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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good day, and welcome to Syngene International's First Quarter Ended June 2022 Financial Results Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Ms. Neha Shroff from EY. Thank you, and over to you, ma'am.
Thank you, Stephen, and good afternoon, everyone. Thank you for joining us on this call to discuss Syngene's Q1 FY '23 financial and business performance. From the management side, we have Mr. Jonathan Hunt, MD and Chief Executive Officer; Mr. Sibaji Biswas, Chief Financial Officer; and Dr. Mahesh Bhalgat, Chief Operating Officer. Post opening remarks on the management's health, we will open the line for Q&A and we will be happy to answer any questions you have.
Before we begin, I would like to caution that comments made during this conference call today will contain certain forward-looking statements and must be viewed in relation to those risks pertaining to the business. The safe harbor clause indicated in the investor presentation also applies to this conference call. The replay of this call will be available for the next few days and the transcript will be subsequently made available.
With this, I will now hand over the call to Mr. Jonathan Hunt. Thank you, and over to you, sir.
Thank you, Neha. Good afternoon, everybody. Thanks for joining the earnings call to discuss Syngene's first quarter results. I'll start my remarks with a quick overview of the key financials for the quarter before getting into operational and strategic highlights, the most notable being the 10-year strategic biologics manufacturing partnership with Zoetis. After that, I'll hand over to Sibaji to give more details on the financial performance. And then we'll be happy to open up for questions.
Overall, the shape of the quarter was pretty much in line with the expectations we set at the start of the financial year. You'll recall, we guided for mid-teens growth in revenue from operations for the full year, but We said there'd be some phasing through the year with growth rates picking up as we went along.
We expected muted growth in the first quarter in comparison to what's a boosted first quarter last year due to the one-off spike in demand for Remdesivir, and that's pretty much what we saw. In fact, the first quarter result is better than our predictions, with signs of strong operational delivery and I think a clear boost from currency. I'm signposting those 2 now as I know Sibaji will cover them in more detail in his remarks.
So reported revenue from operations grew by 8% to INR 644 crore. EBITDA was up 6% to INR 188 crore. EBITDA margin for the quarter was maintained at 28.5%. Profit after tax, PAT, declined 4% year-on-year to INR 74 crore.
In the same period last year, Syngene's revenue was boosted by the manufacturing of Remdesivir to fulfill the high demand of India back in the second wave of COVID. And while the company retains the voluntary license, there hasn't been much demand in the first quarter, a reflection, I think, of the increased uptake of vaccinations and the positive impact we're all seeing from those vaccination programs. The demand for treatments like Remdesivir has reduced, and I think that's a pretty positive sign for all of us.
But if we exclude the impact of Remdesivir, underlying revenue from operations in the quarter was around 30% year-on-year. PAT, profit after tax, for the quarter grew around 31% year-on-year. And the underlying growth rate, excluding Remdesivir , I think may be a better indicator of the sort of momentum that we're starting to see. These results reflect sustained performance across all our business divisions, with the growth momentum being led by the Development and Manufacturing Services divisions as a result of consistent delivery of planned projects during the quarter. Discovery Services and Dedicated Centers also continued to perform well and they did play a part in contributing to the revenue growth.
With a healthy demand environment, supported by rupee depreciation, we are raising guidance for the year from mid-teens to high teens.
And as I mentioned, the recent highlight was the signing of the 10-year strategic partnership with Zoetis. This contract relates to the commercial manufacturing of Librela, a first of its kind injectable monoclonal antibody which is used to alleviate pain associated with osteoarthritis in dogs. Zoetis has already launched the product in key markets in Europe where it's enjoying considerable success and they anticipate taking it into the U.S. soon, subject, of course, to gaining FDA approval. Our role will be to support them as the product grows by manufacturing the drug substance on a commercial scale.
We gave you a sense of the overall financial value of the deal. Let me remind you that we see this as having the potential of being worth up to USD 500 million over the next 10 years subject, of course, to regulatory approvals and market demand. And Sibaji will cover his thoughts on how best to model this in his comments.
As all of you will know, we've been collaborating with Zoetis since 2011, originally within our research services business, and we really are delighted to be partnering with them across [indiscernible] of the full value chain. The deal will leverage the sustained investments we've made over recent years in setting up world-class production facility for biologics. And overall, we expect development and manufacturing Divisions to contribute an increase in share of our revenues going forward. I'll let Sibaji give you thoughts on how best to incorporate that into your models. But I caution you that we capture the benefit we expect this year in our upgraded guidance for the full year. So really, it's only a modeling factor you have to form a view on for next year and beyond.
