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Edited Transcript of SYNGENE.NSE earnings conference call or presentation 25-Jul-19 9:30am GMT

Q1 2020 Syngene International Ltd Earnings Call

BANGALORE Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Syngene International Ltd earnings conference call or presentation Thursday, July 25, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jonathan Hunt

Syngene International Limited - CEO & Whole Time Director

* M. B. Chinappa

Syngene International Limited - CFO & President of Finance

* Mahesh Bhalgat

Syngene International Limited - COO

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Conference Call Participants

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* Aditya Khemka

DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare

* Charulata Gaidhani

Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst

* Dheeresh Pathak

Goldman Sachs Asset Management (India) Private Limited - Executive Director

* Mohnish Dave

Temasek Holdings (Private) Limited - Associate Director

* Prakash Agarwal

Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals

* Surya Narayan Patra

PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Syngene International's First Quarter FY 2020 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn hand the conference over to [Karthik], who will coordinate the call on behalf of Syngene's Investor Relations group. Please go ahead, Karthik .

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Unidentified Company Representative, [2]

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Thank you. Good afternoon and thank you for joining us. On today's call, we have Mr. Jonathan Hunt, Chief Executive Officer of Syngene; and members of Syngene management team to discuss the financial and business performance for Q1 FY '20. After our prepared remarks, we welcome your questions.

Before we begin, I'd like to caution you that comments made during this conference call today, July 25, 2019, will contain certain forward-looking statements and must be viewed in relation to the risk pertaining to our business.

The Safe Harbor clause indicated in our investor presentation also applies to this conference call. The replay of the call will be available for the next few days immediately after this call, and the transcript will be made available in a week's time on the company's website.

With that, I will turn the call over to Mr. Jonathan Hunt. Over to you, sir.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [3]

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Thank you, Karthik. Once again, may I welcome you all to this earnings call to discuss Q1 results? Let me begin by giving an overview of our business performance for the quarter, a brief comment on the financials and I'll follow it up with key operational updates. Mr. Chinappa, our CFO, will give more details of our quarterly financials in his comments.

The revenue for the quarter increased 4% to INR 441 crore, and that compares to INR 425 crore during the corresponding previous year quarter. This reflects steady growth in our Discovery Services and Dedicated R&D Centers verticals, offset, I think, by more muted performance in our other businesses, Development Services and Manufacturing Services. Also, these verticals were impacted by re-phasing of projects either as a consequence of a later-than-expected project start or changes in client specifications. The impact of this is that these projects were now completed later in the year, and consequently, we expect growth rates to pick up over the next couple of quarters.

Turning to profitability. We saw both EBITDA and PAT grow faster than revenue in the quarter, with EBITDA up by 11% to INR 142 crore and PAT for the quarter up by 9% to INR 72 crore. The margin performance is good, coming in well within our expectations for the year, EBITDA recording a margin of 32% and PAT coming in at 16%. So both measures of profit were in line with our expectations for this part of the year.

So let me move on to some of the operational highlights for the quarter. Firstly, I'd call out the successful completion of the U.S. FDA audit of our Human Pharmacology Unit in our Clinical Development business. This is the seventh successful U.S. FDA inspection for Syngene and I think highlights the robust systems and processes that we have in place.

A second highlight is the progress we made during the quarter in expanding our research operations. As you may know, we plan to open a new research facility in Hyderabad later in this quarter. We selected Hyderabad, really, because of the excellent infrastructure, favorable ecosystem for life sciences research, and the availability of an excellent scientific talent pool. So the facility is in the final stages of construction and fit-out, and it's on track to open this quarter. We plan to expand it in a phased ways manner, with Phase 1 opening around 50,000 square foot of lab space, and that's enough space for around 150 scientists covering chemistry and also biology.

Also during the quarter, we continued to strengthen the leadership of the organization. And really, I'm delighted that Dr. Mahesh Bhalgat joined us as Chief Operating Officer. He comes with over 25 years of experience in the field of biotechnology and biologics and has worked across multiple areas of R&D, including analytical development, technology transfer, regulatory sciences and quality. And Mahesh will be responsible for operational efficiency, safety, integrity and ensuring that we continue to deliver differentiated world-class services to all of our clients around the world.

