Edited Transcript of SEQU.NS earnings conference call or presentation 31-Jul-20 3:00am GMT

These are indeed challenging times, and we function in an essential industry where demand is consistent. This has allowed us to operate our plants and be it with significant operational challenges. I would like to use this opportunity to place on record my sincere appreciation of the efforts of all our employees as well as our leadership teams across the globe for a nearless — near flawless execution in a very difficult and challenging operating environment. I will briefly touch upon the performance for the quarter, and then we can open the floor for a Q&A session.

Now coming to the quarter performance. For the quarter ended June 30, we have cropped revenues of a little over INR 310 crores, 11.5% increase over corresponding period last year. The growth was primarily led by another consistent performance from APIs, which grew at 13.5%, while formulations came in at about 8.5% on a constant currency basis. This comes under the backdrop of a very nervous business environment as well as operational challenges, and the team has showed great courage and flexibility to adapt to the new normal and deliver a near-normal performance.

If I had to analyze formulations, you would observe that we have had good growth across LATAM, Europe and Turkey. However, as I had alluded in the earlier call, we stay cautious in emerging markets, leading to a decline of 43% during the quarter, partly tempering the growth of the formulations business. Adjusting for this, our growth in the rest of the formulation business is actually upwards of 20%. However, as I have always mentioned, the strength of our business model is in its diversified portfolio mix, which ensures resilience to such challenges.

Going forward, we expect the growth in the emerging markets to return, and we expect to finish the year on a strong note. This will also be facilitated by our recent commercialization of — from 1st July of a multiyear agreement with Zoetis India to market and distribute their ruminant portfolio in the country. This portfolio of 13 brands spanning about 19 SKUs, covers the therapeutic areas of antibiotics, parasiticides, hormones as well as vaccines and includes both some vintage brands of over 25 years of existence as well as some of their global brands. This addition effectively doubles our presence in India. It doubles our presence in India’s dominant business.

API, as discussed earlier, turned in another strong performance with a growth of 21.5% on reported basis and 13.4% on a constant currency basis. Our focus on — our focus in API business continues to be on the regulated markets and the recent global development in the space works well for us in the medium- to long-term basis.

In keeping with the increasing demand, we have initiated expansion at our Vizag facility, which should facilitate our growth from FY ’22 and beyond. We envisage a total investment of about INR 50 crores spread over 18 months in this regard.

Also, as mentioned in the last call, we have deferred our expansion plan at the Bremer facility in Germany for the time being due to execution challenges because that requires multi-country execution, especially with project management crew coming from India as well as Italy.

Coming to financials. Our EBITDA margins for the quarter have improved 290 basis points and now stands at 16.8%. This has translated into a highest ever EBITDA at INR 52.1 crores, for the quarter in a generally weak quarter, which gives us a sound start in a new financial year of a very unpredictable environment.

The net profit for the quarter was higher by over 80% at INR 21 crores.

We, as a company, pays equal, if not higher, emphasis on our balance sheet and balance sheet ratios with both ROCs and net debt to EBITDA moving in the right direction now over 13 quarters consistently. We draw great comfort in generating over INR 40 crores of cash flows from operations for the quarter, leading to a significant reduction in our net debt level since the last quarter. I’m sure you would have also seen our update on the progress on Carlyle transaction. The transaction is expected to conclude within the current quarter.

To conclude, our focus during the pandemic has been to keep the business functioning, while at the same time, empathizing with all our stakeholders. While placing employee safety as the top priority, we have also ensured that our bankers, but more importantly, our vendors and other partners in this journey are paid in time. We now look at the rest of the year with far more confidence compared to where we started the year.

With these words, I now throw open the floor for Q&A. Over to you, Abhishek.

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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 Cyndrella Carvalho from Centrum.

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Cyndrella Carvalho, Centrum Broking Limited, Research Division – Analyst of Pharmaceuticals [2]

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Congratulations on a good set of numbers. Sir, just wanted to understand from you, how are we looking at the formulation emerging market business, you indicated that — how is it — like from June onwards, have you seen some discovery there or what is the current status?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [3]

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Yes. So Cyndrella, I’ll break our emerging market business into 2 buckets. One is India, and the second is, of course, the other emerging markets that we operate in. Both these markets were down in the last quarter and for the last — for last some time. And our concern largely has been around collections rather than revenues. So that’s why we have been going slow. Having said that, with oil prices moving up and the dollar being stable now, the other emerging markets have stabilized, and we already see a traction in business. Even in India, there has been an improvement in the business environment starting from June. And that has really picked up in July, further facilitated by our recent Zoetis commercialization of portfolio in India. We are very confident of this part of business being back on growth track for the rest of the year.

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Cyndrella Carvalho, Centrum Broking Limited, Research Division – Analyst of Pharmaceuticals [4]

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Sir, any color I get can it is, how it will help us and what is the strategy over there?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [5]

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So this Zoetis portfolio is largely their vintage brands, which have been in existence. These are old Pfizer brands, which have been in existence in India for over 25 years as well as some of the global brands, including vaccines. Now clearly, there is a strong element of pulling these products. And what we are likely to achieve out of this is not only kind of enhances our presence with the doctor base. But more importantly, it will also help facilitate some of our own business practices. So what we foresee out of this is our own debtors and all in India business will come down because of the very high pool that the Zoetis portfolio commands in the marketplace.

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Cyndrella Carvalho, Centrum Broking Limited, Research Division – Analyst of Pharmaceuticals [6]

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And sir, any color on the API side, how is the pricing environment? Are we seeing some price inflation there? And any view in terms of sustainability of that?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [7]

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Sorry, I didn’t hear the last part clearly. Can you come again?

