RPG LIFE SCIENCES LTD (RPGL) Q4 FY23 Earnings Concall Transcript

RPG LIFE SCIENCES LTD (NSE:RPGL) Q4 FY23 Earnings Concall dated May. 02, 2023.

Corporate Participants:

Yugal Sikri — Managing Director

Analysts:

Sudarshan Padmanabhan — JM Financial — Analyst

Aditya Khemka — InCred PMS — Analyst

Sajal Kapoor — Individual Investor — Analyst

Tushar Manudhane — Motilal Oswal Financial Services Limited — Analyst

Naresh Vaswani — Sameeksha Capital — Analyst

Ankit Pande — InCred Asset Management — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the RPG Life Sciences Limited H2 FY’23 Results Conference Call hosted by SMIFS Limited. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to. Dhara Patwa from SMIFS Limited. Thank you. And over to you ma’am.

Dhara Patwa — Operator

Thank you, Dovin. Good afternoon, everyone. On behalf of SMIFS Limited, I welcome you all to Q4 and full year FY’23 conference call of RPG Life Sciences Limited. We are pleased to host the management of the company and today we have with us Mr. Yugal Sikri, the Managing Director; and Mr. Vishal Shah, the CFO of the company. So we will start the call with initial comments on the results and then we will open the call for Q&A.

Now, I hand over the call to the management. Over to you sir.

Yugal Sikri — Managing Director

Thank you, Dhara. Good afternoon, everyone. Thank you for joining us on this earning call. I hope everybody is fine at home and I hope the pandemic is very, very much behind us.

It’s now my pleasure to share with you briefly the market context and brief highlights of our performance in Q1 and full-year FY’23. Let me first talk a bit about the market context. As you all know, the market is growing at single-digit, sometimes lower single-digit, sometimes higher single-digit. The MAT data indicates it is around 7.9% with the price growth, leading the growth, contributing about 5.1%, new introduction 2.3%, and volume growth continues to be very tardy, it is flat more or less. Let me also — at this juncture only bring out compared to market RPG Life Sciences growths had been substantively higher. The volume growth is in the vicinity of 13%, the price growth is a little over 5% and the new introductions are 2% or so. So put together, our domestic formulation business is registering a healthy 20% growth versus 7.9% growth of the market as reported by IQVIA. On the market, if we look at on positive size biologics, biosimilars are gaining acceptance, e-commerce gaining foothold, API gaining government attention with the PLI scheme, and some of the companies in the top-quartile are also following and see research and they are also filing NDAs.

Let me now turn your attention towards RPG Lifesciences. RPG Life Sciences — for us in RPG Life Sciences FY’23 has been indeed milestone year in the long, long history of the company. Sales first time have crossed 500 crores mark, in fact, we have registered close to 513 Crores. EBITDA has crossed 100 crore mark first time, in fact, it is 107.5 crore. Cash surplus has crossed 100 crore mark, in fact, we are 115 crore. And I’m very delighted to also share with you in our journey of creating megabrands out of our legacy products, Naprosyn has become the first brand to cross 50 crore mark. In fact, it has registered 60 crore-plus in the year gone by. And what’s noteworthy is the — for the fourth consecutive year we have year-on-year upward trajectory on number of financial parameters, sales has grown consistently more than the market for the last four years. All profitability incdices EBITDA, PBT, PAT all have registered year-on-year consistent uptrend or superior growth. Both PBT and PAT has multiplied, has grown six times in the last four years. Similarly, margins have also registered consistently year-on-year growth. EBITDA has moved to 21% in FY’23, PBT is up from 4.4% in FY’19 to 17.9% now. PAT is up from 3.2% to 13.2% now.

Similarly, cash flow has also registered one of the remarkable growth, from minus 14.5 crore in FY’19, I’m pleased to share with you, we are 115.2 crore this year. And, all-of-the-above, with a very strong iron grip on the hygiene. In fact, even in the hygiene front, we have almost reached the industry benchmark. We were around 4% plus expiries in FY’19. We are now down to less than 1.5%. Reaching here been a journey indeed. If I recap FY’19, we had the first thing to do was getting into the business and fixing the fundamentals. From there, we move to process excellence and then to sustainable profitable growth, and I’m happy to share with you today RPG Lifesciences stands amongst the best in the comparator group of less than 1,000 crore turnover with a number of our margins, number of our financial ratios matching up or even number one compared to the peers in the — less than 1,000 crore or 2000 crore turnover company. Yes, I’m referring to EBITDA margin, PBT margin, PAT margins, leverage ratios, interest coverage, debt-equity ratio and on the liquidity ratio, cash flow to sales ratio, and the like.

