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Edited Transcript of TORNTPHARM.NSE earnings conference call or presentation 23-Jul-19 1:00pm GMT

Q1 2020 Torrent Pharmaceuticals Ltd Earnings Call

Jul 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Torrent Pharmaceuticals Ltd earnings conference call or presentation Tuesday, July 23, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aman Mehta

Torrent Pharmaceuticals Limited - Strategic Planning

* Sanjay Gupta

Torrent Pharmaceuticals Limited - Executive Director of International Business

* Sudhir Menon

Torrent Pharmaceuticals Limited - CFO

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Conference Call Participants

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* Anmol Ganjoo

JM Financial Institutional Securities Limited, Research Division - Director

* Anubhav Aggarwal

Crédit Suisse AG, Research Division - Associate

* Chirag Dagli

HDFC Asset Management Company Limited - Senior Equity Analyst

* Damayanti Kerai

HSBC, Research Division - Analyst, Healthcare and Hospitals

* Neha Manpuria

JP Morgan Chase & Co, Research Division - Analyst

* Prakash Agarwal

Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals

* Srihari Chintalapudy;PCS Securities;Equity Research Analyst

* T. Ranvir Singh

IDBI Capital Markets & Securities Ltd., Research Division - Pharma Analyst

* Tushar Manudhane

Motilal Oswal Securities Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day and welcome to Torrent Pharmaceuticals Limited Q1 FY 2019-'20 Earnings Conference Call. We have with us today Mr. Aman Mehta, Chief Marketing Officer for India Business; Mr. Sanjay Gupta, Executive Director for International Business; and Mr. Sudhir Menon, Chief Financial Officer. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Sanjay Gupta. Thank you, and over to you, sir.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [2]

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Good evening, everyone, and welcome to the Q1 FY '20 earnings call. I would like to begin by introducing to you Mr. Aman Mehta. He has been with the Torrent group for a period close to 5 years and has recently taken over as Chief Marketing Officer for our India business. And you will hear more from him this quarter and in the quarters going forward.

So coming back to our results. In Q1, our revenues were INR 2,022 crores, up by 8% on a year-over-year basis. Q1 EBITDA was INR 558 crores, up by 11% on a year-on-year basis.

Let's look at trends in some of our key markets. India revenue was up at INR 907 crores, up by 9% on a year-on-year basis. During the quarter, we discontinued low-value, low-margin products and changed the sales cycle to advance the financial closing process. Adjusted for these 2 factors, sales growth for Q1 stands at 12.6%.

From the exterior indicator perspective, growth stands at 9.3% for the quarter against an IPM growth of 7.9% for the quarter as per AIOCD. Adjusted for discontinued products growth stands at 10.6% as per AIOCD.

On the productivity front, Q1 productivity has surpassed the 7 lakhs mark and currently stands at 7.2 lakhs compared to 6.2 lakhs for the financial year '18-'19. As per AIOCD, quarterly ranking without bonus units stands at the sixth position in the Indian pharma market.

During the quarter, we have entered into an in-licensing agreement with Glenmark for Remogliflozin. This drug is from the SGLT2 class, which is an important growth driver in the diabetes market. The SGLT2 market currently in India stands at INR 817 crores and has a growth rate of 55%.

On brand building, Torrent's current count of brands more than INR 100 crores stand at 9 with the addition this quarter of Veloz as per AIOCD.

In addition, Shelcal has also surpassed INR 450 crore mark. In sync with our specialty-driven business model, 72% of our prescriptions are from specialists and on an overall basis Torrent stands at sixth position across specialties as per the prescription dataset from SMSRC.

On the integration front, we have been further able to optimize in Q1 and current sales force strength at Torrent stands at 4,200 sales reps.

Moving on to the U.S., Q1 sales are $51.4 million, up by 6% on a year-on-year basis and flat when compared to Q4 '18-'19. During the quarter, 3 ANDAs were filed and we expect to file about close to 15 more ANDAs this fiscal year.

At the end of Q1, we currently have 11 tentative approvals and 34 ANDAs pending approval with the FDA.

During last week, our Dahej facility received an OAI classification from the U.S. FDA. While we have fulfilled the commitments provided in our initial response to the FDA, we shall now be engaging with them to know further about their concerns. We are committed to resolving the issues at the earliest.

Needless to mention, it does not disrupt our current revenues and supplies from the Dahej facility. We are yet to listen from the FDA on the Indrad facility classification.

On Brazil, our sales this quarter were BRL 96 million, which were up at 7% on a year-on-year basis. As per secondary sales trends, Torrent's MAT May growth is 9.6% versus our current growth of -- covered market growth of 7.3%. Growth is primarily driven through volumes and full year impact of new launches. Brazil continues to be a fundamental attractive market for us, and we expect to continue the current trend of growing better than the market.

