Divi’s Laboratories Ltd (DIVISLAB) Q3 FY23 Earnings Concall Transcript

Divi’s Laboratories Ltd (NSE: DIVISLAB) Q3 FY23 Earnings Concall dated Feb. 03, 2023

Corporate Participants:

M. Satish Choudhury — Company Secretary and Chief Investor Relations Officer

Murali K. Divi — Managing Director

Nilima Prasad Divi — Whole-Time Director

Analysts:

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Prakash Agarwal — Axis Capital Limited — Analyst

Damayanti Kerai — HSBC — Analyst

Cyndrella Carvalho — JM Financial — Analyst

Ashish Thakkar — IIFL Asset Management — Analyst

Neha Manpuria — Bank of America — Analyst

Surya Patra — PhillipCapital — Analyst

Shyam Srinivasan — Goldman Sachs — Analyst

Sameer Baisiwala — Morgan Stanley — Analyst

Chirag Dagli — DSP BlackRock — Analyst

Sayantan Maji — Credit Suisse — Analyst

Naushad Chaudhary — Aditya Birla Sun Life — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Earnings Conference Call of Divi’s Laboratories Limited for Q3 FY 2023. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.

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

M. Satish Choudhury — Company Secretary and Chief Investor Relations Officer

Good afternoon to all of you. I am M. Satish Choudhury, Company Secretary and Chief Investor Relations Officer of Divi’s Laboratories Limited. I welcome you all to the earnings call of the company for the quarter and nine months ended December 31, 2022.

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; Mr. Venkatesa Perumallu, General Manager Finance and Accounts.

During the day, our Board has approved unaudited financial results for the quarter and nine months ended December 31, 2022, 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 note that the audio of the conference call is the copyright material of Divi’s Laboratories Limited and cannot be copied, pre broadcasted or attributed in the press or media without the 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 expectations 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 for opening remarks. Over to you, sir.

Murali K. Divi — Managing Director

Good morning, ladies and gentlemen. Welcome to our earnings call for the quarter three of financial year 2023. I hope that all of you, your family and your friends are in good health.

I am pleased to report that our manufacturing operations have been running smoothly despite the volatile global market scenarios, including the global recession, energy crisis and geopolitical uncertainty. After having a great opportunity to service COVID products during last year, we are seeing normalization of our core API product portfolio, which is growing, and with the addition of new product opportunities, that continue to grow further. We have implemented various strategies to ensure uninterrupted supply and maintain normal operations despite COVID surge in various parts of the world. We are continuing to maintain leadership position in our core products. Our top generic products continue to grow. This growth is primarily driven by volumes despite pricing pressure. INR275 crore has been capitalized for the first nine months of this financial year. We have a capital work-in-progress of about INR575 crore as at the end of the quarter.

We would like to inform you that the Unit 3 facility near Kakinada has received the necessary clearances from government officials and we are prepared for the prospective development of the same. We are currently finalizing the plan and will give you an update in the coming quarters. We are happy to report that Divi’s has continued to operate responsibly and make a positive impact in the communities where our business operates. During the last quarter, we implemented various CSR and sustainability initiatives, including infrastructure improvement in the areas surrounding our manufacturing facilities, which benefited thousands of people.

With that, I’ll hand over to Ms. Nilima, to share some operational and financial highlights of the quarter. Thank you.

Nilima Prasad Divi — Whole-Time Director

Ladies and gentlemen, a very good afternoon to all of you, and thank you very much for joining us today to discuss the results for the third quarter FY ’23. I hope that everyone along with your friends and family is in good health.

Considering the operational front, we had no disruptions to our customer shipments during the quarter and we are operating with a commitment to fulfilling all our customer requirements on time. The global logistics scenario showed improvement with respect to sea and air freight costs during the quarter. However, minor disruptions in matters pertaining to manpower shortages continued and we are being cautious about inbound and outbound logistics management to keep our operations smooth and meet our customer commitments. Raw material procurement and availability have been stabilized and the material prices have slightly softened compared to the last quarter. However, the prices for some base metals like lithium and iodine have increased over the past quarters and we are expecting this trend to continue. We are also continuing to monitor the ever-changing energy situation. With a strong and reliable supply base and inventory control, we are confident in facing challenges that may come our way. As the world continues to change, our team stays vigilant. We are mindful of the global development, tracking geopolitical tensions and energy prices. We are diversifying our supply base and working to mitigate risk so that we can keep our customer shipments on track and our supply chain stable.

I would now brief you on financial performance for the third quarter of financial year 2022-’23. We have achieved a consolidated total revenue of INR1,822 crores for the current quarter as against a revenue of INR2,510 crores for the corresponding quarter of previous year. Material consumption for this quarter came to be about 43% of the sales revenue due to change in product mix. Profit before tax for the quarter amounted to INR436 crores. Our effective tax rate for the quarter is 29%. We have a profit after tax of INR307 crores for this quarter. For the nine-month period, we have a consolidated revenue of about INR6,100 crores and profit after tax of INR1,502 crores.

