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Edited Transcript of STAR.NSE earnings conference call or presentation 29-Jul-19 12:00pm GMT

Q1 2020 Strides Pharma Science Ltd Earnings Call

Aug 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Strides Pharma Science Ltd earnings conference call or presentation Monday, July 29, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arun Kumar

Strides Pharma Science Limited - Founder, Group CEO, MD & Director

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Conference Call Participants

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* Abhishek Singhal

Macquarie Research - Former Associate Director

* Aditya Khemka

DSP Investment Managers Pvt. Ltd. - Assistant VP, Healthcare

* Alankar Garude

Macquarie Research - Analyst

* Anmol Ganjoo

JM Financial Institutional Securities Limited, Research Division - Director

* Sachin Kasera

Lucky Investment Managers - Analyst

* Tushar Manudhane

Motilal Oswal Securities Limited, Research Division - Research Analyst

* Deepa Porter

Sofario Capital - Analyst

* Nirmal Gopi

IDFC Securities - Analyst

* Depel Shah

RW Equity - Analyst

* Nesek Vicario

Lucky Investments - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day and welcome to the Strides Pharma Science Limited Q1 FY '20 earnings conference call. (Operator Instructions) Please note that this conference is being recorded.

I'll now hand the conference over to Mr. Abhishek Singhal. Thank you, and over to you, sir.

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Abhishek Singhal, Macquarie Research - Former Associate Director [2]

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A very good afternoon, and thank you for joining us today for Strides' earnings call for the quarter 1 FY '20. Today we have with us Arun, Founder and Managing Director; and Badree, Executive Director of Finance, to share the highlights of the business and financials for the quarter.

I hope you have gone through our results release and the quarterly investor presentation, which have been uploaded on our website, as well as the stock exchange. The transcript for this call will be available in a week's time on our company website.

Please note that today's discussion may be forward looking in nature and must be viewed in relation to the risks pertaining to our business. At the end of this call, in case you have any further questions, please feel free to reach out to the Investor Relations team.

I'll now hand over the call to Arun to make the opening comments.

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [3]

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Good evening, and thank you for joining us today. We just completed our Board meeting a little late today. So obviously, some of you may not have had enough time to review our data. And like Abhishek mentioned in his opening, we are more than happy to address any questions that any one of you have, either today or later.

And before I start, as this is our first quarter since we divested our Australian business, and for the benefit of our investors and analysts covering -- following us, please note that our numbers have been completely recast only to reflect the continuing business numbers.

So consequently, our reported EBITDA of last year of INR 469 crores, INR 4.690 million, it now should read as INR 257 crores, ex-Australia, yet including our supplies to the Australian market. Consequently, our Q1 EBITDA of last year is INR 49 crores, and the Q4 EBITDA is INR 95 crores. So our reported numbers today of INR 688 crores with an EBITDA of INR 123 crores demonstrates a very significant growth of our core businesses -- across our core businesses.

What is also important to note in Q1 is that our Singaporean facility has gone commercial considering that they have received FDA approvals recently, and although it is running at very limited capacity utilization as we move larger volumes over time, the current OpEx includes a cost of INR 25 crores per quarter, both for the Singapore facility and the Chennai facility that we acquired now 100% from Vivimed. So the INR 25 crores is the number, OpEx number, that you will not see in Q4 of last year, and the INR 124 crores that is reported today includes that number. Adjusted for that, our EBITDA is closer to INR 150 crores this quarter.

Having said that, we are very delighted with the fact that the Singaporean facility has now already started winning contracts for the VA market for which it is intended. And we should soon be having no under-recovery in this facility. And our aim is to have a zero under-recovery by the end of the year.

Having said this, overall, it's been a great quarter: 11% sequential growth, 30% on EBITDA. EBITDA margins on the base business have grown in the last 12 months from 10% to now 18%. And that's a very healthy track record. Most importantly, our net debt is now INR 700 crores, which is a significant reduction from where we started this in the last 12 months.

We have today announced a dividend of 12 rupees is an interim dividend. Including those dividend payouts, our total debt would be about INR 850 crores, which is significantly lower than the INR 1,000 crores we hoped we would end up by the end of this year.

Having said this, and as communicated in our earlier statements, all of this is blemished by the fact that our Puducherry facility had a warning letter, coming out of 25 very successful FDA audits in the last six years. This obviously is a setback. But like I have mentioned, post- the warning letter and announcements that we made, outside of one product, which is a modified release product where we have currently revenues of around $3 million, every other product is fungible. Bulk of our sales already are being salvaged from several of our other FDA-approved sites. And we do not see any reduction in our momentum to grow the U.S. market.

We are satisfied with the fact that post- the Puducherry facility, Singapore and Bangalore received favorable FDA outcomes. Bulk of our throughput comes from the Bangalore facility. And now that we have the [ER] in place, we are expecting several of our products to be approved.

