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Ladies and gentlemen, good day, and welcome to Q4 FY '22 Earnings Call of Torrent Pharmaceuticals Limited. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Sudhir Menon. Thank you, and over to you, sir.
Yes. Thank you, [ Sara ]. Good evening, and welcome, everyone, to Quarter 4 FY '22 Earnings Call. Quarter 4 witnessed strong growth in the branded generic market, aided by market share gains, performance of our top brands and new launches. The branded generic markets revenue constituted 70% of our total revenue in quarter 4, which grew by around 15%.
Our financial highlights for the quarter are as follows. Revenues were INR 2,131 crores, up by 10% on a Y-o-Y basis. The gross margins were at 71%, improved by 1% on a sequential basis. The EBITDA was INR 612 crores, up by 1% on a Y-o-Y basis. The operating EBITDA margins are at 26.3%.
This quarter, we have taken a difficult decision of discontinuation of our liquid business in the U.S., which we had acquired in 2018. The exceptional item of INR 485 crores in the income statement relates to the impairment provisions and costs related to discontinuation of liquid business in the U.S.
The Board of Directors today have recommended a final dividend of INR 23 per equity share. Additionally, the company is completing 50 years this year of its incorporation. To commemorate the same, the Board has additionally approved a special dividend of INR 15 per equity share and a bonus issue of 1:1.
I will now request Aman to share his insights on the India business performance.
Thanks. India revenue, at INR 1,034 crores, grew by 12%. As per AIOCD data, Torrent's Q4 growth was 11% versus the IPM growth of 4%. Growth was aided by new launch momentum, a robust performance of top brands and continued market outperformance across our focused therapies, particularly in CNS, gastro and women. We have expanded our field force during the quarter to 3,900 compared to 3,600 in Q3. We expect the India business to continue the above-market growth momentum as our April AIOCD numbers look encouraging, and we have a good new pipeline, new launch pipeline coming up in the next few quarters.
I'll now hand over to Sanjay Gupta for the international business.
So let's start with Brazil. So Brazil revenues were at INR 251 crores, up by 33%. Constant currency revenues were at BRL 172 million. As per secondary market data in Q4, Torrent's growth was at 15.4% as compared to a market growth of 10.1%.
The quarter witnessed good initial traction from launch of 5 new products since November of 2021. These are: Memantine, [ ropivacaine ], rivaroxaban, desvenlafaxine and Ticagrelor. With strong underlying growth of the market, we expect Brazil to continue growth momentum aided by the new launches, performance of our top brands and the new division in the CNS segment.
Moving on to Germany. The Germany revenues were INR 218 crores. They were down by 18%. Constant currency revenue were EUR 26 million. Growth was impacted by a loss of products in a recent tender and price erosion. We have already initiated cost measures to improve competitiveness and are confident to revive growth in the coming quarters.
For the U.S., U.S. revenue was at INR 282 crores, up by 5%. Constant currency revenue was $37 million. Revenue growth sequentially by 20%, aided by the launch of Dapsone, a new derma product.
We continue to await USFDA reinspection of our facilities. Torrent has decided to discontinue the liquid facility operations. The operational cost of this facility was INR 135 crores per annum. The decision was made by taking into account incremental investments required for bringing pipeline products into the market and the increased competition intensity in the liquid space.
As of March 31, 2022, 57 ANDAs are pending approval with the USFDA and 5 tentative approvals were received. During the quarter, 6 ANDAs were filed and 1 NDA was approved.
To conclude, as branded generics market, including India, remain on strong footing, we expect the current growth momentum in these markets to continue and are optimistic to revise growth trajectory for Germany in the coming quarters. The cost optimization measures initiated in the previous quarter shall lead to steady margin improvement in the coming months and quarters ahead. Thank you.
Operator, we can open the call to questions now, please.
[Operator Instructions] The first question is from the line of Sriraam Rathi from BNP Paribas.
Just one question, particularly on the gross margin that considerably has further improved because there is a key one-off in this quarter. But how is the raw material cost scenario now for Torrent Pharma? And I mean, earlier, you were expecting that in -- by Q1, we should be back to the normal level. So where do we stand now?
So Sriraam, did you say on the raw material prices, the price increase?
Yes, raw material price increase. So basically, I mean, is the impact, you see continuing for Torrent Pharma?
And earlier, we were expecting that by Q1, which should be back to the normal levels of gross margin. So I mean, does that stand true for us?
No, I think the thing that we spoke about on cost optimization to start in quarter 1 was more on the plant overheads, which I had said, right? I mean, for example, we were looking at optimizing our cost at the API facilities basically, which is part of the raw material costs, right, and then impacting the gross margin. That should start from quarter 1, Sriraam. So that's something which has not come in quarter 4.
