Indoco Remedies Limited (INDOCO) Q2 FY23 Earnings Concall Transcript

Indoco Remedies Limited (NSE:INDOCO) Q2 FY23 Earnings Concall dated Nov. 11, 2022

Corporate Participants:

Aditi Panandikar — Managing Director

Sundeep Bambolkar — Joint Managing Director

Analysts:

Aditya Khemka — InCred PMS — Analyst

Mitesh Shah — Nirmal Bang Securities — Analyst

Rashmi Sancheti — Dolat Capital — Analyst

Deepan Shankar — Trustline PMS — Analyst

Aegis Lakhani — Unifi Capital — Analyst

Vipul Kumar Shah — Sumangal Investment — Analyst

Cyndrella Carvalho — JM Financials — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Indoco Remedies Limited Q2 FY ’23 Earnings Conference Call, hosted by JM Financial. [Operator Instructions]. Please note that this conference is being recorded.

I now hand the conference over to Ms. Cyndrella Carvalho. Thank you and over to you. Cyndrella?

Cyndrella Carvalho — JM Financials — Analyst

Thank you, Yashashri. Good morning, everyone. I, Cyndrella Carvalho, on behalf of JM Financials, I welcome you all on the quarter two FY ’23 earnings call of Indoco Remedies. At the outset, I thank the management of Indoco Remedies for giving us this opportunity to host the call. I am looking forward to have a detailed insight on the earnings from the management.

Today from the management team, we have with us Ms. Aditi Panandikar, Managing Director; Mr. Sundeep Bambolkar, Joint Managing Director; Mr. Pramod Ghorpade, Chief Financial Officer.

I now hand over the call to management for their opening remarks. Over to you, Ms. Aditi.

Aditi Panandikar — Managing Director

Thank you, Cyndrella, and thank you all for joining us this morning. Amidst a very volatile Indian pharma market experiencing highs and lows due to COVID therapy product performance, [Technical Issues] it’s been a pleasure to report excellent overall performance for the last few quarters. Our journey of financial excellence continues for Q2 FY ’23, where a steady domestic business and a fast-growing international business have helped us post good numbers. We closed second quarter this year with a Y-o-Y growth of 8.6%, with domestic branded business contributing to 55% of revenues.

Anti-Infectives and Respiratory segments have shown substantial improvement over their Q1 performance this year. But the high base of last year for these therapies continues to create a drag for growth for India business. Overall, acute therapies, which will be growing by 20% in Q1, are now only marginally degrowing at 1.8% for Q2. I’m confident that in the coming quarters, both anti-infectives and respiratory as well as acute therapy overall will start showing better performance for the Company.

Sales to U.S. and EU have shown substantial growth and helped the Company post overall good performance. As part of our super transformation journey at Indoco, we recently achieved a major milestone when we successfully implemented SAP S/4HANA across all verticals and geographies for the Company. This was particularly satisfying as we went live within eight months on dot as planned. I’m confident that SAP and all the advantages it offers will help us significantly in our quest for better top and bottom line in the years to come. On August 23rd, Indoco completed 75 glorious years. Indocoiites wholeheartedly participated in the celebration of the Platinum Jubilee year. I’m confident they will strive hard and allow us to register an excellent performance this year.

This was the short preamble from me. I now hand over to Mr. Sundeep Bambolkar, Joint MD, to take you through the financial performance for Q2 and half year.

Sundeep Bambolkar — Joint Managing Director

Thank you, Aditi. Good morning, participants. Hope you and your family members are all safe and healthy.

Let me first begin with the business highlights.

Net revenues for the Company grew by 8.6% at INR404.3 crores compared to INR372.6 crores for the same quarter last year. In the first half of the year, revenues grew by 6.1% at INR799.5 crores as against INR753.8 crores. EBITDA to net sales for the quarter is 21.7% at INR87.8 crores compared to 23.2% at INR86.3 crores. EBITDA to net sales for the first half is at 19.9% at INR159 crores compared to 23% at INR173 crores. PAT to net sales for the quarter is 12.3% at INR49.6 crores compared to 11.2% at INR41.6 crores. PAT to net sales for the first half is 11% at INR88 crores compared to 10.8% at INR81.2 crores. Earnings per share for the quarter is INR5.39 compared to INR4.51. EPS for the first half is at INR9.56 compared to INR8.81 for the same period last year.

Coming to the domestic formulation business, Indoco ranks 26th in the second quarter FY ’22/’23 with market share of 0.69% and reflects growth at 10.2%. This is as per AWACS data. Revenues from domestic formulation business for the quarter registered a growth of 4.2% over the immediately preceding first quarter of current fiscal and de-grew by 2.4% at INR208.5 crores as against INR213.6 crores for the same quarter last year. For the first half, revenues de-grew by 4.7% at INR408.5 crores against INR428.7 crores.

During the quarter, one product was launched by Indoco’s paid division, namely [Indecipherable] tablets, that is levocetirizine hydrochloride 5 milligram with pseudoephedrine hydrochloride 120 milligram sustained release tablets under the respiratory segment.

Coming to the international formulation business, revenues from international business registered a growth of 28.5% at INR174 crores as against INR135 crores. For the first half, revenues grew by 22% at INR351.5 crores against INR288 crores. Revenues from regulated markets for the quarter grew by 32.6% at INR147 crores as against INR111.4 crores. For the first half, revenues grew by 23.2% at INR295.3 crores as against INR239.6 crores. Revenues from U.S. business for the quarter grew by 44.7% at INR69.3 crores as against INR47.9 crores for the same quarter last year. And for the first half, revenues grew by 42.7% at INR134.2 crores as against INR94 crores for the same period last year.

Revenues from Europe for the quarter grew by 25.2% at INR74.7 crore against INR59.7 crores, and for the first half, revenues grew by 9.8% at INR152.5 crores against INR138.8 crores. Revenues from South Africa, Australia, New Zealand were at INR3.7 crores constant as the same quarter last year. And for the first half, revenues grew by 28.5% at INR8.7 crores compared to INR6.8 crore. Revenues from emerging markets for the quarter grew by 9.5% at INR26.5 crores against INR24.2 crores, and for the first half, revenues grew by 16% at INR56 crores against INR48 crores.

