Thank you very much. We will now begin the question -and-answer session. First question is from the line of CA Garvit Goyal from Nvest Analytics Advisory LLP.
CAPLIPOINT · FY2025 Q1
Caplin Point Laboratories Limited analyst Q&A
Congrats for a good set of numbers. I have 3 questions. One is on the U.S. side. Can you provide some insight into the factors that contributed to decreas e in revenue for Caplin Steriles from INR100 crores last quarter to INR80 crores in this quarter? Additionally, can you also share expectations of growth guidance for Caplin Steriles in FY25 over FY24? That is my first question.
I think there might be some confusion, Garvit. We've actually increased our revenue by almost 70% from last year.
Yes. He is talking about the previous quarter, not the year-on-year.
So, I think when it comes to Caplin Steriles, you can imagine that this is still a very nascent stage for us. We wouldn't like to compare ourselves on a Q-on-Q basis. And typically, what happens is the second half of the year is always larger. If you see in t he last couple of years also, that would be something that you would see as a pattern. And sorry, what was the second part of your question, please?
Growth guidance for Caplin Steriles, like last time you mentioned INR300 crores by FY24. So, what is the guidance for FY25?
Yes. So, we are confident that we will do well this year. We don't want to be very specific on a particular set of numbers. But certainly, we will beat last year comfortably. That's all we are able to say at this point.
I would like to add one more thing here. More than the top line, now that we are planning to go for a front end as I told in course of my speech, we will not really market our products in the sense we will distribute our products. We'll also go for outsourcing of other products, which is an asset light model. In addition to that there is something which is very unique in U.S. market. Many companies, especially the trading companies, they buy and sell. They buy the product and sell that. This also will contribute to our business. Here, the most important factor is the visibility. Most of the time, our visible metrics have come from the invisible opportunities. So, what is important to us as with regards to U.S. business is the front end which we've started. We currently have been stating this for the last 3 mont hs. I understood what is about the most important thing in the form of taking care of integrity and quality in addition to automation and digitization. Thank you.
Understood, sir. My second question is on our standalone business that has been muted this quarter, both in terms of top line and bottom line on Y -on-Y basis. I want to understand the reason as even if I look at last 5 years number, our top line CAGR is nearly 3%. I understand we are focused on building a profitable franchise and we are doing it on consolidated level in a very better way. But as an investor, we would like to understand from you why a particular segment or a portion of our consolidated business is not on the track of scaling up in the terms of revenue, sir.
I would like to tell you this. See, what is important in any company, this is how I look at it. I hope you would also agree with me. See the cash flow and then profits. And every year, we're in a position to create the cash flow of INR300 crores after completing the projects. I would request you to look at the company of our size and see, especially the one who is doing simple generic business, not in the form of more complex injectables, some technocrats who are capable of creating one product, you should create huge revenue or somebody knows a team which has created the brand marketing and Indian market asset. So, we are totally different. We have created a unique business model for generics with a result now we have been growing. The priority to us is the cash flow and profit. I think in all humility I can say that we have been giving you the results which is fairly convincing to the investors.
So, in addition to that also, Garvit, if you look at us as a company, the stand -alone is certainly not the way to look at us because, number one, we have acquired all of our distribution over the last 5, 6 years, right, more than 5, 6 years, through Subsidiaries. And in addition to that, we have Caplin Steriles also which is a high-growth entity, that's also subsidiarized into a separate entity. So, all of these will be part of the consolidated business only. So stand-alone by itself, I think, would certainly be the wrong measure to evaluate. And of course, you answered many other points with your question itself, but I don't think the right barometer is stand-alone for us to be compared.
Then lastly, on the effective tax rate. This quarter, tax rate is more than 19%. So, what is the expected tax rate for full year, sir?
I will request our CFO to do it.
Can you please repeat the question?
The effective tax rate.
As we have been maintaining, it will be hovering at 20% on a consolidated basis.
20%. I think last year, it was 18%, right?
That's okay, yes. This is all it is. When the units are making losses, we have created deferred taxes leading to lower effective tax rate. Now whether you want to make profit or be at a lower rate, it's a decision we have to make.
