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CAPLIN POINT LABORATORIES LTD (CAPPL) Q2 FY22 Earnings Concall Transcript

CAPLIN POINT LABORATORIES LTD (NSE:CAPPL) Q2 FY22 Earnings Concall dated Aug. 05, 2022

Corporate Participants:

Vivek PaarthipanChief Operating Officer

M. SathyanarayananDeputy Chief Financial Officer

C. C. PaarthipanChairman

D. MuralidharanChief Financial Officer

Analysts:

Anika MittalNvest Research — Analyst

Harshal PatilSharekhan — Analyst

Hrishikesh PatoleBatlivala & Karani Securities India Pvt. Ltd. — Analyst

Girish BakhruOrbiMed — Analyst

Sachin KaseraSvan Investments — Analyst

Alisha MahawlaEnvision Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Caplin Point Laboratories Limited Earnings Conference Call, hosted by Batlivala & Karani Securities India Private Limited. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Hrishikesh Patole from B&K Securities. Thank you. And over to you, sir.

Hrishikesh PatoleBatlivala & Karani Securities India Pvt. Ltd. — Analyst

Thank you, everyone. Good evening. On behalf of Batlivala & Karani Securities, I would like to welcome you all for Q1 FY ’23 earnings conference call of Caplin Point Laboratories Limited. From the management, today, we have with us, Mr. C. C. Paarthipan, the Chairman; Mr. Vivek Partheeban, Chief Operating Officer; Dr. Sridhar Ganesan, Managing Director; Mr. D. Muralidharan, CFO; and Mr. M. Sathyanarayanan, Deputy CFO.

I now hand over the call to Mr. Vivek for his opening remarks. Thank you. And over to you, sir.

Vivek PaarthipanChief Operating Officer

Thank you, Hrishikesh. Good evening, everyone. We are pleased to welcome you all to our earnings call to discuss our quarter one results. Please note, a copy of our disclosures are available on the Investors section of our website, as well as on the stock exchanges. And also do note that anything said on this call, which reflects our outlook for the future or which could be construed as a forward-looking statement, must be reviewed in conjunction with the risks that the company faces.

With this, I hand over the floor to our Chairman for his opening remarks.

C. C. PaarthipanChairman

Ladies and gentlemen, welcome to our earnings call. You are aware that the world has been witnessing COVID war, CIS war, and also the cold war now. Whether it’s COVID war or cold war, what is important to companies are war for talent and war chest of cash. At Caplin, we use our ESOP to attract the deserving talent as we all know that the importance of people first. Currently, our cash and cash equivalents stand at INR746 crore, which is approved for our effective cash flow management.

Now, let me give you a presentation of our useful past and present and how we will create our useful future for all our stakeholders in the form of projects and technology, and markets and models. As you know well, it changes the nature of business, challenges the future of business. The challenges are not new to Caplin, as it’s a turnaround story. Challenge means, as you all know, it’s supposed to be hard. If that was easy, everyone would have done it. The turnaround of Caplin is the first challenge we undertook by going to the toughest parts of the world and created a business model, which really works even today.

The proof is the report of Value Research magazine, where Caplin has been ranked as number one in India among the 100 Most Consistently Profitable Companies. Had we not accepted challenge as a change of course for Caplin, we would not have reached to this position. Hence, handling the challenge is the useful proposition for our future business, too.

Now, let us look at the projects and technology. Number one, the second phase and the second unit of CSL is in progress. The COO will brief you in detail. Number two, Onco OSD will be completed in two months from now, and the Onco Steriles will commence their commercial operations in the next year, hopefully, in the third quarter. Number three, API. We are still in negotiation with the company for the appreciation of their plant in Vizag. These two that COO will brief you. Number four, the land for OSD for the regulated market has been bought, and we would start the construction shortly. Number five, the injectable and softgel facility of our Pondicherry facility, which we call it as CP-1, will be expanded as we have great opportunity to export these products to the current markets of Latin America, where we are present now. Number six, the necessary R&D activities are in progress for the expanded facilities. Number seven, the CRO, our AMARIS CLINICAL got the approval from Chilean authorities. We are planning to register 12 OSDs in Chile, but these studies are already on and will be completed by November. Number eight, the APIs at the R&D level has been completed for 70 products.

Further, the capital allocation being a strategic priority is also being done effectively. There is no debt overhang or debt leverage, and most of it — most of the cash has been from the internal accruals. Our major markets, as you know well, are Latin America. However, we are now present in US in addition to brand marketing of West Africa. We are currently registering our products in many bigger geographies, mainly USA, Mexico, South Africa, and Europe, and we have plans to enter Brazil and Southeast Asian countries, and CIS, too. Our first order has come from Cambodia, although it’s a small one.

We will continue to follow our business model of catering to the middle and bottom of the pyramid, which means we’ll look at second tier and third tier opportunities in the larger markets, and stock and sell models in the smaller geographies, the way we are doing in LATAM now. Although, the lead time for registration and the entry barriers are high in the regulated market, we have the opportunity to create various buckets in the form of injectables OSD Onco and OSD General to form a larger basket of over 100 products in three to four years from now. We can start our stock and sell model in Southeast Asia faster as the registration will be completed in 12 to 18 months.

We’re also getting into tender business in the current markets of our operations now as we are planning to manufacture our API from key starting materials. We are sure that would be in a portion to create an end-to-end tech platform in the form of KSM to formulation. KSM means key starting material to formulation. And also the front-end presence. You are aware that we have an end-to-end marketing presence in the Latin American markets. We will also follow the leaders of the industry in terms of technology, be it in the form of projects and R&D, and also the markets, especially the bigger markets. But we will create and continue our business model that is unique, which is what has created the cash flow and profits in the last 10 years. So finally, our focus will always be on the bottom line and cash flow. Thank you. Thank you very much.

