Viyash Scientific Limited (512529) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Sequent Scientific Limited Q1 and FY '25 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.

A very good morning, and thank you for joining us today for Sequent Scientific's earnings conference call for the first quarter and full year ended financial year 2024. Today, we will have with us Rajaram, Sequent's 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 been uploaded on our website, as well as 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 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 Rajaram to make the opening comments.

Thank you, Abhishek. Good morning, everyone. I'm Rajaram Narayanan, Managing Director of the company. A very warm welcome to everybody on the call for the quarter 1 FY '24/'25 results. Joining me on this call is Mr. Saurav Bhala, our Chief Financial Officer. This is the first quarter of a new financial year, and I am delighted to share that it has started well for the company. We continue to strengthen our performance and are on course to delivering our plans as per the guidance that we have shared with you over the last few calls. Our transformation program, which was rolled out late last year has continued to deliver. And all our businesses are becoming more competitive as a results of initiatives we have taken to deliver a better product mix, introduce new products, embed operational efficiencies and increase our investment on R&D and talent. Coming to the performance of the quarter. In quarter 1 FY '25, our consolidated revenues came in at INR 3,902 million during the quarter, which translates to a strong revenue growth of 17.1% when compared to the same quarter last year, that is Q1 FY '24. Sequentially as well, this represents a revenue growth of 8% compared to the previous quarter. This quarter -- this growth continues to be quality growth, which is seen in the margin and the EBITDA numbers. During the last quarter, the company recorded an EBITDA pre-ESOP of INR 483 million, which is the highest recorded quarterly EBITDA pre-ESOP in the last 3 years. This translates to an EBITDA pre-ESOP margins of 12.4%, which continues to show an increasing trend in line with our targets and guidance. While Saurav will go into more details, I'll share some key highlights. The formulation business which accounts for 3/4 of our revenues and is spread over multiple geographies show a strong growth of 21.1% versus quarter 1 last year. Let me give you an overview of some of the reasons. So there was strong growth in Europe, particularly in Benelux countries as there was increased demand due to outbreak of virus diseases. Our teams are very agile. And with the help of our partners, we have managed to support the local government in making vaccines available. The continuing work on adoption of new treatments such as phytosolutions have helped volume growth in home and export markets for our European companies. Our strong presence at the front end in many of these markets helps us to build strong relationships with innovators for distributing select products. This is a stream of business development which we intend to pursue further. On the whole, the margin improvement initiatives in Europe around portfolio rationalization, pricing and new products that provide a strong momentum to the results. Coming to emerging market. In Turkey, the government actions on inflation and currency have resulted in an improving climate for investments. This, in turn, has helped the environment in Turkey to move towards more predictability. Our business has taken judicious price increases while accelerating introduction of new products and extensions. And as we have indicated earlier, Turkey is emerging as a good base for exports. We have recently received the EU GMP certification for our manufacturing facility in Turkey. We continue to accelerate exports to other emerging markets from Turkey, which, in turn, helps in heading on our foreign exchange requirements in addition to, of course, driving operational efficiencies. Turkey is one of the large markets for animal health, and we have a very strong presence in the market in Turkey. And the priority in the coming quarters, it should drive volume growth while maintaining a strong discipline in operations. Our business in other emerging markets has been stable on the whole, BSM positive, and in some places, some challenges. Our formulations business in India is poised for growth. We have expanded our team as we have initiated earlier, and now the team is on ground, and this should begin to deliver results towards the second half of the year. India is a key market for development, and we are pursuing this plan aggressively in terms of products on NAM presence as well as the R&D. Now coming to the other large business, which is API, which accounts for 1/4 of our total revenues. The API revenues for the quarter grew at 14.4% in comparison to the same quarter last year. This is a strong performance coming on the back of a strong prior quarter. Our margin improvement plan has been rolled out well under the name project Pragati, to which I have alluded a few times. This is a comprehensive program across all work areas in API to deliver operational excellence. Sales from regulated markets remain strong. We are also seeing some positive signs in the demand for anthelmintic drugs, which is an area where we have substantial experience and expertise Importantly, we are preparing ourselves for the future. The Vizag API facility has received a positive reviews at the EIR, which is Establishment Inspection Report. We've also received preliminary certification from new markets like Japan. And we are in the process of finalizing prequalification registrations for supply for WHO products. All of these further strengthen our preparedness for new opportunities. So overall, it has been a good start to the financial year. The animal health market remains attractive, driven by the increasing demand for protein, higher awareness of diseases and increasing pet ownership. Of course, there are many challenges in the environment, geopolitical events, transformation and technology and the of course socioeconomic undercurrents. Our company has learned to be agile and responsive to the things that we can control. And I believe that this capability will serve us better and go for long. I wish to, first of all, thank all our employees for their resilience and commitment to grow and deliver. Our employees, our business partners and investors have had a big role to play in this improving performance. We are now poised for accelerated growth while improving margins. The increasing interest in animal health across the world reaffirms our belief that the company is operating in a growing market and is positioned for a larger play in the sector. We will also continue to evaluate opportunities for strategic partnerships or inorganic actions, both in formulations and in APIs. We remain focused and confident that our actions and plans will deliver consistent, profitable and sustainable growth in the coming years. I'll now hand over to Saurav, our CFO, who, with his team, has been at the forefront of the efforts that I've spoken about. Over to you, Saurav.