Right. Okay. Okay. Got it. Got it. So -- and in terms of raw material cost inflation which we are seeing. So I mean, what is your view on that? And because earlier we were doing gross margins of around 73%, 74%. So now, right now, we are at 70% to 71%. Any view on that?
So Sriraam, the greatest impact on the gross margin has been by the generic businesses which are there, right, which is essentially U.S. and Germany, right? And that's the reason why there is a dip in gross margin over the previous quarters which you're looking at. We used to be 73% kind of a number, right?
What we also said during the last quarter is that, come quarter 1, since we'll be taking price increases in the branded generics segment, we should start seeing improvement in the gross margin coming. That's point number one.
Point number two, what we said is, once the USFDA reinspection is happening next year, which any time we are expecting now, looking at the others having the reinspection of the USFDA, the U.S. new product approvals will start coming in. And what we had indicated was that should start happening somewhere in quarter 4 of this year. So that should play out in a positive way to the overall margins.
So probably, let's say, quarter 4 of next year, you should seeing those margins coming back is what is my understanding. But having said that, I think let's wait for quarter 1 performance, which could give a better direction to the overall gross margin progression during the year.
Okay. So that's helpful, sir. And just one question on the [ U.S. ]. I mean, of course, we've seen decent pickup -- I mean [ you are starting see it ] in this quarter. With $37 million sales, I mean, from here on, how should we look at it? I mean, assuming that FDA inspection [ happens ] at a certain time. But without that, can we expect that this revenue run rate to sustain and maybe improve from here on?
Sriraam, on a quarter-on-quarter basis, our price decline is, I would say, low single digits. On a year-on-year basis, it is in mid-teens. So that is what has happened. So we are seeing some relief from -- compared to the previous year in terms of pricing erosion. But -- so my guess would be that we would see modest strength in price erosion. So especially given the announcement by several companies that they are discontinuing products, I think our customers would be a little bit careful about asking for further price increases. So on that basis, I would say, without reinspection and without new launches, where the chances of having fairly stable sales base are higher.
The next question is from the line of Anubhav Aggarwal from Credit Suisse.
Sanjay, question for you. Just continuing with the previous question on U.S. market. So Dapsone gel, looks like from your comments that, that was the largest contributor in terms of delta to this quarter. So quarterly sales of $5 million to $7 million per quarter looks very high from Dapsone sales. Would you say that this was just driven by some extra inventory filling which would normalize next quarter to a lower number?
So no, I will not comment upon sales by product because it's something which is a sensitive information. We had good sales from that Dapsone this quarter. We know there are other competitors on the horizon. I'm not seen their product as yet, but you don't know what is their supply chain connectivity looking like. But -- so I would not go into venturing to make forecast for Dapsone for subsequent quarters.
But we have a good customer mix. We had some anchor customers and some smaller distributor customers. So we will do what we can to retain them. And pricing to see sustained as long as there are no new entrants that come to the market. Because it is still a 3-player market: [ The originator ], the one generic, and us. So it's a fairly, I would say, stable situation as of today. But in the U.S. generic space, as you know, a new entrant can shuffle the cards. So I will not tell you what it would be next quarter. It will only depend upon if there is a new entrant and how that plays out.
Sure. And second question is on the Brazil market. In this quarter, what is roughly help -- how much the new launches that -- those 5 launches you have done, how much would they have contributed roughly as a percentage of sales of this quarter?
Correct. So we showed a growth of about 21% there. And I would say roughly about 13% to 14% of that is the contribution from new launches.
Very substantial contribution. So what -- how are you expecting Brazil sales growth next year? Are you -- do you think double digit is doable in constant currency?
So if you look at the Brazilian -- starting with the GDP, right. This year -- the [ '21 ], you had a GDP growth of about 4%, 4.5%. Next year forecast is looking at less than 1%, especially with the elections happening in October. So generally, from our past 20-year experience in Brazil, we've seen the pharma market to be sustained irrespective of these macroeconomic fluctuations. So assuming that the market grows at another like 8% to 10%, we should be well above that.
Okay. And just last clarity from Sudhir. This close down of this facility, the liquid facility in the U.S., would it help you reduce cost in subsequent quarters?
Yes, yes, yes, Anubhav. So the operating expenses on a full year basis is INR 135 crores. As part of the impairment, I mean, most of the activities haven't actually stopped there. And as part of the impairment, which we have taken on 31st March, we've also included the closure cost related to the closure. So we should see those benefits coming from quarter 1 and second quarter, Anubhav.
So how should we see? Should we just divide INR 135 crores by 4, and just that will be the annual -- and quarterly savings that will just come through?
