Indegene Limited analyst Q&A

Yes, sir. Thank you very much. We will now begin the question -and-answer session. The first question is from the line of Amresh Kumar from Geosphere Capital. Please go ahead.

Thank you, Manish and Suhas. I hope I am audible. I have two questions. First is on revenue growth and margins. The second is on operations. On the revenue growth we have been growing at 25% plus for more than 10 years, 15 years. Last year growth has come down. I was wondering if this is an – and similarly on the margins front the last year margins grew significantly by more than 200 basis points. So my question was is this an outcome of deliberate conscious choices or should we be looking at growth and margins in blocks of more than one year and w hy I am asking this question is that for the market participants the predictability of these numbers is equally important if not more important than the numbers themselves? My second question would be on your operations front. If you can give a quick into your conversations with your counterparts at your customers, what convinces them to outsource activities that they have been do ing in-house for so many years and w hat are the measures that they use to calculate their own returns on the expenses that they make on outsourcing? So these will be the two questions for the first-time understanding of your company?

Thank you so much for those questions. Let me take at least the first and third part which is the revenue growth and what makes our clients buy from us. I will pass on the margin thing to Suhas. Let's start with growth. See the pharma industry is, I would say, reasonably stable industry. It is fairly resilient to economic cycles, but i t has its own innovation cycles, and I will come to that in a while. Before that one of the things which happened there was an event called COVID and during that point of time pharma industry which was fairly low and behind digital adoption for a very long period of time accelerated their digital adoption which benefited us because we are positioned very strongly as a digital-first partner. They did a lot of activity and 24 was one year of consolidation for them. So that's one thing which happened in 24. The other thing which happened is going back to what I said the pharma industry is resilient, but has its own economic cycles. This is an industry which has been growing if you take the last 15 years or so data the industry would have grown north of 6%. I'm talking about dollar terms over here and pretty much all the years were growth years, apart from, let's say, a blip in 2012 where the industry had de grown because of a bunch of patent expiries clubbing together in one year. Outside of that it grew. 23 was one more year of dip. The top 30 pharma companies declined revenues by 7.1%. So that was one year and a s I said this happens every, call it, 10 years, 15 years or so and then again it picks up. So t hese are the two broad things which contributed to the revenues slowing down in 24. Nevertheless, we still grew and that's been a track record for a long period of time. As far as why do our clients buy from us - first of all this industry is used to partnering with external people in a very significant way across the board. They have been working with CROs. It's a very large income. I'm talking about clinical research industries. They're working with agencies. They work with contract sales organizations. They work with contract research organizations, the CDMOs, which you are aware of. Even at a research level, they do partnerships with labs, biotech. This is an industry which is very open to partnerships, given the complexity of this industry. What we bring to the table for an industry and the reason we exist today in the form we do, is a shift which happened to digital, which drove a lot of complexity in how things are done. When you are working, doing sales and marketing, just by a medical rep carrying a calendar type of a printed thing, that was one thing. But now you're reaching out to your customers using iPads, e -mails, WeChat, integration with electronic medical records, being present on websites where doctors are presenting, I can go on and on. The complexity, the skill sets, technology, domain required and across, call it 40 countries, 50 countries, is nontrivial. That's where a company like Indegene, which comes around with a combination of medical expertise and technology, skills and platforms, which we have invested for a very long period of time, just stands out. That's why companies partner more and more with us. I'll let Suhas talk about the margin piece.

Thanks, Manish. As I already mentioned, historically we have been growing and the EBITDA CAGR was a very healthy 41% plus in the last 10 years. We have, in the past, operated at margin levels or EBITDA, a level of more than 22% in the past as well. In the years of high growth, if I dial back to March ‘ 22, March ‘23, our EBITDA margins fell below 20% on the back of our investments during a high growth period. As we embarked on this journey of high growth, seeing how the market was responding to what we bring to the table, we invested in market expansion activities. We invested in operations and technologies at a pace which needed us to dial down a bit on the margin front. This was also a temporary call, especially on the operational side. We had to take certain measures in terms of subcontracting and building capacity in the short term to cater to these requirements. Having said that, we continue to focus on initiatives which, over the period, have resulted in the margins continuing to expand from the 18% mark in March ‘22, going closer to 20% in March ‘23 and in March ‘24 today at 22.5%. Having said that, we will continue to reinvest in periods of high growth as we see the market responding to us, but in the longer run, we would strive to operate in the range of 22%-24% at EBITDA level.

For the short term, can I ask you, if our employee count is close to 5100 today, what it would look like at the end of FY ‘25 or even FY ‘26?

