Solara Active Pharma Sciences Limited (NSE:SOLARA) Q2 FY23 Earnings Concall dated Nov. 09, 2022
Corporate Participants:
Abhishek Singhal — Investor Relations
Jithesh Devendra — Managing Director
Hariharan Subramaniam — Executive Director and Chief Financial Officer
Analysts:
Rohan John — ICICI Securities — Analyst
Palak Deka — Individual Investor — Analyst
Sumit Gupta — Motilal Oswal Financial Services — Analyst
Mitul Jan — Individual Investor — Analyst
Nitin Agarwal — DAM Capital — Analyst
Anish Kara — VT Capital — Analyst
Rohit Suresh — Samatva Investments — Analyst
Presentation:
Operator
Ladies and gentlemen, good day, and welcome to the Q2 FY ’23 H1 Solara Active Pharma Sciences Limited Conference Call. [Operator Instructions]
I now hand the conference over to Abhishek. Thank you, and over to you.
Abhishek Singhal — Investor Relations
A very good afternoon to all of you, and thank you for joining us today for Solara Active Pharma Sciences Earnings Conference Call for the second quarter and half year ended financial year 2023. Today, we have with us, Jitesh and Hari to share the highlights of the business and financials for the quarter. I hope you’ve gone through our results release and quarterly investor presentation, which have been uploaded on our website. The transcript of this call will be available in a week’s time on the company’s website. Please note that today’s discussion may be forward-looking in nature and must be viewed in relation to the risks pertaining to our business. After the end of this call, in case you have any further questions, please feel free to reach out with the Investor Relations team.
I now hand over the call to the management to make the opening remarks. You take Jitesh.
Jithesh Devendra — Managing Director
Thanks Abhishek. Good evening, everyone. Thank you for joining the call today. I’d like to start off, We’re sharing good news that we have received CEP approval for manufacture of ibuprofen from our Vizag site, which is in addition to our Pondicherry sites. We also received approval for ibuprofen DMS from China for our monetary site, making a total of two products approved by Chinese authorities. This is our first step towards Vizag being qualified for regulated markets. We’ve also amended our U.S.
DMS to include Vizag site as an additional site for ibuprofen with one of our major customers filing PS application. We expect a prior approval inspection by U.S. FDA in the next financial year. We have initiated validation of new products from Vizag site, which shall be filed in second half of this financial year. Coming to the Q2 performance, we had a steady performance during the quarter, with Q2 revenues at 342 crores, which is greater than 85% of our historical run rate. I would like to reiterate that our cost correction strategy is in action now. We continue to focus and build on the actions that we have initiated in this fiscal year to get back to growth, both in terms of revenue and margins. improving our cash flows and strengthening our balance sheet.
The first one, the revising the base business growth and profits by bringing back the momentum we had on customer centricity by better networking and continuing focus on operating cost reduction, continuous improvement program and efficient inventory management. With improved business margins in Q2 FY ’23 and along with our actions taken in H1 the stage is set for a stronger bounce back in second half of this financial year. Reckoning the R&D focus by adding 15-plus new programs for the year, and we are on track to file six new products in this financial year and adding more high-volume products under the cost improvement basket. We have filed eight new market extensions for nine of our existing APIs for Q2, taking the total to nine new market extensions for 10 of our existing APIs for shown.
And then enhanced capacity usage at visit by supplying validation qualities to our customers. Although our greater focus will be on regulated markets, we are tapping opportunities in markets with no regulatory buying, and we are planning certain product supplies from a to markets where there is less regulatory binding from Q3 of this financial year. And this will help to reduce the under recovery at wise. Our white-tie strategy is playing to plan as stated at the opening of my speech as one of our customers has already filed the PAS for the U.S. FDA, and we have received the CEP approval for manufacture of ibuprofen. We have invested on capitalization capability at our Vizag site, which is a unique capability added for one of our ongoing product validations. Coming to an update on the Cuddalore site. In the last quarter, I mentioned we have one pending approvals from our Cuddalore site. Our customer has filed one of our polymer products, taking the total to 12 pending approvals from U.S. FDA.
Our focus market, Latin America, specifically Brazil and China has also seen traction. We secured a major order for one of our key products from Brazil, for which the delivery will take place in Q3. With this, our total number of filings in Brazil is two, and the target is to file three to four products in this financial year. On CRAMS front, we have had good inroads in the U.S. market with onboarding of our CRAMS set for North America. We will see traction of these efforts in FY ’24. Meanwhile, the RFPs we have submitted in first half of this year, we are hoping to win some in the second half of this financial year. With a focus on all the actions about, we are confident that in outgoing Q4, we will return to our historical revenue run rate of minimum INR400 crores per quarter, with mid-teens EBITDA margin and turning PAT positive.
