RPG Life sciences –Q4FY23–Earning Call Highlights —2nd May23 :
–Mkt is growing at single digits , the data says its at 7.9% with price growth leading the growth contributing about 5.1% , new introduction 2.3% & volume growth is tardy & flat. But we are growing higher –volume growth is 13% , the price growth is 5% and new introductions are 2% so put together the domestic formulation biz is registering a healthy 20% growth vs 7.9% growth of the mkt as reported by IPR.
–This yr has been a milestone for us , sales for the first time have crossed 500Cr+ , EBITDA 100Cr+,Cash in Hand 100Cr+, 1000Cr+ Mkt cap.
–first product in our portfolio Naprosyn+ becomes the first 50 Cr+ Brand Franchise
–for the 4th consecutive year we had YnY upward trajectory i.e sales has grown consistently more than the mkt for the last 4 yrs , all profitability metrics EBITDA / PBT / PAT all have registered YnY consistent uptrend superior growth , both PAT & PBT multiplied & grown 6 times in the last 4 yrs. Margins have grown consistently YnY
–EBITDA is 21% in FY23 , PBT from 4.4% in FY19 to 17.9% now. PAT is up from 3.2% to 13.2% now.
–Cash flow has also grown i.e from -14.5Cr in FY19 , we are 115.2 Cr this year . All of the above with a very strong hygiene which is an industry benchmark.
–Q4FY23 YnY revenue –14% growth
–EBITDA YnY –20%+
–PBT YnY –26%
–PAT YnY—38% and margins in all showing upward trend.
–We have 3 segments –domestic formulations / international formulations and API
–We have 67/68% coming from domestic, 17/18% coming from international formulations , & 15/16% coming from API.
–In Q4 –both formulations ( Domestic & International ) grew by 19% , API was sluggish due to order pattern by the customers and some inventory adjustments by one of our top cust. for one of our top products
–This is the best year for net working capital also i.e we had 48 days of net working capital which is 13% to our sales which is the best in the last 5/6 yrs.
–Ops highlights –new products launched in FY19 contribute 28% to our sales
–The New Product Denosumab Sales ~5 Cr in the very first year of Launch
–The New Rheumatology Franchise grows to contributing significantly to Specialty Sales
–Next 3 yrs domestic formulation outlook ? —Product portfolio rejuvenation is the first of the 5 pillars which we have identified as biz improvment. We have focussed on 3 subpillars (1) How to rejuvenate & maximise our legacy products as they contribute 67/70% of our turnover –so we have decided to have lifecycle mgmt strategy
so we have launched close to 9 line extensions for legacy products and they are growing much ahead of the mkt at 16/17% thanks to lifecycle mgmt
(2) focus on speciality biz –we have Nepro as dominant segment so strengthened it and as part of lifecycle mgmt for our immunosuppressant basket we have decided to branch out to Rheumatology which has usage of immuno suppressant products which were earlier being prescribed only in Nephrology & now we are also getting into Rheumatology & now we are foraying into dermatology & gastroenterology not in mass but in specialty side & the
( 3) is Chronic portfolio thrust.
–Chronic is not that big for now , this is the area we have to strengthen it . It contributes 11/12% –cardiovascular. Another chronic therapy which we are focusing on is urology which is contributing 2/3% to turn-over.
–Margins –Consistently improving since FY19 from 10% to 20% –outlook ahead ? – its a function of both components of the cost i.e COGS and Opex & our cost reduction story is structural i.e basic components of the cost which are contributing greater proportion have been addressed from fundamental standpoint. i.e Org. structure where we have addressed the roles , overlapping of roles , span of control & all this put together has helped us in good % point in the cost reduction.
2) Unrelenting focus on processes which has reduced our mfring cost thanks to lot of efforts.
–Drivers of further improvement in EBITDA Margin is going to be Product mix , scale of ops & those factors which will help us to keep this increasing. The input cost increase has come down to some extent but not to pre-covid levels & that is putting pressure on material cost.
–Aditya Khemka from Incred capital —Employee cost is higher than our run-rate i.e its about 35% growth YnY on our employee cost ,reasons ? –This is largely because of good performance which we had this year so incentives which we have planned for the mgmt is part of this provisions. Yearly the growth is 17% compared to 16.5% in revenue , we are growing now and talent requirement is increasing across the roles and attractive incentive plans. This going forward will be in line with the revenue growth which we see
–Also the International Formulations & API has shown some muted growth , why ? –International formulations is 13/14% growth which is not bad but in API the smallest segment of ours where the product basket is also limited , there we had some inventory correction so we are in touch with cust. and it will not be stretching to Q1 …this was one time correction in this Qtr & It will bring growth trajectory as we had in earlier years.
–Decided that International biz also becomes our growth driver in a step-wise manner for which are investing in the modernization of both plants & working on product pipeline for both international formulations and API Biz & there is a time period of 1.5/2 yrs but we see a good traction from this which might be higher than domestic formulations going forward.