We will not be able to give that number. All I can tell you is that we have made campus offers which are higher than what we did last year. Those people are going to be joining. We are gearing up for that.

Thank you. The next question is from the line of Abhisar Jain from Monarch AIF. Please go ahead.

Yes. Hi, Manish. Congratulations to you and the team for a good listing for Indeg ene. My question was on this very sharp revenue growth that we saw in the last 3-4 years. You, of course, alluded in your initial comments that post-COVID, there was a wave of, you know, focusing on digitalization for all the big biotech pharma companies but just wanted you to maybe dig deeper here and let us know whether we have been al so able to substantially gain wallet share and market share or whether the out sourcing CAGR itself in those periods was equivalent to the growth that we showed. Because it seems that we have almost increased the revenues by 150% in that 3-year period. So just wanted to understand this better whether we were able to gain some wallet share and we sacrificed on the margins by investing also as Suhas also was mentioning during this period and this will hold us in good stead going ahead or in fact the industry CAGR itself was so high that we delivered those numbers.

Sure. That's a great question. Thank you for asking this. If I just break down how we get our revenues or growth. First of all, our revenue base is fairly stable, as I said, because it's not linked to product, therapeutic area. It's a very broad base, almost an index of, pretty much think about it, the pharma industry. Hence, it's reasonably stable. Now, there are a few things which happen. One is the growth of the industry, growth in the spends of which we operate in, growth in outsourcing, but there are two other parameters. One is shift to digital. If you are spending $100 as a pharma company, how much of them were in traditional channels and ways of doing things, how much of that is in the new ways of doing things, digital AI driven and stuff like that. And the last but very important one is how much of your operations are you centralizing to bring in the best practices and being more careful on cost, compliance, factors like that. Now, those drive obviously growth for us. During the years of COVID, the shift towards centralization and digitization, shift to digital, accelerated. And they accelerated because the industry was way behind the curve. And Pharma industry was really one of the laggards in terms of digital adoption. So, they had to at least come to some level of respectability in terms of these adoption rates. And we, with our existing customers, were well positioned. So, as the shift happened, we got a chunk of the shift towards the digital world. And new customers who are probably not moved in this direction, they realized that they just have to move. And given that we were well positioned in the industry, we could acquire new customers also. That's what happened during this period. Having said that, typically what we have seen in our growth, we grow at a certain pace but there might be a year, in which a customer decides to do much more aggressively and you will have a bump up. So, that's how the typical pattern for growth in the last 15 years. And trying to see there will be some years of growth, then all of a sudden some bump up will happen because two customers decided to do more activity versus the scale of our customers that matters. So, that's one piece. The second piece is that typically, as Suhas said, our margins are reasonably stable. We have traded off a little bit of margins for high growth. For example, if my growth from a regular thing is going to be 10%- 15% up, then we might drop, to enable that growth, drop the margins by, let's say, a percentage or so. This is exactly what happened until, let's say, 2022. That we grew at 70% or so. Hence, our margins came down by 3 percentage points. And over time, obviously, we know the levers to press to get it back to the right level. That's what we have done in the past. That's what shows in the last three years' data as well.

And just to follow-up on this and just to tie it up with the data that you mentioned in the fact sheet. So, Mani sh, just to understand this a little bit better, would you feel that some of that growth, that high growth that came in that period was also related to the environment and the adjustment which most of these companies are doing to digital? And they may have now gone back to do some of that stuff internally also because I see a drop in the absolute employee count for us in FY ’24. And also, FY ’24 growth for us has slowed down. So, of course, I'm not sure but I'm just guessing at that point of time, of course, with our capabilities, we could have got a lot of work immediately. And now, is that the thing that some of that work, those companies are also doing themselves?

No, absolutely not. Our revenues are not one -off projects. These are very deep -standing engagements, especially the 82% revenue, enterprise commercial and enterprise medical. These are engagements where setting up engagement requires a couple of months, by the way, right? Integration of processes, skill sets, training materials. And most of our engagements are very longstanding. We have shared some of that in the DRHP. So, none of that has reversed. The other thing is that the nature of our construct in our contracts are hybrid contracts, F TEs, dedicated F TEs, but a significant portion being per-unit pricing, where we have the flex to develop tools, technologies, process optimization, to be more efficient. And those are the levers we pressed to drive our margin improvement and the headcount being what it is, which also shows in that we have delivered higher revenues by having a lower headcount, by pressing those models. Revenue-wise, it's fairly stable.

Thank you so much. Those are my questions and best wishes.

