Torrent Pharmaceuticals Ltd (TORNTPHARM) Q4 FY22 Earnings Concall Transcript

Torrent Pharmaceuticals Ltd  (NSE:TORNTPHARM) Q4 FY22 Earnings Concall dated May. 25, 2022

Corporate Participants:

Sudhir Menon — Executive Director and Chief Financial Officer

Aman Mehta — Executive Director and Chief Marketing Officer, India Business

Sanjay Gupta — Executive Director, International Business

Analysts:

Sriraam Rathi — BNP Paribas — Analyst

Anubhav Aggarwal — Credit Suisse — Analyst

Damayanti Kerai — HSBC — Analyst

Neha Manpuria — Bank of America — Analyst

Bino Pathiparampil — InCred Capital — Analyst

Shyam Srinivasan — Goldman Sachs — Analyst

Nitin Agarwal — DAM Capital Advisors — Analyst

Prashant Kothari — Pictet — Analyst

Saion Mukherjee — Nomura — Analyst

Rajesh Kothari — AlfAccurate Advisors — Analyst

Bharat Celly — Equirus — Analyst

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Q4 FY ’22 Earnings Call of Torrent Pharmaceuticals Limited. [Operator Instructions]

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

Sudhir Menon — Executive Director and Chief Financial Officer

Yeah. Thank you, Sravan. Good evening and welcome, everyone to quarter 4 FY ’22 earnings call. Quarter 4 witnessed strong growth in the branded generic market aided by market share gains, performance of our top brands and new launches. The branded generic markets revenue constituted 70% of our total revenue in quarter 4 which grew by around 15%.

Our financial highlights for the quarter are as follows, revenues were INR2,131 crores, up by 10% on Y-o-Y basis. The gross margins were at 71%, improved by 1% on sequential basis. The EBITDA was INR612 crores, up by 1% on a Y-o-Y basis. The operating EBITDA margins are at 26.3%. This quarter, we have taken a difficult decision of discontinuation of our liquid business in the US, which we had acquired in 2018. The exceptional item of INR485 crores in the income statement relates to the impairment provisions and costs related to discontinuation of liquid business in the US.

The Board of Directors today have recommended a final dividend of INR8 per equity share. Additionally, the Company is completing 50 years this year of its incorporation. To commemorate the same, the Board has additionally approved a special dividend of INR15 per equity share and a bonus issue of 1:1.

I would now request Aman to share his insights on the India business performance.

Aman Mehta — Executive Director and Chief Marketing Officer, India Business

Thanks, Sudhir. Revenue at INR1,034 crores grew by 12%. As per AIOCD data, Torrent’s Q4 growth was 11% versus the IPM growth of 4%. Growth was aided by a new launch momentum, a robust performance of top brands and continued market outperformance across our focused therapies, particularly in CNS, gastro and women.

We have expanded our field force during the quarter to 3,900 compared to 3,600 in Q3. We expect the India business to continue the above-market growth momentum as our April AIOCD numbers look encouraging, and we have a good new pipeline, new launch pipeline coming up in the next few quarters.

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

Sanjay Gupta — Executive Director, International Business

So I would like to start with Brazil. So Brazil revenues were at INR251 crore up by 33%. Constant currency revenues were at BRL172 million. As per secondary market data, in Q4, Torrent’s growth was at 15.4% as compared to a market growth of 10.1%.

The quarter witnessed good initial traction from launch of five new products since November of 2021. These are [Indecipherable]. With strong underlying growth of the market, we expect basel [Phonetic] to continue growth momentum aided by the new launches, performance of our top brands and the new division in the C&I segment.

Moving on to Germany. The Germany revenues were INR218 crores. They were down by 18%. Constant currency revenue were EUR26 million. Growth was impacted by a loss of products in a recent tender and price erosion. We have already initiated cost measures to improve competitiveness and are confident to revise growth in the coming quarters.

For the US, US revenue was at INR282 crores, up by 5%. Constant currency revenue was $37 million. Revenue growth sequentially by 20%, is it by the launch of [Indecipherable], a new derma product. We continue to await US FDA re-inspection of our facilities. Torrent has decided to discontinue the liquid facility operations. The operational cost of this facility was INR135 crores per annum. The decision was made by taking into account incremental investments required for bringing pipeline products into the market and the increased competition intensity in the liquid space.

As of March 31, 2022, 57 ANDAs are pending approval with the US FDA and five tentative approvals were received. During the quarter, six ANDAs were filed and one ANDA was approved.

To conclude, as branded generics market, including India remain on strong footing, we expect the current growth momentum in these markets to continue and are optimistic to revise growth trajectory for Germany in the coming quarters. The cost optimization measures initiated in the previous quarter shall lead to steady margin improvement in the coming months and quarters ahead. Thank you.

Operator, we can open the call to questions now, please.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Sriraam Rathi from BNP Paribas. Please go ahead.

Sriraam Rathi — BNP Paribas — Analyst

Yeah. Thanks for the opportunity. So one question, particularly on the gross margin, that consequently FSW [Phonetic] improve, because there is certain one-off in this quarter. But how is the raw material cost scenario now for Torrent Pharma? And I mean earlier, you were expecting that by Q1, we should be back to the normal level. So where do we stand now?

Sudhir Menon — Executive Director and Chief Financial Officer

So Sriraam, did you say on the raw material prices, the price increase?

Sriraam Rathi — BNP Paribas — Analyst

Yeah, raw material has price increase. So basically, I mean, is the impact to be continuing for Torrent Pharma? And earlier, we were expecting that by Q1, we should be back to the normal levels of gross margin. So I mean is that still stand true for us?

Sudhir Menon — Executive Director and Chief Financial Officer

No, I think the thing which we spoke about on cost optimization to start in quarter 1 was more on the plant overheads, which I had said, right? I mean, for example, we were looking at optimizing our cost at the API facilities basically, which is part of the raw material cost, right? I mean, impacting the gross margin. That should start from quarter 1, Sriraam. So that’s something which has not come in quarter 4.

