Divi’s Laboratories Ltd (DIVISLAB) Q2 FY22 Earnings Concall Transcript

Divi’s Laboratories Ltd (NSE:DIVISLAB) Q2 FY22 Earnings Concall dated Nov. 06, 2021.

Corporate Participants:

M. Satish Choudhury — Company Secretary & Compliance Officer

Murali K. Divi — Managing Director

Nilima Prasad Divi — Whole-Time Director (Commercial)

Analysts:

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Shyam Srinivasan — Goldman Sachs — Analyst

Prakash Agarwal — Axis Capital Ltd — Analyst

Damala Banumathi — SEBI — Analyst

Cyndrella Thomas Carvalho — Centrum Broking — Analyst

Surya Patra — PhillipCapital — Analyst

Vivek Gautam — GS Investment — Analyst

Rahul Maheshwari — CCBL — Analyst

Aejas Lakhani — Unifi Capital — Analyst

Damayanti Kerai — HSBC Securities — Analyst

Rahul Jeewani — IIFL — Analyst

Lakshmi Narayanan — ICICI Prudential — Analyst

Presentation:

Operator

I now hand the conference over to Mr. M. Satish Choudhury. Thank you, and over to you, sir.

M. Satish Choudhury — Company Secretary & Compliance Officer

Good afternoon to you all. I am M. Satish Choudhury, Company Secretary and Chief Investor Relations Officer of Divi’s Laboratories Limited. I welcome you all to the earnings conference call for the quarter ended 30th September 2021.

From Divi’s Labs, we have with us today, Dr. Murali K. Divi, Managing Director; Ms. Nilima Prasad Divi, Whole Time Director Commercial; Mr. L Kishore Babu, Chief Financial Officer; and Mr. Venkatesa Perumallu, General Manager Finance and Accounts.

During the day, our Board has approved the financial results for the quarter and half-year ended 30th September 2021 and we have released the same to the stock exchanges as well as updated the same in our website. Please note that this conference call is being recorded and a transcript of the same will be made available on the website of the company. Please also note that the audio of the conference call is the copyright material of Divi’s Laboratories Limited and cannot be copied, rebroadcasted or attributed in press or media without specific and written consent of the company.

Let me draw your attention to the fact that on this call, our discussion will include certain forward-looking statements, which are predictions projections or other estimates about future events. These estimates reflect management’s current expectation of the future performance of the company. Please note that these estimates involve several risks and uncertainties that could cause our actual results to differ materially from what is expressed or implied.

Divi’s Labs or its officials does not undertake any obligation to publicly update any forward-looking statement, whether as a result of future events or otherwise. Now, I hand over the conference to Dr. Murali K. Divi Managing Director of the Company for opening remarks.

Over to you, sir.

Murali K. Divi — Managing Director

Good afternoon and thank you everyone for joining us on our Q2 financial year ’22 earnings conference call. I hope that all of you, your families and friends are in good health and keeping safe during this still existing pandemic. It’s very heartening to see vaccination drives going at a great pace and nation completing 1 billion vaccine milestone.

This has been reflected in the severity of COVID-19 cases that was declining till recently. However, we are witnessing the rise of another COVID wave in other parts of the world. Hence, it is important for all of us to be vigilant and responsible even after being vaccinated by, following all the COVID-19 protocols. As a part of our focus on the same, we conducted vaccination drives and got more than 90% of our employees and their immediate families vaccinated, as believe that vaccination is possibly the best way to imbibe the essence of support and confidence in fighting COVID-19.

On the business front, our utmost priority is to ensure uninterrupted production and supplies to our customers with focus on navigating through a secure and smooth supply chain and getting our expansions operational in the estimated time. We have completed many of the expansion and debottlenecking activities planned during the quarter with slight delay caused by the second wave.

During the quarter we have capitalized INR296 crores, most of it was for the fast-track projects. We have INR440 crores of CWIP outstanding at the end of the quarter in projects, especially for creating capacity for new generic molecule and validations for these new generics are progressing very well. We anticipate to spend another INR300 crores during the second half of the financial year.

Regarding Kakinada projects, all cases by the landlords are dismissed by the High Court and the state government has fixed a price of INR10 lakh per acre which we have already paid. We are awaiting for APIIC to handover final date of [Indecipherable].

I would now like to go through — throw some light on the CSR activities during the quarter. Being at the forefront of pharmaceutical industry, we have been contributing to fight pandemic since day one and are continuing to do our part in helping communities around our manufacturing units wherever possible, especially when the economy is slowly opening up.

