Neuland Laboratories Limited (NEULANDLAB) Q3 FY23 Earnings Concall Transcript

Neuland Laboratories Limited (NSE:NEULANDLAB) Q3 FY23 Earnings Concall dated Feb. 14, 2023.

Corporate Participants:

Abhijit Majumdar — Chief Financial Officer

Saharsh Davuluri — Vice Chairman and Managing Director

Sucheth Davuluri — Vice Chairman of the Board and Chief Executive Officer

Analysts:

Ravi Udeshi — Ernst & Young — Analyst

P. Suresh — Burrams Financials — Analyst

Sajal Kapoor — Independent Investor — Analyst

Unidentified Participant — — Analyst

Ankush Mahajan — Axis Securities — Analyst

Nikhil — SMPL — Analyst

Sanjaya Satapathy — Ampersand Capital Ltd. — Analyst

Gautam — Orion Capital — Analyst

Keshav Kumar — RakSan Investors — Analyst

Sachin Jain — Individual Investor — Analyst

Kunal Shah — Carnelian Asset Management — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Neuland Laboratories Limited Q3 FY ’23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Ravi Udeshi from Ernst & Young. Thank you and over to you.

Ravi Udeshi — Ernst & Young — Analyst

Thank you, Yashasvi [Phonetic] Good evening, friends. We welcome you to the Q3 FY ’23 earnings call of Neuland Laboratories Limited. To take us through the results and to answer your questions, we have with us the top management from Neuland, represented by Mr. Sucheth Davuluri, Vice Chairman and CEO; Mr. Saharsh Davuluri. Vice Chairman and Managing Director; Mr. Abhijit Majumdar, CFO; and Mr. Sajeev Emmanuel Medikonda, Head – Corporate Planning and Strategy.

We will start the call with a brief overview of the financials by Abhijit Majumdar and then Saharsh will give you a broad highlight of the business trends and what he is observing in the market. And post this, we will open it up for the Q&A session. As usual, the standard Safe-Harbor clause applies as we start the call.

With that said, I now hand over the floor to Abhijit. Over to you, Abhijit.

Abhijit Majumdar — Chief Financial Officer

Thank you very much, Ravi, and a very good evening to all friends and a warm welcome to you all for joining our Q3 FY ’23 earnings call. I think you must have seen the presentation which Ravi mentioned and it has put up on our website and it has been uploaded on the BSE and NSE websites. As always, any comments on the content of this presentation which we have sent will be highly appreciated and we’ll do our best to give our traditional data points, which will help you to understand our business better.

I will briefly talk about financials now. The total income for this quarter is INR270 odd crores against INR238.4 crores in Q3 FY ’22. This was largely driven by a growth in our GDS business. Our EBITDA for the quarter stands at INR54.9 crores with an EBITDA margin of 20.3%, an increase 6% or 600 basis points over the previous year. The increase in EBITDA margin has been led by a revenue shift margin towards high margin products. While we have continued to witness volatility in input pricing, however in line with Q2 FY ’23, we continue to experience some easing on a relative basis. Our focus on execution excellence and costs have enabled us to minimize the cost impact from raw material increases within our industry.

At the same time, we have seen a sequential drop in revenue by 8% when compared to Q2 FY ’23 and an EBITDA margin drop of 30 bps due to a slight change in business mix, as well as lower revenues impacting our operating leverage. I would request you to measure our performance over a one-year time horizon as our EBITDA margins will fluctuate on a quarter-on-quarter basis.

Coming to specifics, our gross margin was 55.2% in Q3 compared to 49.2% in Q3 FY ’22 and 56.2% in Q2 FY ’23. Profit-after-tax was at INR30.4 crores as compared to INR12.7 crores last year. This quarter’s EPS is at INR23.7 per share. On a nine-month basis, the total income is INR785.8 crores, an increase of 12.3% over the prior period of last year. The EBITDA increased by 46.1% to INR153.3 crores as against INR104.9 crores in the nine-month FY ’22. The EBITDA margins come — has come in at 19.5% compared to 15% for nine-month FY ’22 on account of a stated shift to higher-margin products. We generated a free cash flow of INR161 crores in the nine months of FY ’23. Our net debt position stands reduced to INR72 crores, worth INR212 crores as at the end of March ’22. We continue to invest in upgrading our facilities and have invested INR50.9 crores in capex during this period. Our net gearing ratio stands at 0.1 times as on December 2023.

With that, I would like to hand over the call to Saharsh for his remarks. And once again, thank you very much.

Saharsh Davuluri — Vice Chairman and Managing Director

Hi. Good evening, everyone, and thank you, Abhijit. Again, in terms of the quarter itself, I’ll add a few comments on top of what Abhijit has already said and then we can open it up for Q&A. The quarter in many ways is a fairly decent representation of the direction that we have been scaling our business. The latest uncertainty surrounding raw material prices, we are starting to see some stability. In my opinion, this quarter continues to indicate that our strategy of focusing on the GDS specialty and the CMS business is shaping up well. The growth driven by both the specialty and the commercial products in the CMS business has meant that we have healthy gross margins flowing through to the P&L. In the specialty segment, products like Apixaban and Ezetimibe have contributed significantly and we are excited about these products. With regards to the CMS business, I would like to highlight the significant jump in revenues from commercial products. You may recall that over the past few years, we had stressed that our molecules will gradually transition to commercial, and this quarter marks such a transition. We expect further commercialization to happen over the medium-to-long term. The contribution of the CMS business has been a significant driver of the improved EBITDA margins that we have witnessed in the last few quarters. We continue to see some early-stage projects getting added to the business this quarter and we are continuing to see an increased traction from new customers as our ability to execute complex late-stage projects that distinguishes us and makes us a highly regarded CDMO.