Sriraam Rathi — BNP Paribas — Analyst

Right. Okay. Okay. Got it. Got it. So — and in terms of raw material cost inflation, which we are seeing — so I mean, what is your view on that? And because earlier we were doing gross margins of around 73%, 74%. So now, right now, we are at 70% to 71%. Any view on that?

Sudhir Menon — Executive Director and Chief Financial Officer

So Sriraam, the greatest impact on the gross margin has been by the generic businesses, which are there, right, which is essentially US and Germany, right? And that’s the reason why there is a dip in gross margin. Over the previous quarters, which you’re looking at, we used to be 73% kind of a number, right? What we also said during the last quarter is that from quarter 1 since we’ll be taking price increases in the standard generic segment, we should start seeing improvement in the gross margin coming. That’s point number 1.

Point number 2, what we said is once the US FDA re-inspection is happening next year, which any time we are expecting now, looking at the others having the re-inspection of US FDA. The US new product approvals will start coming in. And what we had indicated was that should start happening somewhere in quarter 4 of this year. So that should play out in a positive way to the overall margins. So probably, let’s say, quarter 4 of next year, you should seeing those margins coming back is what is my understanding. But having said that, I think let’s wait for quarter 1 performance, which could give a better direction to the overall gross margin progression during the year.

Sriraam Rathi — BNP Paribas — Analyst

Okay. So that’s helpful, sir. Thank you. And just one question on the US generics. I mean, of course, we’ve seen decent pickup — I mean in this quarter, this is $37 million sales, I mean, from here on, how should we look at it? I mean — I mean, assuming that FDA inspection happens at a certain time. But without that, can we expect that this revenue run rate to sustain and maybe improve from here on?

Sanjay Gupta — Executive Director, International Business

Sriraam, on a quarter-on-quarter basis, our price decline is, I would say, low single digits. On a year-on-year basis, it is in mid-teens. So that is what has happened. So we are seeing some relief from — compared to the previous year in terms of pricing erosion, but — so my guess would be that we would see modest strength in price erosion. So especially given the announcement by several companies that they are discontinuing products. I think our customers would be a little bit careful about asking for further price increases. So on that basis, I would say, without the inspection and without new launches, with the chances of having fairly stable sales base are higher.

Sriraam Rathi — BNP Paribas — Analyst

Okay. Great. That’s helpful. Thank you. I’ll jump back in the queue.

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. Thanks. Sanjay, question for you. Just continuing with the previous question on US market. So Dapsone gel looks like, from your comments that, that was the largest contributor in terms of delta to this quarter. So quarterly sales of $5 million to $7 million per quarter looks very high from Dapsone gel. Would you say that this was just driven by some extra inventory filling, which would normalize next quarter to a lower number?

Sanjay Gupta — Executive Director, International Business

So Anubhav, I will not comment upon sales by product, because it’s something which is a sensitive information. We had good sales from Dapsone this quarter. We know there are other competitors on the horizon. I’ve not seen their product as yet, but you don’t know what is their supply chain connectivity looking like. But — so I would not go into venturing to make forecast for Dapsone for subsequent quarters.

But we have a good customer mix. We had some anchor customers and some smaller distributor customers. So we will do what we can to retain them. And pricing to see sustained as long as there are no new entrants that come to the market, because it is still — it’s still a three-player market, the originator; the one, generic; and us. So it’s a fairly, I would say, a stable situation as of today. But in the US generic space, as you know, new entrants can shuffle the cards. So I will not tell you what it would be next quarter. It will only depend upon, if there is a new entrant and how that cleans up.

Anubhav Aggarwal — Credit Suisse — Analyst

Sure. And second question is on the Brazil market. In this quarter, would you roughly help how much the new launches that — those five launches you have done, how much would they have contributed roughly as percentage of sales of this quarter?

Sanjay Gupta — Executive Director, International Business

Correct. So we showed a growth of about 21%. And I would say roughly about 13% to 14% of that is the contribution from new launches.

Anubhav Aggarwal — Credit Suisse — Analyst

Very substantial contribution. So what — how are you expecting Brazil sales growth next year? Are you — do you think double digit is doable in constant currency?

Sanjay Gupta — Executive Director, International Business

So if you look at the Brazilian — starting with the GDP, right, this year, the 21 [Phonetic] GDP growth of about 4%, 4.5%. Next year forecast is looking at less than 1%, especially with the elections having in October. So generally, from our past 20-year experience in Brazil, we’ve seen the pharma market to be sustained, irrespective of these macroeconomic fluctuations. So assuming that the market grows at another like 8% to 10%, we should be well above that.

Anubhav Aggarwal — Credit Suisse — Analyst

Okay. And just last clarity from Sudhir — close down of the facility — the liquid facility in the US, would it help you reduce cost in subsequent quarters?

Sudhir Menon — Executive Director and Chief Financial Officer

Yeah, yeah, yeah, Anubhav. So the operating expenses on a full year basis is INR135 crores. As part of the impairment, I mean most of the activities have actually stopped there. And as part of the impairment, which we have taken on 31 March, we’ve also included the closure cost related to the closure. So we should see those benefits coming from quarter 1 and second quarter.

Anubhav Aggarwal — Credit Suisse — Analyst

So how should we see? Should we just divide INR135 crores [Phonetic] and just that will be the annual quarterly savings that will just come through.

Sudhir Menon — Executive Director and Chief Financial Officer

Yeah, logically yes, Anubhav. I mean, 10% to 15% here and there, for — in the first quarter. Other than that, I don’t think the numbers should change drastically.

Anubhav Aggarwal — Credit Suisse — Analyst

No. It’s a big number. This effect — already talking about almost like INR30 crores, INR35 crores, which is like 7%, 8% of the EBITDA of the Company.

Sudhir Menon — Executive Director and Chief Financial Officer

INR30 crores is 1.5%. I mean, INR2,000 crores run rate on a quarter basis.

Anubhav Aggarwal — Credit Suisse — Analyst

Yeah. Quarterly EBITDA is about INR500 crores, INR600 crores, right?

Sudhir Menon — Executive Director and Chief Financial Officer

Off the EBITDA, you’re saying. Okay.