Also in the quarter, we continued to invest in new infrastructure and capability development. I'll give you a couple of examples of how we're rounding out our range of services and continue to keep pace with the leading-edge science. By the way, these examples are really just meant to illustrate enhancements in the use of technology and skills rather than a trigger to change something in your forecast models.
The first is the addition of a kilo lab to our polymer speciality materials team in Development Services, which will serve to shorten the development timeline for clients who look for highly customizable and flexible systems to expedite formulation and process development work.
Secondly, this is part of phase 3 of our expansion in Hyderabad. We commissioned the PROTACs lab, adding over 150 scientists and analysts. PROTACs, as you know, is targeted protein degradation offers therapeutic intervention not easily achievable with many of the existing drug discovery approaches.
Further highlights for the quarter has we've been awarded the most preferred workplace by Mark daily in association with India Today. We really are very proud of the career we offer to scientists and we offer opportunities for them to develop their skills while collaborating with some of the leading global science-based companies and best scientists in the world. So in that respect, this is very much a welcome recognition of our efforts.
So in conclusion, I'm delighted with the signing of the long-term agreement with the Zoetis. We see this as a significant strategic step forward for our biologics business. We pride ourselves in the many long-term client relationships with those over the years. And we're excited to extend our relationship with Zoetis even further.
Each of our divisions performed well in the quarter, and we continue to invest in capability building and we'll continue to explore opportunities to invest where we see healthy demand.
And finally, given the positive start of the year on an underlying basis, supported by the benefit of depreciation of the rupee, we are raising our revenue guidance for the year from mid-teens to high teens growth in revenue from operations.
So with that, let me hand over to you, Sibaji, for more details on the financials.
Thank you, Jonathan, and a very good afternoon to you all. I'm happy to take you through our results for the first quarter and start with revenue performance, then take you through margins and profitability for the company as a whole and end with thoughts on outlook for the rest of the year. I'll also advise you how to model the Zoetis deal so that we have a better understanding of how it contributes to Syngene's growth profile.
Please note that you hear me refer to underlying performance throughout my remarks. The context for this, just to be absolutely clear, is excluding the impact of Remdesivir manufacturing, which is particularly significant in the first quarter, as you might have seen. We recorded high sales of Remdesivir during the first quarter of FY '22, and this is due to the second wave of COVID and no Remdesivir has been recorded in Q1 FY '23, which is the quarter we are reporting.
Now let me begin with highlights of quarter 1 performance. As you have heard, revenue from operations for the quarter grew by 8% versus the same quarter last year. Underlying revenue growth was around 30%, a pretty strong performance. This growth is driven by contribution from all divisions, in particular, our Development and Manufacturing Services are showing good growth and future looks positive with good demand situation.
While the supply chain issues which impacted the biologics business last year continues, we have sufficiently stocked up to navigate such challenges. With this and with the signing of the long-term commercial supply agreement with Zoetis, we are looking forward to scaling up the biologics business to drive revenue growth. Now let me spend a moment on the Zoetis agreement. The agreement with Zoetis to manufacture the drug substance for Librela will take Syngene into commercial manufacturing of large molecules, which is in line with our strategy to offer an end-to-end discovery development and manufacturing platform.
As Jonathan mentioned, Zoetis anticipates USFD approval for Librela this year. From our perspective, this will trigger an FDA and EMA inspection of Syngene's facility to qualify for the commercial supply before the manufacturing staff.
Syngene's overall investment in biologics has been about 550 million, and we expect to generate a healthy return on investment and an asset turnover of around 1x as we scale up the manufacturing. We have plans to invest another $30 million in the current year, taking the cumulative biologics investment to $80 million by end of this financial year.
We expect the overall EBITDA margin for FY '23 to be around 30%, as guided earlier. With increased capacity utilization of the manufacturing facilities, we expect operating leverage to improve from FY '24, that's next year. Jonathan mentioned rupee depreciation during the period, so let me address that. Our hedging policy requires us to fully hedge receivables in advance. And the hedge rate for quarter 1 FY '23 was around INR 78 per USD 1. Due to our hedging policy, which prevents us from taking any speculated position, our P&L is insulated from ForEx fluctuation in the short to medium term. And therefore, at the PAT level, we do not have any benefits from recent rupee depreciation. However, top line has improved as the rupee depreciation benefit moved up from the hedge gain line in OpEx to the revenue line, improving the optics of revenue growth. At constant exchange rate, our underlying growth net of Remdesivir is around 25%. This quarter, we have a hedge loss of INR 3 crores compared to a net gain of INR 15 crores same period last year and the swing will have an impact on the EBITDA margin. This is because rupee depreciation improves the revenue line without any corresponding improvement in EBITDA, thereby reducing the reported EBITDA margin.