In terms of the overall business, we are witnessing a shift towards high margin business, which has been our stated goal, but we continue to remain slightly cautious about how the business or even product mix, raw material prices, or forex could negatively impact these margins in the future. I think that this is something that we would like investors, analysts, and all stakeholders to be mindful of. So, I would like to mention that our Unit III operations continued to ramp up, which has contributed to growth that you’ll have recently witnessed. Some of our late-stage products are being scaled up here. Hence, resource utilization continuing to move up. As I had alluded earlier, we have a good visibility on the CMS business flow in terms of higher-value projects over the short-to-medium term and we expect these factors will contribute to our margin increase in the future as well. In order to keep up with the requirements of our customers, we will add new production blocks in Unit III and invest in R&D infrastructure to facilitate their goals over time.

As always, I would like to state that the very nature of Neuland’s business in terms of working on high-quality complex molecules besides the revenues and margins could be lumpy on a quarter-to-quarter basis. But as Abhijit just now emphasized, on early basis, they’re steadily moving upwards and you could expect the same going forward. We think that the recent momentum is sustainable over long term and, therefore, we continue to remain excited about the future of the business.

So, maybe. I think I’ll pause here and open it up for Q&A.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] We have a first question from the line of P. Suresh from Burrams Financials [Phonetic] Please, go ahead.

P. Suresh — Burrams Financials — Analyst

Hello?

Operator

Yes, we can hear you.

P. Suresh — Burrams Financials — Analyst

Hello?

Operator

We can hear you, sir. Please, go ahead with your question.

P. Suresh — Burrams Financials — Analyst

Hello? Hello, madam? Hello?

Operator

Yes, Mr. Suresh.

P. Suresh — Burrams Financials — Analyst

Hello?

Operator

Yes, we can hear you.

P. Suresh — Burrams Financials — Analyst

Sir, Neuland launched a property one time sale. That amount is not taken in the balance sheet. Hello?

Operator

Sir, hold on, please.

Saharsh Davuluri — Vice Chairman and Managing Director

Sorry, we’re not able to form the question, Maybe you can jump back in the queue [Speech Overlap]

P. Suresh — Burrams Financials — Analyst

Hello?

Operator

Mr. Suresh, please check your net. Can you redial in, please? Okay? Thank you. We’ll take the next question from the line of Sajal Kapoor [Phonetic], an independent investor. Please, go ahead.

Sajal Kapoor — Independent Investor — Analyst

Yeah. Hi. Thank you for taking my questions. I have a small acknowledgment to start with. So, I’ve been tracking Neuland Labs for almost two decades now. And I must say that our balance sheet and cash flows have never been stronger than what we have today. So, well done, team, and a warm welcome to our new CFO, Mr. Abhijit Majumdar. I have two questions. So, let’s assume a hypothetical scenario where your competitor is a privately-held and unlisted entity, operating in the area of innovator synthesis and NCE scale-up as a service model. I guess, they will have much more freedom to plan strategic objectives and execute them as there will be a limited number of shareholders in a privately-held business and these shareholders are also much more educated and much more aware of the business economics in terms of upfront capital deployment, long gestation window, lumpiness in cash flows, etc. compared to being a listed entity like Neuland Labs where analysts and other shareholders are usually very impatient and short-term oriented and look one quarter at a time in a business that is — fundamentally has very long-cycle times like seven, eight, or even 10 years with upfront capital deployment in infrastructure, R&D, scientific talent, etc. So, which of these two companies is better placed in your view, the listed one or the unlisted one? That’s my first question.

Saharsh Davuluri — Vice Chairman and Managing Director

Yeah. I think it’s — thanks for sharing that observation. I think from the way we look at our business while there is challenges in the quarter-on-quarter smoothness of the business, I think as CDMOs reach a certain size and I think for Neuland, our CMS business has been fairly small compared to our overall revenues. I think now it’s closer to 35%, 40% of our total revenues. But I think as we keep scaling up the business, we think that some of these volatilities can be managed. And I think going forward also as the business keeps growing, we should be able to provide a certain runway of growth and performance. But it would be very difficult to demonstrate that on a quarter-to-quarter basis and I think alternately, investors will have to decide whether this is the kind of business that they would be interested in. But I think I do believe that a registered company, you can have something that’s in your business model. And as long as the business is profitable and has sustainable growth, I think being a listed company does not really create any kind of a challenge being in the CDMO business.