Anubhav Aggarwal — Credit Suisse — Analyst

Yeah, off the EBITDA.

Sudhir Menon — Executive Director and Chief Financial Officer

Yeah, yeah. Absolutely, yeah. I mean, it was a cash burn which was happening for the last two, three years. So I think finally, the call taken and they should start rolling up into the EBITDA.

Anubhav Aggarwal — Credit Suisse — Analyst

Okay. Thank you.

Operator

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

Damayanti Kerai — HSBC — Analyst

Yeah. Hi. Good evening. Thank you for the opportunity. My question is on the Germany market. How should we look at sales in coming years, because you mentioned the loss of one tender led to quarter 4 performance. So when will the next tender open up there? And also, can you specify, what is the split between tender and retail market in Germany?

Sanjay Gupta — Executive Director, International Business

Yeah. So essentially, in the current Q1 and Q2, we do not expect many new tenders to start. And we would expect more tenders to come on stream, new tenders that we have either won or will start from September, October onwards. So we would expect savings in the second half to be better than the sales in the first half in terms of growth momentum. We also have 10 to 15 launches planned for this year, which would be a bulk of it coming after September, October also. So that should provide some growth momentum. And in terms of tender — non-tender sales, the tenders sales are roughly 60% of our business.

Damayanti Kerai — HSBC — Analyst

60%? Sorry, 60, right?

Sanjay Gupta — Executive Director, International Business

Yeah.

Damayanti Kerai — HSBC — Analyst

Okay. My second question is on India business, how should we look at FY ’23 growth over FY ’22? And if you can split growth contribution coming from volume, price and new launches?

Aman Mehta — Executive Director and Chief Marketing Officer, India Business

Yeah. So for Q4, our AIOCD reflection of growth was 11%. Breaking that up into new products is 3%. Price is 8% and volume is 0%, but that’s against a market volume of minus 3%. And additionally, maybe a 1%, 1.5% upward adjustment on volume reflection, because of this field force expansion. We’ve had a bit of reshuffling of some of our brands in our divisions. So volume is about 3% to 4% above the market growth currently.

And I think in terms of the upcoming year, of course, last year base, because of COVID would be much higher. So on a quarterly basis, hard to say what the growth would look like. But on a CAGR basis, I think a double-digit growth should be doable for the market, and we should be — we expect to grow above the market as well.

Damayanti Kerai — HSBC — Analyst

So CAGR, you mean to see pre-COVID, right? Or CAGR was what business.

Aman Mehta — Executive Director and Chief Marketing Officer, India Business

Over a two to three-year period. So roughly speaking, double-digit growth of the market without COVID should continue where our base is predominantly chronic driven, so we would not have that impact in our base. So we expect that double-digit growth should be possible for the year.

Damayanti Kerai — HSBC — Analyst

Okay. And just a clarity on India business, the price hike, which was allowed for [Indecipherable] portfolio, although it’s a small part of your business. That’s all included in your assumption?

Aman Mehta — Executive Director and Chief Marketing Officer, India Business

No, that would not yet be included, because that would have been effective from April.

Damayanti Kerai — HSBC — Analyst

Okay. So most likely, after first quarter onwards, we can assume those prices to be incorporated.

Aman Mehta — Executive Director and Chief Marketing Officer, India Business

That’s right. That’s right. Absolutely.

Damayanti Kerai — HSBC — Analyst

Okay. And what about the non [Indecipherable] impact, that’s a normal 7% to 8% price hike, which you generally take on a regular basis, right?

Aman Mehta — Executive Director and Chief Marketing Officer, India Business

Yeah, the price range that has been seen over the past few quarters has continued. So this quarter was 8%.

Damayanti Kerai — HSBC — Analyst

8%. Okay. Thank you. I’ll get back in the queue.

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

Thank you for taking my question. Aman, on the field force addition, is all of our planned addition done? Or do we expect some more in the coming quarters?

Aman Mehta — Executive Director and Chief Marketing Officer, India Business

No, there would be some additional expansion happening by end of Q1, which is when we expect the entire exercise to be complete. So this quarter ended at 3,900 and probably another 200, 300 reps by the end of Q1.

Neha Manpuria — Bank of America — Analyst

Okay. Got it. And these were all for existing divisions? Or are we planning to add new divisions?

Aman Mehta — Executive Director and Chief Marketing Officer, India Business

So we have launched a new division in CVD and there will be — most of the field force for the new launches that are coming up in the coming year.

Neha Manpuria — Bank of America — Analyst

Okay. Got it. Sudhir, on the margins, I think Sanjay mentioned in his opening remarks about steady margin improvement. But if I were to look at everything that has been discussed in terms of gross margin improvement, new overheads coming down, price increases and the fact that we have cost savings from divestment, shouldn’t there be a significant step-up in margins from the first quarter itself?

Sudhir Menon — Executive Director and Chief Financial Officer

We do expect it, Neha.

Neha Manpuria — Bank of America — Analyst

Should we…

Sudhir Menon — Executive Director and Chief Financial Officer

Yeah, yeah.

Neha Manpuria — Bank of America — Analyst

Sorry, go ahead.

Sudhir Menon — Executive Director and Chief Financial Officer

From a — 26.3% [Phonetic], which is in quarter 4, we should see at least 300 basis points upside starting from quarter 1. But having said that, let’s wait for the results to come. But we are positive.

Neha Manpuria — Bank of America — Analyst

Okay. Fair enough. Thank you so much.

Operator

Thank you. The next question is from the line of Bino Pathiparampil [Phonetic] from InCred Capital. Please go ahead.

Bino Pathiparampil — InCred Capital — Analyst

Hi. Just a follow-up question on the US, you mentioned that there are companies that are discontinuing products, etc. Could you please elaborate a little bit on this, what are you exactly seeing in the market?

Sanjay Gupta — Executive Director, International Business

So we are seeing a lot of pressure on the Company, especially for legacy older products. And so what we’ve seen is some companies are willing to give up products if the pricing goes below a certain threshold. So I’m hoping that, that reduces the level of competition for the older legacy products. So especially for oral solids, that was becoming — lot of prices are becoming non-sustainable. So I think it’s a wise thing on behalf of the generic companies to maintain some minimum profitability so that they can continue in business. So that’s what we are seeing.

