Dr. Reddy's Laboratories Q1 24/25 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2024

There are 7 speakers on the call.

Operator

Please note that this conference is being recorded. I now hand the conference over to Ms.

Operator

Ritcha Periwald. Thank you and over to you.

Speaker 1

Thank you. A very good morning and good evening to all of you and thank you for joining us today for the Doctor. Reddy's quarter 1 FY 2025 earnings conference call. We have with us the leadership team of Doctor. Reddy's comprising Mr.

Speaker 1

Erez Israeli, our CEO Mr. Parag Agarwal, our CFO Mr. M. V. Nastamon, our Deputy CFO M.

Speaker 1

V. Ramana, our CEO for Branded Markets and the entire Investor Relations team. Earlier during the day, we have released our results and the page is also posted on our website. We begin the call with opening remarks from the management, following which we will have the forum open for Q and A session. Please note that today's call is a copyrighted material of Doctor.

Speaker 1

Redeep and cannot be rebroadcasted or attributed in press or media outlets without the company's expressed written consent. This call is being recorded and the playback and transcript shall be made available on our website's note. All the discussions and analysis of this call will be based on the IFRS consolidated financial statements. The discussion today contains certain non GAAP financial measures. For a reconciliation of GAAP to non GAAP measures, please refer to our press release.

Speaker 1

Before I proceed with the call, I would like to remind everyone that the Safe Harbor contained in today's press release also pertains to this conference call. Now, I hand over

Speaker 2

the call to Parag. Thank you, Richa, and greetings to everyone. Thank you for joining the call today. I hope you have received a copy of our earnings release documents and press presentation uploaded on our website. It's my pleasure to present results for the Q1 of 2025.

Speaker 2

We recorded a steady performance during quarter 1 FY 2025 with a double digit revenue growth and stable EBITDA margins and return on capital employed. For this section, all amounts have been translated into U. S. Dollar at a convenient translation rate of RUB 83.33, which is the rate as of June 30, 2024. Consolidated revenues for the quarter stood at RMB7673 crores, which is US921 million dollars and grew by 14% on year on year basis and 8% on a sequential basis.

Speaker 2

The growth is mostly driven by the generics business in the U. S. And recent in licensing of Sanofi vaccine portfolio in India. Consolidated gross profit margin stood at 60.4% for the quarter, an increase of 170 basis points over the same quarter in the previous year and 160 basis points sequentially. The year on year increase is on account of favorable product mix and overhead leverage, partially offset by price erosion in generics markets.

Speaker 2

Gross margin for Global Generics and PSAI were at 64.7% and 23.1%, respectively. The SG and A expense for the quarter INR2,269 crores, which is worth over 2.72 1,000,000, an increase of 28% year on year and 11% quarter on quarter. The year on year increase is primarily on account of continued investments in new business initiatives, increase in freight rates, annual merit increases and business capabilities to enhance operational efficiency. The SG and A cost as a percentage of sales were 29.6% and is higher by 3 30 basis points year on year and 67 basis points quarter on quarter. We expect our SG and A to be in the range of 27.5 percent to 28% for the full fiscal year.

Speaker 2

Our announced R and D efforts are further supplemented with collaborations to create a robust sort of pipeline for small molecules, novel oncology assets as well as biosimilars to drive future growth. The R and D spend for the quarter is INR 6.19 crores, which is $74,000,000 an increase of 24% year on year and a decrease of 10% quarter on quarter. The R and D spend is at 8.1% of sales and is higher by 68 basis points year on year and lower by 164 basis points quarter on quarter. Overall, R and D continues to be a cornerstone of our growth strategy, and we expect the investment to be in the range of 8.59% for the full fiscal. The other operating income for the quarter is INR2147 crores lower versus last year due to a one time settlement income in the base period.

Speaker 2

The EBITDA for the quarter is INRISP 2,160 crores at US259 $1,000,000 a growth of 15% quarter on quarter and 1% on a year on year basis. The EBITDA margin stood at 28.2% and is higher by 172 basis points quarter on quarter and lower by 3.67 basis points year on year. The net finance income for the quarter is INR84 crores as compared to INR78 crores for the same quarter last year. Profit before tax for the quarter stood at INR1882 crores that is US220 $6,000,000 The PBT stood at 24.5 percent of sales. Effective tax rate for the quarter is at 26%.

