CIPLA — 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

LIMITED · DR. R. ANANTHANARAYANAN -- GLOBAL COO,

MR. KEDAR UPADHYE -- GLOBAL CFO, CIPLA

DR. R.

ANANTHANARAYANAN -- GLOBAL COO,

CIPLA LIMITED · MODERATOR:

MR. NAVEEN BANSAL – INVESTOR RELATIONS TEAM,

Moderator · Conference Operator

MR. CHIRAG TALATI – KOTAK SECURITIES February 6, 2019

Questions and answers

Moderator · Conference Operator

Thank you very much.

We will now begin the question-and-answer session.

The first question is from the line of Neha Manpuria from JP Morgan.

Please go ahead.

Neha Manpuria

Sir, on the India business, we maintained the guidance, but usually if you look back, our fourth quarter does tend to be seasonally slow.

What changes in this quarter for us to maintain our guidance and indicate double-digit growth for fourth quarter?

Umang Vohra

I think, Neha, we have seen a fair amount of destocking for our products in the channel, largely for the Acute portfolio of Cipla, and this is a portfolio that has not been growing, if you really February 6, 2019 look at our numbers Chronic which includes Respiratory and our new launched Diabetes and Cardio is actually growing very fast, we do not have an issue of destocking there, but in Acute we have had this issue, and as a result of that we have lost as we mentioned about six days of sales.

So I think we are still confident the Q2 and Q3 had base effect, we know we are slightly behind competition in terms of performance in Q3 from an India perspective the six versus 10 or 11, but I think we are confident of Q4.

Neha Manpuria

So it is more normalization of the six days of sales lost?

Umang Vohra

I do not think we are going to recover it in the next quarter, but it will stay at the same level.

So we would not lose anything incrementally.

Neha Manpuria

My second question is in the opening remarks you mentioned about 150 basis points impact from selling down some inventory in South Africa.

I could not catch that clearly.

If could you repeat yourself, sorry?

Kedar Upadhye

Neha, 150 basis points impact for the quarter is because of certain pricing related discounts that we had offered in the quarter both on the South Africa tender and on Global Access business in the current quarter and I think largely throughout the nine months be it in terms of liquidation of some of the inventories that we had built earlier at lower prices, roughly around 150 basis points impact in gross margins we have seen.

Neha Manpuria

This should not continue pretty much.

All of this pricing discount is done for the tender market because you also indicated the South Africa tender business was soft in this current quarter, so I am little confused?

Kedar Upadhye

It is largely done, because the inventories are quite normalized now especially for the Global Access business, but I think there could be variations once a while, but this is largely done.

Umang Vohra

On South Africa now a new tender which is floated which will start getting serviced only sometime around Q2 of next year.

There the prices are lower but there I think our private market business and the Mirren acquisition will help us offset that impact.

So, I am saying largely from the Access business, the business is rebased.

The South Africa tender business will go through a little bit of compression, but we are hoping that the private market will offset that.

Neha Manpuria

US we are tracking to achieve 120, 125 exit.

Next year we have a good pipeline plus we will ramp up a lot of the products that we have launched.

How should we look at growth for the US business in FY20 in terms of run rate?

Kedar Upadhye

Neha, our thoughts on the next year probably we will be able to share in the May earnings call.

You are right, largely the current base which we have achieved 118 and fourth quarter very high confidence of 120 to 125 million that will get demonstrated.

February 6, 2019

Moderator · Conference Operator

Thank you.

The next question is from the line of Anubhav Agrawal from Credit Suisse.

Please go ahead.

Anubhav Agrawal

Umang, you mentioned about South Africa tenders, on the pricing they are lower, but how about volumes – have we able to renew most of the volumes we had?

Umang Vohra

To answer, yes, I think we are also hoping that the allocation could be slightly higher also in terms of volume, but we have been able to get roughly the same amount of volume so far in terms of an award.

General performance has always resulted in us being able to supply more than what is being allocated.

Anubhav Agrawal

Just for the US, can you just roughly explain about this Voltaren.

IMS reflect about 30% market share.

So, most of this Voltaren benefits has already reflected in this quarter or we are yet to see good part of it to reflect in the Q4?

