Torrent Pharmaceuticals Ltd (TORNTPHARM) Q1 FY22 Earnings Concall Transcript

Torrent Pharmaceuticals Ltd (NSE:TORNTPHARM) Q1 FY22 Earnings Concall dated Jul. 29, 2022

Corporate Participants:

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

Aman Mehta — Chief Marketing Officer

Sanjay Gupta — Executive Director

Analysts:

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Prakash Agarwal — Axis Capital Ltd. — Analyst

Dheeresh Pathak — White Oak Capital — Analyst

Damayanti Kerai — HSBC — Analyst

Saion Mukherjee — Nomura Securities — Analyst

Kartik Mehta — Klay Capital — Analyst

Nitin Agarwal — DAM Capital — Analyst

Shyam Srinivasan — Goldman Sachs — Analyst

Anubhav Aggarwal — Credit Suisse — Analyst

Neha Manpuria — Bank of America — Analyst

Dheeresh Pathak — WhiteOak Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Torrent Pharmaceuticals Ltd Q1 FY 2023 Earnings Conference Call. We have with us today Mr. Aman Mehta, Executive Director and Chief [Technical Issues] India business; Mr. Sanjay Gupta Executive Director International Business; Mr. Sudhir Menon, Executive Director, Finance and Chief Financial Officer. [Operator Instructions]

I now hand the conference over to Mr. Sudhir Menon. Thank you, and over to you, sir.

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

Yeah, thank you, Faisal. Good evening and welcome everyone to quarter 1 FY 2023 earnings call. Quarter one continued to witness strong growth momentum in the branded generic markets led by robust India performance. The branded generic market constituted 70% of our total revenue and on an overall basis grew by 15% on-Y-o-Y basis, aided by market share gain, performance of top brands and new launches. Sequentially, there is an improvement in EBITDA margin mainly led by the cost initiatives, which we had guided earlier in the previous quarter. In terms of the financial performance during the quarter, revenues were INR2,347 crores, up by 10% on a Y-o-Y basis, gross margins at 71.9%, improved by 1.1% on a sequential basis, EBITDA was INR742 crores, up by 3% on a Y-o-Y basis and up by 21% on a sequential basis. EBITDA margins at 31.6% improved by 2.9% on a sequential basis. The other operating income includes a one-off of INR38 crores towards settlement income in the US. Adjusted for this, the EBITDA is INR704 crores and the EBITDA margin is 30.5%.

Now I request Aman to take us through the India performance.

Aman Mehta — Chief Marketing Officer

Thanks, Sudhir. India revenues at INR12.45 crores grew by [Technical Issues] as per AIOCD data, Torrent’s Q1 FY 2023 growth was 17% versus the IPM growth of 2%, growth was aided by new launch momentum, robust performance of top brands and market share gains across our focused therapies. During the quarter, Torrent added 300 MR bringing the total field force strength to 4,200. At the end of the quarter, Torrent has 18 brands in the top 500 of the IPM, with 11 brands, more than INR100 crores sales.

I’ll now hand over to Mr. Sanjay Gupta for the international business.

Sanjay Gupta — Executive Director

Thanks, Aman. Let’s start with Brazil, our largest branded generic market outside of India. So Brazil revenue was at INR184 crores, up by 20%, constant currency revenue growth at BRL117 million, up by 8%, adjusted for the discontinued tender business in the previous year, the growth rate is 10%. Our generic business in Brazil now accounts for 12% of our overall Brazilian sales and is growing at a fast pace. For our branded generic business, Q1 growth came primarily from our new product launches, as well as strong price increases from April onwards. IQVIA’s June data is indicating that Torrent’s Q1 growth rate is 13%, which is in line with the overall BC market growth.

With the market growth of high-single digit to double digit, we expect Brazil to continue it’s growth momentum backed by performance of top brands, new launches and our new second field force in the CNS therapeutic area. Going on to Germany, Germany revenues were INR214 crores or down by 18%, constant currency revenue were EUR26 million. Growth was adversely impacted due to the loss of high value tenders that started in February of 2022. The German generics market has become a lot more competitive due to the entrance of new players. Future growth that Torrent will come from new tender wins and new launches, we have incremental tender wins on hand which will start adding sales progressively from Q3 onwards.

We have launched Q4 products in Q1 of which one-off, one of them was the day one launch and we will be further launching product four products in Q2, of which we expect, three of them to be day one launches. We are also taking measures to become more cost competitive to be more successful in future tender. Lastly for the US, US revenues were at INR299 crores, were up by 13%, constant currency revenue was at 39 million, up by 7%. Revenue was as indicated by Sudhir positively impacted by the settlement amount received from an innovator. This was complemented by the strong performance that we’re seeing from that on our anti-acne medicine. We continue to await the US FDA’s re-inspection of our facility.

To conclude our BGS markets, particularly the two largest ones, India and Brazil remain on a strong footing and we expect the strong growth momentum to continue. We are optimistic that the initiatives undertaken should progressively revive growth in Germany from Q3 onwards. Faizal, we can open the call to questions now.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Tushar Manudhane from Motilal Oswal. Please go ahead.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Sir, just on Germany market, while recently there has been certain media in news about shortage of medicines in that country, so is this kind of a temporary shortage or you think that there is a good affordability out here?

Sanjay Gupta — Executive Director

So I mean honestly we have not seen any impact of any shortages in Germany. So, from our side, we’ve been adequately supplied and we have not experienced a one-time bump in sales. On the contrary, we’ve seen the German government reduced reference prices, in Germany, a good chunk of our business is lot tender sales of [Technical Issues] and the German government’s reduction in reference prices has had a negative impact on non-tender sales. So that is what we are seeing.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Got it. That’s it from me, sir. Thank you.