We have been continuing to support the government schools by distributing essential stationaries, benefiting more than 600 students from three high schools as they recently opened. We have been taking several initiatives towards development of villages around our manufacturing facilities by contributing towards developing road infrastructure, helping in conducting vaccination drives, canal developments and many others Swachh Bharat initiatives.

We shall continue to manage our operations responsibly and create a positive impact around the communities we operate. Thank you. Now I would like to turn over the call to Ms. Nilima Divi.

Nilima Prasad Divi — Whole-Time Director (Commercial)

Thank you. Good afternoon and welcome everyone to Divi’s Laboratories Limited earning call to discuss the results for the second quarter ended September 2021. I hope that each one of you along with your family and friends are safe, considering the continued existence of COVID-19 pandemic.

On the operations front, many manufacturing industries are experiencing their own challenges with volatility in global supply chain across geographies. For pharmaceutical industry, on procurement side, power outages in China have impacted the supply, creating the shortage, thereby volatility in prices of basic chemicals, commodities, raw materials and especially the solvents.

We have been closely monitoring the recent uncertainties. Production wise, as of now, we have secured the required materials. However, we are reviewing the long-term strategy to maintain a stable supply chain. In terms of logistics, shipping costs have not only sold, but also increase unavailability of containers due to increased crude oil prices, empty containers congestion in US ports and blank sailing causing longer waiting times.

We are committed to serve our customers. Despite all these headwinds. The margins are under watch. We are diligent while closely monitoring the situation and trying to mitigate the risk and trust our operational excellence in ensuring an intact supply chain.

Before moving on to our operating efficiencies, I’m delighted to mention that the capex programs for debottlenecking backward integration and upgrading of utilities taken up during the last two years are continuously resulting in minimizing supply risks and production disruptions, achieving in more improved financial performance.

I’m pleased to state that the Company has achieved a consolidated total income of INR2,007 crores during the second quarter, reflecting the growth of 14% year-on-year. Profit before tax for the quarter amounted to INR760 crores, a growth of about 10% year-on-year and the profit after tax to INR606 crores reflecting a growth of 17% year-on-year.

For the half-year ended September 30 2021, the Company has earned a consolidated total income of INR3,996 crores reflecting a growth of 14% year-on-year. EBITDA of 43%. Profit before tax of INR1,574 crores with a growth of 16% year on year. And profit after tax of INR1,164 crores, higher by 15% year-on-year.

During the half year, export accounted to 88%. The organization continues to have normal business distribution across regions. Europe and U.S. accounted for 72% of our revenues. Product mix for generics to custom synthesis for half year is 46% and 54% of the revenue respectively. Constant currency growth for the quarter is 15%, while for half year it is 18%.

The Nutraceutical business for the quarter amounted to INR168 crores and INR306 crores for half year. Rupee had strengthened towards end of the quarter. There is a ForEx loss of INR7 crores for the quarter, while the ForEx gain has been INR12 crores for the half year.

During the current year, assets worth INR296 crores have been capitalized during the quarter and INR566 crores have been capitalized in the half year. For this, the new SEZ accounted to INR281 crores. The capital work in progress is about INR440 crores as of 30th September. Cash on books is INR1,763 crores. Receivables as of 30th September amounted to INR18,52 crores and inventories INR2,676 crores. Thank you.

M. Satish Choudhury — Company Secretary & Compliance Officer

Thank you, madam. With this, we would request the moderator to open the lines for Q&A.

Questions and Answers:

Operator

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Thank you for the opportunity. Sir, just on the Molnupiravir, is there any traction that is factored in this quarter 2Q FY’22?

Murali K. Divi — Managing Director

Yes, there are some sales from Molnupiravir in this quarter.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Okay, and — so are you quantifying that?

Murali K. Divi — Managing Director

Pardon.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Would you be able to quantify it?

Murali K. Divi — Managing Director

We are bound by confidentiality agreements and we cannot disclose. Even the information that we manufacture Molnupiravir is already were disclosed by Merck. That’s how we are able to say that. Otherwise we are quite bound by confidentially agreement. I cannot disclose that.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Sure sir. Sure, just another one on Molnupiravir, would you be incurring any further capex for this product?

Murali K. Divi — Managing Director

We don’t anticipate at least during the next two quarters.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Understood. And just lastly on the API side, there has been some amount of moderation, if I look at the year-on-year growth on the Generics segment per se, while the custom synthesis is growing at a phenomenal rate. So, would you like to comment on some moderation on this API sales run rate?

