Dr. Reddy's Laboratories Ltd

Ladies and gentlemen, good day and welcome to the Dr. Reddy's Laboratories Ltd Q1-FI21 earnings conference call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Agarwal. Thank you and over to you, sir.

Very good morning and good evening to all of you. And thank you for joining us today for the Dr. Reddy's Earnings Conference Hall for the quarter-ended June 30, 2020. Earlier during the day, we have released our results and the same are also posted on our website. This call is being recorded and the playback and transcript shall be made available on our website soon. All the discussions and analysis of this call will be based on the IFRS consolidated financial statement. To discuss the business performance and outlook, we have the leadership team of Dr. Reddy comprising Mr. Erez Israeli, our CEO, Mr. Shomin Chakraborty, our CFO, and the investor relations team. Please note that today's call is a copyrighted material of Dr. Reddy's and cannot be rebroadcasted or attributed in press or media outlets without the company's express written consent. Before I proceed with the call, I would like to remind everyone that the safe harbor contained in today's press release also pertains to this conference call. Now, I hand over the call to Mr. Swamin Chakraborty. Over to you, sir.

Thank you, Amit. Greetings to everyone. During the current challenging times, I hope you all are keeping yourself safe and healthy. We are going through quite an uncertain and challenging business environment with volatility arising from both demand and supply side. I'm glad that our teams have responded very well to those challenges. and have been able to deliver quite healthy financial performance during this quarter. The key financial highlights for the quarter are one, strong year-on-year revenue growth of 15%, two, healthy gross margin at 56%, three, Evita margin of 26.3% and Evita growth of 47% adjusted for settlement income in last year 4. PVT margin of 19.9% and PVT growth of 74% adjusted for settlement income in last year 5. Strong free cash flow generation of Rs. 925 crore before payout for business acquisition from ROCAT. And six, Q1 FY21 annualized return on capital employed of 23.6%. Let me take you through these in a bit more detail. For this section, All the amounts are translated into US dollar at a convenience translation rate of rupees 75.53, which is the rate as of 30th June 2020. Consolidated revenues for the quarter stood at rupees 4,418 crores, that is 585 million dollars. and grew by 15% on a year-on-year basis and remained flat on a sequential quarter basis. Year-on-year growth has been supported by 88% growth in PSAI, 48% growth in Europe, 9% growth in emerging markets, 6% growth in energy, with a decline of 10% in India. The sales were impacted due to decline in volume in our global generic business which was upset with a growth in PSAI business. Consolidated gross profit margin for this quarter has been 66% with an increase of 430 basis points year-on-year and 450 basis points quarter-on-quarter. This increase was driven by favorable forex rate Beta Product Mix, and Improved Productivity. Gross margin for the Global Genetics and PSAI were at 61.4% and 33.4% for the quarter. The SG&A spent for the quarter is Rs. 1279 crores, that is $169 million. and increased by 6% year-on-year, 5% quarter-on-quarter. The increase is primarily attributable to higher freight due to shortage of carriers for exports. The R&D spent for the quarter is Rs. 398 crores, that is $53 million, and is at 9% of sales. Most of the product development activities continued during the quarter, including development of a few COVID-19 related products. The EBITDA for the quarter is Rs. 1,162 crores, that is $154 million, which is 26.3% of the revenue. EBITDA grew by 2% year-on-year on a reported basis. and 47% adjusted for settlement income in previous years. Sequentially, EBITDA grew by 16%. The strong growth is reflective of improvement in gross margin and productivity. Profit before tax of the quarter is Rs. 879 crore, that is $116 million. with a year-to-year growth of 3% on a reported basis and 74% growth adjusted for settlement income in previous year. Sequentially, PVT grew by 23%. Effective tax rate for the quarter is at 34.1%. The ETR has been impacted due to discontinuation of weighted deduction on R&D and completion of tax holiday for one of our plants. As you know, we are continuing with the world tax rates for India due to availability of match credit in our books. We expect the ETR to be in the range of 25 to 27% for the full year. Profit of the tax for the quarter stood at Rs. 579 crores. That is $77 million, which is 13.1% of the revenue. The reported EPS for the quarter is Rs. 34.86. Operating working capital decreased during the quarter by around Rs. 200 crores, which is $26 million. This decrease is due to reduction in receivables and an increase in trade payables We have been partially offset with a planned increase in inventory across the market. We invested 150 crores, which is $20 million, towards capital investment in this quarter. The free cash generated during this quarter was 925 crores, which is $122 million, before making the acquisition-related payment of The net free cash flow for the quarter stood at minus Rs. 574 crore, which is Rs. 76 million. Even after the acquisition related payout to Vocard, our net debt as on June 30, 2020 was Rs. 336 crore. Our net debt to equity ratio is at 0.02 and continues to reflect our strong balance situation. Foreign currency cash flow ages for the next nine months in the form of derivatives per US dollar are approximately $260 million, largely aged around the range of Rs. 73 to Rs. 77 to the dollar. In addition, we have cash flow ages of Ruble 2,600 million at the rate of rupees 1.045 to the ruble, maturing over the next nine months. With this, I now request the stage to take to the key business highlights.