Operator

Thank you. The next question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.

Prakash Agarwal — Axis Capital Ltd. — Analyst

Yeah, thanks for the opportunity. Good evening. The first question is on this clarification, this INR38 crore settlement income, it’s — whereas this sitting, is it [Technical Issues] quarters is related to?

Sanjay Gupta — Executive Director

Yeah, this is other operating, Prakash. So it is basically related to some patent settlement which we’ve done with one of the innovator, so that income is sitting in other operating income.

Prakash Agarwal — Axis Capital Ltd. — Analyst

Okay. But this is non-recurring, right?

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Non-recurring, non-recurring.

Prakash Agarwal — Axis Capital Ltd. — Analyst

Okay, perfect. And just trying to understand this R&D that we are doing every quarter, every year and I understand a large part of it is for the US, so I mean, what is the filings on rate here from these existing plants or we already doing some sites, which is if you could update on the R&D utilization. As you know, these two plants start without any much from the US. So correct my understanding and more color would be appreciated.

Sanjay Gupta — Executive Director

So, in a normal year, we file about 10 to 13 ANDAs, last year their filing rate was just 5. So this year, we expect the rate to pick up and given what is happening within the inspection, we have started filing some products from alternate sites, but this is — the impact will be down the road not right now because these filings will be kept reviewed and then whenever we’re proposed to be launch them. So I would say that we’ve taken steps to — for future filing. But the past filings are from the facilities at Indira and Dahej.

Prakash Agarwal — Axis Capital Ltd. — Analyst

Okay. And is there any update in terms of US FDA inspection, no?

Sanjay Gupta — Executive Director

Unfortunately, no. So honestly we have not heard anything.

Prakash Agarwal — Axis Capital Ltd. — Analyst

Okay. And fiscal 2023 onwards, you’re expecting double-digit filing again or similar to 2022?

Sanjay Gupta — Executive Director

Yeah, I mean either double-digit or close to double-digit.

Prakash Agarwal — Axis Capital Ltd. — Analyst

Okay. And lastly, what is our current capacity utilization as I understand, US capacity utilization from these two facilities will be low. So what are our capacity utilization and asset turns and how do you anticipate that to improve?

Sanjay Gupta — Executive Director

So all the facilities put together, we should be around 54%, Prakash.

Prakash Agarwal — Axis Capital Ltd. — Analyst

Okay. Okay. And is there an expectation of US FDA resolution by end of this year? Any broad plans or thoughts you have?

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

Yeah, probably, and the interest — which we are carrying is that it should happen over the next three to four months, but can’t say for sure, so that’s the minimum expectation. I think internally we are guessing.

Sanjay Gupta — Executive Director

So, Prakash as you probably have seen and we are seeing also the pace of inspections in September 2021 has been quite robust. And so we kind of keep track of how many and how much they are doing. So since the pace has picked up, our expectation is also the reason as to that they would be here sooner rather than later, but we have no direct indicator to share.

Prakash Agarwal — Axis Capital Ltd. — Analyst

Okay. Lovely. And lastly, in terms of the breakup of the India growth, so very strong growth in India, volume off late was very low, but I think June and for you I think April-May has also rebounded. So what is the broad breakup here for volume and price for you?

Aman Mehta — Chief Marketing Officer

So our AIOCD growth reflection is 17%, break-up is volume at 5%, price at 9% and new products at 3%, but the price reflection is a bit of an over reflection because of product mix change from last year, so there is a bit of base effect. So maybe it would be close to 8%. So that’s where there’s also a bit of a gap between the AIOCD reflection and the internal growth.

Prakash Agarwal — Axis Capital Ltd. — Analyst

Okay. Thank you and all the best.

Operator

Thank you for the opportunity. For the Brazil business, 12% is generic. There is new tender now and balance is branded generic. Is that the correct understanding?

Sanjay Gupta — Executive Director

Yes, that’s correct. About 88% is branded generic and 12% generic.

Dheeresh Pathak — White Oak Capital — Analyst

Can you share something like what the share of top brands like you gave for India 11 brands are more than INR100 crores. So can you share something on Brazil like the skewness towards the top brands?

Sanjay Gupta — Executive Director

So essentially, the business is firstly, it’s a very specialty business. We do only CNS, diabetic and cardio brands. So about 83% of our prescriptions are generated from specialist. And how we look at it is brands above BRL20 million, so roughly close to $4 million. So I would say 88% of our business is coming from brands above BRL20 million. And the number of brands that we have over BRL20 million is 10.

Dheeresh Pathak — White Oak Capital — Analyst

Germany, what is the tender cycle? And what do you mean by being more cost competitive because the manufacturing would be done in India. So I’m just trying to understand what you mean by that? And what is the tender cycle?

Sanjay Gupta — Executive Director

So for the tender market in Germany, let’s say, there are 10 insurance state-owned or private, which issue tenders. And the duration of a tender is two years. But each large insurance company will issue tenders 3 or 4 times a year for different sets of products. So it’s a perpetual activity. And you get — so like the largest insurance company is AOK. They might issue four tenders in the year. And each tender will have a set of products but also they will divide Germany into 25 sectors and you can choose which products and which sectors you want to bid for.

Dheeresh Pathak — White Oak Capital — Analyst

Understood. And what do you mean by cost competitive being more cost competitive?