R Ananth

It has already reflected in this quarter, in fact, we are clocking now 35%, we have actually gained market share.

Anubhav Agrawal

Just one clarity on this.

You mentioned capacity constraints last quarter, that is Rs.100 crores kind of impact.

Which geographies it reflected in this quarter?

Umang Vohra

It is across our geographies because it is specific to a couple of plants and with Cipla most of our plants supply all markets, it is not sequestered for US separately and India separately.

So the impact is reflected in top line across markets, and it is now at a stage wherein Q4 we are hoping that it will be lower and at the end of Q1 hopefully I would say it will be very stable post that.

Moderator · Conference Operator

Thank you.

The next question is from the line of Chirag Dagli from HDFC Asset Management.

Please go ahead.

Just a couple of clarifications

Are you saying that your gross margins would have been higher by 150 basis points on an overall basis for nine months had some of these inventory clearances would not have been?

Kedar Upadhye

That is right, Chirag, the impact of inventory liquidations and some of the tender pricing, had that not been there, the gross margin would have been higher by 150 basis points in itself, but as you know gross margin is a function of several variables across geographies and cost lines.

So, yes, if you have taken this particular item out, gross margins would have been higher by 150 basis points.

Chirag Dagli

So this should bake in FY’20 right, at some level this has to benefit if this does not pick up?

Kedar Upadhye

Something goes up, something comes down, that is what I said, probably the next year thoughts we will share in a quarter from now when we meet again for the call.

February 6, 2019

Chirag Dagli

Did you indicate that the B2B business is now for the quarter, just 10% of US sales?

Umang Vohra

Close to yes, that is right.

Chirag Dagli

This four quarters back was how much sir?

Kedar Upadhye

Upwards of 25.

About two-and-a-half or three years back, the whole US business was B2B only practically.

Chirag Dagli

There was some comment you made on NPV of R&D.

I am sure if I got that.

What exactly is that?

Umang, you made some comments in your opening remarks.

Umang Vohra

I think we are saying that we have a launch pipeline which is roughly targeting at about 150 million of NPV and look, our NPV is calculated over three to five year basis right, not just every year.

So what we try and do is we keep adding to our pipeline at that rate every year because that provides a little bit of stability to grow.

Moderator · Conference Operator

Thank you.

The next question is from the line of Kumar Gaurav from Kotak Securities.

Please go ahead.

Chirag Talati

This is Chirag.

Umang, on and off we keep on hearing chatters about you are leaving the management or management instability in the company, can you really address some of these issues and tell us about how the management team is looking at the company from the next three, five years point of view?

Umang Vohra

Thanks for asking.

I think several one-on-one interactions have had this question coming to me directly, but I am happy to address this on the call today.

There has been a little bit of turbulence in the sense that there was one gentleman who left from the management team and then also Prabir decided to leave, but I think these are natural in our course and journey, we finished one wave of our transformation over the past three years and there is a new challenge now for the next three years.

So some people will leave, some people will come, Ananth also joined just six months back, so I think the people who come new bring new thinking, new perspectives, new energy and help us reset where the business is.

As far for myself, I am very much here and looking forward to the next couple of years of strong growth, next couple of years of repositioning Cipla to be an innovation company.

So right now there is no truth to any of the rumor and we are all very much here, the management team is very committed to building Cipla to a greater future.

Moderator · Conference Operator

Thank you.

The next question is from the line of Shariq Merchant from Quest Investments.

Please go ahead.

Shariq Merchant

My question is on the North America business.

In your earnings presentation, you called out InvaGen where you are expecting 223 million run rate of last year fall in closer to 200 million this year owing to pricing challenges in the US.

Now, given that you all are still sitting on close February 6, 2019 to $380 million of goodwill on your books, how often do you revisit the goodwill amount and when do you decide to maybe revalue it – is it on a quarterly basis or annual basis if you could throw some light on how we should think about this?

Kedar Upadhye

Accounting standard require us to revisit goodwill at least once a year and we have been doing it every year, we will keep doing it, the goodwill because of Invagen is actually common because our DTM business and Invagen business is integrated, there is very significant degree of closeness in manufacturing, R&D, Pharmacovigilance.

So part of the goodwill is attributable to the whole US business as such.