Thank you, Raja. Good morning, everyone. It's my pleasure to be here today and share key insights into the financial performance of our company for Q1 '25. Our total revenue and EBITDA pre-ESOP, for the quarter, is INR 3,902 million and INR 483 million, respectively. Our formulation business contributed INR 3,002 million and API business contributed INR 924 million. Our European operations have shown robust growth, largely pulled by new business opportunities and results of our portfolio restructuring over the past few quarters. Europe achieved revenue of INR 1,571 million, reflecting a 34% year-on-year increase or growth. Emerging markets reported revenue of INR 1,187 million, marking a 36% year-on-year growth in constant currency terms. This increase were driven by the decisive price actions estimated in Turkey. India formulation business clocked a revenue of INR 244 million. Moving on to margins. I'm pleased to share that our gross margins has improved by 3.60 percentage, rising from 41.5% in Q1 financial year '24 to 45.1% in Q1 financial year '25. This increase is attributed to several operational efficiency optimization areas as shown over last few quarters, such as optimizing the sales product mix, effectively applying price increases across geographies and improve operational efficiencies in our key business segments. Happy to inform you that our target initiatives to optimize our cost structure and drive operating leverage has successfully led to a notable reduction in our operating expenses despite absorbing inflationary pressures across regions globally. We have managed to achieve a 1.1% reduction in our OpEx on a Y-o-Y basis. That is INR 1,291 million in Q1 financial year '24, to INR 1,276 million in Q1 financial year '25, reflecting our commitment to driving profitable growth with clear focus on operational excellence. The above merits have resulted in significant improvement in our EBITDA margins pre-ESOP. On a Y-o-Y basis, the increase is 9.60% from 2.8% in Q1 financial year '24 to 12.4% in Q1 financial year '25. And on a quarter-on-quarter basis, the increase is about 1% from 11.4% in Q4 financial year '24 to 12.4% in Q1 '25. We also successfully completed our term loan restructuring process, moving away from multi-geography multibank structure. This restructuring has resulted in simplifying our borrowing structure and covenant. It has also helped us in creating the additional lines available to support our business growth needs across geographies in the time to come. I thank you all for your continued support. And now I'll request for the quorum to be open for Q&A.

Steve, can we take the Q&A, please?

[Operator Instructions] Your first question is from the line of [ Jagdish Selma ], an individual investor.

Congratulations on an excellent set of numbers. I just have a few questions. First question is, could you just throw some light on the reasons behind the increase in EBITDA margin in this quarter? And what can we expect -- can we expect this to increase for the rest of the year? This is my first question.

Can you -- do you have any more questions, Jagdish? We'll take them altogether. Anything else that you have?