Yes, logically yes, Anubhav. I mean, 10% to 15% year-on-year in the first quarter. Other than that, I don't think the numbers should change drastically.
It's a big number, this effect. Already talking about almost like INR 30 crores, INR 35 crores, which is like 7% or 8% of the EBITDA of the company.
INR 30 crores is 1.5%. I mean, INR 2,000 crores run rate on a quarterly.
Yes. Quarterly EBITDA is about INR 500 crores, INR 600 crores, right?
Of the EBITDA, you're saying. Okay.
Yes, of the EBITDA.
Yes, absolutely. Yes. I mean, it was a cash burn which was happening for the last 2, 3 years. So I think finally, the [ point is taken ], and it should start rolling up into the EBITDA.
The next question is from the line of Damayanti Kerai from HSBC.
My question is on the Germany market. How should we look at sales in coming years? Because you mentioned the loss of 1 tender led to quarter 4 performance. So when will the next tender open up there?
And also, can you specify, what is the split between tender and retail market in Germany?
Yes. So essentially, in the current Q1 and Q2, we do not expect many new tenders to start. And we would expect more tenders to come on stream, new tenders that we have either won or will start from September, October onwards. So we would expect the sales in the second half to be better than the sales in the first half in terms of growth momentum.
We also have 10 to 15 launches planned for this year, which would be bulk of it coming after September, October also. So that should provide actually some growth momentum. And in terms of tender/nontender sales, the tenders are roughly 60% of our business.
60%? Sorry, 6-0, right?
Yes.
Okay. My second question is on India business. How should we look at FY '23 growth over FY '22? And if you can split growth contribution coming from volume, price and new launches?
Yes. So for Q4, our AIOCD reflection of growth was 11%. Breaking that up, into new products is 3%, price is 8% and volume is 0%. But that's against a market volume of minus 3%. And additionally, maybe a 1%, 1.5% upward adjustment on volume reflection because of this field force expansion, we've had a bit of reshuffling of some of our brand unit divisions. So volume is about 3% to 4% above the market currently.
And I think in terms of the upcoming year, of course, last year base because of COVID would be much higher. So on a quarterly basis, hard to say what the growth would look like. But on a CAGR basis, I think a double-digit growth should be doable for the market, and we should be -- we expect to grow above the market as well.
So CAGR, you mean to pre-COVID, right? Or was [indiscernible].
Over a 2- to 3-year period. So roughly speaking, double-digit growth of the market without COVID should continue. Where our base is predominantly chronic-driven, so we would not have that impact in our base. So we expect that double-digit growth should be possible for the year.
Okay. And just a clarity on India business. The higher price which was announced for [ India ] portfolio, although it's a small factor of growth, that's all included in your assumptions?
No. That would not yet be included because that would have been effective from April.
Okay. So most likely, after first quarter onwards, we can assume those prices to be...
That's right. That's right. Absolutely.
Okay. And what about the [ non-Indian part ] that's a nominal 7% to 8% price hike which you will take on year-over-year basis, right...
Yes, the same price range that has been seen over the past few quarters has continued. So this quarter was 8%.
The next question is from the line of Neha Manpuria from Bank of America.
Aman, on the field force addition, is all of our planned additions done? Or do we expect some more in the coming quarters?
No, there would be some additional expansion happening by end of Q1, which is when we expect the entire exercise to be complete. So this quarter ended at 3,900, and probably another 200, 300 reps by the end of Q1.
Okay. Got it. And these were all for existing divisions? Or are we planning to add new divisions?
So we have launched a new division in CVD. And there will be -- most of the field force for the new launches that are coming up in the coming year.
Okay. Got it. So then on the margins. We know -- I think Sanjay mentioned in his opening remarks about steady margin improvement. But if I were to look at everything that has been discussed in terms of gross margin improvement, new overheads coming down, price increases and the fact that we have cost savings from divestment, shouldn't there be a significant step-up in margins from the first quarter itself?
We do expect it, Neha. From 26.3%, which is in quarter 4, we should see at least 300 basis points upside starting from quarter 1. But having said that, let's wait for the results to come. But we are positive.
The next question is from the line of [ Bino Pathiparampil from InCred Capital ].
Just a follow-up question on the U.S., you mentioned that there are companies that are discontinuing products, et cetera. Could you please elaborate a little bit on this, what are you exactly seeing in the market?
So we are seeing a lot of pressure on companies, especially for legacy older products. And so what we've seen is some companies are willing to give up products if the pricing goes below a certain threshold. So I'm hoping that, that reduces the level of competition for the older legacy products. So especially for oral solids, there was becoming -- a lot of prices are becoming nonsustainable. So I think it's a wise thing on behalf of the generic companies to maintain some minimum profitability so that they can continue in business. So that's what we are seeing.