Sanjay Gupta — Executive Director

So in the generic markets of Germany and the U.S. one key I would say feature to be successful is continuous cost improvement and cost reduction. So you have to keep working and improving your cost because the competition is increasing and everybody is doing the same thing. So that’s what I mean. So essentially, there are ways in pharmaceuticals to improve costs which either come from buying a cheaper API, developing a better route of synthesis or increasing your batch size in your plants or finding shorter manufacturing cycles or doing something where you minimize changeover timing. So there are various ways and it’s a continuous process. So for Germany we need to accelerate this cost improvement process so that we can be more competitive in this — I would say in this market where there are more players than ever before.

Dheeresh Pathak — White Oak Capital — Analyst

No, so what I meant was the competitive positioning is deteriorated for us because somebody else with better cost structure more vertically deteriorated is beating us or the margins in general? Because the market is more competitive, you might win more tenders. But your margins will be lower versus what they were in the past. So what is the case?

Sanjay Gupta — Executive Director

So your second statement is correct because any market which has more players there is obviously a higher competition on price which leads to some kind of margin compression.

Dheeresh Pathak — White Oak Capital — Analyst

Okay. Understood. And U.S. this INR38 crore settlement income this is part of the U.S. revenue?

Sanjay Gupta — Executive Director

Correct. Understood. Thank you.

Operator

Thank you. The next question is from the line of Damayanti Kerai from HSBC. Please go ahead.

Damayanti Kerai — HSBC — Analyst

Hi. Thank you for the opportunity. My first question is what are your observations on some of the macro headwinds, which is impacting the sector, such as like raw material prices, feed cost, etc.? So any moderation from last quarter number, any updates from your perspective?

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

Damayanti you’re asking for general cost inflation seen on food material prices?

Dheeresh Pathak — White Oak Capital — Analyst

Yes, broad basis.

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

So we are not seeing higher cost inflation impact quarter-on-quarter. So there has been an impact general increase we are seeing across the raw material prices, but not very significant [Technical Issues].

Damayanti Kerai — HSBC — Analyst

So from your portfolio or from market perspective quarter-on-quarter there has been no notable changes?

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

Correct.

Damayanti Kerai — HSBC — Analyst

And what will be key margin driver from current levels? Because you have already I guess, reverted back to the normal level after disruption in the previous quarter.

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

It’s a difficult question actually because I think all the levers are more or less there, right? I mean, from April that’s what we had guided. I think from here what can really happen Damayanti is that if the top line growth is better than quarter one, that could enable some operating leverage benefit to play out. That’s one. And then some amount of cost efficiency, which is continuously happening, but that won’t be significant I would say.

Damayanti Kerai — HSBC — Analyst

So it’s mostly the top line growth, which will be driving the [Speech Overlap].

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

Yes, absolutely. And some amount of cost efficiency may come in quarter-on-quarter, which may not be that significant.

Damayanti Kerai — HSBC — Analyst

Okay. My second question is on Brazil market. So can you update us on your new launches and MR addition plans there? And how should we look at growth perspective in the Brazilian segment?

Sanjay Gupta — Executive Director

So in the last six months, we’ve launched five products in Brazil. And that is a result of the large number of filings and approvals that we’ve been able to get in Brazil. So just to give you a background, last year we got eight approvals. And this year already we’ve received two approvals in Brazil. So currently, we have about 11 products which are under approval. And we will be making a number of filings in the current fiscal year in Brazil. So all of that results in a good new product momentum. And we’ve launched five products in the last six months. Just to share with you two of them are in very fairly large markets.

So one is Rivaroxaban which is about $150 million market, but the level of competition is quite high. We have 11 branded generic players that we are competing with. So we’ll see how that goes. And secondly, we launched in CNS a very large product called Desvenlafaxine. Again the number of players is 11 which is a fairly large number going by historical trends. But given our past track record in these areas I would not be pessimistic.

So we generally target a market share in branded generics close to double digit at the end of the 12-month period. It’s a kind of a generic statement I’m making. And as the quarters go by, we will communicate on market shares as to how they are progressing. Right now it’s too early. So most of the new launches have been between November and April and our market shares are less than 5%. So it’s kind of too early to comment but we’ll see how it goes from there.

Damayanti Kerai — HSBC — Analyst

In new launches which you have done in the last six months you said market share is currently around 5% or less so. And here you expect a pickup to happen in coming quarters or so? But in the established product, market share will be in the double digit?

Sanjay Gupta — Executive Director

In the core products like the products where we are our market shares are actually pretty. I mean we have to look at product by product but the minimum threshold for it to be a lead build brand in our company is at least 15% market share. And so we have that threshold in quite a few products. And I was mentioning that earlier in the call that one way we measure product is how many of them do more than BRL20 million which is close to $4 million of revenue in a year. And we have a fairly large number of those brands close to 10.

Damayanti Kerai — HSBC — Analyst

Got it. And in terms of growth any indication?

Sanjay Gupta — Executive Director

I think the IMS reflects fairly well with the growth of Torrent. It’s a little hard if you look at primary sales quarter-on-quarter because the stocking destocking impacted. But like I mentioned IMS is showing a 13% growth for Torrent branded generics business and which is I would say a reasonable expectation you can have.

Damayanti Kerai — HSBC — Analyst

Okay, sure. Thank you. I’ll get back in the queue.

Sanjay Gupta — Executive Director

Thanks.

Operator

Thank you. The next question is from the line of Saion Mukherjee from Nomura. Please go ahead.

Saion Mukherjee — Nomura Securities — Analyst

Yes. Thanks for taking my question. Just continuing on Brazil, in the branded market, you are focusing on the specialty of CNS, diabetes, cardio. So how large is this market? And how are you positioned in this market? And how much of the market you currently cover?

