Indoco Remedies Q4 2013 Earnings Call 28 May’13 Operator Good evening ladies and gentlemen, I'm Julia, moderator for this conference. Welcome to the conference call of 4Q FY13 Earnings of Indoco Remedies Ltd, hosted by Asian Markets Securities Private Limited. We have with us today, Ms. Meeta Shetty from Asian Market Securities Private Limited. I would now like to hand over the conference to Ms. Meeta Shetty, Asian Markets Securities Private Limited. Over to you ma'am. Meeta Shetty, Analyst Thank you, Julia. Good evening everybody. On behalf of Asian Markets Securities Private Limited, we welcome you all to the management conference call of Indoco Remedies Ltd. We have us today Mrs. Aditi Kare, Managing Director, Indoco Remedies, Mr. Sundeep Bambolkar, Joint MD, Mr. Sunil Joshi, President, Finance and Company Secretary and Mr. Vilas Nagare, Executive VP, Corporate Affairs. I'll now hand over the floor to Mr. Bambolkar to do the company financial performances and then we can begin the Q&A session. Over to you, sir. Sundeep Bambolkar, Joint Managing Director Yeah, thank you. Dear participants, good afternoon to all of you. Let me first brief you on the highlights of the quarter under review. The revenues for the quarter grew by 8.7% at INR160.5 crores against INR147.7 crores during the same period last year. The revenues for the year grew by 11.8% at INR626.4 crores as against INR560.10 crores last year. During the first quarter of FY13, the Indian pharma sector has began with a healthy growth of 16.9%. This growth trend started decelerating in the later quarters at 13.5%, 9.1% and 7.8% respectively. IPM for the year grew at 11.9%, it is on this background the revenues of Indoco's domestic formulation business for the quarter grew by 12.9% at INR92.5 crores as against INR81.9 crore. For the full year, the revenues grew by 15.4% at INR390.4 crores against INR 338.2 crores last year. Both during the quarter and the full year, Indoco's domestic formulation business' growth rates were above the industry average growth rate. During the quarter, our brand in the Urinary Alkalizer category namely, Cital moved up in the top 500 category, making the tally of brands to five in that category. The details of these brands are; Febrex Plus ranked 110, Cyclopam, 347; Sensodent‐K, 419, ATM, 494, and Cital, 486. The source is from AWACs data. Therapies that performed well for the company in this quarter; stomatologicals grew at 11.3%; gastro intestinal at 13.5%; pain and analgesics at 39.8%; antidiabetic at 13.4% and cardiac at 10.7%. Products that performed well during the quarter are Cyclopam tablets grew at 22.8%; Sensodent‐K at 16.1%; Febrex Plus tablets 11.7%; Cital at 10.9%; Tuspel Plus Expectorant at 15.8%; Cloben G at 17.6%; MCBM 69 at 16.2%; Glychek‐M Forte at 22.6% and Methycal tablets at 16.6%. During the quarter, the company launched four products, taking the total to 37 products during the year. The products launched in the first quarter in acute therapy were nine; in quarter two, seven in acute and seven in chronic; in quarter three, eight in acute and two in chronic, and quarter four, four products in acute therapy, totaling to 28 products in the acute therapy and nine products in chronic therapy. The company is putting more thrust on increasing the share of chronic therapy products for a balanced growth. The company has moved up the rank by two positions in the secondary sales audit AWACs compared to last year. The MAT ranking as on 31st March, 2013 stood at 29 as against 31 last year. Ranking as per prescription audit CMARC data for Jan to Feb '13 stood at 26. Impact of drugs price control order 2013. The new drug price control order announced by the government of India affects eight Indoco products, overall impact of which is less than 0.5% of our domestic formulation sales. In any case, the long‐term impact of the new pricing policy on the company as well as overall industry remains positive. Coming to international business, formulation business for the quarter is at INR58.1 crores against 55.5 crores during the same quarter last year. The reg markets recorded revenue at INR52.9 crores as against INR43.5 crores and the emerging markets recorded revenue at INR5.2 crores against INR12 crores during the same quarter last year.
Transcript
Indoco Remedies Q4 2013 Earnings Call 28 May’13
Operator Good evening ladies and gentlemen, I'm Julia, moderator for this conference. Welcome to the conference call of 4Q FY13 Earnings of Indoco Remedies Ltd, hosted by Asian Markets Securities Private Limited. We have with us today, Ms. Meeta Shetty from Asian Market Securities Private Limited. I would now like to hand over the conference to Ms. Meeta Shetty, Asian Markets Securities Private Limited. Over to you ma'am.
Meeta Shetty, Analyst Thank you, Julia. Good evening everybody. On behalf of Asian Markets Securities Private Limited, we welcome you all to the management conference call of Indoco Remedies Ltd. We have us today Mrs. Aditi Kare, Managing Director, Indoco Remedies, Mr. Sundeep Bambolkar, Joint MD, Mr. Sunil Joshi, President, Finance and Company Secretary and Mr. Vilas Nagare, Executive VP, Corporate Affairs. I'll now hand over the floor to Mr. Bambolkar to do the company financial performances and then we can begin the Q&A session. Over to you, sir.
Sundeep Bambolkar, Joint Managing Director Yeah, thank you. Dear participants, good afternoon to all of you. Let me first brief you on the highlights of the quarter under review. The revenues for the quarter grew by 8.7% at INR160.5 crores against INR147.7 crores during the same period last year. The revenues for the year grew by 11.8% at INR626.4 crores as against INR560.10 crores last year. During the first quarter of FY13, the Indian pharma sector has began with a healthy growth of 16.9%. This growth trend started decelerating in the later quarters at 13.5%, 9.1% and 7.8% respectively. IPM for the year grew at 11.9%, it is on this background the revenues of Indoco's domestic formulation business for the quarter grew by 12.9% at INR92.5 crores as against INR81.9 crore. For the full year, the revenues grew by 15.4% at INR390.4 crores against INR 338.2 crores last year. Both during the quarter and the full year, Indoco's domestic formulation business' growth rates were above the industry average growth rate.
