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Edited Transcript of SYNGENE.NSE earnings conference call or presentation 23-Oct-19 11:30am GMT

Q2 2020 Syngene International Ltd Earnings Call

BANGALORE Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Syngene International Ltd earnings conference call or presentation Wednesday, October 23, 2019 at 11:30:00am 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

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Conference Call Participants

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* Charulata Gaidhani

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

* Nishant Chandra

Temasek Holdings (Private) Limited - Associate Director, India

* Prakash Agarwal

Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals

* Shaleen Kumar

UBS Investment Bank, Research Division - Associate Director and Analyst

* 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 evening, ladies and gentlemen, and welcome to Syngene International's Second Quarter FY 2020 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference may be recorded. I would now like to hand the conference over to Karthik, who will coordinate the call on behalf of Syngene's Investor Relations group.

Thank you and over to you.

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Unidentified Company Representative, [2]

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Thank you. Good evening and thank you for joining us. On today's call, we have Mr. Jonathan Hunt, Chief Executive Officer, Syngene, and members of the Syngene management team to discuss the financial and business performance for Q2 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, October 23, 2019, will contain certain forward-looking statements and must be viewed in relation to the risks 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 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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Thanks, Karthik. And once again, thank you all for joining us on this call to discuss the 2Q results. Let me begin by giving you a brief overview of our financial performance for the quarter, and then I'll share a little bit more on some of the operational highlights. And then Mr. Chinappa, our CFO, will cover the financials in more detail in his address.

So starting with the headline financials. Happy to report robust growth of 11% in 2Q revenues. That was up from INR 437 crore in the corresponding quarter last year to INR 485 crore this quarter. This growth was driven by the continued expansion in our Discovery Services business and also combined with steady performance in the Dedicated R&D Centres and the Development Services businesses.

Looking at profitability. EBITDA for the quarter increased 10% to INR 160 crore. So that's pretty much in line with revenue growth and pretty much in line with where we expected. While profit after tax saw a 5% increase to INR 82 crore, and of course, that's having adjusted for the one-off item exceptional gain in the quarter. Absent that, PAT was up 64%.

EBITDA and profit after-tax margins remained within the historic range that we've seen in the business over many, many quarters. And the profit after tax is a notch lower on a quarter-on-quarter basis. This is due to increasing head count, which we take as a reflection of growing demand for our services as well as our continued investment in leadership, quality, compliance, safety and, of course, business development activities. Now I've emphasized this before, these investments really should be looked at as long-term investments for improving revenue and operational efficiency. And in the quarter, we also received the third installment of the insurance claim for the S2 building, which resulted in the exceptional gain of INR 46 crores net of taxes. And I'm going to leave that to Chini to talk about more in his address.

So let me now move on to some of the business updates for the quarter. Delighted to share that the first phase of our Hyderabad facility is now up and running. We did a soft launch for that back in August. And as I mentioned in my last quarter's address, Phase 1 comprises of 50,000 square foot of state-of-the-art lab space, housing a team of up to 150 multidisciplinary discovery research scientists. Now initially, we're going to offer Discovery Chemistry services from Hyderabad. However, this gives us the optionality to place other Discovery Services at that facility. And the way we look at it is that Hyderabad's not just a satellite, but it really offers us the option if we want to build that into a second center of excellence for Syngene's Discovery Services alongside our campus here in Bangalore.

Other news in the quarter. Further regulatory inspections, another highlight there was the successful completion of another U.S. FDA inspection with no 483s or major observations. The audit was conducted to inspect our facilities from -- viewing them from an analytical laboratory for general GMP coverage, so a GMP audit, and we received confirmation this morning from the FDA. Actually, that was a completely positive outcome, so very happy to see that.

A research partner providing scientific research services to many global organizations, quality standards and compliance are, of course, extremely important to us. The continued successful inspections not just by the FDA but also by other regulators as well as those inspections by our clients really are, I think, a testament or testimony to the robust systems and processes that we've got in place and that they consistently allow us to meet what we see as the required international standards.