Export for the quarter continued to be around 87%, and export to Europe and America is about 69% of our revenue for the quarter and 70% for the nine-month period. Product mix for generics to custom synthesis is 55% and 45% for nine months, and it is 60% to 40% for the quarter. We have a forex gain of INR47 crores for the quarter and a gain of INR134 crores for the nine-month period.

As we have a lower sales revenue during the quarter, our constant currency growth for the quarter has been negative 40%, while it has been negative 17% for nine-month period. Our nutraceutical business amounted to INR150 crores for the quarter and INR509 crores for nine months. As of December 31, we have cash on books of INR3,849 crores, receivables of INR1,669 crores and inventories of INR2,981 crores. Thank you.

M. Satish Choudhury — Company Secretary and Chief Investor Relations 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. [Operator Instructions] The first question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Yeah, thanks for the opportunity, Sir, first, on the gross margin thing, so the kind of product mix that is there, so is this for some upside in gross margin to look for going forward, and which is significantly down, if we look at the historical number. If you could elaborate on that?

Nilima Prasad Divi — Whole-Time Director

Could you please repeat the question again?

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

The gross margin for the quarter has been significantly lower while you alluded to the change in product mix being one of the reasons. But if I look at it, the historical run rate, it has been significantly down. So again, considering the product mix, should the 3Q gross margin to be taken as a sustainable rate going forward or there is more one-off or inventory write-off for the quarter?

Murali K. Divi — Managing Director

It will improve in the coming quarters. It so happened in this quarter. The raw material prices have gone up and there were pressures from the sales price of the API and we anticipate in the coming quarters, it should be better. There should be a growth and also profitability growth. And also I think you said, gross, even when it came to the net, because of the high tax rate of 29%, it has impacted naturally the profit after tax.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Okay. Sir, and secondly, if you can highlight further in terms of the role played by Nilima madam and Kiran sir, given in terms of shifting of gear or roles in the second generation?

Murali K. Divi — Managing Director

Somehow, the voice is not clear. Can you please repeat?

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Is it better?

Murali K. Divi — Managing Director

It’s better.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Yeah. Sir, my question was now that considering your age and considering the second generation also into the business, Nilima madam and Kiran sir, so would like to understand in further details in terms of the roles taken up by each of these? And how to look at this going forward?

Murali K. Divi — Managing Director

I think the roles are clear that the finance, accounting, the material purchases, our supply chain management will be done by Nilima. The production planning, marketing, sales, technology development, what we call, R&D will be handled by Kiran and his team. It’s also being followed like — this has been happening for the last five years. They both are heavily involved. And I just foresee the new products, new pipeline, new chemistry, what else can we introduce like the vapor phase chemistry, continuous flow chemistry, photochemistry, gadolinium compounds, peptide, these are the new chemistries I’m trying to see what can be introduced in addition to the regular generic custom synthesis, that’s all being handled by both Kiran and Nilima and we’re also having professionals who are experts who have been with us for number of years.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Understood sir. This helps. And just lastly, if I may squeeze in. So when do we expect Kakinada, basically the construction to sort of start or let’s say, in over next 12 to 15 months, how much money you plan to invest at Kakinada?

Murali K. Divi — Managing Director

Finally, after five years, since we started the first attempt to start our work in Kakinada, we got all the clearances and [Indecipherable] handed over to us. The project planning is under progress, products planning, some of them are starting materials, some of them are intermediates, some of them are APIs, and an investment of about INR1,000 crores, and I think we will update in the very near future because we have been handed over the land in the last couple of weeks. So we are protecting the land by constructing the wall around. We have moved the teams, construction teams and fabrication teams. So the whole — I think we will be updating in the coming — going forward.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Thanks a lot. This helps.

Operator

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

Prakash Agarwal — Axis Capital Limited — Analyst

Yeah, thanks for the opportunity, sir. Good afternoon. Sir, trying to understand, definitely the product mix has changed, your generics have gone up. But within generics, is there a pricing pressure that you are seeing? Because this kind of gross margin and EBITDA margin, we have never seen before. I mean, you have talked about raw material pressures in the past. But is it more related to pricing in the generics that you are seeing or that is fairly stable?

Murali K. Divi — Managing Director

It is mainly from the generic compounds where we have seen the price pressures because during the COVID, several of the generics, probably did not — several of the companies probably with generics did not get opportunity to sell. Now the growth is there, but there is price pressure. But going forward, we see the price pressures will ease-up, and probably the raw material prices also may ease-up and come down. We are seeing this, so the profitability should increase. We cannot compare with the previous five, six quarters where we had exceptional opportunity. We increased the speed, took challenges and executed. So it resulted in the upside during the last six, seven quarters, the anti-COVID drug. But if you see the pre-COVID business, I think we are seeing normal growth in the coming quarters and profitability should improve quarter-on-quarter.