The reported EBITDA margin for the quarter was 28.5% compared to 29.2% in the same quarter last year. Normalizing for the rupee depreciation impact in the top line and adjusting for hedge losses and gains in both periods, EBITDA margin for the quarter is higher by 50 basis points compared to the previous year.
I'll now cover the other top-line items of our P&L. Material costs decreased from about 32.1% of revenue in the first quarter of last year to 24.6% in the first quarter of this year. This is mainly due to -- this is mainly because of the high raw material costs from Remdesivir in the previous year.
You will remember from my previous commentary that we expend non-inventoriable raw materials and structures. So this quarter, lower raw material cost is also a reflection of materials, such as last quarter and used in the first quarter. On a normalized basis, the raw material cost in the business should be in the range of 26% to 27%. And this may move up a bit with increasing share of manufacturing in revenue.
Now moving to staff costs. During the quarter, staff cost as a percentage of revenue was 28.2%, same as first quarter of last year. The year-on-year increase of 9% is in line with the increase in the staff strength.
Power costs increased from 2.2% of revenue in quarter 1 FY '22 to 2.6% in quarter 1 FY '23. While we added new facilities and infrastructure, which is increasing the cost, there was also an inflationary impact and unscheduled downtime in public distribution lines forcing us to use alternate sources of energy which is more expensive. We believe this will somewhat moderate in the coming quarters.
Now moving to other costs. I would like to remind you that the first quarter of last year was impacted by the second wave of pandemic, its activity at the minimum level required to run the operations without any disruption. While this reflects in a year-on-year increase of 57% in other costs, if you compare on a sequential basis, that is compared with quarter 4 of FY '22, the last quarter, other costs have actually declined by 7%.
Now let me explain the underlying reasons for the cost increase to decline year-on-year. Facility and equipment maintenance costs increased as we opened new lab space and installed new equipment and infrastructure during the last 12 months, mostly in Hyderabad and Mangalore. Also, as we came out of pandemic restrictions from quarter 2 last year, global travel and sales execution activities have picked up, nearing the pre-pandemic level. These, along with other operating investments, including commercial team expansion, acceleration in digitization and automation [indiscernible] business is also leading to higher cost on a year-on-year basis. We are also witnessing inflationary pressures, like most of the businesses, which is driving up cost. The increase in cost, however, is in line with expectation and guidance given at the beginning of the year.
Overall EBITDA for the first quarter was INR 188 crores compared to INR 177 crores for the same period last year, a growth of 6%. As Jonathan mentioned, underlying EBITDA growth is broadly tracking the top line growth and is reflecting of the operating leverage in the business.
Depreciation for the period was INR 86 crores compared to INR 75 crores in the same period last year. This increase of 15% on a year-on-year basis is mainly going to the new investments.
Interest income for the quarter increased from INR 12 crores last year to INR 16 crores in the current year with improving -- with the improvement of interest yield.
Finance costs increased from INR 7.9 crores to INR 9.4 crores as we recognized the interest component on new leased assets during the period. With strong net cash balance and then continuing to earn net interest income. Now turning to tax. Basically [indiscernible] was around 20% compared to 18% during the same period last year. As mentioned previously, there is a gradual increase in the tax rate as some of our units moved out of SEZ tax benefit period and also an increasing share of business now are coming from locations not enjoying SEZ benefit.
So profit after tax stood at INR 74 crores as compared to INR 77 crores, a decline of 4%, which is in line with what we mentioned in our previous call, indicating a decline in profit for the first quarter. Further, on an underlying basis, profit after tax is in line with underlying revenue and EBITDA growth. Now let me spend some time on the guidance for the year. In our last call, we gave you guidance of mid-teen growth in revenue from operations for the year, taking into account the effect of Remdesivir in FY '22. We can see how this played out in the current quarter in diluting the overall revenue growth.
For clarity, the mid-teen growth guidance for the year already factored in a good element of growth in biologics manufacturing. Now with the benefits we are seeing from rupee depreciation and with the commencement of manufacturing of Zoetis towards the end of the year, we expect overall revenue growth to move up to high teens in FY '23.
Just to be clear, Zoetis recent growth is subject to regulatory approvals. We will provide further clarity on this as we progress through the year.
As a modeling input on Zoetis deal, we could simply divide the deal value by the number of years, but adjusting for the first 2 years as we scale up to the optimal utilization level.
Also as a caution, the revised FY '23 guidance now being given already includes some elements of Zoetis, so please don't double count the same.
If we look at these upgraded guidance on an underlying basis, excluding Remdesivir, you see underlying growth of upwards of 20%. And we see this as a reasonable guide for expected growth in FY '24 as well.
With this type of strong underlying growth, we believe we can also maintain our 30% EBITDA margin guidance despite the inflation pressures in the business and additional operating investments that we are making. We will continue to provide further update on our revenue and margin guidance in the subsequent quarters based on the progress during the year. This concludes my remarks and can now open the phones for questions. Thank you.
