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Ladies and gentlemen, good day, and welcome to Q4 FY '23 Earnings Conference Call of Glenmark Life Sciences. As a reminder, all participant lines and there will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call please signal an operator by pressing star then 0 on phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Soumi Rao, General Manager, Corporate Communications, Glenmark Life Sciences. Thank you, and over to you, ma'am.
Good morning, everyone. I welcome you all to the earnings call of Glenmark Life Sciences Limited for the quarter and year ended March 31, 2023. From Glenmark Life Sciences, today, we have with us Dr. Yasir Rawjee, our MD and CEO; and Mr. Tushar Mistry, our CFO. Our Board has approved the results for the quarter and year ended March 31, 2023. We have released the same to the stock exchanges and updated it on our website. Please note that the recording and the transcript of this call will be available on the website of the company. Now I'd like to draw your attention to the fact that some of the information shared as part of this call, especially information with respect to our clients and strategies may contain certain forward-looking statements that involve risks and uncertainties. These statements are based on current expectations, forecasts and assumptions that are subject to risks, which would cause actual results to differ materially from these statements depending upon the economic conditions, government policies and other incidental factors. Such statements should not be regarded by recipients as a substitute of their own judgment. The company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our actual results may differ materially from those expressed in or implied by these forward-looking statements. With that, I invite Dr. Yasir Rawjee to say a few words. Thank you, and over to you, Dr.
Thank you, Soumi. Good morning, and welcome to everyone on our Q4 earnings call. Before we dive into the Glenmark story, let me talk about the overall macro situation. So while we hear about COVID here and there, we seem to be okay from the industry perspective. Demand is stable, we don't have any challenges on supply chain and operations are also not impacted by this element as of now. So it's not going to be alarming. The China situation is certainly improving, manufacturers have started in full swing. We are having a good supply situation as well as prices are under control. The other elements like inflation and the banking sector stress and so on, have less of an impact on us. So overall, the macro situation, I would say, is favorable to the industry. However, we must remain vigilant. Now coming more directly to the industry. I had mentioned in last quarter that solvent prices were softening as a result of gas and crude prices coming down, and this has certainly played out well in quarter 4. Even the freight situation has eased off, so we are okay. There is a bit of, I would say, a bit of a bump with the custom situation in Mumbai, okay, with the new software being installed and some material getting slowed down. But that won't have an impact that we are talking about this quarter. Okay, on Q4, let's talk about performance. So we've had a reasonably good quarter, strong growth on a quarter-on-quarter as well as on a year-on-year basis. So this growth basically rides on the back of very robust growth in the generic API business which was driven both by the external business as well as the Glenmark business. And then we had good recovery on the CDMO side as well in this quarter. So overall, I would say, we highered on all 3 that make up our business. On the CDMO space, one of the projects Ms. Soumi Rao has picked up well on account of an additional indication that the customer received. Plus, there was some rationalization on inventory in the last 2 or 3 quarters, and so the CDMO space for us was a bit depressed. Okay, so on the one project that we are still waiting on, there are some regulatory delays but hopefully, that will also clear in this year. Now, the one thing that also has helped our growth in a big way is -- the additional capacity that was brought on in the hedge. So we added 240 kiloliters at the hedge, which came extremely handy in this last quarter and helped significantly with this big demand that we saw. So the hedge capacities have come fully online. We've also got the oncology block started off and started manufacturing oncology molecules commercially as well. Now when we look at the annual situation, the top line does look flattish, right? But I would say that the growth that we've seen is a quality growth and that's reflected in our profitability numbers. So I'll start with CDMO. Like I said, there's been some inventory rationalization pressure from Q1, which I also highlighted in the earlier call, even that has picked up very well in this fourth quarter and we believe that this momentum would continue. Coming to GPL business, again, Denmark Pharma was in this mode of inventory tightening rationalization and so that impacted us in the first 3 quarters of this year. But [indiscernible] that already and so we began to see some very good demand from them in Q4 which will also be sustainable. Now last year, we also had the impact of a little bit of the base and so this entire flattish behavior on the growth is as a result of all these things. Now the one thing I must say is that despite these 2 engines firing late, our external business has continued to grow at a very healthy pace of around 15%, okay? And this is -- a testimony to the diversification of the business that we have been able to create at the product level and at the geography level. So this is extremely encouraging and this is a trend that will continue. With respect to margins, okay, like I said, the quality of the growth has been very good. So we've got a growth of 6.4% in EBITDA and 11% growth on net profit in spite of being flattish on the