Now, I will hand it over to the COO.

Vivek PaarthipanChief Operating Officer

Thank you, Chairman. I’ll just take a couple of minutes to update on the regulated market operations, specifically, the US, and also throw a little more light on the capex strategy of the Company. So as you all might have seen through our results released today, we’ve had a reasonably good growth in the revenue, specifically, it was a healthy mix of profit share and milestone revenues also for Caplin Steriles. We’ve grown more than 60% compared to last year.

I think this year is when we can say that business is sort of mature enough where we can compare it on a quarter-to-quarter basis, which was something that we couldn’t do in the previous years. Now, the revenue has been a mix of 75% Caplin’s own ANDAs, which we’ve out-licensed to multiple partners in the US and 25% from CMO. And when it comes to product revenue versus profit share, I would say, this quarter it’s been around 70-30, but this will not be very consistent going forward. It could be 80-20, it could be 40-60. So as long as there is a healthy mix, I think we are happy about this.

Now, our order book compared to the last time we spoke continues to remain even more healthy. Compared to last time, we were at about INR150 crores, INR155 crore, now we are close to INR175 crore. And we just need to make sure that we execute well, and added to it, a good profit share and milestone revenue should push us closer to the INR200 crore mark where we will effectively have a net breakeven from Caplin Steriles. That’s the milestone that we’ve all been waiting for, and we remain quite cautious and we remain quite excited that it could happen this year.

Most of the products that have been approved have been launched. We have two more that is yet to be launched, which will probably happen in the next three months. And we also have five ANDAs under review and we are on target to file another 10 to 12 this year. Going forward, our target will be more on specific molecules where the complexity to manufacture or complexity in the form of sourcing or development would be more compared to what we have taken on in the past, because our product line, our pipeline of products is already quite robust in terms of quantities. Now, we will start to do a little bit more cherry picking on slightly more complex products going forward.

Our larger focus would be to have a differentiated business model in the US. Actually, what we are planning is, we are planning to do something that is similar to our Latin American model where we will be focusing a little bit more of the Tier 2, Tier 3 buyers, and specific focus towards the bottom of the pyramid. We feel that this is something that is, if it is possible in Latin America, we feel that this is very much possible in the US as well as long as we get into the right kind of partnerships, we get into the right kind of conversations in the front-end.

And on that note, we are putting together the processes and plans in place to have our label in the US within the end of this year. We are likely to launch Caplin’s own label products, three of them specifically, before the end of this financial year in the US. We are making very good progress on the complex products, as well as I discussed, we have already completed two emulsion injectables, one of them for a partner and one of them for ourselves. And for the one that we’ve done for ourselves, we’ve used AMARIS CLINICAL to complete the biostudies for that product. We are likely to file that by January of next year. We have four more complex products that will be scaled up and ready for exhibit batches sometime within the next four to five months, and the filing will be in another six to seven months from then. So the pipeline absolutely remains very robust and healthy.

When it comes to capex, I will start with Caplin Steriles and then move on to other one. So we made a strategic decision to expand into two separate units. This will make us achieve better flexibility, quicker qualification timelines, and also utilization of the additional capacity a little bit earlier than what was originally planned. This will, obviously, increase the capex by about INR40 crore to INR50 crore. But thankfully, the parent company is healthy enough with adequate surpluses that can take care of the extra INR40 crores, INR50 crores in terms of capex requirements. So we expect the final number to be around the INR260 crore, INR270 crore mark, plus GST. When it comes to CT-1, which is our Pondicherry plant, we are expanding our softgel line. This is an area where we’ve seen a gap between the orders that we received versus what we’re able to execute, which is always a good thing.

So we have already ordered the process machineries from Korea. And we are also expanding our warehouse and injectable section here that should be completed in the next four to six months. When it comes to oncology, as Chairman said, the oral solid dosages oncology phase is nearly completed now and we will be going for qualifications and validations of the process equipment in the next three to four months. The injectable phase of the oncology side will be completed probably by end of next year. When it comes to API, as once again the Chairman said, we are at final stages of evaluation with regards to this Vizag facility. And we also have design drawings, etc. already completed for a greenfield facility of our own, which will be closer to Chennai. That’s basically what the updates for both Caplin Steriles and on our capex projects.

Let me hand over the floor to our CFO for some remarks on the numbers before we can open it up for questions. Thank you.

D. MuralidharanChief Financial Officer

Thank you. Thank you, Mr. Vivek. Good evening, one and all who’ve joined us in the — for the investors call. The numbers are already there with you. The numbers are gratifying, even more gratifying because most of our peers and also the bigger players in the industry have either been stagnating or reported a negative revenue growth or profit growth for the quarter ending June ’22. The numbers what we have reported, thanks to the strategy of Chairman judicious product selections under the market, we have reported a 16.3% growth over the year-on-year.

And in terms of PAT, it is even more better, 20% on an increase of sale of 16.3%. We have reported 20% growth in PAT that thanks to CSL, which is our US regulated business, which has turned positive this quarter as compared to minor negatives in the past. That has also helped the overall PAT number being what it is today. And coming to the major components of the P&L, gross margins are stabilizing around 54%, 55%. There were some apprehensions in the past and then this all taken care of. This is the range in which we would continue to operate. As I mentioned, it is on account of product selection and the product shipments, what I would say.

And in terms of opex, though it may look as though the quantum had increased in terms of employee cost, other costs, it is an investment for future. As Chairman rightly put in his opening remarks, we are taking a lot of talent keeping the future in mind for the various projects and various — he has also mentioned about the operational excellence division in the press release. So we are creating separate focus on such listings, so that will give us in good stead for the future when the company grows into a different league altogether.