So with that, let me conclude my overview for the second quarter, and I'll just do a quick sort of summary before handing over to Chini.

Q2 was a good quarter from a revenue point of view, in line with our expectations. We saw, as we anticipated, a step-up in the sequential year-on-year growth on a reported basis when you compare that to Q1. We expect to sustain that sort of growth momentum into the second half.

I think we're making good progress on our strategic priorities both in the small and large molecule space. And we're going to continue to make the strategic investments that we think are important to strengthen our service capabilities, operation efficiency and as well as those really key areas of quality, compliance and safety.

So with that, let me hand over to Chini to take you through a little bit more detail on the financials. Chini, over to you.

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

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Thanks, Jonathan, and good evening to all. Let me start with the financial highlights for the quarter and then go to ForEx, insurance and CapEx.

Talking about the financial highlights for the quarter. As already mentioned by Jonathan, our revenues for the second quarter grew by 11% to INR 485 crores, and this compares with INR 437 crores in the same quarter of last year.

Discovery Services continued to drive growth, supported by consistent performance in Dedicated R&D Centres and the Development Services business. On a [full year] basis, growth was also at the same level, 11% as the average net realization for both the quarters was approximately INR 70 to the dollar.

EBITDA for the quarter was at INR 160 crore, up 10% compared to the same quarter last year, but profit after tax and before exceptional gain is at INR 82 crores, up 5% compared to INR 78 crores in Q2 FY '19.

During the quarter, we had the exceptional gain amounting to some INR 46 crores net of taxes, and this relates to the insurance claim of the S2 facility. I will talk about -- or more about this and -- later.

EBITDA and profit margin, excluding exceptional gain for the quarter, was at 33% and 17%, respectively. I will -- during the quarter, we recorded interest income of INR 20 crore. Associated with this are finance charges of INR 8 crores and income tax of INR 7 crores. Therefore, the adjusted EBITDA margin for the quarter, excluding interest, is 30% with a profit after-tax margin, excluding exceptional gain, at 17%.

Moving on to the cost elements. Material and power cost as a percentage of revenues in Q2 FY '20 is at 28%, which is similar to Q2 FY '19. Employee costs as a percentage of revenue is at 27% compared to 26% in Q2 FY '19 and should trend down into H2. Other expenses for the quarter are up by about INR 70 crores, reflecting a ramp-up in subsidies as well as the initiatives in business development, safety and compliance.

During the quarter, we had ForEx gain of INR 3 crores compared to a loss of INR 5 crores in Q2 FY '19. The gain reflects the difference between the forward rates and the prevailing spot rates. The hedge rate was 50% above the spot rate for the quarter.

A quick update on the first half performance. The revenues have grown by -- grown to INR 927 crores, up 8% compared to INR 862 crores in the same period last year. If we exclude the one-off costs too in H1 FY '19, the revenues is up 13%.

EBITDA at INR 301 crores is up 10% compared to INR 273 crores in the same period last year, while profit after tax, excluding exceptional gain, is INR 154 crores, which is up 7% compared to INR 144 crores in the same period last year.

EBITDA and profit after-tax margins for the first half, excluding exceptional gains, stand at 32% and 17%, respectively.

Coming to tax. As you may be aware, the Government of India recently announced changes in the corporate tax rate as well as the GST application and select services. The effective corporate tax rate has been reduced from 35% to 25.2%. However, the reduction will not benefit us in the near future as the effective tax rate is already below this level. The effective tax rates for the quarter has decreased to 17%, mainly reflecting the revenue mix and the impact of the new units that are expected to go live during the quarter.

The GST notification that came out in September provide exemption on the export of toxicology, analytical stability and clinical services. This will benefit approximately 10% of our business and as a result, all our export services are now exempt from GST.

