BLUEJET — earnings call
The transcript as filed. Every paragraph is addressable: its link names the page and the position it sits at in the call.
Prepared remarks
JET HEALTHCARE LIMITED · MR. V. K. SINGH – CHIEF OPERATING OFFICER –
MR. V.
K.
SINGH – CHIEF OPERATING OFFICER –
BLUE JET HEALTHCARE LIMITED · MR. GANESH KARUPPANNAN – CHIEF FINANCIAL
MR. GANESH KARUPPANNAN – CHIEF FINANCIAL OFFICER – BLUE JET HEALTHCARE LIMITED MR. SANJAY SINHA – DEPUTY CHIEF FINANCIAL OFFICER – BLUE JET HEALTHCARE LIMITED
Moderator · Conference Operator
MR. DIWAKAR PINGLE – ERNST & YOUNG Blue Jet HealthcareLimited November 15, 2023
Thank you.
The next question is from the line of Darshan Shah from Multi-Act Equity Consultancy, Pvt.
Rahul Picha
My first question is on the contrast media segment.
The largest customer accounts for a substantial portion of our revenues.
We do about INR450 crores with GE Healthcare.
So, just wanted to understand how much penetration have we achieved with that customer and what is the scope for incremental growth with the same customer?
Ganesh Karuppannan
While our top customer will continue to be the single largest customer, we have certain launches in the next couple of quarters which actually would bring in the concentration risk which will be addressed.
Currently, we have a couple of opportunities in contrast media as well as pharmaceutical intermediate space.
That would actually de-risk our concentration risk in the near term.
In terms of the customer lock-in with our major customer, we have long-term contracts in place that would sustain whatever businesses we are currently doing with these customers.
Blue Jet HealthcareLimited November 15, 2023
Rahul Picha
Incrementally from our understanding point of view, so incremental growth in the contrast media business will be more driven by new customers or is there potential for, more penetration with the larger customer as well?
Ganesh Karuppannan
With the existing contract, there will always be a nominal growth based on the customer requirement and a step-up jump will always happen as and when we have a new customer or a new product.
Rahul Picha
That’s exactly what I wanted to understand.
Is there scope for newer products with the same customer or we are almost fully penetrated?
Ganesh Karuppannan
We are working on a number of projects and as we speak, we plan to have a few launches in this financial year, which is expected in Q4 to Q1 of FY25.
Rahul Picha
On the pharma intermediate business.
Can you give the rough split between the revenues that come from patented and generic products?
Ganesh Karuppannan
We don't actually share this particular information.
VK, you want to take it on?
V K Singh
Yes.
No, Ganesh, you are right.
I agree.
We don't categorize it and share the numbers in that fashion.
But today, whatever revenue we are getting, we are getting from products which are protected and there is no generalization.
In fact, our strategy is to follow leads which are still either under patent protection or some sort of marketing exclusivity.
Even if they are not, we try and track those opportunities where the generic competition has not hit in.
Till date, we have been successful.
We have to see how it pans out going forward.
Rahul Picha
Over the next couple of years, what kind of scale-up are you expecting in this division?
V K Singh
We have four or five very interesting opportunities.
A couple of them have already kicked in the previous quarter.
And because of those opportunities which have kicked in, for example, the couple of opportunities which have now entered the commercial phase, you will see a ramp-up happening and very good traction in this third vertical gaining.
We are tracking some more opportunities in this space, and I think there is a lot of headroom for growth in this vertical.
Moderator · Conference Operator
Thank you.
We will take the next question from the line of Nikhil Mathur from HDFC Mutual Fund.
Nikhil Mathur
On the contrast media business.
You talked about nominal growth in the existing business and step up only when the new products will come on stream in 4Q and 1Q of next year.
Can you give some color on the addressable market of these launches that are planned in the next six months-nine months in terms of how big is the addressable opportunity, what can be the volume market share that Blue Jet is looking to target in these products, so that we can get some understanding as to what can that step up be once the business growth gets exhausted?
Ganesh Karuppannan
Actually, in the intermediate space, there is no available data on the market size, specifically on contrast media.
Today, what's happening is the key customers, they are fully backward Blue Jet HealthcareLimited November 15, 2023 integrated, and they control everything from intermediate to formulation.
There is no available data on what that market opportunity is.
