Syngene International Ltd (SYNGENE) Q2 FY23 Earnings Concall Transcript

Syngene International Ltd (NSE:SYNGENE) Q2 FY23 Earnings Concall dated  Oct. 20, 2022

Corporate Participants:

Avantika Mishra — Investor Relations`

Jonathan Hunt — Managing Director and Chief Executive Officer

Sibaji Biswas — Chief Financial Officer

Analysts:

Tarang Agrawal — Old Bridge Capital Management Private Limited — Analyst

Surya Narayan Patra — Phillip Capital (India) Pvt. Ltd. — Analyst

Harith Mohammed Ahamed — Spark Capital Advisors (India) Private Limited — Analyst

Mehul Sheth — Axis Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to Syngene International Second Quarter, Ended September 2022 Financial Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Avantika Mishra from EY. Thank you, and over to you.

Avantika Mishra — Investor Relations`

Thank you, Yashaswi, and good afternoon, everyone. Thank you for joining us on this call to discuss Syngene’s Q2 FY ’23 financial and business performance. From the management side, we have Mr. Jonathan Hunt, MD and Chief Executive Officer; Mr. Sibaji Biswas, Chief Financial Officer; and Dr. Mahesh Bhalgat, Chief Operating Officer. Post opening remarks from the management side, we will open the line for Q&A, and we’ll be happy to answer any questions you may have. Before we begin, I would like to caution that comments made during this conference call today will contain certain forward-looking statements and must be viewed in relation to the risks pertaining to the business. The safe harbor clause indicated in the investor presentation also applies to this conference call. The replay of this call will be available for the next few days, and the transcript will be subsequently made available. With this, I now hand over the call to Mr. Jonathan Hunt. Thank you, and over to you, sir.

Jonathan Hunt — Managing Director and Chief Executive Officer

Thank you, and thank you to those joining us on the call today to discuss Syngene’s performance in the second quarter and first half of the year. I’ll start by commenting on the headline numbers, then move to some of the operational and strategic highlights for the quarter and for the year. Sibaji will provide a more detailed insight into the financials in his remarks. I think like all businesses, we’re keeping a keen eye on the broader economic environment, including concerns over global economic growth, potential for ongoing supply disruption, rising energy costs of geopolitics. I think despite those concerns, I really would reiterate that the second quarter and the first half of the year has been a positive demand environment for Syngene. We continue to see good demand in the main client markets of the U.S. and Europe. That’s helped us deliver strong revenue growth and puts us on track to meet our guidance for the rest of the year. So looking at the specifics of the second quarter. The quarter was characterized by positive performances across all four divisions. Revenue from operations grew 26% to INR768 crores over the corresponding quarter last year. Reported EBITDA was up 22% to INR232 crores. Profit after tax, PAT, before an exceptional item was up 11% over the corresponding quarter to INR102 crores. Now the exceptional item was a onetime downward adjustment to INR25 crores in the second quarter of last year on account of the government’s decision during that quarter to cap the Services Export Incentive Scheme, SEIS scheme, for research and development services at a INR five crore cap for the financial year.

The performance during the second quarter was robust and came on the back of the strong first quarter. You may recall that we upgraded our financial guidance for the year last quarter. And against this, we’ve delivered a first half in line with these higher expectations, and I think this positions us well for the full year. So just turning now to the operating divisions, start with Discovery Services. Overall performance during the quarter for Discovery Services was good. We’re seeing a healthy demand environment as clients continue to make a couple of grand they lost during the pandemic as well as bring new projects forward. This positive demand was most pronounced in Discovery Chemistry where we saw some of the strongest demand we’ve seen in recent quarters. Our second campus in Hyderabad played an increasingly important role in Discovery Chemistry operations, then growing to over 600 scientists and we’ve got more expansion plans there in Hyderabad. During the quarter of the proprietary integrated discovery platform, SynVent continued to gain traction. That portfolio currently stands at 18 integrated programs. I think we continue to see good demand for that to a fully integrated research approach. In Dedicated Centers, as part of the partnership with BMS, we’ve fully commissioned and now operationalized a new state-of-the-art translational medicine laboratory to help BMS accelerate the discovery therapies. Growth in our development services business was predominantly from repeat orders from existing clients as well as an increase in the number of collaborations with emerging biopharma companies. In the last 2.5 years, while we sustained the collaborations we have with 15 of the top 20 biopharma companies globally, our partnerships with clients in that small and medium-sized biotech sector continues to accelerate. So now just looking at the manufacturing side of the business over the past few years, I think we’ve made some important investments in establishing our biologics manufacturing capacity. This groundwork will pave the way for the 10-year agreement we signed with Zoetis in the first quarter, and that’s to manufacture the drug substance for Librela and some monoclonal antibodies we use in animal health. Now while lots of work is ongoing, the key progress indicators in the second quarter with the completion of the process performance qualification batches for commercial manufacturing, and of course, the preparations for the expected regulatory inspections.