Murali K. Divi — Managing Director

It’s not our intention that we grow more on custom synthesis or grow more on generics. Now we take all the opportunities that come and we grow them. It so happened that we have few fast track projects that are really taking off. That’s the reason you have seen the tilt of 55:45 to 45:55 for the custom synthesis. So we do not see any — that generic is going down or custom synthesis is going up. I think both will grow. That’s what we said about the six growth engines in the last quarter.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Sure sir. And just lastly from my side. While we have been working on backward integration on Valsartan, given that there is now impurity issues has come up for Valsartan, are we on — expected to work on Valsartan as a product as well?

Murali K. Divi — Managing Director

We do have it and it’s our product, but we do not have any problem of the impurities of nitrous amines or acetone [Phonetic] impurities, in our whole portfolio. So we are quite good at that.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Great. Thanks a lot for this. Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.

Shyam Srinivasan — Goldman Sachs — Analyst

Good afternoon and thank you for taking my question. My first question is on the overall COVID antiviral space, you talked a little bit about Molnupiravir in the past. But, just from a capacity perspective, and just comparing that to Merck’s comments that this year they’re — we’re seeing about up to $1 billion of sale. And next year of about $5 billion to $7 billion. So is that how it will also works for us from a disease perspective given that you and Merck have disclosed that you are one of the largest suppliers. How should we look at this for a next year base?

Murali K. Divi — Managing Director

As I mentioned earlier that we are bound by confidentiality agreements. We are geared up to produce whatever is required or whatever is ordered. We have considerable capacity to meet the world’s requirements and we are producing. I think that’s all I can say.

Shyam Srinivasan — Goldman Sachs — Analyst

Got it. Notably — just clarifying here, yesterday Pfizer came out with its PAXLOVID. DO you think as — and maybe you can answer it from an industry perspective. Do you think oral antivirals are now here? And since you have had past experience of working in this space, do you think you will play a larger role? And I’m not trying to tie it down to any specific molecule, but just to understand, in the space very attractive now and we will be one of the key beneficiaries of this overall move towards antivirals?

Murali K. Divi — Managing Director

Right, for the human mankind, the companies are coming up with anti-COVID drugs, which is very good news. One, I think you have heard, I mean it’s — we already cleared and what you heard is right from Pfizer as well that these drugs, once they’re available very soon, now not only the countries which cannot afford vaccination, not only countries where vaccination is not done, these oral drugs will definitely help the population.

Now as a business, you’re talking about, not just $1 billion $2 billion. I think it’s anywhere from $30 billion to $50 billion business per year, and it looks like these are ahead really in the fast runners and sure, more will come in future follow-on products, the first-in-class, best-in-class, then the further.

As we have seen earlier in other products, other therapeutic segments. But we are here to take — to manufacture because we can manufacture any chemistry. We are experts in chemistry, not necessarily product. So we are here to take all the opportunities.

Shyam Srinivasan — Goldman Sachs — Analyst

Got it, sir. Last question is on the financials. If I were to look at the half yearly balance sheet cash flow statement, we have seen inventory levels increase significantly. Just trying to measure it using operating cash flow to EBITDA. I think we have had one of the weaker halves in terms of conversions. So anything to read into — does this tie into your earlier comments around the raw materials, where we have sourced sub inventory?

Murali K. Divi — Managing Director

It’s not the inventory issue at all, is a better management by the sourcing, our sourcing departments where Nilima’s team have a decision of, in the volatile uncertainty delays in procurement, we have enough stocks procured, that is number one. So unlike in generics in custom synthesis as well that we have to ensure that we have enough stock to meet the requirements without even a single day delay.

And these usually, these custom synthesis projects are lengthier route of synthesis, which will take longer time from start of the day for the shipment. That’s how the socks are built up. So it’s really speaking with more on work in progress between inventory management to for assurance of supply, as well as for the capital work — sorry, for the work in progress.

Shyam Srinivasan — Goldman Sachs — Analyst

Got it, sir. Thank you and all the best. Thank you.

Operator

Thank you. The next question is from the line of Prakash from Axis Capital. Please go ahead.

Prakash Agarwal — Axis Capital Ltd — Analyst

Yeah, thanks for the opportunity and good afternoon to all. Sir, my first question is on the comment that Nilima madam made on cost and margins under check. I understand there has been significant power outage and shipping cost has increased. So how do we see this as — obviously, as a large business, you would have some pressures, but can this be also turned into an opportunity those smaller guys are not able to even meet the customer demand on time and so we get into the market share or are we highlighting a more from the cost pressure and margin tended from here? Some more color will help.

