Viyash Scientific Limited (512529) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the SeQuent Scientific Limited Transaction Update 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.

Thanks, Sagar. A very good evening, and thank you for joining us today for SeQuent and Viyash merger transaction update conference call. Today, we have with us Mr. Rajaram, SeQuent's Managing Director and CEO; and Dr. Hari Babu, Co-Founder, Chairman and CEO of Viyash Life Sciences. The transcript for this call will be available in a week's time on the company's website. Please note that today's discussion may be forward-looking in nature and must be viewed in relation to the risk pertaining to the business. We request you to kindly restrict the discussions in this call to the transaction announced. After the end of this call, in case if you have any further questions, please feel free to reach out with the Investor Relation team. I now hand over the call to Mr. Rajaram to make the opening comments.

Thank you, Abhishek. Good evening, everyone. Today, we have the opportunity to throw more light on the announcement, which was made on the 27th of September regarding the proposed merger between SeQuent Scientific Limited and Viyash Life Sciences Limited. I'm really delighted that Dr. Hari Babu, the Co-Founder, Chairman and CEO of Viyash Life Sciences is here on the call with me today. Dr. Hari Babu is well known in the industry for his experience and expertise in the area of pharmaceuticals globally. Over the last 35 years, he's been a scientist, a technologists, global CXO and an entrepreneur. I'm also joined by Saurav Bhala, CFO of SeQuent, and Mr. Ramakant Singani, CFO of Viyash. This is a significant step in the journey of the company as we move forward on our SeQuent 3.0 plan to secure a leadership position in animal health with end-to-end capabilities. The proposed merger will create a unique and differentiated platform to serve global markets and pharmaceutical clients. The combined entity will have access to over 150 countries with a strong R&D, IP and product development capabilities, apart from state-of-the-art manufacturing facilities. The combined entity will have 5x higher R&D talent pool and 9x more in terms of U.S. FDA-approved manufacturing facilities, which will form a strong operating backbone to serve our customers better. The entity will also have a more robust financial profile as reflected in its margin and balance sheet. The merger will be accretive to SeQuent in revenue growth and margin in the very first year itself and deleverage the balance sheet. The transaction would be at a valuation that is at a significant discount, in fact 44% discount to the current trading multiples of SeQuent, and we believe that it will be value accretive for SeQuent shareholders. The process we have followed to arrive at this announcement as well as the swap ratio has adhered to the highest standards of governance. Throughout the process, we have worked with highly reputed leading advisers and valuation agencies. The proposed merger is subject to receipt of customary, statutory and regulatory approvals, including from shareholders, stock exchanges, NASH, NCLT, Competition Commission, et cetera. Upon the scheme becoming effective, all shareholders of Viyash will be issued shares of SeQuent in the ratio of 56 shares of SeQuent for every 100 shares of Viyash. The new shares of SeQuent so issued will be traded at the National Stock Exchange and the Bombay Stock Exchange. I will now request Dr. Hari Babu to introduce themselves and talk to us about the Viyash business and its outlook. Over to you, Dr. Hari.