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Cyndrella Carvalho, Centrum Broking Limited, Research Division – Analyst of Pharmaceuticals [8]

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Sustainability of the pricing — pricing environment on the API side, sir?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [9]

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Yes. So see, you have to bear in mind that our strategy is in and around regulated markets and regulated customers. And being in animal health, the end product pricing does not really change. So see, we are not in human pharma, wherein shortages lead to spike in prices and whatnot. It’s a very commercial industry with stable prices. So for us, we are not seeing any benefit — short-term benefit of the price changes that are happening in the industry, not are we wanting to go that route, because ours is a long-term sustainable business model with regulated customers who do not like price changes on an order-to-order basis. So having said that, the recent global dynamics or geopolitics that are emerging clearly reflects to a long-term good times for API business, maybe between 3 to 5 years. So I mean, I see a definitive improvement in the way API businesses are looked going forward for a sustainable period of time.

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Operator [10]

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The next question is from the line of Varun Goenka from Nippon Mutual Fund.

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Varun Goenka, [11]

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Congratulations for a good set of numbers. It’s been a few quarters since we’ve been showing consistent improvement. My question is regarding the Zoetis agreement. If you can just help us understand what’s in it for us, how does this agreement really come to be? I mean exactly what is the strength that we are bringing to the table? And what is the demand opportunity in India for these products that you are going to market? Maybe the whole, if you can help us understand the end-to-end market opportunity, it will be giving us a good set.

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [12]

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Yes. So obviously, I cannot disclose too much details about it given the confidentiality reason. Some of the color around the arrangement, I’ve already shared in the previous question by Cyndrella. So anything more specific will be difficult. But having said that, as I said, this kind of doubles our presence in the ruminant business in India. And we — while Zoetis also benefits from it because they are not having their own field force to market these products. We are also going to benefit not only from incremental profitability out of this portfolio, but more importantly, improving our own hygiene of business as well, leveraging these long-standing vintage nature of these brands.

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Varun Goenka, [13]

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Okay. And what would be the probable India demand opportunity or addressable opportunity for us as such?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [14]

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We expect between INR 25 crores to INR 30 crores of incremental sales out of these products in the current year, which is about 9 months of operations.

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Varun Goenka, [15]

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Okay. And that would be what market share…

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [16]

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Yes. I think you have to bear in mind that animal health does not have this kind of data. So if you are able to figure out, let me know, we’ll be happy to…

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Varun Goenka, [17]

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No, but in your guesstimate, sir, what could be the size of the market and we would be getting our trading margins? Or how is that mean?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [18]

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Let me say it slightly differently. This has a meaningful impact on our India business in terms of profitability — both sales and profitability. But in an overall perspective, it is obviously not that significant. So yes. On a global P&L basis, it is not material. But certainly, for our India operations, it is fairly significant.

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Varun Goenka, [19]

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Okay. So would that also maybe in future entail that we can get into some kind of a manufacturing arrangement or them or something? Or this is purely distribution?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [20]

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This is purely a sales and distribution arrangement for India. Having said that, we are already engaged with them on the API side of business. And that will always continue to kind of expand as part of our regular business strategies.

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Operator [21]

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The next question is from the line of Samir Palod from AUM Fund Advisors.

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Samir Rameshchandra Palod, AUM Fund Advisors LLP – Partner & Co-Founder [22]

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Great set of numbers. My question pertains to the U.S. geographies there. If I look at your R&D slide, you talked about a lot of filings that you are likely to do in the U.S. market over the next few years as well as on the API side. So since you’re already present in Europe and LATAM in a big way, U.S. is — I guess, is there specific — can you just explain the U.S. strategy and the size of the market and when you expect to crack into that market?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [23]

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So Samir, I — of course, this requires a much larger conversation, which we can do off-line at some point of time. But broadly speaking, I’ll split this into 2, the API side of business, wherein we are already in U.S. and selling, as we speak, already — between 3 to 4 molecules of us are already commercialized. And this will only expand as we go forward. However, coming to the formulation side of business, we are at least 18 months away from our first commercialization in U.S., having filed the first product in the last quarter in the — I mean, that was in March 2020, which is when we filed first product. So we are at least 18 months away from our first commercialization. We do not foresee U.S. to really appear in terms of our formulation business till end of FY ’23 — sorry, FY ’22. And the meaningful contribution will only start from FY ’23.

If you need more clarity on this, we can get into a separate conversation off-line because it requires a much detailed conversation.

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Samir Rameshchandra Palod, AUM Fund Advisors LLP – Partner & Co-Founder [24]

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Okay. So it’s not an immediate FY ’22 or ’23 sort of initiative, it’s just building up the pipeline at the moment.

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [25]

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Yes, because there is a regulatory approval time line. So anything that we have filed today will take minimum 18 months for approval. And that’s how we are building up the pipeline. But the journey has been started. And in the meantime, obviously, the commercialization of those in-house developed products in other geographies, including in Europe, will keep driving our formulation business. So we are still confident of a double-digit formulation growth in the medium term.

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Samir Rameshchandra Palod, AUM Fund Advisors LLP – Partner & Co-Founder [26]

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Okay. And my second question is with respect to margins. How do you see — I mean, you’ve got almost a 300 basis point increase in margin on a Y-o-Y basis. Given your mix, how do you see — and you also mentioned that emerging markets are going to bounce back. So how do you see the margin profile for the rest of the year and maybe for FY ’22 as well in your business?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [27]

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So again, I’ll take a step back here. And as we have been alluding in our previous con calls, we have been targeting a mid-teens growth in revenue and about a 200 bps margin improvement year-on-year in the medium term. Largely speaking, we stay in line on delivering those objectives. Having said that, the current period is a bit unique and it is very challenging to predict what will happen. And as I have been always mentioning, we will take 1 quarter at a time in the current year because we do not know how really the lockdowns and the localized spots will play out across the globe. So after first quarter, certainly we are far more confident for the rest of the year. But having said that, I would really kind of reserve my comments for the current year and will take quarter-by-quarter as we go along. But the long-term directional goals continue to be intact.