Till now we are comfortable with the value of goodwill that we are carrying and yes, we will keep doing the impairment testing every year.

Shariq Merchant

But part of the goodwill will also be attributed to specific drugs in your pipeline, right?

So, do you believe that there could be some challenges when you may be evaluated in the fourth quarter?

I am referring to the goodwill that is carried on the subsidiary books of Invagen, that is the one you disclose annually.

Kedar Upadhye

Strictly, the goodwill which we are carrying on balance sheet is entity level, what we call as cash generating unit level attribution of that asset.

What you are probably referring to the intangible assets.

That goodwill as I said is more an entity level asset and that includes the benefits of all the assets which we are carrying and the future synergy of the platform that we have acquired.

What is probably subject to frequent assessment and possible is product level intangible and that also we keep checking quarterly for any triggers and once a year annually again.

Shariq Merchant

So that is also checked quarterly.

So maybe it is not only done in Q4?

Kedar Upadhye

Intangibles is more frequent, goodwill is once a year.

Shariq Merchant

My second question is on the South Africa business.

So the private market you called out is growing at 1-2%.

Do you believe that these are challenges that the market is facing for a longer period of time, I am talking about the private market.

So what are your thoughts on how we should look at the market growth going forward?

Umang Vohra

I think the numbers you are talking about are if you were to look at it over the past four quarters, the overall market growth has slipped down by about 500 to 600 basis points and that is largely to do with the appreciation of the RAND and the movement in the currency, because of that the government has a set pattern in which it allows price increases.

So, the fall in the market has been because companies have not been allowed to pass on these prices which is why start of the year it is about 8% or 9% ending the year at about 1% to 2% for the market growth.

I think what is happening now is those prices are getting reset again for the next year and I think the market should hopefully start picking up growth going forward.

But despite this Cipla’s performance has being very strong; we have actually grown almost 3, 4x market for the past three to four quarters because of our execution and which is why we feel strong about the private market being able to offset the tender outcome that we are seeing in the next year.

February 6, 2019

Shariq Merchant

What would be the quantum of price increase allowed for CY19 or FY20?

Umang Vohra

It could be in the range of about 3% to 3.5% or so or thereabouts which actually in the past year reduced to almost one or less than one and it was in the year before that almost 5.

Shariq Merchant

Normal volume growth for the market will be in the 4-5% kind of range?

Umang Vohra

That is about right.

Moderator · Conference Operator

Thank you.

The next question is from the line of Sameer Baisiwala from Morgan Stanley.

Please go ahead.

Sameer Baisiwala

Umang, just your thoughts on CPN101.

What are the key timelines, milestones that you are looking for this asset?

Umang Vohra

Sameer, where it is right now, it is in phase, we will start hopefully our Phase-2 study, the dose finding study will start sometime around this quarter end and then from there I think we will move to a Phase-3.

So right now we are not seeing it as a launch before 2021 or mid-2022 calendar years.

Sameer Baisiwala

Which means filing by end of 2020?

Umang Vohra

That is how we are seeing it right now.

Sameer Baisiwala

What kind of outlay would you have for the studies?

Umang Vohra

This will not be much, Sameer, I think we are looking at roughly about 20 million, the sample sizes are not that large.

Sorry, I want to correct the statement I made; the filing will not be in 2020, it will be in 2021, so the launch will be probably 2022-23 mid, so I got one year wrong on that.

Sameer Baisiwala

On CTP-354?

Umang Vohra

That has just come in, Sameer.

We need to make sure there is something that we are checking into the drug from a toxicity profile perspective, the drug had a tox signal which we believe is species-specific.

So we are just trying to make sure that if we can cross that bridge which is approximately the next six to nine months and will cost us about million-and-a-half or two then I think this is a fantastic drug.

If we are not able to cross that bridge, then this product will obviously not be in the pipeline going forward.

Sameer Baisiwala

Umang, what data do you have so far on this?

Umang Vohra

We have got Phase-1 and we have got tox studies in certain species and because it is a GABA alpha receptor, we are quite well aware of how this would work, it has basically got the similar February 6, 2019 action as any of the other GABA alpha receptors, so it is pretty potent.