Sucheth Davuluri — Vice Chairman of the Board and Chief Executive Officer

Yeah, I would agree completely with what Harsh said, Sajal. It all depends on the specific organization rather than whether they’re listed or unlisted. And therefore, as a company if you notice our investor calls over the last several quarters, we’ve always said that please, do not expect consistency on a quarter-to-quarter basis because that’s not how our business operates, that our business life cycle operates. However, we’ve stated what our expectations from the business are in terms of product mix as well as margins over the long term. So, I think as long as the company is transparent, I think from shareholders and people like [Indecipherable] we’ve always been under [Indecipherable]

Sajal Kapoor — Independent Investor — Analyst

That’s helpful, Sucheth, and thank you, Saharsh, as well. So, second question is on the private equity money that has been chasing API and generic CMO assets in India in recent years, whether it is Carlyle Group or any other PE for that matter, they all are sitting on losses after almost three years, and these guys typically invest for about five years, right? So, question really is on the economics of the generic pharma stroke API businesses. I mean, is this not an investment-worthy sector and private equity has got it wrong, or you think they overestimated the growth runway and the cyclicality which is inherent in any generic business with pricing pressure on one end and raw material challenges on the supply side, both availability and the pricing of raw material and the pricing pressure, of course, on the product side? So, how would you read it as an industry participant this obsession of private equity running after API assets and not being able to make any decent gains? I mean, all of them as far as I know are sitting on losses. So, what do you think it means for the industry and more importantly, for Neuland Labs? Thank you.

Saharsh Davuluri — Vice Chairman and Managing Director

Yeah. Thanks for the question, Sajal. I think we’re quite well aware of the private equity activity in the API space. And I think, obviously, while we are aware of what’s going on, it’s hard for us to comment on what their specific strategy, financial goals, exit plans are. I think what do you understand about the business is that every API company is having a different strategy. Some of — some companies are going after plans [Phonetic] of big pharma, some companies are going after biotech companies, some companies are more focused on generic APIs. And every business has its own diamond mix in terms of margin profile, growth challenges, etc. So, I think the way we are looking at it Neuland’s perspective is the kind of businesses that we are focusing on, which is the specialty APIs as well as the CMS business, I think these require a very high level of attention to the customer’s needs in terms of what needs to be done for their drug, whether it is phase-appropriate development, setting up the right kind of infrastructure, and providing them a partnership for a five to 10-year runway. And I think that’s an area where we see feel that we are very well calibrated as I think more structurally or traditionally to do that. And in that space, when we are going through that journey, we don’t necessarily see competition around us. I think, because it’s a very large space, right? It’s a $50 billion, $60 billion space, the CDMO space that we operate in. It’s too — we are too small a player or no one is going to really elbow the other out. And therefore, I think while we keenly observe what’s happening, we will find it very difficult to comment on what the rationale is. But I think as far as our business is concerned, we’re not really seeing any direct threat or concerns coming out from these private equity organizations.

Operator

Mr. Rajat [Phonetic]

Unidentified Participant — — Analyst

Yeah. Hi. Can you hear me?

Operator

Yes.

Unidentified Participant — — Analyst

Yeah. Hi. Hi, Saharsh, and congrats on the great set of numbers. I just have two questions. My first question is that if I were to compare your gross margins to any of the other API players right now, even if I compare it to Divi’s like right now, you’re sitting at the highest gross margins within the API space in India at least, at least on the listed space. I just want to understand like what are you doing so differently here, like, because I think, you have a large portion of your business coming from generic APIs also, while if I see Divi’s, they have roughly 50% of their revenues coming from custom synthesis. But still your gross margins are higher than them. Could you just give some color on that for my benefit? I also want to understand, are there any particular products where you are really enjoying high realizations at the moment and you feel that going forward, they might not be sustainable? That’s my first question.

Saharsh Davuluri — Vice Chairman and Managing Director

Yeah. I think, Rajat, it’s — I think what we’ve shared in terms of our remarks about the quarter, I think it’s a general representation of the trend going forward. I think yes, we also did see some challenges on raw materials. But as I had mentioned in my remarks, it has softened a little bit, it’s not as severe as it was, say, three or four quarters ago. I think some of these raw material like we have lithium metal base prices are still high but solvents and all that softened. But again, I think the gross margins are also a direct factor of the business mix and the product mix that we have. And maybe because of the mix that we have, we have this kind of margin. But again, we are very clear that it’s not a one-time exceptionally high gross margin. We think that this is [Indecipherable] margin that you think is sustainable provided there’s no major shift in terms of raw material supply situations or foreign exchange fluctuations and things like that. But, yeah, I would not really know why the other players’ margins have, like Divi’s, again, because the businesses are so diverse within the API space, it’s just maybe challenges that they’re facing for their specific product.

I think also another point is prime is — has been relatively smaller compared to how big it used to be for us in the past. And prime is definitely a segment where we have some pricing challenges and maybe few issues at raw material. But I think we don’t see any other challenges other than what we had mentioned.

Unidentified Participant — — Analyst

Sure. Saharsh, could you also tell me like what — how much backward-integrated are you at the moment, like what percentage of your raw material is imported from China? Could you give some color there?

Saharsh Davuluri — Vice Chairman and Managing Director

So, your question is about how backward-integrated are we?

Sucheth Davuluri — Vice Chairman of the Board and Chief Executive Officer

So, it’s a product-specific strategy, Rajat. So, we don’t have an overall umbrella strategy that for every product we have to be backward-integrated, because it doesn’t make sense. So, we do a product-by-product evaluation and for some products, we are fully backward-integrated. For some products, given the supply situation, we’re not backward-integrated. And therefore, we could not give you an overall percentage number. Today, our procurement from China, I would say, is in the range of about 25% or so, though our dependence on China is far less than that, but those are the rough numbers.