Okay. And are you seeing this in the last, say, 30 days or 2 months, 3 months?
Yes, it's a theme, right? Because during COVID, things were stable. After COVID, we started very severe price erosion. And I would say, for the last 2, 3 months, especially since 2022 began, we see companies taking into account this market reality and adjusting their strategies.
Okay. Great. And just a question on revenue mid term. Do you still maintain that we would be able to launch with the next [ area of generic retention? ]
No, we are much later actually. So without giving you a precise date. We are not in the initial 2 phases of launch.
Next question is from the line of Shyam Srinivasan from Goldman Sachs.
Just first on capital allocation. There has been some press speculation around the M&A for you. So just wanted to get some clarity around what are some of the therapy areas. Like you said, you're doing probably INR 2,000 to INR 2,500 crores of EBITDA. So just the usage of this, maybe if you want to use it. Before R&D also, you can add. But just the capital allocation priorities. That's my first question.
Shyam, frankly, I didn't get your question. If you can just -- you said something. Add or something. What was that?
No, no. So let me slowly repeat. Capital allocation, what are the priorities for Torrent Pharma? There is the press speculation around M&A, where you are in the advanced stages of one of the...
Okay, okay. Understood, understood, understood. Okay, Shyam. Okay. Let's come straight to the point, right? I mean, M&A happens when it has to happen, that's what I personally believe. I mean, given that we keep on looking at all the assets which are there in the market, right? I mean, so all the deals which have happened, whether we have looked at? Yes, we've looked at it, right? But having said, yes, I mean, there are a few other assets which we have been looking at.
I think from a capital allocation perspective, it's quite simple for us to think that, over the next 2 years, I think most of my existing debt would be repaid, right? I mean, which is basically outstanding for the Unichem acquisition.
And from the third year onwards, the kind of cash flow generation, which will happen with U.S. and Germany also coming back on track, hopefully, I think there's a good amount of capital allocation which is possible for any acquisitions which we are doing.
So basically, there's a good asset, which we find today, advancing that by 1 year or 2 year does not really change the needle. Because, as I said, 2 years down the line, I think most of our debt would be repaid.
Got it. So if I were to approach further. So what will be the likely order or rank-order of what assets you're looking for? Maybe it's over a 2- to 3-year time frame as well. We don't need to be near term. Is it going to be India? Are you looking at assets elsewhere in the world? Which therapy areas? Will it be complementary? How should we look at that?
So currently, Shyam, it's only in India we are looking at. So I mean, U.S., I think in the near term, we don't think so. Germany, we're already #5 in the market, right? And there's still enough room to expand into the 50% branded generic market where we are not present. So I think the growth story for Germany should be good over a long term. So whether something immediately is happening in Germany, the answer is no. Brazil, we've not seen any assets coming for the last so many years. So definitely, it would be India compared to the other geographies.
Got it. Last question is on the field force. I think you said another quarter of field force addition. So if you can just help us understand just -- I think you gave some details last quarter. But just what are these people specifically doing? We talked about a new department as well. If you can just give us color on what are the new field force therapy areas? Again, just refresh, please, on where are the new areas? What is the field force productivity at this point of time? And where can this go?
Yes. So the expansion is essentially to help us mainly cater to the new launches as the existing divisions would be -- would not have the space remaining, so we had to have to expand the divisions as well. So given that there are important launches coming up in the next 1, 2 years, that's where the need for this was established.
In terms of PCPM, roughly speaking, since our top line has remained the same and 10% field-force have been added, from that INR 9.5 lakh, INR 10 lakh level, it would have come down by 10%. But that will -- with next year's growth, that should get back up to the same level. So we think that range of INR 9 lakhs, INR 10 lakhs with PCPM should continue. So essentially keeping in mind the new launches that are coming up in high-size market, particularly in CVD, that's where this -- the majority of the new expansion should cater to.
Got it. And last question, just an extension of this. And how -- where do you think that we can go before you again need to start thinking about expansion of the field force? So is it like a 2- to 3-year window? So do you think we can go beyond this INR 20 lakh? How should we think about that?
It can, but that's not the objective. I think INR 10 lakhs would be a reasonable number. And as the pipeline keeps on increasing in new launches, we'll have to expand to a certain level. So I think INR 10 lakhs is something that we are quite comfortable with, and not looking at increasing beyond that, especially given that we have to be aggressive and competitive with the new launches in the next 2, 3 years.
The next question is from the line of Nitin Agarwal from DAM Capital Advisors.
Sudhir, just on the other expenses for the quarter. So the sequential increase is just a Q4 impact? Or is something -- anything else to read in that?