During the quarter, our brand in the Urinary Alkalizer category namely, Cital moved up in the top 500 category, making the tally of brands to five in that category. The details of these brands are; Febrex Plus ranked 110, Cyclopam, 347; Sensodent‐K, 419, ATM, 494, and Cital, 486. The source is from AWACs data.
Therapies that performed well for the company in this quarter; stomatologicals grew at 11.3%; gastro intestinal at 13.5%; pain and analgesics at 39.8%; antidiabetic at 13.4% and cardiac at 10.7%. Products that performed well during the quarter are Cyclopam tablets grew at 22.8%; Sensodent‐K at 16.1%; Febrex Plus tablets 11.7%; Cital at 10.9%; Tuspel Plus Expectorant at 15.8%; Cloben G at 17.6%; MCBM 69 at 16.2%; Glychek‐M Forte at 22.6% and Methycal tablets at 16.6%.
During the quarter, the company launched four products, taking the total to 37 products during the year. The products launched in the first quarter in acute therapy were nine; in quarter two, seven in acute and seven in chronic; in quarter three, eight in acute and two in chronic, and quarter four, four products in acute therapy, totaling to 28 products in the acute therapy and nine products in chronic therapy. The company is putting more thrust on increasing the share of chronic therapy products for a balanced growth.
The company has moved up the rank by two positions in the secondary sales audit AWACs compared to last year. The MAT ranking as on 31st March, 2013 stood at 29 as against 31 last year. Ranking as per prescription audit CMARC data for Jan to Feb '13 stood at 26.
Impact of drugs price control order 2013. The new drug price control order announced by the government of India affects eight Indoco products, overall impact of which is less than 0.5% of our domestic formulation sales. In any case, the long‐term impact of the new pricing policy on the company as well as overall industry remains positive.
Coming to international business, formulation business for the quarter is at INR58.1 crores against 55.5 crores during the same quarter last year. The reg markets recorded revenue at INR52.9 crores as against INR43.5 crores and the emerging markets recorded revenue at INR5.2 crores against INR12 crores during the same quarter last year.
As regards the regulated market, the launch of ophthalmic products in U.S. market have got delayed due to delay in ANDA approvals from US‐FDA. Health‐Canada approved our ANDS for two ophthalmic solutions and the shipment for one of the products was effected during the quarter. The company added two more projects for product development with Aspen. We received marketing authorization for three products against our own Dossiers filed with MCA, South Africa and have also started Contract Manufacturing for two products with a new partner in South Africa.
In the emerging markets the company has decided to change the business model from distribution to promotion for enhanced profitability and long‐term sustainability. The operations part, during the quarter our plants successfully faced various audits such as the new plant that is Goa III successfully faced GMP Audit by Pharmacy and Poisons Board, Republic of Kenya. The facility also received certificate of GMP Compliance from German Regulatory Authorities.
Baddi Plant successfully completed the MHRA‐UK Audit. This is the third time that Baddi Plant was audited by MHRA. Kilo Lab & Patalganga API facility were successfully inspected for WHO‐GMP compliance. API business revenues for the quarter are at INR9.7 crores against INR10 crores for the same period last year. During the quarter the company received certificate of suitability from EDQM for an Ophthalmic API.
I'd now turn to the financials of the business for this quarter. During the quarter, the material consumption to net sales is at 39.8% as against 43.9% during the same period last year. The improvement in material cost is due to improved margins of various products and due to efficiency in procurement and also due to the efficiency in manufacturing The staff cost to net sales is at 15.6% against 14.1% during the same period last year. The increase in staff cost is due to additional field force recruitments and also annual increments. The depreciation/amortization are at INR6.3 crores against INR5.3 crores. Research and development expenses for the quarter is 1.7% of net sales, amounting to INR2.8 crores against 2.2% amounting to INR3.2 crores.
Other expenses to net sales are 26.1% as against 25.1%. The marginal increase in other expenses was mainly on account of increase in freight, travelling, advertisement and sales promotion expenses. On year‐on‐year basis, the material consumption to net sales is 41.8% against 43.7% last year. The staff cost to net sales is 16% against 14.6%. The depreciation/amortization are at INR23.7 crores against INR19.3 crores. Research and development expenses are at 12.9 crores, which is 2.1% of net sales as against 10.8 crores, which is 1.9%. Other expenses to net sales are at 25.9% against 26.2% last year.
Profit after tax stands at 12.9 crores against 12.5 crores during the same quarter last year. PAT as a percentage to net sales for the year is at 6.8% at INR42.7 crores against 8.3% at INR46.3 crores. Earnings before interest, depreciation, tax and amortization, EBIDTA, as a percentage to net sales for the quarter is at 17.6% that is at 28.2 crores as against 16.7% at 24.6 crores during the same quarter last year. EBIDTA as a percentage to net sales for the year is at 16.9% at INR106 crores as against 17% at INR95.4 crores last year.
The MDA has already been circulated. I now request the participants to go ahead with their questions. Thank you.
Questions And Answers
Operator Thank you, sir. Ladies and gentlemen, we will now begin the question‐and‐answer session. (Operator Instructions) The first question is from Mr. K.C. Suri from Span Capital Services. Please go ahead.
K.C. Suri, Analyst Yeah. Good afternoon Mr. Bambolkar and the rest of the team. I mean, we are clearly not really happy with the results as we ‐‐ I mean, as shown here. Do we still stand by the guidance which we gave last quarter that you planned to be a 1,000 crore company by FY15 with a 20% EBITDA margin because that looks like really impossible task from here?
Aditi Kare Panandikar, Managing Director Why does it look impossible from here?
