MANKIND — earnings call

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Prepared remarks

Moderator · Conference Operator

MR. ALANKAR GARUDE – KOTAK INSTITUTIONAL

EQUITIES · Management

Mankind Pharma Limited May 31, 2023

Moderator · Conference Operator

Ladies and gentlemen, good day and welcome to the Mankind Pharma Q4 FY ‘23 Earnings Conference Call, hosted by Kotak Institutional Equities.

As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes.

Should you need assistance during the conference call, please signal an operator by pressing star, then zero on your touchtone phone.

Please note that this conference is being recorded.

I now hand the conference over to Mr. Alankar Garude from Kotak Institutional Equities.

Thank you and over to you, Alankar.

Alankar Garude

Good morning and good afternoon everyone.

On behalf of Kotak Institutional Equities, I would

Moderator · Conference Operator

Thank you.

Our first question comes from Prakash Agarwal with Axis Capital.

Please go ahead.

Mankind Pharma Limited May 31, 2023

Prakash Agarwal

Hi, good afternoon.

Just one question.

First of all, thank you and congratulations on listing.

Just one question.

You gave an elaborate bridge of gross margin as well as EBITDA margin impact.

You mentioned cost impact of API of 130 bps. How much of that has been recovered in the second half and what is the outlook for fiscal ‘24?

Ashutosh Dhawan

Thanks Prakash for the question.

So we undertook the price increase in the Q2 and full impact of this cost pressure has been recovered by Q4 and in the next year FY ‘24, so this is getting normalized.

So the full impact has been covered by way of price increase.

Prakash Agarwal

But there is another round of price increase, if I am not wrong, that happens in April and the impact comes by end of Q1. So would that be beneficial and we would go beyond 68% is the endeavour or how should we look about, what is the band that you are looking at, at the gross margin side?

Ashutosh Dhawan

Definitely, the NLEM price increase, we will be taking from April, so that will have a positive impact on the gross margins going forward.

Prakash Agarwal

Any band you are looking at in terms of gross margins?

Ashutosh Dhawan

Any band?

So the price increases in line with the IPM market price increase.

Arjun Juneja

So Prakash, Arjun here, Arjun this side.

So basically to answer your question, we have taken price increases in line with the NLEM price increases, which have fallen in place in the month of April.

So those price increases we expect, the benefits of those price increases to start coming from June onwards.

And apart from that, whatever price increases the government allows for the non-NLEM products, we have taken those price increases as well, which will happen during the course of the year, which will give effect in different quarters to come.

Prakash Agarwal

So ideally speaking, the gross margins should improve from that 68% mark, would that be correct understanding?

Arjun Juneja

The gross margins would improve slightly but not as much because if you see we are sitting at about 67% of gross margins as of now, around 67%-67.5% of gross margins.

But having taken these price increases into account and the volatile Dollar-Rupee conditions and the volatile API markets, we are projecting gross margins should be around in the range of 68% plus 1% or so.

Prakash Agarwal

Okay, perfect.

This is helpful.

And second question is on the cash flows.

So we had a very strong cash flow.

Just trying to understand, like last couple of years, we have taken endeavours in the gaps that we had, the Panacea and the smaller ones and respiratory and derms.

What is the thought process now in terms of using the cash?

Rajeev Juneja

The thought process is very-very clear that after the successful acquisition of Panacea, looking out for other M&As as well and feel, whenever the opportunity is right, we will definitely use it.

Right now, we are just accumulating the gunpowder, so that at the right time, we have good amount of money in our hands.

That's a thought because the value of any company can increase as a whole, if it really utilizes the money, rightly.

That's the thought process.

Mankind Pharma Limited May 31, 2023 And it is always unpredictable, when you get the right kind of organization, which fits in your company very well.

Like we believe Panacea has really happened.

Of course, not to forget that in 2024, we expect to incur around INR600 crores capex, in our R&D and other places, in our factories.