Given our relationship with the customers, we were one of the preferred suppliers for the top four players whenever it comes to outsourcing.
As and when the customer decides to outsource, we are one of the preferred suppliers in getting these opportunities.
If you are looking for market data on the intermediate space, this is not available actually.
But the opportunity size, if you really look at a 5.9 billion market, even if you could make a best estimate, the intermediate would be quite a sizable opportunity which is currently controlled by the top four players.
75% of the market is covered by the top four players.
And the opportunity for outsourcing for intermediate, we believe, would be quite interesting.
Nikhil Mathur
The launches that are planned in contrast media, all of them are NCEs?
Ganesh Karuppannan
No. Shiven, you want to take on the profile of the product because mostly it's all off-patent.
Shiven Arora
Yes.
These molecules have been off patent for 30 decades now.
But these opportunities that we are tracking, we will invoice one important validation that we are doing in Q3 this year.
This is an advanced intermediate from what we are doing at this point in time.
We are also tracking some credible opportunities on the MRI side.
These are new products launched in the market and we are a key supplier to one of the big four players in this.
Nikhil Mathur
If the molecules are already quite generalized, like you're mentioning that they have been in the market for decades, why is it difficult to gauge the market potential of these molecules?
Ganesh Karuppannan
Today, what's available is the sales of the formulation, the contrast media, the dice part.
Today, the entire supply is controlled by the formulator.
Today, if you look at the top four players, there is no information available on what is actually getting outsourced.
There is no reliable database on the intermediate side.
Nikhil Mathur
Sir, on the formulation end, the molecules that you are likely to launch, what is the market size of the formulation of these two or three molecules that you are launching?
Shiven Arora
Just take a step back.
We will still be an intermediate manufacturer for these innovators.
There are a few molecules that have an established market space.
Today, since the overall market is growing, the propensity to outsourcing intermediates is increasing because in this particular way, our customers can make more of API outsourcing certain intermediates.
Over the past few years, we've seen this trend increasing.
Today, since we are fully backward integrated, it gives us a good advantage from a cost and quality standpoint.
This is one of the major reasons net realizations per kg is increasing as we launch some key products.
Nikhil Mathur
My second question is on the margin front.
When I look at gross margins in the past, the data that we have from your DRHP of the last three years, gross margin has been above 60% as well in FY ‘20, FY ‘21.
I think raw material prices were kind of under control at that point in time.
Then they shot up in FY ‘22 and FY ‘23 and your margins came down to 58%, 53%.
Blue Jet HealthcareLimited November 15, 2023 Now you are tracking 56%, 57% in the first half.
Is there a possibility of a gross margin turning back to above 60% levels in the next two years-three years?
Ganesh Karuppannan
If you look at the high margin period, I think that was because of the COVID impact.
I think when COVID started, most of the chemical prices crashed.
Especially some of the key raw materials we were importing, the prices literally crashed.
So, you have to take it as one outlier.
Normally, I would actually expect levels of around 60% gross margin, 58% to 60%.
FY ‘23 was again an issue with raw material prices.
You might be aware most of the chemical prices significantly went up.
That impact you could see in FY ‘23.
FY ‘24, we are back to the 58% levels.
We believe at the current chemical prices, we should be in a position to sustain this particular margin level.
Nikhil Mathur
So, 57%, 58% is where the company can go to, perhaps not beyond that on a sustainable basis?
Ganesh Karuppannan
On the existing portfolio.
Nikhil Mathur
The incremental business in FY'25, '26, will it be at a higher gross margin or at a similar level?
Ganesh Karuppannan
It depends on the portfolio.
Like our assessment, it will be in excess of 50% to 55%.
Nikhil Mathur
One final question on the employee cost side.
The numbers at 7% of sales and some employee costs how do you see this trending in the next two, three years?
Amongst the companies that are a bit similar to yours, employee cost doesn't usually trend this low.
At 6%, 7% is what you have been trending in the last two, three years.
Will this continue or do you need to step up the employee cost expenditure in the coming two, three years?
So any color on the employee cost, please?
Ganesh Karuppannan
It won't be significantly different.
There could be a marginal increase of a percent or so.
Our senior management is in place and for any new capacity addition, we will be actually hiring people at an operator level.