Lastly, on Germany, our sales were EUR 33.2 million, up by 6%. Sales for the quarter was softened due to certain difficulties with serialization and tamper-proof packaging.

Going forward, our expectation would be to return to a normal growth rate.

In Q1, R&D spend was INR 136 crores against INR 128 crores in Q1 of last year. Current ratio of R&D to sales stands at 6.7%.

To conclude, India, U.S., Brazil and Germany continues to be the focus markets for us. Our strategic priority continues to be the specialty-driven business, productivity improvement, brand building, maintaining high-quality manufacturing practices and investments into R&D for a robust future pipeline.

We can now open the call for Q&A. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of 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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Sir, first question is just a clarification on the 12.6 percentage growth you mentioned. So you explained 9%, 10.6% driven by the low volume. The third piece, I missed. You said, adjusted for what, sorry?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [3]

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So if you remember the last quarter, we had mentioned that we had advanced aftersales closing process. So that impact is another around 2%.

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

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Could you explain what you have really done? I mean, in terms of closing, what dates you are using and...

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [5]

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Well, so Prakash, in order to close the month much faster than what we used to do, so we have preponed it by a couple of days. So what typically happens is the orders which are not serviced during the month gets on to the next month. And quarter 1 typically being the highest among all the quarters, there is an impact of 2%, which means that this 2% will get neutralized in quarter 2.

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

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Okay. I understand. So net impact is 2% for the change in -- sorry, adjustment in the policy, basically 2, 3 days, whatever it is.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [7]

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That's right. That's right.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [8]

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Okay. And in general, if you were to break up the volume and price and new product introduction, how would you break it up? And do you think that there has been a significant impact on volume? And what are the things that we are doing to improve the same?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [9]

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As per AIOCD, our volume growth adjusted for discontinued products is 1%, price growth is 8% and 2% is NI.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [10]

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Yes. And would you think this is the new normal or there is a specific thing happening in the industry where volume has come off quite a bit and what are we doing to improve the same, sir?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [11]

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So this last 2 months, and it is too early to comment on the future quarters. I think, we'll probably have to wait another quarter or 2 to comment if this is a short, medium-term trend, because we are pretty confident that we will maintain this level of growth.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [12]

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Okay. And second question on the U.S. If you could just help understand. Last quarter, we mentioned that we are temporarily shutting down the Bio-Pharm facility and also there is some discontinuation of Losartan and Losartan HCTZ. So we still managed to do Q-on-Q flattish. Has Losartan already started? And is it also covered by new launches? Any color would help.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [13]

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Sure. So we have started selling -- sales of Losartan. So that's our first point. And second point is that we have actually seen full quarter impact on some launches, which were made in the tail end of last year. And thirdly, we also have our usual volume of onetime sales. So the market is -- there is a lot of disruption in the market with other companies discontinuing products. So one being always [a venue] with available stock from the U.S., so we get some benefit from that. So these 3 factors combined have led to a, I would say, a stability in sales.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [14]

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And Losartan is as usual as per you? I mean, what you used to do Q4, would it be similar?

No.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [15]

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We are launching in a very cautious manner, Losartan, and so we are not immediately targeting to reach back to the shares and the sales that we had in the previous year. So -- but we restarted and so you would (inaudible) sales and we would build it up as the quarters go along.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [16]

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So it's largely the new launches and small onetime sales which is covered up Q-on-Q?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [17]

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Sorry?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [18]

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Sorry, Sudhir?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [19]

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And Losartan.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [20]

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And Losartan.

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Operator [21]

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Next question is from the line of Neha Manpuria from JPMorgan.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [22]

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My first question is on Dahej facility. Sir, you mentioned that we have to engage with the FDA to understand what additionally is required. Any time line that you could mention as to when this could happen? And also what were the sort of approvals that you were expecting this year from the U.S. which could potentially get impacted?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [23]

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So Neha, just to be clear and transparent, we have not received any approvals, okay, during quarter 1. Yes, so we continue to ship the existing products. We are not getting new approvals. So as we file between 15 to 20 products per year, we expect to receive about close to 15 to 20 approvals per year. So that is our annual run rate. So right now, one quarter is gone, so you can include a fair percentage on quarter 1. So those are impacted. And in terms of time line for when we will be getting or getting back to a normal status from the OAI status, currently we cannot give a specific guidance. So our experience with our peers and from the experiences that our colleagues have had in previous life is that it can take anywhere from 6 to 12 months. So given that there are no data integrity issues and et cetera, so our internal expectations would be it should be on the shorter side.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [24]

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Sir, I mentioned that have you got any communication from the FDA as to when they would probably get back to you on additionally what needs to be done to get a sense of how much more remediation is required?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [25]

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No, not as yet, Neha. We had just initiated contact. So we would get clarity in the coming days. So this is very recent, right? So we just got the OAI status last week.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [26]

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Understood. And Sudhir, on the gross margins, it seems to have seem a very strong improvement from what we did last year, close to about 72%. Is this number sustainable? But on the same -- at the same time, we have seen a very sharp increase in both employee cost and other expenses. So if you could just give some color there?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [27]

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I think, Neha, I have been carrying one version which I said, the normal gross margin should be between 71% and 72%, right?