And as far as our R&D is concerned, it will be approximately 2.2% to our sales.

Ashutosh Dhawan

So currently also, it's around 2.3% in that range.

Prakash Agarwal

Understood.

And lastly if there is any dividend policy that you would like to highlight?

Arjun Juneja

Basically yes, there is a dividend policy.

We are working on the dividend policy but we don't have a fixed pay-out ratio as of now.

We are in the process of working on the same and will be updated in due course of time, maybe in the upcoming quarters.

Moderator · Conference Operator

Thank you.

Our next question comes from the line of H.

Kunal with Macquarie Company.

Please go ahead.

Kunal Dhamesha

Hi, it's Kunal Dhamesha from Macquarie and thank you for providing the opportunity and congratulations on the good set of numbers.

So while we have shared our medium-term target of growing by around 1.3 times, the IPM growth rate, but I would like to know your thoughts on the Indian pharma market growth, let's say three-year time period.

How do you see that because there has been a lot of volatility with the COVID products coming in, going out, etc. But do you see structurally what, kind of, growth rate is possible in IPM and then based on that what is our target growth rate that we are looking for in the next three years?

Sanjay Koul

So Kunal, this is Sanjay Koul.

Thanks for the question.

And if you look at the IPM growth of FY '23, it was 8%.

As per IQVIA, they have given basically next five years projection for growth of the IPM.

So as per IQVIA, the IPM is going to grow between 10% to 11% for next three to five years.

And major segments, which will be the growth drivers will be cardiovascular disease, which will grow faster than the IPM growth.

And the second will be anti-diabetics.

Third will be dermatology.

Fourth will be gynecology.

So these are few of the segments, which are going to grow faster than the IPM growth in the next three to five years as well.

And these will be the growth drivers of IPM.

And even anti- infectives last year grew by 6%.

And the IQVIA says that even anti-infectives can grow between 8% to 9% in the coming three to five years.

So we have a very strong portfolio of anti-infectives, gastrointestinal, vitamins and minerals, which are projected to grow by -- the market is projected to grow by 12% to 13% as per vitamin and mineral segment is concerned.

So we have strong portfolio in cardiovascular disease, anti- infectives, vitamin and minerals and gynecology.

So all these segments as per IQVIA are going to show robust growth and we are aligned because these segments have substantial presence in our portfolio.

Mankind Pharma Limited May 31, 2023

Kunal Dhamesha

Sure.

So basically it means that we should be somewhere around 12% to 14% range in the medium-term annual growth rate?

Sanjay Koul

So traditionally, last five years, last three years, last 10 years, we have outgrown the IPM.

And even our volume growth has been higher than the volume growth of IPM.

And we believe the trend will continue, because we have a number of strategies in place.

We are expanding our covered market.

We have launched specialty divisions in the last two years and these divisions are going to be the growth drivers besides existing business.

And we expect that in the next two to three years, we will continue growing faster than IPM by 1.3x to 1.4x.

Kunal Dhamesha

Perfect.

And the next aspirational or -- in terms of EBITDA margin, you have provided 24% to 26%.

We know what in your view, let's say from quarter four, we have ended at around 20.5%.

What is the major primary lever of that going from 20.5% to let's say 25%, which is midpoint?

I don't know if you can provide some clarity to that.

Ashutosh Dhawan

Sure.

So let me give you a perspective.

Let me show the roadmap from 22% to 25%.

So as we mentioned that there has been a gross margin compression of 1.3% in FY '23, which we have recovered through price increase.

And let's assume that we maintain the same, even though technically what Prakash mentioned that because of price increase, there are chances of improvement therein.

But let's be conservative.

So 1.3% recovery, which we have undertaken through price increase, which we expect to continue even as a matter of abundant precaution at a 68% GC level.

So 1.3% is going to come from there.

1.1% has been the drop on account of higher employee costs, because we added workforce in FY '22 and FY '23 has been the year of consolidation.