Murali K. Divi — Managing Director

I think you are right that the market is volatile. We’re ought to be agile and in the uncertainty times, the larger players like us, yes. As somebody had — I think earlier I mentioned the inventory or result of — increase in inventory is a result of making sure we have enough stocks of raw materials, so that the assurance of supply will be there, which is what our generic customers or the big pharmas wants to make sure that we don’t say that, well cost improved, our supplier did not supply. So there is no availability of the product, no.

Cost of the goods is one thing, price is another thing, but assurance of supply is the most important thing, on-time delivery. This is where we have a good name and we want to maintain. So there is more opportunity for the bigger player, naturally probably is, it may be little tougher times for the small companies with the increase of energy, increase of coal price and meeting all the requirements. So…

Prakash Agarwal — Axis Capital Ltd — Analyst

Understand that. And what is our flexibility to increase the prices or pass on the cost because the supply obviously and finished good product would be a big challenge and the customers would understand that. Is there an acceptability of cost increased by them?

Murali K. Divi — Managing Director

Most of our — as you know that we export more than 88% of what we produce and our customers are large customers in U.S., Europe and elsewhere. So we also have a long-term contract where some of these cost enhancements are going down or automatically built into the AR calculations, whereby we can transfer at least most of the cost of it. But again, how much we can transfer, how much we will absorb.

I think these are all, is it a short term or is it going to be a long-term in China from — mainly the impact is not just China alone on solvents or material. Because of the backward integration we escape for a lot of recalibration, but some of the basic solvents and methane needs in some of the gases and coal, for example. So these are the ones that will impact everybody. So we’ll be — our intent is to make sure that somehow retain margins as much as possible and let us see.

Prakash Agarwal — Axis Capital Ltd — Analyst

Understood. And lastly on the capex guidance. Sir, for this year and next year, fiscal ’22 and ’23?

Murali K. Divi — Managing Director

Nilima mentioned about INR400 crores about the capital work in progress. That should bring that to complete most of our projects. I did mention that another INR300 crores, we should be spending before the end of the year in capex, mainly to see some of the products. The next one is on the Kakinada, when they handover the land to us, probably we are estimating anywhere from INR1,000 crores to INR2,000 crores of investment.

Prakash Agarwal — Axis Capital Ltd — Analyst

Okay. So what I understand is about INR900 crores for this year and a similar number for next year?

Murali K. Divi — Managing Director

The similar number depends upon the more on how soon we will have Kakinada in our hands and how soon we will start.

Prakash Agarwal — Axis Capital Ltd — Analyst

Okay. Okay, got it. Sir. Thank you.

Operator

Thank you. The next question is from the line of the Damala Banumathi [Phonetic] from SEBI [Phonetic]. Please go ahead.

Damala Banumathi — SEBI — Analyst

Yeah, good afternoon, sir. Thank you very much for giving the opportunity. I’ve been a regular follower of your business. Quite good results this quarter also. One thing I’m observing is, you are very the concerned in providing shareholders bonus every five years. It’s almost more than five years for the third bonus, when we can expect sir?

Murali K. Divi — Managing Director

I think in an appropriate time we will do that. Let’s look at — I think we need to, in the coming quarter — we need to wait and see.

Damala Banumathi — SEBI — Analyst

Thank you sir. Thank you very much.

Operator

Thank you. The next question is from the line of Cyndrella Thomas Carvalho from Centrum Broking. Please go ahead.

Cyndrella Thomas Carvalho — Centrum Broking — Analyst

Thanks for the opportunity and wish you all a Happy Diwali. So just want to understand on the generic side of the business. If we — if we look at it, are we saying that the inventories would normalize as we go ahead and the demand should come back, along with the two highlighted, you said that there are products which are under validation and moving faster, so along with the new generic products which are coming, how should we see this segment in terms of growth overcoming 18 to 24 months?

Murali K. Divi — Managing Director

The investments have happened. The investments are happening. The CWIP, one these generic fast track — sorry generic opportunities where we said that these are the ones going out of patent in ’23, then the growth sixth engine where we are validating we are ready to take the opportunity as and when they grow out of patent. That’s the sixth engine. The fifth — the second engine where we increased the capacity from the current 20%, 30% of the world demand to going towards the 70% of the capacity, those already happened and we are increasing our market share and it is happening. These are the two things that are happening in generics.

Cyndrella Thomas Carvalho — Centrum Broking — Analyst

And sir, in terms of just now we were discussing around the long-term supply sustainability around all the commodities and solvent increases. Do we see any specific opportunity for us, we being among the first ones to backward integrate with our portfolio. So do you see any specific opportunity in terms of backward — further backward integrating our portfolio to ensure that the margins would sustain? Is there any visibility or is there any thought process that you could share with us?