Speaker 2

We expect our normal ETR to be in the range of 24% to 25% for the fiscal year. Profit after tax for the quarter is still at INR1392 crores, it is US167 million dollars The paid percentage stood at 18.1 percent of sales. Reported EPS for the quarter is rupees 83.5 percent. Operating working capital as of 30 June 2020 4 was INR11,565 crores, which is US137 $1,000,000 an increase of INR262 crores, which is US31 $1,000,000 over March 31, 2024. Our capital investment in this quarter stood at INR491 crores, which is US59 $1,000,000 The free cash flow generated during this quarter was INR 3.27 crores, which is US27 million dollars Consequently, we now have a net surplus cash of INR6731 crores that is US808 million dollars as of June 30, 2024.

Speaker 2

Foreign currency cash flow hedges in the form of derivatives are as follows: US8 $1,000,000 held around rate of rupees RMB83.7 and RMB84.1 to the dollar, maturing over next 12 months with nothing available which allows participations in U. S. Strengthening. We will ship 175,000,000 with minimum protection rate of RMB 0.899 to the region maturing in the next 6 months Australian dollars 5,500,000 at the rate of rupiah 56.1 to Australian dollar maturing in the next 9 months and GBP 458,000,000 at the rate of RMB1.267 against dollar. With this, I now request Erez to take us through the key business highlights.

Speaker 3

Thank you, Farag. Good morning and good evening to everyone. Continuing the momentum of the previous fiscal, we have commenced FY 'twenty five on a positive note. We get another quarter of highest ever revenues and stable margins. Our approach to growth continues to include both setting new businesses and strengthening our presence within existing spaces in line with our stated strategy.

Speaker 3

Let me take you through some of the key highlights for the quarter. 1 double digit growth in revenues in Q1 at 14%, Reported EBITDA margin stood at 28% and annualized ROACE stood at 33%. Net cash show plus was $808,000,000 This quarter witnessed a significant milestone in building global consumer healthcare business with acquisition of Micotinel and the 2nd large brands as well as related market leading brands in the nicotine replacement therapy category in markets outside of the U. S. The transaction is expected to close in early Q4 of the calendar year 2024 and operations will transition to us in phased approach.

Speaker 3

You may remember that another step taken to our building robust consumer healthcare business in India was the nutraceutical joint venture with the global FMCG giant Nestle. The JV operation is expected to go live soon. Strategic collaborations are an important part of our growth story. We have reached 9 following deals. We licensed Takeda Nobel gastrointestinal drug, Vonopazan, for commercialization in India.

Speaker 3

We partnered with Novartis Pharma to visit the 2 of the leading anti diabetes brands, Galbus and Galbus Met in the Russian retail market, received exclusive rights from Ingenious Pharmaceuticals to commercialize a cyclophosphatamate injection in the U. S, collaborated with Algotec for commercialization of their benosumab by similar candidate in the U. S. On an exclusive basis as well as in Europe and the U. K.

Speaker 3

In Merivio, the drug free migraine management device is now available in 5 countries, mainly India, Germany, Spain, UK and South Africa. Our CDMO, Origin Pharmaceutical Services, inaugurated the 70,000 square feet state of the art CDMO Biologics facility in Jhunjhun Valley, Hyderabad, India. On the regulatory front, in May, the U. S. FDA completed a routine GMP inspection of 2 of our formulation manufacturing facility in Nevada.

Speaker 3

Did a VASAC and issued a Form 4A 3 with 2 observations. In June, the U. S. FDA completed the GMV inspection of our API manufacturing facility in Sri Kakulam under our tradition issued a Form Form 483 with 4 observations. We will address and resolve the issues within the stipulated timelines.

Speaker 3

We continue to be recognized for focused effort in ESG. We are the only Indian company to be featured in the 2024 list of Global 500 Most Sustainable Companies by DynaVegen and Statista. For the 2nd consecutive year, we were named Africa Pacific Climate Leader in 2024 by Financial Times, scoring the highest among India Pharma peers. We won the Master of Risk Award for Healthcare and Pharma at the India Risk Management Awards. Through these efforts towards sustainability, we endeavor to contribute to the well-being of our patients, our people and our planet.