K.C. Suri, Analyst I mean, you're talking ‐‐ if that's been the reason, then how is it that ‐‐ I mean, from ‐‐ how do you see the profits doubling from
here? What would drive those kind of numbers? I mean, if you could just reiterate it, it would probably reassure us on this.
Aditi Kare Panandikar, Managing Director First of all, I think if you had logged in for our earlier con. call at the end of the nine‐month period, this number should not have surprised or shocked you as at the end of time, but all the same, let me repeat. You might have noticed that there is a pretty good improvement for EBITDA for this quarter vis‐a‐vis the same quarter last year. There is also an Indoco has 90% product portfolio in the acute segment, which for the market, has only grown at 6%. Despite of that, the company has posted a growth of 15.4% annually. I think that is very creditable and it shows a lot for our strategy which is going to drive the business going forward.
Also, if you have read the MDA correctly, you might have realized that most of the upsides which are expected to come from the international business, especially from U.S. are yet to be accrued. I don't see any reason why with all these factors coming in, we cannot achieve what we have stated out to do for 2015. Maybe Sundeep would like to add something here.
Sundeep Bambolkar, Joint Managing Director Yeah. You have something to say?
K.C. Suri, Analyst No, no. Sorry. Go ahead, sir.
Sundeep Bambolkar, Joint Managing Director Yeah, see, on the domestic front, Aditi has already spoken to you. On the international front too, there are so many avenues which are going to open out. So it really surprises us that you are saying do we need to rethink on the strategy also, which we are absolutely sure about.
K.C. Suri, Analyst So I mean, the 600 odd, we are at ‐‐ we'll be probably 1,000 crores and the 14%, 15% EBITDA margin, I mean, of course, you are adding back R&D and other income, but I mean, if you include R&D and expense and exclude the other income, we are still about 14.8% EBITDA. So that would scale up to 20%. I mean, are we talking about a 1,000 crore or ‐‐ 200 crores [ph] of EBITDA there?
Sundeep Bambolkar, Joint Managing Director That's a methodology of looking at things. In every call, we have reiterated that the R&D spending is for long‐term ‐‐
K.C. Suri, Analyst Agree.
Sundeep Bambolkar, Joint Managing Director ‐‐ that you're 100% sure about. As and when the ANDAs get approved, hello?
K.C. Suri, Analyst Sundeep Bambolkar, Joint Managing Director Yeah, so this time, we're already clarified earlier.
K.C. Suri, Analyst Okay, and I mean, what would be the loss now? I mean you have the Watson deal, you have these two products which I mean, of course, delays on the FDA part that the ANDAs are not getting approved. Other than these two, which are the other products, which
would probably you see have a ‐‐
Sundeep Bambolkar, Joint Managing Director We have 11 products in the Watson deal, so ‐‐ and the last out of the 11 was filed before December 2011. So already one and a half year has passed from which date the last product was filed.
K.C. Suri, Analyst Okay, I mean, we're talking about a three year ‐‐ I mean, normally what FDA now think about a 37 month period for this thing. So it'll be a 2014 kind of a ‐‐ December '14 would be probably the earliest you can see the launch of the last of the products if everything were to go on‐track?
Sundeep Bambolkar, Joint Managing Director Sorry, I didn't get you.
K.C. Suri, Analyst I'm saying, FDA is now ‐‐ I mean, FDA is saying it takes approximately 37 months to approve an average ANDA, that's your average approval time. So considering that the last filing was around December, so are we seeing 11 product launches by 37 months added to December 11, say January 15, is that ‐‐
Sundeep Bambolkar, Joint Managing Director See December 2011, the last product was filed, not all 11. 11 have been filed over a period of time, and now the 37 period time has to come into play right now. It's not applicable for the products which we've filed three years before. So this is going to the sort of ramp up slowly as you've seen (inaudible) again telling you. So this particular year, two products are going to be approved immediately. The timeline of which we are not really sure about. In addition to that, three more products we are anticipating that these to be approved over the last (inaudible)
Last product filed in December '11 was just to give you an indication that what is the ‐‐ brightness that is in store for the company.
K.C. Suri, Analyst Sundeep Bambolkar, Joint Managing Director No, the total finance cost which we have shown as 21 crores, almost 12 crores out of that is on exchange of ‐‐ loss in forex loss and that was ‐‐ a major hit has been already taken in the P&L. So going forward, we estimate the finance costs to be much lower.
K.C. Suri, Analyst Okay, you said 10 crores, right, that's during Q2 [ph]
Sundeep Bambolkar, Joint Managing Director The interest cost so far is eight crores for the year.
K.C. Suri, Analyst Okay, so 12 crore was there. Right and I mean the top three products, Stomatological is now a Sensodent‐K, I mean that's from the word it's says that it's probably for sensitive teeth and we see a lot of these FMCG companies coming with OTC product. How do you compete with them in terms of this product because we see a quarterly fluctuation in revenues which really goes from 52 crores to down to 36 crores. So just to understand that, I mean 5 crores to ‐‐
Aditi Kare Panandikar, Managing Director Yeah, first and foremost Sensodent‐K is one of the dental preparations we have in the de‐sensitizing market. We have many other products. In fact the direct competitor is Sensodyne, which you see advertise so much on television is currently being launched with Myers.
Coming back to your question about how do we compete, we do not get into that space at all of OTC proportion of any kind. We entirely stick to ethical promotion through the doctors. All our (inaudible) on account of prescription generated by doctors. And in the very first year after these products were taken OTC, we in fact have seen a big jump in the demand for these products, coming through prescriptions itself. So there is a definite market for these products, our products through the prescription route and that is what we're sticking to.
K.C. Suri, Analyst All right. Okay, thank you and all the best.
Sundeep Bambolkar, Joint Managing Director Okay, thank you.