Murali K. Divi — Managing Director

The major products, we have already backward integrated to make sure that we have assurance of supply as well as cost savings. Now the newest generics which we are entering here has various opportunity so backward integrate once we reach a 60% 70% of the market share. I’m talking about the second growth engine where we were 20% of the market and we are going towards the 70% of the market. Those, once we reach the 70% — 60%, 70% of the world’s market, yes, there will be opportunities to invest on backward integration again, just like we did on our naproxen, Dextromethorphan, Gabapentin, and several other products.

Cyndrella Thomas Carvalho — Centrum Broking — Analyst

Thank you very much sir, and all the best.

Operator

Thank you. The next question is from the line of Surya Patra from PhillipCapital. Please go ahead.

Surya Patra — PhillipCapital — Analyst

Yeah, thank you for this opportunity, sir. And congrats for the good set of numbers. Again, first question on cost control. See, despite the — all the challenges in terms of trade, in terms of the container cost and the spike in the solvents what we have seen in the recent times along with the raw materials. So, still we have seen a kind of very good cost control in terms of material cost, which is despite of all this challenging situation we have maintained our gross margin intact either on a sequential basis or year-over-year basis.

So my first question is, did you see any impact of this — all this challenges, sir? And which possibly would have neutralized by your backward integration more and more? Was that the scenario?

Murali K. Divi — Managing Director

I think, it’s not that we didn’t face challenges or we are not facing challenges or we are not going to face challenges. We are facing challenges, not doubt. But how quickly we can react to it and how quickly we can start working on it should be — the advantage for us is the human element. We have continuity. We have the senior management who have been with us, the middle and senior management for more than 15-20 years with us.

So they constantly work on expanding into new technologies, atom chemistry and efficiency. It’s not just recoveries alone. Cutting down the various — consuming less and less raw materials. And I think this is not just one thing.

Surya Patra — PhillipCapital — Analyst

Okay. Okay, just an extension to that. Sir. May I know, what is the share of the solvent cost in the overall raw material cost, for you?

Murali K. Divi — Managing Director

It changes from product to product and also it changes from — some customer sensitive projects, they may not allow you to recover the solvent; whereas in some projects, we may be able to recycle, recover and reuse. So they may range anywhere from 5% to 10% or around that, the cost of solvent.

Surya Patra — PhillipCapital — Analyst

Okay. My purpose of asking the question was that, see in a challenging time if we’re maintaining this gross margin at this level, so if there is a kind of improvement in the situation going ahead and more and more backward integration that we might see because of our effort, so then can we further improve our gross margin situation?

Murali K. Divi — Managing Director

There are several plans that is, as I said, it’s a continuous planning going on. Now, will we go up to manufacturing our own methanol and ethanol? I think that a question mark? No, but yes we will manufacture majority of our key raw materials, key intermediates when chemistry is the key.

It’s not a mass volume of making a stick and air dry or mass volume of solid state. No, these are not the, they don’t have much value as chemistry, but these are proven state of — there are technologies available and our consumption is really nothing compared to what other industry consumes, but there will be price up and down, sometimes 2 time for a solid state or maybe stick and air dried and this we have to face for some time, but they will come back.

Surya Patra — PhillipCapital — Analyst

Okay. Okay, sir, just last question on, one of the component of your six zone growth engine, what you had mentioned. So you talked about entering the new APIs, which are good — likely to going off patent during FY ’23 and ’24 and that’s a larger opportunity, we are seeing, but it is slightly different, means, this approach is slightly different compared to our earlier stands. We never used to chase the new generic opportunities rather we used to have a well-integrated product profile before entering a new market and that used to provide us greater market share for any new entrant, a new product entries. So sure. In this case, when we are saying that we are targeting products which are going to be off patent soon. Then how integrated, will you would be then and whether they would be similar in terms of profitability in a way that we have been having?

Murali K. Divi — Managing Director

Definitely, these products will have either similar profitability or higher profitability because they will be just going out of pattern at that time and we will be entering it when they just become generic. The, I think two fundamental things I want everybody to remember that we do not manufacture dosage forms. As a result, we don’t compete with our customer. So our customers who make formulations, they prefer to buy their API from independent API manufacturers like us than buying from somebody who makes APIs and also formulations.

So once we start manufacturing, once the patent situation is clear, it becomes generic. We will take the opportunity. We all done these in the past. It’s not — it is not the first time. This will be like our second growth engine, where we have produced the products immediately after the expiry of the patent and slowly expand it to 20% now. Now going towards the 50%.