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [28]

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Yes.

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [29]

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So quarter 1, 72% looks sustainable, other things being constant. I would say, because if something is happening in some other geographies or depreciation of currencies happening, then probably 72% would not be 72%. But as on date, if you ask me whether it is sustainable, it is sustainable.

And I think the employee cost has not gone up, Neha. I mean, if you look at the quarter 4 number which is 347, it has gone up by 9% to 381. So that's normal increment number which is being looked at, right?

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [30]

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And the other expenses, that's also up about 11%, 12%?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [31]

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Yes, other expenses...

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [32]

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So there is no one-off in the other expenses number?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [33]

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No. No. Not at all. So I mean, what I've seen is that quarter -- when the year changes, the other expenses and employee cost go up by 8% to 10%.

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Operator [34]

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

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Tushar Manudhane, Motilal Oswal Securities Limited, Research Division - Research Analyst [35]

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Sir, I just would like to understand on the quantum of R&D spend on the discovery part for FY '20?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [36]

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So FY '20, we can't say the number with you, but FY '19, it was roughly INR 100 crores.

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Tushar Manudhane, Motilal Oswal Securities Limited, Research Division - Research Analyst [37]

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INR 90 crores, INR 95 crores. Yes, so will that meaningfully change this year or it's going to be more or less similar number?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [38]

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No. No. It should be more or less similar number.

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Tushar Manudhane, Motilal Oswal Securities Limited, Research Division - Research Analyst [39]

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Okay. And secondly, just from the investment on the [oral] oncology [operating] in terms of how much of the investment over the next what period?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [40]

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So the investment is still going on, Tushar. And hopefully by the year end, we should have the number as to what kind of CapEx has gone into Onco. So I think we should wait for couple of quarters more.

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Tushar Manudhane, Motilal Oswal Securities Limited, Research Division - Research Analyst [41]

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So even -- so current -- so till date how much has been spent?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [42]

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Yes, I think till date roughly INR 180 crores to INR 200 crores.

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Operator [43]

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The next question is from the line of Anubhav Aggarwal from Crédit Suisse.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [44]

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Sudhir, one clarity. You mentioned that this quarter in India was also impacted by preponement of quarter closing that was from March quarter and was it additionally done this quarter?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [45]

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No. So Anubhav, Q4 is the lowest, right? I mean, in terms of India business. And therefore, the impact in Q4 was not that high. And Q1 is always the highest in terms of sales. So this [2%] impact we are talking about has come in quarter 2; quarter 4 was not that high.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [46]

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So you're seeing impact, it was 2 days of that quarter 4 sales which normally is low has just gone to quarter 1. That's what you mean to say?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [47]

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So that's come to quarter 1, and quarter 1 closing will go to quarter 2. So from quarter 2, it should get neutralized.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [48]

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And can you also share the net debt number now?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [49]

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So we repaid -- in quarter 1, there was a repayment of roughly INR 330 crores.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [50]

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So what's the net outstanding net debt for you?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [51]

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So if you look at financials of '18-'19, I think the total borrowing was around INR 6,000 crores. It's come down by about INR 333 crores.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [52]

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But that will not be all deletion --so is -- like in fiscal '19, your net debt was about INR 4,820 crores.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [53]

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I'm talking about gross debt. So the gross debt in -- as at 31st March 2019 was around INR 6,000 crores. So that's gone down by INR 333 crores. The cash balances more or less have remained the same at March level.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [54]

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Okay. So -- but, is there any working capital release because then you seem to have generated a lot of cash in just 1 quarter?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [55]

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Yes. Yes. Yes. So there is an improvement in terms of receivable days and inventory days. So yes, I mean, there has been some release in terms of working capital.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [56]

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Okay. Sure. And just one comment on the India business. Can you guys talk about the channel destocking right now? I mean, if you divide it into 2 levels, let's say, at the chemist level and at the distributor level, what kind of destocking you're seeing at these 2 levels?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [57]

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So I think, Anubhav, as far as we are concerned, there is no major change which has happened. So the kind of inventory which we have in these channels is more or less very comfortable.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [58]

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Okay. So this volume impact for the industry and for you guys has nothing to do with the destocking?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [59]

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Yes. I think, for us, no.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [60]

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Okay. Sure. One more clarity on this. And that's for the U.S. Maybe Sanjay can help. When FDA gives OAI to a company, is this very typical for FDA to meet the companies or to entertain all requests to get a one-to-one meeting with the FDA? Or this is only for some special cases does this happen?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [61]