The next question will be from the line of Tushar Manudhane from Motilal Oswal Financial Services.
Sir, on Caplin Steriles, will it be possible to share the gross margin, EBITDA margin?
Request CFO or Sathya to take this, please.
This is Sathya Narayanan here. The EBITDA of Caplin Steriles for this quarter ended June '24 is INR19.3 crores.
INR19.3 crores. So, sir, and gross margin, how much?
The gross margin would be around close to 55%.
Sir, how much?
So, is it the U .S. business which has helped us get better gross margin both year -on-year and earlier quarter-on-quarter? Or is it the US business also which has been implementing the gross margin??
Sorry, your line is not very clear. We are not able to hear very well.
Sir, is it better now?
Yes, a little better, please. Please repeat your question.
Just trying to understand. This quarter, we had one better gross margin, both quarter-on-quarter as well as year-on-year. Is it driven by the Caplin Steriles? or the LATAM business?
As I mentioned in the opening remarks, contribution of CSL in the total revenue has gone up from 11% last year to 16 % this year. This has also helped overall gross margin going up from 55 to 59 %
Understood. So, if you can't share any of the progress on the Mexico business, both in terms of registration and then front end?
Yes, the registration is in progress. And of course, we have to complete. This is a country where the registration takes a long time. And we are very confident that we will be able to complete at least 25-30 products in the next 1 year. We will not be in a position to start business in a big way. We are getting our business in bits and pieces from Mexico. A lot of products are being filed and there are products which are in the pipeline also and some products are in the Ministry of Health. Hopefully, in 1, 2 years, we can do very well in these bigger geographies of Mexico and say, Brazil and Chile.
Understood. When do you see the approvals for registering product?
Vivek, can you take over? I could not hear the call.
Yes. I think, Tushar, if I'm not wrong, you are asking how long it will take? Because your line is very muffled, we're not able to hear.
Sorry for the disturbance. I mean to ask the products which are already registered. Tentatively when do we see the approval coming through for th ose products? And so subsequently, the commercialization?
Yes. That's why I said, see, we'll not be in the position to understand the exact day because it is in the hands of the Ministry of Health. That is why I said, as and when the servi ce registration comes, we start our business, but the warehousing model will not be able to start unless you have 20 to 30 products at this stage. So, it will take 1 to 2 years. That's what I said.
Understood,. So, tell me on this API facility which is now expected to get started in the second quarter. So, how do you think about it? Maybe in terms of captive consumption or external sales, will it require for the exhibit batches to be done? So, any timeline or any color in terms of how it is going to help either in the sales or in the profitability?
Yes. Now we are going ahead in full steam with regards to our general category API plant at Vizag. And hopefully, by end of the year, we should be in a position to start taking trials. But I would say that we are probably around 15 months to 18 months away from filing BMS from that plant. Again, the thing is we need to focus our attentions and priorities on what are important and urgent, right? So, for us, that is expansion of c apacities in Caplin Steriles, that is making sure that our onco site continues to breakeven as quickly as possible. The thing about API is it's really certainly a good to have and not a must have, right? Because we have multiple API sources that we can bu y from outside, and I think anyway at a decent level. So, this will be much more in terms of augmentation of our supply continuity and margins, et cetera. But if it gets delayed by another couple of quarters, it's not going to affect the company in any way or any shape or form.
Understood, sir. And lastly, given the kind of cash the business is generating and the capex is already coming back through internal accruals, what is the thought process on utilizing the cash that is available in the balance sheet?
Can I go ahead? Coming to the cash reserves. See, ours is a company, we, in fact, of the 2 or 3 meaningful acquisitions, probably this can happen over a period of time are, A) brand marketing company and B) distribution company, which has got a very good network of supplying to various institutions or pharmacies, which are at the bottom of the pyramid. C) we will also go for some brands, if it is, meaningful. And if everything goes well, there is a possibili ty of acquiring from ANDA also. So, it's better to keep the cash as a reserve to go for more acquisition advantages.
The next question is from the line of Aman Soni from Nvest Analytics Advisory LLP.