Surya Patra — PhillipCapital — Analyst

Okay. Sure sir. Wish you all the best. Thank you, sir.

Operator

Thank you. [Operator Instructions] The next question is from the line of Vivek Gautam from GS Investment. Please go ahead.

Vivek Gautam — GS Investment — Analyst

Congratulations. Sir, on once again, good set of numbers. Huge wealth has been created by Divi’s for Indian shareholder who are getting listed. Sir, the first question, there is a few regarding that the KSM crisis, you have been able to solve it in a very exemplary manner. So what prevents the other pharma companies to going for that? Is it a very difficult sort of a thing and how long the crisis of increased KSM prices and freight charges will receded sir, in your opinion?

Murali K. Divi — Managing Director

So, if I understand right, you’re saying that the increase in prices, what China has done for the APIs and the advanced intermediate, we were able to get over with that quickly because we started this three years, ago when we started looking at the impurities that they’re not consistent. So we have done it for two reasons; one, assurance of supply; two, to have consistent quality with no impurities; three, backward integration to help our costing.

So I think it’s not just one objective. So we’ll follow similar for other products. Now, how long this will happen? I think it depends upon the volatility of what’s happening in China. One time it was environment, second payment for safety and explosion; third now it is the energy crisis in China or maybe the COVID something else. So it looks like last three, four years, off and on, more than 60% of time, there is always a price pressure either on API or on intermediates or on starting materials.

Vivek Gautam — GS Investment — Analyst

So what prevents other pharma companies to going for, let’s say, an integration through KSM levels and overall for the pharma sector as such, in Indian Pharma sector?

Murali K. Divi — Managing Director

I really do my business. I’m very confident on my business. Really I spend less time on what’s happening in India with other companies because I am on exports. I interact with all the companies who compete with me in U.S. Europe, in custom synthesis as well as in generics. So I don’t think we want to comment on anything on other manufacturers in India.

Vivek Gautam — GS Investment — Analyst

Thank you, sir. And good luck. Keep up the good work, sir. Thank you very much.

Murali K. Divi — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Rahul Maheshwari from CCBL [Phonetic]. Please go ahead.

Rahul Maheshwari — CCBL — Analyst

Yeah, hi, good afternoon, everyone, and I congratulate team Divi’s for such a fantastic result. Sir, I just want to understand a small thing. Yesterday I think Pfizer announced their drug with an 89% efficacy rate vis-a-vis Merck’s estimated 50% efficacy rate. So how is this going to impact the overall business for disease because your association is with, Merck?

Murali K. Divi — Managing Director

First of all I think, we need to — as I think I’ve made a statement — first I would like — I made a statement saying that the two companies, the Pfizer, Merck they are bringing these overall formulations which will help the suffering humanity. I think we want to look at it that way first, because as you know recently, the other product from [Indecipherable] pharmaceutical that did not do well. So wishing these to do well is the most important thing.

Coming back to opportunity for those two companies and also the custom synthesis manufacturing companies. For those two companies, the world is very large. It’s not — it is the billions of people we are talking about. The opportunity is something like $70 billion. The opportunity is $70 billion, definitely for these pharma companies, so sky is the limit. There is a wide gap between vaccines and the oral dosage form, which is the easiest way somebody can have access from external practitioners.

So we think each one will have their own plans and games and we are here to support any requirement of that to forms of ingredients by not only these two company, any company that comes out with complicated chemistry for support.

Rahul Maheshwari — CCBL — Analyst

Yeah, well, that’s convincing. Thank you so much and I wish you all the best.

Murali K. Divi — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Aejas Lakhani from Unifi Capital. Please go ahead.

Aejas Lakhani — Unifi Capital — Analyst

Yeah, sir. Congratulations on an exemplary quarter. Again, mirroring what all the other participants have said, you’ve done a phenomenal job. So, kudos to you on that. So two questions, one tactical and one more strategic in nature. The tactical one being sir, you called out at the start of the call that you know you’ve had some of the price escalations built into your contracts. So is it fair to assume that the margin trajectory that we were on earlier in 1Q and last year, we see a move back to that levels. That’s my first question.

Murali K. Divi — Managing Director

Pardon, can you repeat that? Can you please repeat that?

Aejas Lakhani — Unifi Capital — Analyst

Yeah, sir. I — my first question, sir, is that you mentioned at the start of the call that we have some of the price increases baked into your contracts to some extent and we spoke about the KSM situation quite briefly, you mentioned all of that. So is it fair to assume that the margin trajectory that we on in the last year, you see the situation moving towards that in the second half of the year.