revenue. Okay. So to summarize on a full year basis, during the first half we've seen demand issues for both GPL and CDMO, which then normalize -- began to normalize in the second half. And this quarter, we sort of hit a pretty good situation, okay, with external business continuing to grow. So just to talk a little bit more on the external business. We have introduced a few new products to the basket that have contributed to the growth. And the overall basket is now 139 molecules and on the customer front as well, we now are sitting with 700 customers across the geographies. Coming to R&D, we had 433 filings as of last year, which has now gone up to 468 at the end of FY '23. The R&D pipeline remains robust with a total of 20 molecules in the pipeline now, of which many are complex molecules. We have 3 iron compounds out of which regulatory filings for one have been completed. We've also added one new high potent API to our pipeline, taking the total high potent API pipeline to nine. So out of these 9 high-potent API molecules, we have 5 which are in advanced stages. So overall, our complex R&D pipeline in the -- in a complex R&D pipeline has continued to grow and has a market opportunity of approximately $20 billion, -- a front-end market opportunity of $20 billion. So let me sum it up on the business side with saying that the demand has come back pretty strong with all 3 levers firing well. Cost pressures have rationalized and that's why the profitability has also improved. And I believe that this will sustain in this new financial year. And so we'll stick to our guidance of around 12% to 14% with stable margins. Before I close and hand over to Tushar, I'd like to just let you know that our HR team has done a brilliant job on employee retention where we got a gold award from the economic -- in the economic times human capital awards, competing with some really big names, okay? So we were selected for employee retention, we got the gold award and for business continuity, we got a silver award. So I'd like to thank my entire team for working tirelessly and bringing a lot of innovative products, policies to the company. And as a result, we remain highly optimistic to continue our journey. So with that, I'll hand over to our CFO, Mr. Tushar Mistry, who will discuss the financial performance in greater detail. Thank you. Tushar, over to you.
Thank you Dr. Yasir. Hello, and good morning everyone. I would like to briefly touch upon the key performance highlights for the quarter ended [indiscernible] March 2023, and then we'll open the floor for Q&A. We registered revenue from operations of INR 621 crores with a sequential growth of 14.9% and 20.9% on a year-on-year basis. Doctor has already discussed the growth drivers in detail, so I will move to the performance numbers. Gross profit for the quarter was at INR 341 crores, up 23.6% quarter-on-quarter and 31.7% year-on-year. Gross margin for the quarter was 54.9%, up 319 basis points on a sequential basis and up 450 basis points compared to the same quarter last year. Gross margin was driven by higher CDMO sales and better product mix. EBITDA for the quarter was at INR 209 crores, up 37.6% on quarter-on-quarter basis and 42.1% on year-on-year basis. EBITDA margins for the quarter were at 33.7%, up 560 basis points on a sequential basis and up in 500 basis points on year-on-year basis. EBITDA margin for the quarter was higher due to higher gross margins as well as lower operating costs. Dr. alluded to this in his opening remarks that cost pressure for raw materials as well as for operations have come down, which has resulted in high EBITDA margin. Profit after tax call at INR 146 crores in Q4 FY '23, registering a growth of 49% on a sequential basis and 48% on a year-on-year basis. PAT margin for the quarter was at 23.6%, increased by 120 basis points on sequential basis and 440 basis points year-on-year. PAT growth was driven by better EBITDA margins and lower finance costs. External business grew strongly by 19% on a year-on-year basis and 2% on a sequential basis. External business was driven by strong growth in U.S., LatAm Japan with other geographies remaining stable. The Glenmark power business also referred strongly during the quarter, growing 45% on a sequential basis. Glenmark [indiscernible] Karma contribution car revenue was 37% during the quarter and roughly around 31% to 32% for the full year. General EPA revenue for the quarter was at INR 530 crores, registering a growth of 10.4% on a quarter-on-quarter basis and 15.5% on a year-on-year basis. Strong recovery in even more for our own business and beyond extra API sales have led this growth. For the quarter, the CDMO business doubled on a sequential basis to INR 28 crores, whereas on a year-on-year basis, the growth was 30.4%. R&D expenditure for the full year was at INR 65.2 crores 3% of sales. We believe R&D expenditure to stay around 3% for FY '23 as well. [indiscernible] for the business. Working capital days for FY '23 are 71 peaked in Q3 at 178 days and now we are witnessing it pulling down. During the quarter, rationalization in inventory like to implement developing EBITDA. Rates for the year looks higher but they are driven by strong sales in Q4 FY '23. So I believe the working EBITDA levels to remain at similar levels in coming quarters. The CapEx for the year was at INR 170 crores, which is in line with our strategy of doing calibrated CapEx of around INR 150 crores to INR 200 crores every year. Even after CapEx, we have delivered strong free cash flow of about INR 143 crores. We continue to remain a net debt free company with cash and cash equivalents of INR 284 crores on the books as of 31st of March 202e. And this is after paying the dividend of almost INR 260 crores in March. To conclude, strong demand record supported by better input prices and availability of excess capacity will help us to deliver sustained growth in the coming years. With that, let us open the floor for Q&A. Thank you.