Just one question. Do you see any kind of headwinds coming in that may prevent us to achieve our target for this year that what we had earlier anticipated at the beginning of the year, sir?
We'll continue to achieve what we have been achieving. See, in any business, there are complexities, challenges, logistical issues, as you know well. But when you have your own business model in the form of keeping the stocks closer to the customer, the challenges become opportunities. If there is a rise in freight, what will happen, ma ny companies, especially smaller companies, they will hesitate to send the consignments because their profit will be reduced to minimum. That's the time we'll have opportunities to sell more goods at the higher price also in the market. So, like that, every challenge has got an opportunity also. See even that the worst thing which has happened in the last 100 years is COVID. COVID also improved the sales in pharmaceuticals. So, we will not allow the crisis to go waste. That's how we'd like t o take it. Thank you. Thank you very much.
As far I want to understand in more detail about our front -end plans for U.S.A. I tried understanding it from th e various calls we've done before. But as I understand, in the U.S.A. there are 3 or 4 large wholesalers, pharmacy benefit managers, even the pharmacy chains are highly organized and very large, like Walgreens and all of those. So, if you can explain exactly what we are planning to do there right now. And how does it compare with the larger generic players out of India? What do they do different? And how are we going to be different?
Yes. Go ahead, Vivek, first and then I'll add some colour later.
Yes, yes, Chairman. So, I think on paper, what you said is absolutely right. I think there are 3 very large GPOs and wholesalers and stuff, and they control most of the market. But the truth is there is a high amount of noncompliance out there because people are unable to supply product or maintain supply continuity for various reasons, primarily being the prices coming down to an unsustainable level. So, if you look at Caplin Point as a company, we've always been taking the road less travelled and we've always looked at what is hiding from plain sight, right? So, we understand that the other side of the market, which is not covered by these very large players, are still significant enough. And given the right kind of value proposition, with sustainable pricing and supply, there could be a fairly decent business model to be established. In addition to that, if we also take another leaf out of Caplin Point's book, which is to outsource some products from highly quality conscious companies, we can really expand our offering from our current number to even twice their number within the next 2 to 3 years. So, we will not be going after very large contracts or anything like that because that will be sort of a race to the bottom when it comes to pricing. So finally, what I would say is we cannot really compare this to some of the very large companies because typically, what happens is they will always be chasing top line. And if you want to be chasing top line, I think you need to go to some of the very large players irrespective of what kind of margins they offer you, what kind of draconian clauses in the contract that they offer you. So, we would be threading the road less travelled here as well with smaller accounts.
Okay. I would like to add one more. Products available next to the customer becomes valuable. The reason being most of the time, the customer wants immediate supply. If they place the order to the customer who is in India, if he has to export it from India, it takes a long time. That's one of the reasons if you look at all the successful communities starting from Jews to others, they all migrated from one country, like 2 generation, 3 generation before. And today, they control I was told 33% of the business or 33.5%. Where did they do all these things? They learnt only from the market. They know struggle, they face the issues and then they understood the reality and they worked with the reality and created what exactly is what they conceive and believe they have achieved. See that the same ways look at com panies which are into U.S. market, there are 3 types of companies, I'm sure you will be aware. The small one most of the time is the CMO, is a contract manufacturing facility. The big ones, they only look for the cream layer. They are not very keen to focus on the poor. And they are under the impression that change is the only thing which is permanent. Poverty also is permanent in the world. And only the poor is not pro -prosperity, is pro-poverty, unfortunately remains poor. But if you have where we try to cater to the poor, I'm sure again you can create the cream layers for your company. So, we will not focus on the big boys' domain. We will position ourselves in a place which is ignored by the big boys, and which is not reachable to the smaller companies. That means for a smaller company to become a big entry barrier. For a big company, it's a very small business. That is exactly what we have done in Latin America, market is a market, whether it's Africa or Latin America or North America.
Got it. Sorry, sir, just to ask a follow-up. So, with our front end in U.S.A., are we planning to, therefore, target certain independent pharmacy chains? Or is this geared towards more institutions?