As far as the employee cost and the opex is concerned, our focus on R&D continues to be there, and we have been consistently debiting all our R&D-related expenses to the profit and loss account. We don’t consider to capitalizing any of them as of today. And then the working capital cycle, again, is now stabilized. It is closer to about five months. Out of the five months, the receivables were around three months. And then the inventory on [Indecipherable] is about five-and-a-half months. And the five-and-a-half months we see, two to two-and-a-half months is taken away by the voyage time.

As all of us will know that the market channel partners were acquired by us and they are part of our consolidated numbers today, so the inventory once it is sent from here, comes into my books. And then they are all part of transit and then that itself is about close to INR100 crores, which is about 40% of the inventory on hand. The receivables is about 90 days, inventory is about five months on cost of goods sales, and then the creditor support is definitely to the extent of three months in terms of RM on PM.

So this adds it to about — to five five months of working capital cycle. And thanks to our cash flow, we are debt free, and then all our capex and opex are being funded, including the projects on hand and projects that both organic and inorganic growth source, what is in — what is visible today for the next two, three years, we’ll definitely be able to fund our — out of our own internal accruals. Then coming to the capital expenditure, the depreciation, somebody had raised the question as to why it has come down as compared to the last quarter, this is because most of the capex is set to be put into use.

So we have about INR52 crores worth of advance towards capital expenditures, which are either in the form of in-transit or have been received, but not yet put to use. And then INR30 crores to INR35 crores is in capital WIP, and various stage of installation. So we would see definitely a quantum increase in depreciation over the next couple of quarters, but the profitability will be commensurate with the increase in operations and then the 23%, 24% of PAT, I think we see a good reason why we should not continue in that range.

The numbers are there, and then as we have already mentioned in the press release, a good milestone has been reached, INR100 crores plus PBT in the very — one quarter is a milestone. We are very proud of having reached it. We hope to sustain that in the future as well. And if any of the queries have — any queries, we would be more than glad to answer them. Thank you, Mr. Vivek.

Vivek PaarthipanChief Operating Officer

Thank you, sir. So we can open the floor for questions now, please.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We’ll take the first question from the line of Anika Mittal from Nvest Research. Please go ahead.

Anika MittalNvest Research — Analyst

Hello. Good evening, sir. Am I audible? Hello?

Vivek PaarthipanChief Operating Officer

Yes, please.

Anika MittalNvest Research — Analyst

Okay. Sir, my question is on your API backward integration side. Basically, I’m a little bit confused between these inorganic acquisitions and that organic greenfield expansion you are talking about. So can you please elaborate and clarify the same about these two action plans in more detail?

Vivek PaarthipanChief Operating Officer

Yeah. I would let Mr. Chairman to take this.

C. C. PaarthipanChairman

Vivek, can you — in fact it was not very clear.

Vivek PaarthipanChief Operating Officer

So the question was, can you please clarify on whether it will be an inorganic acquisition or a greenfield expansion for the API?

C. C. PaarthipanChairman

Okay. Okay, in fact, we are trying both, whichever is meaningful eventually we will do it. We are talking to one or two companies for acquisition, but when we go for the acquisition, there are issues which has to be sorted out, the known and unknown, that’s why it’s taking time. And side by side, as the COO said, we have already bought the land and the drawing and everything is completed. We are planning to start at the earliest. Even if the acquisition opportunity comes up at later, we currently have enough cash to acquire. On top of it, going forward that we will have to develop many products, as I told in my speech that we have and the R&D level we have around 70 products done, which means by going for one project, it may not be enough actually to complete all the 70 products in one year. So it will be a mix of both organic and inorganic piece.

Anika MittalNvest Research — Analyst

So basically, we can go for both also? That means — that what you are saying?

C. C. PaarthipanChairman

We are trying both. As I told you, if it is meaningful, we will acquire actually the one which we are talking, which today is in the negotiation stage. And we will also start the other one. Yes, please.

Anika MittalNvest Research — Analyst

Okay. So let’s say, we are going for both, so capex amount will remain the same, like INR110 crore?

C. C. PaarthipanChairman

Again, we are going for both.

Vivek PaarthipanChief Operating Officer

Yeah, so I will — I’ll answer that one. So basically, the acquisition cost that we are looking at is not very high. We expect it to be less than INR30 crore. So regardless of our greenfield expansion, the acquisition will not really move the needle too much on the overall outlay for our capex.

Anika MittalNvest Research — Analyst

And what is that expected timeline when do you expect this API backward integration will start either organic or inorganic?

Vivek PaarthipanChief Operating Officer

Yeah. So obviously, if it is an inorganic one, this can be very quick potentially in the next few months itself. Of course, we might not be able to use it immediately after taking over. There will be some refurbishment that needs to be done to bring it up to live and bring it up to the US standards that we would be using it for. When it comes to the greenfield one, we believe a complete structure can be completed within nine to 10 months. We will be going for pre-engineered buildings. And from then on, another six months for completion of all the interiors activity. So the inorganic one would be a few months, but the greenfield is potentially about 15 months from now.

Anika MittalNvest Research — Analyst

So what are the problems are we facing in this inorganic acquisition? Like last to last con call you were mentioning that we are all set to buy next month only, now it is quite different, like you are saying, it is in the next two months [Indecipherable]?

C. C. PaarthipanChairman

I would like to pitch in here. See, this company is [Indecipherable] to receive the factories once we get satisfied with the due diligence, technical due diligence, then the financial and legal due diligence starts [Indecipherable]. Even the financial due diligence, actually we didn’t have any issues. When it goes for the legal due diligence, we have come to know that most of these factories, which are in the region of INR30 crore, INR35 crore, they have a lot of issues in the NCLT.

The major issue, the promoters of the company, they come forward when it is the question of settlement, like one or two companies they already actually they are saddled with the debt and the company, especially this, what you call that, actually it’s a DRT company, they are not coming forward and they are not in a portion to actually accept the settlement with the promoters. So like this, there are issues, that’s why it has been hanging on for quite some time.