So there is no change in our approval guideline of 12 to 15 products. We have also started work on moving some of the products that we filed from the Puducherry facility to other plants as alternative sites. So we seem to be -- we are on top of this. We are very confident that with the actions that we have taken now, we should get a reinspection sorted out in the next eight to 12 months. And then we hope we will receive a good outcome. And the remaining six or seven filings, relevant filings on that facility, will get through the approval process.

So getting into specific businesses, our regulated market business today has grown over the last 12 months from INR 309 crores to INR 560 crores, which is an 80% year-on-year growth. U.S. continues to grow, adjusted for the [ofaltimaride] and benzonatate, which are purely winter products, our business has grown 10% Q-on-Q. This is the fifth consecutive quarter that the U.S. business has grown.

Zero pricing challenges. We continue to have stable pricing environments with the product selection and the fact that we have a stellar track record on supply situations. No FDS for the company, and we continue to build market share across several products.

Our other regulated markets from now on will include our sales to Australia. This quarter, order growth has moved from INR 151 crores to INR 170 crores Q-on-Q. The Australia businesses are not really accounted for in Q4 -- in Q1, simply because of transaction cutout dates. You will see a full quarter impact coming from next quarter -- from this quarter onwards, and this would continue to be a very significant business that we are seeing growth momentum.

We are fully invested in this business. We have a great leverage on our portfolio maximization across our various markets. We are seeing good traction in Europe and in U.K. And our Canadian and South African businesses that have been recently acquired are going through a strategic reset, and we are very confident that our fixed leverage will start demonstrating several quarters from now.

Having said this, we believe the other regs market will now receive significant attention like what we have provided to the U.S. market, considering the U.S. market has got to critical size. And this is our typical strategy, to stay focused on one market, blitz-scale that market, and then start focusing on the next big region. So the other reg markets is what you will see significant growth.

Emerging markets is a work in progress. I'm delighted to say that I have no more excuses to make for the brands businesses. We are now settled, and that business is now completely course-corrected for hygiene. We've got a new leadership in our African operation. Business is looking up. Secondary sales are growing. Our institutional business bounced back from a low base. So it's good, but we are far away from what numbers we used to do. Our Kenyan operations now remains the only part of our business which does not make money for us yet. And we expect by the end of this year that will be a settled strategy, too.

Getting to specifics, the U.S. market moved from $51 million just to revenues, although we reported $53 million including the Tamiflu sales -- January's Tamiflu sales, sorry. That's gone up to $56 million. Growth has been significant year on year, 125%. Almost on all key products, we have seen increase in market share. And this has been a steady quarter-on-quarter growth across the portfolio of products.

Two big wins in the last two quarters have been a significant market share on ibuprofen tablets, where we are now emerging as the market leader, and a significant market share in mycophenolate mofetil, which is an immunosuppressant, which has got significant reception in the supply chain with existing players. And we continue to build market share through focused approach to our go-to-market strategies.

We spoke a little bit about the other reg markets. Business has grown. It's been steady, coming back strongly from serialization issues that most companies went through. This is now a settled strategy. We've had -- to get ready for Brexit, we completed inspection from a European agency for our flagship Bangalore plant, which went through very well. And we expect to be certified from the EU authorities, although we have the U.K. approvals. But in anticipation for Brexit, we think it's important that we have both U.K. and European approvals. So that's now in place. And you will see a full year, like I mentioned earlier, to the Arrotex operation, and that's going to significantly expand our other reg business, both in terms of top line and profitability.

We spoke about the emerging markets. And today, we also announced our foray into the Chinese market with Sihuan Pharma. We have announced a partnership. It's amongst the top 15 Chinese companies with over 7,000 salesforce across the markets, and we started out with four products. All of them are unique. Two of them would be first-time products in the Chinese market. So this is an important go-to-market strategy for us. We don't believe that you can thrust upon China with hundreds of products. Chinese companies have specialization across therapeutic formats. So we're going to work with two or three companies to achieve a strategic intent for the Chinese market.

The structure here is that we would have 49% equity. Strides will -- we'll create a JV. We'll have 49% equity in this JV. Strides will produce -- we'll license the product to the JV. We'll receive a licensing fee up front, which is not significant. So we're not putting numbers around that. And then we will have a supply agreement, a profit share, and Sihuan Pharma would then take care of its front-end marketing.

I'm going to -- in terms of the debt book, like I said, we're now at INR 700 crores. That's a significant achievement. Although we've committed after the Arrow transaction that we will pay down $150 million. We chose to pay a little over $200 million as debt. And now and as a consequence, both our depreciation, interest cost, amortization of intangibles have already or significantly making the transaction EPS accretive almost immediately. And once we add the supply contracts going this quarter, you will see the true value of our rationale of this exit, yet keeping significant control on the IP and also on the supply contracts.