Got it. I will not go for independent pharmacy chain. We'll only cater to bottom of the business pyramid. See, the pharmacy chains also in U.S., you know very well is monopoly. But that doesn't mean they control entire 100%. There are some like in a huge market, which is considered as a signature destination. There are least 10% of the people if you could cater or 1% of the people if you cater, sorry, 10% maybe individual pharmacies. I don't know how much the percentage is. If you could cater even 0.5% of it, then that itself will strengthen your bottom line.
That is what I'm asking. Sorry, sir. That's what I'm asking. So, you're planning to target independent pharmacies, right, 1, 2-unit pharmacies?
No. There are 3 sets of people you have to target. Being a injectable company, you have to target the hospitals, home care clinics, these are the ones. And now what you will do maybe today, we have 24 products. Again, if you think that we can go crowd sourcing, I don't want to mention the name of the company, it's number 1 company in injectable. They're ready to give their products to us. To him, what is the business to multinational or to Caplin Point is one and the same because they're not our friend. Then the next set of people, many of them are CMOs. There are some CMOs, they are ready to give their product. What we have done in China for the ROW market, we can even do it in America. Only thing we will have to be very careful in selecting our partners. And then coming to quality of the products here , nothing to worry here because the quality of 100% is managed by the USFDA, there won't be any issue that way. The system is very efficient. If there is an issue, you know there are a lot of other issues, which takes care of the quality. There are lot of measures. So, my other is the business model, which is very important.
Sir, your sourcing capabilities, we have seen enough evidence of execution. I was more trying to understand the front end in a market like U.S.A. But okay, I will also take the top lin e with you, sir, if you permit. My second question is on API. So, I think Chief Operating Officer, sir was saying that API can wait because they are not an immediate need for the business. So, what I wanted to understand is when the oncology and OSD APIs, everything comes on line, what percentage of our own manufacturing will get backward integrated? Like out of 100, how much will get backward integrated? And what kind of margin effect can we expect from that?
To be honest with you, at thi s juncture, it is better to focus on our metrics as you rightly said, urgent and important. So, what is going to create more revenues, more cash flow to the company? As I told you before is the business model. And we are not a company where it is -- or the promoter by technocrat. And when you are from a starting -- or low starting point, it's not easy to attract the talent, which is like the way we see in other cities like Hyderabad or Vizag or in Bangalore or in some parts Ahmedabad or Mumbai. You know very well, Tamil Nadu, the ecosystem for pharmaceutical has not been extraordinary. We are trying to create an ecosystem internally. It takes time. So, what we will do is the priority. The priority is to focus on major areas. One is today Latin America, of course, continue to grow. We don't focus so much on Latin America. We want to focus on U.S. because U.S. is the gold standard for any company, if we can really make it happen in the U.S. So, the role of API coming to U.S. business is very minimal in terms o f profit and cash flow. The role of your business model is much more important than the presence of other areas.
Okay. Sir, what is the total capex amount going towards our API facilities?
I would request the COO to answer to your questions, please. He knows.
Yes. We are targeting probably another INR20 crores in total for our Vizag facility. And for our oncology API, it's probably around INR60 crores to INR70 crores at max. And to your earlier question. I think if you are fine, we can throw some light on it, would be a lot more backward integrated when it comes to oncology products compared to general category, just purely by way of the share number of products that we do in general category compared to onco. And also, onco APIs are much, much more expensive compared to the general category ones.
Sure. So, you said INR80 crores incremental. And has anything already been spent? Can you quantify that amount on an API facilities?
On Vizag, all put together, I think we've already spent close to INR40 crores, if I'm not wrong.
Okay. Yes, about INR120 crores total. Okay. And last question, just from my side. You have so many of your lines coming online now. You have Steriles new lines coming online, oncology, OSD, et cetera. So, if I look at the company from a 3- to 5-year perspective, you have shown a very, steady growth trajectory of 20%, 25% every year. So, will that trajectory continue? Or will there be a fair jump in revenues in the next 3 to 5 years at some point?