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So fortunately, Torrent does not have a lot of experience with OAIs. So this is one of the -- I think in 10 years, this probably is the first one that we've received. So there's very little first-hand experience in our organization. Generally, what I feel is that what I learned from our regulatory colleagues is, things are clearer and then the FDA is a little bit more communicative in their initial letter with the status. So in our case, we haven't got that clarity, so we are reaching out to get. But I cannot give you the statistical -- as to what is the norm.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [62]

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Okay. Sure. And just maybe -- sorry, one last question. Is this quite normal for us year-on-year growth -- sales growth is about 8%, EBITDA growth is about 8%, 9%? Does this represent more steady state for us? What's missing in this quarter? Maybe U.S. could have been better for us, but India was still good.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [63]

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Yes. So I think the way to look at is the key geographies, right? One is India, which has grown at 9%, but adjusted for the cutoff, we are talking about a 11% growth and for the adjusted -- for the discontinued products [base in fact] , there is another 2%. So 13% is real growth as far as India is concerned. While the base in fact on the discontinued products would continue up till quarter 3. Quarter 4 onwards, I think, it should get neutralized. As far as the cutoff impact is concerned, as I said, it should get neutralized in quarter 1. So I think India is -- India, we feel, that double-digit should be there for the full year. As far as U.S. is concerned, then typically the base is the same, right, as Q4. So 51 run rate in quarter 1, but still we would like to wait for 1 more quarter to see what could be the base for U.S. business. As far as Germany is concerned, Sanjay, do you want to talk about...

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [64]

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No. I mentioned that we had some issues with utilization and we also had some issues with tamper-proof packaging because of which the growth rate of 6% from next quarter onwards, it should be back to its normal 9% to 12% trend.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [65]

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And Anubhav, Brazil also. From a market perspective, the market -- in the market, we are growing at double-digit. I think for the full year, we still feel that we should be able do double-digit in Brazil as well. I mean, that's the way to look at it. From EBITDA margin perspective, yes, it's a sustainable margin which we believe what we've delivered in quarter 1.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [66]

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Okay. Sure. Was there some one-off there in Brazil because the 8% was the constant currency growth this quarter?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [67]

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Yes. I mean, specifically, right? Quarter 4 is the highest, and then there is an impact which passes on to quarter 1. So the same thing happened this year. So that's why we feel that quarter 2 should be much better.

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Operator [68]

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The next question is from the line of Ranvir Singh from IDBI Capital.

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T. Ranvir Singh, IDBI Capital Markets & Securities Ltd., Research Division - Pharma Analyst [69]

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My question relates to U.S. business. In Losartan, we see market share earlier used to be at 30%. Just if you would give some more light, what is the market share currently? And were there other players, some of who have started supplying it or resume supply after initial disturbances?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [70]

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Firstly, we used to have quite high market share. So we were close to 30% market share. And for Losartan and Losartan H was about close to 20%. So we are nowhere near that. So we started sales, but like I mentioned it, that we are taking a slow and cautious approach in terms of making sure that the product that we sell and the API that we buy are impurity-free. So we do not expect to get back to the original market shares, I would say, at least in the next couple of quarters. So our shares, you would see in the IMS as they are reflected, but our expectation is that it will be much more modest than it was in the past.

As far as other players, yes. People are coming back, but there is still a lot of -- demand exceeds supply in the Sartan market in general, across the board.

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T. Ranvir Singh, IDBI Capital Markets & Securities Ltd., Research Division - Pharma Analyst [71]

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Okay. Secondly, on India business, I see that volume growth for most and not only Torrent, but at industry level also is declining for last 2 months. Secondary sales data is showing this. So what may be the reason for decline in volume?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [72]

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As we mentioned earlier, the 2 months trend is difficult to pinpoint exactly, but as far as we are concerned, we have seen a net positive growth adjusted for discontinued products sits at 1%. So probably by next quarter, there will be a better picture of the industry volumes as well.

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T. Ranvir Singh, IDBI Capital Markets & Securities Ltd., Research Division - Pharma Analyst [73]

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Yes. So historically, volume growth has been in the range of 4% to 5% and then your price growth has been 2% to 3% and some net new product launches in the similar range. But now trend are [similar] reverse trend. Now volume has gone down. In fact, it's de-growing and price has descended 4%, 5%. So this reversal in trend, just I wanted to understand that, is there any structural changes happening because this may be Torrent's strategy to discontinue older products? But this is across company, because I see similar trend in -- at industry level also. So if you could give some more light on it.

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [74]

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I think that's what we are trying to understand. So that's what Aman said, May and June showing a decline in volume. It's something which is not understood. So it's better to wait for a couple of months more to have a better grip of what's happening in the market.