So we expect the productivity and ramp up to go up, so that should also give us the benefit of close to around 1.1-odd percent.

And thirdly, there has been a one-time integration cost in FY '23 because of these acquisitions.

So that also impacted our P&L close to around 0.6%-0.7%.

So that we expect that that will normalize in the next year.

So if we do a totaling of these three, we expect it to be somewhere hovering around closer to that guidance level of 24% to 26%.

There are other operating levers as well as an organization level.

The focus is on the chronic segment, so that also can be added impetus to the margins.

So this is broadly how the roadmap from 22% to the taking it to the guidance of 24%-26% EBITDA level.

Kunal Dhamesha

So when you say chronic, it would again be higher productivity than what we are suggesting right now, which is the current negative impact that we have seen from the -- so we are just right now 1.1% is just making in breakeven of those new people that you’ve have hired, right?

I mean, once they start generating beyond breakeven.

Ashutosh Dhawan

Yes, so that's why because -- and then -- so the impact will be on both the sides with the chronic.

One is on the employee productivity and second is on the gross margins.

So the impact will be Mankind Pharma Limited May 31, 2023 double-fold if we increase the chronic market share and increase it from a current 34% level to a higher level.

Kunal Dhamesha

Sure.

And the third question that I have is on the new integrated facility, which we have said that we will commercialize in H1 FY '24.

So is it fair to say the current CWIP for INR493 crores belongs to that facility?

And you also talked about dydrogesterone export opportunity.

So what is the overall addressable market size there?

What is the competitive landscape, if you could help us understand?

Ashutosh Dhawan

See, it's very difficult to point it out, because there are multiple projects, which are undertaken at the organization level.

Last year, we have incurred the capex, both CWIP plus the capitalized part of close to INR832 crores.

And this year, we are expecting it to be lower than that.

That is expected to be somewhere close to around INR600 crores.

That's the capex spent for FY '24.

And this facility, which is coming up in Udaipur, which is we expect to get commercialized within the next one or two quarters.

So there no more capex will be going on in that.

Arjun Juneja

So basically, this facility -- this is Arjun here, this facility, which is being built in Udaipur, it will get commercialized in next quarter.

And the reason for this facility is that it's a totally integrated facility, where we will be producing dydrogesterone from scratch.

And it will help us remove our dependence from China on the KSM.

So we'll be producing the KSM, the raw material to KSM, then to the intermediate, finished API, then the finished formulation at one integrated facility for this product.

Because we've seen that since the last couple of years, we launched the product in 2019, ever since our volumes have been going up, and we were not able to meet the increasing volumes.

So looking at the future volume forecast of this product, we have built this facility to cater to the Indian market and also to -- we are exploring opportunities across the globe wherever there is market for dydrogesterone, whether it is China, whether it is Russia, whether it is Southeast Asia, South America.

So we'll be exploring all the markets for dydrogesterone going forward with this facility.

Moderator · Conference Operator

Thank you.

Our next question comes from the line of Surya Patra with PhillipCapital India Private Limited.

Please go ahead.

Surya Patra

Yes, thanks for the opportunity, sir.

Sir, just first question on the, let's say, margin.

We have seen kind of 25% to 26% margin during the COVID period.

Obviously, that was a temporary opportunistic period where the margin has seen that number.

So now we are guiding almost that kind of scenario.

So are we saying that the margin that we have on during the COVID period is achievable number, and efforts have gone towards that?

Arjun Juneja

Yes, I think you are right.

The margins that we achieved during the COVID period, those are achievable numbers.

I mean, this year was a slightly unexpected year, because last year because of the, if you see the early half of last year, especially January, February, March, China was in a bit of a turmoil.

We were not sure of how COVID situation is happening in China.

Mankind Pharma Limited May 31, 2023 And going to the same, we started increasing the inventory of raw materials, because we never knew what's going to happen in China because different parts of China were shutting down at different times.

And we started sitting on extra inventory because of that.

At the same time, the pricing of different APIs went up.