So to sum up, Q1 started on a positive note. And while the revenue growth was at the lower end of our expectations due to re-phasing of projects, we do expect growth rates to pick up through the remainder of the year. Overall, we're progressing well on our strategic priorities as we continue to invest in quality, safety, scientific talent and business development activities.

So with that, let me call on Chinappa to walk you through the quarter's financials.

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [4]

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Thanks, Jonathan. Good afternoon, everyone. As always, I'll start with a brief commentary on the reported performance for the quarter covering revenues, EBITDA and profit after tax. I'll then touch upon the impact of interest income and the currency movement, and finally close with an update on our ongoing CapEx program.

As already mentioned by Jonathan, revenues for the quarter grew by 4% to INR 441 crores compared to INR 425 crores last year. If you recall the metrics in Q1 FY '19, as mentioned, the revenues were boosted by a one-off raw material cost pass-through building up to about INR 40 crores. [Due to the annualized] this quarter's performance, it's important to take that INR 40 crores off the revenue line and the material cost line last year. And if we do that, then you would see that the -- excluding this one-off item, our underlying revenues have actually grown by 15% year-on-year. The primary drivers, as already mentioned, is the steady growth in Discovery Services and the Dedicated Center business. But some of the phasing of the development and manufacturing businesses has actually lowered the growth rate for this quarter. We had about a 3% benefit on account of the currency movement.

Let's go into the EBITDA with -- for the quarter is INR 142 crores, which is up 11% compared to INR 128 crores in Q1 FY '19, and profit after tax is up by 9% at INR 72 crores compared to INR 66 crores last year. EBITDA and PAT margins for the quarter are 32% and 16%, respectively, which is slightly lower than the adjusted full year average of last year, but well within our expectations for this part of the year.

For the quarter, we recorded interest income of INR 20 crores associated with the finance charges of INR 7 crores and income taxes of INR 7 crores. So, therefore, the adjusted EBITDA margin, excluding the impact of interest income for the quarter, is 29% and 16% -- sorry, the PAT at 16% and EBITDA at 29%.

Let me now talk about the cost element. The material and power cost as a percentage of revenues is 27% for this quarter compared to 26% last year. This is, of course, after adjusting for the one-off pass-through in Q1 FY '19, as I just mentioned.

Similarly, employee cost as a percentage of revenue is up 30% compared to 28% in Q1 FY '19. This is mainly because of the increase in headcount, which reflects the growing demand for our services and the effect of the annual salary increment. We continue to invest in safety, compliance, and business development to further strengthen our position.

Moving to other expenses. We have classified certain expenses relating to property as finance and depreciation charges in line with the new accounting standards. This is reflected in a reduction of INR 4 crores in other expenses and a corresponding increase in depreciation and finance charges. Besides this, there was also a marginal decline in general leverage during the quarter.

Moving on to FX and the impact of currency movement on the financials. As you know, most of our clients are based out of India and what is predominantly in U.S. dollars. However, our reported currency is Indian rupees. During the quarter, we had a ForEx gain of INR 2 crores compared to a gain of INR 11 crores in Q1 FY '19. This reflects the difference between the forward rates versus the prevailing stock rates -- versus the prevailing spot rates. The hedge rate was (inaudible) above the spot rate during the quarter. Also, we had the head -- also, we are hedged for the full year, and therefore, don't expect any negative impact of the recent rupee appreciation.

The effective tax rate has marginally decreased to 17% in Q1 FY '20 due to the revenue mix and the impact of some of the new units that are expected to go live later this year.

Coming to balance sheet. We have invested approximately $30 million to its ongoing CapEx program in this quarter, of which $12 million pertains to the API manufacturing facility and another $12 million for the Discovery Services.

With this CapEx inclusion, our fixed assets currently stand at $330 million, and we're on track to take our overall asset base to $550 million by the end of FY '21. The construction of a commercial API manufacturing facility in Mangalore is on track and is scheduled to be operational by end of FY 2020. That's by the end of this year. We expect the second phase of the upgraded (inaudible) to also be operational by the end of this year. And with regards to the insurance claim, we have so far received INR 81 crores and expect to receive the balance proceeds over the next 12 months.

Overall, as Jonathan mentioned, it's a positive start to the year and we expect growth to accelerate in the second half of this fiscal, taking up full year growth and margins to be in line with the directional outlook that we have given in the last investor call.

With this, I'll hand it over back to the operator, and we'd be happy to take questions.