With regards to the insurance claim related to the S2 facility, we have received INR 97 crores in the quarter, taking the total amount received [bill date] to INR 177 crores against a total loss of INR 106 crores. This has resulted in an exceptional gain of INR 46 crores net of taxes. We expect to file the final claim over the next 3 months and to take the last installment in the next fiscal.

Now coming to the balance sheet. In the first half of this fiscal, we have invested approximately $50 million towards the ongoing CapEx programs, of which $19 million pertains to the commercial API manufacturing facility, $18 million towards the Discovery Services and the balance towards our dedicated centers and Development Services. With this, the capital -- with this capital infusion, our fixed assets currently stands at $400 million, including fees of up to $50 million. Overall, we're on track to take our total asset base to $550 million by the end of fiscal 2021.

The construction of our commercial API manufacturing plant at Bangalore is on track and is scheduled to be operational by the end of this fiscal.

To summarize, it's been a good quarter and revenue is largely in line with the expectation. We expect this -- to build on this momentum in the second half of the year with strong [long-term] growth.

With this, I conclude my financial overview and happy to take any questions that you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We take the first question from the line of Prakash Agarwal from Axis Capital.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [2]

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So my first question is regarding the commentary actually in Q1 where we had talked about a rephasing of few projects, which led to a softer growth in Q1. Have you captured some part in Q2? And if you can quantify, that would be helpful.

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

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Yes. It's not necessarily a reflection. I mean what we tried to flag in making that comment in the first quarter was the 4% reported revenue that we saw in the first quarter was not indicative of the outlook for the full year and that we expected during the sequential quarters that followed to build a bit of momentum. So I'm not sure whether or not I would pin it on a particular project not happening in the first quarter, reappearing in the second. It was just a sense of there is a sort of cyclicality of -- a sort of phasing in the business that's perfectly natural and that our assessment of that was that we would pick up pace in the second quarter. And of course, I'm delighted to say that we did. You can see that in the numbers: 11% reported revenue growth for the quarter, same sort of...

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [4]

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Yes. I was trying to understand more from if we had some addition to Q1, then Q2, 11% would be lower than 11%, right? So I'm just trying to understand on an H1 basis, should we look at 8% or it should be higher than 8%?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [5]

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I'd leave you with that modeling conundrum to yourself. I think we've done the best we can to direct you to our expectations, and we flagged that we thought 4% in the first quarter would rise in a bit.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [6]

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Understood. And secondly, Sir, on the commentary on second half momentum picking up. Is it a function of either the capacity addition which we have done over last 12 months being completed and orders getting started? Or that confidence also is coming from the China disruption where we might be getting new orders already or at least the talks would have been started? If you could throw some broad-level highlight, that would be helpful.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [7]

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Yes. I'll come back to the sort of China geopolitical question in a moment and make some comments.

I hate to say it's a bit more mundane than that. It's not about capacity that's being built sitting idle waiting for clients. And I'm looking across the management, particularly at my commercial colleagues leading sales and business development. It's -- perspiration is the key. But it's about hard work, getting out, meeting new clients and making sure they know what you can do for them. So I think the second half momentum's going to come out of the capabilities we already have out of the relationships we already have. But then that's not surprising because we're in an enviable position.

We have good partnerships, good relationships with 15 of the top 25 biopharma companies in the world. We have over 330-plus ongoing live relationships with clients. So we're getting to the point where we have quite a large footprint in terms of exposure to clients, and I think that changes the nature. It's not about growth only comes with adding new logos. Always happy to add new logos, and that's an element of the BD guys as well. But just as much comes from step-ups in volumes of existing relationships or having new services. So I hope that, that gives you a flavor of that.

Going back to the China bit, I wouldn't overplay it. There's multiple reasons why customers look to partner with research organization [to us] with [like houses] around the world. There's some very good companies in China, very capable. One or two of them are organizations that I think we admire, and I know they do a good job. But at the same time, I'm not going to underplay the capabilities we have. I think we can add every much -- every bit as much value as they can. And from that point of view, we're both viable companies in terms of providing services.