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Operator [75]

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The next question is from the line of Chirag Dagli from HDFC AMC.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [76]

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On this SGLT2 product, what sort of margins do -- how should we think about margins on such products? And will we see more of these in licensing?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [77]

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Yes. So I mean, this is one opportunity which had come to us and we signed the deal, right? And as Sanjay explained in the call, it's INR 800 crore market growing at 30%. So it's a next wave of antidiabetic -- in the antidiabetic market. In terms of gross margin, I think it's a little competition-sensitive. So we would not be able to disclose that with you.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [78]

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But such effort is not margin dilutive [status], that understanding is correct?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [79]

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Yes. Yes. Yes. Absolutely. Absolutely.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [80]

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The effort itself is not margin dilutive. Okay.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [81]

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Yes.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [82]

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And on the Unichem profitability have we -- are we -- have we sort of achieved whatever we set out, and is there scope to improve margins further?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [83]

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That's what we have said in the last quarter, right? I mean, as far as the integration objectives are concerned, we substantially achieved, but there would be some pockets of more cost synergies working in as we go along. But from our overall company perspective, that would not stand out, I would say, but still margin improvement is a possibility.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [84]

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Okay. And what could be tax rate for full year?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [85]

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So quarter 1, we are looking at a 23% rate. So for the full year, we should be around 23% to 25%.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [86]

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And I missed out on the pending total ANDA number.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [87]

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So we have about 11 tentative approvals and 34 ANDA pending approvals. So this gives a total of 45 with the FDA.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [88]

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And of these, how many are from Dahej?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [89]

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So I don't -- we don’t disclose by facilities, but essentially, our ANDAs come from 5 sources. So Dahej, Indrad, Pithampur, which is our Derma plant, Levittown, which is our liquid plant; and some external partners.

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Operator [90]

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The next question is from the line of Shashank Krishna Kumar from JM Financial.

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [91]

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This is Anmol Ganjoo. So my first question is on the domestic market. This whole process of rationalization of what you would perceive to be an extended tale or discontinuation of products, is this largely done or is it a continuous exercise where we expect some incremental impact in the quarters to come?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [92]

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This discontinuation was carried out in the previous financial year. We have not discontinued any further products this year either from -- either of the portfolios. So since the discontinuation has begun in the first quarter last year, the impact will be neutralized by the end of the year.

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [93]

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That's helpful. Second, in terms of synergies and some of the operating metrics, which you have done a great job in trying to get up, PCPM moving to INR 7.2 lakhs, is that -- is there some more room to go or this is largely done in terms of improvement?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [94]

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During this quarter, we have been able to optimize our strength further by about 200 reps, so that's brought down the total strength to 4,200. We don’t have any plan right now to further take a call, but this is something, as we mentioned in the previous quarters also, that it's a constant process that we keep evaluating.

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [95]

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Yes, sir. But just trying to understand that incrementally the drivers will be topline in terms of productivity or the reduction in denominator or how are you looking at that [model?]

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [96]

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From here on, it will be topline focus. The first phase of cost synergies, we've pretty much settled that now.

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [97]

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My second question is related to the U.S. -- to the current situation both at Dahej as well as Indrad. If you could just share slightly more comprehensive risk assessment of what the situation is? And any mitigation strategies you have in mind, how do we kind of assess the current situation and what could be the impact in terms of, say, for example, what would be number of approvals that for the full year could be at risk and so on and so forth? Any clarity there would help.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [98]

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So firstly, current business continues as usual, right? That's an important point because that's very important for our customers, that we maintain continuity of supply, and we don’t see any risk to that. Where we are going to feel the pinch is in terms of new approvals. And in terms of new approvals, we -- as I mentioned, that will be filed between 15 to 20 per year. We expect up to 15 to 20 approvals per year. You can spread out over the quarter. Now most of our product filings without disclosing by site, but historically and legacy, some of our filings were done from Indrad, then Dahej came along; later on, we started filing from our Pithampur and Levittown facilities and as well as some external partners. But if you were to, kind of, order it in terms of importance, it would be Indrad, Dahej, Levittown, Pithampur and external partners. That would be the sequence. And also, given that, I mean that certainly would have an impact on our revenues and the sooner we can resolve this OAI situation, the faster we can get back to growth.

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [99]

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That's helpful. That's helpful. So the last question on the domestic market. Once again, before I get back in the queue, I know that you said that it's too early, we should wait for a couple of months to see whether the volume trends that have been recorded by external parties seem to be an aberration or whatever, but any hints that you picked in the marketplace of anything changing structurally with respect to either distribution or pricing or replacement impact of Jan Aushadhi? There is a lot of noise, so your thoughts around it? I know that it's early, but any thoughts around that would be helpful for us to map out growth going forward.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [100]

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Yes. So in terms of the exact reason, rather not speculate at this point, but specifically touching on Jan Aushadhi, so we feel Jan Aushadhi would definitely help expand the market reach, but we don’t see a significant impact on branded volumes and that should be the -- that's how we see it in the long-term as well.

