Poly Medicure Limited analyst Q&A

Thank you very much. We will now begin the question and answer session. The first question is from the line of Jaiveer Shekhawat from Ambit Capital. Please go ahead.

Sure. Thanks for taking my question. M r. Baid first question on the domestic business. You alluded to the fact that there were certain onetime orders from the government that you lost during the quarter since the last year. What was contribution of that for the rest of the year, 9 months FY '24, the remaining 9 months?

So it was for a very special product, which was for vaccination programs, some auto disable syringes. So we have already discontinued the product after the end of last quarter , first quarter of last year.

Understood. So there is no other reliance for the remaining part of the year?

Yes. Because this was mainly for the auto disable syringes and we had started this business only because of government's insistence because there was a huge shortage of supply at that time.

Understood, sir. Yes. On the U S business given that you've already announced tie -up with a couple of GPOs there. So what kind of access does that provide to the medical insti tutions that are there in the US market for you?

See, basically, they will be placing the product directly into the market, and they have their own sales teams to do that. So our job is limited to manufacturing in India and maintaining those quality standards and regulatory requirements and training those people initially on this product line. But beyond that, I think mostly the business will be managed by them locally.

And sir do you believe that the given that those GPOs sort of provide to tens of thousands o f medical institutions in the US, do you get access to all of those with respect to your products, or are there specific institutions where your product is supplied?

They will be probably starting with a few institutions to begin with and then they scale up basically. The scale -up will happen maybe in few years. And already, there will be existing contracts with existing suppliers and manufacturers. So it's not going t o change overnight. But that's the reason we are saying that there's a ramp-up period and maybe in the next 3 years, we'll see that ramp-up. That's what we have been calling out.

And sir similar to Europe wherein you have more of your direct presence in the hospitals, are you looking to sort of build a similar thing in the U S as well over a period of time, so that you get direct feedback from your customers and possibly.

We already have a team out there. We have a couple of people in U S right now. But as time progresses, we will also maybe build some clinical resources so that we have a direct access to the market and information what's happening out there.

Understood. And you recently had your Vision 2030 Strategy Meet. So could you talk about some of the targets that you have set for yourselves and the vision that you have?

See, I can't talk about future numbers so much. But yes, I think the opportunity size and I think Vision 2030 is mainly focusing on Indian market, that what is happening in India and how we can actually outsmart the growth, which is 12% to 15%. And can we do around, let's say, 22% to 25% growth in India. And I think with all the ideas we have got from our team, I think we're pretty sure because these new two verticals will do well in India, because there's a lot of gap between imports and local manufacturing. So that is where we are trying to focus. Renal seems to be very promising. And overall, the opportunity size is too big, because market is growing at 12% to 15%. We are still not present in every hospital. We still have only 40% coverage. And we also have to go deeper in each account where we are operating today. So when we look at this leverage, I think the opportunity is quite big actually. I can't give you the numbers, but it's quite big.

Totally understand. Sir, lastly, on your capacity expansion, the new three facilities, as and when they come up, what kind of overall capacity increase does that lead to? And then what do you think would be the peak revenue potential from all the 15 capacities that you have?

Jaiveer, you're asking the same question in another way. But again the idea is with these 3 or 4 new plants which we established between '23 and '24, we were able to increase almost capacity by 50% from 1.2 million almost to 1.8 million by the end of this year. Similarly, with these two new plants which we'll establish sorry, next four plants we're looking at expansion. And this expansion is more focused towards, I think, cardio or critical care. So there the numbers may not increase, but the value would increase. So again increasing it by another 40%, 50%, that's the plan.

Right. Because my question is in terms of continuing to reinvest in your capacities. I mean, does that leave you with a lot of capacities which can possibly give you a 20% plus growth for the next 5 years without much capacity investment?