Prakash Agarwal — Axis Capital Limited — Analyst

Okay. Just one point on the generics. So you mentioned there is some pricing pressure, but you’re also saying that you would see pricing to improve. So what gives us confidence, are we seeing it already, or I mean, what gives us that confidence that generics pricing will improve?

Murali K. Divi — Managing Director

We’re already seeing the prices improving and also the volumes improving. In several of the generics, we are seeing even if 50%, 60%, 70% of volumes improving, naturally then volumes improve, prices also improve. There is a change. And also our new generic and the certain contrast media, where there is no price pressures, I think we should look better in the coming quarters.

Prakash Agarwal — Axis Capital Limited — Analyst

Fair enough. And secondly, sir, given the cash pile we have, are we considering any large buyouts, especially in the contract manufacturing side, injectables something like that?

Murali K. Divi — Managing Director

We are not planning to buy any injectable or anything like that. We are planning to invest in new technologies. As I mentioned a few minutes ago, in the vapor phase chemistry, continuous flow chemistry, photochemistry and in some of the newer compounds called gadolinium compounds, which are the MRI contrast media agents, where we have already developed process, we are trying to tap with some big name people in that. And again, there is large interest in the [Indecipherable] and there is good demand in the expanded contrast media business. I think we are going to be very busy in the coming six to eight quarters in implementing all these projects.

Prakash Agarwal — Axis Capital Limited — Analyst

That’s great to know. Lastly, on the Kakinada, you said INR1,000 crores yet to be invested or within the CWIP, what is the share of Kakinada sir?

Murali K. Divi — Managing Director

One second. We outlined Kakinada almost in the last five years, at least five, six times as if we are going ahead, but there was always a roadblock not getting the full clearances. Now we got full clearances. Based on our current requirements or demand for starting materials, intermediates and API, we are grouping them and creating the infrastructure of utilities. And I think in the next quarter to two quarters we should be totally — the project should be going to full swing of construction.

Prakash Agarwal — Axis Capital Limited — Analyst

The INR1,000 crore is the capex we want to do going ahead?

Murali K. Divi — Managing Director

That is what we planned initially, a INR1,000 crore investment as Phase I, because we waited a long time. We have substantially invested in both Unit 1 and Unit 2. Those projects where we invested in the new blocks, they’re getting occupied, validation is being completed and commercial production will be starting, some of them just started, some of them are planned in a phased manner as we get regulatory clearances. So we don’t immediately need such capacity, but we foresee the capacity requirements as regards the new projects coming in.

Prakash Agarwal — Axis Capital Limited — Analyst

I understand, Sir. I was asking on the INR575 crores CWIP, how much is Kakinada? That’s what I wanted to ask.

Murali K. Divi — Managing Director

Kakinada is not that INR575 crores. It’s a small amount that is there in the — it is in the existing SEZ and EOU. That is where the investment is.

Prakash Agarwal — Axis Capital Limited — Analyst

Okay. Which will give us more capacity in the near to medium term?

Murali K. Divi — Managing Director

Yes, I think in the growth engines, I have described about that some of the big CS projects, some of the products, where they are expiring, some of the sartans, we have been — we planned with three, four quarters ago. That is what the work-in-process, CWIP.

Prakash Agarwal — Axis Capital Limited — Analyst

Okay, sir. Thank you so much and all the best.

Operator

Thank you. [Operator Instructions] The next question is from the line of Damayanti Kerai from HSBC. Please go ahead.

Damayanti Kerai — HSBC — Analyst

Good afternoon. Thank you for the opportunity. Sir, can you update us on your progress in the Iodine-based contrast media projects, which you are working for few last quarters? When we are expecting notable sales to come from these products?

Murali K. Divi — Managing Director

Yeah. I think, as I mentioned in the last quarter, that projects are under implementation. Now, two of the products are our own generic products. And the contrast media, where we are doing custom synthesis, that project is already implemented. The qualification is done. Now it has just entered into commercial production and you will see good numbers in the Q1 2024 onwards, by which time all the regulatory clearances would happen. And the strength for it, again, I would just stress that, the capability of Iodine recovery to the maximum where it used to be $25 a kilo, it is $75 a kilo. Also we have excellent relationship with the customers, as well as the Big Pharma where this contrast media is being used.

Damayanti Kerai — HSBC — Analyst

Okay, sir. Sir, just to clarify, by first quarter of FY ’24, you should be starting commercial supply both for the custom synthesis project as well as for your own generic, right?

Murali K. Divi — Managing Director

That is correct.

Damayanti Kerai — HSBC — Analyst

Okay. Sir, my second question is on demand scenario for overall generics portfolio. So you mentioned that you are seeing good volume for some of the products where 50%, 70% increase has come on demand side. But on very broad basis, are you seeing recovery in demand from the customer for some of the base generics which are like large product for you?