No, no. There's some bumping of expenses which have happened in quarter 4. And just to name 1 or 2 of them. So most of the U.S. filings have happened in quarter 4, right? I mean, so we filed 5 ANDAs and I think 1 or 2 DMS also. So there's a filing which happened in quarter 4. So there's a lump in terms of the U.S. filing cases which has come in, which I knew should have bought and distributed over the quarters.
The second item is there's a big lump sum which has come in terms of the [ information technology ]. So almost INR 18 crores which we paid in quarter 4 which could have been paid in previous quarters, but we made earlier in quarter 4.
And plus, the freight expenses have gone up a little bit more than quarter 3, so around INR 8 crores of that. So all these 3 put together is around INR 40 crores. So I would say it's bumping of expenses which have happened in quarter 4, which otherwise would have been evenly spread out.
Right. But from if you sort of look through the year, there's nothing -- not much one-off in those numbers. But if you would annualize, I mean...
For the year, [ they're pretty much there. ]
Okay. And likewise, for the employee expenses, there is a sharp-ish reduction on a Q-o-Q basis. Anything specific there?
Yes. So 2 things basically. So one is the reworking of annual incentives. There was a reversal of provisions which have happened, which were taken in the previous quarters and got reversed in quarter 4. Plus, this time, the Chairman Emeritus commission was foregone by the Chairman Emeritus. So there's a reversal of his commission in that as well.
And Aman, on the India business, so there has been, in your comments you recall, a lot of talk about new product launches. And you're sort of making the business prepared for higher intensity in new product launches. Can you give us a little more color on how things are changing on this front versus what they've been over the last 3, 4 years?
Yes. I mean, this is more driven by the patent expiration pipeline. So if you recall, not last year but the year before, there was a big wave of launches in cardiac and diabetes. To name a few examples, Dapagliflozin, vildagliptin.
So again, this year onwards and possibly next year, a similar intensity of launches is anticipated that we are preparing for. So we have to create the portfolio which is kind of future-ready as well. And hence, ensuring that we do the absolute best we can in these new launches.
In terms of competitive intensity, I think there probably is a slight increase in the chronic space compared to maybe 2 years ago. But we remain confident of maintaining or even gaining our market share as we have been compared to last year as well. For example, at the company level, our market share has increased from 3.5% -- from 3.2%, sorry, to 3.5% at an overall level. So we remain confident of consistently gaining market share.
If you were to just sort of break up the -- look at your growth in terms of new product launches, pricing and volumes for -- in the existing portfolio, clearly, there is this component of new product growth which is going to increase, hopefully should decrease going forward with the new launches. How should we look at the other 2 components? They should largely remain in line with what they've been? Or are you seeing changes on those accounts also?
So it will predominantly depend on the market growth trajectory. And assuming that the similar range of market growth continues, we think the delta between the market growth and our growth in volumes, in particular, is around 3-odd percent. We think that should continue. And the performance of new launches should add maybe another percent to that. And as we mentioned, the price growth range is within the 7% to 8%. So hard to really anticipate exactly what is likely to be, each break up, but that's the kind of broad direction that we believe should be doable.
The next question is from the line of Rajesh Kothari from AlfAccurate Advisors.
The current participant has left the question queue.
We'll move on to the next question from the line of Prashant Kothari from Pictet.
I'd just like to confirm about this write-off that we have taken in the U.S. business. So the write-off is about [ INR 439 crores ] and plus the expenses. From what I recall, and please correct me if I'm wrong here, you had already taken the write-off of about half of that investment in some prior year. I just wondering why it's much larger than that. What am I missing here?
Yes, Prashant, you're right, actually. So I think 2018, we made the acquisition. And I think the acquisition was around $70 million-odd, right? And 2019, when we had to take a temporary closure, we had taken an impairment of I think roughly $25 million, $26 million.
And so the whole focus was to upgrade the facility, right? I mean, for the last 2 years, we've spent money on upgrading the facilities. So there's a lot of construction costs and new plant and machinery which has come into the plant. So essentially, the CapEx was much higher, I would say, for the upgradation which we had taken over the last 2 years. So all put together, this is a impairment of assets which have happened.
Because intangibles -- most of the intangibles, we have written off, as you rightly said, in 2019. This impairment, there's a major share of the tangible assets which was spent as part of the upgradation process.
So we spent on upgradation and now we have decided that it's actually not worth doing that business so we are shutting it down?
Yes. I mean the entire building was brought down and the new construction was undertaken.
Okay. I'm a bit surprised that we've spent money and now we've kind of suddenly figured that it may not be worth spending all that additional money behind this.