Murali K. Divi — Managing Director

I think our margins are good and we always maintain and plan for betterment of the margins. And in this volatile situation, I think I said we have to be agile and we have to closely monitor. And in these uncertainty times, we just have to be responsible and make sure that we supply, we keep continuing our supplies. I think that is the most important thing. However it’s different to have access [Phonetic].

Going forward, what would be the upside? I think that will be difficult because it’s very uncertain times. The coal went up from INR2,500 per ton to INR8,500 a ton. Tomorrow, it could be INR10,000 a ton. So I’m just throwing an example or a base chemical — basic solvent went up 300%. Now, will it come down by March? Will it come down by April? I think these are some of the things they may impact, but our — we are planning to see that there is least impact and whatever is there we’ll try — we welcome contracts whereby we can transfer.

At the same time we are working on our prospects and things whereby — to perform well.

Aejas Lakhani — Unifi Capital — Analyst

No. Fair enough. So, that’s very helpful. I just want to understand that and this is a more-broader question that I’d like your commentary on. Probably five years back, the sensitivity to taking a price hike by customers would have been far more noisier conversation. So how much has the conversation shifted from price hike to more consistent supply, which we’ve been talking about. So has that noise around your ability to take price hikes or your sensitivity to take price hikes really reduced from the customer end, sir?

Murali K. Divi — Managing Director

I think what is more important. I think I did mentioned a few minutes ago that continuity of supply, assurance of supply and we play complementary role, not a competing role. In other words, it’s not that I manufacture at $10 a kilo and I sell at $50 a kilo to another formulator. But my formulation has the raw material cost of $10. So the company that’s making formulations and the API and selling API is competing with their own customers whereas I always say we play a complementary role.

So our customers, they do help us to see how they can help us in maintaining our share of the market or growth of the market or the help us with our uncertain — when the prices are volatile. They do help us because of the long-term relationship contract and also our continuity of supply during difficult times.

Aejas Lakhani — Unifi Capital — Analyst

Got it sir. That’s very helpful. And since you mentioned a $70 billion dollar market size, what exactly is that market size for could you — I didn’t get that. The $70 billion market sizes for what?

Murali K. Divi — Managing Director

The $70 billion market size is that for the anti-while oral tablet formulations that are coming up for this COVID.

Aejas Lakhani — Unifi Capital — Analyst

Got it sir. Thanks a ton, sir.

Operator

Thank you. The next question is from the line of Damayanti Kerai from HSBC Securities, please go ahead.

Damayanti Kerai — HSBC Securities — Analyst

Hi, thank you for the opportunity. Sir, my first question is again coming to Molnupiravir. So here earlier you mentioned you have three streams, two for export and one for the domestic Indian players. So are you supplying from all the three streams or how you see it scaling up supplies here?

Murali K. Divi — Managing Director

We are manufacturing in all the three streams as per the requirement and demands yes. And we are prepared to enhance whatever quantity is required even further.

Damayanti Kerai — HSBC Securities — Analyst

Okay. Okay, sir. And sir. My second question is, can you update us on your opportunities, which is one of your growth engine Contrast media. So how do you see this opportunity playing a key in near to medium term for you?

Murali K. Divi — Managing Director

This is where, I did mention in the Contrast media, the recovery of iodine is the key. The iodine, what used to be $12 a kilo, went to $25 a kilo; now it is $50, $60 a kilogram, which is the major raw material for the Contrast media. So I did mention that the recovery and recycle, reuse and whoever is the most efficient, they remain in business. This is where some of the investment is happening and we are validating the other Contrast media and once these valuations are completed, we will be in the commercial scale.

Damayanti Kerai — HSBC Securities — Analyst

Okay. So, most likely, we could see some of these opportunities coming in next two to three years.

Murali K. Divi — Managing Director

Three years, maybe too long. May be much before that.

Damayanti Kerai — HSBC Securities — Analyst

Okay. Okay, sir. Thank you.

Murali K. Divi — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Rahul Jeewani from IIFL. Please go ahead.

Rahul Jeewani — IIFL — Analyst

Yeah, hi, sir. Thanks for taking my question. Now, I know you are not commenting much on the Molnupiravir financials as such, but can you qualitatively coming on how the sequential trends have been for you on this product, because on the custom synthesis side, we have seen your revenue going down sequentially by $18 million. So is that sequential decline largely on account of Molnupiravir?

Murali K. Divi — Managing Director

Going down?