Great, sir. Then my second question is what is the reason behind the high growth in Europe? And in which markets you are growing in Europe? This is my second question. And you were talking about the Turkey -- or in the -- businesses in Turkey. So you have said the environment is more stable, right? So the performance is going to be sustainable? Or what is our long-term market strategy in Turkey? This is my third question.

Okay. Thank you very much. I think this will help answer a lot of, probably, clarification on the things we have spoken. So first of all, on increasing EBITDA margin in the quarter. I think -- if you remember, we have already indicated last year that towards the end of FY '24, we would be moving to double-digit margins. So we had achieved 11-plus percent, even in quarter 4. So to that extent, a 12.4% margin is an increasing trend, and it is the benefit which is coming through from both some of the actions and of course, some of the growth that we are seeing in the market. So the EBITDA margin improvement is across all the sectors. In the API business, we have seen, of course, the leverage play in because when you have sales which are higher, you do have that advantage coming in on account of your operational initiatives that you have taken. So the margin improvement initiatives in the API business, coupled with the top line which has come in and the product mix, that's one reason why we are seeing it. As Saurav told you, the gross margins have been steadily moving up, and we have kept costs under control. On the formulation side, EBITDA margin is largely driven by new markets. One is Turkey, where we have, of course, seen the currency a bit more stable, and therefore, price increases and volume increases are beginning to play out well. The second place where we have seen this growth is, of course, in Europe, where we had already begun to see, for the last couple of quarters, an improving margin trend. So some of that leverage has helped. And of course, in this quarter, there has been accelerated demand on some animal health products, because there are -- animal health business is typically also driven by periodic outbreaks which happen in diseases, and these tend to vary year-to-year in terms of the intensity. And this quarter, there have been a couple of viral diseases which have been more intense. And therefore, we've had the opportunity to supply vaccines to some of the European markets, particularly in Belgium and Netherlands, which, of course, has allowed us to take some market share in those markets and gain some top line as well. And that's the other reason why we are seeing improved performance in Europe. So there are a combination of these things, which has resulted in increased EBITDA margin. But I think the way you've got to look at it is to look at it over a period of a year. And I think what we should stick by is that what we have indicated earlier, which is we will move towards ending the year more in mid-teens. And therefore, there will be some ups and downs, of course, of opportunity. But directionally, we will move towards a mid-teen margin by the end of the year. Yes. I hope that also takes care. Yes, in terms of sustainability of performance in Turkey, at this point, of time, the government interventions over the last kind of couple of -- more than 2 quarters actually, has been consistent. Inflation is gradually coming down. Interest rates are going up, and there has been increase in the interest in -- for investment in Turkey. And the policy is also more stable. And therefore, it allows a large company or a company with a big market share presence like us to take more predictable, stable actions in that market. So while things are substantially better than what they were a year ago, we have to still be very agile, and we are taking the right kind of actions on pricing and volume in that market.

The next question is from the line of [ Zeena Jen ], an individual investor.

Firstly, congratulations on a good set of numbers. I have a couple of questions. So I just wanted to understand a bit better, what is happening on the India formulation business, which is meant to be one of the growth focus areas. And you had mentioned earlier about some discontinued product. So have the supply started for the same? Secondly, there is a mention of vaccine business. Are we manufacturing vaccines? And thirdly, have you seen the full impact of all the costs and some of the initiatives will we see more during this year?