In terms of other updates, like I said, we completed the transaction with Arrow. We have secured an excellent supply contract, which is long term, for over 50%, which will allow us to retain at least 50% of the Arrow EBITDA. And then you will see from the financials that we are very close to reporting numbers which included Arrow. So having sold Arrow, having reduced our debt book, our growth rates are significant enough for us to feel comfortable that we will end this year with a very significant topline growth and an EBITDA growth, driven across markets and not specific markets.

So, overall, it's been one year of strategic reset. And we think we've come a long way. We thank you for the support that we have received from our investors and for those who believe in our story. And I'm more than happy, along with Badree and my other colleagues here, to answer questions that you may have. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of [Nesek Vicario] from [Lucky] Investments.

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Nesek Vicario, Lucky Investments - Analyst [2]

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The first question is that you mentioned that you are very comfortable with the pricing that you are enjoying in the products that we have in the U.S. Is this a unique situation to us because of our astute product selection? Or is it that the pricing in the U.S. has not bottomed out and is improving sequentially?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [3]

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I think it's a combination of both. So, A., while a lot of NDAs have been withdrawn, we are seeing the actual supply challenges only emerging now. You will see from the FDA website that you will see older dosage forms to have more products in the shortage list than injectables for the first time in several years. We are seeing [national] procurement from the big boys in terms of the consolidation. And we believe that product selection plays a big role. You will see that more than 50% of our products are catered to very unique products, very few players in these markets. That helps in our overall strategy. But this is our fifth consecutive quarter that we are commenting that we have had no price erosion in our U.S. business.

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Nesek Vicario, Lucky Investments - Analyst [4]

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Okay. My second question was regarding to what is the sales of our molecules to the U.S. as of now from the Puducherry plant?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [5]

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The Puducherry facility currently delivers approximately $35 million to $40 million of sales.

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Nesek Vicario, Lucky Investments - Analyst [6]

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Okay.

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [7]

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But all of these products are serviced from two sites. So we have already moved several of our products because part of our remediation exercise was to reduce this output by half. But this is not changing our forecast or our ability to service these products from our other plants. And both the facility in Bangalore and in Singapore have enough capacity to make up for all the outputs.

But even having said that, we have no plans to reduce -- I mean, we have plans to reduce the number of products, but the volumes on the reduced number of products will still be quite high from Puducherry. So in effect, except for one product, where it's a modified release, which is about $2 million to $3 million, every single product has already been completed in terms of regulatory work and alternative site. And this is not something we do exclusively to Puducherry. In almost every product of ours, we have at least two sites manufacturing the product across the group. This is part of our overall risk mitigation that we have been working on since four to five years.

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Nesek Vicario, Lucky Investments - Analyst [8]

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Great. So we should not have any transient impact in any quarter, where the sales are depressed for a quarter because we are shifting those products to the other site. I mean, things would be as usual.

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [9]

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But also try and understand, the inspection of the facility was in January.

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Nesek Vicario, Lucky Investments - Analyst [10]

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Yes.

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [11]

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So if you are alluding to some stringent or severe action from the regulators, it will happen long before than what we are -- than now. But that's not the point. The point is that we are conscious that remediation will slow down capacity. All I am saying is that we have enough capacity in all our other plants to take care of this throughput, the demand that is required. Our growth is coming mainly from the niche products that we have introduced in the last one year. Most of them come from our Bangalore facility. And we have moved a lot of our capacity to Chennai and to Singapore from Puducherry.

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Nesek Vicario, Lucky Investments - Analyst [12]

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I appreciate that. And lastly, sir, what is the maximum sales that is coming from a single product for us from now in the U.S. market?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [13]

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We don't give specifics on any product, but we now have several products which have revenues greater than $15 million.

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Operator [14]

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The next question is from the line of Aditya Khemka from DSP Mutual Fund.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP, Healthcare [15]

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A few questions for you. Now firstly, on this key organization, merging the wholly owned subsidiaries into the parent, what is the purpose behind it?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [16]

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Okay. So basically, we had an emerging market plan, emerging markets, which was predominantly focused on the African markets. About two years ago, you'll recall that we decided to exit our generics business, and we moved a lot of our products or we are in the process of moving a lot of our products to our Kenyan operation.

