Divi’s Laboratories

Divi’s Laboratories Limited Q4 FY ’23 Earnings Conference Call May 20, 2023 – Rephrased Notes:

Q3/4 of FY23 operating margin less than 25%, and gross margin is also in the range of 57%, which has never been the case over last 10-year period. Any specific unprecedented condition? it is the general course that took place:

• The anti-COVID drug a one-time opportunity gave us a good push in the sales and PAT.
• Raw materials were procured at higher prices. We do not keep normally more than three-month stocks, but we had kept six months, nine months stock of raw materials anticipating problems from China, COVID and various things. As of now, using a mix of both the materials. Probably, go back to our normal gross margin of 67%, 68% towards the year end.
• Pricing pressures in the generic market. People who had huge stock, destocking them, price pressures, raw materials where we procured at higher prices until they get stock out and be replaced with the materials that come with lower prices.

Custom Synthesis:

• Two custom synthesis projects that were supposed to commission either end of Q4 or Q1 is what you had said in our last earnings call. So, what’s the update on that?
  • 1st one: Sartan, already gone into commercial production and commercial supply. It will add up in our coming quarters.
  • 2nd one, qualifications are complete. The ramp up of production is happening for supplying in the quarter. I think both will reflect from the coming quarters.
• Are seeing several other opportunities in custom synthesis projects from big pharma, never seen so many opportunities.

Generic products:

• For traditional and the established (60% to 70% market share products like naproxen, dextromethorphan, gabapentin), the material price is the issue for some of the products and market is not the issue. Some of our customers have large volume stocks of dosage forms due to COVID, I think they’re destocking and once that is over, the price pressures should disappear.
• Other generic products (where market share is 20%, 30%), the capacities are increased substantially to become number 2 or number 1 in the market. Qualifications are completed and commercial sales have started. It will take at least 4~8 quarters to see the full benefits.
• Contrast media:
  • Non-gadolinium products: Iodine cost is a significant part. If the Iodine prices were to go down, why the end customer to shift to a new supplier? Growth is minimum of 10% and 10% of let us say 2,500 tons to 5,000 tons of each contrast media requiring 200 tons to 300 tons a year extra quantity. Now either they must install new capacity or they must outsource. We have an advantage of creating capacity at low cost, already technologies are in place, drug master files are in place and there is an advantage of the Iodine recovery, which brings the cost down.
  • Gadolinium (MRI contrast media): Where are we in the development? Developed process for some of them and we are developing processes. There are two or three customers who are in the gadolinium compounds. We are in discussions with them. MRI compounds changing from gadolinium to other metals, there also we are heavily involved with the customers as well as our own research to development of processes at our own labs.
  • Can we expect a revenue for media agents in first quarter? They have invested enough with tech transfer and everything and then validations are completed, commercial ramp-up is already in progress. So, I think I would leave at that.
  • Should become the leader in the next 2~3 years just like every generic product we are in.

Others:

• Tax rate? Reaching to the closing of SEZ and SEZ benefit, expect the tax to be around 25%, 27%.
• Would you like to indicate some kind of growth trajectory on FY ’24? We have been growing at double-digit growth. Even without the one-time opportunity of the COVID drug, we will continue growing at that rate double-digit growth.
• Kakinada (Unit 3, 500 acres of land): Phase 1 to start manufacturing nutraceuticals and advanced intermediates? Investment of INR 1,200 crores to INR 1,500 crores and expect to commercialize by end of ’24 (CY). so that our existing production buildings at Unit 1 and Unit 2 will be freed to that extent whereby GMP, US FDA inspected, European FDA inspected buildings will be able to take advantage to produce the required quantities of new opportunities of custom synthesis and other generic products from fiscal year ’25. Unit 3 project what we are envisaging now INR 1,200 crores to INR 1,500 crores. Phase 2, APIs which usually takes three to four years for the qualifications and US FDA inspection, clearance and then be able to sell.
• In discussions with several big pharmas for several products. So let’s wait for the next quarters to come out with that investments.