Unidentified Participant — — Analyst

Got it. And would it also be possible for you to break on this 24% growth which you have reported in the GDS segment in terms of price and volumes? Would that be possible?

Saharsh Davuluri — Vice Chairman and Managing Director

We would prefer to keep the growth numbers to what we have shared. We will not be able to provide further.

Unidentified Participant — — Analyst

Okay. Thanks. Thanks, Saharsh.

Operator

Thank you. We have a next question from the line of Ankush Mahajan from Axis Securities. Please, go ahead.

Ankush Mahajan — Axis Securities — Analyst

Yeah. Thanks for the opportunity. And, sir, congrats for a good set of numbers. Sir, my question is that in the API segment at this time, the whole industry is talking about the low or less export and prices are falling for the APIs, even the peers are — they are also saying the same things on the con-calls. So, would you throw some light, sir, how do you see our company in regarding to it that what about the price realizations for the APIs? That’s the first part. Second, sir, what about, sir, capacity utilization of the new plants and how do you see the capacity utilization in the current quarter? That’s our Q4.

Sucheth Davuluri — Vice Chairman of the Board and Chief Executive Officer

So, Ankush, on the pricing side, we’ve mentioned this in previous calls, but over the last decade or so, we’ve consistently de-risked our procurement positions from China to other suppliers. So, we’ve made the supply chain much closer to home. And therefore, as far as our solvents or raw materials are concerned, we are seeing volatility, but it is not extreme volatility as you see reflected in our performance numbers as well.

Coming to your second part, I think our Unit I and Unit II, the capacity utilization tends to range between 80% to 85% given that specific quarter on the product mix. Our Unit III is about 65% based on the installed capacity today. But given that the industry is growing and we continue to add capacity, that number will keep evolving.

Ankush Mahajan — Axis Securities — Analyst

So, sir, Unit I, Unit II, 85%, and Unit II is 65% currently?

Sucheth Davuluri — Vice Chairman of the Board and Chief Executive Officer

I said, 80% plus-minus.

Ankush Mahajan — Axis Securities — Analyst

Okay. Sir, would you throw some more light on the CMS business? How the commercial and development stays they could do in upcoming quarters?

Saharsh Davuluri — Vice Chairman and Managing Director

I think as I had indicated earlier, there has been good progress in terms of commercialization of certain CMS molecules. So, I think the increase in the commercial revenues this quarter is an indication of that. Going forward, we expect over the several partners in the next couple of years maybe that more molecules will get commercialized. And we’re actually very excited about the potential of these molecules. And as these molecules get commercialized and the ones that just recently got commercialized also scale up, we think that will be a key driver for the CMS business. I think if you go back to our con-calls two years ago, we have indicated that we have a pipeline of several molecules which are in the completing Phase III, early part of commercialization. These molecules are all kind of still around and we too have become commercial since then. I think if you look at our tables that we’ll disclose, that number is evident. And I think in the maybe one to two years, we expect maybe a couple of more to get commercial. The number maybe very small but these are high-potential molecules, so I think we are excited about them. The only caveat I would add is, because these are new drugs, there’s always a risk that drug may not get approved or there’s also a risk that the drug may not be successful. So, therefore, we are still very cautious. But I think if you look at the last several quarters’ trends, it should give you some indication that things are looking positive from a CMS commercialization revenue standpoint. So, I think that’s what we can share at this point.

Ankush Mahajan — Axis Securities — Analyst

And, sir, we see in the CMS business that from the last two quarters, it’s doing very well. So, some kind of a growth, sir, any growth number that we can put on the CMS side?

Saharsh Davuluri — Vice Chairman and Managing Director

Yeah. We won’t be able to give any sort of guidance, but I think all we have been confident to say is that whatever numbers we have seen and whatever kind of I think we’ve seen is a sustainable one. So, there’s nothing like an exceptional quarter that has happened and we may go back to how we were like say three-four quarters ago. But, I think beyond that, it’s very difficult for us to give any guidance.

Operator

Thank you. Ladies and gentlemen, in order to ensure that the management is able to answer queries from all participants, kindly restrict your questions to two at a time. We have a next question from the line of Nikhil from SMPL [Phonetic] Please, go ahead.

Nikhil — SMPL — Analyst

Hello. Am I audible?

Operator

Yes.

Nikhil — SMPL — Analyst

Yeah. Hi. Congratulations on a great set of numbers and I think I’ll add to a previous participant’s point that we’ve never seen the balance sheet of Neuland being so strong in terms of debt and cash flows. So, great work on the efforts with the management has been making, I think now results are clearly visible. Just two questions. One is, Saharsh, if I look at our product mix breakup between Prime and Specialty and compare it year-on-year, the last year, it was around 56, which is now 61, Prime and Specialty both. While if we look at the industry across most API commentary, people have been complaining about high inventory levels. And as a result, there is a major inventory destocking which is happening and the demand has been hit and also the pricing has been hit. But our numbers seem to be very different from what the industry — across players what we are looking at. So, if you can just help us understand what different is happening in our set of products, because the Prime and Specialty mix has only improved where there should have been more inventory issues, which the industry is talking about, but our numbers belie that thing. So, just help us understand on these two segments.