Let me now turn the attention towards some of the performance parameters on Q4 and then on full year. On Q4, I’m happy to share with you Y-o-Y basis, revenues have gone up by 40% plus, EBITDA 20% plus, PBT 26% plus, PAT 38% plus, and margins, I’m also — every single margin has registered an uptrend. EBITDA from 14.2% to 15%, PBT from 10.5% to 11.7%, and PAT from 7.2% to 8.7%. And all of these performances are very well supported by the three segments of the business which we have domestic formulation, international formulations and API. Just to remind, we have about 67%, 68% coming from the domestic formulation business; 17%, 18% coming from the international formulation business; around 15%, 16% coming from the API. And if I talk about — and the number which I mentioned to you was quarter four numbers. If I have to talk about quarter four, both the formulation business, domestic formation, international formation registered a healthy growth of 19%, however, API was a bit sluggish, largely because of the order effect on by the customers and some inventory adjustments with one of our top customers, one of our top brands, or top products. So, as I think even on the API front, there is no major worry things appear to be normal. That was Q4.

Turning to full year. Revenues up by 16%, we’ve registered a 16.5% growth precise. EBITDA, as I mentioned crosses 100 crore 20% plus growth, PBT 91.7 crore plus 25%, PAT. 67.6 crores plus 31%. Similarly, the margins, EBITDA moves up from 20.3% to 21%, PBT from 16.6% to 17.9%, and PAT 11.7% to 13.2%, in fact, everything renders on the — this year also has improved by a good number of basis points. As I mentioned, it has been the best year for the net working capital also. We have had 48 days of net working capital which 13% to us, which is perhaps the best in the last five or six years. Cash surplus, I’ve already talked to you about.

Let me very briefly mention to you some of the operational highlights which will perhaps answer some of your questions, which you might be having to be raised during the question-and-answer. Product portfolio front, our innovative lifecycle management strategy, which we adopted for all legacy products is yielding results, and Naprosyn as I said, become the first brand to cross 50 crores registering 61 crore also the turnover. New products today contribute — new products launched since FY’19 today continued over 28% to our sales. And the product which we launched last year, one of the mab, denosumab where we launched the product in key therapies is almost reaching 5 crore mark in the very first year of launch. New therapy, which we entered just 2.5, 3 years back Rheumatology has also contributed significantly close to about 15% to the phase of specialty business today.

On the customer front, multiple initiatives were launched to increase the prescriber and the patient base. Today, we cover close to about 90% of all target specialties be it Nephro, Rheuma, Onco, Cardio, Diabeto, Uro, even on CP than GPs front our customer coverage has increased significantly. Digitalization, something which we got during the pandemic time has gone into our DNA. It has helped us to increase our share of voice and the customer engagement dramatically. And I’m sure you remember, I talked about RPG serve it’s a very, very unique FijiTel initiative which we launched during the pandemic. Today, I’m happy to report to you that all 83,000, 84,000 doctors which we cover are enrolled on this platform and it has become a wonderful tool for us to engage our customers bit of any specialty.

Medico marketing initiatives, we believe we are doing the business ethically, has been our one of the fulcrum for customer engagement. On people front, I don’t remember — I don’t know whether you remember, RPG is the only group in perhaps globally we just taken happiness as one of the teams of the entire group, and we not only make sure that a lot of happiness initiatives are launched and implemented, we also have gone to the extent of measuring the happiness at the end of the year. And I’m happy to share with you that the happiness score which was two years back, 83%, which was also considered to be one of the very good scores moved to 84%, and last year it had a quantum jump of 87%, which has helped us to focus on performance-focused culture. On the process front, a number of internal processes are being challenged constantly, adding to agility, speed, and cost effectiveness. That has helped us to reduce decreased COGS, opex, and simplifying the processes.

Going forward, I know you would have read in my — I put across at this time in the website, we have seven pillars of growth. One, in the pharmaceutical business, if you expand international formulation business, which I believe is going to be the second big growth driver for us, the first is the state-of-art increased capacity plants. I’m happy to share with you that over 100 crores of capex has been spent in the modernization of the plants, as well as capacity enhancement. Second is, the plants are getting ready to get the regulatory approvals after becoming modern. We are also working on R&D pipeline, both the international formulation business as well as the API close 9 to 10 products have been identified now and R&D is working on this. In fact, the R&D organization also been strengthened. The third pillar institutionalize innovation and the fourth is technology enablement. A lot of work is going on from back end to front end to have technology adoption so that we are able to increase the speed, we are able to decrease the cost and then the competitive.