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Operator [101]

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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 [102]

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Just a couple of clarifications. One is on the net debt reduction. So you mentioned cash remaining same and gross debt reduced by INR 333 crores. So that's the net debt reduction also, the same number, right?

That's c

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [103]

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Correct. Yes.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [104]

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And what is the outlook for the year, sir?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [105]

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I mean, let's wait, Prakash.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [106]

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Okay. I mean, last call you said about INR 800 crores to INR 900 crores. Just wanted reiteration on this, sir.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [107]

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Yes. Yes.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [108]

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So we are on track to do that?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [109]

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That's a good number. Yes, that's a good number to take.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [110]

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.

Okay. And just one more clarification on the U.S. sales. You mentioned there is a Losartan comeback a little bit, launches. And the third one you mentioned was onetime sales. So is this like a couple of quarter one-time or is it like a 1 quarter one-time?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [111]

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One-time basically means one time. So it's not a couple of quarters. So every quarter we get one-time sales. It's nothing new. It is a standard for Torrent and we have been doing it for a while. So I said that we don't give you the breakup of our sales every quarter. But since we are always in stock, we are usually the go-to company for people who run out of or who fall short on products. And so we get the benefit of that. And I don't remember any quarter where we did not have it. The volumes can -- values can vary quarter-to-quarter, but it's a consistent feature.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [112]

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And it has gone up in the last 2 years actually as other companies have discontinued or have had quality issues.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [113]

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Yes. So what I'm trying to understand and what other companies also disclose as a NBO, New Business Opportunity, which usually runs 2, 3, 4 quarters. So is the life of this one-time sales is 1 quarter or it is more extended, is what I was trying to understand?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [114]

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Usually, it's one quarter. So for us, it's a spot business.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [115]

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Okay. Understood. Fair enough. And thoughts around -- if you are sharing any outlook for the U.S. business. I know there is one event still pending, but as you mean, no new approvals coming from these 2 plants, would the business be flattish or given there is some price erosion and the business could see some kind of a little bit decline as well?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [116]

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I think we will get better visibility after the next quarter. But if you want to take the worst-case scenario where these -- the site issues are not resolved, then best-case scenario in that case would be to have kind of flattish revenues. And the price erosion in the U.S. continues to be in the high single digits. So if you are able to compensate for that with enhanced market share, that would be a good thing.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [117]

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You said best case is flattish?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [118]

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Yes. If the facility issues are not resolved.

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Operator [119]

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The next question is from the line of Damayanti Kerai from HSBC.

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Damayanti Kerai, HSBC, Research Division - Analyst, Healthcare and Hospitals [120]

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My question is regarding resumption of Losartan supplies in the U.S. So 2 questions there. First, are we sourcing API from multiple partners? And are you facing any issues in availability of the API?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [121]

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So we have 2 approved API vendors for Losartan for the U.S. One is Hetero and one is Zydus. So essentially, we source API from both our partners.

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Damayanti Kerai, HSBC, Research Division - Analyst, Healthcare and Hospitals [122]

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In terms of availability of APIs, aren't you seeing any issues there or it's normal the way you wanted?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [123]

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Actually, so everybody is a little, let's say, burned in the Losartan market. So we are also cautious as to how much we want to purchase. And I think even the manufacturers are a little bit cautious as to how much they produce. But right now, we do not -- I mean, whatever we have decided in our risk management perspective, we are getting.

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Damayanti Kerai, HSBC, Research Division - Analyst, Healthcare and Hospitals [124]

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Sure. And can you quantify the one-time supply sales which you mentioned for U.S.?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [125]

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So we don't provide granularity in our sales. So that -- so we generally just give you our overall country-wide sales, but we don't provide further granularity, either in terms of product-wide sales or -- so I would suggest that you just take the IRS figures and try to figure out on that basis.

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Operator [126]

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Next question is from the line of Manoj Garg from White Oak Capital.

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Unidentified Analyst, [127]

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Just want to understand about other countries where even the growth for the quarter was also 7%. While we had a pretty strong last year, anything you would like to highlight here?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [128]

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Yes. So I think for the full year, we should be good, Manoj. There have been some hiccups during the quarter. So I would say quarter 1 is not reflective of the full year. So we should be getting back on the track from next quarter.

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Unidentified Analyst, [129]

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Sure. And well, I think that a lot of questions have been asked on the domestic market. Aman, just one question for you. Like, so you have one external party, you are showing the volume growth going down to maybe minus 4% to 0% kind of thing. Are your internal numbers also facing the same? Forget about the third-party or the outside, but for your internal numbers, like, if you can give some light maybe more qualitatively and less quantitatively?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [130]

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Yes. We won't be able to share the internal breakup, but it's similar to our previous quarters in terms of the breakup.