I now hand over to Hari to take us through the financials for Q2 FY ’23. Thank you.
Hariharan Subramaniam — Executive Director and Chief Financial Officer
Thank you, Jithesh.We are pleased to announce our quarter two year two results. Key highlights for the quarter are the following. Our revenue is 340 crores which is about 85% of our historical quarter date. And as it is indicated in Q3 and Q4 will be at the historical trend rate. Our gross margin stands at 42.2%. Compared improved by 27 basis points over Q1 and operating EBITDA at INR5 crores with a 15% margin. BK is the fact that we are working on the various actions to improve the EBITDA and mainly due to the under-recovery of tacit approval received from CEP approval and other new product validation, and the generic product being built by the non-rent market will be out from the under recovery of Zak in quarter four of the current financial year, so that we become the normalized activity.
As integrated by Nikesh, we have identified key focus areas working on these areas, which will result in improved second half of this financial year. Our immediate period is offset under recoveries in adviser and achieve a breakeven profitable growth in near term. And during the current quarter, we have initiated action particularly regulatory inspection, which was delayed due to COVID for a long time.
In H1, we have reduced debt by floods, and we are working to achieve a comfortable debt to EBITDA net debt-to-EBITDA ratio by the end of this financial year. Our net current assets were reduced by INR63.8 crores, mainly due to the in reduction and the government approval of DOST funds. Our focus is on bringing our cash flows with prudent application of capital with a clear focus on the actions to improve profitability. We remain confident about our growth prospects at Solara. Thank you so much.
Jithesh Devendra — Managing Director
The Q&A, please.
Questions and Answers:
Operator
[Operator Instructions] We have a first question from the line of Rohan John from ICICI Securities. Please go ahead.
Rohan John — ICICI Securities — Analyst
Yes. Am I audible?
Operator
Yes.
Rohan John — ICICI Securities — Analyst
Yes. So I have a few questions. So first of all, the sequential improvement, which you have seen in the regulated and other markets, I see it is quite low for this quarter. So what will drive this growth going forward in the coming quarters?
Jithesh Devendra — Managing Director
Yes. So the growth what we are seeing in the coming Q3 and Q4, — the demand for our base business that’s coming back. And what we have seen in the H1 is not what we are used to from a historical point of view. So in the second half, we are definitely seeing the demand for our key products coming back. That’s one of the key drivers for the revenue growth
Operator
Mr. John?
Rohan John — ICICI Securities — Analyst
Okay, yes. So yes. So now the second question I had was — so is that related to the gross margin. So if I see currently, the gross margin for the half year is around 42%. And you had initially guided to around 50% for the year. So do you still maintain this guidance? Or do you want to — or are you going to revise it?
Jithesh Devendra — Managing Director
Yes. So we did mention that with the actions what we have taken in H1 and the demand is coming back for our key products, the second half of this financial year, especially the outgoing Q4, we will be at closer to that 50% gross margin.
Rohan John — ICICI Securities — Analyst
Okay. Yes. And then another question was related to ibuprofen, which you have got in China. So when will we really start shipping? And what is the potential revenue from this opportunity?
Jithesh Devendra — Managing Director
So we won’t give specific revenues for a product, but the commercial supplies will only happen in 2024. — because customers have to take the validation budgets, they have to do their own regulatory permissions.
Rohan John — ICICI Securities — Analyst
Okay. Okay. And then also book of final is set to be manufactured in Vizag, right? So could you give us some time lines as to when will you reach a bit when the plant will be EBITDA neutral? I think you have to near term, but it could give some timelines.
Jithesh Devendra — Managing Director
Yes. So we are aiming for buy-side under recoveries to be net from the outgoing Q4.
Rohan John — ICICI Securities — Analyst
Okay. Yes. And the last question which I had was related with the CRAMS revenue. So if I see currently, it stands at around 5% from Nora. So do you see it gaining more contribution in the revenues? Or — do you see it at the current levels on?
Jithesh Devendra — Managing Director
So we want CRAM to be definitely a bigger piece than being a single digit with the head of CRAMS for North America come into the picture. — we have seen a lot of traction in the last one month. So we are quite upbeat about the CRAMS business. But yes, we want to grow this business and not just maintain it at 5%.