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Samir Rameshchandra Palod, AUM Fund Advisors LLP – Partner & Co-Founder [28]

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So just as a follow-on to that, Manish, so are you — like we are seeing a lot of others on the pharma side. In animal health, are you seeing a very robust pricing environment, given what’s going on with China and with this pandemic both on the formulation and the API side? Are you seeing price increases? Or the margins are increasing as a result of some mix or efficiencies that you’ve brought to the table? Or it’s a combination of all of this?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [29]

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Yes. So our margins are headed in the right direction, purely coming out of scale as we scale up in every geography or every of our initiatives. Animal business is a commercial industry, unlike human pharma. So we do not see any price changes happening in animal health because the price of protein is not changing for the end consumer. Okay. So to that — so to that extent, the dynamic of animal health business is very different from human pharma. Again, we can take this — again, just — again, we can take this up in a slightly 1-over-1 conversation because this requires a lot of understanding of the business, and we are happy to invest that time. Just for the sake of other questions because others will be waiting. So Samir, we’ll take it off-line, if you will.

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Operator [30]

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The next question is from the line of Dushyant Mishra from SageOne Investment Advisors.

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Dushyant Mishra, [31]

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Just had a quick question on the U.S. acquisitions. Do we have anything in the pipeline? Are we looking for any opportunities to emerge right now?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [32]

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So a difficult question at this point of time, especially where we are awaiting a conclusion of a change of control. So in a way, obviously, we have to reset partly our thinking in terms of way ahead with — once the new ownership is in place. So all I can say is, there’s nothing the pipeline in the short term. But once the change of promoters takes place or change of shareholding takes place, that’s when we will probably get into an engagement with the new promoters and look at the world probably a little differently.

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Dushyant Mishra, [33]

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Okay. Got it. And I know that you had also mentioned something about maybe entering the China market. And I wanted to focus on that as well. So is that something that would also happen once the change of ownership has fully transpired? It can be saving on that as well.

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [34]

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Oh, yes. Thanks.

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Operator [35]

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We’ll move on to the next question, that is from the line of Vishal Manchanda from Nirmal Bang.

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Vishal Manchanda, Nirmal Bang Securities Pvt. Ltd., Research Division – Research Analyst [36]

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Congratulations on a good performance. Sir, on the U.S., can you guide us how the distribution is? Is it like we see in human pharma? Or is it more complex in case of animal health products?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [37]

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Vishal, what I’ll do is because this, again, is a slightly detailed question beyond the quarter performance, we can again take it off-line, and I’m happy to even organize the call of yours with our U.S. Head of Business, who will be able to give you a better color around it.

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Vishal Manchanda, Nirmal Bang Securities Pvt. Ltd., Research Division – Research Analyst [38]

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Okay, sir. Okay. Sir, another one is on this Zoetis transaction. So one, how was this distribution happening prior to you taking over the distribution rights?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [39]

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Yes. So there was another health company, I mean, Boehringer Ingelheim was distributing these products in India till recently. And that’s what is getting transitioned to us now.

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Vishal Manchanda, Nirmal Bang Securities Pvt. Ltd., Research Division – Research Analyst [40]

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And sir, are these kind of unique products, which kind of would have lower competition than other animal health products like probably like for in animal health, we would have many suppliers is what I would understand. So would they see kind of what — what would create that pull for these products basically?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [41]

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Yes. So as I alluded to, this includes portfolio of certain vintage brands, which are very important and relevant in animal health and also some of their innovative products, which means there is no competition for those products. So both the range of products is part of this portfolio. And that kind of creates a strong pull for these products.

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Vishal Manchanda, Nirmal Bang Securities Pvt. Ltd., Research Division – Research Analyst [42]

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Okay. And sir, would you need to incrementally invest in terms of the field force to promote these? Or this would only — you would be leveraging your existing field force?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [43]

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Yes. So more or less, we are leveraging our existing field force. The only thing we have done is, we historically had not started operations in Karnataka and Kerala, which is what we have started as part of this arrangement because, obviously, with the portfolio — complete portfolio between what Zoetis brings in and also our own portfolio, the operations in Karnataka and Kerala now becomes viable for us.

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Vishal Manchanda, Nirmal Bang Securities Pvt. Ltd., Research Division – Research Analyst [44]

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Okay. Okay. And sir, just 1 more. Is the injectable approval in Europe on track? So basically, are there any additional queries or that would — that can potentially delay the approval or…

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [45]

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Yes. There are no surprises thus far. It seems to be on track and is following the regular time lines as mandated by the DCP application process.

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Operator [46]

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The next question is from the line of Sachin Kasera from Svan Investment.

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Sachin Kasera, Svan Invest AS – CEO of Svan Investment Managers [47]

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Congrats for a good set of numbers. Sir, my first question was on the gross margin. So despite the share of [health] market being higher this quarter, when I compare the gross margin vis-à-vis the March quarter, there is a small decline. So would you just like to comment on this?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [48]

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Yes. (inaudible) questions, I’ll pass on to Tushar. So Tushar, if you can?

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Tushar P. Mistry, Sequent Scientific Limited – CFO [49]

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Yes. So the gross margin actually is lower compared to Q4, but in line with Q1. In this current quarter, we have had higher contribution from our European and Brazilian subsidiaries, where the gross margin were generally on a lower side. And that’s the reason why you see this mix change.

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Sachin Kasera, Svan Invest AS – CEO of Svan Investment Managers [50]

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Okay. Okay. Secondly, sir, if you could update us on our strategy of buying out the minority stakes in some of the JVs or subsidiaries? So any thoughts or any progress on that? How are we looking to go overall with that now we are very confident in terms of the cash flows. So are you looking at any of those opportunities?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [51]

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Yes. I think this is something we will align with the new shareholders. And probably based on their thought process, we can see some clarity on this in the rest of the year.