–API was our 3rd priority but with modernizing our plant and product pipeline we expect API also to be a growth driver in 1.5/2yrs hence
–Any plant shutdown for this modernization initiative ? –Yes there would be some shutdown of some blocks but before that shutdown we will have some inventory buildup for the period of shutdown so it sales are not impacted. It will shut down for 3 to 3.5 months but it wont impact our turn-over.
–Capex for FY24 onwards — In the last 3 yrs including this year we had a capex of 100Cr+ in the 2 plants being spent ,this will be over by this FY24 and at the end of it capacity improvement of 40/50% in API & around 15/20% in Ankleshwar formulation plant & more importantly the regulatory approvals from pix and EU regulators should also happen.
–Sajal Kapoor Q –Appreciation for Mgmt for lot of improvement in the Biz on all front in the last 4 yrs since the time new MD joined & lot of initiatives on people side also which many pharma cos dont bother . QUESTION : API biz can be a growth driver after modernization & capacity expansion in this but what gives us the right to Win in this as huge competition in this segment where the core competence is API —We also had similar Qs but with the API situation changing in the country and that we have a API plant since decades now & the fact that we have the infra. i.e R&D , regulatory also in place , we can look at API differently than done earlier by us so therfore right to win will come from 2/3 sources : 1) our strong presence in immunosuppressant, we are one of the major suppliers of brand Azathioprine both on API side and Formulation side so we have a connect with the cust. with whom we are dealing for the past 15/20 yrs and we have good stickiness with them.
2)We have international formulation and domestic formulation products for which we can have backward integration for some of our products , that will help us to improve margins because today we are sharing them with others , tomm. we will not have to share
3) selection of API basket itself . We are not a large player who can compete with Divis etc but we can identify some of the niche APIs which have limited competition , limited DMS filed & we can work on those and connect with the innovators formulators then we have a biz case for us. these are 2 or 3 drivers which are forming the pillars of product portfolio strategy 2) we have a plant already and we have expertise in people in this and leverage it and this biz is more profitable to us so all that put together has helped us in crafting the API strategy & we have been careful in that crafting & deciding which products we will develop & we have been careful and the mkts where we should be entering .
–Gross Margins Q, Chemical prices have cooled YnY & there is price hike that should give us GM so if this is correct then majority of that should filter into the margin , correct ? –
Yes, if RM goes down it will be passed down impacting the margins & the fact is also that we have been waiting for these price reductions and expecting that these input cost will come down to pre-covid levels which barring couple of categories like aluminium foil , to some extent in solvent but in other places not seeing decrease , if that happens ,this should be visible in GM and you would notice that our GM has improved overtime in the last 5/6 yrs but in last few yrs they are stagnant . Input cost has gone up , the material cost has gone up however we have optimisation in mfring overhead so impact on the cost is not that much, its balancing out in a way.
–Some elaboration on the Pillar 2 & 3 in the 7 pillar slide i.e R&D and Innovation ? —On the R&D side we have R&D for the international Formulations and APIs to be exported , the international biz we have clearly defined strategy to focus on our strength of immunosuppressant basket , we are strong player in Azathioprine & now want to work on micofinoled (? need to check the spelling ) which is bigger in size than azathioprine so first focus in this basket , we want to every single strength and variant for these 4 molecules which is Azathioprine, Micofinoled,tetrolimus and ? , currently the work is on . No. of these variants are under development 2) we are focusing on the product which need special mfring conditions like low RH/Temp , low volumes which doesnt attract the attention of biggies and 3) some amount of complexity in the formulation & there are complex generic products etc are the 3rd category which we are focusing. 4) we have our own API plant and we have forward integration for those APIs and backward integration of formulations so some of the APIs in the tgt list are those APIs as well. This is on international formulation side.
–On API side we have clearly identified certain APIs , which are niche , size is sub 100Mn$ and where the DMS filed are less in no. because the vol. are low thats why we can get better margins so thats our focus on R&D pipeline.
–On Innovation side —we are an old co. 55 yr old co. not with a great track record of growth so basically the old processes, old systems , old formulations was the way earlier so what we have tried to do is involve every single HOD, we have 50+ HODs in various functions to identify what is new way of doing what they are currently doing & we had record innovation projects i.e over 130 odd projects which the teams worked out. All of this is helping people to think differently.
–No. of field force additions in the next Yr ? —We look at the tgt cust. coverage ,with the field force expansion which we took in the last 3 yrs i.e 10% each year we are able to cover all our tgt customers 85/90% except GPs we are also increased our coverage to 30% more than what we were covering , as we enter other therapies we will also add reps accordingly. This 8/10% field force expansion on an avg. per year.
– Scope of investments on the branded side ? –sales force additions will be in line and will make sure 85/90% of tgted customers. We will be thoughtful on the M&A and evaluating proposals.
–GM down sequentially? –Largely due to input cost & 2nd also is that product mix is imp. that also plays a role. Once inventory correction settles down, we will be back to normal.
–Pardon some spellings !
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