So that had an impact on the first half of last year where we were sitting on extra inventory and sitting on inventory, which was more expensive.

We also wanted to take price increases, which we take during the course of the year, but there was a lag effect in those price increases because of the extra inventory sitting.

So the price increase impact started coming, especially during the second half of last year.

So had these issues not been there, probably the margins would have been better off.

Ashutosh Dhawan

So just to complement, if you look at during the COVID period, the margins were upward of 26%, closer to 27%.

So while in this guidance, so they have been tapered off 24% to 26%.

So they have been normalized with the COVID effect.

Surya Patra

Okay.

Sir, my second question is about the consumer business.

So let's say over a period of let's say three-year time.

So what is the kind of business here that we are expecting out of this consumer health segment?

And also what is the kind of business here that we are targeting for chronic?

Rajeev Juneja

Look at the history of our consumer business, and you can draw your own conclusion.

We continuously do -- we continue to do quite good in that.

We are right now building our brands.

Rather what we are doing, whichever brands have reached to a level, we are just increasing the portfolio range in that, in Manforce, in Prega News.

And also from OTX to OTC side we're going for.

Hopefully we'll do much better than what we're doing right now.

Surya Patra

Okay.

Sir, FY '23, the margin profile or the profit profile of the consumer health compared to the reported number, could you give some sense?

Ashutosh Dhawan

Actually, we don't discuss the segmental margins, but we can give you that the margins of the consumer business, they are in line with the listed consumer companies margins.

And directionally, the margins have been improving in the consumer business year-on-year basis.

Surya Patra

My last question would be on the indication that you have said, sir, the plastic neutral, carbon neutral effort over the next couple of years.

So whether it is going to have incremental cost, or you are expecting a better pricing power supporting to the profitability, how should we see this and what effort that you are really talking about in terms of cost and all that?

Arjun Juneja

So we are not expecting an incremental cost because of this.

I mean, whatever costs are there, I mean, a lot of these things that we are doing are based on opex models.

And there is not enough -- this in not a lot of capex going into all of this.

And it is all within the rational range of expenses that we've been doing over the last few years.

Surya Patra

Okay.

Mankind Pharma Limited May 31, 2023

Ashutosh Dhawan

So we kept the margin to 68% after factoring pluses and minuses.

Surya Patra

Okay, okay.

Sure, sir.

Yes.

Thank you.

Wish you all the best.

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, a request, please restrict yourself to two questions per participant.

We move on to our next question, which is from the line of Naushad Chaudhary with Aditya Birla Sunlife AMC.

Please go ahead.

Naushad Chaudhary

Yes.

Hi.

Thanks for the opportunity.

A quick follow-up on the previous question.

I understand, sir, you don't share the margin on the consumer business.

But broadly qualitatively, if you can share, are we EBITDA positive here?

And in terms of our marketing spend, how much we spent last year and what is the outlook here for the next two to three years in terms of ad and marketing spend penetration and overall business profitability outlook?

Arjun Juneja

Thanks for the question.

But I can very -- put it out here on record that it is an EBITDA positive business and the operational EBITDA for this business is in high-teens.

And I mean, it will be very difficult to give the -- how much is the marketing spend or the advertisement spend on this business.

We don't do segmental reporting for the consumer business as such.

But it's a positive business, EBITDA positive business.

Naushad Chaudhary

And you have enough juice in terms of operating leverage here as the business grows, should it fall, should EBITDA expand meaningfully here in consumer business?

Arjun Juneja

Yes, there is enough juice in this business to increase the operating leverage.

If we see our historical margins in the consumer business, they are increasing year-on-year.

Till about a few years back, it was a loss making business for us.

But since the last few years, the EBITDA margins have been expanding and there is full leverage happening because of the scale and size of the business at which it is growing.

Naushad Chaudhary

Right.

And lastly, in terms of the API cost pressure, so are we -- do we still have high cost inventory, or is it over in this quarter and from next quarter onwards, there shouldn't be a…?