Revenues from API business for the quarter are at INR18.3 crores against INR19.7 crore. And for the first half, revenues grew by 3.2% at INR31.6 crores as against INR30.6 crores. Revenues from CRO and analytical services for the quarter are at INR3.7 crores constant as the same quarter last year. And for the first half, there is a growth of 20.8% totaling to INR7.9 crore against INR6.5 crores.

One satisfying factor is our going live for the SAP S/4HANA on 5th of August. We now completed the closure of three months of sales revenue from the system and the first quarterly results have come out from the system. So, altogether, the implementation of S/4HANA buyout team has been completely satisfying and highly successful.

Thank you very much for giving me a patient hearing. And now I would like to invite questions from all of you. Thank you.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions]. We have our first question from the line of Aditya Khemka from InCred PMS. Please go ahead.

Aditya Khemka — InCred PMS — Analyst

Yeah. Hi. Thanks for the opportunity. Aditi ma’am, first question on the India business, so if I understand correctly, last year, in the first half, we had sales of about INR430 crores, of which I think we had previously called out roughly INR50 crores was, let’s say, COVID-related sales. So, even if I adjust [Indecipherable] I end up at INR380 crores of sales for last year first half. This year first half, we are at INR408 crores. So, if I do the math, it’s about 6%, 7% growth, excluding COVID impact in the base. And if I understand correctly, the level of price increases we have taken during the first half is around that number, 5%, 6%. So, does that mean effectively that in the first half of FY ’23 over first half of FY ’22, the contribution of volume and new product introduction put together is zero?

Aditi Panandikar — Managing Director

Interesting question, Aditya. A lot of calculations you seem to have done, which I’ll have to put in order. But the scenario you have finally arrived at is incorrect because let me start from new products. So, new introductions in the current quarter contribute to INR5 crore revenue with the contribution of 2.3% to top line, which is the best we have done in the last several years. Same quarter last year, we were at 0.8% of top line at INR1.7 crores. So, new introductions are doing exceedingly well. The kind of math you have done is a bit difficult to apply for the Q1 and Q2 this year, because as I’ve explained before, various products performed well and did not. So, the entire impact of top bottom line going up or down cannot be assigned entirely to COVID or COVID basket, because ATM is a product, which is a great strength for the Company. So, this is a product which without the COVID impact also does all right when the season comes in. I’ll just give you a few numbers, which will explain things possibly. Anti-infectives as a category in absolute terms from Q1 went up by 73%. And respiratory has gone up by 25%. So, overall, the categories have started doing well. But in some cases, there is this huge kind of — so if you see Q2 last year, besides the COVID products, other acute products had also done well because this was around the time when peripheral therapy — peripheral diseases to COVID were being treated, etc., etc. So, it’s not correct to assign entire growth or degrowth to COVID basket. So, in Q2 this year, for example, Febrex Plus as a brand has not done well while all the COVID basket products including ATM, for that matter, and Karvol Plus are doing much better than the same period last year. I hope this answers your question.

Aditya Khemka — InCred PMS — Analyst

Yeah. To an extent, it does, ma’am, so essentially, I understand that the performance of individual products might be different, but at a basket level, if we are growing at 5%, 6% for the first half over like-for-like, excluding COVID and that is the level that is [Speech Overlap].

Aditi Panandikar — Managing Director

You cannot use that calculation for excluding COVID technically. Yeah. That is where we differ possibly [Speech Overlap].

Aditya Khemka — InCred PMS — Analyst

I get your point. [Speech Overlap]. No. No, that’s okay. And second question, therefore, is the last year, we did roughly INR800 crores in India. And this year, given that we have done INR408 crores in the first half and first half tends to be the heavier of the two halves, would it be fair to assess that this year it will be almost zero or negative growth in the India business?

Aditi Panandikar — Managing Director

No. We will do much better in the second half. I’ll explain why. This was a very challenging year for us for target setting for India business, as I said earlier, because when you have for Indoco in particular, anti-infectives and respiratory contribute to 40% of our top line at least and when these two therapies have had ups and downs last year, and we expect that it was very difficult to set targets for the field. So, we had, therefore, created a target for excluding COVID and COVID basket. Surprisingly, it did not support us, this strategy. And we have now revised it strategically for the second half, and I therefore expect much better performance. So, we thought there would be many areas where the ATM drop would affect people’s performance, and therefore, give them separate targets. Actually, ATM has done much better than expected. But people did not push typically as field does. So, we might have got impacted partly for our primary. But at a secondary level, I feel we are all right and therefore, our second half will be better.

Aditya Khemka — InCred PMS — Analyst

But the second half — generally, given that the fourth quarter is the worst quarter of the year, second half generally tends to be like 45% of the full year and first half tends to be 55% of the full year. So, you are saying this year second half can be more than 50% of the full year?

Aditi Panandikar — Managing Director

Yes, yes.

Aditya Khemka — InCred PMS — Analyst

Okay. So, therefore, I mean, if you were to guide us, ma’am, what would you guide us to for the full year in India business on a reported basis on a base of INR803 crores of last year. What kind of growth should we be looking for?

Aditi Panandikar — Managing Director

At least 5%, if not more.

Aditya Khemka — InCred PMS — Analyst

So, INR800 crores going to INR840 crores, INR845 crores, and that’s what we’re looking at?

Aditi Panandikar — Managing Director

Correct.

Aditya Khemka — InCred PMS — Analyst

Understood. Understood. That’s helpful, ma’am. Second question, Sundeep sir, on the U.S. business. Just to understand, in the current quarter, is there any element of brinzolamide profit sharing in that INR70 crore revenue that we have reported?

Sundeep Bambolkar — Joint Managing Director

No, ever since we relaunched brinzolamide, brinzolamide has settled down in the market and the profit share from brinzolamide is not appreciable. The total profit share from U.S. business is around INR7 crores. But that has many products. So, brinzolamide is just settling down. And in the coming quarters, you will see profit share from that product.

Aditya Khemka — InCred PMS — Analyst

Right. And what is the status of Combigan, Sundeep sir? Have you been able to launch the product? And what is the kind of traction?