It is just the tox signal that we have seen in some species and the Phase-1 that we have which is a small Phase-1 seems to suggest that the drug is a promising one to take.

But we need to confirm that this drug is indeed what we think it has species effect.

So we will spend the one-and-a-half to two million to get there and if we get there then we will develop this further, if not then we will have to see what to do with the drug.

Sameer Baisiwala

Further on post the tox check, what would be the development timeframe for this one till NDA filing?

Umang Vohra

It will probably not be a product that we will be able to file before ‘23 or ‘24.

Sameer Baisiwala

So it is a full-fledged?

Umang Vohra

Full fledged drug, yes.

Moderator · Conference Operator

Thank you.

The next question is from the line of Nitin Agarwal from IDFC Securities.

Please go ahead.

Nitin Agarwal

Umang, following up on the previous questions, on this whole Specialty business, on a broad basis how are you looking at R&D cost outlay or investment outlay towards the Specialty programs over the next two to three years?

Umang Vohra

We have given guidance on this that we will not want to spent more than a percent-and-a-half on R&D going forward in some of these assets.

So I think that is the max that we can do from a P&L perspective.

The real expenditure will start coming in as our Advair trial cost begins to ease out by the end of next year.

So overall, we might not see too much of an uptick on R&D as we see it today and then also we are saying that we will probably try and acquire some IP as against spend all the money through our P&L as well.

So, there is an advanced asset which is in Phase-3, etc., we might end up picking that up closer to the launch of Tizanidine or another asset, that is in the pipeline.

Nitin Agarwal

So you said 1.5% of R&D spend towards specialty assets?

Umang Vohra

Of sales will be probably specialty spend and we would like to cap at that.

Kedar Upadhye

That is the P&L money, Nitin, balance probably about $250 million over the next three to five years in the balance sheet side, that is for acquisition of assets, inorganic largely.

Nitin Agarwal

Kedar, on the inorganic front, barring looking at specialty assets, are there any other inorganic sort of agenda which is there for us?

Kedar Upadhye

We have been looking at targets be it for certain select therapies in India, certain country entry strategies for emerging markets, certain assets for US businesses, and we will keep looking at it, February 6, 2019 we do have borrowing capacity based on strategic fitment, I think that will continue, but selective.

Moderator · Conference Operator

Thank you.

The next question is from the line of Tushar Manudhane from Motilal Oswal Securities.

Please go ahead.

Tushar Manudhane

Just on trade receivables have been sharply higher over March 2018.

Anything in particular there?

Kedar Upadhye

This trade receivables for us our base in US was little low and as you make new launches, the gross to net deductions come in.

So I think every company in its growth phase for US market has invested additional amount in receivables subject to new launches.

So that has happened for us also.

And you would have noticed that between March to September most of that increase has happened.

Between September to December we have been largely flattish.

We are also examining ways to see whether some of this could be addressed through factoring, some of this could be done through receivable sales programs.

So we will keep examining that, but yes, answer to your question is largely because of the US business.

Tushar Manudhane

Now that US business is breakeven, if you can help us understand whatever incremental revenue now comes in, how much will that affect in terms of EBITDA?

Kedar Upadhye

Incremental revenue will be margin-accretive because most of these are DTM launches based on in-house manufacturing largely.

So you should expect that additional gross margin benefit because of incremental sales is very high.

You will have to also keep in mind little bit of Advair trial investment which comes in.

So this is post R&D EBITDA which we are talking about and there are several variables.

We will keep updating you how this progresses in the coming days.

Tushar Manudhane

But on a ballpark figure incrementally let us say $1 relating to how much of EBITDA post R&D including that of Advair?

Kedar Upadhye

I would desist away from giving away the granular details at this stage.

We will update you as things move forward.

Moderator · Conference Operator

Thank you.

The next question is from the line of Chirag Dagli from HDFC Asset Management.

Please go ahead.

Chirag Dagli

If I sort of do some basic math based on your guidance that for the quarter post-R&D, US is now EBITDA breakeven, it seems that the US is a 55% kind of gross margin business and incrementally the growth on this business that kind of profitability should flow to EBITDA, is this understanding right sir?

Umang Vohra

That is right, Chirag, subject to any money that we will need to invest in R&D.