Now that we have found one company, which does not have anything in the form of NPA or DRT issue, but the promoters have come very close, hopefully this time actually it should be through.

Anika MittalNvest Research — Analyst

And this company is in Vizag you are saying?

C. C. PaarthipanChairman

Yeah, yeah, these are all factories which are situated in Vizag.

Anika MittalNvest Research — Analyst

Okay. And a little bit clarification on US operations. We are not at breakeven currently right now. And by when do you expect to close that particular level breakeven for US operations?

C. C. PaarthipanChairman

Vivek?

Vivek PaarthipanChief Operating Officer

Yeah. So we expect the revenue run rate with similar kind of profitability that we are doing. We expect INR190 crore to INR200 crore to be the net breakeven level. So at this point, we have visibility within this year itself for us to achieve this. But of course, we will take it month-on-month, we’ll take it quarter-on-quarter. But we are certainly not very far away.

Anika MittalNvest Research — Analyst

Okay, okay, understood. Thank you very much, sir. Thank you.

C. C. PaarthipanChairman

Thank you. Thank you, Anika. Thanks very much.

Operator

Thank you. [Operator Instructions] Next question is from the line of Harshal Patil from Sharekhan. Please go ahead.

Harshal PatilSharekhan — Analyst

Thanks for the opportunity, sir. Just had one question onto the US business. And if I have just missed it, you can probably share it. Sir, the US thing, we kind of have a strong growth of about 60% and there are also some bit of milestone payments that are [Indecipherable]. So possible for you to give a broad mix of what can be a milestone payment or something like that? Just an idea around that.

Vivek PaarthipanChief Operating Officer

I think, Sathya, can you clarify the exact numbers on what was product revenue and what was milestone and profits?

M. SathyanarayananDeputy Chief Financial Officer

Yeah, sure, Vivek. So in the current year, the mix is around 66% has come from product sales and the balance 34% has come from milestone and profit share. Whereas in the last year, it was the product sales revenue was less than 50% and the balance 50% comprised of milestone and profit share.

Harshal PatilSharekhan — Analyst

Okay, okay.

Vivek PaarthipanChief Operating Officer

So here I would just like to add one thing, basically the more products that we launch, the more products that we file, you can expect the product revenue to go up. And because of the fact that we expect our own label to be launched in the US soon, we are not signing any exclusive deals. Typically, your milestone fees go up when you’re doing exclusive deals, but that’s not something that we target. So going forward, I expect the product revenue to climb up even further, and I think it might end up at somewhere around 80-20 sort of a ratio.

M. SathyanarayananDeputy Chief Financial Officer

Okay, okay. Okay, that was helpful, sir. That was helpful.

C. C. PaarthipanChairman

Thank you.

M. SathyanarayananDeputy Chief Financial Officer

Thank you, sir. Thank you.

Operator

Thank you. [Operator Instructions] We’ll take our next question from the line of Girish Bakhru from OrbiMed. Please go ahead.

Girish BakhruOrbiMed — Analyst

Yeah, hi, thanks for taking question, and congrats on good quarter. So on the US side, again, I understand that breakeven possible this year. When do you expect cash flow breakeven in the US?

Vivek PaarthipanChief Operating Officer

So on — see, there’s two parts to this, right? On the cash flow — in fact, at INR200 crore, we’ll be cash flow breakeven itself. That’s why I mentioned that it might be a breakeven overall. When it comes to the second part of it, the fact that we will be filing around 10 to 12 ANDAs this year will put a little bit more strain on our efforts towards breakeven for sure. But how we are trying to mitigate that is, when we sign non-exclusive deals, we do get a reasonable milestone payment.

We are trying to make it so that we are trying to structure it in a way that the time we get ANDA acceptance, not approval, the time that we get ANDA acceptance from the FDA, one of the milestones starts to kick in, so that whatever filing fees that we pay, gets offset by some milestones that we get from customers. So if the timing for both of this is around the same, I think we can very much expect net breakeven including cash flow by end of this year.

Girish BakhruOrbiMed — Analyst

But this new investment or the expanded investment in Steriles, you’re accounting that also in this, right?

Vivek PaarthipanChief Operating Officer

No, no, no. So capex is not being included in this. This is purely opex and R&D that we are talking about. Capex will have some more time for us to.

Girish BakhruOrbiMed — Analyst

Right. And I’m asking more from that angle that say, when you actually look at sizable base with maybe, I don’t know whether number reaches INR100 million by CY ’25, ’26, is that, let’s say, a good level where you feel that, even from the capex side, this breakeven can be achieved?

Vivek PaarthipanChief Operating Officer

So we don’t expect our capex cycle — go ahead. Yeah.

C. C. PaarthipanChairman

Can I add — can I pitch? Now, what is important to us to be very honest with you, if you look at our model, we are not very concerned about the top line. We are always actually — our focus is always on the bottom line and cash flow. So even if it is INR70 million or INR80 million, if we can make actually good profits and cash flows, we would prefer to do that way. As CCO said and as I told you in course of my speech, our focus will be on the Tier 2 and Tier 3, where the profitability will be high. Maybe the topline, as you rightly said, actually INR100 million kind of stuff, we may or may not be in a position to reach there. But we are very sure that will be in a position to achieve the bottom line and cash flow, say, three to four years from now.

Girish BakhruOrbiMed — Analyst

So let me ask this way that what would be, let’s say, your understanding of sustainable margins of the US? I mean, given that we may breakeven this year, going forward in two to three years, what could be the margins in the US?