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Sachin Kasera, Svan Invest AS – CEO of Svan Investment Managers [52]

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Sure. And 1 lastly, sir, on the U.S., you have been mentioning about building up front-end there and maybe taking whether organically, inorganically. So any progress on that front? How are we thinking? Are we now more or less decided that we are going inorganic? Or are we still evaluating the options?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [53]

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Yes. So I’ll again split this into 2 parts. On our own, we were thinking of setting up our own organization. And to that extent, we had already hired a U.S. Head of Business last year. Having said that, this is one area wherein we do foresee Carlyle making a contribution, and their thinking will certainly impact our strategy, especially on the acquisition front. So give us a couple of weeks or a couple of months before we can clearly give an answer on this. But surely, I expect our U.S. strategy bid to be a little more aggressive than what we had envisaged earlier.

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Sachin Kasera, Svan Invest AS – CEO of Svan Investment Managers [54]

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Okay. And then just last question regarding the other expenses. So we have seen a lot of operating leverage coming this quarter. So I would believe part of that would be the cost reduction initiative done by the company and operating leverage. But is it that some part of the expense could not be incurred because of the lockdown and that will normalize from Q2? Or this is like a new run rate that we are looking for?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [55]

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Yes. Again, difficult one, so I’ll pass it to Tushar.

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Tushar P. Mistry, Sequent Scientific Limited – CFO [56]

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Yes. So on the OpEx front, you see some reduction that is happening. 50% of this is on account of — related to fees and travel expenses because our people in all have not been traveling, and that is the reason why it is — you see a reduction there. And 50% is towards certain reduction in our outsourced cost that is conversion cost, which we outsource, since we got that in-house. So that is what is an impact on OpEx. But also important to note is that you see some increase in the employee cost side, which is — we spend almost about INR 1 crore on — I referred to the one employee cost related to incentives that we have given for employees during this pandemic time and also certain additional welfare expenses that we incurred on them. So both these things are contributing to the movement in that OpEx.

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [57]

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No, no, no. I think because of — I think at a broad level, roughly 50% of these OpEx reduction will scale back once the field operations start and 50% is, therefore, good because whatever we have brought in internally will stay for good. And also there would be a kind of normalization of employee costs going forward. So all in all, I don’t think we have tackled the cost side very drastically. In fact, we have been — we want the environment to survive. And that’s why you’ll see in my commentary also I’ve been mentioning that we have operated our business very responsibly. Only if our vendors survive, can we survive in the long run. So we have been making their payments, we have not been harsh with them. And we have been, in a way, proved — proven right at the end because we see similar behavior from our own customers.

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Sachin Kasera, Svan Invest AS – CEO of Svan Investment Managers [58]

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That’s very nice. And sir, congrats once again and all the best for the European ones.

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [59]

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Thank you.

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Operator [60]

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The next question is from the line of Rahul Veera from Abakkus Asset Manager.

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Rahul Veera, Abakkus Asset Management, LLP – Research Analyst [61]

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I just wanted to understand like in terms of our manufacturing facilities, what would be the top 3 manufacturing facilities for us contributing maximum?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [62]

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So on API side, we have 2 major facilities. The real major big one is the Vizag facility. And then we have Mahad, which will constitute almost, between the API business, 90% of our revenue. Tarapur is more of an intermediate facility.

And coming on the formulation side, our 2 major facilities would be — actually, there’s enough — there would be 3 because Spain is for Europe, and then we have Turkey facility for Turkey as well as Brazilian facility for Brazil. So it’s fairly evenly spread out. In that sense, we are not dependent on single facility.

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Rahul Veera, Abakkus Asset Management, LLP – Research Analyst [63]

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Okay. Okay. And sir, due to few COVID cases on the Mahad facility, do you see some revenue loss on that end of the business, sir? 15 days or 20 days of quarantine is required for the same facility in COVID, generally.

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [64]

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Yes. So I will have Sharat respond to it from how we are dealing with it and what all actions we have taken. But that is brought — from a revenue perspective, we do not see any impact because we have that kind of headroom available, for say, in terms of production capacities. But Sharat, if you can explain?

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Sharat Narasapur, Sequent Scientific Limited – Joint MD & Director [65]

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So at Mahad, we have over 400 employees and about 50-plus of them who tested positive, largely asymptomatic cases. So out of that, already as we speak today, about 45 has already been released from the quarantine site, right? So they are all doing well. But rest of them who are negative, they have — as a part of common health precaution, we have discontinued production temporarily, and this impacted everything. But within next couple of weeks, all of those who are negative will turn back to the work. And in the meantime, we have all processed everything which is in WIP and the show continues.

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Operator [66]

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The next question is from the line of Anmol Ganjoo from JM Financial.

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division – Director [67]

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Most of the questions have been answered, especially the tough ones. So I have an easy question to you, Manish. You alluded to the absence of data, which characterizes our business. This typically also throws up arbitrages or short-term opportunities in the market. Given where our filings are, how would you kind of characterize that landscape and market opportunities in the current times? And are there any possibilities of a positive surprise emanating from that in the quarters to come?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [68]

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So see, ours is a kind of a dull and drab industry, unfortunately, with very few big opportunities. And everything in our business is branded generics, which means that there are no short-term surprises that can typically happen in this industry. That was both ways because there are no short-term positive surprises and also any short-term negative surprises as well because it’s slow and steady and consistent business. So personally, I do not see any of those surprises emerging in our business as also for the industry, as I see it at this point of time, both from a positive angle or a negative angle.