First is M&As. We have a good cash surplus available to us and we want to deploy that with well thought out M&A strategy which is in line with profitable growth, which we have talked about early on. The next is we also looking at exploring adjacencies in our businesses and see that how do we see draw on the synergy of the customer segments which we cover. And the last one, I think very, very critical for us is talent development, and wherever we do not have the talent, talent acquisition. So these are the seven pillars going forward which are driving — which are set to drive our growth. You will recall, I’ve mentioned, we had looked out very diligently planned transmission agenda. There were six tenets of transformation agenda and every single tenant execution is being monitored very, very closely and that’s what has resulted into the performance what we see today.

So, I thought let me just give you a pre-brief about the financial performance as well as the thoughts or the strategy behind the financial performance before I invite your questions. So here I stop and request the questions to come over. I’ll try my level best to answer the question. If I do not, I’m not in a position to answer the question, I’ll take down your question and maybe reach out to you later.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Sudarshan Padmanabhan from JM Financial PMS. Please go ahead.

Sudarshan Padmanabhan — JM Financial — Analyst

Thank you for taking my question and congrats on great set of numbers. Two questions from my side. The first on the domestic side. It’s very nice to hear new launches doing ver well. But if I look at the split, we have a proportion of whole legacy products which still have a lot of speed. We have not gone on antibodies that I think we didn’t launch more products and in the power in the market, and of course, the new products. If I’m looking at, say, the next three years horizon, how do you see each of these subdivisions doing and how do you see the proportion of that in mixed period? I have on the — the other question, but I will come back up after I know answer in first.

Yugal Sikri — Managing Director

Yeah. Thanks for the question. I think that’s very relevant for us. In fact, product portfolio rejuvenation is the first of the five pillars we have for domestic formulation business improvement. And when we crafted our portfolio strategy, we had focused on three things, three pillars, so three sub pillars. One is how do we maximize on our legacy products because legacy contributed close to about 67% to 70% of our turnover and that’s where we decided to have a very diligent lifecycle management strategy. And result, we have launched close to about eight or nine-line extensions for our legacy products and the legacy products is growing today much add of the market around 16% to 17%. Thanks to the lifecycle management strategy which we have. That’s the first pillar.

The second pillar was the focus on the specialty business. As you all know, we have Nypro in — we have a dominant player in Nypro, so we thought we should strengthen the specialty business, that’s where we have got a great customer engagement. As a part of the lifecycle management for our immunosuppressant basket, we decided to branch out for Rheuma because rheumatology also had the usage of immunosuppressant products which were earlier being only natural. So we forayed into dermatology and now we are foraying into dermatology and gastroenterology not the mass side but the class side, the specialty side. And with the result, all the three segments are — the third one I must mention is chronic. So great strides in the first one, which is lifecycle management legacy products, very good traction in the specialty side.

The chronic side, we have entered, we done all that what we could do. The progress there is a bit slow. We anticipated that to happen because that space is already occupied by the big players, but we have a good representation of product portfolio today and we expect that also to grow significantly. Going forward, I expect all the three to contribute, the legacy business, thanks to lifecycle management, specialty business, thanks to the lifecycle management of the Immunosuppressants plus entry into the new therapies like rheumatology, going forward in dermatology and gastroenterology. And the third is continued thrust on the chronic portfolio. So I expect all three to contribute going forward. Do you talked about [Indecipherable] antibodies, has been our interest because we are strong in speciality. And the specialty has a place for mabs or monoclonal antibodies and happy to share with you that the five mabs which you have launched have got excellent traction, they are contributing close to about 70% or so to our turnover in the domestic formulation business.

So that’s my commentary on the domestic formulation and the new products. I hope I could answer the question.

Sudarshan Padmanabhan — JM Financial — Analyst

Yes, sir. It was very helpfil. And, sir, how much would be the chronic today and maybe expected in the next two years, sir?

Yugal Sikri — Managing Director

Yeah, chronic is not that big, frankly speaking, that’s been our area which we — from the product portfolio side has strengthened, we had a legacy product called Aldactone, which I call as it gate opener for cardiologists because the Aldactone is very well known brand name in the cardiologists. The traction is not that great. The chronic might be contributing close to about now so around maybe 11% or 12% cardiovascular, 11% to 12%, and yet another chronic therapy which we are focusing on is urology that also should be contributing around 2% to 3% to our turnover now.

Sudarshan Padmanabhan — JM Financial — Analyst

Sure, sir. Sir, my second question is on the margins. If I look at from FY’19 till now, consistently we have been improving the margins, in fact, the actual EBITDA margins have moved from 10% or 20%. And when we hear commentary going forward some several stakeholders in the pharma space they do talk about the some prices coming down and certain costs coming down, and especially with MR productivity that you are seeing and basically the scaling up happening faster, where do you see, number one, the margins from here? And can you also give some color, because the working capital improvement has been very good this year, primarily on the inventory side, we have been able to see about 12 crores and the payables side about 16, 17 crores. Is this something that one should expect going forward, what should be the working capital [Indecipherable]?

