Morepen Laboratories Limited analyst Q&A

Yes, sir. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on your touchtone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handset while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Raj Saraf from Finvestors. Please go ahead.

Yes. Sir, first of all, congratulations on the numbers, which we have shown growth in EBITDA and PAT numbers, not on the revenue numbers. So would have been happy if revenue would have been increased with a larger pace. So first of all, sir, give me some outlook about this India-centric and South America centric API business, which I'm seeing de-growth.

Yes. Raj, particularly India most of the customers what we have that customers which are say the likes of I am not meaning again any the likes of, Cadila, Sun Pharma, Cipla, Mankind, these are all our customers. So there is no drop of any sales there. There were some sales which were happening through trades or the traders, I would say, to use a better word. So there we could see that because of the China fluctuation, so many people were expecting that, okay, prices are dropping, we do not know what will happen, we do at this price or this price. So we said, okay, China, the prices have already started going up. So we don't want to reduce the prices just for sake of it. So sometimes you don't have a holding capacity and you are compelled to sell the material. But this time we took a call that, okay, we don't want to sell low and the demand is there, season is there, of course, this time the winter started late. So demand was also low. So we didn't want to push--

Hello sir you were not audible.

Sorry to interrupt, sir. The line got disconnected. I'll quickly add. Thank you for patiently holding. The line for the management has been connected back. Yes, sir. Please go ahead.

Yes, I was saying that for the South American market, there was a one tender which we got last year. Last two years we were getting that tender. But obviously that tender, the word, even in the moment you say the word tender, so the tender is always at a competitive price. So this year our customer did not get the tender. Actually, we were not participating in that tender. Our customer has got, to get our common supply tender and they buy material from us. They did not get that tender at their wish price and they did not buy from us. But obviously, when they were looking at a supply from us, they were looking for a much cheaper price. But as a part of the strategy, we had decided not to go below a certain price. I'm not for sake of confidentiality not naming the customer and not naming the agent, but the product is clear that it was Atorvastatin. So it's, we have to maintain certain margins. So that's one. And secondly, as both in API both in India and some neighbouring countries, they all understand what is happening in China. When the prices were going down in China, we were supporting, but now the prices have stabilized, so we don't need to go down and we have to maintain the profitability.

So sir, on the whole year basis, sir, our API segment will have the same growth as the industry or

That is right.

That's true. That's true.

So that we'll grow, we'll grow API segment.

We will grow, we are growing. The only point is quality of the business is more important than the quantity. So we need to maintain the profit margin and you would see that our EBITDA numbers were in single digit. So the whole focus is to take the EBITDA to 12%, 13%, 14%, 15% slowly and that would depend on two things. One is the market segmentation, second is the product segmentation also. We need to have products also which are high yielding, branding formulation, exports.

And sir, coming to the medical device segment. So, we are very hopeful with this medical device segment. We have also done QIP for extensions. So what I think, sir, the medical device segment is growing up at the rate of, I think, 25% or not. So in this quarter, sir, we couldn't see any growth in our medical device numbers. So is any capacity constants or are we operating at the under capacity or even sir, I can see the de-growth in the BP monitor number also, sir. So how can you so please give outlook on this sir?

Yes. I think we talked last time that in end of Q1 and Q2, we had capacity constraints because we had started to, shifted our production to SMT lines, which certainly we had a capacity limitation now it is balanced almost. So we were not having enough meters to supply to the market. That is one point. And second, of course, similarly, the capacity for making of the strips also. Our strip capacity was limited in the beginning because we were not getting those sheets which were earlier imported. And that is why the reason was that we want to put up a automatic plant for making strips also in India. So these are the few triggers. So last two quarters are big disturbs on the production front, but there's is no reduction in the market and our strip consumption is going up. Here Raj, the basic point we understood is that this is like a lifetime business. It's a perennial business. So we have already got our installed base of 13 million meters. That meters are already there in the market. .

BP growth, that is nominal from 3.1 to 3. I mean that's, that might be inventory in hand or goods in transit. That's a nominal thing. But BP also we had a capacity constraint because BP, the SMT machine needs much more time because it's a much bigger instrument. So it took us some time to establish the line. So now everything is okay. So we will be on the target for the year as a whole. Year as a whole, we were planning INR445. sorry, INR545 crores INR550 crores. So we are already at 271.

Okay, sir, if you allow me to put me the last question, sir.

Yes, yes, Raj, go ahead.

