Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Neuland Laboratories Ltd (BOM:524558, Financial) reported a 21.7% increase in total income for Q1 FY25, driven by high growth in the CMS business.
- The company's EBITDA margin improved by 174 basis points to 28.9% compared to Q1 FY24.
- Gross margin for the quarter was 56.1%, showing an improvement from 55.2% in Q1 FY23.
- Profit after tax increased significantly to INR98.3 crores from INR62.2 crores in Q1 FY24.
- The company generated a free cash flow of INR50.9 crores and repaid debt of around INR8.7 crores, resulting in a net debt position of INR110.2 crores.
Negative Points
- The CMS business is inherently lumpy, making quarterly performance an unreliable indicator of annual performance.
- FY25 is anticipated to be a year of moderate growth and normalized margins, indicating a potential slowdown compared to previous years.
- The company faces risks from fluctuations in foreign exchange rates and volatility in raw material costs.
- There is uncertainty regarding the impact of the US Biosecure Act on future business inflows.
- The company has not disclosed specific ROA metrics for new investments, making it difficult to gauge the financial impact of future capital expenditures.
Q & A Highlights
Q: Slide 10 CDMO project dashboard Phase II pipeline has improved significantly YoY. Is this organic or inorganic? What I mean by inorganic is molecule hitting our space from outside via track transfer instead of organic progression from Phase I to Phase II?
A: So Sajal, I think there's a combination of both which is happening when it comes to the number of molecules which are there in Phase II. We have had additions in terms of molecules which new business has gotten from customers. At the same time, we have worked with molecules in (inaudible) and they have also progressed to update is the reason why you find the collective number up there. So it's a mix but I think if I were to put the number there, I would say that it is almost 60%-40%, 60% in terms of progression and 40% in terms of new business that we have brought in.
Q: In a scenario where dollar starts reaping down to higher-than-normal inflation in the US and the ballooning US national debt, there will no doubt be a material impact on our business because we are predominantly a US dollar-denominated exports. So how do you guys read into this USD-linked fragility, which may or may not play out in near term is anybody's guess, but in a scenario, if it happens, I mean, what sort of strategy mitigation, et cetera, you have put in place?
A: Sajal, at this point, we've discussed this, obviously, between ourselves and also at the board level. And we made a conscious decision that we will leave our hedging position open for now. Having said that, it's hard for us or anyone exactly the dollar is going to go in the future. So at this point is that we look for movement given the Fed rate came back as uncut for now. Maybe it will be a rate cut in September, at least that's the indication. But we'll wait and see how the market plays out, and we'll take a suitable call at this time. But for us, it's hard at this time to predict whether it's going to weaken or strengthen.
Q: On the US Biosecure Act I just wanted some more clarity in terms of some of our peers have started mentioning that they are getting pilot projects or higher RFQs. So like are we doing anything or specific to kind of gain the attention of some of these Western innovators? Or what is it that is stopping us from getting more RFQs?
A: Yes. So I think the Biosecure at that's being discussed, I think there's a lot of anxiety amongst the US pharma biotech segment, no doubt. And a lot of companies have started exploratory work involving India. And as I had mentioned in my comments, we don't see any tangible RFPs or business inflow yet. But having said that, there's really a heightened level of customer it RFIs meeting requests, things like that, which could be considered as lead indicators of the behavior of pharma biotech, US pharma, US biotech. But it could also be premature on our part to bring that it will lead to a specific increase in new business. I think that's something that remains to be seen. I'm sure other companies are also enjoying the same thing. I think it's very evident in whatever conversations we have had with US customers that they are looking at an alternative to China, whether or not the Biosecure Act gets implemented in its coming drop or not. So there is business to come. It just remains to be seen how much and when. And that's where I think we also wanted to just caution that I don't expect any dramatic increase in new business, at least from our perspective. The other part in fact that I can give you is that we are also-- please understand that we are a pure-play API company. We don't offer a lot of other services to these companies. So obviously, Saharsh, given the focus area that we are in, our observations will be very different from what may be a clinical biologically focused CDMO or maybe med based focused CDMOs. So maybe you should take that also into consideration.
Q: With respect to CapEx. So I understand that we are adding more capacity in Unit 3, which I think you mentioned will be operational by end of FY26, if I'm not mistaken. So like since our Unit 1 and 2 are already being utilized at optimum capacity. And we expect the revenues to inflect from FY26 onwards. So why are we not trying to put a larger capacity or start putting a larger capacity right now so that when two years down the line, the Unit 3 gets fully utilized, we already have a capacity in place. So anything on that? And also, the current small addition which we are doing in Unit 1, is that for EMS business? Is that for a commercialized molecule? What is it? Maybe some color on that.
A: Yes, sure. I think you kind of loaded up multiple questions, so I'll try to answer them. The Unit 3 capacity creation will be ready by end of FY25. And will we commercialize in the second half of FY26, that's the comment we had made. The capacities of Unit 2 and Unit 1 are more limited, given that there is limited space over there. However, in Unit 1, as we had previously disclosed, we had acquired a 5-acre piece of land addition to Unit 1, which we will serve as an extension to Unit 1 and therefore, make units on a larger facility. There is some CapEx that was approved today, which will be deployed for expanding capacity Unit 1, which is largely for GBS products just because we have increase in volumes for some of the GBS products. We anticipate increasing the next two to three years, and we want to service that demand and therefore, this CapEx is being deployed for that reason. With regards to your last question with regards to foreseeing capacity and creating capacity ahead of time. I think we definitely would like to do that, and we continue looking at ways to do that. But also, we are-- we believe, I think being a very specialized API company, we are very cautious in what kind of capacity we are going to create and how much capital we will deploy just purely for capacity creation because we also want to make sure that capacity is being created in anticipation of some specific demand rather than create a very large facility and then look for customers. I think that is not an approach that we believe was for the kind of APIs we are pursuing in CNS as well as GDS. So yes, I think we are thinking well into the future. So we are thinking about capacity requirements for three years, five years into the future. And as we make progress on those areas, we will continue to update everyone.
Q: I would like to know the size of opportunity for the following specialty APIs paliperidone, entacapone, brinzolamide, apixaban. And I would also like to understand the competitive landscape of these specialty APIs.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