Operator Unidentified Participant Hi Aditi and hi Mr. Sundeep. I just wanted to understand in Watson, how is it progressing and also the AOK for Germany, both these contracts, how are they progressing and I mean, you did talk a little briefly, but if you could just again just hit back on the German part and the Watson deal and how is it progressing and when do you think launches are likely and what is your US FDA situation and your plans got approved and could you just throw us more light after the last call, what all things happened, if you could just throw some more light on that?
Sundeep Bambolkar, Joint Managing Director Yeah, Niraj, I'll just let Vilas get in the detail, okay?
Vilas Nagare, Executive Vice President Corporate Affairs Niraj, US FDA approval is something which is beyond our control. We cannot today say when ‐‐
Unidentified Participant I do understand that but I just wanted to know what is the latest news, I do understand that.
Vilas Nagare, Executive Vice President Corporate Affairs No, that the latest is ‐‐ last communication that we had from US FDA says that it will take few weeks. So more than that we have no further information to share.
Unidentified Participant In terms of Watson, what's happened in terms of your products and are you ready to launch it, so what do you the timeline, maybe three months like ‐‐ and AOK of Germany ‐‐ about how's your ‐‐
Sundeep Bambolkar, Joint Managing Director If the approval comes tomorrow, we are ready for launch.
Unidentified Participant Okay. But do you think three to six months would be a fair thing or would it be shorter than that? What would be your
Sundeep Bambolkar, Joint Managing Director This is anyway guess. So I think it is six months in the ‐But if the approval comes tomorrow, you can factor ‐‐
Unidentified Participant Okay. No, I understand.
Aditi Kare Panandikar, Managing Director If approval comes tomorrow, you can ‐‐
Unidentified Participant And what about ‐‐
Aditi Kare Panandikar, Managing Director I'm sorry?
Unidentified Participant No, I understand. Second part of AOK of Germany, AOK of Germany, do you think ‐‐
Sundeep Bambolkar, Joint Managing Director Germany has approved our new plant.
Unidentified Participant Right.
Sundeep Bambolkar, Joint Managing Director German authorities have approved our new plant, which has a much higher capacity. So we are well set for any contracts which come our way. That's what we wanted to highlight.
Unidentified Participant Right. And Aditi, once more I would like to ask you, where would you like ‐‐ you have grown it to now a 600 crore company which you have set 1,000 crore. Where do you ‐‐ and where do you see, if you could just throw some more light, I mean, you've spoken through that, but if you could just again reiterate how would you like to grow the business and where do you see the pitfalls or where do you see the rises and to take and you go to ‐‐ how much 600 crores or 1,000 crores, your challenges and your ‐65% of our top line continues to come from the Indian market. Here we have a presence up to 90% in the acute segment. Our first endeavor would be to increase the contribution of chronic to our domestic sale. In addition to that, our legacy products which are doing very well, most growing at more than double digits, we continue to emphasize on them. We have got certain advantages there and we will build them into bigger brands.
There has been good amount of restructuring that has been done in domestic in order to further exploit the conditions of market
and take our products to a better level. Internationally, as you are already aware, a lot of studies have been done in U.S. We are only waiting for the regulatory signal to take it forward. In Europe, the company is looking to file on our own, which is the next thing going forward.
Coming to Aspen also, you are aware of the ‐‐ Sundeep will probably brief you later, but that business is also going very well. Apart from that, the API business which is very, very small, on a very small base is going to increase rampantly. We have also filed with the Japanese authorities. We are waiting for that approval. So that's where we are going.
Unidentified Participant And you think that ‐‐ so you will be one day a 50‐50 domestic export company ‐‐ so you have confident of that, right, you are going in that direction, right?
Sundeep Bambolkar, Joint Managing Director Yes.
Aditi Kare Panandikar, Managing Director Yeah.
Unidentified Participant And then any ‐‐ in the MR productivity, anything has improved or anything you think next year you would improve it and how would you take it, domestic MR and how would you do that? Would you throw some more light on that? And how many MRs do exist ‐‐
Aditi Kare Panandikar, Managing Director Yeah, as the share of chronic in the portfolio goes up, as the legacy brands become bigger, as we control recruitment which we've done this year, we've only added 100 people all across the country, which is enough. As this breakeven happens, so this takes about 15 to 18 months in the field for a rep to start breaking when he starts really delivering the sales. We are very confident this year to look at anywhere between 2.1 pH life for the company.
Unidentified Participant That's great. And my last question, Sundeep, how do you ‐‐ I mean, you achieve this 1,000 crore milestone, how much debt would you need or how much more money would you need to have the cash flows? I mean, you are not a high debt company, so you can always borrow. How would you grow it? Would you take a debt equity? What would, you as
Sundeep Bambolkar, Joint Managing Director Yeah, yeah, that's a question I'd love to answer because as things stand, about $8.5 million is the long‐term debt approximately, 8.5 million to 9 million.
Unidentified Participant Yes.
Sundeep Bambolkar, Joint Managing Director And short‐term debt was between 45 crores to 55 crores, 45 crores to 60 crores depending on peak season and lean season. So our endeavor is now for at least 12 to 18 months, we bring down the long‐term debt substantially, don't borrow anything for the next 12 to 15 months on long‐term basis and also by efficient working capital management ‐efficiently collections, driving them up, reduce the short‐term debt. So that is our aim. So to be more precise, if we go to 1,000 crores, we should have at least not increase the debt level from here. That's what we are trying to do.
Aditi Kare Panandikar, Managing Director We won't need it.
Unidentified Participant That will be great.
Aditi Kare Panandikar, Managing Director I think we have enough capacity. Most of our plant capacities which is not occupied with international right now have been filled up with domestic, which we can easily free. Further investment is likely to be in the area of research going forward, which we will need in order to keep the traction going ahead.
Unidentified Participant Thanks. Wish you very best, Aditi and Sundeep. Wish you all the best and see you soon.
Sundeep Bambolkar, Joint Managing Director Thank you, thank you.
Aditi Kare Panandikar, Managing Director Thanks. Thanks, right.