Subject to the successful completion of the required regulatory audits, we anticipate that manufacturing of the drug substance is likely to begin in the fourth quarter of this financial year. And therefore, that means it becomes a factor for your modeling of revenue from the start of the next financial year. I’ll leave it to Sibaji to comment further on that, if needed. And finally, just to preempt a question that comes up each quarter, our small molecule manufacturing facility in Mangalore is on track to obtain the key regulatory approvals around the mid of the next financial year. Beyond the divisional operating performances, just a brief comment on capex. During the first half, we invested close to USD30 million out of the total USD100 million that we planned for the year. Half of that capex has gone into research services, 30% into biologics and the remainder into common infrastructure, safety-related improvements, replacement of old equipment, et cetera, digitization and those splits are a reasonable indicator of what we’d expect for the full year. So let me summarize before I hand over to Sibaji. We’ve made good progress on our strategic priorities over the first half. We started the year with strong revenue momentum, and this has continued into the second quarter, leaves us in a good position with our first half performance. The first quarter performance with underlying revenue from operations growth of around 32% prompted us to upgrade our guidance for the full year and the performance of the second quarter puts us solidly on track to achieve that upgraded revenue guidance of high teens for the year. With that, let me hand over to Sibaji.

Sibaji Biswas — Chief Financial Officer

Thank you, Jonathan, and a very good morning to all of you. Good afternoon to all of you. Let me start with revenue performance, then take you through margins, profitability and capex investments for the company. I’ll give you a little color on the impact of currency as it benefited us in the quarter. And I’ll also cover our current view on outlook for the full year FY ’23, which is both positive and it also reflected of the upgraded guidance given last quarter. With this context, I’ll now cover the Q2 performance. Please note that you will be — you will hear me referring to underlying performance in parts of my comments. Just to be clear, this is performance excluding the impact of remdesivir manufacturing. We recorded high sales of remdesivir during the first half of FY ’22, with most of it in the first quarter. As no remdesivir sales has been recorded in the first half of FY ’23, we think it is helpful to exclude remdesivir from both periods to illustrate the underlying performance of the ongoing business. As you heard from Jonathan, reported revenue from operations for the second quarter grew by 26% versus the same quarter last year. Underlying revenue growth, that is excluding remdesivir was stronger at around 31%, which I believe is a very good performance. As a reminder, the first quarter also delivered a strong underlying revenue growth of around 32%. At constant exchange rates, our underlying growth for the quarter, net of remdesivir was around 22%. So irrespective of which measure of revenue growth is used, we see a very positive momentum in the business. I’ll now move to EBITDA for the quarter. EBITDA from operations, that is excluding interest income for the quarter, came in at INR217 crores compared to INR177 crores in the same quarter last year. That’s up by around 22%.