Thank you. Ladies and gentlemen, we will now begin for the question-and-answer session. Anyone wishing to ask a question please star and 1. If you remove yourself from the question queue participants request of handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the questions get unveiled. The first question is from the line of Tarang Agrawal from Old Bridge Capital, please go ahead.
Good morning everyone, congratulations for an extremely strong set of numbers. Just a couple of questions from my side. One, if you could comment on the volume growth for the entire business for FY '23?
Tarang, it's largely driven by volume growth. So the 6% growth that we've seen in the top line for FY '23, would it be fair to presume all of it is volume? Yes, largely. I mean there is some price growth but it's largely volume.
Okay. The second question is -- I mean, I think the commentary that you laid out in your opening, I guess, it does seem like Q4 there weren't any one-offs. So would it be fair to presume that the traction that we've seen in Q4, given the capacities have expanded and overall operating environment has improved, should probably continue going forward in FY '24?
That's what we would say, yes.
Okay. Sir, any sense on -- if you could give us a sense on what was the contribution of Favi in FY '22 to your overall business?
22?
Yes.
Yes, Tushar.
About INR 96 crores was conclusion in FY '22.
Got it. And the last question, Tushar, I mean, if I look at the business, right, I mean, working capital expansion has just been on one street. If I compare '22, '21 and '23 over '22, even though Q4 has sort of lightened up from Q3 numbers. But I mean, I understand '22 was on account of you wanting to hold off additional inventory given the uncertainties in the environment. But I was surprised when I saw the balance sheet numbers yesterday that the expansion sort of continues. So are we going to -- I mean, is there a way that this can be probably be addressed or this is how the business operates?
See the -- if you see from Q3 to Q4, within the working capital, it is -- the inventories have softened significantly. I mean, -- you can see the softening happening on the inventory front -- front, for sure. The working capital has seemed like sort of because of betters because of receivables. And that is an amount of a very high number on the Q4 sales revenues. Actually, if you annualize the Q4 sales and you look at the receivables, they will not look like 18:35 [indiscernible] 13 of the civil they will look like 118 days of [indiscernible], right? So out of the 4 quarters the fourth quarter has been extremely good and that's why if you take annual sales and look at the closing receivables, the receivables will look higher. But if you analyze the fourth quarter sales and your receivables will be reasonably low, right? So one is to look at it from that perspective.
So how should we see this number going forward in, say, if I were to look at December '23?
So, I think from 171 days, you should see another 8 to 10 days of reduction going forward.
Okay. But ballpark about 160 to 170 days that you should be trading now?
Yes.
Is there something that's fundamentally changed in the business, which is resulting in an expansion in working capital?
Strongly that you see generally a top industry because everybody has been sitting on inventories. We have also built up the inventories cautiously. And that's why we're working capital has gone up. While now we are seeing some ease off happening globally, and because of that you can see that the inventory levels have also come down in Q4. While we are hopeful that it will still come down, but we'll still tread cautiously on this as we go forward.
Got it. Thank you, Tushar, just a last question. CapEx for FY '24, how should we look at it?
CapEx should be between the INR 150 crores to INR 200 crores range.
Thanks. All the best guys.
Thank you.
Thank you. The next question is from the line of Neha Manpuria from Bank of America. Please go ahead.
Sir, on the fourth quarter performance on the generic API side, if you could just help us understand what's the pricing trend that we're seeing because some data shows us that realization continue to weaken so generic APIs, -- have we seen a similar trend? And what's your turn point where the pricing is exactly? Could you see more pricing pressure as raw material costs come off for API?
Yes, Neha, for sure, pricing pressure is there, right, more driven by the U.S. market. And as costs do ease, there is an expectation from customers to lower prices. We've managed to sustain it -- if you recall, right, we have passed on some of our higher cost to customers. So now the shoe is on the other foot, okay? And there is an expectation which we've managed reasonably in Q4. But in order to keep customers happy we would be sort of addressing that as well.
Sir, just to get a sense, how much of the realization -- blended realization be down for our business, let's say, from last year to where we are ending now?
3% to 4%.
Okay. Okay. And assuming fourth quarter, this number would be higher, obviously, since this is from the beginning. So there was also an increase that we saw in the first half.
Neha, could you repeat that, please?
So I'm saying that in the fourth quarter, probably the realizations are down even higher on a quarter-on-quarter basis.
Yes.