Thanks, Rajaram and good evening, everyone. So my name is Dr. Hari Babu. Of course, industry known as Mylan Hari Babu. So I've been with the industry almost last 30 years. Of course, after completing my PhD in organic chemistry, started in API, R&D, then handled the various functions, quality, regulatory and joined in [ Matrix ] early 2000 and grown actually with the company, almost 20, 25 years with Matrix, Mylan together. So actually I was head of takeoffs and ad hoc quality, then India Chief Operating, CEO. So finally, ended up as a Global Chief Operating Officer for Mylan. So where I have seen actually beginning of the Matrix so where there was a small company to the big global company actually where I handle almost 45,000 people like [indiscernible]. So a lot of excitement, did great job. And then after that, I sell it to great Mylan, then started Viyash something in 2019. So before starting I debated myself, actually debated with a couple of people. What should we do? How can we start as differently since this market is so crowded. If you do same as what others are doing, how can you differentiate, how can you grow the company. So we had actually a lot of debates and had a thought process to start these things. The intention was to building the right quality company. So the intention of building this company was day 1 thesis was that build the right company, with a small company execution capabilities with big companies, regulatory, quality, R&D, IP capabilities. That's how we thought we can differentiate the company. So in that process, we acquired a couple of companies, one started with the intermediate company, then a few API manufacturing facilities. Then we partnered with Carlyle. The reason was with Carlyle partnering was actually to build a big platform. To that scenario unless you have a scale, it's very difficult to grow, okay, to and also face all headwinds in between unless we have scale and financial strength, it's very difficult to do that. That's how we work together, we partnered and we acquired a couple of other companies like Symed that was one of the biggest acquisition. Then one of the formulation companies [in India ]. All put together, we thought actually we can build a right integrated pharmaceutical company that's the thesis initially. Then first 1, 2 years, this all was done in 2021. We completed all these activities by end of 2021 And first 2 years, we spent a lot of time to understand these companies because they are different. And it is a different size of working. We thought let's first understand and address whatever other things required to build the right company. That's how we took almost 2 years to reassess, to rebuild the company, that's how we rebuild it at our senior management team and that team is where I picked up personally from various industries are all pretty actually very well experienced guys in big pharma. We started building the team. Then we build R&D capabilities. Then most important to grow and differentiate all you know quality and [ EHS ], R&D are very essential to differentiate and grow. That's how we spend a lot of resources first 2 years to rebuild these entities, a couple of divestments also done part of optimization. Then finally, we ended up having 9 high-quality U.S. FDA-approved facilities. So all if you see every facility is U.S. FDA-approved. That's the minimum thing. Of course, majority of API factories are approved by all other regulatory agencies. So with that, I feel probably actually, we have a strong platform build with respect to team, with respect to culture, with respect to R&D, our quality. It's a fantastic job was done by team first 2 years, and build a right base at 2024. So I feel actually the starting point for Viyash in 2024 is the right way to grow. That's how we started growing from '24. You can see the numbers how we have grown. And we have a fantastic opportunity to further. We streamlined a couple of things, whatever we acquired, integrate business, we downsize somewhere. Wherever is a long-term opportunity, we try to build the business with the high-end markets like innovators backward integrate are actually the -- a little more advanced Internet for the new products. Then API, we stepped up a lot. API, we started growing very well the last 2 years. So API is the biggest vertical for us today. And formulation also we started growing. Of course, in between, there were admins. Actually, now we started rebuilding that. With these 3 companies, we were able to do many things. One is wherever we have strong momentum is, we are able to do forward integration. Wherever we are strong in API where it requires either forward integration to free stores or backward integration to internet, are all that was initiated and a couple of things have done already or in the process of doing. All these things work pretty well. And today, we have a strong base. We have great customer base. And if you see our presentation, we sell almost in 150 countries. All kinds of countries we do that, whether it is highly regulated, developed countries or even the very low-end countries, but we are able to compete every market, okay. The regulated markets were able to compete with respect to IP, our R&D skill set. At the same time, with the small markets, other developed markets, we are able to compete with our cost efficiencies. It started growing, so 150 countries, a lot of products, you can see almost 60 plus products are commercial products. And at least, I can say 5 to 10 products are, we are the market leader. We have good market share globally. And it's very sustainable. It's not 1 year market leader, it's demonstrated couples of years actually showing growth and sustainability on that. So we have a strong product mix with large volume or mid volume and technology driven, all kinds of things. We have good product mix, commercial INR 60 crores, INR 70 crores API. And of course, another INR 30 crores, INR 40 crores for intermediate and [ 3 stores ], we have about 30 ANDAs. So all kinds of products and R&D, you must have seen that 200 resources in R&D with high-end analytical capabilities is able to do 10, 12 products in a year. It's a fantastic journey so far, but I see even better than the near future. And I strongly believe coming together with SeQuent, we have a lot of synergies on various things like business development, expanding market, utilizing better whatever we have capabilities like R&D, our manufacturing. That's, I think, is going to give a lot of synergies together. And I think I'm very excited to work together. I see it's a big growth opportunities for the company. And of course, end of the day it gives value to the investors and shareholders. With that, thank you very much Rajaram, who give us this opportunity.

Thank you, Dr. Hari. It's indeed a pleasure to have you here and have this conversation. I will now invite Saurav Bhala, our CFO, to share the details of the proposed transaction. Saurav?