Sucheth Davuluri — Vice Chairman of the Board and Chief Executive Officer

So, Nikhil, I think there are two elements here. When it comes to our Specialty business, I think that we both have driven by [Technical Issues]

Operator

Sorry, sir, you’re sounding muffled.

Sucheth Davuluri — Vice Chairman of the Board and Chief Executive Officer

Yeah. Can you hear me better now?

Operator

Yes. Please, go ahead.

Sucheth Davuluri — Vice Chairman of the Board and Chief Executive Officer

Yeah. When it comes to our Specialty business, I think the growth is being driven in the numbers are a reflection of some of the molecules which are in the pipeline where our customers are taking quantities for launch. And as we have mentioned, molecules like Apixaban and Paliperidone have driven some of the revenues and the growth there. And also we have had other Specialty molecules like Donepezil, Ezetimibe too which have contributed. And I think even as you see the industry trends, I think for these specific [Technical Issues] part of the cycle where I think there’s a continuous growth and also customers are looking at launch, which is why you have seen the reflection in the numbers. And when it comes to Prime, I think, again, it is products like Mirtazapine and a few others which are contributing consistently to their revenues and it is, in our case, we have a lot of molecules which are, say, around 100 to 200 tons medium in terms of their molecule trade when it comes to tonnage, where there are — there haven’t been fortunately so many inventory issues because the buildup is likely to be lower in the medium-size kind of volumes products. So, that is the reason why we have seen a certain consistency in the last few quarters from these segments.

Nikhil — SMPL — Analyst

Okay. Thanks for the detailed explanation. Just one last question on the CMS side. Now if you go to Slide Number 15, what we see is that the commercial launch has scaled up. So, for last four quarters, we were averaging around between INR40 crores to INR50 crores. And this quarter we moved to almost INR75 crores. So, which means there is a big commercial launch either which has happened or we’ve participated. So, do you see — because what we understand in the patented molecules buyers pick up large volumes and then it stays for some time and then it reduces to a normal level till the time the next amount is — next quantum is required for a larger launch or based on the demand. So, this INR74 crores, INR75 crores is sustainable, or do you think we’ll come back to that INR40 crores, INR50 crores kind of a run rate? So, is it supported by launch of a molecule which has driven this?

Saharsh Davuluri — Vice Chairman and Managing Director

The short answer is it’s sustainable, because I think what you are alluding to is typically how a launch happens. But every case is very different. Sometimes you get to — you’re commercializing a drug that is already in the market as a second source, in which case you will probably start supplying continuously from the beginning. In some cases, there could be a situation where you will make maybe three, four months or three, four quarters of launch quantities and then you’ll go into maybe hibernation for a year or so. So, I think it’s possible, different scenarios are possible. But I think the question that I’m guessing you want to know is, is this is a one-time thing or is it sustainable. I think the short answer to that is it is sustainable.

Nikhil — SMPL — Analyst

Okay. Fine. Thanks. I’ll come back to the queue.

Operator

Thank you. We have our next question from the line of Sanjaya Satapathy from Ampersand. Please, go ahead.

Sanjaya Satapathy — Ampersand Capital Ltd. — Analyst

Yeah. Sir, thanks a lot. I just want to ask couple of questions. Your Specialty business contribution declined in this quarter, if you can just explain that. And secondly, though you have already warned that your numbers will be volatile because of the nature of business, but your commentary nowadays is far more confident than what you used to do in this year. So, what has really changed, if you can just explain us.

Operator

Sir, we are unable to hear you.

Sucheth Davuluri — Vice Chairman of the Board and Chief Executive Officer

So, if we are to look at the Specialty segment, I think, we — again, because the molecules themselves are small volumes in terms of their nature, So there is likelihood to be more lumpiness because even customers, campaigns, and all are done on a regular basis, but are done more only made-to-stock or not on a made-to-stock, but on a made-to-order, and in certain markets based on how the demand phases out over a period of time. So, therefore, there’s likely to be a certain lumpiness. But if you have to look at it over an annual period, we can see that there has been a significant growth in the Specialty business and which is very clear both in the percentage from the Specialty business and even it is reflected even in our margins too. So, it is just there is likely to be a certain lumpiness because of the nature of the molecules. But overall, we are seeing an upward trend.

Sanjaya Satapathy — Ampersand Capital Ltd. — Analyst

Thanks. And if you can just tell us about that will your numbers be less volatile and kind of a secular — relatively secular compared to what the turbulence that you saw in the previous years? I mean, have you kind of read the states where you can be a lot more sure about your prospects primarily because your new molecules are more better commercial states.

Saharsh Davuluri — Vice Chairman and Managing Director

Are you referring to the Specialty business in particular or the overall [Speech Overlap]

Sanjaya Satapathy — Ampersand Capital Ltd. — Analyst

No, I’m talking about the CMS business now.