Yes. Sir, we have a vision of achieving INR5,000 crores revenue by 2030 with a CAGR of at least 20% and the PAT margin of 10%. So right now, sir, our revenue contribution from medical device is 30% and the pharma business is 70%. So going forward, sir, what will be the revenue bifurcation by this time, sir, 2030? How we are doing--

I can give you a broad thing that devices will grow faster than the rest of the pharma, but whether it will be 39% or 40%, but I would say it will be more of 40 60.

40:60 by 2030, sir?

Yes.

And sir, if you can give anything about near-term guidance about this financial year because we are not going at the revenue level in the last quarter though we have grown 9% at a half year. So how much, how should I look about this financial year after the company you --

Raj, I don't know you had a chance to go through the presentation, our investor presentation and results. So the whole focus. Raj. here is on the getting better yield and better profitability and better earnings per share. That means we are not running after the top line because in a B2B business, yes, in finished dosage and in medical devices, I know that it's a consumer-facing business, only the top line would help. But we are trying to reduce our exposure wherever we can so that we do not lose the customer and the market, but still try to improve the profitability. So we will we are on the target on the profitability. Rather profitability for the first two quarters is higher than much higher than the last year. So, I don't think we are lagging anywhere. So whatever we are doing, it's a strategic call.

Yes, I got that, sir. We are very focused on the profitability, but sir, there is a limit to the profitability, sir. We can grow in a longer run while we are looking for the newer market on something.

No doubt. No doubt, you are perfectly right. So we are naturally expanding the team, we are expanding the sales team and we are expanding the area, everything is on and we don't see any lack, but it's because of the B2B business, we have to be little fair to the market that with China thing was last two quarters, China was not, I would say, big disturbed, but not disturbed. So we had to balance it out at how much should we be aggressive or not aggressive, otherwise there is no gap and we will be able to complete our targets.

So just give you a final word, sir. Will we see higher growth in H2 to what we have seen in H1?

That's right. We are looking for better growth in H2. Medical devices at least is low in the Q4, but API is higher in Q4.

So with the same profitability, sir. Margin sir will be at the same level for about.

Margin will be much higher. Margins will be better, rather, I would say we'll be able to maintain the same margins which we are doing in H1.

Okay. So Q2 H1 margin, so not Q2 margin?

H1, H1. And that's why Raj, I shared with you that in the presentation that last four quarters is what we have already tracked. Last four quarters we are getting EBITDA at INR50 crores. So we only have EBITDA and PAT. We do not have much interest because zero-debt company.

Yes. So thank you.

Yes, so nice, Raj. So nice.

Yes, already my question was based on that margin and which Raj has already asked from Investor group. However, sir, you have mentioned in the last concall that you have 700 customers for API, out of which 500 was worldwide and 200 in India. Then also sort of there is a downfall in the API segment, sir. Why it is so? This is that your customers are shifting towards some other companies or is there is any other reason for that?

Good question. Of course, I do not have, I cannot give you name of each and every customers on the call. But in general, I would say out of the 700 customers, the customers are rather intact. Rather we have added 80 more customers. The reduction in sale is only because of the some traders. So that if we still have the trailers, if for example, just as an example, if I'm selling goods worth say INR100 crores to one trader. So instead of INR100 crores, I am only giving INR40 crores because I'm selective. At this product I will give you at this price, this product I will not give you at this price. So it's a selective choice which we have to make sometimes that because we have to control the price. Being a market leader if Morepen reduces price for example, Montelukast as an example normal running price of Montelukast some years ago was like INR35,000. During COVID time, it reached up to INR58,000. From INR58,000, it came down to back to INR32,000, INR30,000. And if someone asking me INR26,000, I can't give it. So we need to maintain which are the market leader, so we have to have that system. And of course, I'm not saying that we decide. Ultimately, it's China import so many other factors. So but there is no shortage of the orders. There is no shortage of the there's no shortage of demand. Everything is okay. The only point is that there are some selective decisions. And in case I would have lost business, I won't have got the profitability. So the focus is on profitability. So that's the only point.

Sir, my another question is that in last concall you had mentioned there is a launch of weight loss product during this festival season. So in your concall, you have not mentioned that, that product has been launched or not. And you have mentioned that Europe, you are planning to approach 3 lakh outlets in three years. So how many outlets we have achieved in this quarter, sir? Can you throw some light on that?

No. I do not have any answers with me, but I'm sure that on an annual basis, when we do the annual presentation, we will give full details focus. Number of customers, number of distributors and quarterly results, we try to be very precise, but everything we'll give you in the coming quarter.