Speaker 3

Now let me take you through the key business highlights for the quarter. Please note that all references to the numbers in this section are in respective local currencies. Our North America generic business recorded revenues of 4.63 $1,000,000 for the quarter with a year over year growth of 19% and sequential growth of 18%. The increase was largely volume led coupled with higher market share in certain products, partially offset by pricing pressure in some key products. We launched 3 new products during the quarter and we expect the launch momentum to continue in the balance of the year.

Speaker 3

Our European generic business recorded revenues of $59,000,000 for this quarter with a year over year growth of 4% and a sequential growth of 1%. The increase in base business volume and contribution from new product launches during the quarter has helped offset price erosion. During the quarter, we launched a total of 12 products across markets. Our emerging market generic business recorded revenues of INR1188 crores in Q1, year over year growth of 3% and sequential decline of 2%. On year on year basis, market share expansion and revenue from new products more than offset the unfavorable talks.

Speaker 3

In constant currency, the emerging market grew at 9.8% on overall business. We launched 17 new products during the quarter across various countries of emerging markets. Within the segment, the Russia business grew by 12 percent year on year basis and 10% sequentially in constant currency. India business recorded revenue of INR1325 crores in Q1, a double digit year over year growth of 15% Q1 and sequential growth of 18%. The growth was primarily on account of additional revenues from the recently licensed vaccine portfolio from Sanofi and new launches.

Speaker 3

As per Acuvia, our IPN rank is 10. We have launched certain brands this quarter in addition to integrating Sanofi's vaccine portfolio. Our PSAI business recorded revenue of $92,000,000 in Q1 of FY 2025, a year over year growth of 12 percent and sequential decline of 7%. The year over year growth was primarily on account of improvement in volumes as well as new product launches. We filed 11 BARD master files this quarter.

Speaker 3

Our R and D investment this quarter stood at INR 6.19 crores, up 24% on a year

Speaker 4

to year basis, driven by our

Speaker 3

bisoning products pipeline. Development efforts across generic as well as novel oncology assets in origin. Further, we will continue to complement our in house efforts with partnership and collaboration to develop innovative solution. We have done 22 global generic filings, including 1 AMD in the U. S.

Speaker 3

During Q1 of FY 'twenty five. We continue to focus our core business on generics, biosimilars and APIs, while investing growth driver of the future in 3 areas consumer and care, access to novel molecules and digital therapeutics. We are confident that this strategic growth initiative, coupled with our disciplined financial management investment in our people and driving operational efficiency will enable us to deliver sustainable growth in coming years. As you may all be aware, Taraka Gharwal will be retiring effectively on August 31, 2024, and would be like to devote his time for making meaningful difference to the lives of voiceless animals. I want to thank Parag for his full use of service and direct to Redis as the CFO and for the impact he has had on the company as well as our stakeholders.

Speaker 3

Paragas' driving and strategic vision for the company, which has placed Doctor. Reddy's in strong position for future growth. I'm pleased to announce that MB Narasimhan, also popular and known as MBM, who is currently serving as the Deputy CFO, will take over as the CFO from August 1, 2024. And Ian has been associated with Doctor. Reddy's since fiscal 2000.

Speaker 3

He is already a member of our management council and is seasoned strategic and financial leader. Please join us in wishing both Parag and NVM the very best in the new journeys ahead. And with this, I would like I would request NVM to say a few words and then we will open the floor for questions and answers.

Speaker 2

So thank you, Rajesh, and greetings to everyone. I would like to thank Faraz for his invaluable leadership and mentorship. He has been instrumental in corporate financial success and I look forward to building on the strong foundation that we have created. I also look forward to meaningful engagement with all of you and it's committed going forward. Thank you.

Speaker 1

We can open the floor for Q and A now.

Operator

Thank you very much. We will now begin the question and answer session. We have our first question from the line of Kunal Dameshia from Macquarie Capital. Please go ahead.

Speaker 5

Hi. Thank you for the opportunity and congratulations on a good set of numbers. First one on the cash flow from operations, which seems to have come down meaningfully despite our working capital is largely similar to the last quarter, right? So what is driving the sequential moderation in cash flow generation?

Speaker 2

Hi, Kumar. Thanks for the question. The reason the free cash flow is a bit on the dollar side is because of fluctuation in factoring. We do the factoring in various markets largely in the U. S.