Saharsh Davuluri — Vice Chairman and Managing Director

The CMS business? I think, yes, as we had indicated a couple of times in this call, the CMS business, the shift to commercialization is giving us more confidence that this business is sustainable and it’s more sticky. And I think you should see continued performance going forward. I think depending on the order mix [Technical Issues] there could be variation in terms of margins and numbers, etc. But I think overall, what we are emphasizing is if it’s commercial revenue, you can see that it will be sustainable. Maybe just a little bit of lumpiness, but it will be sustainable for sure.

Sanjaya Satapathy — Ampersand Capital Ltd. — Analyst

Understood. And lastly, on Unit III, can you just tell us like what kind of utilization now and what kind of utilization you are looking forward to in the next couple of years?

Saharsh Davuluri — Vice Chairman and Managing Director

So, if you look at — I think Sucheth has mentioned that Unit III utilization in FY ’23 estimate is around 65% — 62% to 65%. As we move forward into FY ’24, with the product mix change, we would be closer to 68%, 69%. And so, it kind of tells you there’s a window [Indecipherable] that would come from [Technical Issues] next two years.

Sanjaya Satapathy — Ampersand Capital Ltd. — Analyst

Understood. Thanks a lot, sir.

Saharsh Davuluri — Vice Chairman and Managing Director

You’re welcome.

Operator

Thank you. We have our next question from the line of Gautam [Phonetic] from Orion Capital. Please, go ahead.

Gautam — Orion Capital — Analyst

Hi. Thanks for taking my question. Just a quick one on Unit III. Has the U.S. FDA approvals come through there? If not, what is the update there, please?

Sucheth Davuluri — Vice Chairman of the Board and Chief Executive Officer

Yeah. So, we have products that we are shipping into the U.S. from Unit III. So, we’ve had virtual audits by the FDA. We haven’t had a physical inspection yet. But the site is listed in the FDA database as an inspected site for the U.S. model.

Gautam — Orion Capital — Analyst

Is there any sort of a clarification of when that physical inspection will happen, like it’s been triggered already, right?

Sucheth Davuluri — Vice Chairman of the Board and Chief Executive Officer

See, right now, the FDA determines when the physical inspection happens. Right now as far as they’re concerned, we do not — we haven’t seen any approvals from inventory being held up because of a lack of a physical inspection. Therefore, it’s a complete prerogative [Indecipherable] schedule and inspection.

Gautam — Orion Capital — Analyst

Okay. But I mean, correct me if I’m wrong, at the moment, you are not making any novel stuff from Unit III, right? It’s mostly the generic that is being manufactured there. You’re waiting for the…

Saharsh Davuluri — Vice Chairman and Managing Director

We are making NCEs from Unit III along with generics. And I think what Sucheth said applies to both, because the way the FDA has been functioning, especially post-COVID, is if they are not seeing any broad-based challenges with an organization, they are approving specific filings with online inspections. They are not necessarily holding back approvals for a fiscal inspection. So, therefore, our product is getting consumed or will get consumed in the U.S. markets without any physical inspections both for NPEs and generics.

Sucheth Davuluri — Vice Chairman of the Board and Chief Executive Officer

Yes. And that’s the current status of it, but as you know, nothing keeps changing in the dynamic level.

Saharsh Davuluri — Vice Chairman and Managing Director

Yeah. They may come for a physical inspection, which we are ready and welcome [Indecipherable]

Gautam — Orion Capital — Analyst

Okay. But Unit III at the moment is still running at a breakeven or loss or any update there?

Saharsh Davuluri — Vice Chairman and Managing Director

I think see, we’ve not disclosed unit-wise numbers, Gautam, but I think we can indicate that I think by this upcoming quarter, we would have turned the corners and it would be profitable, yes.

Gautam — Orion Capital — Analyst

Okay. Wonderful. Thank you very much.

Operator

Thank you. We have our next question from the line of Keshav Kumar from RakSan Investors. Please, go ahead.

Keshav Kumar — RakSan Investors — Analyst

Hi. Good evening. Sir, with the debt-to-equity of 0.13, it looks like we’ve released a substantial amount of debt this quarter. And one of your peers have seen challenges in receivables. So, I guess, the inflation and cost of debt is leading to some pain over there due to clients deferring payments. So, are we seeing or anticipating some impact in the near term or as of now, it’s a business as usual for us?

Abhijit Majumdar — Chief Financial Officer

So, if you look at how we have reduced debt in this quarter, it kind of gives — tells you the resilience of the underlying business. Working capital remains as it is as we gear up ourselves for Q4. So, the short answer is, we’re not facing the challenges that others maybe facing.

Keshav Kumar — RakSan Investors — Analyst

Sure, sir. And sir, lastly on a medium-to-long term. So, there’s quite a bit which has happened in biopharma in the last 20 years and in the last five years, we have seen AI impacting in a big way. So, there is a lot of progress in procure mix, databases are being populated at an ever-increasing pace, the ability to figure protein structure, finding potential new targets, and so forth. So, this should come as a beneficiary to both small molecules and peptides. But when we see the CDMO supply, they’ve traditionally been in short supply, and with the timing of 18 to 24 months and the capacity can’t be scaled exponentially to match the pace of drug discovery advances. So, just pure empirically, we should see a much larger share of inquiry because we are recently established player and also have the capability to do both peptides and small molecules. So, is it too soon to sort of have any feelers yet or are we seeing the intensity of early phase inquiries going up?