Okay. The second question is, given we mentioned there's no one-off in this quarter, your commentary seem pretty upbeat and we have the CapEx coming. Any reason for maintaining the revenue growth at the 12% to 15%? Because I would just -- I understand this quarter-on-quarter lumpiness in the business, but if I just look at the fourth quarter numbers by itself you should be growing in the mid-teens to probably slightly higher. So what -- any concerns that is sort of keeping you conservative on the top line guidance?
Okay. So see, our visibility for the first 2 quarters is pretty good, okay? But then I mean, things change, right? So yes, we've been a little bit careful in terms of the numbers that we are putting out -- that's it, right? So let's see, I mean, how the year plays out. But the first half of this year looks pretty good.
Okay. And this will also have the contribution from the CapEx, right, the commissioning of the new CapEx?
Yes. I mean the new CapEx has kicked off very well, right? So the hedge, I mean, utilization is around 80% already, okay? We will complete the Ankleshwar intermediate block fully and that will also help. We'll hopefully get it done in the first half itself, the Ankleshwar block. So both will contribute very significantly to the servicing of the business.
Got it. And my last question, similarly on margin, we did 33% margin. Your commentary on raw material costs, easing rate cost easing, good top line improvement, Ankleshwar kicking in, again, any reason for keeping the flat margin expectations? I would assume that with the additional CapEx coming in, operating leverage there and cost easing we should be seeing margin improvement going forward.
The thing is, see, if you recall, right, in the last couple of quarters, what we said was that there are headwinds, right? And even in the headwinds we've been at the sort of 29-ish percent range, right? If you look at Q4, basically, all the good things have happened together, right? Now that if all that continues, right, then what you're seeing will happen, right? But then let's realize that we live in a world which is changing very rapidly. And something here and there could move around and as a result of which that would have some impact on the margins. So that's why we are saying that we'll maintain at around 31-ish percent.
Got it. Got it. And last, you...
Ms. Manpuria, may we request that you return to the question queue, the participants waiting for their turn?
Sure. Thank you.
The next question is from the line of Madhusudan Kela from MKVentures.
Congratulations on a great set of numbers. So I had 2, 3 questions. One, we had paid INR 21 as a dividend. So what is the thought process going forward? Is there any particular payout percentages you have in mind of a percentage of profits? That is one. Second, is there any PLI benefits which are there in the Q4 margins? And may I also ink, everything is pointing towards better margin. So let's say, if we are not to be conservative for any other external event happening, what is the kind of possibility do you see for margin expansion? Because in Q4 of '24, we had 58.8% gross margin and we have 36.14% EBITDA margin. And I understand there was Covid -- there might be some COVID impact on that quarter. But can we see the margin going back to those levels in the first 2 quarters? And the third is we have had INR 450 crores of CapEx in the last 3, 4 years. How much do you think the turnover can go because of this CapEx already being done? What is the kind of potential which is there?
Okay. So I'll let Tushar take the first 2 and then come back on the...
The first one was...
On the dividend.
Yes. On the dividend part. So Mr. Kela, actually, if you look at our cash flow generation, if you take roughly about INR 600 crores of EBITDA and look at how the EBITDA is generating INR to cash, we will continue to generate about INR 200 crores to INR 300 crores of free cash. And that is the momentum that will be within of distributing that free cash as dividend. And that is a way to look forward for this business.
Tushar, based on this quarter number, our annualized EBITDA should be INR 840 crores.
Yes. So... Exactly. I mean that is -- that is something that one can continue to expect going forward.
Fair enough.
So whatever is required for business after CapEx and after working up in investment, whatever is there will be distributed. One has to be mindful that 80% is still held by the parent and the only way to upstream cash is through dividend, and that is something that we'll continue to do.
Yes, I understand, but I just wanted to reaffirm that.
Yes. Second is on margins. Yes, PLI has benefited the margins in the current -- in the current year. Roughly about 200 basis points improvement in the margin would have come through PLI benefit, between 150 to 200 basis points will be there. Overall, from a margin perspective this quarter, another 100 basis points would have come because of the better CDMO business, I would say, because later we saw some good revenue relation happening, and obviously, CDMO business is a much better margin business compared to the other part. And that's how we see this margins.
Tushar, my question is simple. Can we go back to Q4 margins in the first 2 quarters of this year. We had 36.14% EBITDA margin, and we had 58.8% gross margin.
First 2 quarters were not that high. First quarter was...
No, no. We are as a whole, we had that kind of margin. Is there a potential that we can go back to those levels of margins?
No. We will -- as Dora mentioned earlier, we are creating obviously OCC on this. I mean, this is -- while as Yasir said, all the levers hit us -- hit positively in this quarter. It's an outcome of product mix overall, and some products do well and some products not higher-margin business.