Rahul Jeewani — IIFL — Analyst

So your custom synthesis revenue has decreased sequentially by $18 million. So is that $18 million revenue decline in the custom synthesis business, is that on account of lower Molnupiravir sales. So I’m talking about the custom synthesis revenue excluding the Nutraceutical segment.

Murali K. Divi — Managing Director

Yeah, the custom synthesis used to be around 40%, 45% last year and similar numbers the previous year, whereas that has increased it to 54% this year, actually this quarter. So the custom synthesis in fact has increased substantially in the last two, three quarters.

Rahul Jeewani — IIFL — Analyst

So, yeah — sir, I’m talking about the sequential decline in the custom synthesis business. So if we look at your custom synthesis contribution in 1Q, was around 50%, excluding the Nutraceutical segment, but this quarter, the contribution has come down to 43% because Nilima ma’am said that the contributions which you spoke about at 54%, that included the Nutraceutical segment and that for the first half. So sequentially we have seen the business coming off. So my question is, is the sequential decline on account of Molnupiravir and whatever quantities you shipped on Molnupiravir during the second quarter, has the revenue recognition entirely happen for those shipped quantities in 2Q?

Murali K. Divi — Managing Director

First of all, we cannot comment on Molnupiravir, it’s quantities, it’s exports. I think that is highly confidential and we cannot talk about that. Now, in general, I commented that the exports now the custom synthesis count has increased to 54% from the traditional 45%.

Rahul Jeewani — IIFL — Analyst

Sure sir. No worries. And just on the COVID anti-viral opportunity, you spoke about that the market opportunity is quite big and we do have exposure to Molnupiravir, but we are working on some other products as well on the COVID antiviral side which the competitors might be developing?

Murali K. Divi — Managing Director

The custom synthesis of these products are highly confidential and we do sing confidentiality agreements, I cannot comment. The reason I’m able to say on Molnupiravir is that — is because Merck has declared that we are the authorized manufacturers, otherwise we wouldn’t have even mentioned anywhere about that we are the manufacturers for Molnupiravir. So I cannot comment on any other product where we do custom synthesis.

Rahul Jeewani — IIFL — Analyst

It’s clear sir. Thanks a lot.

Operator

Thank you. We take the next question from the line of Lakshmi Narayanan from ICICI Prudential. Please go ahead.

Lakshmi Narayanan — ICICI Prudential — Analyst

Yeah, good evening, am I audible?

Operator

Yes, sir. You are.

Lakshmi Narayanan — ICICI Prudential — Analyst

Yeah. Sir my question is that, what are the key business indicators you actually look at on a regular basis in addition to margins and various other things. So when you look at business and you do your MIS on a monthly or a quarterly basis, what parameters do you actually keenly tests?

Murali K. Divi — Managing Director

I focus more on what are the new products, what are the new technologies and how efficiently we should be able to do them. I think those are the things we need to keep monitoring. This not just P&L and it’s not the bottom line. What is more important is, what new technologies are coming that we could apply those to either our generic platform or our custom synthesis. See the reason people come in custom synthesis to us is because we keep investing in new technologies, new equipment, new systems.

So what is important is that one needs to monitor what’s happening in the world with the new technologies, what kind of new products are coming out requiring such technologies, both I think to be monitored. Business automatically comes once you are monitoring them.

Lakshmi Narayanan — ICICI Prudential — Analyst

Can you give us a case example of that, any — just to understand this better? Something which you has done quite recently or over the last one or two years on this front, technology or products?

Murali K. Divi — Managing Director

Yeah, if you recall, the T20 project Advair, there is a 20 — I’m going add the peptide that came out from Roche. We looked at it, we followed and the moment they were looking at the key building blocks, we made our own starting material, the [Indecipherable] which is mainly the bulk protection required. We made all the bulk protected amino acids, we have [Indecipherable] amino acids, we have dipeptide, tripeptieds and we have created it and we supplied quite good of these building blocks before even people thought about them.

So such kind of thing is the proactive approach, one needs to have in both investing in new technologies and investing in new chemistries. And regarding the human manpower dedicated employees who will continue the technology and refining it — refine than just learn and leave, learn and leave.

Lakshmi Narayanan — ICICI Prudential — Analyst

Got it. Thank you sir.

Operator

Thank you. Ladies and gentlemen, there are no further questions. I would now like to hand the conference over to Mr. Satish Choudhury for closing comments.

M. Satish Choudhury — Company Secretary & Compliance Officer

Thank you all for joining us today for the earnings call of Divi’s Laboratories Limited. In case, you need any further clarifications, please reach out to our Investor Relations. Thank you.

Operator

[Operator Closing Remarks]