So, it cannot be a significant jump in the salaries and wages cost.
Nikhil Mathur
So, it won't go beyond 7%, 8%?
Ganesh Karuppannan
Yes, it will be around in the similar range actually.
Moderator · Conference Operator
Thank you.
The next question is from the line of Naushad Chaudhary from Aditya Birla.
Naushad Chaudhary
Hi, thanks for the opportunity.
Firstly, on the value addition piece in your Contrast Media business, so if you can help us understand, where exactly do we add value in term?
Do we participate anything in terms of the product development piece or on the process side?
What exactly do we add value to the customers here in this business to get the contract from the client?
Shiven Arora
Over the years, we've developed a good level of understanding with our key customers because the relations are of more than a decade in some cases.
So, there could be some problems that we could help them when it comes to intermediates in terms of the quality profile.
What we Blue Jet HealthcareLimited November 15, 2023 have recognized over the years is that since we are fully backward integrated and the unit operations that we are conducting in a semi-continuous manner offers better quality and yield.
So, this in turn creates advantage from a customer standpoint, from a sourcing view because this value addition is important.
These molecules have been off patent for many, many years.
But with the kind of manufacturing and the automation that we are offering, there is still innovation happening on the engineering side.
So, customer engagement on two fronts.
One is helping them on the existing molecules and also participating in some of their newer developments which are in the early phases at the intermediate stage.
Naushad Chaudhary
In your existing portfolio, with some examples, if you can, share what exactly we have done to get the contract from the client?
Is it the more the process innovation you have made which is helping you to make it cost-effective versus peer?
Is there anything else which you have added and which has led you to win this contract?
At least in your key products.
With some example, that would be helpful.
Shiven Arora
I think the biggest win for us as a company is pure consistency and concentration in this particular segment.
Today, we have been recognized as a credible intermediate supplier in the contrast media space with these global innovators.
Over time, we have proven our capabilities from a scale-up standpoint.
And it's a very heavily guarded industry.
I mean, they don't prefer opening their specifications also at this intermediate stage because it's very unique.
Even though the molecules have been off patent, this particular therapeutic area has not seen generalization.
Multiple factors to it would be the drug-device coupling.
The scale at which the existing customers are operating.
Like I mentioned before, as we start from the basics, when we move up the chain into advanced intermediates, there's a positive impact on the quality and yield which is much appreciated buyer and customers.
Naushad Chaudhary
That we understand, sir.
Just from a product qualification point of view or for any new product which comes into your basket, there would be some checks, something which clients would do from his end to go ahead with you or with XYZ other suppliers.
So what are the key things they check before giving a contract to their bidder?
Shiven Arora
I think the most important factor that they look closely is the quality parameters that we are offering.
We'll have to, let me just take a step back and explain that this particular segment is addressing the Medtec industry.
It's a high-dosage injectable.
Injectables, as you are aware, have a very strict regulatory control.
So even at the intermediate stage, product validation takes years.
Naushad Chaudhary
Typically, how many suppliers do they keep for one product?
Shiven Arora
So these are specific opportunities that we track closely with our customers.
This has been discussed for many, many years after we effectively start manufacturing it because of the Blue Jet HealthcareLimited November 15, 2023 regulatory burden.
I would refrain from making any statements from a customer sourcing strategy.
But just like many other MNCs, they would have alternate sources.
Naushad Chaudhary
So there could be two reasons, geographical diversification or supplier diversification.
Is there a possibility that clients can have two suppliers from the same region, from same geography?
Shiven Arora
That is true.
That's quite possible.
Naushad Chaudhary
On the pricing policy side, how often do you change your product prices in your Contrast Media business?
Shiven Arora
So bulk of the contrast media revenues are backed by multi-year supply agreements that have a pricing formula, which factors in some key raw materials and major price fluctuations.
So the pricing is fairly stable.
The customers don't like working with many suppliers because that's one of the major reasons they've controlled the specification requirements and avoided competition.
Naushad Chaudhary
What all are the key raw materials, if we can share, you use in your business?
Two, three key raw materials?
Shiven Arora
It's safe to confirm that we are fully backward integrated.
Naushad Chaudhary
I would like to understand from a pricing point of view, to have some sense on the business, if you can share the name of your key raw materials.