No, we have to keep on investing. I think this industry needs a tactical investment every year and I think that is what we need to do and because there's a lot of technology. This is something which is not static, that you start something . it's not like a steel plant that you invest once and then you are done. Here every year you are adding new technology in the existing product also. So you have to keep on investing to upgrade and look at new areas. So investment will continue.

Sure. And sir with respect to the inorganic opportunity, it's my last question, are you also looking to get into any related medical equipment as well?

I can't answer that, sorry.

Sure. Thanks a lot and all the best.

Thank you.

Thank you. The next question is from the line of Harshi from Bee Capital. Please go ahead.

Hi, sir congrats on the great numbers. I just wanted to understand this point you made on how PLI has not worked very well for medical devices in India. So just wanted to know the road blocks that are coming in?

See what has happened is, government called out four categories of products in PLI. But they equated everything on the same parameters, equipment, implants, consumables on the same parameters where you need to do incremental revenue of INR60 crores every year, starting from 0 and from first year onwards do incremental revenue of INR60 crores every year. And I think in certain industries, it's not possible. Even the equipment industry is struggling today. So every year you can't almost double your business or increase by 60%, 70% in that category because it takes time to establish the product and especially when you are supplying to government you need 3 years of market standing. So that was not well thought of. And even government department is asking for certifications which are like CE, U.S. FDA certifications on machines. So that takes 2 to 3 years to actually get one regulatory certificate like that. So from day 1 you can't get. So most of the companies are not able to comply with that incremental revenue. And because of that, there's no incentives even being distributed. So this year, if you read the budget fine print, only INR85 crores have been allocated to medical device sector for PL I. The whole scheme was for INR3,420 crores. Year 3 would have been the peak year, which is the year 3 this year, FY '24-'25. And in the peak year which is third year we were looking at INR1,000 crores of incentives to be given to companies, but the only incentive paid will be INR 85 lakhs which is budgeted in government's document. So even that budget will be there or not nobody knows.

Understood. Thank you.

Thank you. The next question is from the line of Prem from Dolat. Please go ahead.

What is the infusion sales contribution in domestic business if you can.

Sorry could you repeat that question. There is some disturbance in the line.

Just a moment. Can you hear me now?

Yes it’s better.

So want to know that infusion sales contribution in domestic business is how much?

Infusion products though we don't call out separately, but it should be close to around 60% to 65%.

Okay, sir. And what about the gross margin a s the contribution from export is high, so do you maintain the guidance of what you've given for the full year?

Yes. Again in the beginning of the call I already said that we are maintaining that guidance which we have given of a revenue growth of 20% to 24%. And even the margin we have spoken that there will be an improvement by 100 bps to 150 bps in the current financial year when you look at the year as a whole.

Okay. And sir you have guided for 20% to 24% of export growth.

Total growth not export. Total revenue growth of the company.

And any guidance for domestic growth? Do you maintain that growth or no changes?

Domestic growth as I said earlier we are looking at between 20% and 22% overall growth for domestic business in the current financial year, b ut export will be slightly higher. So then the blended growth will be 22% to 24%.

Okay sir.

Thank you.

Thank you. The next question is from the line of Bino Pathiparampil from Elara Capital. Please go ahead.

This year we have already given a guidance of INR 250 crores which we have al ready spent around close to INR70 crores in the first quarter. And for the rest of the year we'll be spending around close to INR180 crores or something in that range.

Okay. And that is going to substantially go up in the next couple of years?

Yes, it will go up because, first of all, we are going to set up 4 new plants. So that is something which we are already working on right now. And this current capex is happening in the existing plants, which we set up in last couple of years.

Understood. So if I roughly put your capital raise plans and this together roughly INR250 crores, INR300 crores of maintenance capex plus another INR300 crores, INR330 crores of new plants, so roughly INR600 crores roughly per year capex for the next 3 years is something of a rough back of the envelope calculation?