Thank you, Raja and Dr. Hari. Let me run through the deal structure and the merger ratio. You would be happy to note we have done a very extensive due diligence and valuation exercise taking help of leading firms and best-in-class experts in domestic M&A as follows: Our deal advisers are JM Financials. Commercial diligence has been done by Bain & Company. Financials and tech dilutions has been done by KPMG. Legal division from advisers are AZB & Partners. Valuation jointly done by KPMG on behalf of SeQuent and PwC on behalf of Viyash. Fairness Opinion has been provided by ICICI Securities. Based on the recommendations of valuers and fairness opinion providers, and also an independent review by our board, the approved merger ratio as consented by the board, all the shareholders of Viyash will be issued shares of SeQuent in the ratio of 56 shares of SeQuent for every 100 shares of Viyash based on the approved swap ratio. We believe this merger is structured to deliver stronger combined growth and delivered long-term value to all the stakeholders. The benefit would start flowing from year 1, and we keep on improving over the years with the various synergy effects coming into place. The budget is anticipated to conclude over the next 12 to 15 months, subject to the various regulatory and other approvals required. In the indicated time line, we would require preapprovals from stock exchanges [indiscernible] our shareholders like you, NCLT, CCI and others. I would now request Abhishek to initiate the Q&A session. Yes, we can start the Q&A, please.

[Operator Instructions] Our first question is from the line of Amresh Kumar from GeoSphere Capital.

Congratulations on this transaction. Sir, I just wanted you to elaborate a little bit more on the synergistic part of the deal. How Viyash going to help SeQuent and vice versa. Given that what I understand is Viyash is largely a human health company, and we are an animal health company. So how are we going to help each other going forward? So that would be my first question, sir.

Do you have more questions, Amresh? You can put all of them together, then I'll -- or is that the only question?

No. And the second question is what will be the role of our promoter going forward in this -- after this transaction is over?

Sorry, just repeat the second one, what would be the?

The role of our promoter of the Carlyle after this transaction is over?

Okay. And so you have 2 questions, right?

Yes, yes.

Okay. Thank you very much, Amresh. I'll answer this, and I will also then invite Dr. Hari Babu has any comments. So I think the first thing is that if you really look at the way -- we need to look at SeQuent growth in the next 5 to 10 years. There are clearly a couple of shifts happening in the market. Okay. I think the first is that in the animal health space there has been an increasing move from the growth of the livestock business, and it's now moving more and more towards the growth of companion animal business, which is really the pet care piece of it. Some years ago, 40% of the developed market used to be in pet care. Today, it's well over 50%. And therefore, as the market for companion animal treatment keeps growing faster than what it is for farm animals, we also were looking at what do we need to do to build the necessary capabilities which are required to win in such a market. And it is a fact that the product treatments, et cetera, which are required for companion animals, increasingly are converging and are becoming closer to the kind of capabilities which are required from human pharma. And so clearly, we need capabilities in R&D, chemistry manufacturing, which at this point of time are not there within SeQuent adequately. So that's really the first piece where we've been looking for an opportunity to find a partner for this. The second part of it is that even in the farm animal space, increasingly, there is a lot more stringent demand in terms of requirements from regulators, but also that you need far more competitiveness in terms of cost of supply. And for SeQuent, it was important to build capabilities where we could be more competitive on costs by in-housing as many of our intermediates and early-stage requirements. So when we look at this, clearly, we see a synergy with a company like Viyash, because Viyash is a company which has a very, very differentiated play in the pharma market. It has a huge amount of capabilities in R&D. It has a track record of launching products, innovative products, working with some of the best companies in the world and at the same time, also having a large manufacturing base with U.S. FDA facilities. So clearly, that's something which comes in very useful for SeQuent's ambition. And on a stand-alone basis, also, Viyash is a fast-growing company of equal size in SeQuent and which has established itself in a niche and differentiated way in the overall human pharma market. The last piece of it, of course, is that financially also, it is a very accretive deal because if you really look at this margin in every respect, it is accretive on revenue, it's accretive on margin. It deleverages our balance sheet. And at the same time, we've also completed the share swap at very competitive discount because it is significantly discounted to the current trading multiple. I think it's about 44% discount to the current trading multiples of SeQuent. So even for our -- all our shareholders, it is a very value accretive transaction, which is being proposed. So I think when you put all of this together, there are clearly big advantages for SeQuent. And of course, there are also significant benefits for Viyash as a company. And I'll probably ask Dr. Hari to elaborate a bit on what is it for Viyash in this.