C. C. PaarthipanChairman

Okay, coming to that one, it’s not — actually, we are not in the position to give you the numbers now. The reason is, if you ask me what will happen in Central America, these are markets where we have been there for quite a few years, maybe like more than 10, 15 years we’re there. Here, we are only looking at the borders and we are sure of doing it, the reason is like this. As I told in course of my speech, we will only follow the big leaders, the leaders of the industry in terms of technology and the market. But the models are the one which will give you the profit and cash flow, the business model. And most of the big companies, as you know well, they will only concentrate on the top layer, the creamy layer. But what has helped us actually in the form of creating the creamy layer for Caplin this concentrating on the bottom of the pyramid. So here we will focus more on the uninsured and underinsured, which is mostly in the form of second tier and third tier. So I’m sure that we’ll be in a portion to get good profits and cash flow. But the numbers, I think it’s too early for us to commit actually in terms of profit or in terms of actually top line.

Girish BakhruOrbiMed — Analyst

Right. And when we, let’s say, look at this INR90 million, INR100 million number, I mean, given that your market segmentation see — looks different from the addressable population. How many ANDAs, let’s say, ballpark are you looking in terms of commercialization to reach that number? Or is it dependent on — yeah, sorry, go ahead.

C. C. PaarthipanChairman

Please, go ahead.

Girish BakhruOrbiMed — Analyst

No, I’m just trying to understand, is it dependent on the — because the size is small or in terms of the customers you may reach out to for you have larger number of products to get that number to?

Vivek PaarthipanChief Operating Officer

Yeah, so our current — sorry?

C. C. PaarthipanChairman

Yeah, please go ahead.

Vivek PaarthipanChief Operating Officer

Yeah, so our current pipeline, we have close to 55 products that we are working on in addition to 23, 24 that’s already been filed. But once again, I think it is not the case of one or two products that will decide the fate of the company. As Chairman said also, the business model depreciation is very — going to be important. And for this also just like how we have a large basket of diversified products in Latin America, a large basket would certainly be important in the US as well, which is why if you see our current pipeline consists of many me-too generic products where there is a little bit of competition.

But where we feel we should be in a position to stand apart is, as a smaller-size, our control on the cost of the product, our control on the effective supply chain, and our business model where we are targeting, not exactly the top of the pyramid, where the middle and the bottom of the pyramid is something would probably set us apart, where as long as you are one of the last one standing, you still end up having a reasonably good business in the regulated markets also.

So while there is no magic number as to what number of ANDAs will get us to INR80 million, INR90 million, INR100 million, it’s more of a basket and a continued compliance record that really stands us apart. If it doesn’t happen in three, four years, it might happen in four, five. So we’re not in a race against anyone at the moment. We want to make sure that our fundamentals, which are basically our cash flow and bottom line, are taken care of, which has always been our mantra from the parent company itself.

C. C. PaarthipanChairman

Let me add few words here. I would request you to look at actually the countries where we are present today in Central America versus Latin America. The six countries that gives us a business of INR1,000 crore, the population actually is lesser than Tamil Nadu all put together. So the same logic is applicable actually to US, too. It’s not the population that really matter, but I fully agree with you that the bucket — the basket of products.

But coming to the present situation, although we are in the initial stages in some areas, such as new Onco and even OSD, in four to five years’ time, we are sure actually we’ll have different buckets that would create a big basket, 100-plus products as I told in course of my speech. And those 100-plus products, if somebody can cater actually to the middle and bottom of the pyramid, whether it’s a larger market or a smaller market, it’s bound to create actually a good impact to the company. Is there anything else you want to ask?

Girish BakhruOrbiMed — Analyst

No. Yeah, this is very helpful. But I’m just also taking [Indecipherable] the industry where, I mean, of course larger players are exiting few products and maybe the smaller guys entering and investing into different products. When you look at such big pipelines, 100-plus products, I mean — and at the same time, you are, of course, planning for API backward integration in some. But I mean, I’m just curious that is there a price erosion or significant impact from other companies factored in your equation? Like — or do you feel is it good to be selected from the start?

C. C. PaarthipanChairman

Okay.

Vivek PaarthipanChief Operating Officer

There are many [Speech Overlap].

C. C. PaarthipanChairman

Okay. Go ahead, go ahead.

Vivek PaarthipanChief Operating Officer

See, there are many products — I would say, quite a large number of products that have probably already hit the bottom in terms of the pricing. So I know that there are larger companies that may complain about price erosion and stuff. There are products that we do where we sell it at sub $1. And even on that, we make gross margins of more than 40%. So I think you’ll also have to take into account the size of the company as well and our expenses in comparison to larger companies. So I — while the price erosion is very much still, I don’t think it’s at the stage where you’re talking about 10%, 6% margins or anything like that. I know if there was products like that, obviously we will not go anywhere near it.

Girish BakhruOrbiMed — Analyst

Right.

C. C. PaarthipanChairman

Yeah, coming to one more thing, the price erosion comes to you if you follow the conventional business model. If you can create the — if you can remove the intermediaries and if you have the capability to reach to the last mile or one step above of it, then the profitability is always high. See, it is the intermediaries who eat away the entire profits. You take any country for that matter, not necessarily you have to be a brand player. Even in generics, if your business model is a brand, then you generate profitability and cash — sorry, cash flow. That’s what has happened in Central America.

The logic is one or the same, whether you are in US or in other country, poor people are there actually, poor is poor everywhere. We don’t look at actually poor as poor. We looked at poor as customers and then created a business model, and removed the intermediaries. And what is important to people is affordable actually cost at good quality. And how that can reach, only you have to remove intermediaries, then we don’t want to worry about the price erosions. Who will worry about the price erosion is the one who follows the conventional business model.

Girish BakhruOrbiMed — Analyst

Right. And just —

C. C. PaarthipanChairman

And just if you want to ask, please ask me. I’ll also be happy to know and learn something from you.