Sundeep Bambolkar — Joint Managing Director

Yeah. Combigan, as you know, is a much bigger product compared to brinzolamide. It’s more than double the market size. And we have been the third player to launch besides the innovator. So, we luckily had stocks in Teva’s warehouse already when we got the approval, and Teva has launched it just about a month back.

Aditya Khemka — InCred PMS — Analyst

Month back. So, we are saying in the second quarter number, there is no impact of Combigan sales. Am I right?

Sundeep Bambolkar — Joint Managing Director

Right. Right. From third quarter onwards, we’ll have that.

Aditya Khemka — InCred PMS — Analyst

Right. So, basically, when you ship the product to Teva, that’s not when you recognize the revenue. When Teva actually launches in the market, that’s when you recognize revenue of the product. Is that the right way of understanding, because you said the stock was already there in Teva’s warehouse when you got approval?

Sundeep Bambolkar — Joint Managing Director

Yes. Yes.

Aditya Khemka — InCred PMS — Analyst

Okay. So, you recognize revenue went away actually, so it’s not when you said.

Sundeep Bambolkar — Joint Managing Director

The profit share is recognized when Teva sales, the first part of the dispatch was already recognized.

Aditya Khemka — InCred PMS — Analyst

Okay. So, that — so, manufacturing cost plus markup that revenue, which you recognize, that you recognize when you sell to Teva, when the product goes from your warehouse to Teva’s warehouse? [Speech Overlap]. So, that element of revenue will be there in the INR70 crores of 2Q?

Sundeep Bambolkar — Joint Managing Director

Yes. Yes. Yes correct.

Aditya Khemka — InCred PMS — Analyst

For Combigan. Okay. Got it. Got it. Now coming to the European market, Sundeep sir, obviously, very tough time given how the currencies are playing out. In fact, before this quarter results U.S. published, we were reading so many reports that Indoco will be severely impacted because of the pound depreciation. So, could you talk about — your European revenue seems to be fantastic, better than what is — what I had expected. So, can you talk a bit about the impact of the euro or the GDP of your business and why that hasn’t adversely impacted you yet?

Sundeep Bambolkar — Joint Managing Director

Yeah. I think a very smart question, Aditya, for the benefit of all those who are listening, and I will certainly talk at length on this. We deployed a very careful strategy while hedging the euro and the pound. With the result, our hedging has been near to perfect. I won’t boast too much about it because things could go wrong in the subsequent quarters. So, I’ll be very — a little careful with my words. But at least for the time being, we are on good track, like-to-like currency-wise, found as recorded sales or 2% higher than the same quarter last year, euro 11% higher and dollar 13% higher. So, that is in constant currency terms. Now coming to why Indoco has done better, the order book itself is INR150 crores plus as on today. That’s the first point, which gives us ample and good scope and very good opportunity to control costs and do a near-to-perfect production planning activity in all our plants. That is the two plants in Baddi and Goa 1 and Goa 3 as and when required. Interestingly now, going ahead, we have got approvals for one capsule product of neurotic pain and one of epilepsy. So, Europe will certainly see better times going ahead as far as margins are concerned. Right now, margins are tottering around 10% of EBITDA, 9.5%, 10%, but going ahead, within three quarters from now onwards, I hope to see EBITDAs of 14%, 15% minimum. Coming to your specific [Speech Overlap].

Aditya Khemka — InCred PMS — Analyst

Which is from entire European business, Sundeep sir?

Sundeep Bambolkar — Joint Managing Director

Sorry?

Aditya Khemka — InCred PMS — Analyst

This 10 to — margins going from 9.5% to 10% to 15%, this is for the entire European business?

Sundeep Bambolkar — Joint Managing Director

Entire European business.

Aditya Khemka — InCred PMS — Analyst

Got it. Yes.

Sundeep Bambolkar — Joint Managing Director

When the pound was around 1.20 [Phonetic] to the dollar and dollar was around 79, 80, [Phonetic] we got ample chances to hedge the pound at that time, because if you see the pound was recording over 100 to INR1, and that’s the time we really hedged the pound and euro hedging — euro’s hedging also has been quite favorable for us. The high rates were 95, 98, all those rates and the low rates were around 82 giving us an average rate of around 90. Hello, am I audible?

Aditya Khemka — InCred PMS — Analyst

Yes, yes, yes.

Sundeep Bambolkar — Joint Managing Director

Okay. So, that is where we are on the European business. And as I told you, euro is recorded in constant terms also 11% growth. And pound, we will do far better now going ahead, because pound on constant currency was 2% to 3% growth.

Aditya Khemka — InCred PMS — Analyst

Got you. Got you. So, Sundeep sir, then this hedging that you do, how long do you hedge, I mean what time frame do you hedge for six months’ exposure, 12 months’ exposure? What is the extent to which you hedge?

Sundeep Bambolkar — Joint Managing Director

At this point in time around end of ’24.

Aditya Khemka — InCred PMS — Analyst

Till the end of FY ’24, you are already hedged?

Sundeep Bambolkar — Joint Managing Director

Yes. Yes.

Aditya Khemka — InCred PMS — Analyst

Okay. Okay. And that’s a rolling exercise. As right now, you’ll be buying fresh hedges for ’25?

Sundeep Bambolkar — Joint Managing Director

Perfect. That’s a rolling exercise. So, we get advantage of it every month.

Aditya Khemka — InCred PMS — Analyst

Got it. Got it. Now a couple of questions on the P&L, Sundeep sir. One is our other operating income. It was slightly on the higher side in 1Q and 2Q substantially higher. Is the majority part of this other operating income, forex gain?

Sundeep Bambolkar — Joint Managing Director

Yeah. Other operating income was higher by about INR7.5 crores to INR8 crores. But that is operating income, not only other income. As you know very well, the exchange gain is part of our business. It is not speculative exchange gains. That is very important to be noted.

Aditya Khemka — InCred PMS — Analyst

Yeah. So, out of this INR28 crores this year — this quarter for other operating income, how much is exchange gain?

Sundeep Bambolkar — Joint Managing Director

Exchange gain is around — incremental exchange we should look at is INR13 crores.

