Aurobindo Pharma : Q1FY2023 – Earning call transcript

"Aurobindo Pharma Q1 FY23 Earnings Conference Call"

August 12, 2022

Mr. P. V. Ram Prasad Reddy - Chairman, Aurobindo Pharma USA

Mr. K. Nithyananda Reddy - Vice Chairman and Managing Director of Aurobindo Pharma Limited.

Mr. Santhanam Subramanian - Chief Financial Officer, Aurobindo Pharma Limited

Mr. Sanjeev Dani - COO & Head Formulations, Aurobindo Pharma Limited Mr. Yugandhar Puvvala - CEO of Eugia Pharma Specialties Limited

Mr. Swami Iyer - CFO, Aurobindo Pharma USA

Ms. Deepti Thakur - Investor Relations & Corporate Communications, Aurobindo Pharma Limited

Aurobindo Pharma Limited

August 12, 2022

Moderator: Ladies and gentlemen, welcome to the Quarter 1 FY23 Earnings Conference Call of Aurobindo Pharma Limited. All participants' line will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. In order to ask a question, please signal by using 'a raise hand' option on the bottom of your screen.

I now hand the conference over to Deepti Thakur. Thank you and over to you.

Deepti Thakur: Thank you, Aditya. Good morning and a warm welcome to our First Quarter FY23 Earnings Call. I am Deepti Thakur from the investor relations team. We hope you have received the Q1 FY23 financials and the press release that were sent out yesterday. These are also available on our website.

I would like to introduce my senior management team today on the call with us, represented by Mr. P. V. Ram Prasad Reddy - Chairman, Aurobindo Pharma USA; Mr. K. Nithyananda Reddy - Vice Chairman and Managing Director of Aurobindo Pharma Limited; Mr. S Subramanian - CFO; Mr. Sanjeev Dani, COO, Head Formulation, Aurobindo Pharma Ltd; Mr. Yugandhar Puvvala - CEO of Eugia Pharma Specialties Limited, and Mr. Swami Iyer - CFO, Aurobindo Pharma USA.

We will begin the call with summary highlights from the management followed by an interactive Q&A session. Please note that some of the matters we will discuss today are forward-looking, including and without limitation, statements relating to the implementation of strategic actions and other affirmation on our future business, business development and commercial performance.

While these forward-looking statements exemplify our judgment and future expectations concerning the development of our business, a number of risks, uncertainties and other important factors may cause actual developments and results to vary materially from our expectations. Aurobindo Pharma undertakes no obligation to publicly revise any forward- looking statements to in reflect future events or circumstances. With that, I will hand over the call to Mr. S Subramanian for the highlights. Over to you Sir.

Santhanam Subramanian: Good morning, everyone. I hope that all of you and your families are safe. We are here to discuss the results of the first quarter of the fiscal year FY23 declared by the company.

For Q1 FY23, the company registered a revenue of INR 6,235.9 Cr, an increase of 9.4% year- on-year, the EBITDA before forex and other income was INR 964.7 Cr declined by 1% quarter- on-quarter, EBITDA margin for the quarter was 15.5%. Net profit decreased by 9.6% quarter- on-quarter to INR 520.5 Cr.

In terms of the business breakdown, formulation business in Q1 FY23 witnessed a growth of 9% year-on-year, to INR 5,329.4 Cr and contributed around 85.5% of the total revenue.

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API business contributed around 14.5% of the total revenue and clocked a revenue of INR

906.5 Cr for the quarter registering a growth of 11.6% on a year-on-year basis led by improved demand for some of our key products and declined at 0.7% quarter-on-quarter.

On a constant currency basis. US revenue increased by 6.1% year-on-year and 6.2% quarter- on-quarter to US $386 million. We have received final approval for 10 ANDAs and launched 7 products in the quarter under review. We have filed 13 ANDAs including 4 injectables during the quarter. Revenue for Aurobindo USA, the company making the oral products in the US has increased by 5% year-on-year to US $214 million. Revenue for Auro Medics, the injectable business increased by 16% year-on-year to $71.7 million. The company has on 30th June '22 has filed 741 ANDAs on a cumulative basis of which 516 has final approval and 35 has tentative approval including ANDAs which are tentatively approved under the PEPFAR and the balance 190 ANDAs are under review.

For the quarter, the European formulation revenue clocked INR 1,548.1 Cr, a decrease of 2.2% year-on-year mainly due to the depreciation of Euro currency and in absolute Euro terms, the Europe revenue was at EUR 189 million with an increase of 5.9% year-on-year.

For the quarter, the growth market witnessed a growth of 30.8% to INR 430.6 Cr including the domestic formulation sales of INR 45.6 Cr. The quarter performance led by strong growth in Canada business.

For the quarter, ARV business stood at INR 379.6 Cr with a growth of 28.1% year-on-year. And in US$ terms, ARV revenue was at $49 million with a growth of 23% due to shifting of certain sales from the last quarter to this quarter amounting to US $17 million.

R&D expenditures was INR 310 Cr during the quarter which is 5% of the revenue. Net organic capex during the quarter is $61 million and average Forex rate was 76.9795 in the quarter ending June 22 and 75.0917 in the quarter ending March 22.

Net cash and investments at the end of June '22 was US$ 337 million. The average finance cost is 1.8% mainly due to earning multiple currencies.