Speaker 2

Depending on the interest rate and the benefit we get. And because of that, we have rolled back factoring a little bit in this quarter. But overall, the operational cash flow generated from the business is in line with the normal sense.

Speaker 3

Sure. So it should pick up going forward, right? Yes, yes, absolutely. Sure. And second one on the

Speaker 5

SG and A expense, while you highlighted that we are incrementally investing in the new Horizon Growth Livers, etcetera. There is a step jump in SG and A expense. So is there any one off included in the this quarter's SG and A expense? So

Speaker 2

I said that in my opening comments, Kunal, that in this quarter, as usual, we are investing in new business initiatives. There are also some one offs like increase in freight rates because of some rate issues in the Red Sea, also a few one offs in France. And this is the normal fluctuation that happens from one quarter to another depending on the sales and the level and the phasing of investment. Overall, we are confident that our SG and A percentage is going to be within the range of 27% to 28% for the full year. So, yes, this is pretty much normal.

Speaker 2

It's just quarter on quarter fluctuation.

Speaker 5

And the percentage you described is including the amortization, right? [SPEAKER SRINIVASAN

Speaker 2

VENKATAKRISHNAN:] No, that's not material. That's a normal amortization of intangible that we always have. The normal level of amortization is included. What is one off, I would say, is a spike in the freight costs, as I said, and a few other one offs.

Speaker 3

Amortization for now will be nearly after we closed North Star,

Speaker 2

it will not be relevant before we close that.

Speaker 5

Sure, sure. And one for Ide is on the launch momentum in the U. S. I think we launched 3 products in this quarter. And I think our usual guidance is around 20 plus products, right?

Speaker 5

So are we on track to achieve that? And secondly, you also mentioned that we have roughly 25 first two filings according to us, right. So out of this 25, how many of these are expected to be launched in, let's say, next 2 to 3 years?

Speaker 3

So the answer to the first half, yes, we are on track. How many exact first to 5, anybody knows? I don't know exactly, Kunal, we'll come back to you. I don't recall the number on top of my head, but naturally few

Speaker 2

of them will be there.

Speaker 3

But I don't remember how many is working.

Speaker 1

Thank

Operator

you. We have our next question from the line of Neha Manpuria from Bank of America. Please go ahead.

Speaker 1

Yes. Good evening, everyone. Hope I'm audible.

Operator

Yes. Please go ahead.

Speaker 1

Okay. Thank you so much. So, guys, my first question is on the OTC piece. Now with the acquisition of the NRT portfolio, the Netplay JV going online, how should we think about the potential size of the OTC business, let's say, in fiscal 'twenty seven, 'twenty eight? How big do you think this business can be?

Speaker 1

And are there any more acquisitions or capital allocation that you see in the consumer healthcare business to make it larger?

Speaker 3

Yes. So the OTC and consumer care in general is a focus for us. It's part of the so I'm kind of thank you, Nia. I'm kind of building on your questions. We will have basically primarily 4 spaces.

Speaker 3

1 are the B2B generics, the other is branded generics and innovation. The third one is consumer care and the 4th is biologics. So the best part is about a little bit more than 300 about $320,000,000 currently, spreads along North America, Europe, India, Russia, etcetera. The North Star, the new acquisitions once come will be somewhere around the $300,000,000 So altogether, it's $600,000,000 plus growing. So naturally, it's going to be an important part of the business.

Speaker 3

Likely that we want to build on the platform of a no star and to add more assets in the future. So we see that's obviously a business that we're speaking 1,000,000,000 in the future, but there is obviously and it will be very much depends both on the growth as well as our ability to buy more assets.

Speaker 1

Do you think we can get to that $1,000,000,000 mark with the existing asset, with the LSA JV, with the LRT asset and with Meno Labs existing base by fiscal 'twenty seven, 'twenty eight. Would that be a fair assumption or do you think you need more to get to that $1,000,000,000 number?

Speaker 3

So the $1,000,000,000 we will need to buy now.

Speaker 2

You need to buy now.

Speaker 1

Okay, got it. And my second question is on the default growth lever that you mentioned Biologics. I think you mentioned Deno is a near term opportunity, we also have a Deno is a near term opportunity, you also have a better set. If you could give us some color on the timelines for filing of these assets? And therefore, when should we expect launch of both these products?