The current growth will continue, we are very confident about it. In 5 years from now, we will be one of the best companies of India. We are very sure about it because we are spending money. We are not putting money in areas which are not great in total. We are putting our money on one side, asset creation. Most of the assets that we create that will start fructifying and it's more a vertically integrated model like any of the big company. And on the other side, we are also creating new revenue streams with asset-light models and we also have plans to reach some products in the form of insulin and other products directly from countries where they are manufacturing and they don't have the capabilities to selling in ROW market. We will take it up. We will not focus for biosimilar and other insulin, that kind of system. We will not think of taking it to U.S. market because it's not easy for us to do that kind of a business. But we will sell it. We will sell in countries where we are there for the last 20 years. And we have the right connection. And people also trust the quality of our medicine. So, these are various measures that will contribute to our capabilities.
The next question is from the line of Adityapal from MSA Capital Partners.
Yes. Many congratulations to you and the t eam for this phenomenal quarter. Just wanted to understand. So, when I look at ex Caplin Steriles revenues, over the last 2 years, that is FY22 to FY24, it has been in high single digits. Any particular slowdown you are seeing or we are just getting ready for steeper jump by distant products in the larger LATAM region?
Single digits you're talking on the top line, I believe. Am I right?
Yes, sir.
I'm sorry to say “Top line is vanity. Bottom line is sanity. Cash is king.” That's what they say. So, where you want us to focus more on the top line. Are you not happy with the bottom line and cash flow?
No. You were doing a phenomenal job. Just I wanted to get the colour because I'm a bit new to the company.
To be very honest with you, it's not that we need to do on all fronts. The reason being, we have to focus on areas where we are capable of at least strengthening the bottom line and cash flow. And we think of top line, to be very honest with you, there is a possibility of selling our generics in credit. That will affect the cash flow, which will also affect the profit. Because profit in the books is not the real profit in the bank. So, you know very well. So as a result, what happened now, we are trying to build the facility on one side and on the other side, focus on our own core competence in the form of our Latin American business. And most of the companies, as you know very well, they consider U.S. is the landmark, it is best market in the front of the world. So, we are also trying to get into that gold standard business. It will take time because we are little late bloomers in that area. There are companies which went into the market 20 years ago. Our first ANDA came in 2016. Now that we have around 24 ANDAs, we are sure of doing good business in South and North America. After 2, 3 years, again, we will also increase our profit, which is for sure.
Understood. Just one question that I have on gross margins. So, another phenomenal quarter for you on increasing gross margins as well. But going forward, with the addition of our oncology products, do you see the gross margins further expanding?
As we mentioned in respect of CSL, the gross margin today is a combination of 2 or 3 streams of revenue. Product revenues have different margins and we secure profit in terms of service income like milestones and the profit share, this is 100% margin. So, it depends on the mix. Oncology, I mentioned, because they are all niche products and there's a possibility of increasing the gross margin level. And that's depends on the mix. So, we are looking as a company, as said, total composite mix. What Caplin One Labs will be able to contribute in terms of the total mix for the sales , the company will definitely determine how much basis point the contribution margin will go. As you said, the CSL is a positive point. I mentioned 11% to 16% of growth it is contributing. And the contribution of One Lab has to mature to some level, at least to double -digit levels, whichwill move up the overall contribution margin. Because the base being high with still 80%, 80 -plus, is coming through the Latin American countries. While on a stand-alone basis, oncology product will have a very good margin, Steriles will have a very good margin. But how much they contribute to the total kitty i will determine the improvement in the overall margins.. Have I answered it?
One more thing is the 2 major indicators to us are the free cash reserves, which is INR969 crores, and the total liquid assets stands at INR1,850 crores. And I would request the CFO to tell them what is the payables, please?
Payable remain the region of INR100 crores to INR150 crores, which is more than offered by other current assets in the form of statutory receivables and other things. So, we will have more than paid for.
So, I only request you to look at other companies of our size and see the free cash reserves and the liquid assets also. Then probably, you'll be in a position to understand our company.
No, definitely, sir. You have very quality cash reserve. My last question would be if we're going to spend incrementally INR200-odd crores on capex. If you can give me the figure, how much would be towards the Caplin Steriles?
Vivek?