Murali K. Divi — Managing Director

Yes, we are seeing a double-digit growth in some of the generics, that is the minimum. And the products are expanding as well as the customers who probably were — some of the customers who were buying from elsewhere, probably have issues and that’s where we are also getting a lot of demand from.

Damayanti Kerai — HSBC — Analyst

So in coming quarters, we should be expecting better volume growth on the generic part of your business?

Murali K. Divi — Managing Director

That’s correct.

Damayanti Kerai — HSBC — Analyst

Okay, sir. I’ll get back in the queue. Thank you.

Murali K. Divi — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Cyndrella Carvalho from JM Financial. Please go ahead.

Cyndrella Carvalho — JM Financial — Analyst

[Technical Issues]

Operator

I’m sorry to interrupt you, ma’am but we cannot hear you clearly. Your voice is breaking a lot. We are unable to hear you. May we request you to please rejoin the queue. Thank you. The next question is from the line of Ashish Thakkar from IIFL Asset Management. Please go ahead.

Ashish Thakkar — IIFL Asset Management — Analyst

Yeah, thanks for the opportunity. Sir, you mentioned about gadolinium compounds, and I believe you are also on the Iodinated contrast media. So given that this is a $7 billion market globally and market is growing at 10%, what kind of say will we be having in this entire market. How are we planning to move ahead with the commercialization of the molecules?

Murali K. Divi — Managing Director

There are not many customers who would consume the contrast media both Iodine compounds, gadolinium compounds. There are only handful in the whole world. And with the majority of them, we are discussing for long-term agreement for supply of these APIs.

Ashish Thakkar — IIFL Asset Management — Analyst

Okay. So it’s not intermediates, but you will be directly into APIs. So that’s a fair understanding, right?

Murali K. Divi — Managing Director

In most of the cases, they are direct APIs. In few of the cases, they are flagged N minus 1, N minus 2.

Ashish Thakkar — IIFL Asset Management — Analyst

Okay. Sir, but would it be fair to assume that some of the bigger names they would also be doing in-house, are they willing to shift the entire like seven to eight step process to us, is that a fair way to understand?

Murali K. Divi — Managing Director

I wouldn’t say that they will shift the entire, but we will get a decent portion of the business either a part of the — see, the contrast media is growing in the world at the rate of a minimum of 10% and each of this contrast media is there about 2,500 tonnes to 3,000 tonnes. Every year they need about 300 tonnes extra quantity. So in the last couple of years, if you count, they need about 600 tonnes to 1,000 tonnes, planning for the next four years. So that is the kind of opportunity we are looking at. Number one. Get some quantity from the existing market, and going forward, instead of these Big Pharmas expanding, we will be expanding in India. Number one. So with reference to these new gadolinium compounds or other compounds, where they’re used for MRI and also some of the newer ones, we are looking at supplying the N minus 1, N minus 2.

Ashish Thakkar — IIFL Asset Management — Analyst

Okay, this helps. Thank you so much. Sir, last question on the new pipeline, the NCE based molecules that we spoke about in the second quarter commentary, you said there are like couple of projects, which are there and could see FY ’24 launch? Any update on those lines would be helpful. Thank you.

Murali K. Divi — Managing Director

That’s right. This is the sixth growth engine, where there’s $20 billion products expiring between ’23-’25. Yes, we have submitted for some of them [Indecipherable]. Some of them are getting ready to be submitted. So as soon as the customers have sample, customers have purchased some quantity for the formulation purposes and stability studies to submit to the FDA. And I think going forward, it looks good as and when the patents expire, I think we should have the opportunity.

Ashish Thakkar — IIFL Asset Management — Analyst

Okay. So you are confident of FY ’24 launch?

Murali K. Divi — Managing Director

’25 for sure. Units starts in ’24. I don’t think on day one, will get very big volume. But in ’25, we should get good volumes.

Ashish Thakkar — IIFL Asset Management — Analyst

Yeah. Thanks, and all the best. I’ll get back in the queue.

Operator

Thank you. The next question is from the line of Neha Manpuria from Bank of America. Please go ahead.

Neha Manpuria — Bank of America — Analyst

Thank you for taking my question. Sir, could you give —

Operator

Sorry to interrupt you Ms. Manpuria. May I request you to speak a bit louder?

Neha Manpuria — Bank of America — Analyst

Is this better now?

Operator

Yes, please go ahead.

Neha Manpuria — Bank of America — Analyst

Okay. Thanks so much. Sir, could you give us some color on the extent of pricing pressure that we’ve seen in the quarter? And also just trying to understand the gross margin a little better. Is there some impact from, let’s say, high cost inventory for raw materials that we used in the quarter, and as raw material costs are coming down, we could probably see improvement in gross margins? Is that one of the factors that we should consider?