Arjun Juneja

I would say most of the high cost inventory is gone now.

We'll start reaping the benefits from next quarter onwards.

Naushad Chaudhary

All right.

Thank you so much.

Arjun Juneja

Some of the benefits have already started coming in.

Ashutosh Dhawan

Yes, and the number of days of inventory has also come down in the system.

Naushad Chaudhary

Right.

Thank you so much, sir.

Thank you so much.

Mankind Pharma Limited May 31, 2023

Moderator · Conference Operator

Thank you.

Our next question comes from Harsh Bhatia with Bandhan Mutual Fund.

Please go ahead.

Harsh Bhatia

Yes, thank you.

Good afternoon.

Just two quick questions from my side.

In terms of your opening commentary, you mentioned that you had a 2.5% volume growth versus IPM being flat.

So if you could help us understand in which therapies did you have this delta, like is it entirely infectives driven where you had 2.5% incremental volume growth against the market?

Or is it more to do with the chronic market side?

So that is basically to understand where have we gained market share, in which therapy on volume basis?

Sanjay Koul

So it has been, if you look at the volume growth as well as overall growth in FY '23, so we have seen higher growth in chronic segment as compared to the acute segment.

Our chronic has grown by 1.3x compared to the IPM growth.

So chronic has definitely shown a better growth as compared to the IPM growth and it is 14% versus 9% of acute growth.

So volume growth definitely has come from both chronic as well as acute, but higher growth is coming from, of course, the chronic side.

Harsh Bhatia

Okay, fair enough.

And in terms of the chronic share that you are highlighting, 34% versus 33% last year, this includes -- the 34% includes the Panacea acquisition as well.

Is that the fair understanding?

Sanjay Koul

Yes, it is including both, but let me add here, if you remove, see our growth is, overall growth is 11%.

If you remove chronic, if you remove Panacea from equation this year and from last year, so our growth improves to 15% instead of 11%.

So Panacea will start basically producing good results in this financial year, that is FY '24, and the first six months we tried to basically rationalize the tail, we tried to basically correct the things in Panacea and we are aligned because our Q4 growth in Panacea business was 19%.

Harsh Bhatia

Okay.

So just to clarify, the Panacea numbers are there in FY '22 and FY '23 as well, so could you quantify those numbers if possible?

Sanjay Koul

So these are IQVIA numbers and we have shown growth in this year, that is FY '23 has shown a growth over FY '22, this is as per IQVIA.

And even the top five brands of Panacea have shown a growth of 6%.

Ravi Agrawal

Just to put it in perspective, if you look at the, what Dr. Koul is mentioning is that if you look at the IQVIA numbers, the numbers for last year and this year, both include Panacea, so if you knock them off, then the growth for the company is around 11%.

Sanjay Koul

Correct.

Chronic is 15%.

Ravi Agrawal

And chronic is 15%.

Harsh Bhatia

Okay, all right.

Thank you.

All the best.

Mankind Pharma Limited May 31, 2023

Moderator · Conference Operator

Thank you.

Our next question comes from the line of Mitesh Shah with Nirmal Bang Securities.

Please go ahead.

Mitesh Shah

Thanks for taking my question.

Congratulations for the strong listing.

My first question is regarding the gross margins.

If you can see in the first half, definitely, as you said, it would be under pressure, but the second half gross margin has improved by around 127 bps, I'm just comparing one half versus the second half.

Now I'm just looking the operating margins, EBITDA margins, that have declined.

The first half had a 22.9%, 23%, and the second-half declined to 21%.

I can understand that 4Q might be a soft, but 3Q also have a 21% of margins, and we are guiding around 24% to 26% of margins.

So I'm not able to understand that gross margin already improved in the second half, despite that the margins haven't improved.

And also in the nine months, if I can see from your bifurcation, then in the nine months versus nine month of last year, marketing spend has reduced by around 125 bps. That also has benefited the EBITDA margins of nine months of FY '23.