Girish BakhruOrbiMed — Analyst

Yeah. And just this then last one, and you have some of these complex products like emulsions and all, and you were talking about the own entry. You are not — I mean, are you going to market these products also on your own directly and –?

C. C. PaarthipanChairman

No, here, the issue is, there are products, as you rightly said, if the product can create a huge actually opportunity to Caplin Point, we are not ours to selling this one actually to the top layer. What is important at the end of the day, whether the product, as you rightly said, at that point of time, if the product that we are going to launch, the emulsion or a suspension or a difficult to manufacture product, it can fetch you volume and value. We would prefer you on the top layer.

If the product is very competitive, because we know competitive market destroys profit. The price erosion comes only because of the competition. So how to stay away from the competition is to look for a new business model [Indecipherable] getting into the uncontented space. So that’s why I said, there is nothing in the form of we will follow something, which is actually 100% [Phonetic]beaten track or whatever it is. We’ll cross the bridge when we reach there. We’ll look at actually the opportunities available in the market. If the opportunity is very unique in the form of like our product is unique in the market, we’ll use all the channels.

If we find we are one among the eighth or 10th, then we have to do is we’ll have to decide actually to enter into the second, third tier and reach the customer where the customer feels that he is getting a quality product at a differentiated price compared to my competitors. Am I addressing your question?

Girish BakhruOrbiMed — Analyst

Yes, sir. Thank you. Thank you. This is very helpful. Thank you. Those are my questions. Thank you.

C. C. PaarthipanChairman

Thank you. Thank you very much, Girish. Thank you very much.

Operator

Thank you. Our next question is from the line of Sachin Kasera from Svan Investments. Please go ahead.

Sachin KaseraSvan Investments — Analyst

Yeah, good evening, sir, and congrats for a good set of numbers. Two, three questions on US. As you have mentioned that this year, because of the strong order book, we are looking at net breakeven. But from what I understand that from the December of this year, we’re also going to have our own front-end. And also that the — next year, the expansion will kick in, so again the cost will go up. So is it that FY ’23, we will again see some pressure because of this new capex and front-end costs hitting us and many more filings? Or we think that the momentum we are seeing, the type of top line growth we could see in FY ’24 would more than compensate for the cost increase we could see?

C. C. PaarthipanChairman

Okay. Here I would like to answer to your this way. As I told you in course of my speech about the Value Research report, then I requested my finance people to go back and give me how exactly we fared in the last 10 years, and last eight out of 10 years, eight years the cash and cash equivalents were in two digits. Only the last two years, they have been in three digits, which means we’ll continue to actually have the cash and cash equivalents in three digits every year.

So we are very sure that our current business model will fetch us good profits and cash flow, as I told you before. So we will not have anything in the form of major pressure in the form of cash flow, one. Number two, we’ll also be very cautious in trading into the regulated markets. Currently, the focus is on creating something in the form of long-term value. At the same time, once we complete a project, we’ll also look at it, what is happening with the other projects, which is already there.

The moment we breakeven in one project, then only we will start actually the commercials in a big way in the other areas. So we don’t foresee any major issues in terms of cash flow compression in the future.

Sachin KaseraSvan Investments — Analyst

Sir, my question — thank you, but my question was more specific for the Caplin Steriles that next year when the expansion kicks in and we also have the full-fledged content team operating, will we again see some pressure on margins or the revenue momentum we see very strong in FY ’24 also?

Vivek PaarthipanChief Operating Officer

So there are two answers — so there are just two parts to this. Number one is, when we are launching our own label in the US this year, the front-end that we’re talking about is we’re not taking into account any expenses towards the front-end today, that is work in progress. It may happen this year or it may happen next year. So the way we are constructing this partnership is there are distribution companies in the US that are looking to take products basically in-licensed products from us and sell them on a consignment basis. So that’s the first option that we are looking at when I said that we’ll be having our own label in the US, number one.

Number two, we are filing a bunch of ANDAs this year, which we will probably see getting approvals in the next 18 to 24 months. So next year, we would not be very, very bullish in saying X number of percentages we will grow, but the year after that we are very confident because of the approvals that will start to come through, and also the new capacities that will be put to use. So while we don’t want to get into numbers or when we will have more pressure, less pressure, I think the next 12 months would be similar to the current one, probably slightly better. But 12 months after that, we are a little bit hopeful of better performance.

Sachin KaseraSvan Investments — Analyst

Sure. And —

C. C. PaarthipanChairman

And there is one more thing I would like to convey here. As we are getting into regulated markets, these are the most important things I would like to convey. First, we have to go for a market survey, then it’s selection of products, then, of course, the R&D work. If it is the OSD, then biostudies happen, then the regulatory filing and the registration, that also takes long time. What is important here is the company having enough actually wherewithal to withstand all these things. Yes, we have the wherewithal. We may be the last man standing.

But last man standing will be the least one to get affected or the last one to get affected, and that’s how we look at it. Since we have the support from the parent company, any amount of pressure that comes from Caplin Steriles, whether it’s in the form of capex or opex, it is manageable. And moreover, when we get into the regulated markets, our focus should be on the dream destination in the form of getting into the uncontested space, which can happen maybe in three, four years from now or four, five years from now.

It is sure because we are one of the very few companies that are into the injectable space of our size. Of course, there are one or two companies which are there, but they are not concentrating on their own products, they are in the OEM business. OEM business, it is somebody’s business, although it helps in the initial stages, although it helped only one company in India. In future, it’s nothing like actually going for our own products. The cash flow and the profit with regard to Caplin Steriles may not be huge, but eventually, we’ll make it big because this is going to be — of course, this is the largest market in the world. And moreover, injectable is not a space where each and everybody gets into it also.

Sachin KaseraSvan Investments — Analyst

Sure. Thank you very much.

C. C. PaarthipanChairman

Am I in a position to address your questions?