There has been some sentiment shift in that I think the -- a number of Western clients feel that they're overly exposed, overly committed to China, and they're looking to rebalance that. I think as you've seen over the last decade differential evolutions of the economies. The Indian economy's done well. I think the Chinese economy has grown a little bit further ahead of it. And that comes down to things like labor rates, cost of operations. And I think a number of our Western clients recognize they can get even better value here in India. And of course, Syngene will be delighted to provide that to them.

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Operator [8]

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(Operator Instructions) We take the next question from the line of Surya Patra from PhillipCapital.

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

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So I just wanted to have a sense on the S2 facility, which is now likely to return to operation, so what -- whether it is coming in the same safe structure and similar kind of a potential revenue contribution and like what would it really mean for us in the near term? Can you...

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

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Okay. Excellent question. Let me clarify a few things. The S2 building reopened or, I was going to say, a year ago. It feels at least that. So don't confuse the receiving of the insurance payment, which I'm going to invite Chini to make some clarifying comments about this quarter, with the operational return to work. We upgraded, enhanced, refurbished the S2 building, came online, and I'll get somebody within the IR team to check specifically when, but at least a year ago. They've been full operations and it's been driving the growth over the last 12 months-plus. So that's not a marginal thing for you to think about. It's at an inflection point for revenue. It's up and it's running. It's contributing. But Chini, do you want to say a little bit broader? Just remind everybody where we are with the insurance, what's happened so far, what happens next.

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [11]

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All right. So we have commissioned this. Really, it's 4 floors of (inaudible) so went live last year. Then to the end of the year, we added a second floor and still becomes -- and the third floor. And the last one floor, which is a [common] floor, will be commissioned toward the end of this fiscal. So it has steadily added capacity over the period and supported the revenue growth, meaning as we complete the fourth floor for the -- we will file the final claim, insurance claim, and we expect to receive that in the next fiscal.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [12]

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And that houses how many scientists?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [13]

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(inaudible) lawsuit, any receipt of insurance came from [hereon] will result in exceptional (inaudible).

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

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Okay. And that particular facility houses how many scientists? Can you...

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [15]

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Counting the -- between 400 and 500 scientists.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [16]

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Okay. Sir, second question was on the CapEx number. So cumulatively so far, we have done something like $400 million. So out of that, what is the number that is currently operational? And what is the number that is in the various stages of development or creation?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [17]

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I did capture it in my opening remarks. $50 million is still the figure. And $350 million has been commissioned as we speak.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [18]

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Okay. And a third question on the growth. I mean so I just wanted to have a sense, is that okay? I believe the Discovery Services, that has been one of the -- our star growth contributor. And see, I -- my belief is that possibly, the growth in the Development and Manufacturing Services possibly is relatively lesser than the growth momentum in the Discovery Services. Kindly clarify if I'm wrong. And also if you can provide some visibility in terms of the growth visibility for the Development and Manufacturing Services. How should one really look at that piece in terms of growth?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [19]

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So just let me just summarize the question, Chini, to make sure I got this right. What's our sense of that -- the current momentum within our Manufacturing Services group, how does that contrast with the Discovery Services group? Any comments about the next phase of development? Yes?

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [20]

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Yes.

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

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Well I mean I caution you in so much as our Manufacturing Services group, particularly if you think about it as commercial manufacturing. It doesn't really exist for a year. We're still building. So we've spent the last couple of years developing the site that we've got over in Mangalore. We've got a 40-acre campus there. On those days that it's not raining, which seem to be few and infrequent at the moment, they're building very, very quickly to tie in the cost to budget. So the guys are doing a good job. But we don't actually expect that infrastructure to be complete in the building phase until the beginning of -- the end of this financial year, the beginning of the next fiscal.

At that point, we then need to start qualifying it, putting early start-up projects in there, and we'll build from there. Now it's something that comes up just about every quarter. Thematically, it's a question from the analyst community. I'll largely give you the same answer each quarter, so forgive me because I'm going to do the same thing again today, which is we're focused on building to tie into cost, to quality. I think the right time for us to revisit this is no sooner than the end of this financial year, maybe with the full year results when we'll have completed the building, and we can start maybe helping you think about the next phase.