Consequently, we then converted the second plant in Bangalore to a regulated market facility. And we recently got BG approval for the plant. So this is going to be a designated facility for Australia. And earlier, it was part of a carved-out P&L that was focused only on emerging markets. So that logic is lost, and therefore, the whole idea is to bring it back to the whole core, so that the number of companies that we operate also reduce.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP, Healthcare [17]

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Got it. Also, there's a Singapore facility which has now been cleared. You mentioned the OpEx of that facility currently in this quarter was INR 24 crores. That --

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [18]

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It includes a recently acquired Chennai facility from Vivimed.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP, Healthcare [19]

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But Vivimed facility will already be contributing some revenues, right?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [20]

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It was a 50-50 JV, right, so we were not consolidating it.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP, Healthcare [21]

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Okay. Got it. Okay. So Singapore facility, how much is the capacity of the facility? And what is the sort of peak sales you believe it can achieve let's say in three years' time?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [22]

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It depends upon the products that you make there. So currently, the plant has got 1 billion units capacity. We are already expanding that to 1.8 billion, which will be ready by end of the year. And that's already part of our CapEx plan. And we expect the plant to be fully occupied by the end of this financial year. I can't give you a dollar number because every plant, depending upon what product we make, is between $50 million to as high as $200 million or $250 million for the global market like the flagship plant would be.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP, Healthcare [23]

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That's fair enough. But are you -- did you mean 100% capacity utilization by the end of this fiscal, FY '20?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [24]

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We will.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP, Healthcare [25]

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Okay. That's good to hear. Also, your institutional business has shown a very decent uptick from the fourth quarter of '19 to the first quarter of '20. Was this driven by malaria or antiretroviral sales?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [26]

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It was mainly driven by malaria.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP, Healthcare [27]

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So my understanding was that malaria global fund business has not been doing well because there was a funding issue. So has that environment changed, or is it specific to you in terms of market share gains?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [28]

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No, no. We don't have any market share gains. These are very -- so the global fund has a certain pool of capital. That capital has not changed, Aditya. It's just that it's a lot of different countries, and if we have a stronger position in a country like a [DOP] or Nigeria and where we have local presence and registered, then it depends upon the quarter when those allocations go to those countries. So I don't think you should read too much to it. It's a good turnaround, but if we can just keep these levels, we think we will be happy.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP, Healthcare [29]

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Okay. Also, we have some INR 455 crores or AUD 94 million pending from Arrotex. So [any time that should have settled], and what is it contingent upon?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [30]

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It's contingent on nothing. It's a secured debt. It is [intersparing], and that's the reason why our net debt has reduced significantly. And it's due to the fact that we have agreements in place; we can't give specific dates, but it's not too long.

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Operator [31]

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(Operator Instructions) The next question is from the line of Shashank Krishnakumar from JM Financial.

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [32]

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This is Anmol Ganjoo. My first question is on the impact of Puducherry. You said that this $40 million setback on account of this wouldn't impact the full-year picture. So what you're saying is that $20 million will essentially get supplied by other facility? And the loss of around $20 million will be made up by throughput in other products? Is that...

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [33]

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So what I mentioned is that we have taken a decision to slow down the outputs from Puducherry until we finish remediation. Nothing prevents us from supplying product to the U.S. market from the Puducherry facility. So we have reduced our throughputs by half for the U.S. market from Puducherry. So from $40 million, it'll come down to $20 million.

It doesn't mean the U.S. business will reduce by $20 million. Puducherry will continue to supply to the U.S. market. And the fleet of capacity we are operating for other markets, so the Puducherry facility is not going to result in under-recovery. It's just that we have recast the market orientation from a very heavy orientation to the U.S. to several other markets that plant has got approvals for. The plant is approved by all regulators. And even after this FDA event, we continue to supply to all markets.

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [34]

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Okay. That's helpful. So basically, there will be a rationalization in terms of -- there's no change in the numbers, right?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [35]

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Yes.

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [36]

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Second question is also with respect to the read-through on Puducherry. I understand that it was an acquired plant, but some of the observations just doesn't match up to our stellar compliance track record. So I just wanted to know what essentially went wrong, and what are some of the measures that we're taking that we secure our supplies and this doesn't get repeated? Any thoughts on that? Because it is a slip from our relatively high standards of compliance over the years.

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [37]

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So like I said, in the last six years, we've had 25 FDA inspections. More than half of them had zero 483s. So clearly, this is a blemish.

In spite of the fact that this facility was acquired, obviously, it does have a different cultural fit. But having said that, the plant had a very successful regulatory track record even after we acquired the facility. This was clearly a leadership failure at the unit level and at the corporate level.

So clearly, this was -- the issues were not leading to product integrity. It's about how we displayed data and the quality of the data. No data that is relevant to the product history or the backup data -- it's still available and is in stored condition for all our customers and agencies. So that is nothing that we worry about the product quality and the adequacy of the products, but the way we keep our data and how we retrieve our data and the excessive documentation that we do as a consequence led to more display issues, less to do with product integrity.

So having said that, it's been a blemish, and a blemish is a blemish. So we are very focused on remediating this plant. It's very important for us as an organization. And the fact that this did not cover the other plants clearly says that this is systemic to a local unit.