Murali K. Divi — Managing Director

Yes. One of the factors could be that if you recall, in the last two years, I think in some of the raw materials, I think the prices went up by 2 times. Just Nilima was mentioning a while ago on the lithium, the same thing goes for several other materials, where we’ve procured them at high prices, and some of them still we are procuring at higher prices. And we see now a drop in prices or at least prices are just coming down. So across industry, I think people faced the price pressures. Now, it’s loosening and we should expect better margins in the coming quarters.

Neha Manpuria — Bank of America — Analyst

And sir, what about the API price realization decrease, how much would it have been on an average, let’s say, over the last year or quarter-on-quarter if you could give us some color?

Murali K. Divi — Managing Director

It is surprising that several of the APIs — some of the APIs had price pressures where the prices came down 5%, 10% whereas some of the APIs where we just entered, we were able to maintain good prices when even prices have gone up depending on I think how many suppliers are there. I think what will happen finally is that, if there is a supplier who would continuously supply without interruption and maintaining the quality, I think customers have no choice, but to buy from them. So that’s where we see that we are positioned, and we should be able to get better prices.

Neha Manpuria — Bank of America — Analyst

Sir, is the API realization pressure more on the older products that we are selling rather than the new launches, is that a fair assessment?

Murali K. Divi — Managing Director

I think if I have to say that I would say it is across portfolio. But naturally in some of the new products, there could be a little more pressure depending upon how long several people have been with stocks waiting, when they might disappear after the stock is being — once the stock is disposed into the market, then the prices will stabilize.

Neha Manpuria — Bank of America — Analyst

Understood. And sir, on Kakinada now that we starting work, by when should we start seeing the facility being ready for, let’s say, validation, regulatory approvals and eventually commercial production? Would it be more two years, three years, what sort of timeline should we look at?

Murali K. Divi — Managing Director

I think we should be able to look in two to three years, anytime after two years.

Neha Manpuria — Bank of America — Analyst

Commercial production or validation?

Murali K. Divi — Managing Director

No, these are two things. I think I said that we’ll be doing some starting material with different chemistry, some advance intermediates and some APIs. For APIs definitely, initially, we will be selling to the other markets, while we are qualifying for the regulatory market. But the raw materials — starting materials and intermediates, we should be able to consume them for our existing products to increase our further capacities.

Neha Manpuria — Bank of America — Analyst

Got it. Thank you so much, sir.

Operator

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

Surya Patra — PhillipCapital — Analyst

Yeah, thanks for this opportunity. Just wanted to understand the pricing situation in the APIs and intermediates better. So is there anything to do with the China open-up or it is a accrued correction or inventory rationalization, now what we would be seeing post the strong demand situation during COVID, what a few quarters that we have been witnessing. So anything to do with that the current price situation that we are witnessing for the APIs and intermediates sir?

Nilima Prasad Divi — Whole-Time Director

Can you just repeat the question again please?

Surya Patra — PhillipCapital — Analyst

Hello. Yeah. So just to understand this price erosion or price correction in the API, I’m just trying to understand whether this correction what we are witnessing suddenly in this quarter is because of the China open up scenario what we are witnessing, is that or the recent crash or the sharp reduction in the crude prices that we have witnessed or that we are witnessing any kind of inventory rationalization situation at the customers’ end after seeing a kind of inventory build-up situation during COVID over last many quarters? So what has been impacting this prices? Because we have not seen just kind of broad based price reversion case in case of APIs in many of the names?

Murali K. Divi — Managing Director

The pricing pressures, I think, it’s not only with us, it is across the industry and across products. Now, yes, you’re right that pre-COVID, during COVID, post-COVID, there is a difference in the consumption of the therapeutic segments and now slowly the therapeutic segments are coming back. So we don’t know the real stock with each of the either API manufacturers or dosage manufacturers, but we felt the pricing pressures. I’m sure everybody is feeling across industry. And we see the raw material prices getting better right now what contracts we’re entering. So we expect that in the coming quarters not only we will have the volume growth, I think we should be having a profitability growth as well.

Surya Patra — PhillipCapital — Analyst

Okay. Sir, in fact, the margin figure for the quarter is the lowest ever and this is not only because of the gross margin slippage, it is also because of the spike in the other expenses. So there also, what is that has caused that, whether it is the energy cost element or it is the freight cost one, what is really has — see, can you tell, sir what is the share of this freight cost element in your overall cost?

Murali K. Divi — Managing Director

I think, it’s not just one. I think one is the plant maintenance cost went up because several of the building or several of the utilities, we have built them in 1995. We started implementing, rebuilding some of those plant structures, and also we have invested heavily in replacing some of the old safety systems with new safety systems. You must have heard recently popping up here and there few accidents, and we are making sure that we are removing all those old pipelines, old electrical cables, which we installed in the early years. That’s probably one of the reason. Two, also you must have seen the taxation went up. When it comes to profit after tax, the tax what it’s used to be 12%, 15%, 18%, this is the highest, I think, 29%, 30% almost, that’s what we have paid tax.