The aim, of course, with a big capital investment like that, is to create value beyond your cost of capital over the life of the asset. The life of an asset like a manufacturing campus and the infrastructure on it, such as the buildings, is decades long, multiple decades long, and I'm confident that we will create value beyond the cost of capital over the life of the asset. It's a bit premature to start the quarter-by-quarter revenue watch. Did you sell enough this quarter to be on a trajectory? But we've made the investment. We're building it to plan.

Now there was an element of your question that I think is worth reinforcing. You said, what about the differential growth rate to Discovery Services? That seems to be picking up. And I think you're right. I think our Discovery Services group compared to, say, 2, 3, 4 years ago is more sophisticated in service offering. It's got -- it's more visible on a global basis. And I do think that the growth momentum you've seen over the last couple of years from that group is a bit stronger than even the analyst community or maybe even we expected.

So it's not that manufacturing is going slow, it's that Discovery Services have gone a bit quicker. And I quite like that combination. So I think the strategy we have, discover -- integrated Discovery Services allied to a separate integrated development group, allied to an integrated manufacturing group, small molecule, large molecule, is a sensible one in terms of it allows us to meet just about any need one of our major clients would have. Hopefully, those comments help you.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [22]

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Yes. But -- okay. So in this process, if you can, just -- then I think if you can possibly add something on the kind of a progress that you would have seen for just the large molecule things. Now in terms of the customer addition or in terms of any tie-up that you have done, any -- what is the progress that you have achieved so that -- that would help in manufacturing aspect of large molecules?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [23]

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Yes. An excellent question. And I sort of pointed to you the intention would be to review that at the full year.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [24]

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Okay. Just last one question. On the -- when you say that the Mangalore facility, which could be operational before the end of the current fiscal, so whether it would be operational partially first in phases or it could be all at a time?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [25]

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No, no. I didn't say operational. I said built, constructed. The project moves in a stepwise fashion. Finish construction, then move to validation and sort of operational start-up, then move into commercial operations. And I mean that...

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [26]

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No. I mean capitalization of the asset will happen at 1 go? Or it would be in different phases?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [27]

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I should defer to Mr. Chinappa to give you a textbook financial answer to that.

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

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Of course, the Mangalore plant will be also -- or like chopped up in phases. So what we've seen to date, the $70 million investment is really in the first phase. And once we start to get traction, we will look to build on that. I can't give you an exact number on the amount that will be capitalized as of March 31, but the main production block for certain will go live by that date.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [29]

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Okay. So that's been in phases only that will capitalized, and hence the cost would be accordingly in a staggered manner only will be built into the P&L. Is that right, Sir?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [30]

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It will -- in a short period of time, the entire Mangalore plant, the $70 million first phase will be capitalized.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [31]

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$30 million?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [32]

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But...

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [33]

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And it's after...

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [34]

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But Chini, the premise of the question is the right one, which is at the point it becomes operational in some sense from an analyst modeling point of view, they need to understand the capitalization and then the depreciation. And I think what I was suggesting is we'd be delighted to give you some guidance on that with the full year results.

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

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In terms of that (inaudible), it's to give you a sense of what are the capitalized costs and what could be the operational costs going forward.

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Operator [36]

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Next question is from the line of Nishant Chandra from Temasek.