And that sir, regarding the launch of new weight loss products, have you launched it? Because it was mentioned that during this festival seasons you are going to launch that weight loss product was announced.

You have to see in the presentation, the team has written coming soon. So of course, we were looking for more details, but they are not ready to disclose this. It will come with a surprise which is fine. The surprise you can see here that is Farah Khan is going to the brand ambassador. Actually she is a weight loss queen. She had lost a lot of weight, and she loves the product, she has tested the product. So maybe we have to wait for another few days. Basically people have, people do not stop eating in the festivals. So the suggestion was that we should launch it around New Year when people have so-called new resolutions to lose weight. Mostly the distribution system much earlier. So maybe it will be launched this month, within this month and it will stay in the distribution system and everything, but major promotion will start by end of December, Christmas time or New Year time.

Sir, one last question, sir. Sir, as far as we are seeing that Raj has already mentioned that there is downturn in the sale of the glucometer. And you have mentioned that previously it was costly due to import of material. Now it was due to backward integration, the profit margin will be more, sir. And in last concall, you have mentioned that it will be in the Indian market, you are trying to approach that more INR80 crores to INR100 crores. So we are expecting that remaining quarter, remaining two quarters, there will be more in the sale of the medical devices regarding BP machine, sir.

Look, BP machine, we were last two quarters we were short of capacity, but last year we had sold around 10 lakh meters. So if we continue at the same rate of growth, maybe it will be 10 lakhs or 12 lakhs, but now already 6 lakhs is already there, 6.33 lakhs meters already there.

Thank you, Manish. Thank you very much.

Thank you. The next question is from the line of Meghna Agarwal from Mount Intra. Please go ahead.

Hello. Hi, good evening. Am I audible?

Yes. Meghna, yes, please.

I just wanted to know about the medical devices. If you see year-on-year, we haven't seen any growth. So can you just throw light on that and what are the future expectations?

Yes. Meghna. Here, as we talked earlier that this growth is primarily our primary sale, but when you look at the secondary sale and we look at our actual distribution, so certainly the growth is there in the market. As I shared, the number of strips consumption has gone up per meter sold or amount of strip consumption has gone up. So basically, it's number of meters installed. We already have meters installed, so we'll all people always keep on buying the strips. The only point is at some stage, we control the inventory with, okay, how many meters to be placed in the market and how many strips are we getting a pro rata ratio or not. So, but growth is only I would say, commercial point, but there is actual growth in the market. Consumers are buying and our ratio is improving. And certainly, as I shared earlier that we had some capacity constraints last quarter and of course the capacity constraints were for good that we are going for backward integration. So the SMT machines what we set up, it was taking some time and of course, there's always, whenever you have a new machine, it takes some time to do the setup, there were some capacity balancing. So now which is all sorted.

So you wouldn't say the number of scripts, the number of strips for consumption, the number of strips are increasing, but the number of meters installed are decreasing.

Not decreasing. The question is that we already have a base. For example, we have 13 crores meters in the market, sorry, 1.3 crores meters in the market. So if 1.3 crores meters already there now every month we supply meters, 2 lakh meters, 3 lakh meters. So whether I supply 2 lakh or 3 lakhs, so that meter is not going to give me consumption in the rate. So for the first consumption, first we give three meters, three strips. So that doesn't add to the strip consumption, new consumption because the first 25 strips are free. But the meters the people have already bought. So there the consumption is increasing because once you get used to it, you start regularly measuring. So there our strip consumption has gone up. So generally, that is where the profitability has gone up. So if we are, because we make better margins in the strips. So overall profitability is better because the strip consumption has gone up. So number of meters installed is in our hand. Next month have installed 4 lakh meters, you'll say, by the way, the number of meters have gone up. But to be fair, we always give a transparent data that, okay, this is the number of meters sold because we always calculate what customer base do we have. So because that's the actual meter sold at whatever price we know this is a meter in the market. So, but there's no depth of demand, there is no reduction of demand.

Okay. Just one more last question, like what is the outlook for the medical devices for the top line for this year?

Meghna, we had projected around INR540 crores, INR545 crores. So I would say INR540 crores is the number. So we are already at INR271 crores .

Thank you. Thank you, sir.

Thank you, Meghna. Thank you.

Thank you. The next question is from the line of Gaurav Shah from Harshad Gandhi Securities. Please go ahead.

