Release Date: May 16, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sequent Scientific Ltd (BOM:512529, Financial) achieved its highest EBITDA in the last 12 quarters, with a pre-ESOP cost of INR411 million.
- The company reported an EBITDA margin pre-ESOP cost of 11.4%, slightly ahead of its guidance.
- European operations showed strong growth, with a 7.9% year-on-year increase in Q4.
- The India formulations business grew by 9% year-on-year in Q4, driven by new product launches.
- The API business saw a strong sequential growth of 39% in Q4, with a 2% year-on-year increase.
Negative Points
- Overall revenue declined by 1.5% year-on-year in Q4, mainly due to a higher base in the previous year and discontinued businesses.
- The macro environment remains volatile, with inflation and currency issues affecting some markets.
- Turkey's inflation remains elevated at over 60%, posing challenges despite government actions.
- The emerging markets business has been weak, with currency challenges in regions like the Middle East affecting performance.
- Net debt increased to INR3,789 million as of March 31, 2024, compared to INR3,654 million in March 2023.
Q & A Highlights
Q: My first question is on the API business. What has been the driver of sequential revenue growth? And can you maintain this momentum in the coming financial year? Also, are there any new contracts that you have received in your API business, which can materially add to your revenue?
A: Thank you, Velina. Yes, the API business is accelerating, and we expect to come closer to the INR100 crores run rate. The growth is driven by our strong presence in regulated markets like Europe and the US, which value quality suppliers. We are also expanding our customer base and have new contracts in the pipeline, although specifics cannot be disclosed for confidentiality reasons.
Q: Gross margin has improved nearly by 100 basis points on a QoQ basis. What are the drivers of the same? And by when can we get back to the historical 50% margin?
A: The improvement in gross margin is due to cost optimization initiatives, operational efficiencies, and a reshaped portfolio focusing on higher-margin products. While we can't provide forward guidance on reaching 50% margins, we are confident that the annualization of our initiatives will continue to improve our gross margins.
Q: Can we expect to sustain these double-digit EBITDA margins for the next financial year on a full-year basis? And by when can we reach the mid-teens margins indicated in earlier calls?
A: We believe the margin of Q4 should be sustainable next year, with some quarterly fluctuations. We are working towards improving margins further, aiming for low-teens to mid-teens in the next financial year.
Q: What is the overall outlook for the business over the next three years, particularly in terms of top-line growth and debt levels?
A: We aim to achieve double-digit top-line growth over the next three years and improve our EBITDA margins to the high teens. While debt levels may remain stable to support business growth and strategic opportunities, our debt to EBITDA ratio is expected to improve consistently.
Q: Is the deworming portfolio in the API business fully recovered post-COVID, and what is the filing and development pipeline for the API portfolio?
A: The deworming portfolio is stable and showing volume growth. We typically file three to four new products annually, with a focus on companion animal products. We aim to maintain a three-digit quarterly revenue run rate in the next 12 to 24 months.
Q: Are there any plans to issue new ESOPs, and what should we expect in terms of ESOP costs over the next couple of years?
A: We constantly evaluate issuing ESOPs to employees, but the overall pool is fixed, so we don't expect significant additional costs. The impact of ESOP costs is on a declining trend.
Q: What is the reason behind the single-digit growth in Europe revenues, and what is the growth rate target for the Europe business over the next couple of years?
A: Europe continues to perform well, and we expect higher single-digit to early double-digit growth going forward. The region has been a significant contributor to our margin improvement, and we anticipate even better performance in the coming financial year.
Q: What is the update on strategic M&A activities? Can we expect any M&A activity in the near term?
A: We are actively evaluating targets for strategic M&A, including opportunities in formulations and APIs. Any move will be made responsibly and must be accretive to our business.
Q: When do we expect growth to return in the emerging markets business, and what is the update on the pricing and currency situation in Turkey?
A: Emerging markets will be a mix for a while, but we are seeing stabilization in Turkey with price increases compensating for inflation. We are also focusing on volume growth. In Brazil, we face short-term pressures due to tender variations, but overall, we expect to do well in emerging markets.
Q: What growth are we targeting for the India business, and what will be the drivers for this year?
A: The India business is strategic and important to us. We expect double-digit growth driven by our own brands and the restoration of supply challenges from our principal. We are also expanding our product portfolio with new launches.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