Bino Pathiparampil — InCred Capital — Analyst

Okay. And are you seeing this in the last, say, 30 days or two months, three months?

Sanjay Gupta — Executive Director, International Business

Yeah, it’s a theme [Phonetic], right? Because during COVID, things were stable, after COVID, we started very severe price erosion. And I would say, for the last two, three months, especially since 2022 began, we see companies taking into account this market reality and adjusting their strategies.

Bino Pathiparampil — InCred Capital — Analyst

Okay. Great. And just a question on revenue mid [Phonetic], do you still maintain that you would be able to launch with the next two days of generic entry?

Aman Mehta — Executive Director and Chief Marketing Officer, India Business

No, we are much later actually. So without giving you a precise date. We are not in the initial two phases of launch.

Bino Pathiparampil — InCred Capital — Analyst

Got it. 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

Hi. Good evening and thank you for taking my question. Just first on capital allocation. There has been some press [Phonetic] speculation around the M&A for you. So just wanted to get some clarity around what are some of the therapy areas, like you said, you’re doing probably INR2,000 to INR2,500 crores of EBITDA. So just the usage of this, maybe if you want to use it before R&D also, you can add, but just the capital allocation target. That’s my first question.

Sudhir Menon — Executive Director and Chief Financial Officer

So Shyam, frankly, I didn’t get your question. If you can just — is it something [Indecipherable] or something? What was that?

Shyam Srinivasan — Goldman Sachs — Analyst

No, no. So let me slowly repeat. Capital allocation, what are the priorities for Torrent Pharma? Yeah. There is the press speculation around M&A where you are in the advanced stages of one of the asset [Phonetic]…

Sudhir Menon — Executive Director and Chief Financial Officer

Okay, okay. Understood. Understood. Okay. Shyam, let’s come straight to the point, right? I mean M&A happens when it has to happen, that’s what I personally believe. I mean given that we keep on looking at all the assets which are there in the market, right? I mean, so all the deals which have happened, whether we have looked at, yes, we’ve looked at it, right? But having said, yes, I mean there are a few other assets which we have been looking at.

I think from a capital allocation perspective, it’s quite simple for us to think that over the next two years, I think most of my existing debt would be repaid, right? I mean which is basically outstanding from the Unichem acquisition. And from the third year onwards, the kind of cash flow generation, which will happen with US and Germany also coming back on track, hopefully, I think there’s a good amount of capital allocation, which is possible for any acquisitions which we are doing.

So basically, there’s a good asset, which we find today, advancing that by one year or two year does not really change the needle, because, as I said, two years down the line, I think most of our debts would be repaid.

Shyam Srinivasan — Goldman Sachs — Analyst

Got it. So if I were to approach further, so what will be the likely order or rank, order of what assets you’re looking for? Maybe it’s over a two to three-year time frame as well. We don’t need to be near term. Is it going to be India? Are you looking at assets elsewhere in the world? Which therapy areas? Will it be complementary? How should we look at that?

Sudhir Menon — Executive Director and Chief Financial Officer

So currently, Shyam, it’s only in India, we are looking at. So I mean, US, I think in the near term, we don’t think so. Germany, we’re already number 5 in the market, right? And there’s still enough room to expand into the 50% balance generic market where we are not present. So I think the growth story for Germany should be good over a long term. So there’s something immediately is happening in Germany, the answer is no. Brazil, we’ve not seen any assets coming for the last so many years. So definitely, it would be India compared to the other geographies.

Shyam Srinivasan — Goldman Sachs — Analyst

Got it. Last question is on the field force. I think you said another quarter of field force addition. So if you can just help us understand just — I think you gave some details last quarter. But just what are these people specially doing? You talked about a new department as well. If you can just give us color on what are the new field force, which therapy areas, again, just refresh us please, on where are the new areas? What is the field force productivity at this point of time? And where can this go?

Aman Mehta — Executive Director and Chief Marketing Officer, India Business

Yeah. So the expansion is essentially to help us mainly catered to the new launches as the existing divisions would be — would not have the space remaining, so we had to have to expand the divisions as well. So given that there are important launches coming up in the next one, two years, that’s where the need for this was established.

In terms of PCPM roughly speaking, since our topline has remained the same and 10% field force has been added from that 9.5 lakh [Phonetic], 10 lakh level it would have come down by 10%, but that will — with next year’s growth, that should get back up to the same level. So we think that range of 9 lakhs, 10 lakhs with PCPM should continue. So essentially keeping in mind the new launches that are coming up in high size markets, particularly in CVD, that’s where this — the majority of the new expansion should cater to.

Shyam Srinivasan — Goldman Sachs — Analyst

Sorry. And last question, just an extension of this and how — where do you think that PCPM go, before you again need to start thinking about expansion of the field. So is it like a two to three year window, so PCPM can go beyond this 10 lakhs? How should we think about that? Thank you.

Aman Mehta — Executive Director and Chief Marketing Officer, India Business

It can, but that’s not the objective. I think 10 lakhs would be a reasonable number. And as the pipeline keeps on increasing in new launches, we’ll have to expand to a certain level. So I think 10 lakhs is something that we are quite comfortable with and not looking at increasing beyond that, especially given that we have to be aggressive and competitive with the new launches in the next two, three years.

Shyam Srinivasan — Goldman Sachs — Analyst

Got it. Thank you. Thank you and all the best.

Operator

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

Nitin Agarwal — DAM Capital Advisors — Analyst

Hi. Thanks. Sudhir, just on the other expenses for the quarter, so the sequential increase is just a Q4 impact? Or it’s something — anything else to read in that?

Sudhir Menon — Executive Director and Chief Financial Officer

No, no. There’s some bunching of expenses which have happened in quarter 4. And just to name one or two of them, so most of the US filings have happened in quarter 4, right? I mean so we filed five ANDAs and I think one or two DMS [Phonetic] also. So there’s a piling [Phonetic] up which happened in quarter 4. So there’s a lump in terms of the US filing fees which has come in, which ideally should have bought distributed over the quarters.