Sanjay Gupta — Executive Director

So our coverage in this market is currently around 22%, 23%. And we are aiming to double it in the next three years. I mean that’s where we are targeting and that’s where the new launches come in. So we are playing in a narrow let’s say space in this market, but we are playing in our let’s say more recent products and we have a good track record of doctor relationships and prescriptions here. You’d say something else we wanted to know?

Saion Mukherjee — Nomura Securities — Analyst

Sir, just one [Indecipherable] on the what’s the size of the market? I mean these three therapy segments? And what would be your position in the market in the branded generics in these three segments? What would be your rank in the market?

Sanjay Gupta — Executive Director

So if I take the overall, let’s say, therapeutic area of — if I take the overall area of cardio, diabetes and CNS, I would say the overall market size I don’t have a figure with me so we’ll revert to you. The overall branded generic market is roughly $20 million. And a good portion of it. I just don’t have the data in front of me. This covered market is growing currently at about 5%. And Torrent’s growth in this area is about 13.7% in the last quarter. So we’re growing pretty fast. I’ll revert — I’ll just come back to you, give a few minutes I’ll come back later in the call about what is the exact size of these areas.

Saion Mukherjee — Nomura Securities — Analyst

Sure. And would you know the rank like who would be the top 10 player or what would be your rank in this? I mean how based on —

Sanjay Gupta — Executive Director

So currently our rank in the therapeutic area of cardio, diabetes and CNS is 10. Our overall rank in Brazil is 20.

Saion Mukherjee — Nomura Securities — Analyst

Understood. Sudhir on INR38 crore of other operating income that you mentioned about settlement. Can you give some color? Because typically, we don’t see this kind of increase — is it like some kind of payment you received or some kind of a litigation. If you can give some color?

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

These are not litigation-related settlement income. This was basically one of the patent assignment which we had done earlier somewhere in 2010, 2011. So there were certain milestones, which were defined based on certain events. And that event happened and therefore the milestone got triggered.

Saion Mukherjee — Nomura Securities — Analyst

Okay. Okay. And just one final question, Aman. There has been this news of Torrent group entering into the diagnostics space. We have seen other pharma companies getting there leveraging their pharmaceutical franchise. So why it’s not being done through the domestic formulation business if you see synergies for a diagnostic rollout there?

Aman Mehta — Chief Marketing Officer

Yes, firstly as you said you’re right that this is a group-level venture and not a Torrent pharma venture. And the kind of overall skill set required for this business only a small part of it has to do with the field force and existing customer relations. A large part of it has to do with operations and back-end processing which requires a whole different kind of team and investment mindset. So that’s why we haven’t really considered having it part of the pharma company.

Saion Mukherjee — Nomura Securities — Analyst

But do you think, or at a later stage, do you think it would make sense to integrate because you already have a large presence on the pharma side and you have the doctor connect?

Aman Mehta — Chief Marketing Officer

No, that’s not the plan as of now.

Saion Mukherjee — Nomura Securities — Analyst

Okay, thanks.

Sanjay Gupta — Executive Director

So just to complete what I was saying earlier. The size of the CNS market is BRL8 billion. Diabetes is about 8 and cardio is also between 7 and 8.

Saion Mukherjee — Nomura Securities — Analyst

Okay, thank you.

Operator

Thank you. The next question is from the line of Kartik Mehta from ICICI Securities. Please go ahead.

Kartik Mehta — Klay Capital — Analyst

I’m from Klay Capital. This is Kartik here. Yeah, hi. I have question on the — hello, am I audible? Hello.

Aman Mehta — Chief Marketing Officer

Yeah, please go ahead. We can hear you.

Kartik Mehta — Klay Capital — Analyst

This is on India business. This is a slightly longer-term question. You’ve acquired a few products from a pharma company in India very recently. So if we have to look at it from your perspective for India business [Technical Issues] beyond, do you feel that there are so lesser opportunities of larger size due to issues of let’s say valuation or product mix, etc wherein which you have to acquire smaller businesses and must scale them up? This is only for the India business.

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

No. So inorganic remains kind of a core focus for us as we go along now that we’ve successfully integrated the Unichem acquisition and have also taken over four of the brands from Dr. Reddy’s in the previous quarter. So it’s not about size, it’s really about the strategic fit. And any kind of small to midsize acquisition is something that we’ll open for in the next couple of years.

Kartik Mehta — Klay Capital — Analyst

Yeah, so which I understand, I mean all the assets that you’ve acquired in the past have been very well integrated. We’re not talking about the ability to do that again. With the India business top line that you have now acquiring smaller assets will take a fair amount of time, effort from the top management and there will be a lot of investments required on the ground. In the past when you have acquired inefficient businesses or businesses which had lower investment [Indecipherable] able to turn around. So we are talking about a different thing here. If you do this, is it fair to assume that you will acquire a lot of these assets? And in the interim your profitability, I mean you will be acquiring it at you will be building it at your cost, but the ROI ROE, whichever metrics you use will take some amount of time for us to see?

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

Kartik, if these are brands which are being acquired and goes and sits in existing division, then I think the return profile would be much better, right? I mean because we are taking some brands and the gross margin is driving your overall profitability, right? So that’s something which plays out. And same thing is happening as far as the BRL brands are concerned where you don’t acquire a new division, it goes and sits in some existing division. So that with these kind of acquisition which fills up the product portfolio gaps and certain things which we are looking at in terms of smaller therapies we want to enter so on and so forth, this should be bottom line positive, Kartik.

Kartik Mehta — Klay Capital — Analyst

Yeah, which I understand. Is this definitely because again, just to repeat my question in case I was not clear. Is this something we are looking at because the larger or the more attractive assets are still not available at the right value or probably here you see some amount of opportunity here? I am just trying to look at —

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

It is too speculative in nature to comment on. At least only kind of guidance that we can give on this point is that an acquisition size something that was of the size of Unichem relative to a market share four years ago, opportunities of that scale if they come up we will certainly be evaluating them.