Thank you, [ Zeena ]. So the first question on India formulations, as we have said before, India is an important market which we are doubling down on and -- for our formulations business. So we have a reasonable strength, but I think there's an opportunity, which we find, to scale up here quickly. So the first thing we have done is to scale up our on-presence. So in -- towards the end of last quarter, we had begun an expansion on this field, and we have expanded our team by almost 40%, and we will follow this up with more expansions towards the end of this year. So the India formulation business today, which is run at an annualized sales of around INR 120 crores to INR 140 crores, we expect that this should definitely accelerate in another 12 to 18 months. So the people are on ground. We have a very good portfolio, and now it's really about making it available to a larger number of veterinarians and farmers. The third is, of course, to launch new products, which we have begun. We have the strength of being able to quickly import products which are manufactured by some of our overseas companies as well, which are appropriate for the market. So those select products, we have begun registering in India. So I think this will be a business that is long term, sustainable and has enough opportunities. Because in India, we are still really talking, at this point of time about the production animals and that's largely cattle for dairy. But the Companion Animal segment is still to grow. It is nowhere near the size which is there in the comparable market. So that's another area which to grow that we now need to sort of build the foundation, and that's what we have started, at this point, of time. The question on the discontinued product. Yes, we are also distributors for one of the largest companies for a select range products. And one of the large SKUs was not available for most of last year. We have confirmation that this will begin to come back into supply because their production facilities have had an issue, and we think that will come back before the end of the year. So what you're seeing right now is a bit of the base effect of having had it for a quarter and not having had all of it this quarter. But irrespective of that, we are focused on growing the rest of the portfolio. And when that comes in, that'll only add to it towards the end of the year. Are we -- the question on vaccines, we're not in the manufacturing of vaccines. But because we have a very strong presence in market in the front end in many countries, we are looking at vaccines as being an interesting area to distribute. And there are many companies which have innovative vaccines, but they don't necessarily have the front end to be able to distribute these products. And so the reference to vaccines, which you see in this quarter is the distribution that we have started for one of our partners who's a strong player in Europe. And we have, therefore, taken that to market in this quarter. And that's what we are seeing on vaccines right now. Sorry, what was your third question? Whether all the costs have come into play, at this point, of time. I think this is the year where we will annualize a lot of it because most of the activities in terms of cost initiatives are towards second half of next year -- of last year. So we should get annualization benefits. But having said that, we've already commenced version 2.0 of the program because this is a continuous journey. So we have a next set of initiatives, which will again roll out, and we need to keep doing that every year to get the benefit. Yes. I hope that answers your question.

The next question is from the line of Chintan Chheda from Quest Investment Advisors.

Sir, my first question is related to the formulations business. So can you give a split between the volume and price growth during the quarter? Secondly, we were expecting some kind of a 10%, 12% growth in FY '25 on our overall business. So with the strong start to the year, should we expect a better growth for the full year? And next is, we have seen a very high interest cost during this quarter. So is there any one-off? And what is the net debt as of 30th June?

So I'll take the first 2 questions and ask Saurav to answer the -- next to the -- take third and fourth on interest and net debt. So firstly, on the volume and price, it's a bit of a combination of different markets where it is on the formulation side. I would say that on the Turkey business, most of the growth would be entirely priced, but on the other hand, in the European business, we have probably about 3% to 4%, which would be on price, and the rest of it would be largely volume. Yes. So in an aggregate basis, I don't have the number off hand, but I mean, we look at it as market-by-market because the nature of our markets are such where we have strong sort of price increases on account of inflation and in other markets, we don't. So the general direction for that going ahead would be that we would expect a stable scenario of 3 sort of -- if you look at it top line, it should grow back at 10% to 12%. It should be 1/3, 1/3, 1/3. About 1/3 on volume, about 1/3 on pricing and about 1/3 coming from new products and launches. That's a good sort of mix which we would expect for this kind of a business going ahead in the future. But given the inflation in Turkey, at this point of time, it'll start exactly playing out in that way, but that would be over soon. The second question you have is on, we had given a volume, a top-line growth of 10% to 12% for full year. Yes, we have started well at 21.1%. But I think that I would not want to sort of say that this immediately would translate into a higher than 10% to 12% growth at this point, a bit early. Let's watch for another quarter or so because some of it is also because of the base that we had at quarter 1 last year. But I think directionally, all that I can say is that we are on course to deliver what we have guided, which is a top line of low double digits and maintained EBITDA exit for this year. Yes. I think Saurav, on interest and net debt, if you have.

So debt level, more or less, remains same as March, slight increase of INR 10 crores or INR 11 crores. The cost has gone up because I explained in the last call and during this call also, we have undertaken a large term loan restructuring process. By simplifying the structure, wherein earlier, we had multiple banks in multiple geographies lending at various covenants and managing that was a challenge. Now the current structure is one bank serving all our requirements across the globe. Also we expect next couple of years of requirement. And we have also created the additional lines in case we see the need for future business support. So interest has slightly gone up because of that. And this is a short-term phenomenon. I think the interest rate increase, which you have seen will remain so of that amount will remain for this next few quarters, and then it will start going down.