The second item is there’s a big lump sum, which has come in terms of, see donations actually. So almost INR18 crores which we paid in quarter 4 which could have been paid in previous quarters, but we need those in quarter 4. And plus, the freight expenses have gone up a little bit more than quarter 3, so around INR8 crores of that. So all these three put together is around INR40 crores. So I would say it’s bunching of expenses, which has happened in quarter 4, which otherwise could have been evenly spread out.

Nitin Agarwal — DAM Capital Advisors — Analyst

Right. But from — if you sort of look through the year, there’s nothing — not much one-off in those numbers per se, if you would analyze, I mean…

Sudhir Menon — Executive Director and Chief Financial Officer

Yeah, yeah. Absolutely. For the year, there’s no one-off [Phonetic].

Nitin Agarwal — DAM Capital Advisors — Analyst

Okay. And likewise, for the employee expenses, there is a sharpish reduction on a Q-o-Q basis. Anything specific there?

Sudhir Menon — Executive Director and Chief Financial Officer

Yeah. So two things basically. So one is the reworking of annual incentives — there was a reversal of provisions which had happened, which were taken in the previous quarters and got reversed in quarter 4. Plus, this time, the Chairman Emeritus Commission, was foregone by the Chairman Emeritus. So there’s a reversal of health commission in this as well.

Nitin Agarwal — DAM Capital Advisors — Analyst

And Aman, on the India business, so there has been — in your comments through the call, a lot of talk about new product launches and you’re sort of making the business prepared for higher intensity of new product launches. Can you give us a little more color on how things are changing on this front versus what they’ve been over the last three, four years?

Aman Mehta — Executive Director and Chief Marketing Officer, India Business

Yeah. I mean, this is more driven by the patent expiration pipeline. So if you recall, not last year, but the year before, there was a big wave of launches in cardiac and diabetes to name a few examples, dapagliflozin, vildagliptin. So again, this year onwards and possibly next year, a similar intensity of launches is anticipated that where we are preparing for. So we have to create the portfolio, which is kind of future ready as well. And hence, ensuring that we do the absolute best we can in these new launches.

In terms of competitive intensity, I think there probably is a slight increase in the chronic space compared to maybe two years ago. But we remain confident of maintaining or even gaining our market share as we have been compared to last year as well, for example, at the Company level, our market share has increased from 3.5% — from 3.2%, sorry, to 3.5% at an overall level. So we remain confident of consistently gaining market share.

Nitin Agarwal — DAM Capital Advisors — Analyst

If I were to just sort of break up the — look at your growth in terms of new product launches, pricing and volumes for — in the existing portfolio, clearly, there is this component of new product growth, which is going to increase, hopefully, should increase going forward with the new launches. How should we look at the other two components? They should largely remain in line with what they’ve been? Or are you seeing changes on those accounts also?

Aman Mehta — Executive Director and Chief Marketing Officer, India Business

So it will predominantly depend on the market growth trajectory and assuming that the similar range of market growth continues, we think the delta between the market growth and our growth in volumes, in particular, is around 3% odd. We think that should continue. And the performance of new launches should add maybe another 1% to that. And as we mentioned, the price growth range is within the 7% to 8%. So hard to really anticipate exactly what is likely to be each breakup, but that’s the kind of broad direction that we believe should be doable.

Nitin Agarwal — DAM Capital Advisors — Analyst

No. That’s very helpful. Thank you.

Operator

Thank you. The next question is from the line of Rajesh Kothari from AlfAccurate Advisors. Please go ahead. The current participant has left the question queue. We’ll move on to the next question from the line of Prashant Kothari from Pictet. Please go ahead.

Prashant Kothari — Pictet — Analyst

Hi. I just wanted to confirm about this write-off that we have taken in the US business. So the write-off is about [Phonetic] INR439 crores and plus the expenses. From what recall, please correct me if I’m wrong here, you had already taken the write-off of about half of that investment in some prior year. And just around seems much larger than that. What am I missing here?

Sudhir Menon — Executive Director and Chief Financial Officer

Yeah, Prashant, you’re right, actually. So I think 2018, we made the acquisition. And I think the acquisition was around $70 million [Phonetic] odd, right? And 2019, when we had to take a temporary closure, we had taken an impairment of I think roughly $25 million [Phonetic], $26 million [Phonetic]. And — so the whole focus was to upgrade the facility, right? I mean for the last two years, we’ve spent money on upgrading the facilities. So there’s lot of construction costs and new plant and machinery, which has come into the plant. So essentially, the capex was much higher, I would say, for the upgradation, which we had taken over the last two years. So all put together, this is an impairment of assets which has happened.

Because intangibles — most of the intangibles, we have written off, as you rightly said in 2019. This impairment, there’s a major share of the tangible assets, which was spent as part of the upgradation process.

Prashant Kothari — Pictet — Analyst

So we spend money on upgradation and now we have decided that it’s actually not worth [Phonetic] in the business, so we are [Indecipherable]?

Sudhir Menon — Executive Director and Chief Financial Officer

Yeah. I mean, the entire building was brought down and the new construction was undertaken.

Prashant Kothari — Pictet — Analyst

Okay. So I’m surprised that we spent money and now we are — and certainly figured that, is actually not worth spending all that additional money behind this.

Sudhir Menon — Executive Director and Chief Financial Officer

No, that’s a hard fall just we’ve taken, Prashant. I mean, looking to the fixed costs, which this facility has been incurring and this facility being in US, the fixed cost was really high. And I mean, we’ve got delayed in putting this facility together because of COVID also, right? I mean, because we saw a lot of delays happening in terms of the whole upgradation process.

And today, as we stand, when we look at the potential of the pipeline product because there’s a lot of new competition which has really walked into the market. And the market itself is very small, right? And when we look at the loss of exclusivities in this space, it doesn’t make sense in actually loss funding for the next three years, which is incremental investment and without seeing any major incremental economic benefits flowing out of this investment. So we thought it’s prudent, basically to take this call and shut it down.