33% of what we did in Q4 might be sustainable, then the expansion is not possible.
Yes. I mean that is a fair enough, I would say.
And I asked what the peak potential of turnover because of the CapEx which you have done? So if you can answer that.
So if you look at our fixed service turnover ratio, it is somewhere around 2.9% at the net block level. But for the fresh CapEx that we are doing, one can fairly assume it to be between around 2-ish levels, 1.8-2 levels. So how we would look at how this additional CapEx will contribute.
I had one last question. We had 37% contribution from Glenmark pharma business in the current quarter. Where do you think that will sustain in the current year in '24?
So if you look at the full year number, it is around 31%, 32%. Historically, it was upwards of 40% because of favi records there last year. But we expect it to remain within this 1/3 range in the near term. On a longer-term basis, we expect it to keep on coming down year-on-year gradually. So it will not significantly come down, but it will gradually keep on coming down or year-on-year basis.
And one last thing. You have 82.5% holding in Glenmark Pharma, and by regulation you need to go to 75% in the final period of time. Can you share us what is the time line for getting this done?
It will be July of 2024, from the listing happened in August '21 it was 3 years from then. So...
Still timing there?
Yes.
Thank you so much -- all the very best.
Thank you.
Thank you. A reminder to the participants -- the next question is from the line of Sajal Kapoor an individual investor.
Question on the CDMO business. You have clearly reported a very strong CDMO in the fourth quarter. What is the zoom out over the last 3, 4 years? There is no growth actually, and I know we have only got 3, 4 projects, and they are all generic, and we have no commercial molecules in the NCE,CDMO. But when I look at your Slide 17, and that includes CDMO as a growth lever. So are we really investing in the business development? Are we trying to secure more late Phase III or already on-patent and molecules as well? And what kind of scientific capability you think you need to get to the growth part of CDMO because clearly about 25% annualized growth in the NCE, CECO space is what we can -- what we can factor in. But if we continue with this generic CDMO, there will be pricing pressure because ultimately the end product is off patent. So there will be market driven and pricing challenges there. So I just wanted to understand the outlook on the CDMO on the back of that Slide 17 comment? And where do you see this growing over the -- all the medium term? Thank you.
Okay. Thanks for the question. So let me reiterate, CDMO will be a growth driver. It is a growth driver even now because if you see we are a late entrant into CDM. And given the overall size of our business, even though CDMO features at 7% to 8%, right, it's still quite significant from our top line, but even more so from a bottom line perspective. Now our approach to CDMO is, yes, there is a generic element in the life cycle management piece, but then we also have an innovative piece in which we are working with specialty companies. We have had significant traction in this piece in the last 1.5 to 2 years so much so that we are looking at -- we have discussed more than 10 opportunities actively with customers in this space. So we believe that given the kind of traction we are having on the number of projects in the specialty space and some even in the life cycle space. This is an area that would grow and would continue to grow. And the reasons are that we are a stand-alone API company. There's a lot of trust factor, okay, with players in the CDMO space. What happens in this space is that, like I said, there's a lot of intellectual property that is shared and customers are happy with companies that will not compete with them through the formulation space, right? So we happen to be in that situation. And would drive both the specialty, which is an innovator segment and the life cycle management, which is a generic segment. Now addressing your specific point about NCE, what happened here is that there is a very different set of capabilities that needs to be built with a long period -- with a long gestation period for projects to come online. So the investments that we have to make -- we have to keep making and then realize at a very late stage in terms of time. So we have made a conscious call not to get into that space because there are significant opportunities in the spaces that I pointed out to earlier. So to reiterate, CDMO will be a growth driver. We have seen a lot of traction and we believe that even in the near term, we'll get significant contribution from CDM.
Sure. That's helpful to Dr. Rawjee, and fundamentally speaking, we are a chemistry company -- chemistry capability company. So you see that specialty chemicals or a nonpharma CDMO opportunity which is lucrative in terms of the margins and we have the necessary resources and capabilities to cater to that demand on a sustainable basis, would we shy away from such an opportunity just because it's not in the human pharma domain and we want to stick to the human pharma domain? Or that doesn't matter because fundamentally we are a chemistry company? The reason I'm asking this is because different companies look at the CDMO space differently. Some want to be a pure-play pharma CDMO, whereas others are more open to play on the overall chemistry horizontal level. So how do you see that?
Yes. So we would stay with pharma for a couple of reasons, right? The first is our infrastructure is a high-end infrastructure and getting into a non-pharma play would hamper us from the sort of sharing that infrastructure with pharma, right? So that -- at least off the top of my mind we would stay away. The second reason is that there are so many opportunities in pharma itself in the CDMO space, right, that we really don't see the need to get step out, right? But largely, it is driven by the fact that the quality of infrastructure that we have is more suited to pharma.