Sachin KaseraSvan Investments — Analyst

Yes, sir. Second thing, sir, about this loan that has been given from parent to the subsidiary for funding the capex. Can you just tell us what are the terms of this loan? And will the subsidiary paying any interest or when it will be repaid or eventually it will get converted into equity? And secondly, what about the investors who are there in Caplin Steriles, what is the sort of agreement we have? At some point of time, how do we get an exit?

C. C. PaarthipanChairman

I would request the CFO to answer your questions, please.

D. MuralidharanChief Financial Officer

To answer the first question, the interest is being serviced on the loan that is taken from the parent company on a month-on-month basis. It is arm’s length. The interest rate has been fixed based on the SBI MCLR rate plus risk premium of 2% since its unsecured loan. As regards the investor getting replaced or — it’s a long-term strategy. There is no definitive timeline that has been agreed to. There are various methods by which they will seek an exit through, too premature in may opinion to discuss that.

Sachin KaseraSvan Investments — Analyst

Sure. And sir, for the CFO, can you give us this capex breakup, total INR450 crores, INR500 crores of capex we announced last year. How much was spent of that in FY ’22? How much will be spent in FY’ 23? And how much will be spent in FY ’24? If you could give us a [Phonetic]break through.

D. MuralidharanChief Financial Officer

Yeah, FY ’22, if you see our cash flow, it is about INR92 crores is what our capex for last year was. And during first quarter, we have spent about INR16 crores. As we have outlined, our major plants in terms of oncology OSD, Phase II of Steriles and then the softgel expansion, that will be spread over the next 12 to 24 months, the INR400 crores — 400-odd-plus-crores what we have identified will get consumed in the next 12 to 18 months in a phased manner.

Sachin KaseraSvan Investments — Analyst

But can you give us a sense for the remaining nine months of the current financial year, how much you would have to be spending approximately?

Vivek PaarthipanChief Operating Officer

In terms of the [Indecipherable] product, that will be a little difficult to quantify because what happens is there are instances where there are delays with regards to some semiconductors, some [Phonetic]PLCs that are not available. So while we have an overall plan when projects as supposed to get completed, it might also get pushed over by a few months. So right now, when it comes to Caplin Steriles project, there is also a change that we’ve made, which is to split it into Phase 2 and Unit 2 also. So Phase 2 is likely to get over in — by December to February period, and Unit 2 will be by end of next year. And the API part of it, as we discussed in detail, there is an inorganic opportunity, there is also a greenfield opportunity. So that could be in months to probably 15 months from now. And oncology part of it, again, it is in phase — two phases. So while it might be difficult for us to quantify in so much of detail how much capex is going to be in the next nine months.

Sachin KaseraSvan Investments — Analyst

[Speech Overlap] Yeah, go ahead.

C. C. PaarthipanChairman

Can I go ahead, please?

Sachin KaseraSvan Investments — Analyst

Yes, sir, please.

C. C. PaarthipanChairman

Yeah. See, in the next 12 to 24 months, that’s what the CFO and COO said actually, the projects will be completed. And the next 12 to 24 months, please note that there will be a cash flow stream actually from parent company. Even if we spend INR200 crores, INR300 crores in the next 12 to 24 months, or INR300 crores to INR400 crores, we are sure of actually getting back INR300 crores, INR400 crores will be generated in the form of additional cash in the parent company. So that is not going to create any impact to the cash and cash equivalents in the negative way, it won’t be.

Sachin KaseraSvan Investments — Analyst

Sure. Sir, just last question. When do we start to see the impact of the new markets which you’re entering as far as the emerging market part of the business is concerned?

C. C. PaarthipanChairman

Yes, we are.

Sachin KaseraSvan Investments — Analyst

You have mentioned that you have got some tenders and some registrations. But when do we start to see some meaningful impact in terms of revenue and bottom line of these new markets?

C. C. PaarthipanChairman

Yeah, this is — there are two ways to answer to this question. One, as you know well, two years have spent working from home, that’s not the way business has to be done when we want to create something in the form of new models in the business — in markets. So that’s how we spend two year. And 2019, we spent lot of time, in fact I had eight to 10 trips — more than 10, sorry, more than 10 trips to China. When it was coming to sort of fruition and we were not in a position to continue.. But of course, almost three, three-and-a-half years, we have not been able to travel to the markets, which we are planning to enter now.

However, the registration work is on and some of the inputs in the form of markets survey we have been doing it and collecting those information. The R&D work of Chile is also in progress. Some products for BE studies, the immediate opportunity I would say is from Chile and then Peru, Colombia. A little later we will see opportunities in Mexico because we have a different model in the form of going for a private labeling in Mexico. I already worked in this country three, four times. I’m just waiting for my trip to Mexico.

This can happen anytime in the next three to four months’ time from now. Once we complete our work, which, of course, we have been doing here, after that, we will make a trip. If it is going to be a change in the business model, it is better to do it on our own, because if we try and teach these tricks actually to our professionals, in the initial stages I’m talking, there is some risk in the form of they learn everything from you and they might even become your competitor also. That’s why it’s better actually, the promoters and some of the loyal professionals who have been with us in Central America, that is Latin America, would come with us and we will do the business model changes. Then, of course, the seasoned professionals would take over from there.

So when exactly I would be able to generate revenues and other things is difficult to say how much on other things. When it happens, yes, it will happen actually in a big way. That is the reason I said, we’ll have to look at actually the future of Caplin, say, four years from now, like that you’ll have to look at. And year-on-year, our business is good, so the results that you are seeing now will continue to remain that way. And the big growth, the growth that we estimate, can happen every four years from now in a big way.