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Operator [69]

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

We’ll move on to the next question, that is from the line of Vipul Shah from R.W. Equity.

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Vipul Shah, Ripplewave Advisors LLP – Partner [70]

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Congrats on the fantastic numbers. Just 1 question, I believe which was partly answered, but also in the letter of offer, we’ve mentioned that we are actually looking at buying out our Turkish partners, which is also visible in the minority interest contribution to the total PAT in doubling from the March quarter. So any thoughts on that? And how soon can we expect to have our desired outcome of having total control over the Turkish subsidiary?

——————————————————————————–

Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [71]

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So this is also part of the — as part of our agreement in Turkey, there was an put option at the end of 5 years. So it is all in line with that. We are making good progress on that conversation. And again, probably within the current year, we should be in a position. In the current year, means I’m talking about current calendar year itself, we should be in a position to finalize that arrangement.

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Vipul Shah, Ripplewave Advisors LLP – Partner [72]

——————————————————————————–

So I mean, in general, sir, it’s very difficult to model, it’s because of — I understand the volatility also of the currency. But as — on a steady-state basis, what is the total contribution of, say, minority interest to our total PAT, which we can sort of factor in?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [73]

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So I think you should look at the annualized number rather than any quarter-on-quarter number because of the seasonality or different aspects of business coming out in each quarter. So if you look at the annualized number of last year, that will give you a very good perspective. Tushar, you want to add?

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Tushar P. Mistry, Sequent Scientific Limited – CFO [74]

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Yes, it is around 15% as we look at the annualized number for FY ’20 as the minority interest contribution.

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Operator [75]

——————————————————————————–

The next question is from the line of Ashish Thavkar from Motilal Oswal.

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Ashish Thavkar, Motilal Oswal Asset Management Company Limited – Associate VP [76]

——————————————————————————–

When we see the — this entire concept of the government, where they are trying to promote the manufacturing, would we be a party to it? And any plans on that? If you can share?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [77]

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So I mean, first, let me respond at a industry level and then we’ll respond at a SeQuent level. But as a — this is first time I’m seeing comment moving decisively and proactively in terms of the initiatives that they are taking. And this seems to be a real serious exercise, I must admit at this point of time, that unlike in the past wherein you do some tinkering and all that. This time, we see some clear incentives and some clear direction in the medium- to long-term perspective. Having said that, see, the focus of these new initiative is towards, a, antibiotics, and towards dependence on the human pharma drugs. So we clearly are not participating in that area at this time — point of time. And right now, we do not see any impact of this on our business strategy.

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Ashish Thavkar, Motilal Oswal Asset Management Company Limited – Associate VP [78]

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Okay. Okay. That’s helpful. And on — and for our injectable Europe business, so how are we placed in terms of sourcing of our raw materials in terms of establishing that limited with the supply chain? So if you just broadly 1 or 2 minutes, if you could highlight, help us understand this.

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [79]

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So we are fairly well placed as far as our supply chain is concerned. And I mean, material supplies were a bit uncertain for some point of time, but everything is now more or less back to normal across the world.

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Ashish Thavkar, Motilal Oswal Asset Management Company Limited – Associate VP [80]

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Manish, was there plans also be to monetize similar products in U.S.?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [81]

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That’s correct. You are talking of the formulation development, right?

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Ashish Thavkar, Motilal Oswal Asset Management Company Limited – Associate VP [82]

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Yes, yes.

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [83]

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Yes. our formulation development is global. With most of those products also going to be eventually commercialized in U.S.

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Ashish Thavkar, Motilal Oswal Asset Management Company Limited – Associate VP [84]

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Okay. Just 1 last question before I get into the queue. So you said in the veterinary side of the business, the pricing typically remains constant. So in terms of margin expansion, as you said in the opening commentary, you do anticipate some margin expansion going ahead. So if you help us understand what — how those margin expansion would come up?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [85]

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So our margin expansion is obviously coming out of scale benefits, both on the API side as well as formulation side. So as — on the API front, obviously, all our investments have been made at the site and — so operating costs of the sites remain the same even as we expand our business, especially in the U.S. and Europe, which are better priced markets.

And similarly, on the formulation side of business, once you establish your field force, your fixed costs are already there. So as your revenues grow, the impact on margins is far superior in this industry compared to other industries.

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Ashish Thavkar, Motilal Oswal Asset Management Company Limited – Associate VP [86]

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Okay. Great. And in terms of our capacities, how are we placed? Are we done with the CapEx that we need, at least for the next 3 to 4 years? Or we are about to expand?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [87]

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So again, this is something I alluded to in my opening comments that we have started expansion at Vizag, which will entail an investment of about INR 50 crores over 18 months, and this will facilitate our growth. We are obviously fully invested for the current year, but it will start helping our growth from FY ’22 and beyond.

Similarly, on the formulation side, our major investment, which is about EUR 3 million is envisaged for our facility in Germany to have a 4x expansion there. But that is a project, which we have deferred to sometime early next year, simply because of the uncertain environment. And getting a project team in this environment is not so easy, especially in Europe.

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Operator [88]

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The next question is from the line of Sajal Kapoor from Unseen Risk Advisors.

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Sajal Kapoor, [89]

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Am I audible?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [90]

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Yes, Sajal.

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Sajal Kapoor, [91]

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Manish, congratulations on a fantastic set of numbers in such difficult times. So just a couple of questions. First one is on our new line of business, which we have initiated recently, the CDMO I’m talking about. What sort of capability is attracting our potential partners and customers for that line of business?