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Unidentified Analyst, [131]

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Okay. So you are not seeing any slowdown at least internally in terms of volume growth?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [132]

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That's correct.

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Unidentified Analyst, [133]

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Fair enough. That's very helpful. And last, Sanjay, just from the U.S. If I recall around maybe a year ago, so you clearly have indicated that you are looking a lot of business development kind of activities with regard to U.S. market. Would be helpful if you can take us through what could be your product thoughts in and around that area?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [134]

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So currently we have 4 products filed from external partners, which is a part of the 45 products that I had mentioned. So I have not launched any external project as yet, but this year, we would expect to launch at least 2 products from third parties, and we would expect to file a further 4 projects this year.

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Unidentified Analyst, [135]

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Okay. And any specific area in terms of like therapeutic area or in terms of delivery system you would like to highlight?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [136]

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So these are necessarily -- mostly areas where Torrent does not have internal capability. So we've generally chosen projects where either we don't have the research capability and/or the manufacturing ability. So it helps us to diversify our business with the help of third parties. So other than that, I think you will see as we launch the products, you will see how the selection was made. And hopefully, before the end of this fiscal year, we would have 1 to 2 projects from third parties on the market.

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Unidentified Analyst, [137]

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Sure. So given that these 2 projects at least are not dependent on your current facilities, which obviously have some pending regulatory outcomes, and still we think that U.S. business at best can remain or can be at similar levels?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [138]

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Yes. Yes.

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Operator [139]

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Next question is from the line of Nitin Agarwal from IDFC Securities.

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T. Ranvir Singh, IDBI Capital Markets & Securities Ltd., Research Division - Pharma Analyst [140]

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Sanjay, on the U.S. market, you talked about supply shortage opportunities which have begin to become normal frequent over the last 2 years. I mean, if you can probably just help us understand a little bit more in terms of fundamentally is it -- is it a structural change which you are seeing happening in the market in terms of these shortages becoming more of a permanent feature or this [guide to drawing] products or this is in your assessment just a temporary aberration? And [per se,] does it -- I mean, what does it really imply for product pricing in the U.S.? As we look through the next, say, 12 to 18 months?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [141]

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So I think the pendulum swung too far in one direction, so you see it swinging back a little bit. So what you are seeing is, there are a lot of companies discontinuing products. You are also seeing a record number of companies with FDA-related issues. So both of these combined lead to, let's say, the supply situation is a little tight, even on areas like OSDs or chronic use medication or -- so there is a concern about supply of pharmaceutical products in the U.S. because of these 2 reasons. So I think it's just getting back to a situation where the days of oversupply would be over. So my expectation is that things are coming back to a little bit more normal than they were in the past.

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T. Ranvir Singh, IDBI Capital Markets & Securities Ltd., Research Division - Pharma Analyst [142]

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And what does it mean for people like us who probably started out a little late in the U.S.? Or still in the process of building up the U.S. business? I mean, does it really imply a relook in terms of the way you do business in terms of the kind of -- does it impact the product selection strategies? Or in any way in terms of the recent development? Or none of that changes?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [143]

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So from our -- from where we sit, right, with about $200 million annual business with about 45, 50 ANDAs, we see more upside in the U.S. than downside. So literally, for us, given the footprint that we have, if we launch 20 ANDAs a year, we think our business would have sufficient momentum. So we look at the U.S. as a bright opportunity for Torrent in terms of growth potential, given our small size and small footprint.

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T. Ranvir Singh, IDBI Capital Markets & Securities Ltd., Research Division - Pharma Analyst [144]

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If you were to just probably push that point. I mean the way you've seen things, you've seen the market sort of playing out, is it -- I mean, is it counterintuitive [but to expect] that you probably plain vanilla OSDs may end up becoming a much better option than they were earlier and the so-called complex products may have, given all the challenges that they carry, may not be that lucrative of an option as they (inaudible) used to be?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [145]

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I will give you a story from the frontline. So last week, I met with a couple of important customers in the U.S., and I can tell you that they pressed us to continue and not follow the path chosen by a few other companies where they are discontinuing their OSD products. And we get a lot of benefit from the fact that we've just bottom-lined our Dahej facility, which has a capacity of 7 million pills. So I think customers feel secure in dealing with Torrent because of our commitment to the OSD space and because of the Dahej facility and because of the supply track record that we have established over a long period of time.

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Operator [146]

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The next question is from the line of C. Srihari from PCS Securities.

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Srihari Chintalapudy;PCS Securities;Equity Research Analyst, [147]

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Firstly, on the domestic market, you said that for the quarter, the price hike was 8% across the portfolio. So will you please give a split in terms of OTC and Rx and what is the outlook for the same? And secondly, this onetime sales basket that you're talking about for the U.S. market, can you give some outlook for that as well?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [148]

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So I think from the India business perspective, we are not there in OTC business except for one product which is Unienzyme, which is both under OTC and prescription. Sanjay, you want to comment on U.S.?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [149]

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No, I already said that we cannot provide more granularity on our sales.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [150]

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Yes. So the only thing about U.S. is that we still don’t have any product approvals because of the pending EIR status for both these facilities, which is Dahej and Indrad, and it all depends upon how fast we can resolve the issues.