Speaker 3

You're talking about the Venosumab?

Speaker 1

Veno and the VACUCET, both of them.

Speaker 3

So the nasal lab is next year. And what

Speaker 2

are the other products that you are sorry?

Speaker 3

Sorry? Abatefit. Abatefit should be December 26, hopefully, and depends on the approvals or MAX beginning of 20 27, the calendar.

Speaker 1

December 26 is the filing.

Speaker 4

So refiling should be

Speaker 3

a fixed date before that.

Speaker 1

Sorry, Erez, I missed that. So you said that is a filing should be in '25? The filing

Speaker 3

should be in the end of calendar 'twenty five.

Speaker 2

Got it.

Speaker 3

Okay. End of calendar 'twenty six, so I will not go over with that.

Speaker 1

Okay, got it. Thank you so much.

Operator

Thank you. We have our next question from the line of Amir Tsakhe from JM Financial. Please go ahead.

Speaker 4

Yes. Thank you for taking my questions and congrats on

Speaker 5

a good set of numbers. The first question

Speaker 4

I have on the U. S. Business, for the quarter, we have seen a good quarter on quarter jump, almost $50,000,000 to $60,000,000 Is it possible for the management to give some breakup? How much would be contributing from the new product launches, which we have recently done? And how much would be from the base business improvement?

Speaker 4

Thank you.

Speaker 3

So most of it is from the base business. Most of it is the products that we have before and the contribution of the 3 products helped the growth, but the launch of the growth came from products that we had before.

Speaker 4

So going ahead, how should we think of the quarterly U. S. Run rate? Is it normalized from here? Or do you expect it to maintain at $450,000,000

Speaker 3

What I'm expecting from the U. S. Is to continue to grow. So I kind of maintain the discussion that we had in the past. We have the capability and I'm excluding even linadulamal.

Speaker 3

This kind of discussion to grow in single digits, we need to compensate for any price erosion on year to year basis. That's what we did in the last 6 years and this is what we are going to do. And from time to time, we have those upsets that come from us to market of specific situations. Right now, it looks like that the North America activity should continue to grow throughout the year. Quarter to quarter, it's hard to tell.

Speaker 3

It's always fluctuating. So I cannot guide on quarters, but I can absolutely say that we are trying to continue to grow throughout the year also.

Speaker 4

Sure. The second question I have on the India business growth, which is around 15%. In the opening remarks, we said that some of it is coming from the vaccine business, which we acquired. Is it possible to quantify how much will be the base business growth?

Speaker 3

Yes. So it's let's say without the vaccine, it's probably mid single digits without it.

Speaker 4

Sure. Thank you so much. I will join the Q and A.

Operator

Thank you. We have our next question from the line of Damayanti Kairai from HSBC. Please go ahead.

Speaker 1

Hi. Thank you for the opportunity. Continuing on India, so just want to understand now Sanofi vaccines contributing meaningfully in your India numbers. Is this the current base which we should assume that you will be growing from the base of 1Q in coming quarters? Or how should we look at India growth in near term as well as in medium term?

Speaker 3

The baseline of India without acquisition will be 11 digits this year.

Speaker 1

Okay. And this base business you said it's due in single digit during the quarter excluding

Speaker 3

It was mid single digit and it will be double digit for the year and for sure and for the next quarters.

Speaker 1

Sure. And can you update us on Nestle JV, how that is progressing?

Speaker 3

Progressing very nicely. And we hope that in the beginning of August, we can announce day 1. And likely August 1, but we will announce it when it will come.

Speaker 1

In August?

Speaker 3

August 1.

Speaker 1

Okay. And my second question is on your biologics effort. So can you let us know what is the kind of spend you are doing for this line of business? And you earlier mentioned meaningful sales to be starting from 27, right? So between now and 27, if you could just talk on the cost part for your biologics effort?

Speaker 3

Yes. So on Biologics, we have just maybe just to frame what we call biologics in the company. We have biosimilars, which is about, I think, if I'm not mistaken, 20%

Speaker 2

of the R and

Speaker 3

D. About 20% of the R and D and about 10% of the profit. This is on grade. In addition to that, we are ready to scale up our Carty to launch in India. And we are working on that as well.