The business generated a free cash flow before capex and other items of US$ 121 million during this quarter. Out of this cash flow, US$ 53 million was spent towards the capex, another $8 million was on PLI project, US$ 34 million for dividend and US $22 million for acquisition of business and thereby increasing the available cash , by about US$ 3 million. As a result of the above cash flow generated during the quarter, the net cash portion including the investments at the end of March '22 improve to $337 million.

Also, we reduced the gross debt significantly to $277 million from $313 million end March '22. We have been reducing the gross debt quarter-on-quarter in the past quarters also.

This is all from our end and we are happy to take your questions now. Thank you.

Moderator: Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may use the raise hand icon on the bottom of your

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screen. Once your name has been announced, you will be unmuted, and you can ask the question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. First question is from Mr. Prakash Agarwal. Please unmute yourself Mr. Prakash.

Prakash Agarwal: The first question is obviously you did fairly well in the US market which has shown Q-o-Q growth, is it our preferences volume versus getting into better pricing given the gross margin decline or gross margin is largely due to the cost inflation or we have gone for volumes in the US also to grow the business.

Swami Iyer: In the US we have grown the volumes compared to the last year similar quarter and we have taken a fair amount of business. We have done, grown in terms of volume and the bottom line has various factors. One of the main reasons is the price erosion. And there has been inflation also in terms of transportation. We believe that going forward we can look for better numbers in terms of gross margins and for the years.

Prakash Agarwal: And when you say price erosion what kind of price erosion we are talking about here? It is in line with the previously seen trends of 5%, 7% or it is as reported by some of the peers it's double digit or how are we facing? What is the trend we are facing?

Swami Iyer: we are seeing some kind of tapering. We believe that the price erosion for example, this quarter, compared to the previous quarter is about 2% plus, and including the shelf stock adjustment, it's closer to around 3%.

Prakash Agarwal: Okay. And what about injectables? I mean that growth doesn't seem to pick up, so what's happening there?

Yugandhar Puvvala: Prakash, I think in terms of the growth, we have grown by 16% in US. And the overall growth is in the single digits at the global level. And we expect whatever approvals what we received during quarter one, and we expect some more approvals to flow through in this quarter. We are very confident of hitting the double-digit growth this year. Growth is not a concern at all.

Prakash Agarwal: No, but we have a big milestone, right? I mean, we have talked about almost doubling the business in next two years. So where are we in that journey?

Yugandhar Puvvala: we are still on track to hit the guidance what we have given for FY24, which is $650 million to $700 million. And as I indicated last year, we closed at a pro forma level of around $440 million in FY22. And we expect to cross half a billion this year in FY23. And we are on track for our guidance for FY24.

Prakash Agarwal: So, you're saying it would be largely back ended? Or how should we think about in terms of scale up?

Yugandhar Puvvala: No, it won't be back ended, it will be a quarter-on-quarter growth and which you will continue to see the double-digit growth every quarter.

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Prakash Agarwal: And one question for Subbu sir is on the gross margin. So, clearly the price erosion is stable, 3% is stable in my view, but what is the outlook on the gross margin from here on given we have seen a substantial drop in this quarter.

Santhanam Subramanian: overall if you really see the gross contribution has come down by about 2.8% which is a combination of multiple factors including the price erosion which Swami has mentioned and there was some raw material prices increase also have happened. Even though the price started becoming stable, but because of the weighted average of some of the costs which have not been charged up earlier, have come this quarter. So, all put together around 2.8%. And we believe going forward must be in this range in the coming quarter and probably there must be softening coming in Q3. We are getting some indication but not from everyone. So we can start seeing the improvements in the margin Q3 onwards. I'm talking about the gross contribution, gross margin, not the EBITDA margin.

Prakash Agarwal: Any colour on EBITDA margin, sir.

Santhanam Subramanian: EBITDA margin, even though this quarter looks low as we had additional expenditure to the tune of around INR 60 Cr on account of the freight because we had to reschedule our production process etc. to meet certain regulatory compliance because of which production shifted to the later part of the quarter, which made us to airlift the material to achieve the commitment we had given to our customers. So hopefully going forward this should not be there in the coming quarter or at least at a very reduced level it should be, that's what our feeling.

P. V. Ram Prasad Reddy: One or two quarter will be there, Subbu, this last quarter and this quarter also some extent is there. then it will taper down.

Prakash Agarwal: And last question for RPR, sir. We had Govind sir as our CEO. So, is there any update on looking out for a professional CEO going forward?

P. V. Ram Prasad Reddy: As on today we are not looking. we are happy with the present system. And we have for biosimilar and vaccine and the peptides, Dr. Satakarni as the CEO and Yugandhar is taking care of Eugia Specialities Group and Nithyananda is taking care of the overall and raw material business. I'm taking care of formulation and reporting to Nithyananda. I don't think we are looking but, we are going to appoint in next two to three years.

Prakash Agarwal: Okay, perfect, sir. Thank you and all the best.

Moderator: Thank you. Next question is from Neha Manpuria.

Neha Manpuria: Hello.

Moderator: She has muted herself. Neha, please unmute yourself. Okay. We'll take the next question. Next question is from Shyam Srinivasan.

Shyam Srinivasan: Hi, good morning, everyone.

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