Surya Patra — PhillipCapital — Analyst

Okay. Sir, just, as you said, if I try to ask slightly differently, let’s say, the sequential 10% correction in the margin what we have witnessed, what portion of this would be quarter-specific for this quarter, which may not be there in the following quarter, either because of the improvement in the pricing scenario or few of the cost element, which will not be there like maintenance ones and all that? So this is really lower number. And this is a big negative surprise to the street. So that’s why I’m trying to understand a bit more better.

Murali K. Divi — Managing Director

I think after, we have seen the COVID drug, where we have high margins, high productivity, where we achieved. Coming back to the pre-COVID production schedules, all modifications and getting into the new, utilizing some of those assets to the — reorienting them to make the current, again, generic products or these products, this is where some of the cost went into them [Technical Issues] fully geared up and we should be able to see not only double-digit growth in terms of business, but also profitability.

Surya Patra — PhillipCapital — Analyst

Sure sir. Just last question about the new capacities what we had added, both in the two sides, so around 15-odd units that we had added incrementally over the last 1.5 year period. So out of that, how many of the units are underutilized or it’s not been utilized so far or commercialized so far? What is the kind of spare capacity that is there? And how long the spare capacity can ensure our growth momentum going ahead? Because this quarter there is no problem in the revenues. It is just the margin, which you are saying that it would be improved subsequently. So just about the revenue growth visibility. So what is the spare capacity that we are having? Will that be sufficient enough to drive growth till the time the Kakinada facility is ready for commercialization.

Murali K. Divi — Managing Director

Currently, we are occupying about 75% to 77% of occupancy, that leaves 20%, 23%, 25% of free capacity. So going forward, as we — in the growth engines, where we said that the future growth engine speaks and the sartans engine and capacity increases where we have done the qualifications being either completed or getting completed, regulatory agency clearance has been weighted, I think all these — I think I mentioned in the last quarter and before quarter earlier quarters also, it will take about two years to get into the full benefit out of them. So we have enough capacity for all that and we need not worry about that.

Surya Patra — PhillipCapital — Analyst

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

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

Thank you. Good afternoon, and thank you for taking my question. Just looking at 3Q and comparing 3Q ’23 to 3Q ’21, so December 2020, most of the numbers are absolutely the same like look at generic API, custom synthesis, nutraceuticals. So, my question was historically Dr. Divi, we had like a 10% growth coming through on, and I’m removing all the five, six quarters that you talked about, which had got, say COVID drug Molnupiravir benefits. I’m just looking at like a two-year. So that growth has not happened. There has been no 10% growth even on that base portfolio, excluding all that. So if you could disaggregate and say, is that underlying that business, has it seen volume growth and all that volume growth has been taken away by price, would that be one way of looking at it?

Murali K. Divi — Managing Director

The volume growth has happened and is happening, and we are foreseeing that it will continue. I think double-digit volume growth we foresee that it will continue. Now, yes, the price pressures were there that has impacted on the profitability, which we are hoping with the raw material prices being stabilized or going down, not going up, so we should be able to get back to the profit margins on the gross level. On the taxational level, I cannot comment at this moment based on how the projects which we planned in the SEZ, how soon they will come into commercial production in terms of clearance with regulatory authorities. As and when they happen, of course, you will see the taxation coming down.

Shyam Srinivasan — Goldman Sachs — Analyst

Got it, sir. That’s helpful. Just following up here. So generic API or nutraceutical, I understand some pricing pressure. But custom synthesis, why should that — that number is also same, INR680 crore in 3Q ’21 and INR675 crore this quarter. So just any thoughts there on what’s happening on custom synthesis or custom — that particular line item specifically?

Murali K. Divi — Managing Director

On custom synthesis, it’s different, it’s not on the profit margin. There is no profit margin issue with that. Now during the COVID and towards the end of the COVID, end of the COVID just happened in the last two months, we all were able to remove the masks and were able to just really walk around whether it is in this country or abroad, but everybody, all the companies had preferences towards to see how good they can push the COVID drugs, every Big Pharma, are looking at other therapeutic segments. Now everybody steps down this peddle now for every other therapeutic segment products. So we are seeing now number of projects coming to us from the various Big Pharmas, multiple opportunities in all therapeutic segments and we don’t have any pricing pressures from the Big Pharmas business.

Shyam Srinivasan — Goldman Sachs — Analyst

Got it, sir. So just last question. I don’t know maybe you’ll answer this, but will we go back to this 10% to 15% historical growth rate that you’ve have talked about in the past in sometime in the future?

Murali K. Divi — Managing Director

Why not more.

Shyam Srinivasan — Goldman Sachs — Analyst

Okay, thank you.

Operator

Thank you. The next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.

Sameer Baisiwala — Morgan Stanley — Analyst

Hi, thank you so much, sir. And a very good afternoon to you. Can you update us on the fast-track CS projects that you’ve talked about?