Speaker 3

They will normally don't classify I'm assuming that you're asking me about the biosimilars. Yes. This is also very, very important activity for us. In addition to that, we are engaging in licensing in for various markets. So we mentioned the Renussumab already, but we have also local activities in which we are licensing products for a specific market, especially in energy market.

Speaker 3

Likely that until the end of the decade, we will have a significant number of deals that we are working for those markets. And then after the denosumab, the next global product for us will be and rituximab, of course, that we got definitely the approval of Europe. And we hope and we will get later in the year For the U. S, we will have a better set, like I mentioned, to Nihar before, likely at the end of 'twenty six, beginning of 'twenty six.

Speaker 1

Okay. And all these products which are coming, say, in 'twenty six and beyond, you will be marketing on your own, right, or the way like previous two products had gone through partners?

Speaker 3

If I retuximab that it's a partnership with Fresenius, the rest is we will do by ourselves including EpicSits.

Operator

Seats. We have our next question from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead. Yes, thanks

Speaker 6

for the opportunity. So just again on the North America sales, on the base portfolio, mid lake ex Revlimid, as you highlighted, the price erosion is in the range of high single digit. And despite that, the sales paid year on year or even a quarter over quarter, there has been a very reasonable jump. So just to understand if there was any specific product opportunity, which would have because of the product shortage of some competitor going away or how to think about the base business and the sustainability of 100?

Speaker 3

So first, I did not mention the number that you're saying so. So please don't quote me because I did not say. 2nd, yes, it is going to be consistent and we see that this growth. So it's not particular product, it's actually multiple products, primarily because of great service that we are getting in the United States to customers.

Speaker 6

Got it, sir. Yes, yes, got it, sir. And on the India based business, the growth has been quite moderate ex NOP. So how do you think of scaling up this growth?

Speaker 3

As I mentioned, the growth will be double digit even without the inorganic and the inorganic will be in top of it.

Operator

Grow. We have our next question from the line Surya Patra from Philip Capital India Private Limited. Please go ahead.

Speaker 4

Yes, thanks for the opportunity and congrats to the great set of numbers. So my first question is on the origin biologic facility what we have inaugurated. So what is the kind of how big is the investment there? And also wanted to understand is it for the biosimilar pipeline what we have created by Doctor. Reddy or it is targeted towards the CDMO opportunity what we would be thinking and that we have been talking?

Speaker 4

So can you give some clarity on this?

Speaker 3

Yes. That specific investment is for the CDMO activity of the biologics for Origin. So that's the primary purpose of this. The level of investment is a few 100 of crores. I don't remember exactly how much.

Speaker 4

300 crores you said, sir?

Speaker 3

Yes, in terms of CapEx.

Speaker 4

Okay. Is it backed by any CDMO business, generally many times we find that it is backed by some contract or some association or some kind of collaboration with our target party. So is it, as of now currently backed by that? And when do you think that regulatory clearance of this plant that one should expect?

Speaker 3

So it does we do have contracts that pay for this investment. These are all early stage project that comes from innovators. So it doesn't require now any specific regulatory activity. Naturally, if it will continue with this kind of traction, we will need to have a scale up and then discussion and this is will come for later to the years. Right now, it's primarily for R and D activities.

Speaker 3

So it's more of the deep of the CDMO rather than the manufacturing.

Speaker 4

Okay. And my second question is on the volume share rise as per the settlement in case of lenalidomide, whether you have seen that volume share rise, which was indicated as part of the contract?

Speaker 3

The product is growing exactly in accordance to the contract. The volume is not is impacting primarily by the type of agreement and less about capturing market share or anything like that. And so far so good. We are selling the product exactly in accordance to the contract.

Speaker 4

Sure. So just one small clarification. With regards to freight costing what you have mentioned in Prajak, so how serious and critical is this cost issue for the quarter? And is it fair to believe that this is likely to continue at least in the next couple of quarters the way the trade is happening

Speaker 3

in U. S, China? So most of it is related to obviously the conflict in the Middle East. And we need to see Africa and in some of the cases because of the time and we need to fly Maturen instead of shipping it by sea. So obviously, this is the primary issue.

Speaker 3

So obviously, I wish I could know what by when this conflict will end, hopefully it will end. But yes, the impact is a few turns of course, I don't remember exactly how much, but it's the impact.