Aditya Khemka — InCred PMS — Analyst

13?

Sundeep Bambolkar — Joint Managing Director

Yes.

Aditya Khemka — InCred PMS — Analyst

Okay. Got it. And given that the India business was actually a lower contributor this quarter, to the overall revenue than it has been in the past. I’m slightly surprised that we are seeing gross margins improving 1Q versus 2Q, 67%, 67.5% of gross margin in 1Q and 70.5% in 2Q. So, there are two questions on the gross margin. When the sequential improvement is slightly difficult to understand given that the India business has not really performed very well and compared to Y-o-Y, obviously, your gross margins are down 200 basis points, so I guess the other question is when do we see normalcy being reflected in the gross margins? How long would you guess it would take? So, first question, how did it sequentially improve? And second question, when does it go back to the normal level of 72 [Phonetic]?

Sundeep Bambolkar — Joint Managing Director

Yeah. As I already mentioned to you, the basic product mix of Europe is changing, and I have to talk on Europe because Europe was dragging us down. And a solid conscious effort has been put in within the organization. Aditi and myself are talking about this extremely frequently when we address management teams, and an operational excellence team has been set up under the leadership of our CFO, Pramod Ghorpade and our Operations Head, Sachin Ghosalkar. So, these two teams are interacting extremely frequency and putting the plants under constant surveillance so that our overhead come down and our cost of goods [Phonetic] improve. That’s the first point. Second point, if you noticed, the raw material costs have now started normalizing compared to the sequentially previous quarter. So, there a lot of effort has been put in to have alternate vendor development, which is a constant process for the APIs, which Indoco is not manufacturing on its own. So, that’s the second point. And sequentially, things should certainly look up. With the U.S. business going up, that is going to be a very major contributor because we are in niche segments such as injectables, now getting into complex injectables. The first complex injectable has been developed by R&D and will go into the plant for exhibit batches in January end or February beginning. New line has been purchased, which is getting into the plant in this month. Point number two, suspension ophthalmics like brinzolamide have entered the market. So, that is the second point. Third, sustained release products, solids will get into the U.S. market. One is under very active development. I won’t be able to give you the name. So, these factors all are pointing towards the high-scale U.S. business in time to come, downward COGS movement resulting into much higher gross margin.

Aditya Khemka — InCred PMS — Analyst

Okay. Thanks a lot for your responses, Sundeep sir. I had three more questions, but I will give others an opportunity and come back in queue. Thank you so much.

Sundeep Bambolkar — Joint Managing Director

Thank you.

Operator

Thank you. [Operator Instructions]. We have our next question from the line of Mitesh Shah from Nirmal Bang Securities. Please go ahead.

Mitesh Shah — Nirmal Bang Securities — Analyst

Thanks for taking my question. When Aditya asks questions, then we have already less questions to ask. But I will try my best.

Aditi Panandikar — Managing Director

Mitesh, next time you ask the first question.

Mitesh Shah — Nirmal Bang Securities — Analyst

That would be better. So, again, summing — squeezing to the domestic market. So, are you expecting 16% plus growth in the domestic market, like are you giving the guidance for 5%. So, what would be the major reason or bigger drivers for this 16% growth are you expecting for second half?

Aditi Panandikar — Managing Director

I think 5% was on annual sales. So, the 16% — but this is 5%, of course, includes the COVID impacted basket. So, taking the COVID impact market quantum aside, we would do much better, right?

Mitesh Shah — Nirmal Bang Securities — Analyst

Got it.

Aditi Panandikar — Managing Director

Yeah. So, as I said, almost all parameters, the business is doing well. We have certain setbacks on a few molecules, for example, this quarter, anti-infectives as a category did well for the industry into Q2. But the anti-infectives we sell [Technical Issues] they have not grown as substantially as your amoxicillin. So, when you compare CVM or our performance vis-a-vis the industry, you will see these little bit of hitches. But overall, for the Company, on a product like Cyclopam is at 10% growth, an old product, even on Y-o-Y basis. And on quarter one basis, all products are on good growth. Febrex Plus is flat. So, I’m very confident going forward, we’ll do well.

Mitesh Shah — Nirmal Bang Securities — Analyst

And how much price hikes have you taken in your entire portfolio approximately?

Aditi Panandikar — Managing Director

Effectively, we get around 6% price hike.

Mitesh Shah — Nirmal Bang Securities — Analyst

And that all have started reflecting in this quarter, it will be reflected — start reflecting [Speech Overlap].

Aditi Panandikar — Managing Director

It depends very much on how the units, the inventory in the system consumption, the new price inventory going out. There is some scope in future to get better efficiency and effectiveness here. We will identify — we have identified this as an area of improvement.

Mitesh Shah — Nirmal Bang Securities — Analyst

Okay. My second question is regarding your other expenditure, it increased sharply on a Q-o-Q basis. What is the reason for that?

Aditi Panandikar — Managing Director

Yeah. There is a onetime expense related to indirect taxes of around INR7 Cr. Otherwise, we are all right on all other [Speech Overlap].

Mitesh Shah — Nirmal Bang Securities — Analyst

Got it. So, is that — freight cost and everything has normalized or still on a high level?

Aditi Panandikar — Managing Director

It has steadied. It has not yet normalized, but it is not increasing much. And basically, as Sundeep explained earlier, it is our mix, geography and product mix of international business this quarter, which has helped us because we have done probably higher contribution from U.S. than any other geography at any time, and that has helped because that certainly helps margins.

Mitesh Shah — Nirmal Bang Securities — Analyst

Got it. Got it. Again, in the Europe and the emerging markets, the currency volatility, definitely you have done a good job in the hedging front, but it is a scope for — to pass out the currency — domestic currency appreciation or depreciation of the euro and the emerging markets [Technical Issues].

Aditi Panandikar — Managing Director

Can you repeat that?

Mitesh Shah — Nirmal Bang Securities — Analyst

This currency in fact would be passed out to the end users for more [Technical Issues] emerging markets, its — hedging is definitely a good policy, but it won’t be a sustained for long, right?