[Operator Instructions] The first question is from the line of Prakash Agarwal from Axis Capital.
Sir, first question is on the constant currency growth that we have seen in the quarter and what would be the constant currency revenue guidance for us? I hear you saying high double digit led by Zoetis as well as currency. But what's the constant currency growth guidance for us?
Thanks, Prakash, for this question. As I mentioned, the underlying growth at constant currency has been 25% versus a reported growth -- such as our underlying growth reported of 30%. So that will give you an idea of what has been the impact of depreciation [indiscernible] first quarter.
Our hedge rate has been 78. We are now seeing around 80. And that will continue to [ give ] depreciation benefit going forward and even calculate effectively what that means in terms of -- in terms of the benefit that we can see on the top line.
Currently, what we are building in is from mid-teens to high teens, Zoetis starts only towards the end of the year and part of the increase comes from the rupee depreciation based on our understanding, and that's what we have seen in the first quarter.
Okay. Understood. And secondly, on the margin. Clearly, there is a lot of inflationary pressures. And this 30%, again, is quite phenomenal, but this is including the other income that you calculate, which is the interest income on your investment.
When you say 30% margin, it is operating margin guidance. We do not give margin guidance, including interest income. So the answer is no, this is operating margin guidance. Prakash, there is pressure from inflationary plus there is also the rupee depreciation, increasing the denominated, but EBITDA remains the same. So it's growth in slowing the EBITDA margin, but we are still giving a 30% margin guidance in view of the upgraded top line guidance.
Okay, lovely. And lastly, in terms of the business model, when do we -- I mean, given that growth rate is increasing, you are tying up with large players, when do we see the operating leverage to start with in terms of including margins? Could it happen with Mangalore facility kicking in? Or I mean, are the model businesses with a target of 30% EBITDA margin?
Thanks, Prakash. I mean, I think it's a well-trodden path of the conversation. We've had this on a model. Over the last decade or so, our margins at the EBITDA level have sat comfortably around 30% to 33%. We said countless times that we think that's strategically a stable place for us to be. That puts our margins certainly well above average for our global industry group, their top-performing margins. I'll be delighted to keep them in that range.
But as for calling it quarter over quarter, we'll happily guide you at the beginning of each year further, that's a modeling challenge for you.
Okay. And the second part of the question was on the Mangalore side. A, when is it expected to start delivering dollar revenues? And if that comes in, do we expect margins to move up, down or remain 30%?
I think just aggregate the 2 parts, we will continue with the sort of margin range we have enjoyed traditionally as our business grows amongst all of the divisions. So I don't see it as an inflection point up or down given the comment I gave you earlier, an EBITDA margin range of 30% to 33% is the zone that we've operated in for a decade or more.
As to the timing of Mangalore, I'm sure you can set your watch by the answer I'm about to give you, which is, I think, last course said 15 months was the pathway that we were anticipating through to regulatory inspection, and that was an important milestone for Mangalore. So you can do the math, it's 15 months minus 3 this quarter, which would be 12 to go. All of the operational things that need to happen are happening, and we'll update you when we get there.
The next question is from the line of Shaleen Kumar from UBS Securities.
I just want to understand one thing that while we are increasing our guidance for the top line and taking some benefit of Zoetis and keeping our margin constant, would you like to increase your -- or would you like reiterate PAT margin as well, PAT guidance?
Will we reiterate the PAT guidance for the year, I think is the question. So did you want to refresh everybody's memory of what we said?
Yes, what we said PAT will grow single digit. And the reason, if you remember, [indiscernible] was the increase in effective tax rate year-on-year. And we maintain that guidance. So essentially, what we are saying high teens growth in revenue. EBITDA margin guidance remain at 30%, which means there will be some increase in absolute EBITDA. And PAT growth, we are still seeing single-digit in view of the headwind that we are taking from increasing effective tax rate. And if we set right now at 20%. And over the next few years, it will actually go up to 25%. So please model it appropriately. However, from an increased growth trajectory that we are accessing now, we expect the operating leverage to improve from next year onwards, and that should improve the overall PAT outlook.
I understand that your tax assumption should be there, right? I don't think that there will be a material change in your tax assumption. Are you sure there will be upside to your guidance if you're upping your top line guidance and keeping your margin guidance in?
Yes, we actually don't pocket, we are in a big investment mode at this point of time. We given $100 million plus CapEx guidance, many of them actually get installed and commissioned in the current financial year and will immediately start depreciating. So the depreciation will also start hitting our P&L. And they will start generating revenues over a period of time. So the high investment mode...