Kartik Mehta — Klay Capital — Analyst

Okay, thank you.

Operator

Thank you. The next question is from the line of Nitin Agarwal from DAM Capital. Please go ahead.

Nitin Agarwal — DAM Capital — Analyst

Hi, thanks for taking my question. Sudhir, you mentioned that the US plants are currently operating at 54% capacity utilization. So can you give us a sense of if there is any element of under recovery in these plants at this point of time?

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

Yeah. So just a correction to be made. I said all the facilities in India put together the capacity utilization is 54%. So it’s not only for the US facilities which we are talking about, right? But having said so, I mean, what we try and do Nitin, is on a continuous basis evaluate and try and trim the capacities which are there so that wherever possible, wherever there are pockets of cost optimization, we keep on doing that. So for me to say they’re still under-absorbed overheads which are still there in the P&L, maybe no, at this point in time after we’ve done all those things starting quarter four of last year.

Nitin Agarwal — DAM Capital — Analyst

And so from an increase in the capacity utilization the drivers would be what? US and the German business or any other businesses also can meaningfully impact us?

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

No, absolutely. I’m with you on that. The volumes can come only from the generic side which is Germany and US.

Nitin Agarwal — DAM Capital — Analyst

Okay. And secondly Aman, on the India business can you just give us some sense of your new product launch plans for the year?

Aman Mehta — Chief Marketing Officer

Yeah. So the Q1 new products have contributed to 3% growth overall. Some of the bigger contributors here have been from the CNS and gastro brands which were launched in probably the latter half of last year or January this year. Going ahead of course, there’s the wave of launches. One of them has already happened in first week of July, Sitagliptin. There’s a few more cardiac launches coming up in the second and third quarters. And additionally, we have some product extensions coming up for the rest of the year. So about seven to eight products per quarter is what we’re looking at in India.

Nitin Agarwal — DAM Capital — Analyst

Seven to eight products per quarter going forward?

Aman Mehta — Chief Marketing Officer

Yeah.

Nitin Agarwal — DAM Capital — Analyst

And on the Sitagliptin market, I mean in your assessment how has that played out? And does it give a sense of how some of these incremental overall diabetic product [Indecipherable] is going to play out?

Aman Mehta — Chief Marketing Officer

So obviously, this is a competitive market. So it’s hard to say how quickly the share is shifting to the new launched brands, but our recent launches in diabetes have been fairly positive indicators of our performance, Vildagliptin to name one example. So we hope that at least our market share should be somewhat in the range of those recent diabetes launches and similar for cardiac going ahead.

Nitin Agarwal — DAM Capital — Analyst

Okay, thank you.

Operator

Thank you. The next question is from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.

Shyam Srinivasan — Goldman Sachs — Analyst

Good evening and thank you for taking my question. Just the first one on the medical representatives. I think we have added 300 for the quarter, last quarter we added 300, it was 600. So are we done in terms of the MR additions? I remember you said it’s for the new launches that are coming in the pipeline. So are we right-sized if I can use the word. And if you can talk about how some of these MRs are actually or the first quarter or at least the previous quarter one, how are they integrating?

Aman Mehta — Chief Marketing Officer

Yeah. So the integration has been completed now, 600 reps in the last two quarters and our new divisions are all in place and the new products have also been launched in these divisions. So early to say right now, but in terms of launch plan and MR integration plan, things are on track. Going ahead from here, it will only be incremental expansion that we see for the rest of the year if at all needed, which will be reviewing probably every quarter or so but that would be small numbers compared to what we’ve done so far.

Shyam Srinivasan — Goldman Sachs — Analyst

And in terms of the cost of the MRs when I look at 1Q, do you think most of those expenses or there is like, maybe they got added later half of the quarter? How should we think of the cost bit of it?

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

I think substantially in the quarter.

Shyam Srinivasan — Goldman Sachs — Analyst

Okay, that is helpful. Just going back to your previous quarter guidance of the 300 basis points of margin expansion from 26. I’m just trying to see what has played through and what has not. I remember we had the 150 basis points that was coming from the Leviton shutdown, fixed cost there. We also have higher MRs. We have had this $5 million payment that has come through. So if you could kind of help us understand how much of that organic has come through Sudhir and maybe what is spending or we think the 30.5% is the level that we need to kind of keep in mind.

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

No. Shyam, all those factors, which have been talked about which is what the price increase benefit starting from April for the branded businesses that started playing out. The other what we have said is we had carried out a cost optimization at our plants in India, but maximizing at one side and bringing down the ship working on the [Technical Issues] that’s implemented. So that’s playing out. The Leviton cash burn out which was there has already started coming into the margins. I would say largely everything playing together except for the freight expenses where the impact in quarter three and quarter four was also around 1%, 1.2%, there’s some amount of recovery which is seen in quarter one, but still there is a good amount of room to improve on that.

Shyam Srinivasan — Goldman Sachs — Analyst

Got it. So there is still upside you think? You’re saying just from that particular last break that you just called out.

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

Yeah. But Shyam I would still wait for that to happen before we really start talking about it. But yes, we’ve seen a small recovery happening in the freight expenses.

Shyam Srinivasan — Goldman Sachs — Analyst

Fair enough. Just a last question on — just going back to the German tenders. You’ve done again some kind of a restructuring, you have looked at cost options. So what gives us the confidence that from Q3 I think you’ve got everything right? And can you comment on the competitors? Are these like large Indian manufacturers that you’re competing against? So what gives us the right to win against them now versus say non-Indian manufacturers?