Shiven Arora
It would be currently under confidentiality IT agreements, but we will make that available in the subsequent quarters after the approval.
Moderator · Conference Operator
Thank you, sir.
We'll take the next question from the line of Rohan Advant from Prad Capital.
Rohan Advant
In the presentation, you stated that we have completed plant validation batches for one advanced intermediate.
So is this from our top customer?
Is this from a new customer?
And how big is the opportunity and some timelines on when this would actually be commercialized?
Shiven Arora
This was a very important milestone and a key validation that has been completed.
It is with one of the big four contrast media players.
We see positive momentum on this particular front because the N-Formulation is also growing by low mid-teens.
And it's a credible opportunity.
Rohan Advant
Is this pertaining to the step-up that you talked about that could happen in Q4 and Q1 or this is a separate opportunity?
Shiven Arora
This forms a part of what has been discussed.
Yes.
Rohan Advant
Okay.
So then secondly, with respect to the Mahad unit, we are on our capex program and we plan to increase our capacities.
And also we are expecting a step-up in the last quarter of this year and first half of next year.
How critical was the Mahad unit to this capex plan?
Given that Blue Jet HealthcareLimited November 15, 2023 maybe we lost some part of that unit for some time, what implications does it have on our growth, if at all?
Shiven Arora
So the short and medium-term plans are intact.
The capex, which is ongoing, is in the non- affected area.
Rohan Advant
For FY'24, '25 and '26, what are our capex plans in terms of rupees crores?
Ganesh Karuppannan
In the last 18 months, we have spent close to INR150 crores.
We plan to spend another INR200-odd crore in the next 6 to 9 months.
This expenditure is Unit II Ambernath, where we are coming out with an additional block.
We are coming out with two new blocks in Mahad.
We have also completed our investment in solar.
And this, we should be in a position to integrate with the grid shortly.
The only expenditure which is slated for FY26 will be for our Unit IV, where we are awaiting environment clearance once we have this.
Our capex plan for the new greenfield site should start somewhere in the middle of FY25.
Rohan Advant
Okay.
And sir, you said the capex you've done in Mahad is unaffected by the fire.
So that capex will be usable for our capacities going forward or it would be stalled for some time?
And is the work going on right now?
Ganesh Karuppannan
As far as Mahad is concerned, the capex what we are planning is more for a backward integrated product.
So we are actually taking out one of the imported raw material.
We will be making it in-house out of this facility.
So, while it's not a revenue generating investment, it is going to be more from de-risking our raw material sources.
So, while it is critical, it won't have an impact in terms of the top line.
Rohan Advant
If there's any delay in Mahad.
It's largely to, largely might delay the backward integration but not our revenues and the scale-up.
Is that the right understanding?
Ganesh Karuppannan
So in terms of delay, we need to actually make an assessment because of this particular incident whether any short-term delay is expected in terms of our timelines.
That's number one.
We are also planning to have one additional block which is for multipurpose product.
So that is something which was expected middle of FY25. So we need to make an assessment if there would be any delay in executing these products.
Moderator · Conference Operator
The next question is from the line of Ritika from Value Quest.
Ritika
Hi, sir.
Thank you for taking my question.
My first question is on continuation of capex discussion.
So in H1 FY24, we did INR80 crores of capex.
What is the guidance for FY24 and '25?
Ganesh Karuppannan
FY24, we plan to spend another INR200 crores.
FY25, we should have an investment of another INR150 crores.
That's more on the green field in the site.
Which is our Unit IV.
Blue Jet HealthcareLimited November 15, 2023
Ritika
My second question is on the cardiac esperon drug in the pharma intermediates.
Wanted to understand how has the scale-up been?
I believe there was some delay that was happening in the scale-up.
So in terms of maybe per month, where are we in terms of this drug scaling up?
V K Singh
Yes.
So the scale-up has happened.
Commercialization, we've entered the commercialization phase.
That's the reason that you see that the quarter numbers are showing ramp up and very good traction as compared to the same period of last year.
Hereafter, I think there will be slight increase on monthly offtake as the product stabilizes.
I think there should be a steady revenue stream month on month.
Ritika
So also we were expanding our capacities for this particular drug.
With a Mahad incident or something, do we expect that to get impacted in any which way?
Or do we expect scale-up in our capacities to happen as planned?