Murali K. Divi — Managing Director

There are two big fast-track projects. We’ve completed the projects. We have validations completed for both. Both are in the commercial ramping up. You will see some values in the Q4 of our financial year, and in Q1, they should be fully ramping up Q1 of ’23-’24.

Sameer Baisiwala — Morgan Stanley — Analyst

Okay. That’s great sir. And this is pandemic related, non-pandemic related?

Murali K. Divi — Managing Director

Both are non-pandemic related.

Sameer Baisiwala — Morgan Stanley — Analyst

Okay, got it. And sir, just on contrast media, now that you are getting very close to commercialization, any number that you can share? Is it like INR100 crore, INR200 crore opportunity to begin with or any color would be great, sir?

Murali K. Divi — Managing Director

I think it should be bigger. It should be larger. Because the business is much larger, we are aiming at bigger numbers.

Sameer Baisiwala — Morgan Stanley — Analyst

Okay, that’s good to hear. And sir, just some margin bit. Your normalized margins used to be 40% give or take, and that’s where you used to aim EBITDA margin, you are probably closer to 29% now. So what’s the roadmap for that? You have explained many things and it’s going to improve and all of that. But do you think you can get to this number at all and is it in the foreseeable future? That would be very helpful sir.

Murali K. Divi — Managing Director

We are not talking about immediately in the next three, four quarters to reach such level, but definitely it is possible. We are making lot of efforts with the new chemistry to how to minimize material consumption and how to increase the throughput. So I think we will see in the next two years, probably we should be back with such — and we have several opportunities we are getting from the Big Pharma, so we should be able to again see in the next few years. Yes.

Sameer Baisiwala — Morgan Stanley — Analyst

Okay, great, sir. And sir, can you split broadly qualitatively custom synthesis business, what percentages or what part is commercial molecules versus how much is contributed by developmental quantities? I mean, is it 50-50 or is it skewed more on one side?

Murali K. Divi — Managing Director

We have never disclosed or given any details on the developmental products for the Big Pharma, because we have signed several confidentiality agreements, but it’s very good, I would say. We have never seen so many opportunities coming and they will be implemented in groups. So I think in the next two years, the small volume products will go into the multiple tens of tonnes or higher.

Sameer Baisiwala — Morgan Stanley — Analyst

Okay, that’s great. And sir, on Kakinada —

Operator

Sorry to interrupt you, Mr. Baisiwala. May we request you to please rejoin the queue. We have participants waiting for their turn.

Sameer Baisiwala — Morgan Stanley — Analyst

Yeah, sure. Okay. no worries.

Operator

Thank you. [Operator Instructions] The next question is from the line of Cyndrella Carvalho from JM Financial. Please go ahead.

Cyndrella Carvalho — JM Financial — Analyst

Am I audible?

Operator

Yes, you are. Please go ahead.

Cyndrella Carvalho — JM Financial — Analyst

Thanks for the opportunity. Sir, you had mentioned on last call that regarding the pandemic supplies that we had, we had almost closed those orders for our partner. Our partner has given some more guidance also now. Just wanted to understand from the inventory that we’re carrying with us today. Do we have anything pertaining to this pandemic related goods with us today out of the INR2,981 crores that we highlighted?

Murali K. Divi — Managing Director

We do not have any stock. Whatever we made are already shipped and we don’t have any stock in the API for them. They’re shipped as and when made.

Cyndrella Carvalho — JM Financial — Analyst

That is very helpful, sir. Sir, coming back to the API pricing that we spoke about, the entire recovery that you’re talking about, can you help us understand, can we see the reversal of, say, the top line around INR1,800 crores, INR1,900 crores in the coming one or two quarters’ time or you think it will take three, four more quarters to be at that run rate at the top line? And as soon as the top line comes back, should we expect the margins also to revive to the same extent?

Murali K. Divi — Managing Director

I don’t want to say quarters, but definitely, we are underway with double-digit growth, and double-digit growth also reflects in both for the sales as well as profitability. And going forward, I think we talked about all the six growth engines and they should be able to see as to not only get back to the pre-COVID, but I think further a way ahead.

Cyndrella Carvalho — JM Financial — Analyst

Okay. But sir, in terms of, if we try and understand, you are seeing improvement in the volumes on the generic side as well as on the price side should follow and you’re saying that there will be a customs synthesis project also, which could start shipping in Q4 and we’ll see maybe 1Q FY ’24 will see a full quarter. So in the light of these two comments, how should we see? If you can help us understand qualitatively also, not on the number perspective entirely, but because the numbers have been fairly moving up and down because of pandemic supplies. So just wanted to understand some clarity there.

Murali K. Divi — Managing Director

Going forward with the two big custom synthesis projects where their contribution will be seen of this potential from the Q1 of 2024 and I think with also our generics with a double-digit growth, I think we should see a good growth. We don’t want to say anything about the custom synthesis or generic, separating them, but I think overall, the growth should be there and also increase in profitability.