So what I'm missing, I just want to understand that how would you be able to see that, because I'm expecting the marketing spend will be normalizing next year as well.

Ashutosh Dhawan

Sure.

So just to put it into perspective, if you see the sales mix over the whole year, so if you compare H1 to H2, so H1 sales is approximately somewhere around 52% to 53% of the whole year sales.

And the H2 is normally 47%, 48%.

So, one, is because of the lower sales and the fixed expense base is pretty constant.

So there is a direct hit on the margins.

That is point number one.

So if you see H1, margins are fairly stronger as compared to H2 margin.

So that's one of the reasons why it has been.

Secondly, the gross margin, if you see the H1 gross margins, they were quite compressed, close to around 66% level, which we have recovered in the H2 part of the year.

So basically the margin erosion is coming because of the lower sales.

Mitesh Shah

Got it.

So you mean to say that generally the 1H would be a stronger for you?

Ashutosh Dhawan

Yes, that has been the historical trend has been.

Then according to this, the sales and marketing expenditure is also linked to the sales.

So that's why you see there is a drop in the sales and marketing in H2 as compared to H1.

Mitesh Shah

Actually, I am talking about nine months.

Because in your RHP, the nine-month comparison has given, and it has reduced around 125 bps.

Arjun Juneja

And if you see, I mean, historically also, if you see that quarter four margins are generally lower for us.

I mean, if you see the past three years also in Mankind, the quarter four margins are generally lower.

Mankind Pharma Limited May 31, 2023

Mitesh Shah

I think that could be the reason, because the domestic sales are mostly soft.

But this quarter, I haven't seen any softness, 3Q to 4Q are almost similar.

So that's why even I surprised that the subdued margins.

Ashutosh Dhawan

If you will see the margin between Q3 and Q4, Q4 sale has been 2% lower as compared to Q3 sale.

And that's why there is a slight drop in the margins between Q4 and Q3.

Mitesh Shah

I got the margin front, and now just looking the exports, exports are growing robust around 65% growth in the 4Q and 58%.

So what is the outlook and how do you look at the exports its definitely the smaller pie for you.

Sheetal Arora

So exports are -- growth is looking higher because the base last year was very less.

And going forward, it's an Indian centric company and Mankind focus will always remain on India.

So always 96% to 97% of our revenue will come from India.

The focus will be on India.

Mitesh Shah

Can I squeeze one more question on the tax rate?

Can you just guide about the tax rate for next year, next two years?

Ashutosh Dhawan

Okay.

So if you see the effective tax rate for current year has been around 22%.

And before that it was 26%.

And the drop in the effective tax rate is primarily because we have increased our Sikkim facility where we are availing exemptions.

And then secondly, because of the acquisition, higher amortization cost has also given us depreciation benefit.

And with regard to the future guidance, we expect the tax rates to be somewhere closer to 22% to 23% level.

Why we are saying so?

Because we have multiple manufacturing entities.

So they are at the enacted tax rate .

So we expect tax rates to be in the range of close to 22%-23%.

Mitesh Shah

Got it.

Thanks.

Thanks for all the answers.

Moderator · Conference Operator

Thank you.

Our next question comes from the line of Kunal Dhamesha with Macquarie Company.

Please go ahead.

Kunal Dhamesha

Yes, thanks for the opportunity again.

So a couple of questions.

One basically on the field force productivity number that we have shared.

So is it calculated on just the MR numbers, and not including the first line manager?

Sanjay Koul

So it is on the basis of medical reps only, not managers.

Kunal Dhamesha

Okay.

And any particular reason why would you not add any business reasons in a way that they are just a managerial role, or even the, you know, you just wanted to say?

Sanjay Koul

So this is the normal practice in the industry that PCPM is basically calculated on the basis of the medical reps rather than including managers.

Ashutosh Dhawan

So if the managers get added, so it will be double accounting, because managers are controlling 8 to 16 depending on the span of control.

