Rough Notes:
Q4’23 Call
Capsules
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Will become India’s 2nd largest empty capsules manufacturing company after completion of Capex.
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Realization have gone down in last Q due to excess inventory and now starting to bottom out and show signs or going up. Some competitors saw price erosion much earlier. There is also softening of raw material prices. So overall we expect margins to be better going forward.
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Exports %age could go up from 21-22 (FY23) to 27% (FY24), and 35%+ FY25 because of Mexico order (to start from Q2). Export realization are 15-20% higher than domestic.
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Expect around 1.8Bn capsules per annum volume from Mexico contract, .
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HPMC - The new high speed machines are first time being customized for HPMC, met some technical issues and hence the delay in installation. Once we find the first line working in Q1, we will try to speed up the installation of next 2 machines.
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FY23 gross production, we saw 96% of capacity availability. 17.3B capsules produced vs 18B capacity availability. Can expect similar performance based on HPMC capacity availability for next year.
API
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One quarter of delay in overall plan.
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Reason for dilution in API - Capex estimates went from 96 to 130 cr. No more dilution planned. Didn’t want to raise more debt. Valuation done on basis of 5 year of forecast, the business should do really well from 3rd years onwards when regulated market exports start.
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Opted for PLI from FY25 as anyway we would be utilizing the capacity for only half year in FY24. The rate of incentive per/kg is Rs.6/- irrespective of the qty of production.
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Reason for asset turns expectation coming down from 2.7x to 2x: Rise in capex. rates for the target APIs being down. But the rates quoted are mostly for unregulated market for unregistered sources. Regulated markets from registered sources rates are still at old levels. Our target is the kind of customer who are buying from registered source from China.3rd year onwards when we get to regulated markets asset turns can get 2.7x… so roughly 350 cr. revenue potential when regulated market contribute ~35% of API revenue.
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Commercial trial batches are right now going on for basic API’s Hexamethasone, betamethasone, predisolone. Most of these products involve 10-11 steps of synthesis and then 2 steps of fermentation. Initially R&D lab had done, gram batches which went on to Kilogram. Now we are scaling them upto 100-200 kg batches. For the base API’s complete inhouse backward integration is being done. As far as derivatives are concerned, our strategy is to import intermediates from China, convert them to derivatives, put them to stability tests, make them ready for market. We are now ready for 16 products stability data, we will approach the drug department for license for them. Once the licenses are with us, we can start supplying these to our customers (For those who are ready to take based on stability data from R&D batches).
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There are few customers , who would like to validate the samples from the commercial batches. For them supply would begin (inaudible)
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First year we are trying to target the Cat C customer who are sensitive to price, but gradually move up to registered supplier.
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Pricing : Betamethasone - earlier 825 USD per kg now 740, dexamethasone earlier 400 USD now 345USD, predisolone earlier 425 USD now 350 USD. This kind of price erosion is mostly for unregistered sources. Exim data sources, imports from registered sources happening at previous rates.
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Working capital : Will be little bit higher than Capsules business in range of 90-120 days.
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Margins: Expecting to be on lower side in first 3 years when we supply to domestic players, expect it to be higher 3rd years onwards when we supply to regulated markets.
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For this year we are expecting 60-65 cr. revenue from API. Hope to breakeven in cash.
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natural Capsules currently holds 90% of API division. invested 20 cr. equity and 20 cr debt. (at same interest we are borrowing) operationally we are spending about 20L/month from this qtr. the operating expenses is being absorbed by NC.
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Investment of 75 cr : 2 tranches, first tranche we have taken 50 cr. Second tranche is need based. Both have right to refuse (mutual consent).
My take: One way of looking at the current valuation (of ~350 cr.) is, if we assume, the private market valuation of ~250 cr. for API division is right, at close to (or less than) 1x sales for the FY25-26 (max revenue potential from current API capex without considering the exports to regulated markets), then the additional ~100cr. is for API division which can produce nearly 20-25 cr. PAT at normalized levels (post HPMC coming onstream). Seems par for the course to me. Hope the correction is done and we can wait till Q2-Q3 results start showing up nos from both mexico, HPMC and API.