The reported EBITDA margin for the quarter was at 29.6% versus 30.5% of last year, and the operating EBITDA margin which is without other income was at 28.2% for the quarter compared to 29.1% last year. The revenue for the quarter was hedged at INR78 per U.S. dollar. The depreciation of the rupee versus U.S. dollar strengthened the top line without a commensurate benefit on the bottom line because we book hedge losses as a part of expenses. Our margin guidance for the year was given at the hedge exchange rate. The optics of the EBITDA margin changed due to the average realized rate being around INR80 per U.S. dollar in the second quarter, which is reflected in the top line. Normalized for the revenue at the hedge rate for both years, the operating EBITDA margin for the quarter was at 28.9% as compared to 28.6% in the same quarter last year. I’ll now cover other cost line items within the P&L. Material costs for the quarter increased by 19% year-on-year. As a percentage of revenue from operations, it was at 25.9% compared to 27.5% last year. The last year being high due to raw materials for remdesivir. The current material cost is below the 27% guidance shared previously, and this will move up to the guidance level with the increasing share of manufacturing in our revenue. During the quarter, the staff cost increased by 15% year-on-year and was at 28.4% of revenue from operations as compared to 31% in the second quarter of last year. The year-on-year increase is in line with the increase in headcount and reflects salary increases and changes in the mix of the employee base.

Our direct cost, which is primarily — which primarily includes power and utility costs increased 39% year-on-year and is now at 3.7% of the revenue from operations for the quarter compared to 3.4% for the corresponding period in the previous year. The increase is mainly on account of higher fuel prices for natural gas used for steam generation and high-speed diesel used for power backup. In the current environment, we are seeing the benefit of our investments in renewable energy companies, which not only deduce the energy supply but also reduces our carbon emissions and consequently, our impact on the environment. Despite an increase in consumption due to expansion of facilities and increasing power and fuel tariffs, these investments provide us a mechanism to control cost increases. Other expenses, which include travel convenience, repairs and maintenance, digitization, automation and selling expenses increased by 32% year-on-year. This increase is in line with expectations and guidance given at the beginning of the year. As we came out of pandemic restrictions from Q4 last year, global travel and sales execution activities have picked up nearing the pre-pandemic levels. This, along with other operating investments, including expansion of commercial team, acceleration of digitization and automation projects across the business also led to higher cost on a year-on-year basis. Hedge losses during the quarter were INR19 crores, reflecting the difference between average spot rate during the quarter to the hedge rate. This is compared to the hedge rate of INR10 crores in quarter two of the previous year. Other income for the period increased from INR12.9 crores to INR15.4 crores, an increase of 20% on the back of increasing yields on investments and fixed deposits.

Overall reported EBITDA for the quarter was up by 22% year-on-year to INR232 crores compared to INR190 crores for the same period last year. Underlying EBITDA growth broadly tracked the top line growth, reflecting the operating leverage in the business. Depreciation and amortization for the period was at INR90 crores compared to INR76 crores in the same period last year. This increase of 18% on a year-on-year, it’s mainly due to the new investments in the last 12 months. Our finance cost increased from INR1.2 crores to INR11.7 crores. Here, we recognize the interest component on new release facilities as per the accounting standard IAS 116 in addition to increase in interest rate on borrowings and translation losses on Forex loans due to rupee depreciation. You should note that a large part of our loan is covered through interest rate swaps and hence does not get impacted by movement in exchange rates, but it still impacted from the translation losses on the currency. Profit before tax increased by 15% year-on-year, the lower growth as compared to EBITDA and EBIT is on account of higher interest rates and currency translation losses. The effective tax rate for the quarter was about 21.5% compared to 18.5% within the same period last year. You’ll remember that I have previously told you that there will be a gradual increase in tax rate as some of our units come out of excessive previous tax benefit period and an increasing share of business is coming out — coming from locations not enjoying its benefits. Profit after tax before exceptional items stood at INR102 crores as compared to INR92 crores last year, and that’s a growth of around 11%. Now moving to results for the half year. Revenue from operations grew by 17%, including the impact of remdesivir in the base. Underlying revenue growth was 32% excluding remdesivir and on constant currency basis, underlying revenue growth for first half was at 23%. EBITDA for the period grew at 14% year-on-year, and the underlying EBITDA from operations grew at 31%, in line with underlying revenue growth, reflecting a strong first half of the year.