Rohan John — ICICI Securities — Analyst
Okay. Okay. Got it. Yes, I get back to the queue. Thank you.
Operator
Thank you. We have a next question from the line of Palak Deka, an individual investor. Please go ahead.
Palak Deka — Individual Investor — Analyst
Yes. Am I audible?
Operator
Yes.
Palak Deka — Individual Investor — Analyst
Yes. Sir, just one question on the revenue side, Sir. So when do we expect to hand back to a quarterly run rate of INR400 crores?
Jithesh Devendra — Managing Director
So while we are aiming for — we are confident that from Q4, but internally, with the green shoots we are seeing in some of our base business, maybe it could even advance from Q4 to Q3 itself.
Palak Deka — Individual Investor — Analyst
Okay. Okay. That’s helpful. Thank you.
Operator
[Operator Instructions] We have our next question from the line of Sumit Gupta from Motilal Oswal Financial Services. Please go ahead.
Sumit Gupta — Motilal Oswal Financial Services — Analyst
Hi. Good afternoon. Thank you for the opportunity. Just need to have a clarification if there is any schedule of the U.S. FDA inspection at the Vizag facility. So if you can give any color on the market size of the product, which has regard the inspection?
Jithesh Devendra — Managing Director
So the product which has figured the back inspection is ibuprofen, but there are a couple of other products which we are doing validations which will also help in triggering. So with this trigger, we are expecting the U.S. FDA approval or the inspection for our Vizag side in the next financial year, probably sometime in the second half of next financial year.
Sumit Gupta — Motilal Oswal Financial Services — Analyst
Okay. This helps, sir. And another question is just to know if any shortage of the ibuprofen that has triggered the inspection, if there is any shortage of it?
Jithesh Devendra — Managing Director
We don’t see any shortage of ibuprofen. But yes, our growth in ibuprofen is coming by — because we have added some new customers and new geographies. And that will also help in terms of the Vizag site, where we are also talking to our customers to qualify Vitec also. So we could have both the sites potent to meet the demand growth for ibuprofen.
Sumit Gupta — Motilal Oswal Financial Services — Analyst
Okay. Okay. And sir, how big can the opportunity be from the approval of hybrid book and ABI by CD China and over what period of time, like you said for FY ’24? And Is it trying?
Jithesh Devendra — Managing Director
I think we’re still working on that. Give us some time, we’ll get back on the size of the opportunities. Definitely, China is a large market for ibuprofen. So we are working out with our customers now because it took us nearly three years to get this approval. So it’s a tough regulated market. So now with this approval in place, we are working with our customers in terms of what is the business potential.
Sumit Gupta — Motilal Oswal Financial Services — Analyst
Okay. Okay. And sir, one more question. Can you explain the improvement in the gross margin given that the share of regulated market is almost similar sequentially, we at 66%. So is that the same base case improvement base business?
Jithesh Devendra — Managing Director
So we had a good product mix of our current base products, and that has led to also an improvement in the gross margins.
Sumit Gupta — Motilal Oswal Financial Services — Analyst
Okay. Okay. And sir, final question is, like, are you seeing normalization of inventory with respect to ibuprofen? And just to understand the pricing of products on a sequential basis.
Jithesh Devendra — Managing Director
The pricing is pretty stable on ibuprofen and on other key APIs also what we manufacture. And the inventory level of ibuprofen for us, as I said, in the first half, also we have seen a decent demand. I would not say a great one. This is what we are expecting in the second half — the inventory levels are not a concern at all.
Sumit Gupta — Motilal Oswal Financial Services — Analyst
Okay. Okay. Okay. Thank you, Sir.
Operator
Thank you. We have our next question from the line of Nitin Agarwal from DAM Capital. Please go ahead. This line is disconnected. We’ll take the next question from the line of Mitul Jan, an individual investor. Please go ahead.
Mitul Jan — Individual Investor — Analyst
Hi. My question pertains to the Vizag facility. So as you reiterate in that will be break accredited by Q4. So by when do we expect optimum utilization of Vizag facility? And what is the peak asset turn that we can expect? And what are the further capex number which you are planning to incur this facility? Those are my two questions.
Hariharan Subramaniam — Executive Director and Chief Financial Officer
We don’t expect major capex in Vizag facility because most of the capex we have already incurred. And it will take — because it just — we got just CP approval to take another one way for us to reach the full-fledged operation by just our capacity utilization. So then by end of FY ’24, we’ll be at — we are in potential of the capacity will be achieved.