No. The maintenance capex will end by, let's say, middle of next year. Because these plants will be saturated and then we will not be putting any new investment other than minor, but there is no major because these plants will get saturated. But the new capex that we're planning would be a run rate of INR300 crores to INR 350 crores. That is what we are see ing. And then maybe another INR100 crores to INR150 crores of maintenance capex. So you will see something between INR400 crores and INR 500 crores of capex happening in the next couple of years of further accelerated growth.

Understood. Yes. Okay. Thank you.

Thank you. The next question is from the line of Harshi from Bee Capital. Please go ahead.

Sir, I just wanted to know how is the dialysis business coming along like we are on a target of INR500 crores for the year. So if you could share how is the Q1 been?

Yes. So Q1, we have seen a 40% plus growth in revenue. The target for the whole year is between INR140 crores to INR150 crores. We have already ended over INR30 crores in the first quarter. And the traction is quite strong, because as we have localized production for the machine, we have also expanded, expanding capacity for our dialyzer production and other products. So we're pretty hopeful that for the ye ar, we should be in between INR140 crores and INR 150 crores which probably will give us around a 50% growth over the previous year.

Okay. Thanks.

Thank you. The next question is from the line of Girish Jain from KJMC Finserv Group. Please go ahead.

So Girishji typically we carry two months of raw material inventory in the company because of the current supply chain crisis, because a lot of raw material is imported. Almost 60% to 65% raw material is imported, coming from different suppliers across the world. We have almost 250 suppliers for different kind of raw materials, parts, components which are used in critical manufacturing. On the finished goods side, we don't maintain any inventory on the export front which is 70% of our business because all is made to order. And for the domestic business we carry probably 1 month of finished goods inventory. So that is the current cycle. On the debt side the long -term debt in the company is at this moment close to around INR7.5 crores which is going to be over by end of October. That's the final tranche of payment. It's an ECB which we had taken a few years ago. And working capital, that would be around INR150 crores to INR160 crores.

Okay. And if I have time, I'd like to add one more question. On the capex plan we had four new plants which have now become operational. And in the further fundraise which the company is planning, the entire money of INR350 crores which will be put in these four plants or some new locations are being envisaged?

No. So what we are doing is in the current plants whatever capex we are doing right now, in the current financial year and partially in the next financial year is being funded from internal accruals already. And whatever new fundraise we are doing these are four completely brand new locations. And I'll also call out these locations. So there's a new location, which is outside of Faridabad and one in Haridwar and one in Jaipur. Of course, it is in close proximity to existing plants, but not really attached to the existing plants. And then maybe a fourth location we are scouting right now. Maybe we'll get into one of the medical device parks which are being set up either in UP or in MP. We are already looking at some properties in that area and the existing medical device parts.

And the balance remaining out of the fund raise could probably be used for working capital and or inorganic opportunity?

Yes. Absolutely sir.

’ Okay. Thank you and all the best.

Thank you. The next question is from the line of Harsh Shah from Dalal & Broacha Stock Broking. Please go ahead.

Just a follow -up on the previous participant's question. So if you could kind of say a ballpark figure how much of the amount from the fund raise would be used for an inorganic acquisition or a technology transfer, if you could call out?

Okay. So the new 4 plants or the location that you were saying, so would that be only in cardio and critical care or something else is also.

See mostly because these are new businesses we have just started last year. So we need to have scale-up in these businesses. So we are going to mostly spend money in that area, because these are very deep technology businesses where we have to invest deeply into manufacturing and equipment. The infra is very different from the current infra.

Got it. And lastly if I take a 5-year or a 6-year view, is it possible that our EBITDA margin can exceed 30% or do you think it's more far-fetched?

It is very difficult to answer this question right now. Let's not speculate, b ut I think yes we are trying hard. And in fact this year also you've seen margins are close to 27%. So stretching another 5%, 7%, 8% is not a big difficulty from that 27% number. So hopefully we should be there in a few years, but I can't give you a correc t time line on that. But that's what we would probably aspire to do.

Got it. That’s it from my side. Thank you.