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Nishant Chandra, Temasek Holdings (Private) Limited - Associate Director, India [37]

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I'm trying to understand the business development momentum specifically in the U.S. Can you provide any color, Chini, on the rate of addition there? Because let's say between -- from FY '18 and FY '19, I think the momentum of client addition has been moderating, right? So I'm just trying to understand, have we sort of reversed that moderation? Or is it still continuing to flatten out?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [38]

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Oh, I'd have -- I have to go back and do the math. But I think the difference might be annual growth of 16 or 18 clients in one year versus annual growth of 15 clients in the other year. It's in that order. So while, mathematically, I won't dispute, it's moderating. I'm not sure I'd put any strategic importance on the difference between having 16 or 17 new logos in one year and adding 15 in another. It's well within any, I think, interpretive degrees of freedom. But it also suggests, to some extent, the underpinning thought that growth comes only by adding new logos, new clients. It doesn't. As much, if not more, of the growth momentum is about going deeper into your relationship with an individual client. Now -- and that transition from being fully engaged in a strategic partnership with a client from having the first -- done the first bit of work with them can be many years because it's a relationship built on trust and repeated delivery. So I'm...

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Nishant Chandra, Temasek Holdings (Private) Limited - Associate Director, India [39]

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I understand, Sir.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [40]

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We track things like that more and put more weight on it than we do -- than something as important but simple as just adding a new logo. We're going -- you had a supplementary comment?

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Nishant Chandra, Temasek Holdings (Private) Limited - Associate Director, India [41]

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Fair. So -- and this is where I'm coming from. So if you look at -- I look at gross margin growth as the proxy for valuation growth, and if you look at it that way to adjust for, let's say, the pass-through elements between revenue and material and power costs and all of that, which is there in FY '19, and what I'm trying to understand is whether the moderation in client growth is effectively translating to a slowdown on gross margin growth that we're seeing between FY '18, FY '19 to now H1 '20 to H1 '19.

So if you look at gross margin growth between FY '19, FY '18 and even going back in time, the gross margin growth has generally been in that, call it, 20%. But as this year the year-on-year growth is around 8% and that moderation is effectively -- I mean I'm just correlating data here because we don't have access to all the details. But mathematically, just correlating with a 1-year lag compared to the client addition slowdown that we saw last year. So I'm just trying to see if there is any pattern to it, and hence the reversal in that pattern.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [42]

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I'm looking at Mr. Chinappa to see if he followed your math. But I get the premise of where you're coming from.

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Nishant Chandra, Temasek Holdings (Private) Limited - Associate Director, India [43]

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Yes.

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

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Yes. Got it. Just for gross margin, again, as I said, do a net of material, staff cost and the power, and you -- this definitely will be the real core gross margin. But saying that, H1 of this year has been slower growth than the H1 of last year in the [pre-FI] years. We expect things to pick up in H2. And when you look at it on a full year basis, this should not look (inaudible) than it's been in the past.

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Nishant Chandra, Temasek Holdings (Private) Limited - Associate Director, India [45]

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Okay. Okay. Got it. And on a related note then, Chini, is it fair to say that you are seeing visibility of either billing growth per client or number of clients or a combination of that at this point of time? Because if you're looking at a recovery in H2, then you should already have visibility of contracts at this point of time looking at H2 '20, right? That's what you are saying?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [46]

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Yes. It's -- absolutely. I think it -- that naturally comes out that if you're growing new business, it has to be -- it has to come from 1 of the 2 quarters, either new client addition or expansion of business with the existing clients.

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Nishant Chandra, Temasek Holdings (Private) Limited - Associate Director, India [47]

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Okay. And what's our business development strength in the U.S. now? How many people do we have at this point of time in the U.S. subsidiary?

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

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Yes. That's not what I think we'll ever put into the public domain. And again, if I -- so a little bit of comment. It's not purely a quantity game. It's much more a quality game. This is a sort of business-to-business-type sell. So it's not about your frequency of interaction with your customer, it's about the quality of the discussion and your ability to anticipate their needs. So we have a growing footprint globally in terms of ability to connect to clients through BD. But then the specific numbers are something that's sort of commercially sensitive vis-à-vis our competitors.

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Operator [49]

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Next question is from the line of Charulata Gaidhani from Dalal & Broacha.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [50]

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Yes. My question pertains to, one, the Biologics plant. Are you seeing any traction in the business from the plant? And second question pertains to the -- what are the non-current investment of INR 325 crore in the balance sheet?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [51]

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Charulata, could you repeat the first question? We didn't catch the Biologics part.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [52]

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Yes. The Biologics plant...