Is something a little bit more obvious. The guidance says single-digit growth in PAT. So we're in the range of the multiple options of single digits, did you have it and where are you leaving it? It makes sense. So we don't need to change the guidance, but you've got a whole range there. I'll leave it for you to decide what growth rate to put in your model.
Sure, Jon. That's fine. And just to clarify on the EBITDA margin, 30% as per the last participant. So this quarter, our operating EBITDA margin was 26.8% or INR 173 crores of EBITDA that we should take, right?
Yes, yes. yes. So essentially, what you've...
Please go ahead.
Yes. Please complete, sorry.
Yes. So that's the EBITDA margin, we are looking at 30%, right?
Yes, yes. So essentially, if you see -- yes, essentially, if you see our business and if you have -- if you look at the trajectory that our business has seen over the last few years, EBITDA margin generally increases during the year. That's because there is some amount of seasonality in our business or back-ended revenue generation in the business. And we expect the overall EBITDA margin to go up over the year. And we keep that into consideration while keeping around 30% EBITDA margin guidance.
Sure, sure, sure. And I just wanted to confirm that we are looking at the right path in number, right, operating margin, not including other income. So I just wanted to confirm that.
Because you are modeling, the only unpredictability is the rupee depreciation. Because rupee depreciation will -- if it happens more than what it is today, it will improve the top line particularly on that it will keep on decreasing the margin. So that is the uncertainty which is pure arithmetic, which is not business driven.
Understood. Understood. Understood. How should we build up ForEx part then like we have received like we kind of have like a INR 3 crore of losses. So if, let's say, rupee remains at 80 and our hedges are at around 78, so should we expect similar kind of ForEx loss going forward?
Yes. It all depends. Nobody can predict the currency movement, right? And I'm not -- assuming -- let's say what I'm saying, we may go around on the top line, but we'll never go down on the bottom line because the P&L will ultimately have it captured at INR 78 is our forward hedge rate.
That's clear. But what I'm trying to understand is, let's say, for my modeling assumption, if I'm taking 80 as a rupee what kind of ForEx loss...
We can catch up later to give you a little more clarity on how the modeling can happen so that others can also ask questions. So let's have a discussion later, if you don't mind, please.
The next question is from the line of [indiscernible] from [indiscernible] Capital.
On Librela, we are getting involved in the commercial scale. Were we also involved in the development and discovery part?
Actually, if you go back, that relationship with Zoetis goes back over a decade or so. They're a real innovator in their industry. They were the first company to develop -- or discover and develop a monoclonal antibody used in animals. That was actually a program that we did early-stage work for them many, many years ago. So that relationship is now mapping all of the major touch points in our business from research into development into clinical and then commercial manufacturing. So yes, it's an end-to-end relationship.
Okay. And -- and this number that you mentioned, the $65 million and then another [indiscernible] 85 , would be spread across commercial as well as discovery and development assets or the biologics.
Yes, that's -- yes, that's the investment in the total biologics business. So it includes process development and clinical and commercial segment affecting, that's correct.
Yes. It won't include the research part. That's in a different division. The largest -- we can grow our boundary around it and biologics is manufacturing, development and manufacturing actually in the biologic space is sort of synonyms. It doesn't have the right division you can get on the small molecule side where they're very different. It's much more iterative than the way you do it development flows fairly quickly into the commercial manufacturing piece. So the CapEx numbers we gave you, if you just allocate those to biologics development and manufacturing in particular as an integrated whole, you'll be thinking about it in the right way or at least you'll be matching what we do operationally.
Understood. Just one clarification on this is the first commercial scale manufacturing project for us, the one that we're doing with Zoetis?
Yes. So I think that's the sentiment.
Yes, that's the sentiment. The first commercial won at large scale. We may well have had projects in the past which might have been commercial, but it may have been for particularly small indication. So it's an arbitral distinction.
But if you get in the general tone, then we think this is a strategically important milestone, delighted to be partnering with the world leader in animal health. We like the fact we've got a decade of experience, it then maps across all of our value chain, and this is an inflection point for our biologics business, puts them on to a pathway of really driving up not only their own performance and growth, but heading towards major market regulatory milestones, all of those are very positive indicators for the business.
The next question is from the line of Surya Patra from PhillipCapital.
Congrats for the direct team. The first question is on the regulatory clearance pathway for this manufacturing -- biologic manufacturing plants which will be utilized for [indiscernible]. So how different is the regulatory clearance pathway for the facility from that of the normal U.S. inspection and clearance are for other plants? Is there any meaningful difference?
No, no.
No. I'll invite Mahesh, if you've got a comment on that. My high-level answer would be no. It's the same regulator. It's the same sort of dimensions are, but there may be technical bits today what they actually come in and expect because you're looking at the manufacturing of a small molecule in one case or a biologic and the other. But in general, the regulatory approach, the standards they operate to -- and the sort of time scales that they operate to all look very similar. Anything you have to add to, Mahesh?