Speaker 4

Okay. Is it fair to believe that the point around less than 1% kind of for seeing sequentially what we have seen in Asia, large part of that is because of this freight cost?

Speaker 3

I will not say large part. It should be around INR 50 crores or INR 60 crores, something like that. So I don't think last part. The main part is investment in capability in new product, new business initiative. We are leveraging the fact that we have, if you recall in our previous discussions, we want to be give or take, it's never that accurate.

Speaker 3

And the sweet spot in which we are delivering for the shareholders that also investing in the future. So, we are absolutely using the opportunity to invest more in the business, whether it's R and D or CapEx or new businesses. And the SG and A, if you was the lion part is that, but yes, also freight cost and other one offs are also there like Parag mentioned.

Speaker 4

Sure. Yes. Thank you, sir. Wish you all the best.

Speaker 5

Thank you.

Operator

Thank you. We have our next question from the line of Shyam Srinivasan from Goldman

Speaker 5

Sachs. Just Bethune and M and A, we are generating about what about $220,000,000 to $230,000,000 to $240,000,000 per quarter in terms of cash flow quarter. We have a debt of the cash equivalents. We're going to pay for this NRT, which I think the upfront payment will likely be happening. But even after that, we seem to have lots of cash and cash flow generation.

Speaker 5

So just want to understand, in the next 2, 3 that area will likely curtail the home.

Operator

Sorry, you're sounding muffled in between.

Speaker 3

Yes,

Speaker 5

yes. So Oliver is asking about capital allocation and $1,000,000,000 of cash and cash equivalents and probably cash flow generation of $200,000,000 per quarter. We'll likely pay for the NRT therapy coming up next. But even after that, we are going to have significant cash and cash flow generation. So the question is around the 2 to 3 years, which are the areas we're going to likely continue to invest.

Speaker 5

I believe, Erez, in your comments on India, you said that excluding acquisitions, we'll grow double digits. So maybe in India, which are the areas we are likely to grow? Address?

Speaker 3

Yes. So thank you for the question. Indeed, a very important strategic question. First, we believe that we have about 2.5 $1,000,000,000 that we can invest in organically. That depends, of course, on the time and time, but we have enough financial capacity without even changing dramatically ratings or anything like that should not impact the rating at all.

Speaker 3

And of course, we want to invest in each one of the 4 spaces that I mentioned. We do want to invest in our B2B generics, in our innovation, in our consumer care as well as in biologics. The primary way to use it is less of mergers and acquisitions and more about collaborations, licensing. And from time to time, we will buy also assets or rights to the assets. So our preference is to have access to products, products or products that are complementary to our portfolio that allow us to give to be in a very comfortable strategic position in each one of the segments in each one of the geographies.

Speaker 3

Lastly, we are aiming for high level of IRR and for sure better than the cost of capital that we have for the company. In addition to that, we are using the cash flow internal activities. So we are investing in CapEx, especially in the capabilities like biologics and CDMO and our injectables. We believe that we have a very interesting pipeline for the future, primarily contain of injectables and primarily many peptides product. So this is where the capital allocation will go.

Speaker 3

And we are building the growth of the next 5 years, 26, 27, etcetera, as we speak. And we are using the relatively comfortable financial positions that we have now in order to invest and to bring that position into the future.

Speaker 5

Hopefully, it's addressed your question. Yes. So thank you, Erez. Thank you for that. Just one follow-up.

Speaker 5

In the past, in terms of deals in India, valuations have been a hurdle. Do you think our philosophy will likely change now if you were to look at transactions in India? Recently, many of your peers have done, can I say, high valuation acquisitions? Is it something that Doctor. Dix will be also willing to look at?

Speaker 3

We are looking at all the deals in India. India, so let's just to be very clear, India was, is and will be forever a very important market for us and for sure a very important country for all the activities of Doctor. Reddy's. India is absolutely a focus and we are going to invest in India. We feel that the fact that the demand, the brand is analyst market is now single digit, plus the cost of capital went up over the years, presenting the situation that if we have a cash transaction, at least we don't see a reason to buy EBITDA in which only the interest that you take with the banks will be more than EBITDA that

Speaker 2

we get. So this kind

Speaker 3

of transaction, we will not do. If the deal is better than a cost of capital, absolutely we'll do it

Speaker 2

and India will be absolutely a priority.