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

No, I won’t say that everything is behind us. Cost optimization is a permanent exercise. Maybe we had fallen a little bit behind. But what I was telling is that we would be caught up on a set of products where we expect to win the tenders. In terms of competitors in Germany, the biggest competitors are the large local companies. So Sandoz through Hexcel, Teva through a German affiliate and Zentiva, those are the three big I would say gorillas in the German market. What we are seeing is an influx of players from India. So legacy players are Aurobindo and Dr. Reddy’s from the acquisitions that they’ve made in the European space. And then you have a newer crop of companies who are coming. But so far, I would say the highest market share that I’ve seen now, Indian companies share is close to 3%. Torrent’s reference market share is usually between 6% and 7% and the larger three players have a market share in Germany closer to 10% to 12%. Torrent is ranked number five in Germany with a 6% to 7% market share. So we have won a few tenders whose impact will start to come in October onwards. So that was the guidance I was giving because these tenders get renewed every two years. So we had — in the last round for these particular tenders we had incremental wins as compared to what was a run rate in the past. And this incremental wins would start to show in our numbers from Q3 onwards.

Shyam Srinivasan — Goldman Sachs — Analyst

Got it. Very helpful and all the best.

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

Yeah, thank you.

Operator

Thank you. The next question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.

Prakash Agarwal — Axis Capital Ltd. — Analyst

Yeah. Just a couple of clarifications. So the US business 2Q has actually come down, right? If we remove that INR38 crores which is about $6 million, $7 million. So it would have come down a bit versus the last quarter? [Technical Issues] is coming down. So the base business would be what $30 million to $32 million?

Sanjay Gupta — Executive Director

I would not say that. I would say that the business has come down a little bit to a large extent from price erosion and compensated handsomely by Datson.

Prakash Agarwal — Axis Capital Ltd. — Analyst

Okay, got it. And moving on to margin levers, so you mentioned about that if we exclude that INR38 crores again it’s 29.2%, 300 basis point improvement and we are there, but in the past we were at 31% also. So a little bit on the freight, but operating leverage is something which can clearly kick-in. So what is the time period you’re talking about moving to 31st and then 31 as seen in the past?

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

Prakash, I think I would be able to give a response to that question maybe one quarter down the line.

Prakash Agarwal — Axis Capital Ltd. — Analyst

Okay. And lastly on the M&A side. In the past, you’ve talked about net debt to EBITDA around 1. You usually get comfortable looking at assets. You’ve done smaller deals. How is the environment or what do you call the M&A side assets. Are the assets available or is it the stretch that’s why you are waiting and seeing for the right opportunity or you already have few asset which you’re looking at?

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

I think Prakash, as far as the leverage is concerned I think 30 June we should be around 1.2 times, right? And that gives us enough room from a balance sheet perspective to look at good assets. So all the assets which are there in the market we do have a look at [Technical Issues], no doubt about it. But if something is going to play out, only time can tell us that.

Prakash Agarwal — Axis Capital Ltd. — Analyst

Okay. And lastly for Aman. VYLDA fairly successful top 3, top 5 generic players in that molecule. How is Sita as the market competition playing out? Is it more competitive or is it similar to VYLDA? And do you expect some cannibalization in VYLDA as well?

Aman Mehta — Chief Marketing Officer

So it’s very early days, only 20 days since launch. So let’s wait for the AIOCD data to be out in August. But at first glance, it does seem that it’s probably a bit more competitive than the VYLDA launch. So probably better to see how our performance has been in the end of the July data set.

Prakash Agarwal — Axis Capital Ltd. — Analyst

Okay, all the best.

Aman Mehta — Chief Marketing Officer

Thank you.

Operator

Thank you. The next question is from the line of Anubhav Aggarwal from Credit Suisse. Please go ahead.

Anubhav Aggarwal — Credit Suisse — Analyst

Yeah. Question on the Brazil market. When we see this quarter let’s say excluding the tender business we’ve grown about 10%. Would you just break it up between volume and price?

Sanjay Gupta — Executive Director

Sure. So essentially, in April of this year, the government, as usual announced the price increases. So this year we had inflation-adjusted price increase. The pharmaceutical market is divided into three categories in terms of the level of competition that exists in Brazil. For the first time we saw that the price increases allotted by the government was 10.83% for all the three categories. So there is a strong recognition on the part of the authorities about the inflation component in our business and it was reflected in the price increase that was granted. So price is playing an important factor in our business in Brazil.

And then the second component which has played out for us is the new product launches. And volume in this particular quarter I would say is not growing much. And the reason for that is usually when we look at sales, sales in Q1 get impacted particularly in April from the high stocking that wholesalers do in anticipation of price increases. So the business model of wholesalers, it usually takes into account this type of a trading profit and they try to buy as much as they can in March so that they can take the price increase on the inventories. And we control that, but to some extent it’s part of the partnership that we have with wholesalers as to we have to let them buy some more in March and agree to sell less in April.

So far in Q1, you also don’t see the full benefit of the price increase that we’ve taken on the majority of our portfolio. So as we go forward, you’ll see the growth trend in volume and new product terms normalize and come to reflect more closely what you see in IMS. So that’s why I think it’s hard to judge one quarter performance based on primary sales in Brazil. It’s better to use our secondary sales for general evaluation of the trend of business.

Anubhav Aggarwal — Credit Suisse — Analyst

So Sanjay, for the rest of the year, what kind of price increase at the portfolio level if we’re talking about close to 10% or close to 5%, 6%? What kind of price increase at the portfolio level you’ve taken?

