Sequent Scientific Limited Q3 FY22 Earnings Conference Call Insights

Key highlights from Sequent Scientific Limited (SEQUENT) Q3 FY22 Earnings Concall

Management Update:

• SEQUENT saw significant improvement in the API order book and dispatches in the quarter that were almost at 3Q21 levels, which was the best ever quarter in terms of the reported API numbers.

Q&A Highlights:

• Sanam Jain asked if the company’s 15% of API dispatches struck at the ports are likely to spill over to 4Q22. Manish Gupta MD said that the dispatches are not recorded as revenue in 3Q22 and will be recorded in 4Q22.

• Sanam Jain also asked that in a normal economic scenario, what percentage of the company’s API business is contributed by the albendazole molecule. Manish Gupta MD replied that about a third of the company’s API revenue is contributed by albendazole. And this is a combined sale, both human and animal health products.

• Prashant Kumar with Solitair Financials enquired about the quantum per year for the multiyear master supply agreement with a leading top 10 animal health company. Manish Gupta MD said that at peak the company expects about between $10-12 million of incremental revenues from the agreement. SEQUENT added that a significant part will also occur in FY23.

• Bharat Sheth from Quest Investment asked about maintaining EBITDA in somewhere near the range of FY’21 levels and if it’s pre-ESOP.  Manish Gupta MD replied that the company talks of operating performance pre-ESOP, which SEQUENT directly controls.

• Rushabh Doshi of Proinvest Nirmiti asked about the EBITDA to cash conversion and in FY22 what would that number look like. Tushar Mistry CFO answered that the EBITDA to cash conversion that the company used to have prior to FY22 was upwards of 75%. For the current year, there is pressure on the conversion and for FY22 the company expects to come below 40% is the estimate currently. For FY23, the conversion is expected to go up.

• Rushabh Doshi of Proinvest Nirmiti asked about the commercialization of the multiyear master supply agreement. Manish Gupta MD answered that it will start next year, probably towards the end of 1Q23 or early 2Q23 would be the first supplies. The peak will be somewhere in FY24.

• Vishal Manchanda from Nirmal Bang enquired about the driver of LATAM performance that was up 30% QoQ. Manish Gupta MD said the company has been consistently outperforming in LATAM, largely in Brazil as it has more products, commercialized more products and gained more accounts in the local market. There hasn’t been fluctuation in the Brazilian business and every quarter it has been growing.

• Vishal Manchanda from Nirmal Bang asked about if gross margin is expected to come back to the similar levels as in the past. Manish Gupta MD said the company expects recovery but going back to the earlier levels would take time. The company added that it cannot be done in an year because the costs stay high and it’s difficult to pass on all the cost to customer.

• Varun Pinto from Value Educator asked about the status of the Bremer Germany facility. Manish Gupta MD answered that Germany is developed only for the US market. This is the only project that got derailed due to COVID. The company has to undertake a scale up of the facility for US FDA and also upgrading for the FDA. The project will be taken up from April 2022 and facility will be ready to be offered to US FDA by end of 2022.

• Varun Pinto from Value Educator also asked what countries the company is looking to export from the Turkey facility. Manish Gupta MD replied that for Turkey, it’s a EU approved comprehensive facility across eight manufacturing formats, including injectibles, orals and liquids. SEQUENT is targeting everything else ex-US.

• Varun Pinto from Value Educator enquired about capex for next year. Manish Gupta MD answered that the company is envisaging an investment of little over INR100 crores over the two year for 18 months period. This will spread between Brazil (a small bit), Germany, Turkey and in India.

• Chintan Sheth from Quest Investment asked about the strong growth driver of 28% in the API business, excluding albendazole. Manish Gupta MD said there is no specific reason and it’s part of the business strategy. The company’s focus is on regulated markets and regulated customers. Therefore as more and more customer put SEQUENT on their formulation, the growth happens. Also, this is the reason the company guided to upwards of 20% growth in the API business.

• Chintan Sheth with Quest Investment also asked about the number of molecules added in the first nine months and the guidance on new filings. Manish Gupta MD replied that the company has done three filings; three new APIs have been commercialized. However, none of this matters from a current year revenue perspective. On the filings guidance, SEQUENT said it’s happily placed with 3-5 APIs each year.

• Chintan Sheth of Quest Investment also asked that once albendazole stabilizes, what’s the growth expectation for API business.  Manish Gupta MD replied that it expects 20% plus growth in the API business.

• Bhavesh Gandhi with YES Securities asked about the nature of the contract of product supply to the leading top 10 animal health company. Manish Gupta MD said it’s a standard supply price contract. There is a price with the flexibility to review the price every year in terms any cost pressures. There are certain minimum volume obligations and forecasting and all that. It’s a very typical supply contract.