Mitul Jan — Individual Investor — Analyst
Okay. Thank you.
Operator
Thank you. [Operator Instructions] We have a next question from the line of Nitin Agarwal from DAM Capital. Please go ahead.
Nitin Agarwal — DAM Capital — Analyst
My thanks for taking my question. Just two questions. One is, a, on the debt levels which are there. We still have a fairly high level of debt versus our — given our EBITDA levels. So how are we thinking about a reduction in debt levels over the next, say, couple of years? And what kind of levels do we — do we see this region lowering down to as you go forward?
Jithesh Devendra — Managing Director
Look, if our level — the term loan is only on specific crores we are having, and we expect that every year, we repay around INR100 cromes debt and from the internal accruals and the term loan is especially for buying that and once it is fully operational and to be subsidized. The working capital at the crore that is also pretty in line with the current inventory and returns level. And we’re an around a slight reduction in the debt by the end of the current financial year. But the net EBITDA debt will be around announced or within a couple of — by FY ’24, we’ll be reaching that arise position.
Nitin Agarwal — DAM Capital — Analyst
Sorry. And what would be the normalized position, Sorry, if you can repeat that?
Jithesh Devendra — Managing Director
About 5x.
Nitin Agarwal — DAM Capital — Analyst
Sorry, sir, I think there was a voice was breaking when you were saying that.
Jithesh Devendra — Managing Director
2.5x.
Nitin Agarwal — DAM Capital — Analyst
2.5x EBITDA by the end of FY ’24.
Jithesh Devendra — Managing Director
Yes.
Nitin Agarwal — DAM Capital — Analyst
Okay. And sir, secondly, on the CRAMS business, you talked about RFPs you’re participating in — but what is the nature of typically client businesses that we’re chasing, — these are largely late-stage contracts or these are early-stage contracts in terms of — I mean, these are basically the life cycle management contracts and molecules are in late stages of the techno the patent life. So that’s the nature of the contracts typically?
Jithesh Devendra — Managing Director
Yes. I mean on the CRAMS business, it’s a mix of both the early stage. It’s also in the late stage. Then we also have businesses where we are also supplying the key intermediates because the regulations around the intermediates also have significantly changed from from U.S. FDA. So it’s a combination of both.
Nitin Agarwal — DAM Capital — Analyst
But the bulk of the as an industry perspective, bulk of the RFPs that you’re typically seeing are getting floated by companies — what is the typical nature of these RFPs? I mean, what kind of products are the companies really are putting out RFPs for?
Jithesh Devendra — Managing Director
It’s more on the capability that the company has, right? The product could be anything because these are products on the CRAMS side, and you’re working with the innovative companies they are in the discovery phase — so if it matches our capability both from an R&D asset from a manufacturing point of view, then we will go ahead and evaluate and take it forward.
Nitin Agarwal — DAM Capital — Analyst
Right. And you two you talked about a 50% gross margin by the end of the year. How should we — any thoughts on where could — what’s the sustainable level of margins for a business given the way it is, the way you see it over the next few quarters beyond Q4?
Jithesh Devendra — Managing Director
So beyond Q4 also, we will see the same levels of the gross margins. Of course, we are working in terms of the product mix where we introduced new products and the sales of the new product validation that will help in terms of improving the gross margin also beyond 50%. But for now, I think 50% is something which is quite comfortable.
Nitin Agarwal — DAM Capital — Analyst
Okay. Thank you.
Operator
Thank you. [Operator Instructions] We have our next question from the line of Anish Kara from VT Capital. Please go ahead.
Anish Kara — VT Capital — Analyst
Yes. Am I audible?
Operator
Yes.
Anish Kara — VT Capital — Analyst
Yes. I just wanted to understand what are the utilization levels that for the first half? And where do you think they will be for the second half just for the Vizag side?
Hariharan Subramaniam — Executive Director and Chief Financial Officer
Yes, Mortdecai is around 75% currently.
Anish Kara — VT Capital — Analyst
So it’s at 75%. And where do you see it going in the next half?
Jithesh Devendra — Managing Director
No. As we see the demand for the key products coming back and also Vizag also has to go through the full cycle of inspections from other regulatory bodies, then of course, this percentage will only improve.