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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 Surya Patra from PhillipCapital.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [2]

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Just wanted to have a sense of, since in this quarter that we are mentioning that there is a phase-out of a couple of projects in the manufacturing and development side, and that that could have, to some extent, impacted the growth for the quarter. Sir, at least for the last full year, can you say what would be the revenue mix between your 3 key segments in terms of percentage?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [3]

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Okay. So Chini, do you want to give a sort of a sense of that in terms of the broad shape between the different verticals if you think about Discovery Services, Development Services and then the manufacturing part, maybe Dedicated Centers as well?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [4]

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Yes. Surya, the Dedicated Center is actually about 1/3 of our business, 32%; Discovery Services, 29%; and Development and Manufacturing, about 38%. So that's the broad mix of the business. But that's of last year. There's always a small play between the different segments.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [5]

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Okay. Okay. And with the efforts that we have seen currently (inaudible), possibly there is manufacturing capabilities that we have already built. Though the Mangalore one possibly is likely to contribute a little later, but I think other manufacturing ones that we've -- what we have created and the R&D capacity that we have built in Bangalore as well as the Hyderabad. So how would that change the revenue mix going ahead for this season?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [6]

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So in terms of the prospective revenue mix, I mean, clearly, yes -- I wouldn't think it would change materially actually. I think the percentages you've got would be a good indicator of where I'd expect the full year to land, plus or minus a few percentage points, but it's sort of in the landing. Of course, you've got to remember the Mangalore plant doesn't come online until next year. And when it comes online, it'll be a brand-new, state-of-the-art factory, but it will be an entry factory on day 1. So that in and of itself is unlikely to materially rebalance the mix between Discovery Services, Dedicated Centers and manufacturing. Very much this year or next, we should start to see some change towards the end of the next fiscal. But I wouldn't -- it's a midterm play for that to really start to reshape.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [7]

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Okay. So just on the manufacturing new capability that what we have -- we are building or built so far, like the API plant as well as the Biologics Manufacturing unit and this Mangalore, so considering these manufacturing comparably to what we have built, so when do you think these are likely to really start contributing to your performance?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [8]

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Well, I think the Biologics is starting to do that today. Over the last couple of years, you've seen a small, but growing contribution to revenue from Biologics. That has the opportunity to continue to drive growth this year and into next, so that's the sort of the more near-term driver out of manufacturing. And then I would caution you on the Mangalore investment. It's a long-term investment. A plant like that has something like a 30-year asset life, so I don't think you should focus on the next 4 quarters or even 8 quarters. We're still constructing it. It's in the building stage. It will -- we are expecting to finish the construction of that plant by March of next year. And then we'll take it through a qualification process and start to build the first client base. But I would be tracking that over the next 3 years, not over the next 3 quarters.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [9]

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Okay. Just last 2 question from my side. On the biologic front, so okay, this is an opportunity also to congratulate Mr. Bhalgat and wanted to have a sense from him that how he's thinking about it and what progress that we should be seeing on the biologic front? And what milestones that we have so far achieved on the biologic front, if you can (inaudible)

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [10]

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And in fairness to the Dr. Bhalgat, it's week 2 with the company, so it's a wonderful question, but it's probably almost unfair for you to ask him on his (inaudible)...

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [11]

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You can possibly add something new.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [12]

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Yes, I'll happily contribute a comment, but at the same time, maybe a quick comment from you, Mahesh, at least in terms of your broader perspective on Biologics and the demand in the market rather than the specific one on your assessment of Syngene given that it's week 2. And you've got to know -- I know you've already made an impact, but that's an awful lot to be done quickly.

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Mahesh Bhalgat, Syngene International Limited - COO [13]

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Yes. And so thank you for the question. And as Jonathan said, I'm still getting my feet wet. I'm still literally landing in here to understand the business. But, overall, from a Biologics perspective, I think we all know this is the trend that the industry is going towards. More and more molecules are the ones that are coming out now from a transition from the chemical development to biological development. So while I appreciate that question, Surya, I think that is the kind of growth that we will also expect to see in our business as the industry moves in that direction. And of course, we will do everything that we can to capture that growth in that market.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [14]

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Okay. Yes, Jonathan, if you can just add what milestones that we have achieved so far on the biologic front?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [15]

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Yes. I want to take the journey of the last 2 or 3 years, building a plant, getting it up and running, qualified, we received an EMEA approval. In the past, we've had our first client wins. We've actually produced -- we co-discovered and developed and manufacture a biologic product that goes through to a global client. So we're making all of those right first enabling initial steps. Beyond that, you have to forgive me, but I'm not going to be drawn on given you a forecast for the coming year or years. But strategically, we're happy that we have capability and capacity in the biologics market.