And secondly, do we intend to serve the innovators only or we don’t care who the customer is as long as we have the capability and the economics are favorable for us?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [92]

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Yes. So Sajal, a, as we talk of, we are focusing on CDMO only on API side of business, okay? And that too also only for veterinary customers. We are — so ours is a very narrow focus, simply because of the expertise we have. And we really want to be one-stop solution to the big veterinary companies, which are not too many. There are only 4 or so, as we speak. And we want to be there kind of one-stop solution for all their API needs, including CDMO arrangements. This is a new skill set that we are developing. So technically, we are capable, but it’s all about project management and how do we interact with these customers. So you don’t see too many of these biotech or new start-ups in the animal health space. So our focus will be largely towards these 3 or 4 customers and in catering to their API development needs. Sharat, if you want to add?

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Sharat Narasapur, Sequent Scientific Limited – Joint MD & Director [93]

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Well, I think that’s good enough.

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Sajal Kapoor, [94]

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Okay. Just to follow up on that, Manish. Where do we expect competition, if any, to come from? Because clearly, ours is a pure-play animal pharma and not any other player has got the U.S. FDA-approved facility. So do we expect no competition at this point in time, especially from any other Indian player?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [95]

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No, I don’t think anything in the world carry with no competition in the space we are in. But we are certainly fairly well placed because, obviously, the attention which we give to these customers is very different from the typical human pharma company. Also, you have to bear in mind that increasingly, regulators are seeking segregation of animal health production from human health, which, again, kind of puts us in a good shape because eventually CDMO also has a MO part, the manufacturing part. So given that we have dedicated veterinary API facilities, so I would say, we are very well placed, but it’s not a huge area that we are getting into.

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Sajal Kapoor, [96]

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Sure. Sure. And second question is on our VMF filing. So on 6 of those, we are the sole filer. So an example could be the Robenacoxib, which we filed last year. Any feedback from the regulator or the sort of time line for approval? And whether it’s the — because it’s coming — Robenacoxib is an injectable as well as a tablet, I mean, what sort of launch and time line are we guiding to?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [97]

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Yes. So the API launch is dependent on the formulation, and the API file in U.S. is never reviewed until the formulation is filed and formulation is up for nearing commercialization or review in that sense. So all these filings, which we are referred to, are at various stages of customer approvals. Okay? And will be commercialized as and when either the patent expires and/or the customer gets an approval.

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Operator [98]

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(Operator Instructions) We’ll move on to the next question, that is from the line of Mithun Soni from GeeCee Investments.

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Mithun Soni, [99]

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Good numbers. Just 1 or 2 questions. Did we have any loss of business because of COVID during the quarter, the early months?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [100]

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It depends on how you want to see, call it, a loss of business. Obviously, the performance was lower in certain aspects of business, especially India formulations because nobody could travel. Even supplies could not be made. So there are obviously difficulties in conducting business. There have been some losses in that context, but very difficult to quantify. And that’s why we — I mean, for us, it’s part of life.

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Mithun Soni, [101]

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Fair. And second part is that because — how are we — are we seeing increase in inquiries for our API products? Are we seeing more inquiries from the customer across who wants to join hands for the API? Are we seeing any color there?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [102]

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Yes. So I’ll again respond it in 2 buckets. Certainly, in Q1, there was — and this is first I’m referring from an immediate business perspective. As we were novas, even customers were novas. And we could see some kind of element of differing of purchase decisions at their end. So it was not a normal quarter in that sense, even for us. Even on the API side, though we did display or ended up with a 21% growth. Having said that, from a long-term perspective, I think there is a clear move towards sourcing or kind of sourcing from other than China. And we clearly see a long-term move. This is not going to happen in a hurry simply because of the regulatory process that we have to follow. But I see a strong positive momentum for next 3 to 5 years.

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Mithun Soni, [103]

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Yes, 3 to 5 years. Okay. And one last question on our Europe and Turkey subsidiaries, we are experiencing a strong constant currency growth. How much of that growth was like — growth would be value-driven in the sense, price increase or it is all primarily volume driven? And how much we can take as a future? Like can we still continue to see about mid-teen growth there?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [104]

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So Turkey certainly will grow mid-teens in the medium term. Europe will get — I think double digit is always a good thing to achieve. And the way I look at is roughly 1/3 of the growth comes out of value or price increases and the rest 2/3 comes out of volume.

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Operator [105]

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The next question is from the line of [Vishal Mora] from [NK Ventures].

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Unidentified Analyst, [106]

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Congratulations on excellent set of number. Sir, my question is — few of them were answered, though I have some questions on the just weighted transaction. I’ll just base them into (inaudible) question. I just want to understand what was the reason for this business to be transferred to us from Warangal? And what was the size of this business, although it is in India, I’m assuming the profitability would be good because these are sort of exclusive products. But what is the size and why was it transferred and whether this opens up a possibility for you to do it in other geographies as well, with Zoetis or the U.S., some of the other (inaudible)?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [107]

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Yes. So the first part of the question is slightly difficult for me to answer and partly maybe better for so it is to respond on why they transferred. But having said that, I’ve been in this business, I would say, for last 5 years. So in some sense, it has happened for us at the right time in that context. Zoetis has been using another partner for distribution in the past, and they have transitioned it to us. It is also a kind of reflection of now we are 5 and 6 years old in the business. So there is an enormous acceptability around Alivira, even in India.

The size of the business, again, I covered broadly in the first year of — first 9 months of the current year. We expect between INR 25 crores to INR 30 crores of revenues coming out of this business. And of course, profitability is something I would stay away. That’s too confidential and internal. But clearly, it is meaningful business or meaningful arrangement for both the party.

And finally, can it be expanded to other regions? Time will tell. Obviously, the intent would be to do something beyond India as well.

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Unidentified Analyst, [108]

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Right, sir. And on CDMO, just one thing. Are we looking at, say, over the next 2, 3 years, CDMO being relevant enough and big enough have dedicated capacities for it? Or do we need to see that effectively accelerated because of the CDMO initiatives?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [109]

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Sorry, difficult to answer this because we are very, very new. We are still understanding this business, especially and opportunity within the animal health space. We are clearly — we are very clear that we don’t want to venture on the human side of business. So at this point of time, I would stay away from commenting on that. I don’t — it is not built in our business plan, let me be candid. But maybe in next 6 to 12 months, we’ll be able to give you a better color around it.