Yugal Sikri — Managing Director

Okay. So your first question on margins, EBITDA margins, EBITDA margin it has been function of both components of the past, which is COGS as well as opex. And I must share with you that our cost reduction story is structural, what do we mean by structural is that the basic components of the costs, particularly the ones which are contributing greater proportion, have been addressed from a fundamental standpoint. One example in case is organization structure. We have looked at the organization structure very, very closely and where we address the roles, the duplication of the roles, span of control, and all of that put together has helped us to give good percentage points in the cost reduction. Second, our unrelenting focus on the processes, even our manufacturing costs have shown a significant decrease. Thanks to a lot of efforts there, which include that size optimization process simplification, import substitution, alternate vendor development and the top of it all is the first ever exercise which we did was the formulations in reengineering or product reengineering first time in the history of 50, 55 year old company where we challenge every single formulation of 13 SKUs, which contributed over 80% of the domestic formulation turnover. So all of that has put together has, you just mentioned, has shown 11% to 21% EBITDA increase and that’s likely to continue.

Now going forward, the drivers of further EBITDA margin improvement are going to be the product mix, the scale of operation, and as we go along, I think those are the factors which should help us to deal with the upward trajectory which we’ve set for EBITDA margin. Of course, I must hasten to add here, the input cost increase, which we were expecting to come down, has come down to some extent, but not to pre-COVID level and that is putting pressure on the material cost. But all the cost optimization measures which I just talked about are helping us to mitigate the impact of these opex or these cost increases, input cost increases which we are seeing. So I’m optimistic for future on the margins. Sure, sir. Thanks a lot, I’ll join back.

Operator

Thank you. The next question is from the line of Aditya Khemka from InCred PMS. Please go ahead.

Aditya Khemka — InCred PMS — Analyst

Yeah, hi. Thanks for the opportunity. Hi, Yugal sir.

Yugal Sikri — Managing Director

Hi, Aditya.

Aditya Khemka — InCred PMS — Analyst

Sir, on the employee cost this quarter, so I was just noticing that seems like this quarter has substantially higher than what we normally do [Indecipherable]. Yes, can you hear me, sir?

Yugal Sikri — Managing Director

Yeah. Yeah.

Aditya Khemka — InCred PMS — Analyst

Okay. Sir, I was talking about the employee cost this quarter, so the employee cost this quarter things should be substantially higher than what we normally do as a run rate. It is around 35% growth year-over-Year on the employee costs. So could you just talk about what changed there as we hired additional people? What is driving this additional employee costs?

Yugal Sikri — Managing Director

Yeah. I think it’s an important observations Aditya by you. Yes, the employee costs are up this time and that’s largely if you see what it is yes, on the full year basis, the employee cost is up 17% versus the 16.5% increase in the revenue. And this increase, which you see in the quarter is largely because of the good performance which we had this year and therefore the incentives for management which we had planned are part of these employee cost provisions which you see there. But for the year basis, you’ll see a growth of 17% versus 16.5% growth of revenue. Again, we are growing now and our talent requirements are increasing. The kind of the future we are envisaging, Aditya, will happen only through good talent acquisition and talent is expensive these days. So, across the roads which we have, we are looking at the talent for attractive incentive plans for the for the retention and increased contribution. That’s what is contributing to the employee cost.

Aditya Khemka — InCred PMS — Analyst

So, sir, going forward, when you say that we seeing margin expansion in continue, do you feel your employee expenses will grow in line with your sales or will they outstrip because they will need to invest in talent? And obviously when you invest in talent, some of the payback happens in future years. So just some understanding there will be helpful.

Yugal Sikri — Managing Director

Yeah, we adding to the way we are doing is we are doing competition benchmarking for our employee costs. So you tend to move too little on the higher quartile as you move ahead because you want a better talent, but broadly speaking I don’t think that’s going to outstrip. I think it should be in line with the revenue growth which we see today. It’s not going to be — If it is — the turnover is increasing by 15%, 20% it will be 30%, 40%, no, it’s not going to be that way. It should be in line with the revenue growth which you normally see.

Aditya Khemka — InCred PMS — Analyst

Understood. And sir, this particular quarter, we also saw lower sales numbers coming in the international formulation business as well as the API business. API business sales are actually significantly lower than what we can between 20 and 30 crores a quarter, this quarter was substantially lower than that. And I think the same goes for international formulation business. So could you just help us — I know in your opening remarks you said that the API order pattern in the inventory with the customers, but that’s we have been hearing from other API companies about that over the last three, four quarters whereas that things has apparently hit us as RPG more in this quarter. And your international formulation business also this quarter has substantially slowed down versus what we did in the first three quarters of the tenure. So any colors there, sir?