Saharsh Davuluri — Vice Chairman and Managing Director

I think generally speaking, we have — I think as we have been executing more projects successfully in the CMS space, because it’s a B2B space and a lot of recognition, brand recognition happens through professional networks, etc., I think we are seeing increased — steady increase in terms of inquiries. And I think beyond that, I think it’s hard to correlate with the comments you had made about the general drug discovery landscape and what’s happening over there. But I think we have been kind of seeing a healthy increase in terms of inquiries and we’ve been — we’ve become a little bit more selective in terms of kind of projects we want to work on. Sucheth, anything you want to add?

Sucheth Davuluri — Vice Chairman of the Board and Chief Executive Officer

Yeah. So, again, Keshav, the point that you make about the discovery, the timelines and all of that is valid. But I think if you’ve seen over the past, our focus has been mode in terms of molecules, in terms of our BD efforts is more around molecules in Phase II onwards. And there even as you’re seeing more traction, I think it will take some more time for us to see the impact from flowing through from preclinical to Phase II to happen for it to show up in our purview. So, I think to answer your broader question, that’s where we are right now.

Keshav Kumar — RakSan Investors — Analyst

Sure. Thank you, sir. That’s all from me. Thank you.

Operator

Thank you. We have a next question from the line of Sachin Jain [Phonetic], an individual investor. Please, go ahead.

Sachin Jain — Individual Investor — Analyst

Hi, Saharsh. Hi, Sucheth. Congratulations on a good set of numbers [Technical Issues] My question is, as now business mix improving to desired level and probably the margin trajectory, you’re sounding more confident, what is the sustainable ROE you guys building in?

Sucheth Davuluri — Vice Chairman of the Board and Chief Executive Officer

So, if you broadly [Technical Issues]

Operator

I’m sorry, can you mute your line, please? We’re getting an echo.

Sachin Jain — Individual Investor — Analyst

Is it better?

Sucheth Davuluri — Vice Chairman of the Board and Chief Executive Officer

Yeah. So, we are targeting, I think…

Operator

Sir, I’ve muted Mr. Jain’s line now. Please, go ahead.

Sucheth Davuluri — Vice Chairman of the Board and Chief Executive Officer

Yeah. So, we are targeting an ROC in the broad range of 17% to 20%. And that, I think, so it’s what we would kind of want to sustain at in that broad range.

Sachin Jain — Individual Investor — Analyst

Sure. Am I audible?

Operator

Yes.

Sachin Jain — Individual Investor — Analyst

Yeah. And my second question is, basically, if we have to see the CMS business for next three to five years, can you give some color how you guys are seeing the scalability from here basically?

Saharsh Davuluri — Vice Chairman and Managing Director

I think it’s definitely looking very exciting for us because the quality of the pipeline in the recent periods have been significantly better compared to what we used to have earlier. And I think in terms of the annual revenue per molecule or the margin profile per molecule or the likelihood of the drug itself, the therapeutic area, I think all the important parameters that you would assess [Indecipherable] I think the pipeline has been better. And I think these molecules have also now started commercialization. So, therefore, I think in many ways, there’s lot of scope for growth and obviously, a lot of excitement about the CMS pipeline. The revenue growth that will come, I think, will be evident in the coming couple of years. And it’s hard to paint a picture around it because seeing a percentage number, I think, could be misleading plus it could be either way. But I think we’ve started to see commercialization. And again, as I mentioned, two molecules have already commercialized in the last one year and we expect maybe another couple to commercialize. And each of these by themselves are fairly attractive and cumulatively should be good. And the most important thing I would like to underscore is that our pursuit of new projects continues. Our goal is to keep adding such opportunities to our pipeline and not every opportunity will be successful commercially contracts. But I think we’re continuing to add these and we are creating capacities to support that. So, I think overall it’s very exciting. I think in the the next three to five years, we should see a good healthy growth and profitability from the CMS business. And I think it complements very nicely with the GDS business. So, I think we’ll have a good package on that. But I’m not really able to quantify things and watch potentially.

Operator

Thank you. We have a next question from the line of Kunal from Carnelian Asset Management. Please, go ahead.

Kunal Shah — Carnelian Asset Management — Analyst

Thanks for the opportunity. I have just one question. What are our capex planned for the next year, if at all any?

Abhijit Majumdar — Chief Financial Officer

So, broadly, if you look at trending, we’ve spent around — we’ve been spending around INR100 crores to the capability in our plants and that could be taken as a trending that would continue. Having said that, it’s the large capital investments we have to do to grow our business as and when it happens and we get board approval, we will surely inform you in our quarterly earnings call.

Kunal Shah — Carnelian Asset Management — Analyst

So, basically, INR100 crores would be maintenance kind of a capex, not capacity managing capex? I hope I’m correct.

Abhijit Majumdar — Chief Financial Officer

Yeah. So, it’s a combination of maintenance as well as upgrades, which kind of enables us to meet the capacities of particular molecules which suddenly grew. So, it’s a combination of both. But you could take that as a broad indicator.

Saharsh Davuluri — Vice Chairman and Managing Director

And maybe what I will add to Abhijit’s comment is I think a lot of the business growth may also require capital expenditure, which, I think, will happen in tandem with the business contract or some certainty of business. So, in summary, I think beyond what Abhijit said, if we do invest more, it will be perhaps because we see more growth in terms of some other scale-up opportunities. But I think what we have shared is currently what’s on the radar.