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Operator [16]

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(Operator Instructions) The next question is from the line of Prakash Agarwal from Axis Capital.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [17]

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You clearly mention about the Mangalore, which is kind of completing end of this financial year but will take time in commissioning and other things. But some color on the S2 which you mentioned also, which is also going again live, so what kind of area we are adding in terms of area and scientist and the revenue potential that we can add? And also some color on the Hyderabad. So how big could be the site, if you could add that color?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [18]

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Yes, super, very happy to do that. Chini, I'm going to look to you to maybe just summarize where we are with S2. You may want to make some comments also about the insurance claim and how that's progressing. As I do that, S2, you'll remember, was an already well-established facility, predominantly Discovery Chemistry-focused. When we had the event around the S2 fire, we lost that capacity. So to some extent, one of the ways of thinking about S2, it's a state-of-the-art facility that's been renewed and upgraded and is now coming back, but it's largely replacing capacity we already had rather than adding capacity to it. But I'll leave Chini to give you the specifics of how far through we are with that and what it means on the financial terms in terms of the insurance claim.

Let me just jump to your other question about Hyderabad. Hyderabad is a new Discovery campus for us. As I said in I think in my introductory remarks, we're going to do it in a phase-ways manner. The first phase should be open and operational during this quarter. It's a relatively small first step. It's 50,000 square feet. That's enough capacity for about 150 or so scientists. Very quickly after that, we will have Phase 2 available to us, doesn't necessarily mean that we will start operations in Phase 2, but Phase 2 would allow us to double the headcount, double the floor space. So it just gives us some near-term headroom for expansion should we need it, should we see client demand. And the second thing it will do, it will allow us just to decompress some of the lab space here in Bangalore by moving some of that work to Hyderabad. That's a good thing in terms of creating a great working environment for our scientists and also making sure that we have a very operationally efficient plant. One or two of our labs are a little bit more crowded than we would like because we've grown quite quickly in it. So let me pause there and look at Chini. Do you want to just give a few comments about S2, where we are?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [19]

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Prakash, (inaudible) most of the question. But yes, overall, S2 is -- key floors are operational and the one floor, which is the ground floor, will actually go -- will commission by the end of this fiscal. Overall, the S2 capacity is coming back onstream is more -- is not always been attached to incremental business unlike, let's say, (inaudible) Hyderabad that was supported to win this business. But a lot of the S2 capacity as it came back online was linked to decompressing or reducing the pressure of the other facility, which we're working a double shift when we implemented the BCP post the fire incident. I'm not sure if it answered your question, but finally, it's done. [It's not really] a barometer for growth if you look at the S2 capacities coming up online.

Relating to insurance, as I mentioned in the call, we are filing for the second installment. We expect to receive that in this quarter, that's July to September. And overall, the full insurance receipt was expected to be realized over the 12-month period.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [20]

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Understood. And in the past, we have talked about our investment phase in terms of quality, compliance and senior-level hires, and that's how we're seeing the staff and other expenses moving up. Now given that the fact that we are still guiding for a 20% plus kind of growth and that 2 more from a second half onwards, would it be fair to think that the growth rates would surpass the cost escalation that we see and we can expect some margin expansion of (inaudible) 20% and above? Would that be a fair thing to think about?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [21]

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I'd take a step back from it. So we don't give a specific quarter-by-quarter, year-by-year margin guidance. I think we've talked extensively with analysts and investors in the past around the sort of range that we're comfortable with. An EBITDA margin in the low 30s, but it's a bit of a spread around that low 30s range, is one that we're very comfortable with. We think that's indicative of a well-run quality business. And then if you drop that down at the PAT line, PAT margins in the high teens up to 20%, again, are indicative, if you look at global peers, of being a well-run, added-value business. So we're comfortable with both of those.