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [53]

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Yes. You're quite faint on the line, so if you could...

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [54]

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Yes. Yes. One minute. One minute.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [55]

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Okay.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [56]

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Yes. The Biologics plant got EMA approval in the last quarter. Are you seeing any traction in the business going forward?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [57]

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Of course, Biologics -- the expansion of our Biologics business is a -- that's part of our growth story. We're seeing good demand in this quarter coming from this -- in this space, and we expect Biologics to be a good contributor to our growth going forward.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [58]

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Hello?

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Unidentified Company Representative, [59]

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Yes.

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [60]

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Sorry, on the noncurrent investment, the -- these are fixed deposits which are -- we place these deposits to make sure, along with the -- to coincide with the loan repayment, which is scheduled for March of 2021 to replace fixed deposits, which mature on [in] March 2021 and have been classified as noncurrent investments.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [61]

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Oh, okay. Okay. And if I could squeeze 1 more. There is a tax holiday for the Mangalore plant, right?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [62]

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Yes. It is -- and especially [common floor]. Yes.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [63]

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Yes. So FY '21, what could be the tax rate?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [64]

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We will comment on FY '21 along with the full year results for FY '20 in terms of potential revenue growth, tax rates, costs [actually] (inaudible)...

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [65]

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But just to put a bit of color on that or at least to make sure I understood the question, do you mean specifically what will be the tax rates applicable to the Mangalore plant? Or do you mean what's the impact of the Mangalore plant on the group effective tax rate?

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [66]

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The impact of the Mangalore plant on the overall tax.

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

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Okay. Yes. We'll try and answer both of those, I think, at the full year. But I would caution you, of course. I'd go back to the sort of theme of the last 4 quarters with these questions around Mangalore. Starting next year, it's going -- it's not going to be a plant driving an enormous amount of revenue across the company. There's no reason to expect that it would be. It's a brand-new manufacturing facility that will be undergoing qualification. And then in time, we'll build the client base. So just from that comment, you can probably suggest that it won't be the key driver of the company's effective tax rate.

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Operator [68]

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We take the next question from the line of Shaleen Kumar from UBS Securities.

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Shaleen Kumar, UBS Investment Bank, Research Division - Associate Director and Analyst [69]

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This is Shaleen Kumar from UBS. I just missed the initial part of your commentary. Sorry if you have to repeat it. If I remember correctly, you were guiding somewhere around mid-teens to high-teens kind of a growth. And considering that in first quarter we have achieved -- first half, we have achieved 8% growth, are you expecting to have growth guidance for the full year of around mid-teens? Or are you revising it?

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

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Yes. I think the comments I gave earlier in this call plus earlier in the day, we're happy with the way revenues evolved during the course of the year. It started off at 4% reported revenue in the first quarter. We said it would need to build in the second, and it did up to 11% from our full year expectation of sort of mid- to high-teens growth, you can back calculate it. We need to have a stronger finish to the year and continue this sort of sequential acceleration. But at the half year point, we think we're on a reasonable track to do that. Quite a lot more to do in the second half and quite a bit of hard work to deliver it. But for now, it's where we expect to be, and it's about execution.

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [71]

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And Shaleen, just to add to that, just look at the H1 performance as a low-teens growth. It's 13% adjusted for the one-off pass-through from last year, yes? So just envision what our (inaudible).

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Shaleen Kumar, UBS Investment Bank, Research Division - Associate Director and Analyst [72]

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Yes, Chini. So I'm happy to look at it. But is it -- and so should we look at it that way? I don't mind looking at it that way, at 13%. But is our guidance was based on adjusted number? Or how should we look at it?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [73]

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Yes. Our guidance was based on adjusted number. And you called out that adjusted for FX and the one-off pass-through. So we have a bit of [work] to be close to what we delivered in FY '19.