Operator

Thank you. The next question is from the line of Chirag Dagli from DSP BlackRock. Please go ahead.

Chirag Dagli — DSP BlackRock — Analyst

Yes, sir. Thank you for the opportunity. Sir, quarter-on-quarter, the mix is not very different. Custom synthesis business is 40% this quarter versus 43% in the second quarter. Despite that, our gross margins are down almost 7 percentage points. Two questions there. Why is that — you talked about product mix being different. So if you can just give a little more color around why this large 7 percentage point Q-o-Q dip in margins? And is this across both the pieces, generics as well as custom synthesis or is this more to do with generics business?

Murali K. Divi — Managing Director

I think we have made it in the past very clear that they were the one-time opportunity. Though we should not wish that the COVID should be there and the APIs will be consumed, the profit margin or profitability of the anti-COVID drug was definitely a better one. And when it was there in those quarters and normal in the last quarter, in the quarter just we went through, minus COVID drug, I think this is where we are with the pricing pressures on the API announced on the increase in raw material costs, which I have explained that going forward in the coming quarters or year, we should be able to get back to the normal mode and growth mode without the COVID drugs.

Chirag Dagli — DSP BlackRock — Analyst

Okay, sir. Is generics more impacted than custom synthesis?

Murali K. Divi — Managing Director

Pardon?

Chirag Dagli — DSP BlackRock — Analyst

Sir, is generics gross margin more impacted than custom synthesis gross margin?

Murali K. Divi — Managing Director

Yes. But the custom synthesis, the impact is less because there is no pricing pressure from the customer. It’s only the raw material prices probably some of them went up, some got compensated, some did not by the customers. Whereas in generics, nobody will compensate you for the increase in raw material prices when the generic APIs more are available [Indecipherable].

Operator

Thank you. The next question is from the line of Sayantan Maji from Credit Suisse. Please go ahead.

Sayantan Maji — Credit Suisse — Analyst

Yeah, thank you for the opportunity. So just wanted to understand what was the proportion of sales from US and Europe? And do we see the pricing pressure in both these markets or is it mostly in the US market that you’re witnessing this?

Nilima Prasad Divi — Whole-Time Director

Can you repeat the question again please?

Sayantan Maji — Credit Suisse — Analyst

Yeah, I just wanted to understand the proportion that you mentioned in the opening comments on the US — proportion of sales coming from US and Europe, and exports? And the generic pricing pressure that you’re observing, is it in the US or the Europe market?

Murali K. Divi — Managing Director

The exports to Europe and US is about 70% of our revenue for the quarter and 70% for the nine-month period. So between the Europe and US, we don’t differentiate because the orders come from Europe and we ship to US, the orders come from US, we ship to Europe. So we don’t differentiate much and there is no price pressure differences between Europe, US. I think the difference is not there, but overall, there can be a little lower in price in the regulated market, and of course, in the non-regulated market, it’s much low, the pressures are more.

Sayantan Maji — Credit Suisse — Analyst

Okay. And what would be the proportion of export sales for this quarter?

Murali K. Divi — Managing Director

Exports accounted to 87%.

Operator

Okay, thank you. That’s all from my side. Thank you. The next question is from the line of Naushad Chaudhary from Aditya Birla Sun Life. Please go ahead.

Naushad Chaudhary — Aditya Birla Sun Life — Analyst

Hi, thanks for the opportunity. Two clarifications, sir. Firstly on the CSM business side, can you explain us what is your pricing policy here and typically how often you revise your prices annually, six-monthly? And in which all months it is loaded heavily? Price revision policy in CSM business.

Murali K. Divi — Managing Director

Pardon. The pricing policy, it’s not the revision of pricing policy. It is being discussed with the customers and see what is happening in the market on a quarter-on-quarter basis. Usually the contracts are over long period of time and some of them are discussed when the pricing pressures are little more from the customers. But usually on a quarter basis, we’ll discuss, but there’s nothing like pricing policy on a quarterly basis. It’s driven by demand and supply from the customers.

Naushad Chaudhary — Aditya Birla Sun Life — Analyst

Okay. Secondly, on the operating deleveraging side sir, is there any challenges we are facing on the operating deleverage because of the infra we had created for the COVID based products? Is that creating us — giving a cost load to us on the balance sheet on the P&L or is it forcing us to do some low-margin product and that’s why we are facing the challenge currently?

Nilima Prasad Divi — Whole-Time Director

Well, at this point, what we see is, as the sales increase and the growth is driven more by the profit and the normalcy comes back into place, we would say that the operating deleverage would be more favorable.

Naushad Chaudhary — Aditya Birla Sun Life — Analyst

Okay.

Operator

Thank you. Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to Mr. Satish Choudhury, for closing comments.

M. Satish Choudhury — Company Secretary and Chief Investor Relations Officer

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

Operator

[Operator Closing Remarks]