Yes. So just to add a little more clarity, right? So within the FDA, there is what is called the CDER and the CBER. Both of those are still part of the FDA. And so the overall approach is still the same. On specifics as Jonathan mentioned around what we are looking for are going to be different parameters, and these are extremely technical around how we run the operations, how we run the facilities in that unit.
Just one thing, don't miss the obvious we're not driving the regulatory agenda that sits with the client. So it's completely in the gift of and managed by Zoetis and the FDA.
That is helpful, sir. My second question is on the discovery research business opportunities. So obviously, that is one of the fastest growth driver for us. So -- and in the recent past, we have adopted many qualitative platforms for faster growth. So like, for example, the SynVent or the integrated discovery platform or the platform the PROTAC or even the patients, all these things that we have in the recent past adapted in our core practices. So whether it has really improved qualitative with the growth trajectory of our discovery research won? This is my first question relating to that.
The second point is that -- so having seen a larger investment already in the capacities, both in the -- on the manufacturing capacities and the likelihood or so the strong cash flow generation what we are likely to see going ahead over the next couple of years. So the capital allocation towards the businesses, if you consider whether the services business is like to have a faster and larger asset allocation and hence faster growth?
Just give me the last bit of the question again?
Yes. So the first point...
Is we see product is research likely to have a faster perspective rate growth than manufacturing?
Yes. And the question...
Okay. So we can just aggregate and give you those. We take the $100 million CapEx budget for this year, $50 million of that is going into research, $30 million of that is going into biology, it's principally biologics manufacturing. $20 million, the remainder, is going across the rest of the business, everything from basic CapEx infrastructure, IT, development, whatever, all the other line items. So 50%, $50 million this year is going into research, $30 million into biologics, $20 million into others. That gives you a sense of the CapEx distribution. Mathematically, no, the -- if you're growing off a small base, you're going to split that spectacular growth rate numbers. So it's unlikely with the research services sort of division or divisions the 2 of them together, which a 28-year-old are going to churn at growth rates that are mathematically higher than much more recent development and manufacturing. But it sort of doesn't matter. I think what you really need to get is that -- all of them are seeing good opportunities, all worth investing in, all are generating prospective returns at or above their cost of capital. So they are a good use of shareholder funds.
And I think there was an element of your question you've told us ADCs, you told us about PROTACs, are we seeing it in the growth rate? The underlying growth rate for the quarter was 30%. I think that's where it came from. In fact, we've got a spread of capability.
Just last one question on the Mangalore plant, which is currently there, obviously, that is underutilized. So what are the costs or -- so what is the kind of a negative impact of this plant under inflation that we are currently facing? So let's say, in the...
I'm not going to quantify it for you. Your question gets the sentiment. It's -- it's a high-quality but underutilized assets. It will start to increase its utilization in time. The bellwether event is the achievement of major market regulatory approvals. The time clock to that is the same conversation we have every quarter, 15 months last quarter perhaps 12 months fiscal. That's when we get. Then we'll be able to update you.
But it's -- the strategy is clear, which is that we think it's important for us to be able to offer end-to-end discovery into development, into manufacturing. Then the fact that, that asset, over a period of time, has a negative contribution to margins doesn't really matter. The strategic thing is really create value from it over the lifetime of the asset. And that's the basis that we judged it, investing for value creation.
The next question is from the line of Anubhav Aggarwal from Credit Suisse.
So my question is on clarity on this asset turns on biologics at 1x. The question is, is this to do with the product Librela? Or do you expect most products where you could manufacture on the map front, the [indiscernible] will be about 1x?
I think that's quite a good modeling assumption plug-in 1x for the asset, independent of the particular antibodies going through it. And we're not going to need new miles off in your model.
The reason is that to do with the yield? Because my perception was that at least the effect is in biologics are 1.5 to 2x. So is that a gross wrong assumption or you? What is the yield that working with? Are you working with 4 grams per liter -- are you working with 2 grams per liter when you give this 1x assumption?
Yes, you're going to forgive me for not answering that because that would -- that's exactly the sort of competitive sensitive information that while I'd be delighted to tell you, I don't particularly want to tell all of my competitors.
But the sort of asset term that we guided to, I think, is branded in our own analysis of our facility. It creates economic value for our shareholders. It's profitable growth. So we're very, very happy with it. It is what it is.
Okay. Second question is on this so takes care of what capacity you have right now $50 million. Now you're building up another $30 million CapEx. so with this traction that you're already getting on the manufacturing development front, do you think this $30 million is little under investment for the future projects or let's bake this question down. What's the lead time? Once you spend the $30 million, would you have your entire project ready to take another order in a 6-month timeline? What's the lead time for you to be ready?