Thank you. The next question is from the line of Bhavik Mehta from J.P. Morgan. Please go ahead.

Thank you and congratulations on the listing. A couple of questions. Firstly, if I look at your top client and top five clients this quarter, it seems like a sharp drop over here. So, is this driven by one client or are there multiple clients which have faced issues during the quarter?

Top five customers have been fairly stable over the past many years and quarters. Having said that, given the scale at which we are operating with our top five customers versus the rest, the growth rate of – the rate of growth of the top five would obviously be slightly lower than the newer customers that we have added through the period and therefore, this would tend to be the case. Having said that, it's just a marginal drop in terms of the revenue from our top five customers, which is today at 46% versus the 49%. And this has been the trend over the past many years. If you look at FY ’20, this was 65%. And even with the high growth that we saw over the three years following that, this 65% came down to 49% last year and continues to be in the range at 46% now.

I was talking more from a quarter perspective that top five has come down from 46% to 42.5%. So, it seems like the revenues have also declined for the top five clients. So, was there a particular reason, especially in the March quarter?

No, nothing in particular there. The same, as I said, is reflective of the trend that we are seeing, wherein the growth in absolute percentage terms at the current scale that we are at in these customers versus the growth in the rest of the accounts, which are growing at a faster clip, is the major contribution.

The second question is, can you clarify what was the organic growth for FY’24?

So, while we don't break out our organic, inorganic growth numbers, just to give you a perspective, the acquisition of Trilogy has not contributed to any revenue or impact on the earnings in the quarter. The acquisition was closed as of the last week, I think, 22nd of March itself and this being a non-material acquisition would have no impact on our earnings and results that we have declared for March 24. This is not material and therefore, we don't anticipate that to be a major contributor to the growth in the future. The last acquisition prior to that was of Cult Health in October 2022 and this has contributed to the growth of our omnichannel activation business segment, which grew by 18%, largely driven from the acquisition of Cult Health. But 82% of our business, which is the enterprise commercial and enterprise medical, which grew at 11%, was entirely organic.

Okay, got it. The next question was, how should we think about FY25, given how FY '24 has spanned out? Have you seen any improvement in demand from clients, which can lead to acceleration in growth? And also, should we expect any headwinds from patent expiry or inflation reduction act next year?

So let me take that. So if you see, we'll point you towards pharma growth rate. I spoke about that - after a very secular CAGR of almost 6.3% or so over a 15 -year period. Although it was 5.7% if you take out FY '23, where FY '23 was a year of decline and the top 20 pharma companies declined by 7% in FY '23. 24 calendar year, which will pretty much become FY25 for us, is expected to be a year of growth for pharma industry. Growth is going to be in that 4% to 5% range. That's the broad projection. However, if we take FY25 to FY28, the projections of growth for the industry are in the order of 5% to 8%. And patent expir ies, which you're talking about, are short term. But pharma industry is also sitting on new product launches as never before, which will play out over the next few years, till FY28. And that's why you see that projection.

Okay and lastly if I may…

Sorry to interrupt, sir. May I request you to return to the question queue for follow-up questions, please? Thank you. The next question is from the line of Pradyumna Choudhary from JM Financial. Please go ahead.

Hi, sir. I think the previous participant already asked you regarding the demand sentiments in the industry as such. But just wanted to get more on that itself. Is everything already accounted for in the base year, in terms of there being no COVID-related one-time revenue? Is that already accounted for?

Actually, FY '24 has no COVID-related revenue. Till FY '23, we had a little bit. FY '22, FY '23, these two had a little bit of COVID revenue, which has gone to zero in FY '24 itself.

All right. And secondly, was a slightly longer term related question. How do we see the impact of the generative AI on our business, considering Gen AI seems to be something which would have huge implications on the pharma industry? The more we are reading about it, the more we are realizing the importance of Gen AI in the pharma industry. So how do we expect to see the benefits or the disadvantage or probably the threat to our business from this?

See, from our perspective, our strategy was anchored on, as I said, medical expertise, healthcare expertise and technology expertise coming together. And the way we articulate technology expertise, it's not having 1,000, 2,000, 5,000 people. Our technology manifests in having platforms which we have developed, which encapsulate this healthcare medical expertise. And we've been investing in AI for the last six, seven years when AI was not AI or generative AI. It was machine learning, computer vision, NLP. And that was one of the differentiators we had in the marketplace. So we are excited that Gen AI at one level gives us better tools and results. Having said that, we believe it's a source of competitive advantage. But having said that, again, I want to reemphasize, this is a very conservative industry. And rightfully so -- given the nature of work this industry does. And adoption will take its own time. That's what we have seen. That's why we've been at it for 25 years now.