Prashant Kothari — Pictet — Analyst

Okay. Okay.

Operator

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

Saion Mukherjee — Nomura — Analyst

Yeah. Hi. Thanks. Sanjay, on the US, can you, like, share what is your strategy now? Because we have seen a lot of issues over the last two, three years. There is market issues, there is plant issues, and you have not taken a decision to close down liquid facilities. So what are your longer-term plans here? I mean, now you tend to sort of differentiate, it’s a very subscale business at the moment. And do you think it makes sense to sort of sustain this business? What are your sort of three, five year thoughts on the US business? And how are you like making the decisions on investments in US now incrementally given whatever is happening in the market?

Sanjay Gupta — Executive Director, International Business

So roughly, at some point, the market has to stabilize, but I mean, still the largest direct [Phonetic] market in the world. So we have, I would say, a smallish talent in this market. And from the small base, I would say that it’s easier for us to grow. We need to do a few things right. Some of the steps we have taken today in terms of reducing our cost base in the US. We’ve also taken steps to reduce the number of products that we are developing only for the US.

So most of our pipeline, now we are developing across the globe, and we plan to leverage the R&D expenses around all our geographies. We’ve also taken steps to reduce the overheads in the plant. And Sudhir mentioned that we have allocated capacity that we are using for the US business. And we generally will not be doing business below a certain margin threshold. So I would say that while topline growth is important, we are more focused on making sure that the growth we have is profitable. And the investment in capital are not required. Our plants are all new plants, we have enough capacity. So we don’t see any investment in infrastructure. So our focus is in optimizing our R&D investment, keeping our costs low and generally improving the productivity of our research, because I would say that there are some areas of improvement in terms of what bang for the buck we are getting for the dollars we are putting into R&D. And once we get our quality piece right, that should start us on the growth momentum. So from $35 million a quarter, I don’t see any downside. And if we invest wisely, as I mentioned, in R&D and capex, we should be on a sustained growth trajectory from this low base.

Saion Mukherjee — Nomura — Analyst

And the current level of operation, how profitable is the US business after you sort of factor in R&D expense and other overheads that you carry?

Sanjay Gupta — Executive Director, International Business

So we don’t discuss profitability by geography. But generally in the US business, if you have gross margins in the 25% to 50% range on any product, that is general range now. I’m just doing a broad range as to what happens on a per product basis.

Saion Mukherjee — Nomura — Analyst

Okay. Understood. And just one question on India. So on India, in terms of new launches, any — I mean, can you just throw some light, any partnerships with MNCs or with other companies that you have done? Or you — is that something which you focus on to launch some patented drugs like some of the other peers, larger peers do in India?

Aman Mehta — Executive Director and Chief Marketing Officer, India Business

So the near-term pipeline is mostly the patent expiration launches, but we are in talks for certain licensing deals in our core therapies. Early to say how they’ll pan out, but that’s an important part of our growth strategy going ahead in licensing for us.

Saion Mukherjee — Nomura — Analyst

Okay. Thank you.

Operator

Thank you. The next question is from the line of Rajesh Kothari from AlfAccurate Advisors. Please go ahead.

Rajesh Kothari — AlfAccurate Advisors — Analyst

Yeah. Hi. Thanks for the opportunity. Actually, I missed one of your comments, whereby you said that margins can move up by 300 bps from 26% to 29%. That you are talking about for which entities, consol [Phonetic] standalone, which entities?

Sudhir Menon — Executive Director and Chief Financial Officer

No, no consol.

Rajesh Kothari — AlfAccurate Advisors — Analyst

Consol. Okay.

Sudhir Menon — Executive Director and Chief Financial Officer

Yeah.

Rajesh Kothari — AlfAccurate Advisors — Analyst

And this — the margin improvement of 300 bps is primarily would be driven by a price increase, which has been taken recently?

Sudhir Menon — Executive Director and Chief Financial Officer

So there’s two, three factors, right? So one is this fixed cost of the liquid facility would roll back to EBITDA, right? And I think during the call, we said the impact is roughly 1.5%. So there’s an improvement already coming in by 1.5% because of the fixed cost of the liquid business going away. So that’s point number 1.

Point number 2, also what we had said in quarter 3 is that there is some cost optimization, which we are carrying out at all our facilities. Basically trying to maximize the manufacturing our volumes at one particular facility and bringing down the shift working in the other manufacturing facility, including the formulation and — in that facility [Phonetic]. And that we had guided that it should start — we should start seeing that coming in from quarter 1, because already the steps have been taken. So that’s point number 2.

Point number 3, what we said is the price increases in all the branded generic markets should start from quarter 1 and that should typically help us in getting a margin improvement by at least 75 basis points to 100 basis points on a per annum basis. Add to that, the operating leverage should start playing out with better growth coming in.

The fourth is there was one factor in quarter 3, which we had said that the freight expenses have impacted the margins almost by 1.2%, 1.3%. And quarter 4, we are seeing that the cost has further gone up. We personally believe that maybe in two quarters’ time, it should start normalizing. These are the levers which are there for margin improvement for the next year. And therefore, I said at least quarter 1, we should see minimum 300 basis point improvement, of which 50% is because of the fixed expenses of liquid business going away.

Rajesh Kothari — AlfAccurate Advisors — Analyst

And sir, sorry, I’m not having presentation in front of me. What is your fourth quarter EBITDA margin and your FY ’22 EBITDA margin before other income?

Aman Mehta — Executive Director and Chief Marketing Officer, India Business

Quarter 4 is 26.3% and year should be around 28 — 28.3%. Yeah.

Rajesh Kothari — AlfAccurate Advisors — Analyst

Okay. So you’re saying from — on a full year basis, if I look at it, then from 28.3%, you are saying maybe about 29%, 30%, that’s what basically you’re targeting on full year basis?

Sudhir Menon — Executive Director and Chief Financial Officer

Correct, correct.

Rajesh Kothari — AlfAccurate Advisors — Analyst

Am I right? Because you think on fourth quarter, basically, it will go by 300 bps on 26% to 29%.