Structurally, I think it's well understood by the analyst community that at some of our SEZ infrastructure, the SEZ tax shield unwinds, there's a little bit of a temporary headwind. But we're still more than happy that we can deliver a business in a high teens, 20% or so range at the PAT level. But that's through a business cycle, so that's not a prediction for a particular quarter or a particular year. So in general, we're quite happy with the margin structure of the business. It stands up well, I think, versus our global peers as being upper quartile.

Going to your comments around investments in safety, infrastructure, processes and even leadership, we see those as a virtuous circle. They're one of the reasons why we delivered 28% revenue growth last year because it's differentiating in the market. The stronger our quality environment, the better our infrastructure, the more capable and experienced our leadership, it's a differentiator for our global clients. So we see those as investments that we want to continue to make because we see them paying dividends on the top line and that ultimately flows through to a strong cash flow and profit performance.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [22]

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Fair enough. And you mentioned about the $550 million CapEx by 2021. So would it be fair to think that it's $100 million each or it's more skewed towards fiscal '21?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [23]

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Okay. The addition of incremental CapEx that will go through. So until now, we have $330 million is capitalized, $50 million is still work in progress and then another $170 million to be spent for the next 2 years. You could broadly split that up into -- by 2.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [24]

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Yes. If you just straight line it over the 2 years, it's as a good approximation as any.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [25]

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Okay. And lastly, on the tax rate, last time you mentioned about this Euro sunset clause being [getting over and all], but we're at 17% for the quarter. I mean would we still take 20% or we could expect around 17%, 18% for the year?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [26]

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This year's tax rate we expect to come in lower, the effective tax rate to come in lower, and that's linked to a lot of the new capacities going onstream and that is still depreciation associated with that.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [27]

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So it can be around 17%, 18%?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [28]

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Yes. I estimated 17%, but it should be in that range, 17% to 18%.

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Operator [29]

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

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [30]

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So I've got a few. Firstly, Chini, on the top line guidance that we generally gave of 20% growth for FY '20 as opposed to FY '19. On reported basis, as you've done 4% in the first quarter, do you still feel comfortable with that 20% year-over-year growth number?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [31]

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Aditya, yes. I'll just answer this question first. If we look at last year's growth of 28%, (inaudible) it's about the particular impact of the one-off pass-throughs and (inaudible) currency. That takes us to about 20% growth at constant currency for last year, excluding the one-offs. Last call, I'd indicated that we expect revenues to come in (inaudible) around that number, net revenue growth for FY '20. And of course, if we started [4]% for Q1, it means that Q2, Q3 and Q4 should be at a much higher rate to take us to an average of 20%. As I (inaudible) in the call, it will be more biased to the second half, not the (inaudible) quarters.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [32]

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Understood. But you're still comfortable with the 20% number?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [33]

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Yes. I mean the operative word was around. You said point estimate 20%. We said around 20%. Broadly, that's the plan.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [34]

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I understood. Well appreciated. And next is on the numbers this quarter. I was just looking at the fact that the other expenses are down 13% year-over-year whereas your depreciation is up 27%. Could you confirm to some part of it could be because of these accounting measures where you have taken the -- capitalized the lease and you're amortizing it instead [pressuring] it as a lease expense in the other expense line item?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [35]

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Yes, I'll take this one. Correct, (inaudible) the previous question, I said Q1 growth came in at 4%, the [3Q one] growth at 15%. And that's the rating over the rest of the year to average 20%. But the second question, yes, last year, the average out of -- I mean, total other expenses for the year was INR 242 crores, which averages INR 60 crores per quarter. Against that average, this quarter, we're at INR 52 crores. Add back the impact of this year's accounting, we'd get to INR 56 crores. So this quarter's expenses is slightly lower than our quarterly average.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [36]

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Understood. And the fourth quarter shifts from the other expenses to read depreciation and amortization item, is that correct?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [37]

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INR 4 crores, yes.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [38]

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Understood. And lastly, and maybe this a better question for Jonathan, given the situation in the innovator segment, right, I mean, if you look at the innovator pharma companies, all of them are struggling with getting new products out there and even facing competition in some of the very high-end biologic space through biosimilars. And I don't know how they're thinking about their R&D budgets, but intuitively, it may feel that they may want to relook at those budgets and maybe rationalize a few projects. How does that read across from a model like yours? I appreciate the fact that you guys helped them reduce some of the cost by outsourcing it, but does that not also imply maybe lower volumes over a period of time as the success rate of innovation is incrementally falling and the cost of innovation is moving up in the developed markets?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [39]