Right. Okay. And secondly, being in a fortunate space where customers want to derisk from China, and how do we decide which customers are opportunistic or lower quality in the supply chain shift versus those that are better quality and we could potentially become their long-term API partners. So these are the customers who don't see us as an API "supplier", they would view us as a long-term sustainable partners because they want and supply-side security plus we also want a complex chemistry partnership. How do you take and choose between customers, given that this derisking is happening at a global level quite clearly. And this will likely -- to get the supply chain that is -- that's likely to get frozen over the next year or 2?
So for us, it's the regulated play that matters the most. If you see our business, 80% of our business is now a regulated market. And the thing is that when we are dealing with customers in that space, right, the business is very sticky. So a similar kind of thing would apply, right, even when customers are migrating. So this whole opportunistic play happens once in a while. But we are able to see that, and we do that only when we are likely to see the short-term benefit ourselves. So -- but to address the China derisking piece, we are certainly seeing momentum there. There's been a lot more filings from customers who were only China-focused but are now moving to a more diversified supply chain base for themselves, which is India as well as China. So this is visible. Of course, it does take time because there are regulatory changes and regulatory filings will work. And as long as that's the element, that's the space in the business that we are chasing we see that this will be sustainable going forward.
Right. That's helpful. And one last question.
Sir, I do apologize, but we have participants...
Okay. I joined the queue.
The next question is from the line of V.P. Rajesh from Banyan Capital Advisors.
Congratulations. My question is regarding the payment, the revenue bump that we saw in this particular quarter.
Sorry to interrupt Mr. Rajesh, sir, your audio is not clear. Your voice is running very muffled.
Is it better now?
Sir, can you use the handset mode while speaking?
How about now?
Slightly better.
Welcome back. Okay. So my question was regarding the business from the parent. The growth that we saw in this particular quarter, was it being driven by their domestic business or your export business? If you could just comment on that. And do you see that kind of growth continuing in the coming quarters?
Yes. So like we said in the commentary, basically, they were in an inventory correction or rationalization mode in the last 2 or 3 quarters, which has now -- we have reached a sort of stable point. And that's why the demand has come back in Q4, and this is something that is likely to continue.
Okay. Understood. And then the growth is coming from their export business or domestic business?
That I would not be able to tell, but given the fact that they are also largely in the regulated space, it would be driven -- for us at least with the regulated market space. Of course, they've got a very significant India business as well, but we supply largely for the regulated market.
Got it. Okay. And if I heard you right, you were saying, Tushar, that the EBITDA margin this year could be around 33%, is that right?
So what we said is that if all guns fire it will be in that range, but not all will fire every time. So it will -- we retain our guidance around 30%, 31%.
The next question is from the line of Sharath Ratna Kumar from Ela Consulting.
My question was regarding the U.S. FDA audit, and if you can just tell us when that is expected, how we are prepared for that? And that they've had a good level of client audits recently?
Yes. So U.S. FDA, we are due on all 3 of our plants, because we passed the 3-year time frame. So it can happen any time. For us, a sort of surrogate marker or an indicator is other regulatory audits. So we've had a very successful and Visa audit, which is the Brazilian agency and a very successful [indiscernible] audit, which is the Mexican agency. This is very recent. In addition to that, like you've pointed out we continue to have customer audits, which -- and like we -- since we work with the top 20 generic companies in the world, right, we have pretty detailed audits from customers as well. So -- and so far, [indiscernible] a very good string of orders from customers as well. So we believe that we are ready whenever FDA comes and we remain in a state of all-time readiness.
My next question was regarding the Sholapur CapEx. I understand from the presentation that we are commencing construction in this financial year, have you planned it in terms of phases? Do we plan to use it fully for CDMO or is there going to be generic contributions as well? Can you just throw some light on that, please?
Yes. So Sholapur would start this year. We've received all the permissions, so we are geared up to get started this year. With respect to the planning, obviously, we will do it in phases because we don't want to spend all the money very quickly. It has to go hand-in-hand with the business. With respect to what kind of business, again, the good part is that it's a multipurpose capacity, whether we use it for CDMO or for generic, so it will be used for both.
Okay, sir. And regarding the asset turn that we are expecting from there, is it along the similar lines of 2.5% to 3% that we guided earlier?
For every new CapEx, you will have to consider it to be on the lower side, it cannot be that high. But eventually, it will go to that level. But for new capacity, we should keep it around 1.8 to 2.
The next question is from the line of Surya Golpo from Anand Rathi.