Operator Thank you. Ladies and gentlemen, we request you to limit your questions to two in the initial round. Our next question is from Mr. Sriram Rathi from Anand Rathi Securities. Please go ahead.
Sriram Rathi, Analyst Thanks for taking my question. Basically first question is about gross margin. You've seen around more than 300 basis point improvement in the gross margin on a YoY basis. Now, any particular reason for that because if I look at the proportion of domestic revenue, it is more or less similar to the last year. So what has basically driven this margin improvement?
Sundeep Bambolkar, Joint Managing Director Yeah, you are commenting on the increase in gross margins.
Sriram Rathi, Analyst Yeah. If you look at raw material cost, it has come down by more than 300 basis point on a year‐on‐year basis?
Sundeep Bambolkar, Joint Managing Director Correct. We have specified the main reason that is the good product mix both for domestic and international, point number one. Point two is efficiency in procurement, that is the pricing, and point number three is efficiency in manufacturing processes, yield improvement and cutting down the operational costs in the plants. So all three factors have contributed for sizing the gross margin.
Sriram Rathi, Analyst Okay. So these factors should be sustainable, I believe, because ‐‐
Sundeep Bambolkar, Joint Managing Director Yeah, yeah. Very sustainable.
Aditi Kare Panandikar, Managing Director Specific efforts have been taken across the organization to either let go off or not continue businesses which were not profitable or products which were not giving significant revenues, including some tender like businesses in emerging market. And those have resulted in this kind of improvement. Okay, okay. So there is no ForEx loss or gain item above EBITDA in this quarter?
Sundeep Bambolkar, Joint Managing Director No.
Aditi Kare Panandikar, Managing Director Small gain, I think. Is it there? ForEx.
Sundeep Bambolkar, Joint Managing Director No, no, because previous year also, dollar was at 54 and now it is 54.50. So hardly any ForEx gains.
Sriram Rathi, Analyst Okay. This is more of a base business only, business and one‐off.
Sundeep Bambolkar, Joint Managing Director Yeah, yeah.
Sriram Rathi, Analyst Okay, okay. And this EBITDA margin of around 16% this quarter, should we take this as now base EBITDA margin for the company going forward?
Sundeep Bambolkar, Joint Managing Director Yeah, this can be.
Sriram Rathi, Analyst It can be, okay, okay. Okay, fine. Got it. Thank you. Thank you very much.
Sundeep Bambolkar, Joint Managing Director Yeah, thanks.
Operator Thank you. Next question is from Mr. Amish Kanani from JM Financial. Please go ahead. Yeah. Hi, good afternoon. Yeah, my question pertains to the FDA. I know you have little control over it. Maybe couple of clarification. You said that last quarter at least you were a little more ‐‐ some dates which I think since the approvals are not coming, or not giving, the point is is it something negative that has come or it's just a lack of communication which is the case?
Aditi Kare Panandikar, Managing Director No, we are only waiting. I don't if you are aware. One of our (inaudible) was actually got approved this quarter ‐‐ last quarter, GLIMEPIRIDE tablets. So these products, we are just waiting. That's it.
Sundeep Bambolkar, Joint Managing Director There is no negative.
Amish Kanani, Analyst There is nothing negative, right? So you said the last communication was within few weeks. What was that communication? Was it something that was a letter or it was the personal visit that had been ‐‐
Aditi Kare Panandikar, Managing Director We have a regulatory consultant in U.S. who constantly follows up with FDA and they write formal communication to it. This is a letter he has forwarded from them to us, saying that the indication now FDA says is few more weeks. That's it.
Amish Kanani, Analyst Okay. So this was as old as a quarter before or this is something which has happened last month? That's just ‐‐
Aditi Kare Panandikar, Managing Director At any given time when you check, they say a few more weeks. That's it.
Amish Kanani, Analyst Okay, okay, okay. And there is no adverse development, just that the normal waiting period is getting along with it?
Sundeep Bambolkar, Joint Managing Director It's the waiting period.
Amish Kanani, Analyst Aditi Kare Panandikar, Managing Director Yeah, sure.
Amish Kanani, Analyst Sure and in terms of R&D, if you can just explain us, how much do you capitalize and how much do you charge and then what's the policy there and what's the overall this year, what was the cost.
Sundeep Bambolkar, Joint Managing Director
Whatever is going in for projects which sort of are (inaudible) more than a period of 12 months, those projects and expenditure there on are capitalized.
Amish Kanani, Analyst Okay. So, how much was the total cost and how much of that you would attribute to, for more than 12 months which is capitalized for this year FY13 and how was the ‐‐ what was the case before?
Sundeep Bambolkar, Joint Managing Director It depends on the projects, there is no policy as such, as and when we take the project, the projects by the nature of it's longevity, we decides whether to take it in, capitalize or sort of ‐‐
Meeta Shetty, Analyst We've different lines on like patent expiry which is not always depended upon approvals. Competitors are a different game depending on which segment you're in and where the product is in its life cycle.
Amish Kanani, Analyst Sure, so my question is how much was spent during this year and how much of that is capitalized based on this policy for this year and what was the situation in last year for FY12 ‐‐ FY13 was a reflection of that.
Sundeep Bambolkar, Joint Managing Director Okay, we'll give that information to you. I'm not ‐‐
Amish Kanani, Analyst If you don't have that ready, maybe I'll call up and we can have it off‐line. Yeah, we'll give it to you.
Amish Kanani, Analyst Yeah, sure, okay. Thanks. All the best.
Operator Thank you. The next question is from Mr. Nishit Sanghvi from IDBI Capital, please go ahead.
Nishit Sanghvi, Analyst Yeah, hi sir. Thanks for taking my question. Basically just wanted to ask you sir, probably a little more about the Watson deal, you're expecting pan out in FY14. Basically, so can we get what kind of market size these products will be and probably how many in FY15.