Sundeep Bambolkar — Joint Managing Director

See majority of our emerging markets are in dollars. That’s the first point. Complete Latin America. major part of Africa, and South East Asia are in dollars. The only part which is in euro in emerging markets is the French West Africa portion. So that is the first part. So we stand very strong on the dollar.

Aditi Panandikar — Managing Director

So front end, fortunately for us in Europe, we are not exposed to the front end because a large portion of our Europe revenue is being contract manufacturers. So the impact is really taken by our ebd customers. And the portfolio is exact that they understand that, so it is being absorbed.

Mitesh Shah — Nirmal Bang Securities — Analyst

Perfect. Again just coming back to the domestic market of the strong second half growth, what would be the key driver as far as you think. Definitely the price hike benefit will be coming into [Technical Issues] and you said that new product introduction are also higher than the past. So it would be like a combination of all volume, price hike, and the new product introduction will be driver.

Aditi Panandikar — Managing Director

New introductions will definitely continue to do well. So if you have seen, you know, it’s already come to 2.8 right — 2.3. It will further go up to at least 3% by end-of-the year. I’m very confident. Legacy product growth. Cyclopam is doing very well. It will continue to drive. Febrex plus will also start catching up. As I explained earlier, both my acute divisions Indoco and Spade were impacted with one product each, which did significantly well last year for COVID. That was tremendous challenges in setting targets.

So, we had given targets to Indoco main division, for example, without Karvol plus and with Karvol plus, sperate targets. And same Spade with and without Febrex Plus. Now what happens is that this sort of binds people and this doesn’t allow them to stretch. I’m very confident in the second half, this particular hurdle which we identified pretty early and we have already strategically resolved it. So the performance will give us more, I’m very confident.

Mitesh Shah — Nirmal Bang Securities — Analyst

Got it thanks thanks for your answers. That’s it from my end.

Operator

Thank you. We have our next question from the line of Rashmi Sancheti from Dolat Capital. Please go ahead.

Rashmi Sancheti — Dolat Capital — Analyst

Yeah thanks for the opportunity. A [Technical Issues] on U.S business, you know, if you can bifurcate how many launches have been done in first half and what are you guiding for the full year. And if you can bifurcate in terms of how many injectables you have launched and how many order solids you have launched?

Aditi Panandikar — Managing Director

Yeah, hi, Rashmi. Thanks for your questions So, three new launches happened to this point in the first-half. And overall for the year, we expect to do at least INR300 crores from U.S.

Rashmi Sancheti — Dolat Capital — Analyst

And the new launch guidance like in second-half, how much are you planning to do?

Aditi Panandikar — Managing Director

There are several opportunities but at this stage you know with the regulator and time and everything, I prefer to wait to announce.

Rashmi Sancheti — Dolat Capital — Analyst

And out of the three new launches, how many items, injectables, oral solids, or all are basically ophthalmic?

Aditi Panandikar — Managing Director

One ophthalmic and two injectables.

Rashmi Sancheti — Dolat Capital — Analyst

One ophthal and two injectables. And whatever filings we are doing in the U.S. business, are they majorly cue towards injectable like we are adding more of investable filings or we do have a good basket of oral solids also.

Aditi Panandikar — Managing Director

Yeah, you guessed correctly. Our major — first priority or rather largest contribution to new filings is coming from injectables, followed by ophthalmic, and then the solid oral. We have already filed solid orals in the past. As you remember, we had several F2F opportunities, which will now start getting converted into commercial whenever the patent time comes in. So solid oral work has been done in the past. Now most of the filings for [Technical Issues].

Sundeep Bambolkar — Joint Managing Director

Rasmi, I think you might have joined late because I gave a elaborate answer on the U.S. business when Aditya Khemka asked this question. So our preference now will be towards complex injectables, suspension ophthalmic, sustained release solids going-forward. Sustained release, okay. And sir, everything will be by our partner only, right. We are not doing anything on our own.

Aditi Panandikar — Managing Director

Yeah, I mean, if you are talking of front-end sales, yes. Filings, several are ours. You know that.

Rashmi Sancheti — Dolat Capital — Analyst

Yeah, correct, okay. But, the pipeline which you are talking about the complex injectables will be all through the partners only, right.

Aditi Panandikar — Managing Director

Yes, yes, obviously.

Sundeep Bambolkar — Joint Managing Director

Intellectual property will be held by Indoco.

Rashmi Sancheti — Dolat Capital — Analyst

Okay, I see. Again, coming on the India business, I understand that you already mentioned that second-half, we would be doing much better. Following this high base of FY23, FY23, how do we see FY24? Are we expecting that, you know, we will come back to the double digit growth in FY24 and if yes, how that would be accrued. Say, if you can comment on the number of MRS and are we — do we have any plans to now adding additional MRs like peers are doing this.

Aditi Panandikar — Managing Director

Yeah, yeah, we have head a lot about our peers adding MRs. So, let me start — you asked several questions, but let me start with where we see India business going forward. Of course, it is my opinion. I feel very clearly by the end of 2023, this COVID impact business will all get over and we will have new base on which we can grow. After that, the market I believe will start giving — that is for the industry, higher single digit at least. And in some quarters, double digit growth. And Indoco will be able to beat those numbers, I am very confident.

And question is about the incremental field staff being added. So because, Indoco has always had an acute portfolio, we have — we compared to many of our other peers who are high chronic and have people mostly in the metros, our field staff is actually more scattered in the tier two, three and interior, rural as we call it. So, we have a substantial presence, but we are watching what is happening in the industry and whether this number of people added by others is impacting us directly in any case.

Number three, Indoco has especially with Warren ACE at least a good portfolio, which has an OTX element attached to it. So, the company has done several strategic things so that we should be able to turn this around. We have been internally working very hard to generate prescriptions and all our strategies of evaluation of performance, excellence, etc., are around prescription generation.

You’d be surprised as in the quarter like this when respiratory has given us so much trouble, we have actually added one lakh descriptions even for a product like Karvol Plus. So sometimes at Indoco, addition of prescription and outcome of pain is not something that goes hand in hand, especially if the product has a lot of OTX element attached to it. At Indoco today seven initiatives have been taken, by way of which we can change the ratio of prescription to sale for such products in the coming years and I’m expecting at least in the next year to start seeing some element of this beinng converted into sales.