Material costs adjusted for remdesivir impacting the base factor revenue growth, staff cost increased by 14% in line with headcount growth. Other direct costs and other expenses increased were 48% and 38%, respectively, driven by inflationary pressures, redemption of activities post-pandemic and other operating investments explained earlier. EBITDA margin from operation was around 28%, which was 90 basis points lower than last year due to the rupee depreciation effect on the top line as explained previously. Normalizing the revenue at hedge rate for the respective years, the EBITDA margin for the first half was similar to that of the previous year. capex for the first six months of the year was around USD30 million. Another 50% of the capex guidance of USD100 million has been put into execution and the same will be reflected in the books over the next two quarters. Based on the first half results and the overall trajectory of the business, we confirm the guidance for the full year of high teens revenue growth and EBITDA margin of around 30%, PAT growth as guided before is expected to be in single digits due to the increase in effective tax rates and baseline effect of remdesivir in FY ’22. With this, I complete my commentary and will hand back to the moderator for questions. Thank you.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] We have a first question from the line of Tarang Agrawal from Old Bridge Capital. Please go ahead.

Tarang Agrawal — Old Bridge Capital Management Private Limited — Analyst

Hi, Jonathan, hi, Sibaji. Hi, everyone. Congratulations for extremely robust set of numbers. Two questions from my side and probably one small suggestion. The first is on the dedicated business. So over the last 6, 8 months, there’s been a lot of news flow around the international innovators coming and setting up their GCCs in India. I mean, yesterday, there’s something around Baxter, Herbalife’s gone back and set its own center and Pfizer, Merck, so on and so forth in Chennai, in Bangalore and Ahmedabad. While it does put out a great sort of a story for India, I’m not sure how — whether it’s really a positive or a negative development from a Syngene perspective? And how are you seeing this?

Jonathan Hunt — Managing Director and Chief Executive Officer

Super. Good question. I mean, I can give you a specific — you mentioned Baxter. The announcement they made earlier this week or last week is not new news. They’ve had a center in India for a considerable amount of time, and that’s actually our relationship with them is with that center. That’s our partner as part of their global network, including their Indian operations. So we’re deeply sort of operationally integrated news to working with that. So I get the question, I don’t really see it as an inflection point or neither/or. Some clients often is a good big operational businesses in India already, and they’re quite globalized, a very comfortable setting up their centers, they don’t stopping from working with us on other aspects of our business. Others like that having a strong local partner that really operates well at scale is beneficial to them. I mean the scale we’re at, I’m sure we find it a little easier to recruit and operate in India than many stand-alone start-ups would. So I’m not particularly disturbed by it and actually we just about every company that you mentioned the fact they have a center in India actually just makes them more comfortable dealing in this part of the world, and they know us, they know us well and we operate well with them. Does that make sense?

Tarang Agrawal — Old Bridge Capital Management Private Limited — Analyst

Yes, it does. The second, pertaining to your discovery and development business and the way we are seeing global trends, a lot of emerging biopharma companies have been in it. And that’s basically one of the biggest reasons why businesses like yours are there helping them come up with cutthroat innovation. But at the same time, we’re also seeing fundings for a lot of these businesses drying up, given the macros that the world is facing. So, from your perspective, typically, while onboarding a client or getting into an engagement, how do you track the credit risk that’s associated because your relationship would perhaps continue for multiple years? So if you could just explain us that piece.

Jonathan Hunt — Managing Director and Chief Executive Officer

Yes. So I’ll make a general comment, and I’ll look to Sibaji to talk about the specific approach we take to credit risk. It counterintuitively, the tightening of the funding environment, particularly in the US biotech, and it wouldn’t be obvious. It’s driven, I think, a positive for us. Those companies that are sitting on multiple years of cash are concerned about their cash burn rate and their ability to refinance at some future milestone. If they’ve got cash, and a lot that are like that, that are already well funded. Of course, remember, the observation you’re making is we’ve been through two or three years of a very, very healthy funding environment for biotechs and that market now has slowed indeed. Those that took funding during those boom years are selling on cash. I mean I want to find out how can they make that last longer and deliver all of their science. Well, one of the obvious things they can do is partner with a business like Syngene that offers a very good operating cost arbitrage. And for many of them, they could spend their money in the US or they could triple the runway of their cash burn and come and partner with us. And they wouldn’t notice the difference in the quality of science and the quality of innovation because we operate right at those global standards. But that’s the sort of more macro strategic comment. And then Sibaji, just on the specifics, and then we follow the normal rigorous protocols, any business would about checking the credit worthiness of your counterparties.