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I think actually you half-answered your question with your question, which is, you're absolutely right. The way we add value and create value for our clients is through affordable innovation. So innovation is indistinguishable from the sort of quality of science that they can do themselves, but done partly because of scale benefits, partly because of the operating cost arbitrage as well as an intellectual arbitrage that allows us to create value. We, in some ways, deliver innovation while releasing their CFOs from the burden of a CapEx budget and their heads of R&D by either lowering their operating costs or giving them the opportunity to do more science for the same amount of money. So those 3 things together are quite a compelling proposition and even more compelling in an environment where budgets across the value chain in large biotech and pharma companies are being squeezed.

Remember, we operate at the front end of the value chain or 7 and 8 years upstream of the market conditions that you described as being challenging. So there's 2 different conversations you need to look at there. The science that you're seeing is struggling as it comes through to the marketplace. It's 10-year-old science from our point of view, and it's very distinctly different from the level of excitement there is at the front end around what science and opportunities are available. So I think we're in quite a vibrant period for innovation. It's just 10 years away from the market if you're using market conditions and product launches as your lens on it. We're some way upstream of there. Hopefully, amongst those 3 or 4 points, you can pick at and answer and see why we're relatively excited and confident about the proposition that we have for our clients and clear-sighted on where it creates value for them.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [40]

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No, I get your point. If I may just sort of pick on it, so not only are their R&D budgets shrinking, but their outsourcing budgets are going up, which means the in-house R&D budget will be drastically falling. Is that a correct interpretation?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [41]

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Well, it could be, but I'm not sure which companies you've got in mind and there's a whole universe out there, and each one would be in a different part of their cycle. So I don't want to make a specific comment given that I'd need to go through the R&D budgets of each one of our major clients and major people in the market. But in general, I don't -- I think one of the structural shifts is, heads of R&D globally are not necessarily carrying 2 budgets or 2 pockets in their trousers. They don't see it as in-house R&D, out-house R&D, 2 different budgets. It's just science, and it's just a budget and a way of getting that science delivered. And that actually is a structural shift that is driving the success of businesses like Syngene because it's no longer seen as an either or. It's just another way of delivering innovation, and it stands equal and alongside doing things in-house. But I don't -- I think they see that as a false choice.

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Operator [42]

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The next question is from the line of Dheeresh Pathak from Goldman Sachs.

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Dheeresh Pathak, Goldman Sachs Asset Management (India) Private Limited - Executive Director [43]

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Yes. Chini, which quarter do you take the wage hike?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [44]

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April this quarter, April to June.

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Dheeresh Pathak, Goldman Sachs Asset Management (India) Private Limited - Executive Director [45]

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Q1. Okay. And how many scientist -- what was the base at the end of FY '19? And how many scientists do you plan to hire in FY '20?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [46]

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So it's a good question. You've got people scrambling looking up in the Annual Report because I think that was where we published where the headcount is. I'll take the second part of the question.

We're not going to give you a prospective view of how many scientists we anticipate to hire during the course of the year. I don't think we've ever done that. The general run rate though just to give you some maths is of a -- or 2 Master's degrees and a Ph. D. every working day, but don't use that as a forward basis for a forecast.

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Dheeresh Pathak, Goldman Sachs Asset Management (India) Private Limited - Executive Director [47]

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Okay. What is the attrition last year, the attrition number?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [48]

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It's been pretty stable over the sort of the last 3, 4, 5 years. We're a little bit a clip behind what I see as normal in the Indian industry, so it'd be in the mid-teens. It's fairly stable. If you wanted to delve deeper into attrition, what we tend to find, and I think this is true for many other businesses in our sector in India, the highest attrition is in your newest, youngest recruits. They're often freshest coming straight out of university, and to some extent, they're really trying on their first world of work experience. So they are just as likely to leave in their first year to go to a competitor or to go to Coffee Day to become a barista or to go and reinvent themselves as an entrepreneur because they're young, they're energetic and they're trying to find out what they want to do in life. So that was where you would see the highest attrition.

If you map it through in Syngene, if you get to sort of year 3 with us, firstly, you've obviously done really well because we have high standards, and the people that get through the first 3 years have performed and have proven themselves to be very capable. After that, our attrition rate starts to drop quite markedly. And if you make it through into management and senior leadership, our attrition rates look like I would expect to see in Europe or the U.S., low single digits. So I think it's manageable. It's a little bit more vibrant or dynamic at the front end, but that reflects I think that we hire an awful lot of young scientific talent very early in their career journey.