Operator

Thank you. We'll take our next question from the line of Abdul Kadir Puranwala from ICICI Securities. Please go ahead.

Speaker 2

Hi. Thank you for the opportunity. So my first question is pertaining to the Vaccine business, what we have been licensed from Sanofi. So could you help us understand how the growth profile has been in this particular segment and what are the kind of investments you will have to do to grow this business?

Speaker 3

We acquired this business from Sanofi as what we call the bridge. It's an anchor product will allow us to bring to the segment in the future additional products. So when we identify space that we want to claim, we are trying to

Speaker 2

build what we call the anchor activities that will allow us the capability with the

Speaker 3

product management, with the sales force, with the know how the product, etcetera. So the intent is to buy, to grow it in the best way we can,

Speaker 2

the current business, but to add on it

Speaker 3

over the period of time, additional products that will come from licensing and from other companies.

Speaker 2

Okay. So I mean, have you also taken some MRs, which are obviously pertaining to Sanofi would be not in our payrolls or how is that or anything clear?

Speaker 3

We bought also the sales before from Sanofi.

Operator

We have our next question from the line of Janil Shah from JM Financial. Please go ahead.

Speaker 2

Hi. Thank you for the opportunity. So my question is related to the NRT acquisition. So Aon in their press release have mentioned that the gross assets related to the acquisition of £413,000,000

Speaker 5

So if you can explain why is it so high and is it fair to assume that a large part of this would be good value?

Speaker 3

Michel, I did not personally see the Elion's balance sheet. So you probably need to ask them. I'm assuming that it's mostly intangible.

Operator

Thank you. We have our next question from the line of Kunal Tamesha from Macquarie Capital. Please go ahead.

Speaker 5

Thank you for the opportunity again. I just wanted to understand, has there been any business impact from the Microsoft outage that was there last week for us?

Speaker 3

No, 0, that's 1. Sure.

Speaker 5

And secondly, on the Nestle JV, I didn't understand what will

Speaker 2

Yes. So

Speaker 3

Yes. So we the day 1 is a day in which the JV will work together and whatever we record, we record what we had until now plus what Nestor used to have before it.

Speaker 5

So, it's basically adding our current products like Shalabeda, etcetera, into the JV. It's a way to understand it, right? And then Nestle has brought. Sure. And then, I think the initial activity is to kind of customize the product, the nationalized product, global products for Indian market, etcetera, right?

Speaker 5

For that, we'll have to invest. So this investment will be part of P and L investment or would this be more like balance sheet investment which will capitalize till we commercialize those products?

Speaker 3

So let me clarify. First to your first part, yes, the product activities and the other products that we have, We will add to it the next day activities and both of them will be part of the JV starting from August 1. As related to investment and all the stuff, the intent is over time to bring additional brands primarily from Nestle, the 2nd wave and to introduce them to India to grow them. Specifically, at the very beginning, I don't anticipate impact on the P and L, for sure not in a significant

Speaker 5

Sure. That's very helpful. And the last one from my side. I believe we also undertook the expansion of our biologics facility, right? So is that complete now?

Speaker 5

And with that completion, if you can help with the current capacities, is it more than enough to cover us for the next 2, 3 biologics or biosimilar that we have in pipeline?

Speaker 3

We are still investing in our Baccio Poly facility. The intent is to keep something like 50 kiloliter in that facility. This probably would take us additional 2 years to reach that level. So you're going to see additional CapEx in Batu Polyvat is for the next 2 years. Sure.

Speaker 5

And 50 ks is the aspirational like the future capacity. What is the current capacity? I think 15 ks. 15 ks to 50 ks. Okay.

Speaker 5

Perfect. Thank you and all the best.

Operator

Thank you. As there are no further questions, I would now like to hand the conference over to Ms. Risha Periwal for closing comments. Over to you.

Speaker 1

Thank you all for joining us for today's evening call. In case of any further queries, please get in touch with the Investor Relations team. Thank you once again on behalf of Doctor. Reddy's.

Operator

Thank you, members of the management team. On behalf of Doctor. Reddy's Laboratories Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.

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Earnings Conference Call
Dr. Reddy's Laboratories Q1 24/25
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