V K Singh
So how we structure the business is that we always have bridging capacities.
So currently, this is being made in a particular facility.
And going forward, by the time the volumes ramp up, our new capacity, which is at Unit II for this particular drug, will be on stream.
Then when that happens, we don't foresee any delays.
Whatever timelines have been indicated, we will be keeping in step with those timelines.
The moment that happens, this will transition from the current plant that we are producing to this new facility.
That facility being in Unit II, we don't foresee any impact or any delays from what we have indicated in the past.
Ritika
On the guidance.
So earlier, we were guiding for a PAT, '24 PAT guidance of INR240 crores.
Does that still stand?
Ganesh Karuppannan
We don't share any forward-looking numbers.
Ritika
What we've said is this new validation that we've done in the Contrast Media, we expect that to start commercializing from FY24. Would that be a correct understanding?
Ganesh Karuppannan
Yes.
We are working on that, actually.
Ritika
Any idea on the metric ton that we expect to supply for this new drug for FY24?
Ganesh Karuppannan
No, we will not be giving guidance on those numbers now.
Moderator · Conference Operator
Next question is from the line of Naitik Mohata from Sequent Investments.
Naitik Mohata
Yes, sir.
Thank you for the opportunity.
Sir, starting with what are our utilization levels as of now?
Ganesh Karuppannan
Capacity utilization is around 70%.
Naitik Mohata
Considering the incremental capacity that we are planning in the next 15 to 18 months, what our peak revenue could look like if the incremental capacity is running the same at 70%, 80%?
Blue Jet HealthcareLimited November 15, 2023
Ganesh Karuppannan
Number one, the incremental capacity, what we are proposing in Mahad is more for backward integration.
So we will actually take out one of our raw materials and make it in-house.
So that won't have any implication on the top line.
It's more to do with our sourcing.
And we don't give guidance on the future projected sales numbers.
Naitik Mohata
What would our peak revenue potential be like for our existing capacity or increased capacity per se?
Just a ballpark figure?
Ganesh Karuppannan
When you talk about capacity, in our nature of business, it may not be appropriate to extrapolate the capacity utilization.
The incremental capacity, the revenues generated by incremental capacity could be very different.
The per kg realization, whatever we are discussing at this stage, could be significantly higher than what we are currently earning on a per kg basis.
So, the incremental revenue from the incremental capacity is going to be very different.
Naitik Mohata
Among the three verticals that we operate in, according to you, which would be the vertical that we are more opportunistic in the upcoming years?
Ganesh Karuppannan
We go based on customer.
So, it's basically like it could be either a Contrast Media, Artificial Sweetener, or PI.
We have marquee customers and based on the customer needs, we look at it.
It may not be specific to a particular product segment.
I would actually say it's more specific to a customer.
Shiven Arora
I think we are very positive across the three verticals.
We are hopeful and there are some credible opportunities that we are tracking.
There is solid traction in all the three verticals at this point.
Moderator · Conference Operator
Ladies and gentlemen, as that was the last question, I would now like to hand the conference over to the management for closing comments.
Ganesh Karuppannan
We thank your participation.
Being our maiden call, to the extent possible, we have tried explaining our business model.
The transcript will be uploaded within the timelines.
We look forward to your support.
Thank you.
Moderator · Conference Operator
Thank you, sir.
Thank you, members of the management.
Ladies and gentlemen, on behalf of Blue Jet Healthcare Limited, that concludes this conference.
We thank you for joining us and you may now disconnect your lines.
Thank you.
(This document was edited for readability purpose.)
Questions and answers
“Blue Jet Healthcare Limited
Moderator · Conference Operator
Thank you very much, sir.
We will now begin the question-and-answer session.
The first question is from the line of Sudarshan Padmanabhan from JM Financial PMS.
Sudarshan Padmanabhan
On the Mahad unfortunate accident, I just wanted a little bit more color.
Because if I understand, this facility currently contributes negligible or this facility is prospectively going to contribute over a period of time.
So, one is on the current phase, it shouldn't have much of an impact, is that right?
Second is, from the client side, given that we had impeccable records in the past, as you mentioned, has there been any kind of communication with respect to, because a lot of our clients are MNCs, and they focus a lot on ESG.
So, has there been any kind of actions that you will have to put in other facilities?