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Dheeresh Pathak, Goldman Sachs Asset Management (India) Private Limited - Executive Director [49]

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Okay. What percentage of your scientist pool would be on site where you would be paying dollar or U.S. salary?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [50]

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I'm not sure if I understand the question. I think maybe your question is translating from an [IT BPO] business where they put scientists into their client's laboratories, as it were or software engineers into U.S. sites. The answer to that is we don't do that at all, it's not part of our business model. So 100% of our staff would be 100% working on our own sites because that's the essence of the business.

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Dheeresh Pathak, Goldman Sachs Asset Management (India) Private Limited - Executive Director [51]

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Okay. One last question. For the Mangalore API plant, when it comes up, in the first year of operation, which is FY '21, what would be the rough estimate of the fixed overhead cost which you would incur, irrespective of whether you got any revenues or not?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [52]

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I think it's a little bit too early to getting into that level of detail, so you'll have to forgive me if we take that one for another day. We're more focused on building the plant at the moment, and we are guiding about what its operating cost would be, but thank you.

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [53]

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Dheeresh, the number of scientists is 4,060 as at the end of March 2019.

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Operator [54]

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(Operator Instructions) The next question is from the line of Charulata from Dalal & Broacha.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [55]

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Yes, my question pertains to what is the contribution of Discovery Biologics to revenue?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [56]

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Did you say specifically Discovery Biologics?

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [57]

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Yes.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [58]

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Yes, I'm afraid we don't have a figure we could break out. I'd refer you back to the comments Chini made earlier where he gave you the general balance between Discovery Services, Development Services, Dedicated Centers, manufacturing. Chini, would you mind just sort of rephrasing those numbers?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [59]

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Certainly. Discovery Services business (inaudible) 29% of total revenue, that I'm talking for FY '19; Dedicated Centers, 32%; and development and manufacturing, 38%.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [60]

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Okay. Yes. And my second question pertains to the certification of the Biologics plant. You mentioned that the plant has received EMEA (sic) [EMA] approval. Do you plan for U.S. FDA approval and by when?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [61]

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That's an excellent question. Now what I would do is take a slight sort of detour in answering it, which is that, remember, of course, we don't have our own product pipeline, so it's not us making applications to the regulators, and therefore, we don't control the timing of those regulatory inspections. It's set by our clients, so our whole expectation, aspiration is that one of our clients does exactly that. They had a product that we're working on that they take to either the FDA or the EMEA (sic) [EMA] and that triggers a regulatory inspection and, therefore, regulatory approval. But beyond that, I couldn't give you specific guidance because that would be in the hands of our clients, not our own. It's not a discretionary decision for us.

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Operator [62]

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(Operator Instructions) The next question is from the line of (inaudible) from (inaudible) Stockbroking.

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Unidentified Analyst, [63]

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I would like to know what is the contribution of top 10 clients in your revenue.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [64]

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Okay, Mr. Chinappa, can you refresh my memory on what the concentration is? And while you're looking it up, I'd make a comment that, more broadly, you've seen a slight rebalancing over the last 2 or 3 years. We're quite comfortable with the degree of concentration we have, but it tends to become a little bit more diffused. So the top 1, top 5, top 10, however you want to measure it, is making up a little bit lower proportion of revenue. But at the same time, some of the relationships with our top clients have accelerated in terms of the deepening of those relationships, and we're now adding more services and more service offerings to them, which is a positive thing. It's a metric that's worth keeping a track on, but I don't think it's a particularly fundamental metric for us and from a management point of view. But Chini, do you want to make a comment?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [65]

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Yes, (inaudible), I think (inaudible) in the document, I think it was 69% top 10 clients. As of FY '19, it has come down to 62%.

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Unidentified Analyst, [66]

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Okay. Second question is, on the CMO facility, so have you already started discussing with potential clients or have you signed any deals so far?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [67]

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Discussing, yes. Signing, I wouldn't make a comment.

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Operator [68]

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The next question is from the line of Mohnish Dave from Temasek Holdings.