On net debt. Net debt, yes.

Net debt, yes, sorry. Net debt has gone down by about INR 12 crores because our cash flow from operations had been pretty strong in this quarter. Because Q4 was strong, this quarter is strong so cash flow remains to be fairly strong.

And directionally, I think also...

Yes. Net debt should be lower.

The next question is from the line of V.P. Rajesh from Banyan Capital.

Congratulations on delivering on the project that you had described a few quarters ago. So really happy having to see that net debt. Five questions. Just a quick follow-up on the interest rates. So if you're consolidating, you would expect the interest rate will come down. And then the second related question is, is it a floating debt? Or is it a fixed interest cost debt? So that is the first one. Second, on the CapEx side, if you can give an update as to what we are going to be spending this year. And third, on the M&A side, we have been thinking about recent acquisitions and talked about it in the previous calls. So any update on that? And last 2 questions are first, on the business side. Right now we are 75% formulations. So once you actually get to a steady state, what kind of contribution you are looking between formulations and API? And lastly, on the margins for both of those.

Sure. Thanks for the question, Rajesh. I'll take first and then I'll ask Raja to address the next two. On the interest rate, it is not a fixed rate. It is a floating rate. So as soon as the interest rates start going down, you will see a decrease in the rate of interest applicable to our loans. And on the amount also, interest amount, we don't see any substantial increase on or borrowing. So that's why in my earlier statement, I said the interest rates would be more or less similar to what you are thinking in this quarter for short period, for this year, and then it will start going down. Second, on the CapEx. We have done most part of our investments in the last few years where we have created the base which will support our business operations growth as required for the next few years. Having said that, there are various opportunities which we are seeing in our global formulation. So the CapEx for the current year is going to be subdued, but it's supposed to be around INR 50 crores to INR 60 crores for the current financial year across the board. Raja, your take on M&A?

Yes. So I'll take your other 3 questions, Rajesh, thank you. For the first on M&A, I think we have always been on the lookout, but in the last -- in fact, just about 18 months ago, we were pretty close to completing a transaction which was there and then we could not take it further, which we spoke about in our earlier call. But we are very serious about looking at opportunities to grow inorganically, provided, of course, there is a strategic fit, and more importantly, it's a disciplined acquisition in terms of what we can do. We look both for -- on the formulation side, we would be focusing on opportunities which may be there on companion animals largely. The kind of transactions, which are, right now, possible on the formulation side, would not be full-fledged companies, but it could be assets which are around brands, which could be around licensing, things of that -- sort of that's where we are right now, . As you can see, we are investing heavily into BD partnerships because of the kind of market access that we have in many places with our existing portfolio. So it could be bolt-on brands and partnerships. That's one kind of M&A we are looking at. On the API side, our primary interest would be if there is anything which helps us strengthen or shorten the time-to-market in terms of R&D or give us advantages in terms of scale and intermediates or any other kind of in-house -- in-housing of operations, which makes us more profitable in companion, yes. So we are constantly on the lookout. We feel that after the last 12 months of fixing some of the things which are in-house, we are at a stage where we should be ready to take those on. On the shape of the business, 75-25 on formulation, API. I really don't think we have -- it's more an outcome of how different times, different businesses grow. We used to be -- I think we've also been 65-35 at some point of time. We have become 75-25 now. But my sense is you should expect that the business -- the formulation business will be anywhere between 70% to 75% and the rest of it would be API, depending on which quarter it is and how -- because there's also seasonality in these businesses, which is there. But what is good is that growth of the business have started to stabilize and grow. We expect, from the margins on these, we really don't look at the individual segment margins. We don't disclose them, but I think both of them are consistently growing. And there isn't too much of a difference between the 2 versus the average margin of the company right now. So they're both a little bit above and a little bit below the average gross margin of the company.