Anish Kara — VT Capital — Analyst
Okay. And on the ibuprofen side, I mean how much of a difference in the average selling price are you seeing in North America and Europe as compared to the less regulated markets?
Jithesh Devendra — Managing Director
No, we don’t give any market specific pricing guidance.
Anish Kara — VT Capital — Analyst
Okay. No worries. Also from your tone, it seems that you are not seeing as much demand on the ibuprofen side as we would want to. So then what is the reason for qualifying an additional facility Vizag when we could also be supplying from our existing sites to regulated markets as well, right?
Jithesh Devendra — Managing Director
Now what I said was we are seeing growth of ibuprofen coming from new geographies and new customers.
Anish Kara — VT Capital — Analyst
Okay. Okay. Got it. Also, how much traction are you seeing on the CRAMS side with respect to China plus one model in were hearing about it from a lot, a long time — but on the ground, what is the reality according to you?
Jithesh Devendra — Managing Director
On the ground reality,Of course, China, you have some reputed companies also who are there in the CDMO space. Now this China plus one policy has always been there. But overall, I think it all comes down to what efforts we make in terms of breaking through with the new customers and with the existing customers, right? And with that kind of attraction and we are developing a team around it on the business development side, — so with that approach, we are quite confident that CRAMS will be a sizable portion of our business as we look in the next three- to four-year horizon.
Anish Kara — VT Capital — Analyst
Right. That’s it from my side. Thank you.
Operator
Thank you. We have a next question from the line of Rohit Suresh from Samatva Investments. Please go ahead.
Rohit Suresh — Samatva Investments — Analyst
Good evening, Sir. So just wanted to know if there was a BSF facility that was supposed to come up in Germany. Has it come up? Or if you could just highlight something on that?
Jithesh Devendra — Managing Director
No idea. We have no validated information around that.
Rohit Suresh — Samatva Investments — Analyst
Got it. So in Europe, there’s no major manufacturer of ibuprofen so how is our market share in the European regions? And how do you see it going forward?
Jithesh Devendra — Managing Director
So again, I would not be able to quantify from a number perspective, but I can confidently say from a regulated market perspective, Solara has a good market share, a sizable market share in the regulated markets for ibuprofen.
Rohit Suresh — Samatva Investments — Analyst
Got it. Sir, and just one last question on the non-ibuprofen part. So what are your plans for the next couple of years? And in terms of your total revenues, how do you see that part moving forward?
Jithesh Devendra — Managing Director
On the non-ibuprofen business on the base business, we are pretty solid with what business we have with our existing customers and markets. What’s important is that we also are doing this, and that’s why I said the market extensions for our current products, we are looking at newer geographies. So we will see even growth coming from our non-ibuprofen products. So focus in terms of newer geographies, which really we did not have in the past like Brazil or China, growth that will drive the traction for the non-acute ibuprofens to.
Rohit Suresh — Samatva Investments — Analyst
Got it, sir. Thank you so much, and wish you all the very good. Thank you.
Jithesh Devendra — Managing Director
Thank you.
Operator
Thank you. [Operator Instructions] We have our next question from the line of Sumit Gupta from Motilal Oswal Financial Services. Please go ahead.
Sumit Gupta — Motilal Oswal Financial Services — Analyst
Thank you. I just want to know the target net debt to EBITDA by FY ’23, sir?
Abhishek Singhal — Investor Relations
2022
Hariharan Subramaniam — Executive Director and Chief Financial Officer
Yes, this financial year.
Sumit Gupta — Motilal Oswal Financial Services — Analyst
Yes. Next also?
Hariharan Subramaniam — Executive Director and Chief Financial Officer
It will be around four to five year range.
Sumit Gupta — Motilal Oswal Financial Services — Analyst
Hello. Can you repeat?
Hariharan Subramaniam — Executive Director and Chief Financial Officer
Debt to EBITDA at five time, sir, current financial year, and we’re working for 2.53 by end of the next financial year.
Sumit Gupta — Motilal Oswal Financial Services — Analyst
Okay. Okay. Thank you sir.
Operator
Thank you. [Operator Instructions]
Jithesh Devendra — Managing Director
As there are no further questions, we can just take the closing comments from margin please.
Operator
There are no further questions over to the management team.
Jithesh Devendra — Managing Director
Thank you, everyone, again for joining the Solara’s Q2 FY ’23 call, and we look forward to interacting with you for the next — for the Q3 call. So thank you, everyone.
Operator
[Operator Closing Remarks]