But having said that, we've increased our oversight, brought in new leadership changes and doing all the right things to gain back the confidence of the agency. And we are very confident that we will get this plant back on track much quicker than most of things we would -- watchers would believe.

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [38]

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Okay. That's helpful and reassuring. The next question will be...

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Operator [39]

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This is the operator. May we request that you please rejoin the queue for the follow-up.

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [40]

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This is a second question, right? So first question was right -- I'll just have this question and get back, if you don't mind.

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [41]

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Go ahead.

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [42]

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So on the institutional business, you have spoken about a revised strategy. We also understand that last year, the commentary around some of the global funding piece was that a lot of emphasis had moved from cure to prevention. Is there a change there also? And how should we be looking at the elements of this revised strategy and our revenue going forward for the full year? Because there is a...

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [43]

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Anmol, I know...

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [44]

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(multiple speakers) turnaround in the numbers...

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [45]

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I know that revised strategy is a good way to say that -- in institutional maybe it's a choice of words. But revised strategy, effectively for us, effectively means that we brought in a little more focus on the malarial business to get contracts because malarial business is very, very locally driven as in the demand is local to them.

But for that, there is no change in the donor funding or the donor focus on care and prevention. There is a shift more for prevention going forward. I think it's more to do with the fact that we just won some businesses in some markets that were important in the allocation of funds.

Please try and understand that we are a very small player in this space, and we've obviously -- the inroads that were made even in this quarter is not significant enough. The significance of this business for us will emerge fully when we start getting approvals for the new products that we have filed with the donor, with the WHO, which we expect by this year. And then you will see an uptick in this business with a shift in product strategy. So the revised strategy is predominantly to do with newer products and less to do with the older products that we currently are marketing.

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Operator [46]

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The next question is from the line of Nirmal Gopi from IDFC Securities.

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Nirmal Gopi, IDFC Securities - Analyst [47]

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Arun, on the Australia business, the supplier, the supply business, is there any quantum of that business EBITDA in the current quarter or it's negligible in this quarter?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [48]

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It's very, very small, considering that the cutoff date of the transaction was 10th of July. And so it's a very small portion. And you will see a lot of it...

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Unidentified Company Representative [49]

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(inaudible)

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [50]

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Yes. So the other thing, what Rakesh is prompting me, and rightly, is that we will now get the combined volumes. So you will see that significantly changing in the next coming quarters. But Q2 onwards, you'll see the full flow of the Arrow impact with our revenue recognition issues. And from Q3 and Q4, you will see the Arrotex, as in both Apotex and Arrow, volumes coming through. And before the end of the year, we will get to the 40% to 50% retained EBITDA numbers, as we have communicated earlier.

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Nirmal Gopi, IDFC Securities - Analyst [51]

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And secondly, on the U.S. business, we finished at about $56 million a quarter. This, if I recall correctly, is pretty much the run rate that you guided to for the year, if you were just to analyze that. So where do we really go from here? Because you're talking about 12 -- so there are two things. One is, A., do you see still scope for expanding revenues from current approvals? And secondly, how should one look at the potential of some of the newer launches? You're talking about 12 to 15 new launches going forward. I mean, how should we look at these two pieces now going forward?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [52]

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So this was just considered view of you and your tribe, if I may use this word, in terms of what will hit. What we are saying is that we've only commercialized half of the proved portfolio. We see tremendous opportunities to grow the business. We are very focused on capacity allocation and margin to really launch products where we get the right margin profile.

And clearly, we see continued growth. But will it ramp up from the $25 million, which we had 12 months ago, to the $56 million run rate? The answer is [no, we want double from here]. But I would be surprised if you can grow this Q-on-Q; it will be on a much more moderated number, considering that we have got to a certain significant size.

But yes, I don't think we have reached a plateau in terms of opportunity. We are continuing to take market share. And if you'll see, I haven't specifically mentioned it, but in eight products, we have increased market share over the last quarter.

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Operator [53]

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The next question is from the line of [Deepa Porter] from [Sofario] Capital.

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Deepa Porter, Sofario Capital - Analyst [54]

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Yes. You mentioned your reported number, INR 125 crores EBITDA, but...

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [55]

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Deepa, we can't hear you. Can you speak up?

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Deepa Porter, Sofario Capital - Analyst [56]

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Yes. So, sir, you mentioned this INR 25 crores OpEx, for that INR 150 crores EBITDA. So your EBITDA, reported EBITDA margin was 18%, but if you adjust for that, it becomes 22%. So as you kind of like anticipate your utilization level for your Singapore facility, so how do you see your sustainable kind of EBITDA margin?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [57]

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You are breaking. You said your adjusted EBITDA should have been 22%, and then we lost you.