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Operator [110]

——————————————————————————–

The next question is from the line of [Akash Jain] from (inaudible) Investments.

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Unidentified Analyst, [111]

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Manish, just 1 question for my broad level understanding. So see, there are a lot of parts to our business side on the — there is an API business and even on formulation, there is a LATAM business, a Europe business and India business. If we want to get our arms around the margin profile and how the margin of the company going to improve, can we get some qualitative understanding of how the interplay of margins are between these businesses? API and within formulation, our emerging market/India, Turkey, Europe and LATAM. Just to get a sense of where we are, where is most of the operating lead is going to come from? And how does this interplay work on an overall basis for the company?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [112]

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Very big question, I would say, although it is…

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Unidentified Analyst, [113]

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Qualitative is good enough. We don’t know one quantitative, qualitative is good enough.

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [114]

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So see, broadly speaking, the strength of our business model is having multiple growth engines. And that is what has worked well for us because always, you will see that certain things are firing for a quarter, and you may be faced with some challenging environment in certain parts of business.

At a broad level, certainly, the margins — gross margins are higher in Turkey, which we have been alluding to in the past. Fundamentally, all injectable businesses have higher margins compared to the oral businesses. So our European business as also our Brazil business is more oral, while our Turkish business and also our emerging market business is more injectables. So that would probably give you an indication of margins. The moment there is a faster growth in markets like Europe and/or in Brazil, there would be slight change in our gross margin, though it is not very, very significant.

Similarly, on our API side of business, our API margins are not very different from the collective margins of the formulation business. So again, all in all, you will see very narrow shift in our margins across quarters and across years. The benefit we are deriving is really the scale of benefit as we drive our business going forward. So our investments are already there in place. And as the business ramps up, our revenue — while revenues may ramp up by 15-odd percent, the impact of that on the margin side is obviously slightly more disproportionate given that most of our costs are fixed.

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Unidentified Analyst, [115]

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And just a follow-up question, Manish, if I may ask. On API, obviously, scale leads to a lot of operating leverage. And on formulation business, given that it is all branded generics, typically, the productivity or whatever we call the revenue per sales person is a big driver for improvement in margins. Am I reading it right in terms of how you expect scale-up margins to happen?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [116]

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Absolutely, bang on.

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Operator [117]

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The next question is from the line of Saket Bansal from Opulent Investment.

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Saket Bansal, Opulent Investment Adviser Private Limited – Portfolio Manager [118]

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Sir, my question is regarding the API business. In last quarter, we mentioned we — there was a deferred sales of INR 8 crores, right? This quarter we would have got that sales, so is it correct to understand like that?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [119]

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Yes. We did get back that, that sale has been booked in this quarter. But there is also an element of deferred sales even for this quarter because, obviously, a lot…

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Saket Bansal, Opulent Investment Adviser Private Limited – Portfolio Manager [120]

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What was in that condo?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [121]

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About INR 4 crores.

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Saket Bansal, Opulent Investment Adviser Private Limited – Portfolio Manager [122]

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About INR 4 crores, okay. And sir, you spoke about the margin rationale, like there are different country have different set of margins. I wanted to understand what is the utilization level in all the plants? Like is it at 80%, 90% or what is it?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [123]

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See in pharma, you can never go 80%, 90%. Typically, once you hit or once you envisage you are hitting about 80%, you have to start planning expansion. So…

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Saket Bansal, Opulent Investment Adviser Private Limited – Portfolio Manager [124]

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Sir, what would be the current state?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [125]

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So our current capacities are certainly adequate for this year and also part of next year. And as I alluded or spoke earlier, we are already working on expansion at Vizag and at Germany.

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Saket Bansal, Opulent Investment Adviser Private Limited – Portfolio Manager [126]

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Yes. Okay. And sir, can you throw some color on injectable business? Like what is the size? And what is the target size of the market? How big this opportunity is?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [127]

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Very difficult question, Saket. I don’t have readymade answer. But as I said that we are happy to engage on a more one-on-one basis and give you a better color because the answer is going to be very long.

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Saket Bansal, Opulent Investment Adviser Private Limited – Portfolio Manager [128]

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Just 1 more question. Out of this regulated — see, we have 75% — 85% — 75% of our API business is in regulated market and 65% of formulation is in regulated market now. And in earlier calls, you have mentioned has been moved more into the regulated market, more the margins can be improved, right?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [129]

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That’s correct, especially on the API side.

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Saket Bansal, Opulent Investment Adviser Private Limited – Portfolio Manager [130]

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So how much room is still available like…

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [131]

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See, again, I’ll respond at a broader level. The fact that we are alluding to a 200 bps margin improvement year-on-year over a medium term and not for the year alone, is all coming out of those quality of business parameters that we have been talking about.

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Saket Bansal, Opulent Investment Adviser Private Limited – Portfolio Manager [132]

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Okay. Okay. Sir, and one thing, Turkey business, how is that — like what is the growth rate we are expecting?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [133]

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So Turkey, we are expecting mid-teens growth rate in the foreseeable future. I mean it cannot be every quarter and all. There will be some volatility across quarters. But on a directional level, we are talking of mid-teens growth.

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Saket Bansal, Opulent Investment Adviser Private Limited – Portfolio Manager [134]

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Okay. Any thought — there were some — because this quarter was a growth of only 4%, that is why I’m asking.

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [135]

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So on a constant currency, it is 11%. That’s why we are very upfront in giving it every growth in every geography on a constant currency basis because there is a volatility of currency.