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Mohnish Dave, Temasek Holdings (Private) Limited - Associate Director [69]

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Jonathan, Chini, I had 2 questions. The first one was on the old CapEx program, which was INR 400 million that was announced. So if it's INR 100 million in Mangalore is ongoing and the remaining INR 100 million in Bangalore was completed and commissioned, is there a sense that we can get in terms of how we are tracking on these large CapEx initiatives that we did in Bangalore? And is there an estimate on revenues that we're getting from these [3] commission with CapEx?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [70]

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Okay. Chini, do you want to maybe take that? The question was, did you get it right, 200 -- Okay. Mohnish, would you mind restating the question?

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Mohnish Dave, Temasek Holdings (Private) Limited - Associate Director [71]

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Sure. Sure. So I think we had embarked on a $200 million CapEx program 3 years back, of which $100 million was Mangalore and $100 million was in Bangalore for [SRC] for the biologic facility, et cetera, which got commission. If you can get an estimate of how these are ramping up and what's the estimate, if there's an estimate of revenue that you're getting from these 3 -- these CapEx that you completed in Bangalore recently?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [72]

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Mohnish, just because you've referred to $200 million CapEx, today, (inaudible) all our CapEx program put together is expected to take fixed asset range to $550 million. It's a total of $350 million new CapEx program that have started post the [IPO]. And looking at $550 million as at the end of FY '21, right? As of today, we have invested $330 million in terms of capitalized fixed assets and another $50 million in which is lying in receivable. In that $50 million capital work-in-progress, we have $33 million towards Mangalore. Does that answer your question? And all the rest is practically to -- against investments are in Bangalore, with the only exception being the new facility coming up in Hyderabad.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [73]

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Yes. And then, Chini, I think the second part of the question is, could we give a sort of revenue split for each unit of CapEx that we've put in. I don't think it will surprise you, Mohnish, if I say no, we're not going to break that out. But if I remind you, some of the things that we invested in, so an expanded the Syngene research center here in Bangalore, well, that was part of that program. That's up and running, fully operational and operating at a high level of utilization. So from a post-project review, that's creating shareholder value and operates well beyond our cost of capital. So that business is up and running.

Other things that we've invested in, the stability center, similarly, fully operational, up and running; and the formulation center, fully operational, up and running. And that facility, because it was one of the more recent ones, we're growing into that capacity, that business grew well last year. They've still got headroom for more growth, so they're going up the asset utilization curve. But beyond that, I wouldn't give you any more specifics on the financials.

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Mohnish Dave, Temasek Holdings (Private) Limited - Associate Director [74]

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Sure. So not as fixed, but directionally, if you were to look at an asset turnover of, let's say, approximately one, at least from the recent CapEx that got commissioned over the last 2 years, I would say, I mean, what's the ramp-up profile like? And how do we see attaining that one-time asset turnover over a period of time? How close or how far are we in terms of, let's say, of quarters or years?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [75]

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Yes. I won't break it down. Let me sort of try and answer it this way. Through a business cycle, I think a 1:1 asset turn is not a bad approximation that we would expect. Is that about right, Chini?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [76]

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(inaudible)

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Mohnish Dave, Temasek Holdings (Private) Limited - Associate Director [77]

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Got it. Okay. Yes, the second question that I had was on the Dedicated Centers business. And the last 2 Dedicated Centers that we commissioned were with Amgen and Herbalife in 2016. Since then, we've not seen -- although we've signed fairly large contracts, we've not seen any conversions into Dedicated. Is there any color around being able to generate more Dedicated facilities? Can you give any color on that line of the business?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [78]

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I can give a sort of a broader comment. I think our first Dedicated Center was something like a decade in the making. Second Dedicated Center was about 6 years in the making. Our third Dedicated Center was more like 3 years in the making. It tells you that the adoption cycle or the sort of growth cycle is shortening as our reputation and the visibility of the business becomes better globally, and I think also it becomes a little bit easier for clients to get comfortable with that concept when they're coming to a campus that already has major clients with a proven track record. Beyond that, I think, you know what, if we had something to announce, we'd have announced it, so I can't really answer the question. It's a circular question.

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Operator [79]

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Thank you very much. That was the last question. I now hand the conference over to [Karthik] for closing comments.

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Unidentified Company Representative, [80]

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Thank you again for joining today's call. Hope we've answered all your queries. If you have any questions, please do get in touch with me. Have a good day.

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Operator [81]

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Thank you very much.