Thanks for the opportunity, sir. And congrats on your results. My first question is regarding Denmark pharma approaching some investors for this stake sale. Is that high and what is your internal discussion importer?
So like we explained earlier, right, to an earlier question, the -- according to SEBI regulations, there needs to be a dilution of the promoters holding to 75%. There is some discussion already and that process has started. We have also participated in that. So that's an ongoing thing, it's a regular process that is going on in order to make that happen.
Is that -- any chance they are telling that they will completely sold out our major to stay. So it can affect our business, right?
I'm not able to comment because really that is held by Glenmark. They will decide what -- how much they want to sell, okay? But as far as the business goes, it's not going to have any impact on the business. We continue to drive the company independently and so what kind of shareholding eventually happens is something that will not impact the business at all. Okay. And regarding any...
Mr. Golpo may we request that you return to the question, there are participants waiting for the turn. Thank you. We'll move on to the next question that is from the line of Sudan Maheshwari from Banyan Capital Advisors.
Yes. Am I audible?
Yes.
So I have 2 questions. One question is regarding capital allow questions though, I mean that has 2 someone asked by the previous participant. Sir, do we expect same level of higher division payout in the coming with 3, 4 years or is it because currently higher dividend is many because we have already incurred large CapEx? Okay, and that was the first question. Second question is, sir, how difficult it is to maintain margins in a big growth where realizations are declining? So do you see a similar level of decline in raw material costs? And do we expect 10 level of realizations decline in the near future also?
I'll answer the margin question. I think Tushar has already answered the dividend question, so we'll skip that. On the -- see, we have a very highly distributed business. So while we have big molecules that are more mature and do have a little bit of margin pressure, we are introducing on a regular basis many new molecules to -- as well as existing customers. So the reason for a better margin profile, right, is just that, that we have -- I mean, our business is not based on 10 or 15 molecules. Our business is based on today, a commercial set of around 80-90 molecules and in the overall pipeline, we've got close to 140 molecules. So I mean this is something that will continue because we continue to introduce newer molecules as well as grow geographically. So we are very confident of maintaining our margin profile.
The next question is from the line of Ketan Chira, Retail Investor.
I'd like to ask the question regarding the CDMO. Dr. you sounded very upbeat about the CD&E prospects. But if I look at one of the earlier presentations, you have mentioned that the aspiration is to double the percentage of CDMO revenue contribution in the next 4 or 5 years. So does it mean your revenue contribution probably would kind of hit a peak of about 15%, maybe 3 or 4 years out? So I'd like to know that isn't at this kind of a low aspiration or a low target, while you are still kind of kind of very upbeat and very positive about the CDMO business?
Yes, I'll answer that. So see, right now, we are around INR 150 crores, INR 170 crores, right, which contributes around 7%, 8%, right? So when we are saying we are going to double it to 15%, the rest of the business is also going to grow or more or less double. So in order to sort of make it 15% of a roughly doubled business, INR 150 crores will have to go to INR 600 crores. So I mean, that's not bad, right? Taking INR 150 crores to INR 600 crores in about 4 to 5 years' time, I mean that's what I would say. So to go beyond that, I think it's possible. I mean, we won't rule it out. But then just like in whatever we do, we want to be very measured in terms of what we are able to see and how the overall global environment also shapes up.
Okay. And the next question is, in terms of the growth levers we have the high complex API platforms, iron compounds, oncology compound. So could you comment on what is the contribution of these molecules as of now and when this would scale up going forward?
So today, it's small, right, because we just started this business. But it has started. The thing is that these are levers for growth in the future and so they will contribute very substantially going forward in the future.
Okay, okay. And given...
Mr. Chira, we request that you return to the question queue, there are participants waiting for their turn. A reminder to the participants, -- the next question is from the line of Sajal Kapoor and Retail investor.
I had a question on the employee -- so congratulations on bidding the employee retention and HR award. What is it that we are doing differently to ensure a lower employee attrition really -- that's really what I wanted to understand better because clearly, ours is a business that depends highly on that getting the right sort of scientific talent and the support staff. And so I just wanted your thoughts around and congratulations again.
Thank you. So with respect to retention, I think a lot has to deal with the culture. And the culture comes from the senior management, where we engage very closely with our people regardless of the level. This is something that I think I would not say is unique, but in the industry context of a manufacturing industry, it is not very common. And like I said, all my senior leaders be it R&D, operations, supply chain, finance, regulatory quality, we have a very deep engagement with our people. And I think giving that kind of comfort to our people on sharing their ideas, however, at whatever level they are and so on, is very meaningful and goes a long way to building confidence with people, and they like to come to work basically. So this is something that we worked actively on and also to try and assess how they are feeling. I mean, you need to ask people how they feel, right? If you just treat them like a cog in the wheel, it doesn't work. So I'm fortunate, I think we are blessed as a team to get that response from our people, and that has led to this award. Thank you for asking. I mean, I'm glad you asked the question, that's not a financial question. It's very important because that also drives a big part of our sustainability really to keep our people happy and to go forward.