Sanjay Gupta — Executive Director

So I would say that generally it’s similar to in India in the sense that what you do is you evaluate the competitive scenario for each molecule. So I’ll give you an example. So we launched Rivaroxaban, right, which is a big market. It used to be BRL800 million. But what happened is that we saw the new competitors come in until they reach 11 in terms of branded generics. And the competitors would have their own pricing strategy. So we have to remain cognizant of it while we are doing pricing actions. So we don’t necessarily take the price increase allotted by the government on all our products. Generally, our price increase across the portfolio would be between 5% to 10%.

Anubhav Aggarwal — Credit Suisse — Analyst

And in the past with the new product momentum, volume growth you will expect to be high single digit to double digit here?

Sanjay Gupta — Executive Director

In terms of overall growth?

Anubhav Aggarwal — Credit Suisse — Analyst

For the full year, just the volume growth.

Sanjay Gupta — Executive Director

No, I would not give you guidance on volume and the split. But our volume growth would be in line with the market or greater than the market. And overall, our growth would be in the high double digits figures.

Anubhav Aggarwal — Credit Suisse — Analyst

Okay. And you mentioned about expanding your coverage, doubling your coverage in the next two, three years. So are you thinking of going beyond these three areas you are present in right now cardiac, CNS and diabetes to introduce some more therapies or only within these three areas you want to double the coverage?

Sanjay Gupta — Executive Director

So actually I’m following Aman’s footsteps. So actually what we will do is we will expand our coverage over a period of time. So I’ll give you an example. We set up a brand-new oncology facility in India. So ideally I would like to leverage this facility for our business in Brazil also. So it’s a progressive journey, but we would be expanding, but remaining very close to specialty therapeutic areas which require lesser of a footfall, but it also allows us to expand in institutional business.

Anubhav Aggarwal — Credit Suisse — Analyst

Okay. So basically, but largely it looks like from the current areas what’s your MR field force in Brazil right now?

Sanjay Gupta — Executive Director

Right now, we have two teams.

Operator

This is the operator. Ladies and gentlemen, we request you all to please stay connected while we reconnect the management line. Ladies and gentlemen, thank you for patiently waiting. The line for the management is reconnected. Thank you and over to you. Mr. Aggarwal, please go ahead.

Anubhav Aggarwal — Credit Suisse — Analyst

Yes. Since asked the question on the MR field force in Brazil right now.

Sanjay Gupta — Executive Director

I am sorry. Where did we cut-off.

Anubhav Aggarwal — Credit Suisse — Analyst

You were just about to mention about you have two teams in Brazil.

Sanjay Gupta — Executive Director

Yeah. So we have two teams. Size of a team is generally between 110, 120 people. And so over a period of time without going into specifics, we would need to add additional field force in Brazil, but we do it in a conservative way. So we would do partial increases and get some results and then expand into other parts of the country. So I would say three to five year objective would be to have full double teams in CNS and cardio.

Anubhav Aggarwal — Credit Suisse — Analyst

Okay. And last question on the India business, Aman. The 600 people you added you started new division. How many divisions you put in case here? And are these largely promoting new products or a combination of, I mean there will be some mix, but largely new products or largely existing products?

Aman Mehta — Chief Marketing Officer

You mean how many divisions?

Anubhav Aggarwal — Credit Suisse — Analyst

Yeah.

Aman Mehta — Chief Marketing Officer

Two new divisions. And it’s a mix of both. We’ve shifted some of our existing brands into the new divisions as well. So it’s kind of spread across existing plus new divisions.

Anubhav Aggarwal — Credit Suisse — Analyst

And these divisions are targeting which therapy areas largely?

Aman Mehta — Chief Marketing Officer

Across CBD and CNS.

Anubhav Aggarwal — Credit Suisse — Analyst

Thank you.

Operator

Mr. Aggarwal, does that answer your question?

Anubhav Aggarwal — Credit Suisse — Analyst

It does. Thank you.

Operator

Thank you. The next question is from the line of Saion Mukherjee from Nomura. Please go ahead.

Saion Mukherjee — Nomura Securities — Analyst

Yeah, thanks for the follow-up. Sudhir, on the PLI scheme, the incentive which starts from FY ’23. So how should we think about the incentive? Will it be front loaded, evenly spread over five years and has that started already kicking-in in the numbers?

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

Yes. But the number is quite insignificant in quarter one. So as we go quarter-on-quarter, I think the numbers will keep on increasing.

Saion Mukherjee — Nomura Securities — Analyst

Okay. On an average its around INR150 crores, INR160 crores, right Sudhir?

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

That’s the potential, Saion. But we’ll have to see how much you’re eligible for based on the incremental sales on the approved products which you can get. So it just started. It’s too early to talk about it. Maybe one or two quarters down the line, we can try and give you a color around it.

Saion Mukherjee — Nomura Securities — Analyst

Okay. So first year, it will not significant in your view?

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

It’s a very small number, Saion.

Saion Mukherjee — Nomura Securities — Analyst

Okay, understood. And then just one more on the trade generic part. So [Technical Issues]

Operator

Sorry to interrupt you, Mr. Mukherjee. The audio is breaking from your line. Please check.

Saion Mukherjee — Nomura Securities — Analyst

Yeah. Is it better?

Sudhir Menon — Executive Director, Finance and Chief Financial Officer.

Yeah.

Saion Mukherjee — Nomura Securities — Analyst

Yeah. So I was asking on the trade generics. So what’s the contribution now in the overall number for India?

Aman Mehta — Chief Marketing Officer

Contribution would be around 2.5%. So as the base has gone up for the overall India business, it’s around this range of 2.5%, but the trade generics business itself is growing quite substantially. So we expect that over the next few quarters which should increase in contribution from here as well, a little bit more from here.