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Deepa Porter, Sofario Capital - Analyst [58]

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Okay. Yes. So adjusted EBITDA margin should have been about 22% now as you kind of ramp up your Singapore facility, so how should we look at your sustainable EBITDA margins?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [59]

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We have already done the math.

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Deepa Porter, Sofario Capital - Analyst [60]

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Okay. So around about 22% is what one should...

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [61]

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I'm not saying that, but your math is saying that.

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Deepa Porter, Sofario Capital - Analyst [62]

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Okay. Okay. Understood. And sir, in your opening remark, you also mentioned that we are looking at significantly higher revenue growth. So is the current momentum is what you want to continue in terms of whatever revenue growth you achieve this year?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [63]

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Yes. What we hope to achieve, as one of the key objectives when we sold Australia was that the rest of the markets should have momentum because Australia was not growing. It had good cash flows, but it was flat growth, and there was no revenue growth because we had kind of plateaued. But all of the rest of the businesses were either being course-corrected or were settled.

So yes, we are in a phase where several of our businesses are steady, very well, and growing from there. Several of the businesses -- a few of our business needs attention. I would say, 12 months ago, 80% of our business needed attention. Today, I would say 20% of our business requires attention to get to a certain level.

So there will be growth. Growth will predominantly come from other regulated markets and from the emerging market course correction, and with the Australia buildout on supply -- because of the Australian buildout on supply. Like I was talking to Nitin earlier, there will be growth in U.S., but it's time for you guys to monitor it.

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Deepa Porter, Sofario Capital - Analyst [64]

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Okay, so basically U.S. moderation will kind of be compensated by other --

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [65]

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Exactly.

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Deepa Porter, Sofario Capital - Analyst [66]

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(multiple speakers) market growth. So overall, giving us a good growth environment overall for the company.

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [67]

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That's right.

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Operator [68]

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The next question is from the line of [Depel Shah] from [RW] Equity.

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Depel Shah, RW Equity - Analyst [69]

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Arun, after the five to six quarters where you really engineered this course correction, do you have a specific sort of broad ROE target for the company?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [70]

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For Singapore -- we have already improved our ROE from single digits to now 13.9%, if you adjust for Singapore, which I think is a significant uptick from where we were. Our focus as an organization has moved significantly from EBITDA to cash conversion and EPS growth. And some of the actions we have taken is all leading to that. And I think it will grow from -- by the end of the year, we will absorb for Singapore -- I mean, we will have absorbed all the Singapore underrecoveries. And to have moved from 8% to probably 15% by the end of the year would be a significant achievement for our leadership, and we are very focused to achieve that.

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Depel Shah, RW Equity - Analyst [71]

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That's good to hear. One more follow-up question, probably, is that when we reported the net debt numbers, we've also reported approx INR 400 crores-plus of investments. May I know whether these are, what, liquid investments which we have?

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Unidentified Company Representative [72]

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Yes. This is secured by earnings payment.

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Depel Shah, RW Equity - Analyst [73]

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No. No. That is the -- I'm not talking about the...

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [74]

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They're not liquid funds.

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Depel Shah, RW Equity - Analyst [75]

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Because in the annual report, there was one item, INR 130 crores, [Eastern Gates owning Dragon], so.

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Unidentified Company Representative [76]

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Yes. Yes. That is a mutual fund which has been started in Singapore because it was giving us rates -- a yield much higher than the normal rate which applicable in that country. So that's the reason we did that. And this will be the reflection of the receivable for the next two to three years, [by the interest].

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Operator [77]

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The next question is from the line of Tushar Manudhane from Motilal Oswal.

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Tushar Manudhane, Motilal Oswal Securities Limited, Research Division - Research Analyst [78]

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Just on this China JV, I would like to understand, like, what do you intend to...

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [79]

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Tushar, can you just speak up? We are not hearing you well.

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Tushar Manudhane, Motilal Oswal Securities Limited, Research Division - Research Analyst [80]

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Hello. Is this clear?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [81]

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Yes.

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Tushar Manudhane, Motilal Oswal Securities Limited, Research Division - Research Analyst [82]

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Just on this China JV, just would like to understand how much you plan to invest for this new manufacturing facility which is to be put up in China.

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [83]

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Our investment will be lower than the licensing income we will receive.

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Tushar Manudhane, Motilal Oswal Securities Limited, Research Division - Research Analyst [84]

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Okay. Okay. And just coming to the U.S. sales, maybe the near- to medium-term view, but just would like to understand. (technical difficulty) do you still think that the growth rate will be moderate, at least for the next six to nine months?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [85]

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You are breaking again. You need to be on the main phone or get off the speakerphone, please.

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Operator [86]

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Mr. Manudhane, may we request you to please rejoin the queue because your voice is also cracking up? In the meanwhile, we will move to the next question.