Yes, that's a hard call which we've taken, Prashant. I mean, looking to the fixed costs, which this facility has been incurring, and this facility being in U.S., the fixed cost was really high. And I mean, we've got delayed in putting this facility together because of COVID also, right? I mean because we saw a lot of delays happening in terms of legal upgradation process. And today, at this time, when we look at the potential of the pipeline product, because there's a lot of new competition which has really walked into the market. And the market itself is very small, right? And when we look at the loss of exclusivity in this space, it doesn't make sense in actually loss funding for the next 3 years, which is incremental investment, and without seeing any major incremental economic benefits flowing out of this investment. So we thought that it's prudent basically to take this call and shut it down.
The next question is from the line of Saion Mukherjee from Nomura.
Sir, on the U.S., can you just share what is your strategy now? Because we have seen a lot of issues over the last 2, 3 years, that there are market issues, there are plant issues, and you have not taken a decision to close down liquid facilities. So what are your longer-term plans there? I mean, how you tend to sort of differentiate. It's a very subscale business at the moment. And do you think it makes sense to sort of sustain this business? What are your sort of 3, 5-year thoughts on the U.S. business? And how are you like making the decisions on investments in U.S. now incrementally given whatever is happening in the market?
So roughly, at some point the market has to stabilize, but it's still the largest drug market in the world. So we have, I would say, a smallish presence in this market. And from the small base, I would say that it's easier for us to grow. We need to do a few things right. Some of the steps we have taken today in terms of reducing our cost base in the U.S. We've also taken steps to reduce the number of products that we are developing only for the U.S.
So most of our pipeline now we are developing across the globe, and we plan to leverage the R&D expenditure around all our geographies. We've also taken steps to reduce the overheads in the plant. And we mentioned that we have allocated capacity that we are using for the U.S. business. And we generally will not be doing business below a certain margin threshold.
So I would say that while top line growth is important, we are more focused on making sure that the growth we have is profitable. And the investment in capital are not required. Our plants are all new plants, we have enough capacity. So we don't see any investment in infrastructure. So our focus is in optimizing our R&D investment, keeping our costs low, and generally improving the productivity of our research, because I would say that there are some areas of improvement in terms of what bang for the buck we are getting for the dollars we are putting into R&D. And once we get our quality piece right, that should start us on the growth momentum. So from $35 million a quarter, I don't see any downside. And if we invest wisely, as I mentioned, in R&D and CapEx, we should be on a sustained growth trajectory from this low base.
And the current level of operation, how profitable is the U.S. business after you sort of factor in R&D expense and other overheads that you carry?
So we don't discuss profitability by geography. But generally in the U.S. business, if you have gross margins in the 25% to 50% range on any product, that is general range, I'm just giving you a broad range as to what happens on a per product basis.
Okay. Understood. And just one question on India. So on India, in terms of new launches, I mean, can you just throw some light, any partnerships with MNCs or with other companies that you have done? Is that something which you focus on to launch some patented drugs like some of the other larger peers do in India?
So the near-term pipeline is mostly the patent expiration ones, but we are in talks for certain licensing deals in our core therapies. Early to say how they'll pan out, but that's an important part of our gold strategy going as the in-licensing for us.
Next question is from the line of Rajesh Kothari from AlfAccurate Advisors.
Actually, I missed one of your comments whereby you said that margins can move up by 300 bps, from 26% to 29%. That you are talking about which entity? Conso, stand-alone which entity?
It's on our Conso.
Conso. Okay. And the margin improvement of 300 bps primarily will be driven by a price increase, which has been taken recently?
So there would be factors, right? One is this fixed cost of the liquid facility would roll back to EBITDA, right? And I think during the call, we said the impact is roughly 1.5%. So there's an improvement already coming in by 1.5% because of the fixed cost of the liquid business going away. So that's point number one.
Point number two, also what we had said in quarter 3 is that there is some cost optimization, which we are carrying out at all our facilities. Basically trying to maximize the manufacturing or volumes at one particular facility and bringing down the shift working in the other manufacturing facility, including the formulation and API facility. And that we had guided that we should start seeing that coming in from quarter 1, because already the steps have been taken. So that's point number two.
Point number three, what we said is the price increases in all the branded generic markets should start from quarter 1 and that should typically help us in getting a margin improvement by at least 75 to 100 basis points on a per annum basis. Add to that, the operating leverage should start playing out with better growth coming in.
The fourth is, there was one factor in quarter 3, which we had said that the freight expenses have impacted the margins almost by 1.2%, 1.3%. And in quarter 4, we are seeing that the cost has further gone up. We personally believe that maybe in 2 quarters' time, it should start normalizing.
These are the levers which are there for margin improvement for the next year. And therefore, I said at least quarter 1, we should see minimum 300 basis point improvement, of which 50% is because of the fixed expenses of liquid business going away.