Sachin KaseraSvan Investments — Analyst

Yes, sir, [Indecipherable] appreciate, because if we see last four quarters, our operating profit is now stagnant at close to around INR100 crores, and while I understand that it has been a little challenging, but that is not the track record that we, as investors, are used to at Caplin. Normally, we see very good growth. But last four quarters, despite all that we have done, the EBITDA is more or less stagnant at INR100 crores. So I just wanted to get a sense, with all the effort we are putting, when we can start to see some good growth in EBITDA there?

C. C. PaarthipanChairman

Your answer is actually if you try and compare our growth actually with our past growth, there is an issue. If you try and compare our growth with other companies growth of our size, or maybe some of them who are big clients also, then there won’t be any issues I think. Am I right in that way? Hello?

Sachin KaseraSvan Investments — Analyst

Yeah. Thank you, sir. Thank you for your —

C. C. PaarthipanChairman

Thank you very much. Thank you very much.

Operator

Thank you. Our next question is from the line of Alisha Mahawla from Envision Capital. Please go ahead.

Alisha MahawlaEnvision Capital — Analyst

Hi, sir. Good evening. Thank you for taking my question. Sir, we would like to understand the two tenders that we have in LATAM, are they going to be contributing in this year?

C. C. PaarthipanChairman

No, slowly we are also getting into tenders, but the profitability is reasonable. And these products — see, this is how we will look at it. Wherever there is an opportunity for us to make profits and generate more cash, we’ll get into that space also. Earlier, we were not concentrating on that because we were happy with the private market opportunities. Now, we are entering this space also. Again, we were not going actually with all the tenders, we are going with the tenders where we are getting good profits, as I told you, with that. The same way, the cash flow also should not be affected. Anything else you want to ask on top of it, please.

Vivek PaarthipanChief Operating Officer

So on the timelines, the El Salvador one will be completed by Q2 of this year, and Ecuador one is over 24 months. So we have already started the first dispatches. This will go on for another year or so.

Alisha MahawlaEnvision Capital — Analyst

So there is some contribution from them in Q1?

Vivek PaarthipanChief Operating Officer

Small one, yes.

Alisha MahawlaEnvision Capital — Analyst

Okay, sure. And what is the total number of products that we have launched in the US?

Vivek PaarthipanChief Operating Officer

So we have so far launched 15 products, which includes 10 from our side, five from our partners. We are about the launch two more. In fact, one of them is already in transit. And the last one would be launched in October.

Alisha MahawlaEnvision Capital — Analyst

And after that, at least for 18 to 24 months, there’ll be a gap till the new ANDAs get approved?

Vivek PaarthipanChief Operating Officer

No, no, we have about three that are at an advanced stage. We feel that those could be potentially approved by fourth quarter of this year. And then there are some that we have just filed that will take another 10 to 12 months.

Alisha MahawlaEnvision Capital — Analyst

Okay, sure. And some of the newer geographies, is there anything which is relatively at an advanced stage on the Southeast Asia side that you were talking about Vietnam, Cambodia or maybe something — some of the new geographies in LATAM that will actually materialize in ’23?

C. C. PaarthipanChairman

Yeah, Southeast Asian market we are entering now because we have the wherewithal in the form of huge basket of products, one. Number two, when we go to these type of markets, we will also go for actually creating a stock and sell model next to the customer. And the advantage in Southeast Asian market, especially markets like Philippines, there is actually baby — they call it as baby registration or something, by registration one product, you are allowed to sell to five customer. Something similar to actually what we see in US and Mexico.

So that’ll also be an added advantage when we get into markets like Mexico. Cambodia, although it is smaller in size, the way in which we have product baskets, various, like 400 to 450 products, once we register here, the registration is faster. We are sure of getting good returns also from this part of the world.

Alisha MahawlaEnvision Capital — Analyst

And entering these new geographies, are we expecting it to have an impact on our margins maybe because they are new and it will take time to scale up or because we’re doing more tender business?

C. C. PaarthipanChairman

No, I don’t foresee any major changes in the margins, because the volume of business in terms of tender is not very high compared to our private market. So volume of products that we supply, I mean. Yes, please.

Alisha MahawlaEnvision Capital — Analyst

And the entering new geographies also will not have an interim impact on the margins?

C. C. PaarthipanChairman

No, because the products that we select or the markets that we select, the first thing which is important to us, as I told you before, is the profits and cash flow. If that is going to affect our profits and cash flow, we will not get into that kind of markets.

Alisha MahawlaEnvision Capital — Analyst

Okay.

D. MuralidharanChief Financial Officer

Just to supplement what Chairman said, if you see, madam, the — it will be a very small component of the basket — wide basket what we are carrying today, even a small dent in the margin levels will not impact our overall margin. As you rightly said, the product we choose as we have been choosing judiciously will yield definitely profits, which we have a benchmark.

C. C. PaarthipanChairman

Yeah, another thing, madam, we would request you to look at actually as a whole, not in isolation, and like if it is maybe a small portion in the form of tender, getting into some markets where somebody is not making money, so all those things are totally different from the way in which we are doing business because we don’t follow the conventional wisdom. Yes, when it comes to technology as market, we always follow the big boys. But when it comes to actually business model differentiation, we always create something unique and try our best. It may take one year extra, but at the end of the day, we would always follow actually our own models.

Alisha MahawlaEnvision Capital — Analyst

Okay, thank you.

C. C. PaarthipanChairman

Thank you.

Operator

Thank you. We’ll take that as the last question. I now hand the floor back to the management for closing comments. Over to you, sir.

Vivek PaarthipanChief Operating Officer

Yeah, thanks. Thanks to Rohit, Hrishikesh, and the entire B&K Securities team for organizing the call. And thanks for all the participants and your questions. And we’ll be in touch. Stay safe everyone. Thank you very much.

C. C. PaarthipanChairman

Thanks to all of you. Thank you. Thank you very much.

Operator

Thank you. Ladies and gentlemen, on behalf of Batlivala & Karani Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.

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