So that's why it is being calculated at the MR level.

Mankind Pharma Limited May 31, 2023

Kunal Dhamesha

Okay, perfect.

And secondly, on the specialist coverage, since we have launched I think 18 division around two to three years back focusing on chronic, what kind of specialist coverage progress that we would have made in the last three years?

Any metrics would be helpful for us to track?

Sanjay Koul

So our coverage among the specialists is -- our overall coverage among the doctors is 82%.

When I talk about specialists, one of the major specialists is CP, that is Consulting Physicians, which is approximately 35,000 to 40,000 in the IPM, in the industry.

So our coverage of prescriber share of CPs is 93%.

It is one of the highest in the IPM.

So besides family physicians, where our prescriber share is 91%, our prescriber share among the CPs who are considered as specialists is 93%.

So post-launching of these specialty divisions, we have made inroads in the chamber of specialists like CPs, and we have also improved our prescriber share among endocrinologists, diabetologists, and cardiologists.

Kunal Dhamesha

And, sir, super-specialists, any numbers?

Sanjay Koul

That's what I'm saying.

When I talk about diabetologists, our prescriber share is 84%, Cardiologists, it is 87%.

It is among the highest in the IPM.

Rajeev Juneja

And when you talk about the super-specialty side, I mean, we have given you an example of Neptaz’s, it is a hardcore super-specialty in-licensed product we got from Novartis.

In that, it is explained that we were the second best launch of the year.

Mankind on one side is famous for selling affordable prices, but over there, when we went in the super-specialty category, we had no advantage of prices.

It was sheer on the basis of merits of the quality of working, Mankind could really put in those super-specialty doctors.

Kunal Dhamesha

Sure, sir.

And the last one is basically on the capex.

You have said INR600 crores out of how much that could be the maintenance capex for us?

Ashutosh Dhawan

So normally, the thumb rule what we follow is close to around 85% is the growth capex and 10% to 15% is the maintenance capex.

Kunal Dhamesha

So, sir, when I look at our gross fixed asset turnover, which is roughly on the FY '22 base of gross block, somewhere around 3.6 times.

And if I compare it with some of the domestic focus name, it is meaningfully below that number.

And if I look at the capacity utilization across our plant is also meaningfully low, like formulation would be close to 40%, API would be close to 40%.

So my question is, while the current capacities remain underutilized, what is driving the new capex in terms of capacity expansion?

Arjun Juneja

So if you look at our range of products, it's a very diverse range of products spread across antibiotics, in antibiotics, we have cephalosporins and beta-lactams, we have hormonal products, we have general category products, we have soft gelatin, we have nutraceutical products, we have ointments, syrups.

Mankind Pharma Limited May 31, 2023 So all of these different therapeutic products, they require different set of facilities.

And if you compare us to others, most of our peers, generally what they do is they outsource their domestic manufacturing to contract manufacturers.

And generally, they in-house those manufacturing facilities where they're producing for the regulated market or export markets.

We manufacture about 75% of our products in-house.

So that gives us a couple of benefits, both in terms of quality as well as in terms of delivery timelines and supply chain controls.

And more than that, the margins that these companies give to the contract manufacturers, we retain those margins in- house, which help us increase our gross margins, even though the pricing of certain of our acute side of products is much lower or much competitive than the market.

The reason why some of our facilities are lower in terms of capacities is because we made a huge expansion in our Sikkim plant, which is reaping the tax benefits.

And in years to come, these facilities would be utilizing these capacities very well.

Kunal Dhamesha

Sure.

Perfect.

Thank you.

Moderator · Conference Operator

Thank you.

Our next question comes from the line of Rahul Jeewani with IIFL Institutional Equities.

Please go ahead.

Rahul Jeewani

Hi, sir.

Thanks for giving me the opportunity.

Sir, can you comment on a bit more on your Panacea portfolio?