That's good. We'd be happy to take on other clients. We would be happy to invest more capital if we needed to. I'd be very happy to come back telling you that we're going to put more capital to work. It's one of those catch 22. Each time I tell you about further capital investment, it forms a question you'll already be more. So the answer is yes, that we're always going to be willing to invest where we see good prospective returns and good demand. And I think biologics is an industry area that those are exactly the dynamics we're seeing.
So we're very happy to have what we've already got. Very happy to have the extra $30 million that's going in this year. We'll keep you updated as we make decisions to invest more of our shareholders' capital into that area or any other area.
So when will this $30 million be ready to take the next project? In a year's timeline, 6 months' timeline, some idea of the lead time?
I don't know. I'd have to go and look at. That's the sort of project level at I haven't kept in my head. I think to try and be helpful. If you take a step back, I think from valuing the company as an equity or building a model of our prospective, sort of revenues and profits, I think we've probably given you quite a strong hint of where you need to tweak your numbers.
So just to go back to revenue from operations guidance from mid-teens to high teens this year. We've sort of cautioned you don't stick anything really material for Zoetis in that number. That's just the organic business going forward. We've given you a high-level number of up to $500 million over 10 years, that is USD 500 million revenue from the Zoetis deal. I don't think he's going to be a medium mile as long as you divide that by 9 or 10, take an average, plug it back into your model. I'd probably down weight the front end a little bit and upweight the last bit a little bit. And that takes you pretty close to what's visible to you today out of the Zoetis deal. Does that help?
Yes, sure.
The next question is from the line of Sonal Gupta from L&T Mutual Fund.
So just one question around again your guidance and -- like you mentioned, the upgrade is coming from the rupee depreciation. But my thinking was that...
Yes, go ahead.
Yes. And the -- essentially, what I was trying to ask was that the full-time employees on research services, et cetera, would be all dollar-denominated, right? So as the rupee depreciates, shouldn't our margins also improve?
Okay. So I'm looking across at best -- the comments you gave earlier. The only thing I'd say just what is thinking of answer, we didn't say that the upgrade was solely and exclusively linked to rupee depreciation. Actually, I think we're seeing -- and I made the same comments last quarter as well, I think we're seeing some pretty good demand drivers around the world. Many, many countries where our clients are getting to a new norm, I'm not sure if it's going back to an old normal, but people are back at work, they've acclimated, they're back in their labs, and there's clearly a willingness and an appetite to try and make up for lost ground, projects that maybe run a little bit slower and they try to reaccelerate them. That's a good environment for businesses like that. So we're seeing healthy demand.
Secondly, internally, within the company, I think we're seeing some pretty good operating performance and delivery. And then you've got the third factor that we largely price things in dollar. And a dollar when translated into a rupee has turned out to be more valuable during the course of the first quarter. So it was 3 factors, not 1.
Yes. And Sonal, I'll just repeat and try to explain one more time what I said. We do not speculate we hedge all our receivables. And this year, our receivables were hedged around INR 78, so an average of INR 78 is a good number to take.
So if the rupee depreciates beyond INR 78, which it has already done, it takes up the top line. However, it doesn't impact anything on the EBITDA because if rupee had not depreciated beyond INR 78, I would have captured that in the hedge gain and I have reported that every quarter for the last many, many quarters.
So essentially, it does not change the absolute EBITDA number, it changed the top line number. I am, however, still maintaining a 30% EBITDA margin, which effectively means that I am saying that the arithmetic downward movement of the EBITDA margin, simply because I'm using increasing top line without the EBITDA margin, it's going to be compensated by the comment that Jonathan just made, there is a good demand environment in the market. And towards the end of the year, as I mentioned, we'll start some weighted activity. But again, it's towards the end of the year.
So overall, if I take all this together, I am saying that it will still -- we still hold on -- we hope to hold on to and we expect to hold on to 30% EBITDA margin, which means we'll get something flowing down to the EBITDA line, at least from the top line. Hope I explained that to you, Sonal.
Got it. So just on the hedging part. So how many quarters forward revenue hedge do you have?
So we have -- our policy says that all long-term contracts have to be fully hedged for the contract period. And for the next 12 months, we are 100% hedged. And beyond 12 months, that's 12 to 24 months, we are 50% hedged. That's broadly how it remains. Secondly, are we -- this is the year when it hit. But at any point in time, for the next 12 months, we have to be 100% hedged and we have to be 100% hedged for all long-term contracts. That's our hedging policy.
The next question is from the line of Vinayak Mohta from Stallion Asset.