Thank you. The next question is from Shivam Saxena from ICICI Bank. Please go ahead.

So just two questions. What is the current capacity utilization of the plants currently? And secondly, how much time it takes for a plant to become operational? So suppose if you do a capex for a new plant, so when it will give revenues?

Yes, sure. So the current capacity utilization is close to 75% and maximum we can go is 80% because of the variability in the products which we manufacture. And on the, let's say, the second question was on, sorry, can you repeat that.

Yes, sure. Basically how much time it takes for a plant to become fully operational?

So I think on the plant side, it takes typically 2 years to build a plant and then get all the regulatory approvals. Once the plant is ready, then only you can apply for a product regulatory approval, which could take another because you have to undergo cl inical trials and regulatory approvals, it may take around 6 to 12 months depending on the product complexity and the criticality of the product. And that is India-only specific. And then once you go to global market, then you need another 12 to 24 months depending on the country where you are applying for the registrations. So that is the typical life cycle of starting to build a plant, to be fully operational and functional, maybe between 4 to 5 years.

Okay. And the current hiring that you have done, so what is the purpose of that hiring of people?

Hiring is for sales. These are salespeople.

This is addition in the sales team. Of course, we have also added maybe around 75 people in the plants across different you know, in regulatory, quality, manufacturing R&D, and other services. But mainly we are calling out more on the sales side because this is something we want to build more strongly.

Okay. Thank you. All the best.

Thank you.

Thank you. The next question is from the line of Girish Jain from KJMC Finserv Group. Please go ahead.

Himanshuji in your opening remarks you mentioned that the China plant is not doing great and you may in the future consider closing those operations. Did I understand correctly? And if yes, what could be the impact on the revenue and the profitability?

Look so China plant is a very small plant with less than 40, 50 people and the revenue is under USD2 million from China plant. And the reason we will probably close it down is because of current cost structures in China are much, much higher as compared to India. And also, the plant lease is expiring in the next 18 to 24 months. Initial lease was around 20 years, so we are almost at the end of the lease period. And I think the management team and the Board probably have taken a call, there's no point in extending that and taking another 5 or 10 years. And I think now there is no s uch advantage coming out of being in China. Because I think in India we have already grown in a good way, which will actually make China factory almost redundant.

So will it be correct to assume that the impact on revenue will be less than USD2 million whereas on the PAT, there might be a positive impact?

Yes, because ultimately all that cost goes away and 2 million is nothing if you take USD200 million revenue company.

Thank you so much.

Thank you. The next question is from the line of Nitant Darekar from Bonanza Portfolio. Please go ahead.

Congratulations to the management on a good set of numbers. I just had a bunch of qu estions. First on the over US FDA approval for the current year. So in what therape utic segments are these FDA filed? And the second would be the guidance on the new plants that we are planning to set up. Any geographical guidance of where these plant would be and thirdly are there any new therapeutic segments or devices that we are willing to explore in the coming next few years?

So on the first question it was not very clear. Maybe you were too close to the mic. So maybe if you can repeat that. The next two, I've understood, but the first question if you can repeat on the U.S. FDA. It was not very clear.

So like current ly you have signed four U S FDA and like the total sector is going to be 8% to 10% for the whole current year. So in what therapeutic segments are these FDA side in infusion therapy?

The main products where we are applying for FDA would be more on the vascular access and critical care. These are two important areas we are focusing on. Vascular access is th e core business of the company. So we will focus there, because we have a good global competence in that area. And the next segment we'll be focusing will be more on critical care. And on the new plant locations, I've already mentioned a few minutes ago. The plants will come in Jaipur, Haridwar and Faridabad, o utskirts of Faridabad. And the four th plant we have not decided. We are still contemplating if to go to a medical device park. And on the segment side, I think for the next 4 to 5 years, we'll continue to focus on the current 6 segments we are into. But whatever adjacency we see maybe when we do renal, we could probably look a t urology side of the business or when we do critical care, we can also look at maybe gastro side. So these are some of the adjacencies we will look at, but I can't tell you anything what we'll do in 5 years from now in terms of business, new product areas, b ut currently we have enough to do in the current segments itself what we are doing.