Yes. So, at this point, what we are planning is we are planning the next round o f capital expansion in the injectable side and the Caplin One Lab s. There's a multitude of factors as to why we have taken this decision. But there is a Phase III of Caplin Steriles that will be actually under Caplin One Labs, but also catering towards the U.S. We expect this to be around INR220 crores to INR230 crores kind of an investment over the next 2 to 3 years.
Understood. That's it from my side. I'm wishing you and the team best of luck.
The next question is from the line of CA Garvit Goyal, which is a follow-up question from Nvest Analytics Advisory LLP.
Sir, can you please repeat the amount of capex for injectables that you just mentioned to the earlier participant?
Yes, around INR220 crores to INR240 crores under Caplin One Labs is what we will be spending, which will be the Phase III of our Caplin Steriles unit.
Phase III of Caplin Steriles only, right? It is for injectable?
So, no. The thing is, again, I don't want to get into the nitty -gritty of it. So, this is Phase III of our injectable division that is focused on the U.S. but we will be doing this on the Caplin One Labs, and this will happen over the next 2 to 3 years.
The last question today is from the line of Alisha Mahawla from Envision Capital.
A couple of questions.
So, sorry to interrupt you. Alisha, can you speak a little bit more louder?
Sure. I hope I'm audible.
Yes.
What is the number of products that are registered in Mexico and Chile? And how many of those are launched?
Chile, we have around 72 products, 70 to 72 products. Mexico, I think Vivek knows the exact number.
Yes. We have around 8 to 9 products at this point. We have launched a couple of them. Some of these are very tender -oriented products. So, we actually, like Chairman said, until we get to about 25, 30 products, we don't plan on launching our own warehouse and front -end sales in Mexico until we hit the right kind of portfolio. So probably another 18 to 24 months is what we are looking at to have day-to-day sales over there in Mexico.
And Chile, of the 72 products that are registered and approved, how many have we launched?
Yes. We, in fact, started our warehouse recently. One Indian guy is stationed there. And the market is 70% government and 30% private market. Currently, we are going to focus on the private market because of the volumes, given the volume is lesser, the profitability will be higher. And we will also get into the, what we call, an institution business over a period of time. We are registered overseas by using our CRO, we completed the BE st udy. So next year, we are sure to get very good returns from the Chile market.
Understood. And the sharp increase in other expenses, INR82 crores in this quarter versus INR55 crores in Q1 FY24. What would be the reason for almost a 50% jump?
There are a couple of them contributing that. One, the filing of ANDA will vary from quarter- to-quarter. We have filed 3 ANDAs in the quarter, which is about INR6 crores that is attributing to that. And as you have been following our company, last year, mid we took the call to migrate to CIF for our subsidiary for achieving the optimal freight rate and container availability. So, the freight rate expenditure in some of the account Caplin as against COGS for the subsidiaries. That is another reason rate has gone up. And we have been taking part in the market promotion expenses that have also contributed to that. And while we say sales have grown up by 17%, 18%, your Power & fuel and other expenses relating to the manufacturing has also gone up. Though not in tandem, they have gone up. These are the basic 2, 3 reasons for increased expenditure. You should look at the EBITDA margin has gone up from 31% to 32%. That's an increase in that means that we have been able to absorb the increased expenses and then still report a higher EBITDA.
Yes. That is correct, yes. And my last question is in Caplin Steriles. We have been an investor, and I believe that the investment term is still 2025. So, any discussions on exit for them or next plans for Caplin Steriles?
No, I think there are no active discussions or anything happening. They want us to hit a sizable number in Caplin Steriles, which we're very confident of hitting. But there is no discussion at this point on any event happening there.
A couple of years back, we were targeting $100 million of sales in Caplin Steriles by FY27. Are we still on track to do that?
We are very confident that we will be able to achieve it.
Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for closing comments.
Thank you very much, Dolat Capital, and all of the participants that came together today to hear about our earnings and our story, and we look forward to being in touch with you. Thank you very much.
Thank you. On behalf of Dolat Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
Notes
1. This transcript has been edited for readability and does not purport to be a verbatim record of the proceedings 2. Figures have been rounded off for convenience and ease of reference 3. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Caplin Point Laboratories Limited