I do not think there is any incremental SG&A that we will have to invest for the US business.

I think we just have to keep in mind how much the R&D budget goes up.

February 6, 2019

Chirag Dagli

So is it fair to say that Rs.1200 crores R&D largely spent on Generics because respiratory trials have not started as yet meaningfully?

Kedar Upadhye

Yes, little less than 80% is on R&D, about four-fifths of the total R&D is on US, balance is for all non-US markets.

Umang Vohra

The trials are on for respiratory for Advair.

Chirag Dagli

So from here on the run rate will not increase at least from a spend standpoint?

Kedar Upadhye

Run rate marginally might increase, percentage wise we would want to keep it flat.

Chirag Dagli

Just one clarification sir.

You said quarterly Rs.100 crores of sales impact due to the supply constraint?

Kedar Upadhye

That is right, I think last time we alluded to that, that is over and above the basic tolerance are impacting us by about Rs.100 crores per quarter.

Chirag Dagli

Is there any specific market that this is impacting sir or across the board?

R Ananth

Yes, this is across the board nothing specific to our market.

As Umang mentioned earlier because they are from facilities that cater to multiple markets.

Chirag Dagli

So then in FY20 we should assume some of these will come back, right?

R Ananth

That is correct.

Moderator · Conference Operator

Thank you.

The next question is from the line of Shyam Srinivasan from Goldman Sachs.

Please go ahead.

Shyam Srinivasan

Just looking at the other segments, emerging markets and Europe, I think you talked about Middle Eastern markets specifically.

So can you just clarify what is the reason behind the weakness sir?

R Ananth

Europe for us seems to be showing some good pick and we will see Europe starting to do better.

Emerging markets of course we do have this impact on the Middle-East and that will continue to have its impact as well as the impact that we had from some of the markets like Venezuela.

Shyam Srinivasan

Is there any risk in terms of either receivables or any write-downs we may have to take in these markets in Venezuela or Middle East?

R Ananth

We do not have to take write-offs, but probably some of the receivables will go up.

Shyam Srinivasan

Do you want to quantify how much that number would be?

February 6, 2019

Umang Vohra

We might see some ageing go up, but it is not material most of those are secured.

So we have already secured most of the receivables.

So it is not going to be material to our numbers.

I think what Ananth was trying to highlight was that in Q3 we had a fairly low emerging market base because Q2 on account of the sanction in the Middle East had, there was probably buying that happened more in Q2 versus Q3 and now I think in Q4 hopefully that will stabilize a lot more and that will continue and the receivables will go up because the base will be going up.

So Q3 base is 53 million or 55 million, Q4 base may be slightly higher than that.

So that will automatically take receivables up.

Shyam Srinivasan

Just back on Europe again, your presentation talks about respiratory franchise expansion.

I am just curious, we had like a launch Seretide sometime back.

How is it doing now and how much would respiratory be today as a percentage of the Europe business?

R Ananth

We are pretty happy to report that it is doing well and we will continue to keep tracking that, there has been a good positive movement and positive progress.

I am not sure we declare as a percentage how much that would specifically be at this time.

Moderator · Conference Operator

Thank you.

I would request Mr. Srinivasan to come back in queue for follow up question.

We will move to the next question which is from the line of Anubhav Agrawal from Credit Suisse.

Please go ahead.

Anubhav Agrawal

Kedar, one clarity.

When you mentioned about liquidation of inventory and selling some of that at discount, I was just doing quick numbers from that.

That number suggest like almost quantum to be like Rs.150 crores plus.

Is that quantum significantly off or it is in the range?

Kedar Upadhye

It is in the range I think and that is the nine months period I refer to and it is both liquidation of inventory at a price which is lower than the cost, some of the write-off that we had to take because of shelf life expiries and certain pricing discounts that I refer to, all put together ballpark it will be in that range.

Anubhav Agrawal

So Rs.150-200 crores all taken in this quarter for the nine months inventory which you accumulated?

Kedar Upadhye

No, I think 150 basis points both in this quarter and nine months period.

I think Rs.150 crores is a number more for the nine months, it is not as high to take all of that in this quarter, Anubhav, it is about 150 basis points of sale on YTD basis.