Yugal Sikri — Managing Director

Yeah, in term — if I have to split to just indicative segmental performance, domestic formulation has registered 20% plus growth, the international formulation business also is 13%, 14% growth. Yes, it did lower than what it was earlier, but I think it’s still good. The 13%, 14% is not a bad number. And, yes, the API was the smallest business in my portfolio has somehow — and you know the portfolio is also limited there. We have concentration of the business in couple of markets and couple of products and there were some inventory correction but I have reason to believe because we are in touch with the customers there, it should not be stretching to the quarter one or quarter two going forward because the correction what was to happen has happened. So I don’t envy such things to happen going forward. I believe this was one time correction in this quarter. And I hope that will bring API business to the kind of the growth trajectory which we’re seeing in earlier years. I must also add here, Aditya, that we have decided that the international business should also become our yet another growth driver in a step wise manner for which we are investing in the modernization of both plants, API and international formulation, and we are also working on the product pipeline both for international formulation as well as API business and there is a time period which is one and a half years to two years for the new product development by the time they get develop, get regulatory approval and commercialize. But I see a good traction coming from international formulation business, perhaps even a little higher than the domestic formulation business going forward. Similarly for API, API was our third priority, but with the API getting traction across and we modernizing our plants and the new product pipeline which you are working on, I expect API also to be a growth driver 1, 1.5, 2 years hence.

Aditya Khemka — InCred PMS — Analyst

And last question sir, so on the modernization bit, we didn’t have to take any shutdowns. Sir, have you taken any shutdowns in the plant for modernization? And number two, hence, what is the capex plan for you in FY’20 forward and onwards, we can talk about that.

Yugal Sikri — Managing Director

Okay. Okay. Good question, Aditya. You have perhaps bidding with good pharma companies and therefore you have an insight of whenever there is a modernization there is the possibility of plants shutdown. Yes, in our case also there would be a plant shutdown for — I would say plant shutdown we have two, three blocks and which one block will shut down, but the 40 block shuts down we have inventory buildup planned for period of shutdown already and so that the sales are just not going to be impacted because the inventory buildup will happen for, it’s not going to shut down for long period, it’s going to shut down for our three months or three and half months or so. But before that period we have the inventory build a plan in place. So there is no worry on that count whether that will impact our turnover. And what was your second question, Aditya? On capex, okay, capex. Yeah, as I mentioned in the last three years, including this financial year, we have close to about 100 crore-plus capex on the two plants being spent. All this should be over by the end of this financial year, and at the end of it, I see capacity improvement almost to the tune of 40%, 50% in the API and around 15% to 20% in the Ankleshwar formulation plant. And more importantly, the regulatory approvals from picks as well as from EU regulators should also happen. So that’s not is a development on the plants front. I hope I could answer your question.

Operator

Sir, the line for the participant has disconnected.

Yugal Sikri — Managing Director

Okay.

Operator

We will proceed with the next question which will be from the line of Sajal Kapoor, an Individual Investor. Please go ahead.

Sajal Kapoor — Individual Investor — Analyst

Yeah. Hi, thanks. I would like to start with the world of a reputation for the entire management team and for good execution, not only last year, but over the last four years and Mr. Sikri join back-end of 2018. And there’s a lot of visible improvement on the business hygiene, the cash flows as well as the return ratios, everything has improved and quite remarkably. But there have been a lot of efforts and initiatives taken on the people side as well, which not many pharma companies bother about. So it’s really heartening to note that we have invested a lot behind our people and the happiness initiative. Then we attract those initiatives as well. So it’s not just lip service that we are doing.

Yugal Sikri — Managing Director

Yeah.

Sajal Kapoor — Individual Investor — Analyst

So congratulations and best wishes for the future on that. And coming to my question, sir, on our API business, I heard your comment that API can be a growth driver going forward after this modernization and capacity doubling is out of the way. The question really is what gives us the right to win, as in India, we have many strong API players. So difficult to compete against somebody whos core competencies API versus RPG where our core competence is, branded formulations, and connect with the doctors and connect with the international customers. API is not our core competence. What gives you the confidence that API can be a growth driver going out? Thank you.

Yugal Sikri — Managing Director

Yeah. Thanks, Mr. Kapoor for very generous appreciation. I sincerely thank you. Coming to your question on API, I think it’s also very valid question, what is our right to win in the API space which is very, very competitive. Yes, Mr. Kapoor, I also had the similar thought at the back of my mind when I focus on the three business segments. So we focused on domestic formulation, then the second was international formation, third was API. Now, with the API situation changing in the country and with the fact that we have an API plant which is with us for decades now and the fact that we have the infrastructure, whether it is R&D, regulatory, asset also in place, I thought we can look at API little more differently than what we have looked at so far. And therefore, right-to-win basically comes from two or three sources, one is our strong present immunosuppressant. We are one of the major supplier of Azathioprine both on the API side as well as on the formulation side. So we have connect with the customers, the customers with whom we are dealing we’re dealing for almost 15 to 20 years now and we have a good stickiness with those customers. So one immunosuppressant and sticky customers.