Hi, sir. Thanks for the opportunity. Sir, I have a couple of questions. First one. So sir, first was on the recently won Class-I medical device service for the US and Canada market. So just wanted to find out what's the opportunity size we are targeting there? And second, what's the margin profile like for the export to, for this particular category? And the last question is like do this particular thing gets affected by the terrorist threat we have under the new US regime?

Yes. Gaurav, very intelligent question. So the Class 1 devices. Gaurav, includes the devices which are non-invasive and not non, not used for measuring. So basically two, three products of ours, for example, this Ortho supports, so which is not a measuring device, it comes under that. And even the stethoscope, basically non-measuring devices come under that category. So the market for the ortho support is very good and I don't know if you have been tracking, there is a company from India, Tynor. Then there is an international company LP. So these are all good brand, and they have established good INR400 crores, INR500 crores business out of these ortho support by exports. So we see that the US market particularly very sensitive and people are more active, supports, gyms, everybody gets injuries. So there's a big market there. And as far as profitability is concerned, and of course, I would only say on the lighter side is much better than what we are doing now. Exports are always beneficial and whatever we are talking in terms of it's a rupee versus dollar issue. So there we do not get any device less than $15, $20. And while in India the average you can buy anything between INR200, INR300, even for INR150 rupees, you will get something. So our selling price in India at retail level is $2, $3, $5. So there the starting point is between $15 to $20. So it's much higher. So we are naturally focusing on the international market. As far as the tariffs are concerned, I have not evaluated which particular tariff are we talking, but we can come back to you on that.

Okay. And sir, my last question is on the Jan Aushadhi business. So what's the traction on the Jan Aushadhi business? And what's the current sales run rate in the margin profile there?

Of course, the margins are not very great in the Jan Aushadhi business. We just get around 30% gross margin as we talked last time. But what we are seeing is as a good stable business and regular business coming up. And last year we had increased the capacities of the finished dosage facilities, which earlier we were not having any capacity to serve those markets. So now we are seeing a big traction in the volume also. And I don't have ready numbers for the net profit, but 30% gross margin is there in the Jan Aushadhi business. And government is insisting again and again to increase Jan Aushadhi business, which we are in the game.

Okay. Thanks a lot.

Thank you, Gaurav.

Thank you. And all the best for the future. Okay. Thanks.

So Nice.

The next question is from the line of Saurabh from IIFL Securities. Please go ahead.

Hi, good afternoon, sir.

Yes, Saurabh.

Yes. Can you throw the light on the API business? What is the reason for the degrowth in the API businesses? Can you throw the light on this?

Saurabh, as I shared earlier that the only market which has substantially gone down is India market, which was more of a strategic view that we do not want to sell to the low-yielding products or low-yielding customers. So again, for example in H1 last year, we had INR143 crores. So this year, it is INR130 crores, it's 9% drop. So instead of 9% drop, technically, if there is a 9% increase in the top line, it should have been INR156 crores or INR160 crores. So there is a delta between almost INR30 crores, which we decided not to give to the trade who which are looking for low- quality products or low,I won't say low-quality, it's the same. I mean, low-priced products. So it was a strategic move to reduce our exposure in India market. So there is no and of course, we have now a full-fledged team since last year and a half in Mumbai and we are trying to talk directly to the customers and reduce the exposure in the traders and of course we are looking for good margins. We are trying to reduce those margins also to reduce our, I would say, profit which is going to the traders. So we are trying to go back to the customers.

Otherwise there is no issue.

Okay. Thanks for this question. Thanks for this answering. Can you throw the color on the margin because if you see the trajectory of your margin, the margin has been below on an average 9% or 9.5%. So when can we see in the double- digit margin?

If we look at the presentation this year and the Slide number 11, we have plotted the EBITDA journey for last four, five years. So it was in FY '23 only 6%. Last year it was 10.13% and now in the H1, it is 11.55%. Of course, it is in double-digit since last six quarters, but 11.55% is what we have got in first half. And consecutively for the four quarters, these are all good numbers, and our EBITDA is about INR50 crores in last four quarters each. So we had INR211 crores of EBITDA. So the margins are already higher. Now the whole point is that, yes, in which industry, I would say no. We still have miles to go. We want to go to 15% EBITDA margins as a total, including the API and including the finished dosages, including the medical devices. And industry standard for the finished dosage and medical devices taken together is around 20%. So while going forward, this is where we are targeting.

Okay. Hello.

Yes, Saurabh, yes.