Congratulations on the order from Zoetis. So I just had a question broadly around the Zoetis contract only. So just wanted to understand broadly what kind of ROIC are we looking to maintain in the contract? Because you have mentioned that you'll have an asset turn of around 1x on the face of that. Could you explain what kind of working capital requirements will be required or what kind of working capital days would go into [ a stream ]? And how would it impact the ROIC and the margins for the contract on a broad level?
Yes. So any manufacturing business would require stocking of inventory and a higher level of inventory than normally our research business would have. And I mentioned that in my commentary that as we move more towards manufacturing, the overall inventory levels and the raw material costs will keep on increasing a bit. So that's already built in.
We obviously are always looking at our return on capital and whether we are investing in projects which is giving us at least a return equal to the weighted average cost of capital, plus a good buffer zone. And Zoetis comes very much in that bracket. So we effectively expect Zoetis to give us a return which does not dilute our current existing return on capital employed. So if you know what is our ROC now, that's not going to be diluted from Zoetis.
Understood. So broadly -- understood. So how big would be this Librela and the opportunity that we can go towards? Like what kind of opportunities are we looking at [indiscernible]
That's exactly what we told. Over 10 years' time, it is expected to be a $500 million opportunity. And how we can model it to kind of divide by 10 years, divided by 10. However, the next 2 years is a gradual buildup leads to an optimal capacity utilization. Very simple modeling buildup in the next 1.5 to 2 years to the level where it will give full capacity utilization. And that's what we say. But Zoetis is expected to deliver around $500 million in terms of...
I was just trying to understand if the opportunity is big enough that we can get an incremental order on the current existing one. Is that a possibility? Or is it going to be restricted to the current order that you've got? So that will level just trying to understand what the opportunity like.
Gosh, I love your enthusiasm of the question. I was delighted that we got to the start line. I'm looking forward to kicking that project up over the rest of the year for the Zoetis to get through the FDA clearance and for us to get motoring with it. But yes, I like the premise of the question. I look forward to updating you on that at some point in the future.
And just one last, ROC, including the working capital, the ROC would move to 20% plus? Is that fair to assume?
Again, these are modeling details, we can catch up sufficiently, yes. But when I say ROC, all assets are included. So all investments are included. Obviously, we are not excluding any investment while calculating the capital deployed. And if you want more details, we can get in touch and...
So we can assume it to be 20% plus in that case.
Let's catch up separately. I don't want to comment on the numbers.
The next question is from the line of Prateek Mandhana from DSP Investment Managers.
[Technical Difficulty]
I think this is the last question. Your line is buzzing a little bit. So if we can just make sure we can hear it. And then I think this is the last one we're out of time. So go ahead.
Can biologics be greater than a small molecule's API, say, over the next 5 years or 7 years? Do we -- or do small molecules continue to be bigger after 5, 10 years?
I'm not going to give you specific firm guidance, but the answer to the question is clearly, yes, it could be. Actually, if you take a step back and look at the global life sciences pharma, biopharma industry, we're at a point that's taken about 30 years to achieve, which is if you look now in all of the industry's research pipelines, you've got about a 50-50 ratio between things in development discovery that you would consider to be traditional small molecules that would end up in your API bucket versus those that are biologics and the various multiforms of biologics and biotech products.
So we've reached something that in the industry is known as platform or technology neutrality. Best tool for the job, not the best tool that we've got. So from that point of view, perfectly possible that biologics within Syngene could be bigger or smaller than the small molecules.
I actually think, you've got some quite good hints there, almost certainly over the next year or 2, our biologics business is going to grow to be bigger than our small molecule manufacturing. But you could back calculate that from the guidance I gave you about the Mangalore regulatory pathway versus the timelines that we're talking about with Zoetis.
But I don't see either of those as a strategic point, one being bigger than the other. They're both great capabilities and businesses to have and be in and they both create value beyond the cost of capital. So from that point of view, they're strategically a good fit with our business.
Okay. And then do we expect a similar kind of an asset turnover for both or...
Yes, I think that's pretty much in line with what we've guided.
Yes. But one point over here. Asset turnover depends on how we report the top line and there is a raw material cost variability over there. So in biologics, we are able to come forward and very clearly established that asset turnover of 1x when it's optimally utilized. For the small molecule, we have to wait for the first commercial deal to come through to have a very clear idea on that. But from an ROI, ROC perspective, they're very sound either way.
Thank you. Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference over to Ms. Neha Shroff for closing comments. Over to you, ma'am.
Yes. Thank you, everyone, for joining today's call. I hope we have answered your question. If any further queries, please do get in touch with our team, we'd be really happy to get back to you. Have a good day, and thank you once again.
Thank you, ma'am. Ladies and gentlemen, on behalf of Syngene International, that concludes this conference call. Thank you all for joining us, and you may now disconnect your lines.