Sibaji Biswas — Chief Financial Officer

Yes. Thanks, Jonathan. And Tarang, speaking particularly about how we approach this issue, we do engage with emerging biopharma and biotech. However, we do have a very well structured credit policy and a credit approach. We have multiple categories based on size of the company, market care, profitability or — and whatever information that we can gather for those companies, and we do have a risk rating at Orient and for customers who are best on the credit ratings, we do ask for advances. So I think our credit quality was structured and very robust to handle a situation like that. Over the last six to eight months, we haven’t really seen any impact. In fact, we have been getting receivables as normal, which is — because basically saying that our credit policies are working and it’s very effective. So while I answer this question, at this point, no concern for me.

Jonathan Hunt — Managing Director and Chief Executive Officer

And the only other comment I’d say is that the actual — the history has been a very positive one. It’s not an area that we’ve had a lot of concern, but that doesn’t mean to say you don’t remain sensible and vigilant. Thank you.

Tarang Agrawal — Old Bridge Capital Management Private Limited — Analyst

Got it. Just the last, I mean the qualitative commentary on each of the businesses is helpful, and it helps us get some sense. But going forward, would it be possible to give us some more, say, detailed quantitative numbers across, say, maybe a revenue segmentation or something else? I mean, say, how many molecules you’ve got in Phase I, II or III without naming the customers. So — but some more maybe detailed numbers would probably be helpful for us to get a better handle on the business. Otherwise, the disclosures are great. So this is just the last suggestion. Thank you.

Jonathan Hunt — Managing Director and Chief Executive Officer

Yeah. No, I’m always happy to receive helpful suggestions. I do talk to the IR team about things that you think would be helpful. By the way, that’s not an irrevocable commitment that everything you suggest is something that we’re automatically going to be able to do. But very happy to have the dialogue, I mean, I would actually go back and if you look at the extended breadth of our disclosures, particularly on these quarterly calls, compare where we are today, where we raised, say, five years ago, qualitatively, I think you get an awful lot more information than you used to. And we’re trying very hard to sort of paint a narrative without necessarily breaking down the inner workings of all of our P&L. You get our P&L on the basis that management runs it to. So there’s an alignment there. We’re very happy to always to give you a comment. You talk to the IR team if you’ve got good suggestions.

Tarang Agrawal — Old Bridge Capital Management Private Limited — Analyst

Okay. Thank you.

Jonathan Hunt — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions] We have a next question from the line of Surya Patra from Phillip Capital. Please go ahead.

Surya Narayan Patra — Phillip Capital (India) Pvt. Ltd. — Analyst

Yeah. Congratulations for the great set of numbers. My first question is on — about the incremental collaboration, Jonathan, that you have mentioned in your opening remark, leveraging the advantage of the SynVent. So if you can elaborate a bit, you have said some number also that multiple collaborations that has been added using this SynVent platform. So if you can elaborate a number of customers or the projects that has been added during the quarter or, let’s say, even last one-year period and whether this European situation, what currently that we are witnessing that is bringing in positive this things wise to our business? Or how is it that impacting us?

Jonathan Hunt — Managing Director and Chief Executive Officer

Say a bit more just on that because I — what do you mean by the European situation?

Surya Narayan Patra — Phillip Capital (India) Pvt. Ltd. — Analyst

So like it could bring two impact, right, to us, see in terms of possibly it could bring incremental manufacturing opportunity. That is one. And possibly help us filling our CMO facility quicker. That is one. And on the other hand, so since there are — war issues are going on and the clinical trials could be deferred and hence, the possible near-term impact would be there negatively to us. So —

Jonathan Hunt — Managing Director and Chief Executive Officer

Let’s come back to that. I’ll give you — I’ll talk a little bit about SynVent, and then maybe if you could — while I’m doing that, and I think — I’m not sure I understand fully the question, but it’s a bit you said, did I hear you correctly? This European situation, I don’t know what you’re referring to. That’s why I’m struggling with the question.