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Srihari Chintalapudy;PCS Securities;Equity Research Analyst, [151]

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By OTC, I meant, even quasi products like, let's say, Shelcal.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [152]

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So currently, we have not taken those products into OTC. But yes, there is a potential which, going forward, we'll think about it because Shelcal as a brand is still growing very strong as far as the prescription platform is concerned. And therefore, going forward, we'll see how to take it to the OTC segment.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [153]

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And just to add a bit further on Shelcal, we're focusing a lot more on the extensions of Shelcal. So some introduction that were made in the last year -- rather 2 years, have done well in the launches. So the combinations of Shelcal by themselves are growing at 17% for this quarter versus the current market growth of 9%.

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Srihari Chintalapudy;PCS Securities;Equity Research Analyst, [154]

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So I mean for this 8% growth figure, how do you see it panning out?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [155]

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8%, which growth are you referring to?

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Srihari Chintalapudy;PCS Securities;Equity Research Analyst, [156]

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Price hikes.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [157]

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I think that's something which is constant, right? I mean, the whole issue is that the price increases are taken periodically when the cycle of 1 year gets over, right? So every year after 12 months, we start taking a price hike wherever it is feasible.

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Srihari Chintalapudy;PCS Securities;Equity Research Analyst, [158]

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Yes. But I mean, if you correlate that with the WPI, this seems to be a bit significantly higher than that, so that's [why I'm asking.]

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [159]

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No. So I think WPI is something which is relevant more from the controlled drug perspective. But as far as the DPPO policy states, the products which are not under controlled category, the price increases can be up to 10%, right? So there would be few products which are, where the price increases are in the range of, let's say, 8% or 9%. Some would be in the range of 2%, 3%. So all this depends upon the competition landscape, right, where we are versus the competition and what's the scope of taking price increases.

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Srihari Chintalapudy;PCS Securities;Equity Research Analyst, [160]

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So would this 8% or thereabouts be a sustainable number?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [161]

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For this year, it looks okay. There is nothing which should indicate that it will be lower than that.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [162]

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Obviously going forward, our focus will be more often volume growth.

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Operator [163]

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The next question is from the line of Chirag Dagli from HDFC AMC.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [164]

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Sudhir, would it be fair to say that most of our working capital resides in the U.S.?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [165]

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And why do you say that?

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [166]

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Because in India, there will be limited working capital. So Germany, you've said in the past does not have a lot of working capital.

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [167]

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So that's right, because Germany is the only unique territory which I would say the working capital is negative. But as far as India is concerned, there is a normative inventory level which you carry, right, including the receivable cycle, which is shorter compared to the other geographies. So all other geographies, be it Brazil or ROW markets or U.S., the receivable cycle is between 90 to 100 days. The only additional thing, Chirag, would be that in terms of U.S., we keep a little higher inventory so that these one-time opportunities which keep on coming because of shortages happening in the market, at least we can tap those markets.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [168]

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This change has happened over the last maybe 12 months, Sudhir? That understanding is correct?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [169]

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No. Not really. I think this policy was built in almost 2 years back, actually.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [170]

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Okay. And these one-time supplies, do they happen at substantially higher prices versus what are, say, prevailing in the market at that point versus the previous contracts? Any color and what it does to future contract pricing?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [171]

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You are right. I mean, we are saying it's a one-time buy, so the prices are much higher than the normal contract prices, and that's the reason why we say it's a one-time buy.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [172]

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So what does it do to future prices? Next time when that product comes for RFP, what does it do in your assessment -- or in your experience, have you seen prices change for the better in such products or do you think it goes back to previous levels?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [173]

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No. So Chirag, when we talk about one-time buys, these are buys where you don't have contracts with customers or running contracts with customers, and then suddenly shortages which happen in the market, and therefore since you have a relation with the customer, the customer comes and checks with you whether you can deliver those products in the market or not. And since we have inventories on certain other products which we keep, these opportunities are tapped.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [174]

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So this has no bearing on the future contracts at all, that is what you are...

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [175]

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No. No. Absolutely. Absolutely.

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Operator [176]

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Sir, there are no further questions in queue.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [177]

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So then we can end the call on this note. I thank you all for your participation, and we look forward to being in touch with all of you. Thank you.

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Operator [178]

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Thank you very much, members of management. Ladies and gentlemen, on behalf of Torrent Pharmaceuticals Limited, that concludes today's conference call. Thank you for joining us, and you may now disconnect your lines.