And sir, sorry, I'm not having presentation in front of me. What is your fourth quarter EBITDA margin and your FY '22 EBITDA margin before other income?
Quarter 4 is 26.3% and FY '22 should be around 28.3%. Yes.
Okay. So you're saying, on full year basis if I look at it, then from 28.3%, you are saying maybe about 29%, 30%, that's what basically you're targeting on full year basis?
Yes.
I'm right, no? Because you're saying on fourth quarter basis, it will go up by 300 bps, from 26% to 29%.
Yes. Minimum 300 basis points it should go up. That's what we believe. And therefore, what I said is let's wait for quarter 1 results, and that would be our direction for the full year.
I understand. And one just follow-up question on U.S. business, whereby you said that, in last particularly 1, 2 months, you mentioned that on generic side, the players are maintaining price discipline because prices are sort of so much down. I didn't get that point. Can you clarify on that?
So I think I was just talking in general about what we have seen in the marketplace is that -- if you recall, I had mentioned that quarter-on-quarter, the price erosion is low single digits. While you compare year-on-year, it is in the mid-teens. So obviously, the pricing pressure in the recent months has been a lot lower than it has been over a 12-month period of time. So that is coming from, I would say, more rational behavior from suppliers as well as to some extent from buyers. So that is what I was referring to.
Okay. So from here on, how do you see the pricing behavior? Do you expect the pressure to continue? Or do you expect it to stabilize from here on? What is your internal guess?
So I would say that, especially for older legacy products, it would probably slow down because there is nothing left to squeeze without squeezing the manufacturers out of the market.
The next question is from the line of Nitin Agarwal from DAM Capital Advisors.
[Technical Difficulty]
Sorry to interrupt you, the audio is breaking from your line.
Hello, is it better?
Yes, sir.
Sudhir, what will be the closing net debt number for us?
Net debt-to-EBITDA should be 1.3x. And net debt should be roughly, I think, 3,400. Hello, Nitin?
Yes, I can hear you. I got that. And on hedging, given the fact that the currency has depreciated a bit during the quarter -- during the last few days, in the past, you used to follow a policy of hedging the entire almost like 1 year forward earnings. I mean do we still continue with that?
Yes, yes.
So I guess, presumably that should play out in one form or the other for us in the forthcoming quarters now?
Yes, absolutely. Absolutely.
Okay. And lastly, on the gross margins, you said the incremental addition of the U.S. business with expected approval for the plant [indiscernible] coming through, will it have any impact on the mix for the gross margins?
Absolutely, Nitin. I think the new product launches happening will push up the margin, right? So far, U.S. has been quite negative on the overall gross margins. I think that should stop and at least it should start pushing up the gross margin. Our U.S. should start contributing to the upside of gross margin, I would say.
The next question is from the line of Bharat Celly from Equiris.
Sir, just wanted to understand on the cost optimization part. So you said that 300 bps will be realized in the next quarter. So just wanted to understand, will it be the most optimization or we can further realize in the upcoming quarters as well? And what will be the avenues after looking at the plant? If there will be optimization -- after the plant optimization, where the benefits will come?
After the plant optimization?
So you said that 300 bps benefit will be there in the first quarter. So are we going to realize even after first quarter? Or is it going to be just...
Yes. No, no, no. So I mean, it's something which we are doing it, right? I mean this is already done as of 31st March. We're basically optimizing the capacities which we have in all our facilities, right? So if you're bringing down the ship, it means that it cannot be brought up immediately back again, right? So that's already initiated and should happen in quarter 1, I'd say. And therefore, that benefit should continue throughout the year. I mean there's no going back on the costs later because...
So could we scale up these benefits? I mean, could this benefit scale up to 400 bps or 500 bps in the upcoming quarters also, like [indiscernible].
No, no. That's not the way to do...
So that is the maximum benefit which we can realize by just having this.
Yes, yes. From the cost optimization...
Okay. Are there any other avenues also to optimize the cost, which you are looking at?
So it's a continuous process. The only thing what we said is given the way the U.S. business is behaving for us, with no new product launches coming in, we thought of optimizing the cost to a certain extent, right? And that benefit should flow through '22, '23. Now if you ask me whether further plant optimization is possible, the answer is no, we are not looking at it at least for '22, '23.
Sure. And sir, in the last couple of quarters, you mentioned that you are getting into Trade Generics. So can you talk a bit how that business is behaving, whether we have got some traction there? And what sort of size we have achieved so far?
Yes, it remains within that kind of 1.5%, 2% contribution range to the overall India business as of Q4 as well. And we expect that our second wave of SKU launches should happen maybe around end of Q1 or Q2, and that should help the contribution increase from them.