Surya Narayan Patra — Phillip Capital (India) Pvt. Ltd. — Analyst

Okay. So I’m saying the — practically, there are energy challenges, there are war situations impacting the clinical trials and all that. So hence possibly the supply is what we would be making in the development quantities and all that.

Jonathan Hunt — Managing Director and Chief Executive Officer

Okay. Sorry. Now I get it. Thank you. So geopolitics basically. Yeah. Well, I mean, given that I spend a fair proportion of my time living in Europe, working there, I wouldn’t often characterize it as you just did. I’m not sure that we are seeing operational impacts in the industry, clinical trials not happening. Remember, the situations in Ukraine, and I mean, it clearly, it’s a travesty for the people of Ukraine and I wouldn’t comment more on the politics of it. But I don’t think it is flooding through the rest of Europe and the other, I think, European Union, 850 million people falling within that as a trading block. So I don’t see the operational impact. Go back to SynVent, now that I am happy to talk about. So let me just make sure we all understand what it is. One of the things that we’ve seen as our industry, the CRO services, particularly businesses like Syngene over the last 20, 30 years, have matured, increased the sophistication of what we do. We’ve become actually increasingly like our clients, if our clients are the world’s leading life sciences innovation companies. And what I mean by that is, if you observed this by capability, by infrastructure, by the processes we follow, by the way we go about doing science, we now sit, I think, at a par with the operations and the innovation that you’d see inside the leading companies, around capabilities.

That’s created, I think, a second market opportunity. The primary one for us is functional services where we do something like chemistry or biology and we insert that into the value chain of our clients, and they do the other things around it. So they do the step before and the step after but we are a component in that value chain. SynVent is really is offering the fully integrated value chain as a service on demand to clients that want to do it, either because they want to put an additional project outside of their own operations. I’d say they’ve got more good ideas than they’ve got capacity. They can do some of those projects in their own labs but they still want to put other ones outside, and we can offer that fully integrated as a service or you could — you’ve got others that they just wanted to maybe accelerate or they’ve got a virtualized business model. They never actively intend while investing in innovation to own the infrastructure. So for that, we offer a turnkey solution. So that’s the essence of SynVent that it’s a fully integrated drug hunting, drug discovery, drug development platform series of interlinked — interconnected services. And then the number that I mentioned was that we were up to 18 projects. The baseline of that, of course, would be effectively 0 from when we launched that whole service to the market.

And as I think 2, three years ago, around that time frame and we continue to add projects to it, and we see good demand. Does that help, at least that — things are pictured. How it differs from Syngene and SynVent. Think of Syngene as component verticalized services and think of SynVent as the same things flip through 90 degrees and therefore, horizontally integrated as a value stream.

Surya Narayan Patra — Phillip Capital (India) Pvt. Ltd. — Analyst

Sure. So this is really helpful. One additional extended thing here that I’m just trying to understand, see, you do mention also the universities that you have tied up with. So here, I’m trying to understand whether these associations with universities are for sourcing projects or business opportunities or it is to build our capabilities with the help of university support?

Jonathan Hunt — Managing Director and Chief Executive Officer

I think it’s all of those. It’s an integrated work and sources of talent as well. I mean what we — we’d like to have a close symbiotic relationship with many of the leading universities in India. I’d love every chemistry professor and every biology professor to know that the brightest and the best in their class are very welcome to come and start their scientific career at Syngene. And if they know us and we know them, there’s more chance of that happening. The other bit is being a super smart academic scientist, it adds value to super smart for once, of a better phrase, industrial scientists, and there’s a good relationship between them. So again, we create value intellectually at that interface as well as they may well be sources of good ideas, good ideas for our clients, innovation, blue sky research. So it’s a connected sort of community. And we intend to play an active part of that in India, which is why we’ve increased the number of universities we have relationships with, and we welcome that. It’s a good source of talent, a good source of innovation.