I think Rajaram addressed most of it before. I'll just add a little bit to that. As I mentioned in my introduction, could be lot of hard work [indiscernible] optimizing Viyash. We built a fantastic platform and started growing from 2024. You can see that '24 to '25, with our strong R&D capability, manufacturing network and manufacturing facilities, FDA approved and all other approval thing. And with these that growth and it was strongly from okay, 2024, it will continue whatever you can see from 2024 to Q1 FY '25. So that growth will continue definitely next 3 to 5 years kind of things. So, of course, we are continuously adding the products, technology and platforms. Coming to the synergies, as Rajaram indicated, there are a couple of synergies to SeQuent. The biggest thing was R&D support from Viyash, manufacturing network to SeQuent where we can add a lot of value for that [ backward ] integration capabilities. And when it comes to Viyash synergies, whatever customer base SeQuent is having today, most of the API business goes to innovator business. That relationship can add value to Viyash. That's how we see the big synergies in addition to the management teams, of course, support each other, there's a lot of synergies other than general synergies like material procurement and manufacturing, scale utilization or optimization, all these are actually synergies. Other than that, there a big synergy comes from the business perspective, customer relationship for both the companies. We do few products with few innovators whereas SeQuent do -- they have few other innovators. And our large focus is going to be the -- on that business. We see good synergies, at least midterm to long-term perspective.

Thank you, Dr. Hari. So I'll come to the second question, which is the role of the promoters, which is Carlyle. So yes, I mean, Carlyle as a promoter has been in both these companies. And I think the fact that they have supported this proposed transaction at the Board level indicates, of course, their long-term commitment to grow -- for both the companies to grow the business when they come together. And I think the nature of the terms of the transaction also we confirm that there's a lot of value which gets created to all our shareholders on this. Maybe we'll go to the next question. Is that fine, Amresh?

Yes, yes, Rajaram, that's very pretty clear.

The next question is from the line of [ Ritika ], who is an Individual Investor.

I had a question around the outlook of the capacity and CapEx requirements for Viyash. And are all the plants utilized? And also what about SeQuent. You can highlight the capacity utilization at SeQuent as well?

So maybe I'll give it to Dr. Hari to answer.

Yes, let me start, Ritika. Viyash's current capacity utilization is around close to 70%. And we don't see any additional CapEx requirement for near future, of course, a little bit is required for optimizing the capacities to suit for new products, but we don't expect a big CapEx in near future to manage Viyash. Of course, when you combine these companies when we start working together, if there is additional requirement requires for SeQuent, we need to work out. But at this point, we don't see any much CapEx requirement next, I can say 2 years at least.

Yes. Thank you, Ritika. I think that Dr. Hari has answered on behalf of SeQuent as well. That's the situation on Viyash. Do you have any other questions, Ritika?

No.

[Operator Instructions] The next question is from the line of Nikhil Shetty from Nuvama Wealth.

Congrats for this merger. So prima facie, this looks interesting. But I have a few questions. So what is the synergy benefit in terms of cost. So I can understand some of the raw materials, which we are procuring from others probably we'll procure from the big emerging entity. So what kind of a cost benefit we can see in the -- in terms of the EBITDA? And my second question is on the amortization part. Viyash have a substantial intangible asset, I believe, because we don't have access to the balance sheet, but we can see the significant amount in the -- getting it amortized every year or every quarter. So if you can throw some light on that?

Let me answer the first question on the cost synergies. So I can say short term where we are going to -- there could be some procurement since 2 companies are buying maybe some common raw materials. That's the one actually maybe low-hanging savings. And the biggest saving what we're looking, as I said, R&D and manufacturing capacity utilization. So when I say procuring intermediates from Viyash, okay, looking at the regulatory scenario, of course, we need to do a little more detail, understanding what kind of markets they filed, how long it takes. But once we do that, definitely, it's going to be good synergies, let's say, SeQuent can benefit at least 100 basis point to 250 basis points kind of thing. But we see big term and long term, it's going to be a good synergy. But short term, we need to work out because SeQuent as well as Viyash is working totally under regulatory environment. You may know sometimes regulatory takes a little longer time. But we are going to work together. Of course, we can get there.

Yes. I think the second question is really from Nikhil is on the...

Ramakant?

And I think maybe Ramakant, you can just...

Sure. Nikhil, as you rightly mentioned, yes, we do have a significant amount of amortization in our P&L, and we do have this amortization continue for about 2 years. FY '25 and FY '26 will continue at around that INR 90 crores, INR 95 crores is amortization per annum. FY '27, we'll have part of the period. So we are left at about 2 years and roughly a quarter more in terms of cleaning up the amortization [ amount ].

Yes, sure. And sir, if I may squeeze one more question. So basically, even if you look at the overall EBITDA, I believe, for both the businesses, we are targeting roughly 20%-odd EBITDA margin in couple of years. So I believe because of the cost benefits and operating leverage probably and with a better product mix, probably we'll be able to reach that. But what about the bottom line part because I'm concerned more about the bottom line part and how it is going to look like?

So are you saying at a post-PAT level?