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Operator [136]

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Ladies and gentlemen, we’ll be taking the last 2 questions.

The next question is from the line of [G. Vivek] from GS Investment.

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Unidentified Analyst, [137]

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Congratulations on yet another consistent quarter and surprise depends how come you are so consistent. And if you can elaborate on that part also? Plus, what has the value-add been done by our partner, Carlyle, which is expected? And what experience do they have in the animal health care sector?

And second question is about our domestic dogs and other things, say, they are almost living like a part of family, build over with the cycle going in for a western lifestyle and no kids and the pets are having the important state. So how positive is it for us and opportunity size if you can, sir, tell for us?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [138]

——————————————————————————–

Yes. So as I understand, your first question was around Carlyle and their experience in this industry. So from whatever we know, while Carlyle has great experience in the global health care space, and it is one of their preferred areas of investments, they have no direct exposure. Or this will be their first investment in animal health space. They have in the past been associated with animal feed businesses, but not something directly in animal health space. And the idea is how do we create a far more global organization in the animal health space, is the fundamental thesis of their investment.

At a broad level, they have given us 3 or 4 areas of value creation that they will be focused on. One is U.S., second is China and third is vaccines. Having said that, given that they are not as yet part of the promoters, they do not — we have not yet interacted and created a new — or we are not interacted to the extent that is — that will happen over the next couple of months once they are part of the promoter group.

The second part of the question was pertaining to the Indian companion animal business. That clearly is a growing segment in India. As dogs and not so much cats in India, but dogs are becoming part of families. As we speak, we are not there in that business in a meaningful way, though we have 1 or 2 products. That is, again, an area which we will look at as we move forward. One thing you have to bear in mind is, animal health is very, very complex in that context because there are too many species you need to deal with. So we’ll really pick and choose what we want to play. And in that context, while companion animal in India is growing and important. But it’s so far, we didn’t see an opportunity for us to make a dent in this industry. But that can change going forward.

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Unidentified Analyst, [139]

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That is approved for world over, no, not only for India companion animal business and stationing or what?

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [140]

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That is correct. But if you follow our strategy, we have stayed away from companion animal business across the globe. And that is simply because that’s an area of big focus of the big daddies, and there is a lot of dollars and money that goes in that part of business. So we are very conscious of the way we leverage our capital. And we want to — therefore, we have chosen to offer or chosen to focus on roaming into our production side of business.

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Unidentified Analyst, [141]

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Okay, sir. And can you just highlight the differentiated products, which has been able to give us the consistent performance over the last so many quarters, and I believe your leadership has played a key role in it. You keep up the good work, sir. But just for the recordkeeping and for the new investors, like, differentiators will be really helpful, sir.

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [142]

——————————————————————————–

So I think I would just say, we are lucky here that’s more than anything else. First is, the industry is that way very dull and drap industry. There are — I mean, it’s a slow and steady industry wherein being branded generics, you can’t make — I mean you can’t gain something very quickly and also you can’t lose something very quickly. So that’s the positive of this industry. Having said that, I think, at our end, we have a very strong execution team. And that’s what has made the difference. So it’s not about me. It’s about the entire management team who have come together. We are a very professionally-run organization in that context with promoter not being part of the team in a way, not even at the Board level. So it has been great responsibility on the management team. And so far, we have been so execution focused that, to some extent, we have been able to deliver consistently, partly coming, as I said, from the industry nature and also partly coming out of the management team.

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Operator [143]

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The next question is from the line of Manoj Shah from (inaudible) Investments.

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Unidentified Analyst, [144]

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Yes. Part of my question has been answered. But just wanted to — if you can clarify on the growth part of it. With the Carlyle coming in, where do you see the company over the next 2, 3 years in terms of the revenues or the newer market penetrations? Margins, as you have said that, will grow by 200 bps Y-o-Y for next 2 years and on the new product launches.

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [145]

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Yes. So I think how Carlyle impacts our business strategy, you please give us about 2 quarters before we can respond to it because the transaction is yet to close. So they — we still haven’t really got a chance to interact with them and redesign the strategy. So give us time till the end of the year before we can come out with how the things will look, if at all, any different from what we have been alluding to. But on our own, we are — we stay confident on the medium-term direction of the company, which we have been always kind of communicating.

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Unidentified Analyst, [146]

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So as of now, your plans are top line to grow in what we’ll do.

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [147]

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We have been leading towards a mid-teens growth rate in revenues and 150 to 200 bps margin improvement year-on-year in the medium term. This year is an exception, of course, not that we know anything about this year, everyone is nervous about the current year. Things are only evolving. So for the current year, we are looking at 1 quarter at a time. That’s the way we have been speaking about.

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Operator [148]

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Ladies and gentlemen, that was the last question. I now hand the conference over to the management for their closing comments.

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Manish Gupta, Sequent Scientific Limited – CEO, MD & Executive Director [149]

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Yes. Thank you. Thanks for joining us on the call. The key point that I would like to leave behind today, it has been a strong quarter under a very challenging environment. And both our segments APIs and formulations, have done well in the environment. Emerging market growth was tepid in the quarter, but we expect the numbers to stack up in the second half of the year, partly driven by the multiyear deal with Zoetis to market and distribute their ruminant portfolio in India. We are expanding at Vizag. Vizag expansion at Bremer has been deferred. The Carlyle transaction is on track and will close in this quarter. And finally, in the last call, last quarter, I had mentioned that we shall take 1 quarter at a time this year given the environment. While I still maintain the same, I do believe that our performance in Q1 does provide us the impetus to look at both Q2 as well as the rest of the year with greater confidence. Thank you, ladies and gentlemen. Thanks for joining us so early in the morning.

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Operator [150]

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Thank you. Ladies and gentlemen, on behalf of SeQuent Scientific Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.