I hope that answered your question.

Rashmi Sancheti — Dolat Capital — Analyst

Okay, man. And finally on margin in the past half, you have achieved around 19% operating margin and the second-half — you know normally first half basically is very soft demand because all the cost comes in, but you have actually guided that second half will be much better. Is it better in terms of the operating margin also because [Technical Issues] also getting normalized. Are you expecting that for the full year, any recent new target or guidance of around 20% or 20% plus in FY23.

Aditi Panandikar — Managing Director

So, Rashmi, as you said correctly, we have given much better by guidance for India business. But in fact, now international is almost — international plus others is almost seven of our top line and these businesses we are expecting a good ramp-up in the second-half itself. So therefore, you know, until Indoco used to be heavy on India business, I could understand that the second-half has issues on profitability because the numbers are looking different. But now it is very different. So we are very confident going ahead we will do well and even if we maintain our guidance of 20% odd, which we have made for EBITDA. And [Technical Issues] been also explained earlier, but let me say this again. That various initiatives have been taken to increase operational efficiency and even this month, if you take out our one off INR7 crores out of the other expenses, we would see much better profitability for the company in this quarter also. Costs are coming under control. Contribution from U.S. and India business to total business is going up.All all of this will help us. Yeah.

Rashmi Sancheti — Dolat Capital — Analyst

Okay, man. Thank you so much. That’s it my side.

Operator

Thank you. We have a next question from the line of Deepan Shankar from Trustline PMS. Please go ahead.

Deepan Shankar — Trustline PMS — Analyst

Good morning everyone and thanks a lot for the opportunity. So, firstly from my side in the domestic business, how is our chronic business portfolio performing and what are our plans to scale up this business. So, what kind of targetted contribution we expect from this business over next three, five years?

Aditi Panandikar — Managing Director

Yeah, thank you for that question. Thank you for asking it. I think, sometimes we forget to talk of a chronic and that’s not good.So, chronic today contributes around 10% of India business and is expected to ramp-up well. The size is small so, the incremental sales coming from these therapies don’t show great improvement. But cardiac therapy for example this quarter has grown by 70% and is now at INR3.5 crores. Your anti-diabetic isat INR6.5 crores. So you have, you know, sort of the chronic therapy, but it is slowly making the presene felt. In fact if I wee to share with you on Y-o-Y basis for the quarter, it is our subchronic and chronic rather for the half year, subchronic therapy has grown by 11.5% and chronic therapy has grown by 2% and helped us tide over the minus 13% odd plus acute up and down. So, slowly and steadily, it is making up presence. For the first-half this year, we are clocked around INR50 crore sales from chronic. Last year, we did a major restructuring of our two chronic division and made it into one division synergy so that we could get efficiency and we could focus on the products that matter.

In the call in the last quarter, I had explained this. It did not make sense to be fiftieth launch we know where there are top three players take 60% of the market or something like that. So we are very careful now. We are focusing on the right brand and I’m confident going-forward, Synergy divisio nwill show great results.

Deepan Shankar — Trustline PMS — Analyst

Understood, okay. In the previous year, we used to talk about the launch of Alogliptin kind of product. Those kind of critical products, are we planning to launch in chronic business?

Aditi Panandikar — Managing Director

Yes, yes, certainly. And Alogliptin is also in the market. It is — performance of Alogliptin is still muted, but a work is being done there. And our plans to launch better chronic products in India market continues.

Deepan Shankar — Trustline PMS — Analyst

And ma’am any updates on apixaban launch in the Indian market?

Aditi Panandikar — Managing Director

So, apixaban, we are reviewing. When we were one of the two, it was an absolute fantastic kind of scenario for us to get-in, considering we are such a small player in the cardiology segment. Now then the patents get sort of over and the market opens for every one, then for Indoco which has such a small presence in cardiology, whether we can make a substantial dent in this market is something we are reviewing. We will come back to you once we finalize, but it may not be such a great advantage now as it would have been had we won the case against [Technical Issues].

Deepan Shankar — Trustline PMS — Analyst

Okay, okay, and finally from my side. So, what is our long-term guidance in the margins looking like, so over like three, five-year, considering now, Europe business transforming from France launches and the U.S. business also, complex products are getting launched. And India business continues to do well. So are we upper our long-term guidance of margins to in the range of 25%.

Aditi Panandikar — Managing Director

How much?

Deepan Shankar — Trustline PMS — Analyst

25%

Aditi Panandikar — Managing Director

I did not get you.

Sundeep Bambolkar — Joint Managing Director

25%.

Aditi Panandikar — Managing Director

25%. Yeah, yeah, yeah, so in three years, I feel confident we can reach 25%.

Deepan Shankar — Trustline PMS — Analyst

Okay, sure, thanks a lot and all the best, sir.

Operator

We have our next question from the line of Aegis Lakhani from Unifi Capital. Please go ahead. We have our next question from the line of Aegis Lakhani from Unifi Capital. Please go ahead.

Aegis Lakhani — Unifi Capital — Analyst

Thanks for the opportunity. Couple of questions. One is on Lacosamide, could you speak a little bit and second, could you quantify what was your [Technical Issues] business earlier. Where was it reported. And what is your outlook on that portion of the business?

Sundeep Bambolkar — Joint Managing Director

Which was, South Africa?

Aegis Lakhani — Unifi Capital — Analyst

Yes.

Sundeep Bambolkar — Joint Managing Director

First, coming to lacosamide, for three months, Indoco enjoyed position of being the only generic in the U.S. market for Lacosamide injection. Thereafter two players have got approvals, but when i visisted our partners in very early August, I was told very firmly that $43 million market size, which was prevailing when we just entered the market had grown to $49 million within three months, Which is very good news for us. That means the prices have not at all come under pressure. In fact, we have been able to sell the product at good prices. Taking into account that one or two competitors might have joined right now, but still I think Indoco is holding very strong with its front-end partner.