Kunal Shah — Carnelian Asset Management — Analyst

Okay. So, would it be fair to assume it will be more on the CMS business side, if at all anything lined up?

Saharsh Davuluri — Vice Chairman and Managing Director

Yeah. I think typically, we — our strategy has been to add capital expenditure on the back of the CMS molecules. And since the capacity is fungible between GDS and CMS, we are also able to use the same capacities for the GDS business. But I think over the last few years, I don’t think we have created capacity exclusively for GDS business.

Sucheth Davuluri — Vice Chairman of the Board and Chief Executive Officer

Unit III.

Saharsh Davuluri — Vice Chairman and Managing Director

Yeah. I think in Unit III to immediate Unit III operations, I think the initial capacity created was for GDS. But I think the capacity that we are creating now is we are creating new capacities maybe to accommodate the growth from these new CMS molecules. But the capacity is fungible between GDS and CMS. And what we typically do is we look two years ahead and make sure that we have capacities in place.

Kunal Shah — Carnelian Asset Management — Analyst

Okay. Fair enough. Just one question [Indecipherable] side, which I just wanted to understand, as our gross margin clearing because of the product mix change and because of the branches that we have in the CMS specialty businesses. So, how should one look at the margin basically for these three businesses? Again, the ranking is more bright, but still what would be the kind of difference in the gross margins between these three segments? So, as an investor to go out, how much gross margin can vary at — between the three business verticals depending on the contracts?

Saharsh Davuluri — Vice Chairman and Managing Director

I think then they can be, see, I think at a high level, the gross margins of the Prime — sorry, the Specialty and the CMS maybe similar, Kunal. But I think what’s very important for you to understand is at a product level, there is a variation in gross margin product to product. In CMS or in Specialty, we have products which have 80% gross margins. We also have products which have maybe 30%, 35% gross margins. And in — and how we do in a particular quarter is also a factor of how much of a particular product we have shipped. So, I think it’s hard to give you more granularity on how the gross margins will figure out. But I think what we are seeing is a good blend right now. And unless there’s a crazy surge in raw materials or maybe a big fluctuation in forex, these margins are a reasonable baseline for now to take. But we don’t really want to give you spell-out margins of Prime, Specialty and CMS separately because that may also not be very accurate, because then if we ship certain products in CMS, then that margin will change and then you will wonder why is the margins of CMS different. So, I think it’s rather keep the margins at aggregate level and just help you understand that these are broadly the regional margins.

Kunal Shah — Carnelian Asset Management — Analyst

Okay. Fair enough. So, the real reason for asking is if I look at the last eight quarters, the margins, the gross margins specifically had a wide variance. So, just wanted to have color. But fair enough, I understand what you’re trying to say. Thank you. Wishing you all the best.

Operator

Thank you. We have our next question from the line of Sajal Kapoor, an individual investor. Please, go ahead.

Sajal Kapoor — Independent Investor — Analyst

Yeah. Hi. Thanks for the follow-up. A quick question on our R&D infrastructure. So, in terms of our R&D investment, is the current R&D setup in terms of campus size and capability as well as the scientific talent mix, is it good enough for next two years, or do you think we need a bigger R&D campus or we need to significantly scale up from our current base of around 300 scientists?

Saharsh Davuluri — Vice Chairman and Managing Director

I think today, we are operating at about 360, 370 scientists, Sajal. But as you said, it depends — it is fairly tight because we do have — we do use a lot of scientists for troubleshooting in the plants, we use them for life cycle management, we also have active GDS programs, and then we have the CMS business. So, we are making some increases in R&D capacity in the upcoming financial year and we think tactically, that should suffice for the upcoming financial year. But maybe from our a two- to three-year perspective, it may not be enough. So, we’re also looking at slightly medium-term plans which might involve some expansion of R&D. But at the same time, we’re also looking at ways in which we can improve the effectiveness of R&D that could be in terms of maybe putting certain systems in place, trying to also be better in selecting the kind of projects we want to take up in the organization, maybe also trying to do more computer-aided experimentation to reduce of the load on the bench. So, I think there are lot of important initiatives that are being taken up right now. I think starting pilot batches carefully, using good, modern techniques, using chemical engineering expertise is also a way to reduce your load on R&D labs. So, I think it’s an important question. I think we are in the midst of doing proper evaluation on what’s good for doing process R&D. I think decisions to expand will be based on what we figure out in the next six months or so. But, I think, definitely as a growing company, we will have to make sure that R&D resources do not limit our ability to scale up more and more projects.

Sajal Kapoor — Independent Investor — Analyst

That’s very reassuring. Thank you so much, Saharsh. Thank you.

Operator

Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to management for closing comments. Over to you, sir.

Abhijit Majumdar — Chief Financial Officer

Yeah. I’d like to thank everyone for the engaging questions on the business. While we make every effort to answer your questions with the available clarity to us at this point of time, your questions also act as stimulants for our internal conversations. Even as we are excited about our business, it is important for us that our investors share that and your participation today reflects that. And for that, we would like to thank you. Wish you all a good evening and look forward to talking again.

Operator

[Operator Closing Remarks]