The second is we have international formulation, domestic formulation products which we can have backward integration for some of our products and that will help us to improve our margins because today we are sharing those margins with others, tomorrow you’ll have the internal manufacturing. And the third one is selection of the API basket itself. Now we know that we are not a large player, we can compete with TV’s, etcetera, but we can identify some of the niche APIs which have limited competition, limited number of DMFs slides and we work on those APIs and are able to connect with the innovative formulators I think we have business case for us. So these are the two or three drivers which are funding the pillars of our product portfolio strategy, number one. Number two, since we added plant already and we have some kind of expertise already available in terms of people, we thought we can leverage that in this business. And also this business is more profitable, inherently more profitable to us. So part of that put together has helped us to craft an API strategy. We have been very careful and crafting the strategy, we have been very careful in deciding which products we should develop and we have also been very careful in deciding the markets where we should be entering. I don’t know whether have been able to answer your question, Mr. Kapoor.

Sajal Kapoor — Individual Investor — Analyst

No, that’s really helpful and appreciate that detailed response. And just a couple of quick questions really, one on the gross margin. So I see the chemical prices have cooled off substantially on a y-o-y basis and so we have seen a lot of high price inflation on the input raw material front that’s cooled off now. And plus the fact that there is a set WPI-based formula for price right, which will be happening starting Q1, but the effect of that may not be visible in Q1 because of the channel inventory. So maybe the month of June, we’ll get some benefit and then full benefit should come in the Q2. So putting these two things together, the cooling off on the raw material side, as well as the price hike that should give us to the gross margin. And if that is a correct understanding, then majority of that increase in gross margins should filter down to the operating margin and is that the right sort of as explained?

Yugal Sikri — Managing Director

Yeah. Mr. Kapoor I think you are on the right track on the thought. If the raw material prices go down, yes, these would immediately be passed on. It will have an impact on gross margin. The fact also is Mr. Kapoor that I have been waiting for these price decreases in the inputs for a long time and was expecting that these this input cost will come down to pre-COVID level which barring couple of categories like aluminum foil to some extent in solvents. Other places, I’m not seeing the decrease the way I expected. Yes, if that happens, we should be — they should be visible in the gross margin. You would have seen that our gross margins have actually improved over the last five, six years. However, in the last couple of years, they are almost stagnant. Input cost has gone up, the material costs have gone up. However, the lot of optimization has happened on the manufacturing cost, the manufacture overhead with the result, we see the impact on the cost is not that much, it is balancing out-innovate. But if the material costs go down in future it will definitely have a bearing on the EBITDA margins and the gross margins going forward.

Sajal Kapoor — Individual Investor — Analyst

Yeah, sure. That’s helpful. And finally, so very interesting slide on our slide deck and could you add some more color to the pillar two and three which is the R&D and the innovations pillars on those seven pillar?

Yugal Sikri — Managing Director

Okay. So, thank you so much that you — we actually uploaded this just a few hours back. I sincerely appreciate that you could spare time to go through that. Yes, you talked about the R&D pipeline and innovation. Am I right? These are the two points?

Sajal Kapoor — Individual Investor — Analyst

Yes, correct, pillar two and pillar three in that [Indecipherable] look like?

Yugal Sikri — Managing Director

Sure. On the pillar two, the R&D pipeline, basically, we are deploying R&D for the international formulation and the APIs to be exported. That’s where we are making our R&D to work. The international formulation business, we have very clearly defined strategy. One is we focus on our strengths which is immunosuppressant basket. We are strong player in Azathioprine. We are now wanting to work on mycophenolate, which is much bigger in market size compared to Azathioprine. So first focus is on immunosuppressant basket. We want to have every single strength and variant before these four molecules which is Azathioprine, Mycophenolate, Tacrolimus, Cyclosporine and currently the work is on, number of products are number of these various are under development and are going through [Indecipherable] studies, some of them are going through the [Indecipherable] study. Second is we are focusing on the products which are — which need special manufacturing conditions like low RH, low temperature, low volumes, which does not attract the attention of biggies. And the third one is some amount of complexity in the formulation and you know that there are complex generic products prolonged with these formulations, sustain these formulation etcetera are the ones which are due the third category we are focusing. Fourth is we have our own API plant. So we want to have forward integration for those APIs or backward integration for our formulations. So some of the API we’re manufacturing which are in our target list are those APIs as well. So this is on the international formulation side.