The next question is from the line of Aditya Khemka from DSP Mutual Fund.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP, Healthcare [87]

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So what I was asking was this INR 50-odd crores which is [deferred to zero], so if it's not contingent, then is there any timeline to which we will definitely receive this payment? Is it within FY '20, or --

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [88]

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It is subject to certain items. There should be a change of control situation, or the maximum payout is within three years.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP, Healthcare [89]

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Within three years. Okay. And it's more back-ended than it's front-ended.

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [90]

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Yes.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP, Healthcare [91]

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Okay. Fair enough. And secondly, on the vertical integration, so how much of our API or input comes from the group companies, Solara or SeQuent or [Strides just]?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [92]

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It is about 20% of our total requirements. And that is what we received shareholder approvals for; it is within that.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP, Healthcare [93]

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Right. So the balance, 80%, is coming from external third parties.

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [94]

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That's right.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP, Healthcare [95]

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So how is the pricing environment there? I mean, have the prices more stabilized or even cooling off, or is the pricing (multiple speakers)

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [96]

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On the API?

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP, Healthcare [97]

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Yes.

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [98]

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So as you know, the Solara, we are dependent on the bottom of our pyramid products, which are mainly the commodity products with sales for our big market shares and also around the recovery, so mainly ranitidine and ibuprofen. This constitutes a very large part of our business.

The rest of the businesses, as you know, are very niche products, where our margins are significantly higher, and the API costs as well are a very significant part of our cost of goods. And therefore, we get into -- and these are typically European suppliers, and we have got into long-term supply contracts, because they will not supply us otherwise. So we have three- to four-year supply contracts. We are not seeing any changes in pricing. Those prices are always high compared to other Indian companies. But we prefer to continue with working in that environment.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP, Healthcare [99]

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Understood. Just one more, if I may. So we are paying about INR 150-odd crores dividend while we still have net debt on our books. Firstly, [talk to us if there are engendering] companies which prefer to pay off debt rather than paying dividends. So just want to understand what you guys are thinking in that regard.

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Unidentified Company Representative [100]

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Well, I think, for us as a company, we have brought down debt very significantly. And there is enough free cash that we'll generate in the next year or two that will make us typically debt fee, assuming that we don't do any transactions, which we don't intend to.

Then it is important that we follow our dividend policy of returning some amount of free cash that is available, either through a transaction or a strategic sale, like we have done here. It's now for Strides to have done it, and it's something that we've always considered. We could have done a buyback instead, and that's more complicated. And this is something which goes to everybody's hands, and it's more equally distributed, from that perspective. So no questions around that, and it's a much more easier process to do.

The other way of doing it is probably do a buyback and start increasing promoter stakeholding, which is not the intent. So the point here is to do what we do right and what we think is the right thing to do.

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Operator [101]

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The next question is from the line of Alankar Garude from Macquarie.

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Alankar Garude, Macquarie Research - Analyst [102]

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Firstly, I wanted to check on our Africa business. So we have grown by 1% year on year in this quarter. And you have mentioned about turnaround of emerging markets being the most significant outcome for this fiscal. So how should we look at the Africa business growth in FY '20? Should we expect a sequential improvement from here on? And if yes, then if you could indicate any year-on-year growth range?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [103]

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There are two things. Africa has not delivered profits for us for the last 12 months. It has started to start making profits. So we are more focused on getting each of our businesses profitable to a certain point that is important for us to stay invested.

Africa clearly fits that strategic growth for us. It's a frontier market. We have been in that market. We've been successful there. We intend to course-correct this business. So we have become profitable. And that's the most important thing, first for us to get this business back to profitability, and then focus on growth.

So I am not so sure I'd be worried or focused on increasing my Q-on-Q or year-on-year growth. But clearly, this business needs to deliver around 18% to 20% EBITDA before the end of this financial year, and we are on that track. And currently, until very recently, it was breakeven or negative. This year, it is breaking -- this quarter, it's breakeven. And before the end of the year, we will see this business swinging back to what we currently make as EBITDA. So that's an important part of our overall strategy.

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Alankar Garude, Macquarie Research - Analyst [104]

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Understood. Fair. Secondly, you mentioned about a soft launch of Cinacalcet in July. So can you help us understand the opportunity in this molecule now?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [105]

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Well, in the U.S., you can't establish an opportunity for every single product. What we meant by soft launch is that we want to be sure that -- typically, when there are more players in the market, prices drop dramatically. Then there's significant challenges on gross to net adjustments, all of that stuff.

So when we are in these kind of products, we are very -- we are cautiously optimistic. We are focused on ensuring that whatever product we sell in Cinacalcet doesn't come back to us. That's very important for us. And we don't give anything free or replacements and all of that stuff. So that's what we mean by a soft launch.