Aditi Kare Panandikar, Managing Director Can you repeat that, we didn't get the first part of the question.
Nishit Sanghvi, Analyst Yeah, basically you said that probably you're expecting three products from the Watson deal to pan out, so, probably what kind of ‐‐ will this be in FY14 in itself?
Aditi Kare Panandikar, Managing Director Yeah, yeah. The products in the current year.
Nishit Sanghvi, Analyst Okay and so, what kind of market size will these products have?
Sundeep Bambolkar, Joint Managing Director Nishit, earlier we mentioned that the first two products that we'll be launching have the market size of $220 million. The subsequent one will have a market size of $388 million.
Nishit Sanghvi, Analyst Okay, and sir, and what about the launch pipeline in FY15, how many products are you looking there?
Sundeep Bambolkar, Joint Managing Director Nishit Sanghvi, Analyst Okay. And basically sir on your international formulations basically just wanted to know, which geography probably we did particularly, was it U.K. or was it Germany, basically what kind of growth did we do for the year, full year?
Sundeep Bambolkar, Joint Managing Director I think your mobile signal, your cell phone is interfering. So we cannot ‐‐
Nishit Sanghvi, Analyst I'm sorry. What kind of growth rate in U.K. did we do for the year?
Aditi Kare Panandikar, Managing Director These are the reg market business in totality ‐‐
Sundeep Bambolkar, Joint Managing Director 21%.
Aditi Kare Panandikar, Managing Director ‐‐ has grown by about 21%.
Nishit Sanghvi, Analyst Right, right.
Aditi Kare Panandikar, Managing Director Okay and 80% of that is continues to come from U.K.
Nishit Sanghvi, Analyst
Okay.
Aditi Kare Panandikar, Managing Director and Germany together.
Sundeep Bambolkar, Joint Managing Director Nishit Sanghvi, Analyst Okay. Great. Just on your ‐‐ I missed out your MR, what is the current MR strength number, can you please repeat it for me?
Aditi Kare Panandikar, Managing Director Around 2,300 MR, okay.
Nishit Sanghvi, Analyst Okay.
Aditi Kare Panandikar, Managing Director And 500 managers.
Nishit Sanghvi, Analyst Great.
Aditi Kare Panandikar, Managing Director ‐‐ in the field.
Nishit Sanghvi, Analyst Okay. Thank you. That's all from my side. Thanks a lot.
Operator Thank you. Next question is from Mr. Saravanan Viswanathan from UNIFI Capitals.
Saravanan Viswanathan, Analyst Sir, good evening.
Sundeep Bambolkar, Joint Managing Director Good evening.
Saravanan Viswanathan, Analyst Aditi Kare Panandikar, Managing Director Current year?
Saravanan Viswanathan, Analyst
Yeah, current year, H1 financials.
Aditi Kare Panandikar, Managing Director We are the IPM is showing small recoveries already from how it has been.
Saravanan Viswanathan, Analyst Okay.
Aditi Kare Panandikar, Managing Director As you might have noted when Sundeep spoke.
Saravanan Viswanathan, Analyst Yeah.
Aditi Kare Panandikar, Managing Director For the four quarters we saw a real slide in the market growth and fortunately today, the core is the de‐risk because of products across various categories. So we have been able to sustain and do better than the market.
Saravanan Viswanathan, Analyst Okay.
Aditi Kare Panandikar, Managing Director But in the coming year and expecting that most of the four categories that we are in including respiratory, stoma, GI as well as anti‐infective, all four will do very well.
Saravanan Viswanathan, Analyst Okay. They are our main categories.
Saravanan Viswanathan, Analyst Okay.
Aditi Kare Panandikar, Managing Director Into this through Indoco‐CND, which is a cardio diabeto division, as well as Eterna, we are targeting the chronic segment and we hope to increase the percentage of chronic in our entire portfolio going forward, we will do it. So that's another area where the growth will come from.
Saravanan Viswanathan, Analyst Okay.
Aditi Kare Panandikar, Managing Director
We have restructured some of our mass divisions this year. So that the promising products get a better reach to the doctors. One of our mass divisions, which was not all India has been now made Pan India presence. This was incidentally, the division which carries Cital and we have recently seen the upside in sales coming from this activity. So there are many triggers actually for why '14 will be a better year for domestic ‐‐ even better year for domestic going forward.
Saravanan Viswanathan, Analyst Okay. So even in FY14, you would be doing better than the industry?
Aditi Kare Panandikar, Managing Director Definitely.
Saravanan Viswanathan, Analyst Okay. And see, since ‐‐ I mean, can we understand that based on the inputs that you gave that many of the capacities especially in the international front is yet to be fully utilized, can we expect that CapEx for the next two years to be minimal, only maintenance CapEx?
Aditi Kare Panandikar, Managing Director Absolutely.
Sundeep Bambolkar, Joint Managing Director Saravanan Viswanathan, Analyst Okay. And in terms of ‐‐ I mean, any update on the Aspen deal and when would be the real revenue potential kick in?
Sundeep Bambolkar, Joint Managing Director Yeah, with Aspen also, there are ‐‐ we are working on various modules as we said earlier. First is contract manufacturing of niche products. Second is products which have been developed by Aspen in their R&D center, but being brought to our plant for validation batches and then filing the data from our plant for eventual commercialization. Third is out‐licensing of our own dossiers to them and they filing it. And the last one is they coming up with a wish list for Indoco to develop.
Saravanan Viswanathan, Analyst Okay.
Sundeep Bambolkar, Joint Managing Director So altogether, on these various modules, we have, by now I think, filed for at least 35 to 40 products together with Aspen.
Saravanan Viswanathan, Analyst Okay.
Sundeep Bambolkar, Joint Managing Director So we should start getting commercial from this year, say, mid of this year to end of this year.
Saravanan Viswanathan, Analyst Okay. And in FY14, this will become, I mean, let's say this will be meaningful, become meaningful?