On the API side, we have clearly identified certain — as I was mentioning earlier, we clearly identified certain APIs which are niche size is $700 million and the DMS five are very less number because the volumes are low and that’s where we can get better margins and that’s our focus on the API. R&D pipeline, international formulation pipeline I’ve already mentioned. On the innovation side, what I meant by institutionalizing innovation is, we are old company, 50, 55 year old company and with the great track record growth. So basically this old processes, old systems, old formulation is the way it has been going. So what we’ve tried to do is involving every single head of the department. I want 50-plus the departments in various functions involving every single person to identify what is new way of doing what they’re currently doing and I’m happy to share with you that we had record innovation projects well over 120, 130 innovation projects which the teams worked out. We also have internally innovation festival at the Group level, second highest entry gain from our company in the entire group. And I think all of that is really helping people to think differently and also eventually helping whereas the revenue side or the cost side. So that’s what I meant by institutionalization of innovation.

In the sales force, we have created a platform called Navigator, every quarter we have a meeting of 50 select sales force people who come up with the new ideas, fresh ideas to promote our products, to deal with the competition and thereby they get rewarded. There are good number of Innovation Awards created in the system and that’s what I meant by institutionalizing innovation across the organization. I hope, I could give some flavor.

Sajal Kapoor — Individual Investor — Analyst

That’s very thoughtful and reassuring the deeply. Thank you so much and wish you the very best going forward. Thank you.

Yugal Sikri — Managing Director

Thank you, Mr. Kapoor.

Operator

Thank you. [Operator Instructions] The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services Limited. Please go ahead.

Tushar Manudhane — Motilal Oswal Financial Services Limited — Analyst

Thanks for the opportunity and good set of numbers for the year ’23. Sir, just to understand how many MRs you intent to add for FY’24 [Indecipherable].

Yugal Sikri — Managing Director

Could you kindly repeat your question?

Tushar Manudhane — Motilal Oswal Financial Services Limited — Analyst

The number of you MRs you intend to add or other field force you intend to add for next 12 to 15 months?

Yugal Sikri — Managing Director

Okay. Okay. Thanks for the question. Besides this question gets asked in every meeting and I take the opportunity to clarify my thoughts on the MR expansion is that we — I don’t look at the field force expansion per se. I look at the target customer coverage. So I’m happy to share with you with the field force expansion, which you have taken the last three years, which is a creeping 10% or so every year, we are able to cover all our target customers up to the tune of 85% to 90% except GPs, general practitioners, where also we have increased our coverage almost around 30% more than what we were actually covering. So that’s how we look at. Now as we dermatology, as we enter gastroenterology, we will also add the number of reps accordingly. So that’s our thoughts. And it actually works out close to about 8% to 10% of the field force expansion on an average basis every year.

Tushar Manudhane — Motilal Oswal Financial Services Limited — Analyst

Understood. Sir, the intention to ask was that while you have already discussed in detail in terms of capital allocation for the manufacturing facility, apart from additional remarks and now that you have good amount of cash also that is coming up on the balance sheet, what would be the scope of investment for branded side apart from MR addition and given that you’re already getting into more number of therapies.

Yugal Sikri — Managing Director

Yeah. So, as far as the sales force addition is concerned, as we enter new therapies we will at representative then and we will make sure that we cover 85% to 90% of the targeted customer. So next in the list as I mentioned is dermatology and gastroenterology and that’s where — and there also we are not targeting mass specialists, we are talking about the class specialist who focus on the high end of the diseases and high end of the product. So that’s on the expansion side. What was your second question I —

Tushar Manudhane — Motilal Oswal Financial Services Limited — Analyst

So any further capital allocation apart from MR addition or through inorganic growth to get into further domestic formulation branded fees?

Yugal Sikri — Managing Director

Yeah, actually I request you to kindly look at the website, we have put seven pillars there. One of the pillars for our future is M&A, mergers and acquisitions. As you likely mentioned, we have good surplus now and we also crafted our M&A strategy and we are diligently working on this maybe 15 to 20 proposals would have seen in the last one year, but we’d be — we want to be thoughtful when we pursue the M&A target and that war chest which we have. Apart from modernization of the plants and creating new product assets in R&D, it will be deployed in the inorganic route as and when we get the right candidate.

Tushar Manudhane — Motilal Oswal Financial Services Limited — Analyst

Thank you. That’s helpful.

Yugal Sikri — Managing Director

Thank you.

Operator

Thank you. We have the next question from the line of Naresh Vaswani from Sameeksha Capital. Please go ahead.