Surya Narayan Patra — Phillip Capital (India) Pvt. Ltd. — Analyst

Sure, sir. Just last one question about the clarification about the tax rate to what Sibaji sir has mentioned. So sir, do you say that, okay, now whatever tax rate we are currently witnessing for the quarter, it is kind of a likely rate for future also?

Sibaji Biswas — Chief Financial Officer

So Surya, what I said is that the effective tax rate for this current financial year is around 21.5%. And over the next three to five years, it will gradually move up to 25%. That’s the kind of gap we are looking forward to. So that’s how we can model a gradual increase. But I have to clarify one thing, this does not have a cash flow impact because we have had enough advance tax paid in terms of MAT for the next three to four years, till the time we reaches to year — to FY ’25, ’26, just to kind of adjust against the opening tax rate that we have. So it’s more about the P&L impact. From FY ’25, ’26, we can gradually then assume that the cash tax payout will also start going closer to 25%. That’s just a modeling input. But from a P&L perspective, ETR has been 21.5%, gradually move up to 25%.

Surya Narayan Patra — Phillip Capital (India) Pvt. Ltd. — Analyst

Sure. Yes. Thank you, sir. Thank you so much. Wish you all the best.

Jonathan Hunt — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions] We have our next question from the line of Harith Ahamed from Spark Capital. Please go ahead.

Harith Mohammed Ahamed — Spark Capital Advisors (India) Private Limited — Analyst

Hi. Good afternoon. Thanks for the opportunity. On the Zoetis contract, you mentioned that some qualification batches supplied during the quarter. So qualitatively, can you give some color on whether this was a big contributor to the overall revenues for the quarter? And whether it was a major contribution to our manufacturing services revenues? And then we expect this to sustain in the current quarter…?

Jonathan Hunt — Managing Director and Chief Executive Officer

No. That’s the shortest answer I think I’ve ever given on the call. No, it wasn’t. So if you think the numbers for the quarter were good, I mean, they came in pretty much a beat versus market consensus on each line of the P&L. It isn’t Zoetis that’s driving that, the rest of the business. Zoetis really won’t come online until next year. So you should be adjusting your models to think about that as an engine coming on stream from the first quarter of next year. Between now and then, there’s bits and bobs and there’s qualification work, and there’s a regulatory — a series of regulatory inspections to be cleared. But from a capital markets revenue point of view, dialed in for the 1st of April and not before that.

Sibaji Biswas — Chief Financial Officer

Yes. And just to add to that, Harith, we have indicated that we are seeing good demand situation in biologics. And we also said in our last call, the commercial manufacturing will start some time in last quarter of this financial year, which is what Jonathan is also saying. Actually, revenue from commercial manufacturing will start showing up fully from the next financial year. Till that we may have some small revenue contribution from the trial basis, but nothing significant in the overall scheme of things.

Harith Mohammed Ahamed — Spark Capital Advisors (India) Private Limited — Analyst

Okay. And this product, if I understood correctly, has been launched in Europe. So any takeaways from the performance there and you ramp up there so far in terms of how the update can be in the U.S.?

Jonathan Hunt — Managing Director and Chief Executive Officer

Yes, I’ll give you a qualitative answer, but it’s — that’s a much better question to put to Zoetis. I mean that’s the bread and butter of that in business. It’s a marquee product in their industry. It’s a real source of innovation. Everything I see tells me it’s getting good traction in the market. But really, we’re at a different point in the supply chain to be the best people to comment on in market performance. I mean, that’s an issue for them really to comment on. But it looks to be a very successful product. If you read the scientific data, it looks good.

Harith Mohammed Ahamed — Spark Capital Advisors (India) Private Limited — Analyst

And in terms of inspection timelines by the FDA, so just trying to understand if this is likely to happen in the FY ’23…?

Jonathan Hunt — Managing Director and Chief Executive Officer

Second half — yes, second half of the year is my expectation, but I don’t drive the FDA schedule. They’ll do, and we’ll let you know the outcome when we know the outcome. But I think you’ve got a fairly clear sort of framework. Zoetis wasn’t the cause of the positive performance in the second quarter and the first quarter of this year, it’s the rest of the business that’s driving that. Between now and the end of this financial year, our expectation is to go through and hopefully complete successfully the various regulatory inspections that are needed. Assuming that happens, then we’ll be into starting commercial scale manufacturing in the fourth quarter of this year, which should — given how long it takes to do a batch should start to become a revenue factor from the first quarter. So I think there’s a sequential story and you’ve got all the moving parts.