Anubhav Agrawal

So, what I was trying to do was that on a gross margin that you said if we adjust for it, your gross margin for the other business should be higher by 150 basis points.

That is what I was trying to adjust that, assuming that gross margin on the other business which you are talking about is 30, 35% and the number of that order was Rs.150 crores.

Maybe I can take offline.

February 6, 2019

Kedar Upadhye

We can take it offline.

The math is logical Anubhav way you did it, but I think probably it is a little more accurate number, it will be 150 basis points either for this quarter or for nine months period.

Umang Vohra

But broadly in terms of value it is not very off, but you are right, so on nine months basis that is roughly the impact we have taken because I want to go back, the last call and a couple of calls before we had a fair amount of stock because the global fund changed their ordering pattern and as a result of that lot of companies including us had fair amount of stock which was created for which there was suddenly no orders, and the stocks began to date an age and they had to be liquidated and we are glad that we are pretty much at the end of it now.

Moderator · Conference Operator

Thank you.

The next question is from the line of Nimesh Mehta from Research Delta Advisors.

Please go ahead.

Nimesh Mehta

You mentioned about the input cost increase mainly because of disruption in China.

So has that come to an end or how do you see that and what is the quantum you have seen it?

Kedar Upadhye

I think incremental impact of this cost increase either because of China sourcing or commodities is roughly at a company level about 50-60 basis points of sales.

It is more plateaued now, Nimesh, we are not seeing that it has started easing but it is plateaued, which means increment increase we are not seeing, but it has not come down as well.

We are hoping that it reverses in the next year.

We have heard about some anti-dumping duty being removed on couple of molecules, etc., So, let us see how that pans out.

But it is about company level 60-70 basis points plateaued.

Nimesh Mehta

For the nine months period you are talking about?

Kedar Upadhye

Yes.

Moderator · Conference Operator

Thank you.

The next question is from the line of Ritika Aggarwal from Quest Investments.

Please go ahead.

Ritika Aggarwal

Sir, my question is on domestic business.

So, how are we seeing the risk of NLEM and DPCO impact on our India portfolio?

Kedar Upadhye

Ritika, as you are aware, the methodology for pricing in India regulated is a market-based pricing.

So we have always experienced that cases where you have to reduce your prices for an inclusion of a drug in NLEM are rare.

Usually your future price increase gets capped to WPI because of inclusion in NLEM.

But beyond this, there is nothing to sort of mitigate as such.

We have to comply with the regulations in India and some of the work which we are doing especially on therapy shaping initiatives, be it for respiratory or for other clusters, that helps us drive volume grow which is in our hand.

That is how we are approaching the NLEM issue for India market.

February 6, 2019

Ritika Aggarwal

My second question is on the emerging markets.

So out of 52 countries, 13-countries we have DTM approach.

So how has that strategy been doing on the emerging markets, how are we taking it going forward?

How does strategy to enter into the China and the Brazilian markets?

R Ananth

I think we will continue with the approach.

The DTM where we are present in, we are now outperforming in all the markets that we are present in the DTM and therefore our focus will continue to be to build on the momentum.

The strategy that we have therefore will continue to stay.

Moderator · Conference Operator

Thank you.

The next question is from the line of Christopher Siow from RWC Partners.

Please go ahead.

Christopher Siow

Just wanted to get an update on your comment on market like Yemen?

Kedar Upadhye

Yemen market has seen little bit of currency volatility.

As a company we are conscious of our responsibility to service the patients in that market and subject to a risk assessment as to how much exposure should we take on inventory receivables and other assets, we continue to supply.

In Q3, our primary billing substantially got reduced which is what we said in our initial opening remark and we will look forward to the market returning to normalcy.

Moderator · Conference Operator

Thank you.

The next question is from the line of Saion Mukherjee from Nomura.

Please go ahead.

Saion Mukherjee

Kedar, can you just help me with the Global Access numbers and tender numbers approximately which are there for the quarter?

Understand they would have come down significantly previous year.

Kedar Upadhye

We were tracking about 150 million, Saion, two years back and this year we could track half of that.

On a full year basis, we will be probably half of what we are tracking two years back and large part of this drop actually has happened in pricing which means the contribution to gross margin and EBITDA has been severe and to some extent we have been able to mitigate this because of growth in other businesses.