And specifically, if I look at the growth for the top five brands of Panacea, that looks to be muted at around 6% for FY '23.

So any reasons why top brands of Panacea have moved slower this year?

Rajeev Juneja

Rahul, thank you for the question.

So first of all, you're supposed to understand whenever we have always seen any acquisition, we've always seen from a point of view of long-term strategy.

One was that Panacea was offering us better gross margins.

Second was most of the products were chronic side.

And third was they were quite niche.

And one more factor shouldn’t be forgotten.

We got a patented product.

I mean, how many patented products would be there in India?

Very few.

You can count on your fingertips.

Keeping those things in mind, Panacea was acquired, number one.

The number second basically when you take some company, which was being run not very nicely, it takes time to really integrate the whole organization.

So first year has always been like this and can be like this only because it takes time for the people to understand, we to understand those guys.

We took this company inside Mankind in March of '22.

So it's just 12 months.

Just wait for a few more months.

Wait for the next call.

You'll find us doing fantastic.

Rahul Jeewani

Sure, sir.

So the growth which you saw on this portfolio during the fourth quarter, which is at around 19%, do you think that we can continue this growth trajectory on the acquired portfolio over the next, let's say, three to five-year period?

Rajeev Juneja

Why not better?

Rahul Jeewani

Sure.

Mankind Pharma Limited May 31, 2023

Rajeev Juneja

Why not better?

That's my answer.

Rahul Jeewani

Sure, sure.

And, sir…

Rajeev Juneja

You should see that, because keeping that in mind, we have gone for this company.

Rahul Jeewani

Sure.

Okay.

And, sir, the next question, which I had was on your PCPM that -- given that we have added almost 8 to 10 new divisions for the domestic market over the past two to three-year period, can you split out your PCPM of INR 6 lakhs between the legacy business and the new business, so that we get some clarity in terms of what kind of a PCPM improvement we can see in some of these newer divisions, which we have added?

Rajeev Juneja

I can tell you roughly.

I mean, our established old divisions, traditional companies have a PCPM of INR 9 lakhs, INR10 lakhs, INR 11 lakhs, INR 12 lakhs.

And last four years' time, whatever new specialty divisions we have launched, and don't forget, out of these four years, two years were lost in COVID time, starting, closing, starting, closing.

So you can say they are around two years old, right?

The PCPM varies from INR 2 lakhs to INR 3.5 lakhs and INR 4 lakhs.

That sort of a PCPM is there.

But yes, they are growing faster because of lower base.

That's the point over there.

Rahul Jeewani

And this INR3 lakhs to INR4 lakhs of PCPM on these newer businesses, where do you see this number trending to in, let's say, the next three years?

Rajeev Juneja

I cannot comment on that, but I can tell you, I mean, we wish these divisions to grow, I mean, substantially well, very, very good.

They should be good drivers in future.

Without giving numbers, they will drive our growth.

And on what basis we are saying that our chronic share will increase?

On what basis we are saying that our gross margins will improve?

Naturally, chronic side, naturally, these new divisions.

Rahul Jeewani

Sure, sir.

And do we have any further rep addition plans for, let's say, the next one to two-year period?

Or are we sufficient with the rep team, which now we have created over the past few years?

Rajeev Juneja

I mean, plenty has been done, substantial has been done.

5% to 7% I cannot rule out.

That would be on the basis of requirements.

Rahul Jeewani

Sure, sir.

That's it from my side.

Thank you for answering my questions.

Moderator · Conference Operator

Thank you.

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

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

Ravi Agrawal

Thank you everyone for joining us for the conference call.

We really appreciate you taking time for our first earnings call.

And we look forward to interacting with you going ahead and in subsequent quarters as well.

Thank you.

Moderator · Conference Operator

Thank you.

Mankind Pharma Limited May 31, 2023

On behalf of Kotak Institutional Equities, that concludes this conference.

Thank you for joining us.

And you may now disconnect your lines.

(The document has been edited to improve readability)