Now coming to our South Africa business. We have revived the South Africa business after all the approvals for all three plants in Goa are in place now. And in fact, in the long-term, we have plans to get the Baddi plants also approved because right now for the quarter, we are doing about INR3.5crores. But with more business coming in, more products getting approved, we have certain contracts with large companies. I wouldn’t like to name the two large companies at this stage. But there are various dosage forms, like creams and ointments, liquid orals. So our profitability in these dosage forms is much, much higher compared to solid dosage. So, South Africa business will definitely grow.

In two quarters, we should double this business and going ahead our strong growth of around 15% to 20% I can project.

Aditi Panandikar — Managing Director

On your question of where it gets reported, it gets reported in the MDA under SAANZ. The South Africa, Australia and New Zealand. So, there has been fantastic performance from South Africa this quarter. Australia and New Zealand we expect now seems to ramp up in the quarters to come.

Aegis Lakhani — Unifi Capital — Analyst

So, Ma’am, no, I was talking about [Technical Issues], you had a tender business with Karnataka.

Aditi Panandikar — Managing Director

[Technical Issues] is for South Africa, regulator of South Africa.

Aegis Lakhani — Unifi Capital — Analyst

Yes, correct. So but earlier that business was, if I recollect larger, right, INR60 crores, INR70 crores, my thinking was that.

Aditi Panandikar — Managing Director

Yes, yes, yes.

Sundeep Bambolkar — Joint Managing Director

There are certain regulatory issues but those all have been solved and INR60 crores, INR70 crores business is driven by tenders. So we have applied for tenders and those will be announced shortly.

Aegis Lakhani — Unifi Capital — Analyst

So you expect that tender business to comeback for you in 2024. Is that correct?

Sundeep Bambolkar — Joint Managing Director

In — yes, starting April 23, correct.

Aegis Lakhani — Unifi Capital — Analyst

So whatever the tender business growth and the size of the tenders are what you used to do earlier of that INR60 crore, INR70 crore [Technical Issues].

Sundeep Bambolkar — Joint Managing Director

Yes, yes, per annum, around INR60 crore businesses is there.

Aegis Lakhani — Unifi Capital — Analyst

Okay, so, this business can really scale up much more than if the tender business [Technical Issues].

Sundeep Bambolkar — Joint Managing Director

Certainly, certainly, yes. Noted sir, okay, and sir just again I wanted to, an earlier participant asked this question this question. But, sir given the fact that the way we have profit shares coming in from the [Technical Issues] in the third quarter and we have been speaking about a lot of these initiatives that you have done. The RM basket coming down, it seems quite obvious that your margin will shoot up in excess of 20%. So, directionally is that understanding correct? Meaning [Technical Issues], but I mean directionally, it seems that it will definitely par exceeds that. Yeah, see India business and U.S. business other top contributors right now with the margins. I am taking three quarters time for the Europe business as I clearly mentioned earlier because new product launches will happen there. And Europe business margins will definitely improve in about three quarters from today. But all put together, you are right, next year onwards, margin should be better than what we are doing today.

Aegis Lakhani — Unifi Capital — Analyst

Got it. Sir, just one strategic question because the landscape in the U.S. is so vast and so large and you are you know — you are very targeted on specific molecules. So I just want to understand that how do you go about in the R&D process? Is it partner-led where they are pushing you that you know there are such opportunities in the market next year or could you just speak a little bit about that process, please?

Sundeep Bambolkar — Joint Managing Director

We have — I can answer that question on a general note because there are a lot of confidential matters involved. So we have a process of molecules selection within the organization, which we do, sitting with the business team and the R&D team. And as I said earlier, we are specifically going after complex injectables, suspension ophthalmics, and sustain released solids. And our partnering opportunity, we do it at the right time, sometimes when the molecule is very, very close to approval because the value then increases. So that has been the overall strategy. The partner pushing us, those days are gone. That was co-development. Now Indoco has become very strong to have its own product pipeline going ahead. And we have a solid pipeline with the R&D right now.

Aditi Panandikar — Managing Director

If I can add, there is also fabulous development for the API done the moment the pipeline collection happens. So, for 80%, 90% of our products, we have the in-house API at one of the sources, if not the only, and this is very, very, very helpful especially at the time of launch, at the time of making products available for cash flows and everything else

Aegis Lakhani — Unifi Capital — Analyst

Got it. Could you please quantify what has been the capex till date and for the rest of the year, what is the capex outgo?

Sundeep Bambolkar — Joint Managing Director

Yeah capex, capex for the year, we have projected INR125 crores and we are almost in line with that.

Operator

Thank you. We have our next question from the line of Aditya Khemka from InCred PMS. Please go ahead.

Aditya Khemka — InCred PMS — Analyst

Yeah, hi thanks for the follow-up. Sandeep, sir, capex was INR125 crores for the full-year. First-half, I think the cash flow [Technical Issues] INR90 crores plus. So is it going to be only INR35 crores for the second half?

Aditi Panandikar — Managing Director

The INR95 crores includes a lot of advances, Aditya. So, we are confident to control it INR125 crores.

Aditya Khemka — InCred PMS — Analyst

Got it. Secondly on the other expenses side, I was just looking at it. You know our Y-o-Y growth in other expenses this quarter was about 20% and you know other expenses includes your sales promotion, fuel cost, power cost and traveling expenses, etc., and also sales promotion. I just want to know which of these costs have gone up dramatically y-o-y, you know, up?

Aditi Panandikar — Managing Director

Aditya, we said this earlier, but I will anyway say that there is this element of a one-time expense related to indirect taxes of around INR7 CR, especially for this quarter. Almost all other expenses are under control.

Aditya Khemka — InCred PMS — Analyst

So, INR7 CR of indirect tax that you have paid and [Technical Issues] as other expenses.

Sundeep Bambolkar — Joint Managing Director

One time, yeah.

Aditya Khemka — InCred PMS — Analyst

One time, okay, otherwise, it would have been basically INR112 crores and INR119 as you can see?

Sundeep Bambolkar — Joint Managing Director

Correct, correct, absolutely.

Aditya Khemka — InCred PMS — Analyst

Okay that helps. Lastly on the API business, because we are obviously internally consuming more and more. In this year, what do we see as our external sales of API for this year?

Aditi Panandikar — Managing Director

Yeah. I know we had aspiration to do really well in API external. But I’m not complaining that internal consumption is increasing. But external sales, I feel confident to be able to do as much as last [Technical Issues] about, so close to INR100.