Yes. And can you give me the guidance what kind of a margin you will maintain on FY '25 basis? And can you throw the color on the, I have heard from you on the interview that you will demerge your business. So can you throw this color on this?

Saurabh, of course, we do not give the overall guidance, but in generally, as we are saying that the margins are on the improving side and 11.5% is EBITDA what we're getting now. So we are confident that we'll be able to maintain these numbers. That's only thing I can say. And as far as a medical device business to be put up in a separate subsidiary, so we have already talked about in our annual AGM also and last quarter also. Of course, that is subject to all regulatory approvals and other things. So between this quarter and the next quarter, we will finish the regulatory process. And by beginning of the Q1 of the next fiscal, so this business should be there as a new company. And at that stage, the new company will have its own growth plans.

Okay. Last two questions from my side. Can you throw the color on any increase in your stake in your company you want to increase or any more capital fund planning you are raising. Can you throw this color on that?

Certainly promoters, all promoters want to increase their shares. We also want to do that. But I do not have that say that already plans are there. But as far as fundraising is concerned, so I think you can get a fair idea that if you want to do INR5,000 crores top line in the next five years, five years or so. So certainly, there is increased requirement of working capital, there is increased requirement of capex in whatever lines and categories. For that, the strategic things are still on the way and next two quarters will have a clear direction that, okay, what is coming first, what to do, when to do. But as I started my presentation today that this QIP was just our unlocking, and we certainly have to go to the market for various things. We have to unlock the value of devices; we have to unlock the value of consumer business. So I would say a lot cooking in. So I have to keep quiet on certain things.

Okay. Thank you. Thank you. Thank you, sir. Best of luck for your future.

So nice.

The next question is from the line of Nirali Shah from Ashika Stock Broking. Please go ahead.

Hi, I actually missed a portion of the opening commentary. I just had one question. So we have added nebulizers and ortho support as a recent addition to our medical devices. I just wanted to know some view on what are we planning, how are we going to develop this segment? And are there any more product additions that we are planning for going ahead in terms of domestic growth or export demand?

Yes, Nirali. Basically, I would say the medical devices business, we particularly love calling it medical devices because there are a lot of devices. But thankfully, presently, we have only two devices which contribute around 80% of the business, about 85% of business, glucometer and BP monitor. But other than that, we have thermometers for which we are expanding the capacities because it's a very small machine and it needs lot of capacities. Then we have weighing scales, then nebulizer is the one which is more winter oriented and more North oriented because there's lot of winter stuff in this area. And then we have pregnancy kit, so which is the same pregnancy, which I think Mankind has got a big brand. We have Kareena as our brand ambassador for that. So I would say there are multiple products in multiple brands, but still everything is in a development stage. And on the export front also, we start with glucometer and BP monitor because those are our hero products. But as the demand comes, like we I think talked last time that when we go to international market and we go to a customer, for example, we were talking with, say, Walmart and they would say, okay, by the way, can you make massagers for us. So now massagers may not be their demand for in India, but these are again devices to the customer. We can always produce whatever customer wants, but we are expanding this line. The focus is on home medical devices.

Understood. So and just as you mentioned of massagers, we are also looking to service our clients with some client-specific products or something like that.

Yes. So whatever is a requirement of the customer, but certainly it has to have a volume. We can't produce anything if somebody says, okay, make 5,000 pieces, but if somebody is looking for 500,000 pieces, we'll make it.

Got it. Understood.

That's it. Thanks.

Thank you, Nirali. Thank you very much.

Thank you. Ladies and gentlemen, that was the last question for today's conference call. I now hand the conference over to the management for their closing comments.

Yes. So I would say welcome back. And now it's time to go, I think we took little longer than our usual time power. But I would say as a closing that business is good, pharma industry is good, and we are on a new journey Morepen 2.0, and all geared for our new goals and new targets. So expansions are on track as planned in the QIP. So with the next 12 to 18 months, we'll be finishing all the expansion plans, capacities will be ready. And now the whole scheme or I would say the whole strategy what we are working is to reposition the company from a B2B company to more of a B2C company, wherein from an investor perspective, you get better returns, better PR multiples and a long-term brand, which is more important in our heart. So Morepen brand and Dr. Morepen, people love Dr. Morepen brand, but we have to make it happen that we have to deliver Dr. Morepen brand. There are so many hidden assets within the company. Dr. Morepen brand is sitting in a separate company. Medical devices itself has to be unlocked and the branded formulation business, yes, is looking at lot of opportunities. So we'll keep coming back to you and thank you very much for your support. Good day.

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