At this stage, I can't tell you what this product will end up to. It is looking good. It will meet our targets for a product, which you know is typically a reasonable price in terms of opportunity or market share. And we'll start off slow, and we'll get to a number which we are comfortable. But at this time, I'm not able to put a number on this product.

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Alankar Garude, Macquarie Research - Analyst [106]

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Right. One final question from my side. Should we take the current-quarter depreciation as the full-year run rate? So basically, has the depreciation impact of both Singapore and Chennai now fully captured in the first-quarter numbers?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [107]

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Yes, [that's first-quarter sums].

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Operator [108]

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The next question is from the line of Sachin Kasera from Lucky Investment Managers.

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Sachin Kasera, Lucky Investment Managers - Analyst [109]

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Congrats for a good set of numbers. Just one question regarding the net debt that you reported on June 30. Any type of incremental working capital requirements in the CapEx for the current year? Do we see this number further lower as we end the year, or post- the dividend buyback, post- the dividend, we will see this number going up again?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [110]

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Well, we see current -- we started off the year at 4.5x debt to EBITDA. We will be very comfortable at 2.5x and below. That's our internal target. We are currently including dividends. We are very, very comfortable with that number.

I don't think it will cross the INR 1,000 crores that we have guided as a group. And there are very compelling reasons for us to do it. But overall, not more than 2.5x. Under 2x would be brilliant. So that's the current thinking in the company.

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Sachin Kasera, Lucky Investment Managers - Analyst [111]

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So what is the type of CapEx we are looking in the current financial year?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [112]

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About $15 million, like we guided in the last call.

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Sachin Kasera, Lucky Investment Managers - Analyst [113]

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Okay. And do you see the working capital going up from where we are sitting as on June 30?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [114]

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Could go up because U.S. growth will take incremental working capital. Only don't change my overall guidance that I've just indicated.

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Operator [115]

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Ladies and gentlemen, we take the last question from the line of Nirmal Gopi from IDFC Securities.

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Nirmal Gopi, IDFC Securities - Analyst [116]

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On the Singapore business, the opportunity is going to be largely around the new opportunities? Or there are new products, the general supplies of new products that we'll be doing from there?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [117]

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So we have already transferred products to our Singapore facility, which caters to the VA opportunity because Singapore is the only country in Asia outside of Bangladesh which meets the designated country status. So we are moving opportunities for products that we can make that will get VA business. Like I said, we've got our first significant business already. And we are starting with to supply them from September.

So we are not taking new products out of that plant because of the fact that it's a high cost center. It's fairly highly automated. We don't want to run that plant over the 1 billion or 1.8 billion in [net well assets]. So there are some constraints that we have set for ourselves there under which our opportunity to make only five or six products with high volume and predominantly focused for the VA market.

And like I said, we also sell to Australia from that market. So like I said, we are very confident of being fully utilized of the 800 million to 1 billion capacity by the end of the year. And at that time, we will fully recover the INR 25 crores per quarter -- or INR 18 crores, actually, Singapore costs us because Chennai is the rest. But also, don't forget that we have a preferred tax advantage as a consequence of all of that. So although it may have a marginal impact on the EBITDA, it will have a very significant flow-through of any product produced in Singapore through the pipeline.

So overall, it will be a good addition to the growth strategy and the margin expansion strategy.

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Nirmal Gopi, IDFC Securities - Analyst [118]

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So from a revenue perspective, it will be all incremental revenues from a business perspective. (multiple speakers)

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [119]

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20% of the U.S. market, as you know, has to be (inaudible). So that's an opportunity we couldn't service thus far. So that's really something that's opened up for us.

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Nirmal Gopi, IDFC Securities - Analyst [120]

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And lastly, on the OpEx, the INR 250-odd crores of staff costs, (inaudible) costs for the quarter, I mean, that's pretty much as a base that we can analyze, or there could be meaningful additions to it as we go through?

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [121]

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No. So the only cost difference there would be the variable cost on freight and logistics on incremental sales. But overall, that number will not change much.

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Nirmal Gopi, IDFC Securities - Analyst [122]

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Okay. So the driver...

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [123]

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And of course, we have a salary revision which happens in this quarter. So there will be a small impact on that. But as you can see, they have also improved on it in the last eight quarters -- I mean five quarters gross margin by about 8%. And that's a continued theme that we are building on.

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Operator [124]

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Thank you. Ladies and gentlemen, with this, I now hand the conference over to Mr. Arun Kumar for his closing comments. Over to you.

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Arun Kumar, Strides Pharma Science Limited - Founder, Group CEO, MD & Director [125]

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Thank you all. Appreciate your time. I know you had a busy day with several other calls, and appreciate that you could join us. And if there are any questions, all of us at Strides will be more than delighted to answer them. Thank you for your time today. Have a good evening.

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Operator [126]

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Thank you. Ladies and gentlemen, on behalf of Strides Pharma Science Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your line.