Harith Mohammed Ahamed — Spark Capital Advisors (India) Private Limited — Analyst

Thank you. Thank you very much. Thank you. That’s all from my side.

Operator

Thank you. [Operator Instructions] We have a next question from the line of Mehul Sheth from Axis Capital. Please go ahead.

Mehul Sheth — Axis Capital — Analyst

Yes. Thank you for the opportunity. First question on your visibility towards order book. So are you getting any incremental order inquiries given likely — like market from U.S. or the Europe side, given this — the looking for some China Plus One strategy. Are you getting any incremental inquiry?

Jonathan Hunt — Managing Director and Chief Executive Officer

Yes. I think that’s sort of a general structural trend, but I’m not sure I can pass it out. If you think depending on the baseline is, the world is just starting to come out of a pandemic. So if you ask — if your question is phrased as, are you seeing a change from where we were a one year ago, two years ago. I think the answer is going to be less for everything than everybody because the world is coming out of lockdown. What I tried to get to in my comments was that in our industry — remember for most, nearly all of our customers economically something that’s absolutely central to their business models is creating innovation that’s patentable, and those patents are time-bound monopolies effectively. So that’s the definition of a patent. And that leaves you with an industry that’s speed and speed through discovery into development to the market is absolutely vital. So if you’ve just been through a two-year pandemic period where things have slowed down, gone more slowly being delayed, there’s a real economic spur on the client side to try and make up for lost ground. And I think that’s one of the reasons we’re seeing quite a volume demand market around the world as people are back to work. Not only are they doing what they weren’t doing because they weren’t outward, but they’re trying to catch up on things that got delayed. Does that — hopefully, that gives you enough of a sense, certainly gives you the tonality that what we experienced in the first half of the year a positive demand environment. I look forward to reporting on how that plays out in the rest of the year.

Mehul Sheth — Axis Capital — Analyst

Thank you. Thank you for that answer. And one question on Mangalore plant. So once you said you are expecting a commission in order of the commercialization for second half next year. But there may be some incremental cost or operating cost that will be currently there, you must be incurring. So what will be the impact of that incremental costs related to this plan on new EBITDA, if you can quantify the quarterly run rate or something?

Jonathan Hunt — Managing Director and Chief Executive Officer

Okay. I’m looking at Sibaji whether you have a comment, but my headline comment would be in a business of our size with a number of subunits operating units, we wouldn’t pass out the EBITDA impact of a particular plant or a particular supply point, largely because I don’t think it would be helpful. We wrap all of that up in our overall guidance. And the guidance we gave for the year is EBITDA margins of around 30% for the full year. We’re a little bit below that in the first — in the second quarter. This implies a few hundred basis points of uplift in the rest of the year. But no big deal, really. I think around 30%, stable. Sibaji?

Sibaji Biswas — Chief Financial Officer

And as we mentioned before, the margin is a bit behind because of the rupee depreciation benefit that we’re getting on the top line. If you adjust for that, we are almost close to the guidance and hopefully, by the — when we look at the full year numbers on guidance. But yes, the expenses of Mangalore plant is very much building on overall expenses, but we would not like to call out the exact numbers of that. Thank you.

Mehul Sheth — Axis Capital — Analyst

Thank you. That’s it from my side. Thank you.

Sibaji Biswas — Chief Financial Officer

Thank you.

Operator

Ladies and gentlemen, that was the last question for today. I now hand the conference over to Ms. Avantika Mishra from EY for closing comments. Over to you.

Avantika Mishra — Investor Relations`

Thank you, everyone, for joining today’s call. I hope we have answered your questions. If there are any further queries, please do get in touch with our team, and we will be happy to get back to you. Have a good day, and thank you once again.

Operator

[Operator Closing Remarks]