All right. Thank you.

Thank you. The next question is from the line of Shivam Saxena from ICICI Bank. Please go ahead.

Yes. Thank you for taking my question again. Just wanted to understand what is the frequency of price hikes in this sector, do you think it is easy to take price hike in this sector?

No. If there is a big change in raw material cost then definitely we'll take a price hike. And overall we have experience of now 27 years of running the company. So what we have seen is that prices are more or less steady because we don't see too much changes. As our gross margins are pretty high so we are able to manage any raw material shocks which come in the market. So more or less the prices remain stable. And if there is an untoward change in global pricing, global raw material, let's say, supply chain, then definitely we go back to customers and ask for a price hike. But it depends on the contract, it depends on business to business. So there is no set formula for it.

So how is the competition i high in the sector, competition point of view?

Okay. And another thing, you said that it will take 3 to 5 years to pick up revenues for the new plants. So what would be the revenue growth drivers till that period, if you can.

So for that period we already have established four new plants in the last 2 years and most of these plants will get populated. So by 2027, these plants will probably get exhausted in terms of capacity and capability. And as a result we are now planning to build 4 new plants which will get operational by '26 and '27 and that will help us to again scale up revenues for the following 3, 4 years.

Thanks.

Thank you. The next question is from the line of Harsh Shah from the Dalal & Broacha Stock Broking. Please go ahead.

Thanks for the followup. Y ou mentioned in the opening comments that we have grown about 30% in Europe. So I mean it's a commendable growth, b ut just wanted to understand is it just cost difference that is helping us to win more market share in Europe?

See basically it's about market penetrati on with more and more products t hat is important, because as the funnel is now open. So let's say with the same hospital, with the same distribution partner we have been able to add more products. So that's number one. Because we have a very wide range of products which we offer. Of course, when you're making in India, you have to be cheaper, because there we are competing with local players or with global international players. So definitely if you are matching on quality and performance and there is a price delta definitely then we have a better chance of supplying those products.

And what would be the price delta ballpark?

See, It depends on product-to-product very hard to say what is the delta. But I would say, maybe 20%, 25% price differential for sure between Indian companies and large multinational companies.

Okay. Got it. And lastly in terms of risk share in the export market what could be that risk share? Obviously right now we are facing that container availability issues and stuff like that, but other than that what is the.

This issue was also there in 2022 . So it is not new and maybe also prior to that whenever there is a crisis global. Geopolitical situation always the trade imbalance kind of kicks in. So I think that is always kind of mitigated. Yes, sometimes you have to pay higher freight or customer has to pay for a little higher freight. But again, over a period of cyclic, so it comes back to normal. I think to me the biggest risk I would see in the export business would be if we are really making bad quality products, but which we are not, because we have 27 years of experience in selling into overseas markets today now. And we are in more than 100 co untries today selling our products. So we are very well diversified on the geographical side. We are very well diversified on the product portfolio. So all these things and we have run multiple plants. So all this helps us to mitigate that risk which can arise because of one product or one country.

Got it. And just lastly on I.V Cannula. So what percentage of revenue would that be contributing?

Between 25% to 30%.

And that would be mainly in Europe, right?

Not really. It's a global product. We are the third largest manufacturer in the world. We have almost 10% global market share on that business in terms of volume.

Sorry what market share did you mention?

Almost 10% market share global volume.

Got it. That’s it from my side. Thank you.

Thank you. As there are no further questions, I would now like to hand the conference over to the management for closing comments.

Again thank you everyone for your time and I think a lot of good questions asked. This really helps us to do better and your thoughts which are coming from outside really give us a very different view on the business. So continue your support and have participation so that we can do better every time when we talk. And thank you again and looking forward to speak to you in the future.

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