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Shaleen Kumar, UBS Investment Bank, Research Division - Associate Director and Analyst [74]

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Sure. Sure. No, fair point. Also just as like a bit of a basic question, more of an understanding starting point of view. I believe that your contract, it's more about recognizing the revenue, right? And so when we see this -- such kind of ramp-up happening in H2 or -- so what exactly works? I'm sorry, it's a very basic question, right? Or my understanding is (inaudible) here?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [75]

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Definitely, for the dedicated center, it can be -- certainly, the revenue (inaudible) kind of evenly across all quarters. Discovery Services, again it's steady across corporate and just reflects the full year ramp-up in the business. It's the Development Services, et cetera, that is about close to 40% of our business. These projects are delivered in direct revenue recognized on delivery of the projects, the completion of the projects. And this could be in between quarters.

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Shaleen Kumar, UBS Investment Bank, Research Division - Associate Director and Analyst [76]

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Yes. So there is no seasonality in this? Like most skew towards second half. Or is there certainly some kind of seasonality? We seen more delivery happening or more projects getting introduced in the first half and delivery happening in the second half?

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [77]

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Mostly seasonality in the business. However, like I mentioned earlier, it's dependent on how long the project takes to finish. And as of now, we have -- that's more bunched into H2 rather than H1 in this year.

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Shaleen Kumar, UBS Investment Bank, Research Division - Associate Director and Analyst [78]

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Got you. Got you. One more question from you, Chini, if you can answer it right now. I can take it offline as well. This is more related to the bookkeeping kind of thing. If I -- from your cash flow statement, I just want to understand what is this in the working capital movement, increase in other assets and increase -- rather decrease in trade payables contributing to...

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [79]

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Yes. Yes. So we do receive a lot of customer advances at the beginning of the year, and that gets accounted into revenues this year. So that there is a reduction in that. And that creates a -- where it makes a big difference in [fee] to cash flows for a particular season. So you have to look at it on a full year basis. I mean when you look at it on a 6-month or quarterly basis, it doesn't reveal a correct picture on the business.

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Operator [80]

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(Operator Instructions) We take the next question from the line of Prakash Agarwal from Axis Capital.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [81]

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I just wanted to check on the ForEx cover that we normally take for the next 12 months. If you could help us what is the rates for fiscal '20 and '21?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [82]

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So Chini, ForEx hedging policy, where we are, the benefit we've seen in this quarter and then what our outlook is for the rest of the year.

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M. B. Chinappa, Syngene International Limited - CFO & President of Finance [83]

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Yes. As per our hedging policy, we do look to hedge probably in the 12 months 100%. And in that regard, H2 is hedged at about 2% above the current prevailing market rate, and FY '21 is hedged at about 4% above the current market rate.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [84]

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Okay. Great. And secondly, so there's one part which I think I asked the last quarter also. It was premature then, but having spent some time -- I know BMS being our largest anchor client, have you started seeing some initial talks with the close-out of the Celgene acquisition?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [85]

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Oh, that's an interesting question. I think it's a bit premature for that in so much as they haven't closed out yet. So there's a general sense and standstill. As you know, if you know much about things like Hart-Scott-Rodino legislation in the U.S., you just -- for antitrust reasons, you just cannot be seen to be operating as a combined entity until you've reached that legal point. But what I would say is that both of the parties in that question are organizations that we have interactions with and know well. So for us at least, it's 2 companies that we've done work with coming together rather than introducing us to a new party.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [86]

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Okay. So we -- you also cater to Celgene in a reasonable manner?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [87]

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I think you can take that from my comment.

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Operator [88]

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Thank you. Well, ladies and gentlemen, that seem to be the last question for today. I would now like to hand the floor back to the management for their closing comments. Over to you.

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Unidentified Company Representative, [89]

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

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Operator [90]

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Thank you very much. Ladies and Gentlemen, on behalf of Syngene International Limited, we conclude today's conference. Thank you all for joining us. You may disconnect your lines now.