Saion Mukherjee

So, this is the Global Access number, 75?

Kedar Upadhye

Yes, this is the Global Access number.

Saion Mukherjee

Next year how much will that be – it will fall further?

Kedar Upadhye

Subject to our stance on products portfolio and the little of churn which is happening away from TLE combination to TLD combination, it could change but unlike it will grow significantly here upwards.

February 6, 2019

Saion Mukherjee

Second on CAPEX that you have done for nine months and the plan this year and next year if you can share?

Kedar Upadhye

CAPEX is substantially lower if you see the cash flow statement, nine months capital expenditure is quite low and that reflects our ability to redeploy the existing capital investments made over the last several years and we will continue to keep the same stance on capital productivity.

In the rupees crores probably I would think that our operational footprint, we will probably need about 600-700 crores of routine CAPEX.

This year has been low; in nine months we have done only 370 crores odd globally but next year it could increase subject to some of the API investments that we are required to make.

Saion Mukherjee

So, Rs.600-700 crores maintenance plus some expansion?

Kedar Upadhye

Yes, 700 crores would probably factor everything.

Moderator · Conference Operator

Thank you.

The next question is from the line of Hari Belawant from Tech Financial Consultant.

Please go ahead.

Hari Belawant

The question is your revenues have gone up by 2% whereas your EBITDA and PAT margins are on very low side; (-12%), (-17%).

Some of the reasons you showed in the API prices from China is affecting.

But what are the other reasons for so low of your profitability?

Kedar Upadhye

I think most of the compression has happened in gross margin this quarter.

So if you analyze either YoY or sequential numbers, there is a compression in gross margin and that we referred to some of the ratios in the tender part of the side partially.

I think expenditure is in control, be it people cost or other expenses.

The compression on the gross margin side has led to this and you always see this operating leverage playing out, the sort of decline in EBITDA usually is much higher than the decline in sales.

So increase in EBITDA is also higher than increase in sales.

So, I think probably this is the quarter where negative leverage has played out along with its gross margin pressure.

Hari Belawant

What is the reason, interest cost going up, it was from Rs.9 crores YoY, that is now Rs.44 crores?

I do not think the debt has increased to that; from 4,100 crores to 4,538 crores.

Kedar Upadhye

Part of the interest is because of the rupee depreciation.

Most of our debt is in denominated in dollars.

So that has come in.

Other than that, I think the base of debt itself is not high.

In fact, net debt has improved compared to last year.

I think we could come back to you offline with the FOREX impact on interest component for the quarter.

Moderator · Conference Operator

Thank you.

The next question is from the line of Harith Ahamed from Spark Capital.

Please go ahead.

February 6, 2019

Harith Ahamed

Umang, you did mention about two respiratory filings targeted for the next year.

Could you provide some color on those two assets – is one of them Advair and some color on the second one, is it a inhaler product we are targeting?

Umang Vohra

One is Advair and we are hoping that we will get a clinical trial result which will allow us to file.

It is not an easy product to get a clinical outcome.

So we are hoping that is one.

The second one is also an inhaler product.

I do not want to comment about it at this stage because of the confidentiality that we are doing competitively on this product.

Harith Ahamed

Second question is on the 68 ANDAs pending approval, are there any nasal spray filings that you have done already?

Umang Vohra

I do not want to confirm how many are nasal spray, whether they are pending or whether they were filed, all I would like to say is that nasal spray is a part of our portfolio.

Harith Ahamed

Have you filed them already, could we expect?

Umang Vohra

I do not want to be on that specific at this stage.

I think that category is also highly competitive.

So at this stage, yes, it is part of our portfolio and if we have not filed, within a year, I am sure we would have that filing for that.

So it is there in our portfolio and we do not want to comment on the exact timing.

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, due to time constraints, that was the last question.

I now hand the conference over to the management for closing comments.

Naveen Bansal

Thank you, everyone for joining us on the call today.

In case you have any follow on questions, feel free to reach out to me or Kedar, we will be happy to respond.

Moderator · Conference Operator

Thank you.

On behalf of Kotak Securities, that concludes this conference.

Thank you for joining us and you may now disconnect your lines.