Sundeep Bambolkar, Joint Managing Director Yes. Yes.
Saravanan Viswanathan, Analyst Okay, okay. Okay. Thank you and all the best.
Sundeep Bambolkar, Joint Managing Director Operator Thank you. (Operator Instructions) Next question is from Ms. Meeta Shetty. Please go ahead.
Meeta Shetty, Analyst Hello?
Aditi Kare Panandikar, Managing Director Yeah.
Meeta Shetty, Analyst Yeah, sir. As Aditi ma'am said on the domestic market, obviously 15.4% growth which we haven't seen in the last four, five years is quite commendable, but just wanted to understand a bit more on this. I mean, is the growth driven by price increase or is there a volume increase, so if you can just throw some light on that?
Aditi Kare Panandikar, Managing Director Price increase, we don't really have much scope for (inaudible) the increase in prices.
Meeta Shetty, Analyst True, true. All right.
Aditi Kare Panandikar, Managing Director It has largely come from volume growth. Many of our legacy products have done very well, specifically Cyclopam, which is the second largest brand had grown by almost 17%, 18%, which is really fantastic and that is ‐‐ so it is largely volume driven, it is also because of territorial expansion, as I said, one of the division which has gone all India and it's also because of more product launches. So, new products have also contributed, many factors actually.
Meeta Shetty, Analyst So, I also see that our MR strength has gone up year‐on‐year gradually. Obviously we've taken increase. So is that also a larger or probably a main driver for our growth in domestic?
Aditi Kare Panandikar, Managing Director Last year, at this point, the industry was growing at 18.5%. So there was every reason to further increase number of people in the field in order to get a share of this growth. At that point we added up around 300 people. This year we've added only 100 more. So there is already a control in the number of people added. So, I do not ‐‐ this year's growth has not ‐‐ it takes about 15 to 18 months for the new people to start thinking any kind of substantial sale. So the increase is
Meeta Shetty, Analyst
All right. So now that we've a base which has already grown by 15%. Going ahead are we feeling confident of growing something above IBM or do we need to put in more MRs to that or just a ‐‐
Aditi Kare Panandikar, Managing Director We're confident that the current strength is more than sufficient. In fact the part of the restructuring was to see that most of the mark therapy divisions are given enough manpower, so we actually sort of thought to it that Spade, which is the second largest division has almost equitable number of people at Indoco, which will help us take Febrex Plus also to the same kind of levels of growth as Cyclopam has been giving. So we do not need any more ‐‐ at least for this year, this is just 100, and next year at this point, I don't think we will be needing any further people.
Meeta Shetty, Analyst Okay, great. Second thing on the R&D side. Now that we're looking at further ramping up on the export side as always we had planned so. So what is the R&D percent to sales that probably will have by say FY14 as well as FY15?
Aditi Kare Panandikar, Managing Director FY15, I think which should be inching up to somewhere between 2.5% to 2.7% of sale.
Meeta Shetty, Analyst Okay, okay. All right. And just lastly, one on the Watson, we have two products which probably would come in, in the coming months or so. But as of say two years down the lines, say by end of FY15, what is the kind of number of products that we will have from that basket, from Watson's basket I mean?
Aditi Kare Panandikar, Managing Director By '15, between seven and nine products should be there.
Meeta Shetty, Analyst Okay, so we largely have most of the products by then that's what you're trying to say.
Aditi Kare Panandikar, Managing Director No, I mean totally 11 and five ‐‐
Meeta Shetty, Analyst Five of them you're saying should be there in the market.
Aditi Kare Panandikar, Managing Director Yeah, yeah and then there are 20 in the basket. So, the filings are going to continue.
Meeta Shetty, Analyst Okay, okay great. Thanks a lot. That's all my side.
Operator Thank you. Next question is from Mr. Rahul Sharma from Karvy Stock Broking, please go ahead.
Rahul Sharma, Analyst I just wanted to know was there any ‐‐ how is the Europe and U.S. mix for the quarter and for the year?
Sundeep Bambolkar, Joint Managing Director As we said, drug markets have grown by 21% and drug market we define as U.S, Canada, U.K, Germany a small part of Eastern Europe, South Africa and Australia and New Zealand. Out of this, the main part is U.K and Germany currently.
Rahul Sharma, Analyst Okay, how much would each be constituting for the quarter and year?
Sundeep Bambolkar, Joint Managing Director Together, during the quarter U.K and Germany together constitute about 63% to 64%.
Rahul Sharma, Analyst Okay and for the year.
Sundeep Bambolkar, Joint Managing Director Almost the same.
Rahul Sharma, Analyst Okay on the quarter we had the interest cost, how much is the forex element in that?
Operator Thank you. The next question is from Ms. Purvi Shah from Dalal & Broacha. please go ahead.
Purvi Shah, Analyst Hello?
Sundeep Bambolkar, Joint Managing Director Yes.
Purvi Shah, Analyst Yeah, firstly congratulation and then I have a clarification, one was clarification on the interest and that you've said 22 crores is the
total interest cost for the year, of which 12 crores is the forex loss and 8 crores would be the interest cost.
Sundeep Bambolkar, Joint Managing Director Correct.
Purvi Shah, Analyst So, that adds upto 20. So just wanted to know where the balance 1.8 crore.
Sundeep Bambolkar, Joint Managing Director 8.42 and ‐‐ 21.88
Aditi Kare Panandikar, Managing Director It's a decimal form [ph]
Purvi Shah, Analyst Sundeep Bambolkar, Joint Managing Director 12.42 plus 8.65.
Purvi Shah, Analyst Okay, fair and other was on the tax and if you could guide us as to what the tax rate we've seen for the next two years?
Sundeep Bambolkar, Joint Managing Director It will be similar, the combination ‐‐
Purvi Shah, Analyst Okay.
