

Okay. Okay, sir. And so sir, a follow-up on that is, we've mentioned that we generally cater to 2 types of licenses, companion and food consumption. So just can you name a couple of animals that you primarily -- or our products primarily cater to this could be cattle, horses, so just an idea of that.

So look, this industry, when you say production animals, this is meant essentially there is cattle and -- which is bovine cattle and then there is swine. And of course, there are also other production animals, which are used for food, like, poultry and -- so that's really the section that they are in. And on companion animals, of course, it tends to be the typical pets like dogs and cats. Beyond that -- we are not more sophisticated than that. I mean if we just leave as at production animals...

Okay. Sir, finally...

Can we take this as a last question because I think there are other people in the queue.

So my natural extension to that question will be, so what will your geographical mix in terms of -- should we -- are we also going to focus on countries such as Argentina or Mexico or developed markets such as China or even Australia because we also have large bovine cattle in U.S.A. So how is it -- is there something that is being planned for the company?

Mr. [ Shah ], may we request you to return...

We'll probably come back to this at the end, if we have some time. Yes. I'll take the question at the end.

The next question is from the line of Nikhil Shetty from Nuvama Wealth Research.

Congrats on a decent recovery in Q2. Sir, can you provide some clarity on capacity utilization level in API business and how albendazole is doing?

Sharat will probably give you a sense on our capacity utilization. Sharat?

So the capacity utilization has been about 70%, 75%. It's hovering around that. While you will see that the volumes have picked up in some of these molecules, deworming molecules, however, there is a pricing pressure because of the reasons which Raja already elaborated. Coming to albendazole, yes, it's the same story. Volumes are not as high as they used to be because of muted demand in Europe, because weather conditions and/or otherwise, the key businesses, which are there in albendazole, they remain intact and they are [ steady ].

On the capacity front, just to add since there are 2 parts. One is, of course, we are at [ 70%, 75% ] capacity. Also some of the initiatives which we have done in Project Pragati which is really on manufacturing excellence as well. That itself also has helped us ensure that there is adequate capacity available for our products for both going ahead.