Aditya Khemka — InCred PMS — Analyst

Close to INR100 crores, okay. Okay, that’s helpful. Sandeep sir, what is the utilization of the Micro Labs plant.

Sundeep Bambolkar — Joint Managing Director

Micro Labs plant, There is huge scope for utilization. All the European businesses have been put under of approval in that plant. And as you know, the regulatory agencies have given okay till December 2023. They have maintained the currency of the certification, right now December 2023. So we are on very strong ground. By December 2023, we will be in 70% occupancy.

Aditya Khemka — InCred PMS — Analyst

Okay and if need be, there is space for expansion in the plant itself?

Aditi Panandikar — Managing Director

Aditya, the way we — that plant is used for applying to many geographies today, not just Europe. In fact, some of domestic also gets done there. So the idea is as the European business ramps up and as transfer more and more from Goa to Baddi, we will move the India business out. Yeah.

Aditya Khemka — InCred PMS — Analyst

Yeah, and it will be outsourced to third party or your own plant somewhere in the [Speech Overlap].

Aditi Panandikar — Managing Director

Third-party mostly. We have relationships with these players now for a way long time for India business.

Aditya Khemka — InCred PMS — Analyst

Sure, sure, I understand that. I think I had one more question. Sorry about that. On the R&D side, our R&D is now 5% of sales. Where do we see R&D going given that we have aspirations for being complex products for U.S. Where do we see the R&D as a percent of the sales going?

Sundeep Bambolkar — Joint Managing Director

Yeah. Most important part of the R&D is developing smart products in valid time. So, necessarily, the 5% need not go up because the revenue size is going to go up and 5% of that incremental revenue size will automatically enhance the quantum. So, I think we stay put at around 5% right now and we have an excellent biostudy center in Hyderabad, which we acquired in 2015, 2016, which has excellent record of zero 483s after about eight to nine FDA inspections have been done. So considering all this, I think we are on very sound footing.

Aditi Panandikar — Managing Director

Because I’ll tell you why I asked this question, Sandeep sir because half of our sales is India and I doubt, any significant portion of this R&D goes for our India business, which effectively means that on our export business, we are doing 10% of sales as R&D, right. And that’s a substantial amount of R&D that we’re already doing. So, I am really crossing my fingers that that doesn’t go up and it shows in terms of profitability and top line growth for us.

Sundeep Bambolkar — Joint Managing Director

It will not go up. We will stabilize it around this.

Aditya Khemka — InCred PMS — Analyst

Got it. Yeah, I think that’s it. Thanks a lot for taking my questions and all the best.

Sundeep Bambolkar — Joint Managing Director

Thank you for your very active participation.

Vipul Kumar Shah — Sumangal Investment — Analyst

We have our next question from the line of Vipul Kumar Shah from Sumangal Investment. Please go ahead. Hi. I just wanted to know why our CRO business is not ramping up. It has a very meager contribution. So what is the logic of continuing in that business? What are the plan for.

Aditi Panandikar — Managing Director

So we actually are backward integrated into or rather forward integrated into CRO when the company has got into the aspirations of filing our products in U.S., especially the first to file products. And as of today, 65% of the you know capacity at the CRO is consumed by Indoco for our own products. So, we have only 40% capacity for external sales, which appear here as income from CRO. Happy to share that we have ramped-up capacity of the CRO and an expansion is underway and I’m confident in couple of months that additional capacity, which will of course double, will then allow us to, you know, get more business from this segment. As Sundeep already mentioned, it’s an excellent CRO. We have had eight to nine new U.S FDA audits, all with zero 483. And CRO itself is looking at various new projects. So we are very much focusing on CRO going forward. It may not look substantial in size, but it is a critical part of our business.

Vipul Kumar Shah — Sumangal Investment — Analyst

And what — second question ma’am, what is our MR productivity at present and have you seen any improvement over last two, three years there?

Aditi Panandikar — Managing Director

Yes, we have actually went from three to three and half over the last couple of years, and I see that this will only go up in the coming years.

Operator

Thank you. We have a last question from the line of Cyndrella Carvalho from JM Financial. Please go-ahead.

Cyndrella Carvalho — JM Financials — Analyst

Thank you so much for taking my question. Ma’am, just one question as you have seen almost all our engines firing, like be India, U.S., Europe, and especially [Technical Issues] market, which will support our EBITDA margin, is also going ahead. Is there any vision that you would like to share with us, maybe a little later in time. But if you could help us understand how do you see this business going ahead? That’s it from my end.

Aditi Panandikar — Managing Director

Thanks for the question. When it comes to vision, we didn’t have an aspiration. I believe it has to be something very, very large right. So recently, as I already declared, we completed 75 years. I was very happy that the first-line team that reports to Sandeep and me collectively took a target of achieving INR5,000 crores in five years.

Cyndrella Carvalho — JM Financials — Analyst

That really very helpful.

Sundeep Bambolkar — Joint Managing Director

Cyndrella, we can’t hear you.

Cyndrella Carvalho — JM Financials — Analyst

Am I audible, sir. I’m saying that’s very encouraging to hear, that’s very encouraging to here. Anything more ma’am, you would like to add on that in terms of overall business.

Aditi Panandikar — Managing Director

I think everything else we will speak as and when it turns out. You know what.

Cyndrella Carvalho — JM Financials — Analyst

I think Cyndrella, today has been one of the most active calls.

Sundeep Bambolkar — Joint Managing Director

I think a to raise has been one of the most active. So, whatever we had to share, I’m sure we have shared.

Cyndrella Carvalho — JM Financials — Analyst

Yes, sir, absolutely sir. Thank you so much for that insight.

Sundeep Bambolkar — Joint Managing Director

Thank you for organizing.

Cyndrella Carvalho — JM Financials — Analyst

That’s it. That’s it from my end.

Operator

Thank you. On behalf of JM Financial, that concludes this conference. Thank you for joining us and you may now disconnect your lines.

Sundeep Bambolkar — Joint Managing Director

Thank you very much.

Aditi Panandikar — Managing Director

Thank you.