Sundeep Bambolkar, Joint Managing Director Max credit, accumulate max credit for ten years, so if you target on 1st April 2006, the rise of ‐‐ 31st March 2015, currently the max.
Purvi Shah, Analyst And sir, the last one was on the gross margin front, do we see for this hope for improvment in this margins?
Sundeep Bambolkar, Joint Managing Director Definitely there is cost.
Purvi Shah, Analyst Okay, sir. All the best.
Operator Thank you. Next question is from Mr. Krishna Kiran from ICICI Direct, please go ahead.
Krishna Kiran, Analyst Yeah thanks for taking my question and congrats on good set of numbers. Sir one question on forex loss you mentioned around 2.8 crores of forex loss and is this an including interest cost only or anything was included in other operating income? The entire forex 2.8 is from interest cost only.
Krishna Kiran, Analyst Sir, then what are the reasons why we've mentioned 1.5 crores of loss in other operating income pertain to?
Sundeep Bambolkar, Joint Managing Director Yeah that is on debtor side, that is more on interest.
Krishna Kiran, Analyst Sorry, can you repeat that?
Sundeep Bambolkar, Joint Managing Director That is a loss on this debtors. When the export is realized, export profit are realized, that is the loss on debtors.
Krishna Kiran, Analyst Okay, that's loss on debtors.
Sundeep Bambolkar, Joint Managing Director That is one point, did you get it?
Krishna Kiran, Analyst Sir I'm unable to get your word because your voice is cracking up, hello?
Sundeep Bambolkar, Joint Managing Director Hello?
Aditi Kare Panandikar, Managing Director Have we (inaudible)
Krishna Kiran, Analyst No, your voice has been broken up, I could not get your answer. See that 1.5 crores, you can hear me now?
Krishna Kiran, Analyst
Yeah, now I can.
Sundeep Bambolkar, Joint Managing Director That is the loss at the time of accrual of export proceeds due to debtors. That does not relate to interest on loans et cetera.
Krishna Kiran, Analyst Okay and secondly on tax rate, we are med, but our tax calculations I mean, hardly 10% and we've guided only for 10% for FY14, if I'm right. Is that right?
Sundeep Bambolkar, Joint Managing Director Yeah it will be similar, both years, in which two years it will be similar.
Krishna Kiran, Analyst Okay, 10% around 10%. And sir, regarding this ANDA filing, can you just let us know what is the current status of filing, Watson you said '11, our own product?
Sundeep Bambolkar, Joint Managing Director Our own filings.
Krishna Kiran, Analyst Yeah our own filings
Sundeep Bambolkar, Joint Managing Director Another four have been filed by us on our own and there is a development piepline for another eight.
Krishna Kiran, Analyst Which are our own?
Sundeep Bambolkar, Joint Managing Director Krishna Kiran, Analyst And how many would be filed in FY14?
Sundeep Bambolkar, Joint Managing Director In the current year, there will be six filings of our own.
Krishna Kiran, Analyst Okay, six filings of our own and Watson would be, under Watson?
Sundeep Bambolkar, Joint Managing Director Maybe two or three.
Krishna Kiran, Analyst Two or three. So, around 9 ANDA filings we can see during this year.
Sundeep Bambolkar, Joint Managing Director Yeah
Krishna Kiran, Analyst And we got approval in for one anti‐biotic tablets in April, have we launched that product?
Sundeep Bambolkar, Joint Managing Director Anti‐diabetic, not Anti‐biotic.
Sundeep Bambolkar, Joint Managing Director Anti‐diabetic yeah.
Krishna Kiran, Analyst Have we launched the product sir in U.S. market.
Sundeep Bambolkar, Joint Managing Director No, not yet. It's going on right now that process.
Krishna Kiran, Analyst Okay, so that overall I mean, three products from Watson deal and maybe couple of products in our own will be launched during this quarter, this is a fair assumption?
Sundeep Bambolkar, Joint Managing Director Yes, yes.
Krishna Kiran, Analyst Okay and sir, I just missed the debt number. Can you just tell the gross debt number?
Sundeep Bambolkar, Joint Managing Director Long‐term debt stands at $9 million. Short‐term is in rupee term 60 crores.
Krishna Kiran, Analyst 60 crores, okay sir, thank you very much.
Sundeep Bambolkar, Joint Managing Director Okay.
Operator Thank you. Next question is from Mr. Rusmik Oza from Kotak Mahindra Bank. Please go ahead.
Rusmik Oza, Analyst Yeah my question pertains to the target of reaching 1000 crore by FY15. So we're right now at 620 crores, so somewhere in FY14 it should be mid way that. So could you give us a guidance of what kind of revenue you're looking at FY14. And second is right now EBITDA margins including R&D somewhere around 17%. And we're aiming around 20%, that's 1000 crores. So is it fair to assume you ‐‐ if its a mid way, we should be around somewhere 18% in FY14.
Aditi Kare Panandikar, Managing Director I think it is a fair assumption, both on topline as well as EBITDA which we've paid. So, is it fair to assume somewhere revenue of around close to 800 crores in FY14, that's 18% EBITDA margin?
Aditi Kare Panandikar, Managing Director That is definitely a strategy.
Rusmik Oza, Analyst Okay, thank you.
Operator Thank you. (Operator Instructions) And there are no further questions. Now, I'll handover the floor to Ms. Meeta Shetty, for closing comments.
Meeta Shetty, Analyst Hello, on behalf of AMSEC, I thank the management of Indoco Remedies for taking time our of this conference call and also all the participants for attending the call. Thank you.
Sundeep Bambolkar, Joint Managing Director Thank you.
Aditi Kare Panandikar, Managing Director Thank you.
Sundeep Bambolkar, Joint Managing Director Thank you, everyone.
Operator Thank you everyone. Ladies and gentlemen, this concludes your conference per today. Thank you for your participation and for using
Doorsabha's Conference Call Services. You may disconnect your lines now. Thank you and have a pleasant evening.