The next question is from the line of Saumil Shah, an Individual Investor. So congratulations on a good set of numbers.
So most of my questions were asked. So I just want to reassurance from you. You did mention that the first half of this financial year looks really promising. So can we expect similar numbers of Q4 or we can expect even better numbers than Q4 going forward?
So some will stick with our guidance, okay? Like I said, we've got good visibility, but then we've also put out guidance. So we'll stick with that, right? Hopefully, we'll deliver better than that. But I don't want to give a different set of numbers to a different question.
Okay, okay. But the first half looks promising. I just want a promise.
Yes. It's well...
Okay, fine. That's it from my side.
Thank you. Thank you.
The next question is from the line of Ketan Chira.
My question is on the backward integration. The project that we are doing right now, it is, I guess, partially commissioned and the balance part will be commissioned in the coming year. I wanted to understand what is the margin contribution that we will have from this backward integration? And to what amount of our volume sales this backward integration will contribute to, like, of course, we would not be backward integrating 100% of our manufacturing -- API and manufacturing. So to what level are we backward integrating?
Okay. So one is the capacity related. The other is -- so the capacity will come on fully this year, okay. But on the project side, we've already got one project that we are going commercial. One project that we are doing commercially, okay, it's -- actually it's going to start in Q2 of this year. And it will contribute very significantly to that project, we expect around a 5% to 7% improvement in the gross margin on that product. And this is a product that's around close to INR 100 crores product. So it would be very significant for contribution.
Okay. So I just was trying to understand like in a full financial year, how much improvement that would reflect in the EBITDA margin -- like what amount of basis that would contribute to?
At this point, I would not put numbers Ketan, okay?
All right.
So -- but it would definitely contribute very meaningfully, okay? I mean, I don't want to say that it's not, but since you're asking for hard numbers, I don't want to put something down yet. See, we are getting into this game, right? We've got tasted early success, I would say, right? But it has to pan out on a broader level of APIs for it to be sustainable and meaningful.
Sure.
The next question is from the line of Tushar Bohra from MK Ventures.
And congratulations to the management for a very good set of numbers. Sir, just at an overall macro industry level, just to understand, API companies last 4, 5 years, numbers have generally trended up much better than, say, the preceding few years. This also coincided with a large round of CapEx buildup but it incidentally continues. So reading through whatever your peers are doing as well as I am cognizant that you are looking at a large capacity expansion over the next 2 years. There was a lot of noise from an investor perspective that maybe there's a bit of COVID element in the performance CFI running 1. 22 was a bad year for a lot of your peers. And 23 also, the commentary initially was mixed though now most people are starting to become more bullish. So I want your opinion where we are in the overall cycle in the API business and in the context of, say, the pricing erosion in U.S. overall on the formulation side. Where are we in the overall API cycle? How do you see the next 2, 3 years, not just for yourself, but from an overall industry perspective? And why is it that across there would -- the CapEx buildup is so high for the industry, when the numbers in the near term don't look that promising. Okay. So frankly, I won't be able to comment on the industry, right? Because the API industry is really not a single -- it's not a single type of API. There are players that do large volumes drive, cost leadership and focus on relatively smaller set of molecules, right? There, I can really understand why the CapEx buildup is big. With us, we have CapEx build up, but I would still say it is reasonable. -- right? We are keeping it highly calibrated depending on the kind of business we are seeing. And fortunately, for us, our capacities are completely fungible. So with the kind of multi-purpose capacity we have, we don't have to make that much of an investment. But yes, investments will continue because the outlook on business is very strong for us, okay. Like I said earlier in my comments or somewhere in the answers right to question the hedge capacity was brought online only in Q4, and it has already touched 80% utilization, the additional capacity. So it's very encouraging for us, right? And this is something we would continue to do because if we don't, then actually, we are disadvantaging ourselves. With respect to erosion in the U.S. market, yes, there is pressure. I think Neha asked the question on pricing and stuff. So yes, we have to kind of deal with that. But again, as is a very distributed business geographically. And we also have a lot more new products that contribute very significantly to a higher margin. And so on an overall business, the margin for us will remain sustainable despite erosion and despite giving our customers the support they need to stay competitive in the business.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for the closing comments.
Okay. So thank you. Thank you very much for joining our call. I think we'll close the call now. Thank you.
Thank you, members of the management team. Ladies and gentlemen, on behalf of Glenmark Life Sciences, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.