Saion Mukherjee — Nomura Securities — Analyst

Yeah. Aman, have you shared any numbers in terms of what is the expectation, like where you want this number, where this number would be eventually?

Aman Mehta — Chief Marketing Officer

No, we haven’t shared anything and I believe that it’s a bit still premature to say on what kind of ambition we have yet. But as of now, we are quite confident of maintaining this level of contribution and increasing probably incrementally from here.

Saion Mukherjee — Nomura Securities — Analyst

Okay, thank you.

Operator

Thank you. The next question is from the line of Neha Manpuria from Bank of America. Please go ahead.

Neha Manpuria — Bank of America — Analyst

Yeah. My questions have been answered. Thanks.

Operator

Thank you. The next question is from the line of Dheeresh Pathak from WhiteOak Capital. Please go ahead.

Dheeresh Pathak — WhiteOak Capital — Analyst

Yeah. Thanks again. On other countries, I have an understanding that UK and Philippines are large part of that. But outside of that, which are the other bigger countries just giving a better understanding of some of those?

Sanjay Gupta — Executive Director

So of course in terms of revenue, UK and Philippines but also Mexico is on the same type of size. So you’re talking about countries with revenues of — Philippines might be a little bigger but mostly between $10 million to $20 million.

Dheeresh Pathak — WhiteOak Capital — Analyst

So then there will be like a long good enough tail of countries Because UK, Philippines are like INR150 crore each and the total size of other countries is close to like INR1,000 crores. So then you have — and Mexico is only I think INR70 crores, INR80 crores. So then you will have bunch of countries will be largely distributor led or do you have your branded presence in these countries?

Sanjay Gupta — Executive Director

Presence outside of our four major geographies is fairly concentrated. So let’s say that in the rest of the world countries, we focus on seven major markets which are all branded generics and we have our boots on the ground. And usually, these boots on the ground are either Torrent employees or through distributors. In countries like UK, Mexico, we build up our own subsidiary. For example, I can share with you. In Mexico we have close to 50 reps in the CNS space, we’re building a specialty company in CNS which is going quite well, but it is still let’s say between $10 million to $50 million a year. And we are trying to build a future in Brazil for Torrent in Mexico. In ballpark, Mexican market is 50% of the Brazilian market. So there’s no reason why in a few years’ time down the road we cannot have a $50 million business in Mexico. At least that’s the type of ambition that we fix for ourselves. So we’re working on it behind the scenes. And I think as it grows in visibility, we will communicate more about this market. But it’s a focused effort. It’s not a 50 market effort. It’s a focus effort in [Indecipherable] around a few key strategic markets where we are making investments and the rest of it is just incremental where we partner or distribute our product.

Dheeresh Pathak — WhiteOak Capital — Analyst

Okay. So UK, Philippines, Russia, Mexico, Malaysia, these are the five. Which would be the other two? Sorry.

Sanjay Gupta — Executive Director

No. There used to be Sri Lanka until very recently. So I won’t comment upon that. But for us like Malaysia, Thailand even Nepal is an important market for us which we consider in this area, Sri Lanka and a couple of others.

Dheeresh Pathak — WhiteOak Capital — Analyst

Okay. One last question. The Brazil like you said for you it is 12% generic and 88% branded and zero tender. But for the market let’s say your covered market which is CNS, diabetes, cardio. What would that mix be? It’d be roughly similar or will be more tender and more generic and less branding?

Sanjay Gupta — Executive Director

So it’s kind of a little bit. What happens is that the volume in branded, direct and generics are fairly similar, but the values are very different. So I’ll give you an idea about the size of the overall Brazilian market. So in terms of branded generics, the size of the market is roughly BRL42 million. And in terms of the generic market in Brazil, it’s about BRL12 million. But also the marketing structures are very different. So in branded generic, you have [Indecipherable] all kinds of marketing expenses. In generic, you have a very small team. When you’re looking at these businesses, the bottom line might be the same, because you’re operating in different businesses with different economics and you have to learn to operate them in an efficient way.

Dheeresh Pathak — WhiteOak Capital — Analyst

Size of the tender market or that is included in the generic BRL12 billion that you told?

Sanjay Gupta — Executive Director

Tender market is a separate market which is classified under hospitals and tenders and it’s roughly BRL40 billion and the retail market is about $90 billion.

Dheeresh Pathak — WhiteOak Capital — Analyst

Understood. This is for the overall market. But like your targeted therapies would have a similar mix I’m assuming or tender would be lesser than that?

Sanjay Gupta — Executive Director

No. The tender is the separate component which I put you in the tender [Indecipherable] market. The tender is for government hospitals, private hospitals, municipal, district level, state government hospitals. So it’s usually that is the business.

Dheeresh Pathak — WhiteOak Capital — Analyst

The reason I’m asking is some years back, there was this thing, right, where government had run a program and they were giving certain medicines. I’m forgetting the name of the program.

Sanjay Gupta — Executive Director

Yeah, that’s called [Indecipherable] program.

Dheeresh Pathak — WhiteOak Capital — Analyst

So what happened to that? And has it gained more popularity or something like that?

Sanjay Gupta — Executive Director

No, they became a victim of government budgetary constraints. So it still exists. And with the portfolio of products which are in it are fairly limited and it is subject to the degree of government budget allocation.

Operator

Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Sanjay Gupta for closing comments.

Sanjay Gupta — Executive Director

So I’d just like to close today’s conference call by thanking all of you for your interest in Torrent, for the insightful questions, and we hope to keep the dialogue going, and we’ll be available through our Investor Relations group. Thank you. Good night.

Operator

[Operator Closing Remarks]

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