Sudhir Menon — Executive Director and Chief Financial Officer

Yeah. Minimum 300 basis points, it should grow. That’s what we believe. And therefore, what I said is, let’s wait for quarter 1 results, that should be a direction for the full year.

Rajesh Kothari — AlfAccurate Advisors — Analyst

I understand. And one just follow-up question on US business whereby you said that — in last — particularly one, two month, you mentioned that on generic side, the players are maintaining price discipline, because value going to so much down. I didn’t get that point. Can you clarify on that?

Sanjay Gupta — Executive Director, International Business

So I think I was just talking in general about what you have seen in the marketplace is that if I — if you recall, I had mentioned that quarter-on-quarter, the price erosion is low single digits. While you compare year-on-year, it is in the mid-teens. So obviously, the pricing pressure in the recent months has been a lot lower than it has been over a 12-month period of time. So that is coming from, I would say, more rational behavior from suppliers as well as to some extent from buyers. So that is what I was referring to.

Rajesh Kothari — AlfAccurate Advisors — Analyst

Okay. So from hear on, how do you see the pricing behave? Do you expect the pressure to continue? Or do you expect it will stabilize from here on? What is your internal guess?

Sanjay Gupta — Executive Director, International Business

So I would say that, especially for older legacy products, it would probably slow down, because there is nothing left to squeeze — without squeezing the manufacturers out of the market.

Rajesh Kothari — AlfAccurate Advisors — Analyst

Okay, okay. Perfect, you’re right [Phonetic]. Thank you, sir. I wish you all the best.

Sanjay Gupta — Executive Director, International Business

Thank you.

Operator

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

Nitin Agarwal — DAM Capital Advisors — Analyst

Sudhir [Technical Issues] what is the close [Technical Issues] at your net debt…

Operator

Sorry to interrupt you, the audio is breaking from your line.

Nitin Agarwal — DAM Capital Advisors — Analyst

Hello, is it better?

Operator

Yes, sir.

Nitin Agarwal — DAM Capital Advisors — Analyst

Sudhir, so what will be the closing net debt number for us?

Sudhir Menon — Executive Director and Chief Financial Officer

Net debt to EBITDA should be 1.3x. And net debt should be roughly, I think, 3,400 [Phonetic].

Nitin Agarwal — DAM Capital Advisors — Analyst

Okay.

Sudhir Menon — Executive Director and Chief Financial Officer

Hello.

Nitin Agarwal — DAM Capital Advisors — Analyst

Yeah, I can hear you. I got that. And on hedging, given the fact that the currency has depreciated a bit during the quarter, during the last few days, in the past, you used to a policy of hedging the entire almost like one year forward earnings. I mean do we still continue with that?

Sudhir Menon — Executive Director and Chief Financial Officer

Yes, yes, Nitin.

Nitin Agarwal — DAM Capital Advisors — Analyst

So I guess, presumably so that should play out in one way form or the other for us — I mean, in the — in this forthcoming quarters now?

Sudhir Menon — Executive Director and Chief Financial Officer

Yeah, absolutely, absolutely.

Nitin Agarwal — DAM Capital Advisors — Analyst

Okay. And last, on the gross margins, you said the incremental addition of the US business with expected approval for the plant tunnel [Phonetic] coming through, will it have any impact on the mix for the gross margins?

Sudhir Menon — Executive Director and Chief Financial Officer

Absolutely, Nitin. I think the new product launches happening will push up the margin, right? So, so far, US has been quite negative on the gross margins, overall gross margins. I think that should stop and at least it should start pushing up the gross margin or US should start contributing to the upside of gross margin, I would say.

Nitin Agarwal — DAM Capital Advisors — Analyst

Okay, okay. Thank you.

Operator

Thank you. The next question is from the line of Bharat Celly from Equirus. Please go ahead.

Bharat Celly — Equirus — Analyst

Yeah. Hi. Thanks for the opportunity. Sir, just wanted to understand on the cost optimization part. So you said that 300 bps will be realized in the next quarter. So just wanted to understand, will it be the most optimization? Or we can further realize in the upcoming quarters as well? And what will be the revenues after looking at the plants? Where will be cost optimization — after the plant optimization where the — these benefits will come?

Sudhir Menon — Executive Director and Chief Financial Officer

After the plant optimization?

Bharat Celly — Equirus — Analyst

So you said that 300 bps benefit will be there in the first quarter. So are they going to realize even after first quarter? Or is it going to be just…

Sudhir Menon — Executive Director and Chief Financial Officer

Yeah, yeah. No, no, no. So I mean, it’s something which we are doing it, right? I mean, which is already done. As of 31st March, the — basically optimizing the — capacities which we have in all our facilities, right? So if you’re bringing down the shift, it means that it cannot be brought up immediately back again, right? So that’s already initiated and should happen in quarter 1, I’ve said. And therefore, that benefit should continue throughout the year. I mean there’s no going back on the costs later, because…

Bharat Celly — Equirus — Analyst

So I — so could we scale up these benefits? I mean, could this benefit could scale up to 400 bps or 500 bps in upcoming quarters also, like from second quarter or so?

Sudhir Menon — Executive Director and Chief Financial Officer

No, no. That’s not the way to…

Bharat Celly — Equirus — Analyst

So that is the maximum benefit which we can rely, right, just…

Sudhir Menon — Executive Director and Chief Financial Officer

Yeah, yeah. From the cost [Technical Issues].

Bharat Celly — Equirus — Analyst

Okay. Are there any other avenues also to optimize the cost, which you are looking at?

Sudhir Menon — Executive Director and Chief Financial Officer

So it’s a continuous process. The only thing what we said is given the way the US business is behaving for us, with no new product launches coming in, we thought of optimizing the cost to a certain extent, right? And that benefit should flow, till ’22, ’23. Now if you ask me whether further plant optimization is possible, the answer is no, we are not looking at it at least for ’22, ’23.

Bharat Celly — Equirus — Analyst

Sure. And sir, in the last couple of quarters, you mentioned that you are getting into trade generic. So can you talk a bit how that business is behaving, whether we have got some traction there? And what sort of size we have achieved so far?