Right. And sir, last one from my side. So just wanted to understand what are the time lines for Revlimid launch, whether we are going to be among the second wave of launch or it would be following after that?
I think I already said that we will not be in the second wave, so we'll be launching much later.
The next question is from the line of Saion Mukherjee from Nomura.
Just following up on Trade Generics question. So I mean when you sort of come with the entire basket that you plan, first, like what's the time line? And how much will this contribute eventually, in your view, whatever time frame you want to share, from current 2% currently?
So it could be identical to the first wave of launches that we did last year. So the idea is that these new SKUs should double our base. And what we have mentioned earlier also is that we don't anticipate this to be more than kind of 3% to 4% of the total India business in the near term. Long term, we'll have to see how the overall trajectory and profitability turns out. But near term, I think 3% to 4% contribution is something that we would be okay with.
And Aman, do you see Trade Generics in general sort of cannibalizing the prescription business for the industry? Because we have seen some good growth from some of your peers.
No, not really, because Trade Generics is mainly in the acute segment and very few kind of -- rather very little chronic contribution. And also the regional SKU is quite significant. So wherever there is an overlap between the Branded and Trade Generics, there's minimum kind of substitution that we are seeing. Of course, it does happen, but it doesn't really impact the trajectory of Branded business that much. Particularly in RTS, our portfolio is completely complementary. So the Branded business and Trade Generics don't have any overlap or so. So there's no chance of cannibalization happening there at all.
Okay. And just one last one on field force addition. So we are seeing many companies sort of adding people for new launches and for expansion. Is that having any issue in terms of wage cost inflation and attrition, which have historically been quite low for Torrent. Are you seeing any challenges with respect to attrition and wage inflation there?
No, as of now, not really. Our attrition and cost structure remains fairly kind of identical to how it has been and not really expecting it to change much from here in this financial year.
Ladies and gentlemen, we'll take the last question from the line of Tushar Manudhane from Motilal Oswal Financial Services.
Just on the U.S. generic business per se, strategically, this piece has not kind of given the required economic benefit maybe in terms of the liquid facility or even in terms of the [indiscernible] facilities. So subsequent to this discontinuation of liquid facility at the strategic level -- not maybe on the plant optimization, but at a strategic level, what further can you expect?
So essentially, we are not, by any certain imagination, quitting the U.S. business or anything like that. We are adjusting our investments. So we would continue -- we have, actually, if you look backwards, every year we file close to 10 ANDAs. Unfortunately, those ANDAs have not brought us much benefit because of the facility quality issues.
So once the quality issues are resolved, we will continue with about 8 to 12 filings per year. Usually the number of filings will become less important as we are moving towards more complex filings. And again, these products would be in common with our other 2 geographies. And we are not looking at any further industrial investments for the U.S. market.
So all in all, I would say, making R&D investments and hoping to grow the U.S. business from its current low base is what our strategy is going to be.
So you would see more products like Dapsone, right? So Dapsone is an expensive product to develop. It's a product in recent trial in asthma patients. And it is bringing good fruits. So in the future, you should see similar products to that rather than, I would say, [indiscernible].
Understood. Got it. So any products which are under kind of shortage, which have been filed or which are already filed, which can trigger faster or prioritize your [indiscernible]?
So we have a few CGT exclusivities already in hand, and we have a portfolio of products for which we hope to get competitive generic therapy designation from the FDA. And usually, you get that if you are the first generic for a non-patented product. So yes, we're making efforts to get that designation. And we already have received it for a couple of products. So you will see more of that. So these are limited competition for generic for a non-patented product that is launched by a generic company.
Got it. Okay. And just lastly, if you could help us with the effective tax rate for FY '23, '24.
Sorry, I didn't get the question.
Effective tax rate for FY '23, '24.
Yes, it should be around 32%, 33%, Tushar.
Got it. And just this one last. There's good reduction in the trade payables as well. Any specific highlight there?
Yes. So the Germany business is coming down. So if you see sequentially, there has been a degrowth in German business, right? That's a major chunk of the trade payables actually, Tushar. So as the business comes down, the trade payables also keep on coming down. It correlates to each other.
Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Sanjay Gupta for closing comments.
I'd just like to conclude by saying that we are seeing good traction in our branded generics portfolio. These countries currently account for 70% of our top line. We are doing our best to remediate the U.S. business, and we are optimistic that post the quality inspections from the FDA, we would be on a growth path in the U.S. For Germany, again, after Q2 in the second half of this year, we expect there to be positive momentum from new tender wins as well as new launches. So hopefully, we'll be able to show good results at the end of this fiscal year. Thank you very much for your interest in Torrent and our team of Investor Relations is available for any further questions. Thank you, and bye-bye.
Ladies and gentlemen, on behalf of Torrent Pharma Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.