Thank you. Ladies and gentlemen, in the interest of time, we will be taking two more questions. The next question is from the line of Sarang Sanil from RW Investment Advisors. Please go ahead.

Good morning, sir. Thank you for the opportunity. So firstly, what sort of employees are hired apart from the earlier mentioned PhDs, medical doctors, pharmacologists? Are they usually from the IT services background or do they come in with an expertise in what we do?

So here is how it pans out, if you think about it. There are different sets of employees. One is that 21.5% of those medical doctors, PhDs, pharmacologists. We go to M. Pharm colleges where we hire M . Pharm’s, PhDs. Doctors, there's no campus thing, so we obviously visit various websites. And again, we've been doing this for the last 25 years, so we have a lot of inbound from doctors as well. So that's one source of hiring. The other source, of course, is the engineering talent, engineering, math. Now, these are people who could finally, from a career path perspective, become software engineers, could be analysts, could be data scientists, data engineers. That's the second set of profiles. We also hire people from a creative background. Although numbers are small, but still, that's another profile we have. Especially a few in India, but definitely in the United States, we'll have some people like creative directors, art directors and all that stuff. We hire people who have MBA, marketing kind of backgrounds, as digital strategists, omnichannel strategists and various roles like those. The IT part, when I said people like data scientists, data engineers, software engineers, those are the profiles which could, at a lateral level, come from the IT industry. In our developed markets, US and Europe, where we are customer facing, people will typically come from a life science domain, agencies, CROs, CSOs. That will be the larger profile.

Got it, sir. So second, we wanted to know if segment mix has a role to play on the margin side. If any segment is margin-accurate or dilutive?

Yes. So, as I mentioned, the Omnichannel Activation and the smaller segments, which are clubbed under others, which are consulting and clinical solutions today and these constitute about 18% of our revenues. These, at the segment al level, are not margin-accretive. And these, as we scale, could potentially be margin -accretive as the operating leverage scale would play out. For enterprise medical and enterprise commercial solutions, we are operating at a healthy segmental margin rate in the mid to high 20s.

Sure. Thank you and all the best.

Thank you. The last question is from the line of Naman, who is an Investor. Please go ahead.

Thank you for the opportunity, sir. I have two questions. First is, could you please help us explain how is your business model different from the healthcare and life sciences division of any large IT service company like Infosys or TCS? And second would be that a typical CRAMS or CDMO company like Syngene talks about an asset turn of one time, while our asset turns look much higher than them. So, compared to a CRAMS business, how does Indegene 's business model stack up and what sort of peak asset turns that we see in our business?

Sure. So, as far as, I alluded to this in my initial discussion that, these are the IT companies who are primarily focused on, let's say, we call it a sales force implementation or cloud implementation. More on the CIO side of the business. Here, opportunistically, they will be working on the business side. As Indegene, we are working primarily on the business side, with the P&L owners, brand heads, therapeutic heads, global commercial ops, chief medical officers, head of regulatory safety, head of clinical operations. That's our predominant thing right now . Opportunistically, probably we'll be on the CIO side. It's completely reversed. So, to that extent, what we do is non-discretionary in nature. You've got to file your things with FDA. You need to reach out to your customers. So, it's pretty much non-discretionary on the business side. That's one part. Just before this, I spoke about the mix of talent we have. It's very different than what IT companies will have. It's multiple skills and multiple skills spread ac ross multiple geographies. So, that complexity is much higher. Now, coming to the CDMO industry. Now, while I'm no expert on the CDMO industry, the CDMOs obviously are servicing a very different value chain . I spoke about the lab part subsequent to which we come in as Indegene. CDMOs are primarily in the lab and, of course, on the manufacturing side - segments we don't operate in. From our perspective, we are happy because the segments we operate in from a TAM perspective are much larger. Having said that, even from a c apex and fixed investment perspective, we are very asset light. We don't need large facilities, build whatever it is and investments. To that extent, our ROEs , ROC Es are typically much higher than the CDMO industry and that you'll see in the financials. Suhas, do you want to add anything to that?

Okay. Thank you. That's it from my side.

Thank you. Ladies and gentlemen, that brings us to the end of the question-and-answer session. I would now like to hand the conference over to the management for closing comments.

Thanks so much for joining the call today and your continued support and interest in Indegene. We look forward to speaking with you again next quarter. Have a great day. Thank you so much.

Thank you. On behalf of Indegene Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.