Sudhir Menon — Executive Director and Chief Financial Officer

Yeah, it remains within that kind of 1.5%, 2% contribution range to the overall India business as of Q4 as well. And we expect that our second wave of SKU launches should happen maybe around end of Q1, Q2, and that should help the contribution increase.

Bharat Celly — Equirus — Analyst

Right. And sir, last one from my side. So just wanted to understand what are the timelines for the limit launch, whether you are going to be among the second wave of launch or it would be following after that?

Sudhir Menon — Executive Director and Chief Financial Officer

I think I’ve already said that we will not be in the second wave, so we’ll be launching much later.

Bharat Celly — Equirus — Analyst

Sure, sir. Thanks a lot.

Operator

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

Saion Mukherjee — Nomura — Analyst

Yeah. Thanks for the follow-up. Just following up on trade generics question. So I mean when you sort of come with the entire basket that you plan, so first, like what’s the time line? And how much will this contribute eventually in your view, whatever time frame you want to share from current 2% currently?

Aman Mehta — Executive Director and Chief Marketing Officer, India Business

So it would be identical to the first wave of launches that we did last year. So the idea is that these new SKUs should double our base. And what we have mentioned earlier also is that we don’t anticipate this to be more than kind of 3% to 4% of the total India business in the near term. Long term, we’ll have to see how the overall trajectory and profitability turns out. But near term, I think 3% to 4% contribution is something that we would be okay with.

Saion Mukherjee — Nomura — Analyst

And Aman, do you see trade generics in general sort of cannibalizing the prescription business for the industry? Because we have seen some good growth from some of your peers.

Aman Mehta — Executive Director and Chief Marketing Officer, India Business

No, not really, because trade generics is mainly in the acute segment and very few kind of — rather very little chronic contribution. And also the regional SKU is quite significant. So wherever there is an overlap between the branded and trade generics, there’s minimum kind of substitution that we are seeing. Of course, it does happen, but it doesn’t really impact the trajectory of branded business that much. Particularly in our case, our portfolio is completely complementary. So the branded business in trade generics don’t have any overlap whatsoever. So there’s no chance of cannibalization happening there at all.

Saion Mukherjee — Nomura — Analyst

Okay. And just one last one on field force addition. So we are seeing many companies sort of adding people for new launches and for expansion. Is that having an issue in terms of wage cost inflation and attrition, which have historically been quite low for Torrent? Are you seeing any challenges with respect to attrition and wage inflation there?

Aman Mehta — Executive Director and Chief Marketing Officer, India Business

No, as of now, not really. Our attrition and cost structure remains fairly kind of identical to how it has been and not really expecting it to change much from here — in this financial year.

Saion Mukherjee — Nomura — Analyst

Okay. Thank you.

Operator

Thank you. Ladies and gentlemen, we’ll take the last question from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Yes. Thanks for the opportunity. Sir, just on the US generic business per se [Phonetic]. Strategically, this piece has not kind of given the required economic benefit may be in terms of the liquid facility or even in terms of the Indrad, Dahej facilities. So subsequently, this discontinuation of liquid facility at a strategic level, not maybe on the plant optimization, but at a strategic level, what further can you expect there?

Sanjay Gupta — Executive Director, International Business

So essentially, we are not by any such an imagination, we’re quitting the US business or anything like that. We are adjusting our investments. So we would continue — we have, actually, if you look backwards, every year, we filed close to 10 new ANDAs. Unfortunately, those ANDAs have not brought us much benefit because of the facility, quality issues.

So once the quality issues are resolved, we will continue with about 8 to 12 filings per year. Initially the number of filings will become less important as we are moving towards more complex filings. And again, these products would be in common with our other two geographies. And we are not looking at any further industrial investments for the US market. So all in all, I would say making R&D investments and hoping to grow the US business from its current low base is what our strategy is going to be.

So we would see more products like that Dapsone, right? So Dapsone is an expensive product to develop. It’s a product that is in trial in [Indecipherable] position. And it is become — bringing good fruits. So in the future, you should see similar products to that rather than, I would say wide [Indecipherable].

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Understood. Got you. Any products which are under like kind of shortage which have been filed or which are already filed, which can trigger faster or prioritize your [Indecipherable]?

Sanjay Gupta — Executive Director, International Business

So we have a few CGT exquisites [Phonetic] already in hand, and we have a portfolio of products for which we hope to get compensated generic therapy designation from the FDA. And usually, you get that if you are the first generic for a non-patented product. So yes, we’re making efforts to get that designation. And we should — we already have received it for a couple of products. So you will see more of that. So these are limited competition for generic for a non-patented product that is launched by generic companies.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Got it. Okay. And just lastly, if you could help us with the effective tax rate for FY ’23, ’24?

Aman Mehta — Executive Director and Chief Marketing Officer, India Business

Sorry, I didn’t get the question.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Effective tax rate for FY ’23, ’24.

Sudhir Menon — Executive Director and Chief Financial Officer

Yeah, it should be around 32%, 33%, Tushar.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Got it. And just this one last — would reduction in the trade payables as well. Any specific highlights there?

Sudhir Menon — Executive Director and Chief Financial Officer

Yeah. So the German business is coming down. So if you see — there has a degrowth in German business, right? That’s a major chunk of the trade payables actually, Tushar. So as the business comes down, the trade payables also keep on coming down. It correlates to each other.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Got it. Got it, sir. Thanks a lot for the response.

Sudhir Menon — Executive Director and Chief Financial Officer

Okay.

Operator

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

Sanjay Gupta — Executive Director, International Business

Thank you. I’d just like to conclude by saying that we are seeing good traction in our branded generics portfolio. These countries currently accounts for 70% of our topline. We are doing our best to remediate the US business, and we are optimistic at post the quality inspections from the FDA, we would be on a growth path in the US. For Germany, again, in — after Q2 in the second half of this year, we expect there to be positive momentum from new tender wins as well as new launches. So hopefully, we’ll be able to show good results at the end of this fiscal year.

Thank you very much for your interest in Torrent and our team of Investor Relations is available for any further questions. Thank you and bye-bye.

Operator

[Operator Closing Remarks]