Naresh Vaswani — Sameeksha Capital — Analyst

Yeah. So thank you and congratulations on good set of numbers. So first question is ceiling prices which country based this. So I wanted to understand how much impact you foresee on the domestic growth in FY’24 due to this or do you think that the majority of that will get set-off by the WTI which is that you will be taking?

Yugal Sikri — Managing Director

Okay. So you are talking of the balancing out the WPI increase. What are the factors you mentioned? I’m sorry. I couldn’t get that.

Naresh Vaswani — Sameeksha Capital — Analyst

Yeah. So the ceiling presence under the MLUM drugs which got revise.

Yugal Sikri — Managing Director

Yeah, I understood now. I understood. Thanks, Naresh for bringing that important point. Yes, the ceiling price reduction as like any other pharma company some of the products of ours also covered there. But as you rightly mentioned, WPI increase which you have got 12% plus this year and the price increase in the decontrolled products which we normally have, I should be able to help us to offset the decrease in the prices and we are also internally was that a lot of areas for the cost reduction further repeat us on the cost reduction and third is also looking at our trade practices, we visited the trade practices. All these three put together should help us to tide over if there is any negative impact in the ceiling price reduction.

Naresh Vaswani — Sameeksha Capital — Analyst

Okay, sure. And second on the coverage which you mentioned that gastro and dermatology are the next two therapies where you have a target. So what sort of products do new plan to market in these two therapies?

Yugal Sikri — Managing Director

The therapies of? Which therapy you talked about? Could you please clarify?

Naresh Vaswani — Sameeksha Capital — Analyst

For dermatology and gastro and then gastro you’ve mentioned, right?

Yugal Sikri — Managing Director

Yeah. Okay. I think good question. See we have a immunosuppressant basket in our range which is Azathioprine, Mycophenolate, Tacrolimus, Cyclosporine, these are the products which are also used in derma and gastro. Gastro, for example, there is a indication called ulcerative colitis in that indication we use the immunosuppressant. So, we will promote our immunosuppressant to these target audience. As we promote these products in these target audience, we will also — we have identified product in our product grade which are targeted towards dermatologists and gastroenterologist, particularly the higher-end, I’m talking about monoclonal antibodies and the like, which we have identified, which will be launched for these two specialties and that’s the portfolio. These are part of our product portfolio grid which we have created three years back and it has over 40 products included. We have launched few products already and quite a many are in the play now and which we should be seeing the light of the day going forward.

Naresh Vaswani — Sameeksha Capital — Analyst

Understood, sir. Thank you and all the best.

Yugal Sikri — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Ankit Pande from InCred Asset Management. Please go ahead.

Ankit Pande — InCred Asset Management — Analyst

Hi, thank you for the opportunity. Sir, congratulations on the great set of numbers. So most of my questions have been answered. I just had one question on the gross margin front. So on a sequential basis, the gross margins have come down from around 67.5 to 66.7 and this is despite having a strong growth in the domestic formulation also. So, sir, any — and do you have mentioned that there is still an input cost pressure, so that might be one of the reasons, but any other thing that missing out or by as the gross margin down sequentially?

Yugal Sikri — Managing Director

Yeah, I think the largely it is to do with the input cost, frankly speaking, and that is the one which has one of the major implications on the cost. And second also is particularly when you have a small business, product mix becomes important and that also plays a role. As I mentioned to you, there was some inventory correction happened in one of the major products in the major customer and once that settles down, once that gets normalized, I don’t think even on that front I have a worry on margins. I hope that answers the questions, Ankit.

Ankit Pande — InCred Asset Management — Analyst

Yes, that’s it from my side. Thank you.

Yugal Sikri — Managing Director

Thank you.

Operator

Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Ms. Dhara Patwa for closing comments. Over to you ma’am.

Dhara Patwa — Operator

Yeah, thank you. Thank you, Yugal sir, Vishal Sir and Mr. [Indecipherable], for spending your valuable time and providing this opportunity to host the call. Sir, any closing comments you would like to give?

Yugal Sikri — Managing Director

Thanks, Dhara, and thanks everyone, on the call. It has been a great opportunity for me to talk to you about what today of the RPG Life Sciences and future of RPG Life Sciences. I would just simply mentioned that we have come to a stage from fundamentals succession to process excellence to sustainable profit growth to benchmark performance amongst the comparator companies. Now, we are all set for scale up speech where we need to simply scale up the business beyond the current turnover and for which we listed down seven pillars and we are diligently working on each of the seven pillars going forward and which also takes into consideration the emphasis on domestic formulation, which was slated to be our first priority and we are also stating that the international formulation is also become our second priority and that’s where the pillar one and pillar two in fact the pillar three and pillar four also come into play. So, with this, hopefully, we should move to a yet another league going forward. Thank you so much.

Operator

[Operator Closing Remarks]