Thank you so much. A good morning and good evening to everyone. I hope you and your families continue to remain safe and well in the midst of this pandemic. I thank all of our associates across the world whose relentless efforts and hard work has helped to ensure continued availability of medicines for our patients and customers across the geographies. The strong results of the current quarters in terms of sales growth, improvement in EBITDA margin, and healthy cash generation reflects our continued commitment to the organization's purpose while consistently improving our business performance irrespectively of the challenging circumstances. While many of our markets have been impacted by reduction in demand due to COVID-19 related lockdowns and economic slowdown, we continue to work toward mitigating the risk to focus on increasing market share, launch of new products, and improvement in productivity. Despite current challenges, we continue to progress well to implement our strategy and continue to explore more avenues of growth for each of our business. During this quarter, we successfully completed acquisitions of select business from a workout and we are gearing towards reviving this brand's tech to on-growth trajectory. We also executed the licensing deals for two key products related to COVID-19 treatment, Abidan or Chavi Piravir Tablets and Remitzivir Injections. We are actively working towards launching these products to cater to our patients in various markets. Now let me take you to the key business highlights for each of our businesses. Please note that all the references to the numbers in these sections are in respective local currencies. Our North America Generics business recorded sales of 229 million for the quarter. Sales declined by 2% year-on-year and 8% on a sequential quarter basis. In I&R terms, the sales grew by 6% on year-on-year. The sequential decline was largely due to fraud buying in the previous quarter, reduction in new prescriptions, drop in footfall in retail stores, and reduction in elective procedures in the hospitals. We launched six new products during this quarter, including Abiraterone, Afetai Tablets, and Kolchikin Tablets. We are on track to launch more than 25 new products in this fiscal, including some niche and limited competition products. Our Europe business recorded sales of 43 million euros with a strong year-to-year growth of 38% and a decline of 1% sequentially. The year-on-year growth was seen across markets and was driven by improvement in both base business and new product launches. During the quarter, we launched seven products in Germany, two products each in the UK and Spain, four products in Italy, and one product in France. Our emerging markets business recorded sales of 798 crores rupees, with the year-on-year growth of 9% and decline of 1% sequentially. Within the EM segment, the Russian business declined by 15% in constant currency, both on year-on-year basis and quarter-on-quarter basis. The decline was primarily due to the impacts of COVID-19-related lockdowns, resulting in overall reduction in demand. In the rest of the market, we witnessed mixed patterns of sales performance. China, Vietnam, Myanmar and Kazakhstan are among the markets that performed well at this quarter. During the quarter, we launched 29 new products across emerging markets. Our India business recorded sales of 626 crores rupees with a year-on-year decline of 10% and a sequential quarter decline of 8%. Here again, the sales were negatively impacted Owing to reduction in doctor-patients interactions and prescription generation as a result of the COVID-19 related lockdowns. As various parts of the countries are in different levels of reopening, we expect the sales trend to sequentially improve from this quarter onwards. We launch whole new products in India market in this quarter. We are preparing to launch both Abigan tabs and Remaxivir injection in India in the next few weeks. During this quarter, we integrated the business required for workout and registered sales for a few days. We are placed at market rank of 12th position as per IQIA on June 20 basis. An improvement by one position after workout integration. Our PCI business recorded sales of US$130 million, with a strong year-on-year growth of 74% and in sequential quarters a growth of 14% with an improvement in order book across markets. We expect this business to positively benefit as various companies globally look for strategic and reliable partners for supply of active ingredients. On the R&D front, we continue to strengthen our pipelines of products across the market during this quarter We filed 18 formulation products across global markets, including 5 ANDAs in the United States. As of 30 June 2020, we have 101 humility filings pending for approval within the US FDA, including 99 UNDAGs and two 505 NDAs. We also filed 16 master files globally, including one filing made in the US market. We are also working on few molecules related to COVID-19 and doing our part in this global fight. On our proprietary products business, following the recent approval of Oral Liquid Cell Toxin Formulation , we recently secured the approval of our first NCE under 505 pathway, we are actively working to commercialize both products to partners. Overall, we are making good progress in building and advancing a strong pipeline of high-value, globally relevant assets. We are continuing our efforts to monetize select assets through partnership and licensing transactions that maximize their value. On a biologics front, the phase 3 trial for etuximab is progressing well. In parallel, we are working on the next wave of biosimilars products which are at different stages of development. Over the years, we have had significant investment in digital capability and see it as one of the major value contributors for us. Our strong digital infrastructure allowed us to seemingly enable work from home and connecting with doctors and business partners during these times. It also helped us to be more productive and efficient in several of our business operations. The current business environment remains to be highly uncertain and volatile. However, these challenging times are also unfolding new opportunities to grow our business and improve our productivity further. While the journey in the next few quarters is going to have its own set of challenges, the investment we have made in building the core foundation capability gives me the confidence that we are well equipped to successfully ride through this phase and sustain our growth momentum. We continue to focus on creating more opportunities with less risk and attaining self-sustainability for each one of our businesses. With this, I would like to open the floor for questions and answers.

Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask questions may press star and 1 on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask questions, please press star and 1. The first question is from the line of Rajesh Kothari from Alpha Curate Advisors. Please go ahead.

Good evening, sir. My first question is, With reference to the new regulations in USA where details are probably not available but it would be great if you can give your view on how do you see those rules depending upon your understanding of those rules and what kind of impact you can think it can happen for your company over medium to long term. And my second question is with related to R&D and SG&A. As for the U.S. regulations, I'm assuming that you are referring to the localization of production. Is this correct? I'm talking about the recent norms which Trump has been talking about. in which he has talked about the generics and the pricing and you know I'm talking about the last two weeks back the news which got broke up.

So in the United States you have both agenda one is related to the pricing and the agenda you just spoke in and the second is about localizations of products. So both discussions are in place. On the On the first part, I do not envision a big impact on us, on both short and long term. We actually believe that a company like us is actually the solution for that, as we are providing access to affordable medicines, and I believe it will be more impactful for the innovative products in the United States. and also the chapters that arise from that, I believe, have certain opportunity to actually increase access for generics even further. So, in this respect, no major concerns. On the localizations, we have Actually, looking at this situation, we appreciate that there is a certain need to produce certain products in the United States. At the same time, it's unclear what will be the mode of payment or the pricing of those. So, as it will fall down, we will evaluate it. But at this stage, we will not take any specific action.

Okay, and my second question was related to SGA and R&D, you know, combined. How do you see that total overall expense?

So as you know, we are not giving the guidance. In general, and we said it also in previous times, we want more products and we want them in more countries. So overall, Thank you, Jeff. I'll come back in queue.

Thank you very much. Before we take the next question, we'd like to inform participants that in order that the management is able to address questions from all participants in the conference, please limit your questions to two per participant. Should you have a follow-up question, we request you to rejoin the queue. We take the next question from the line of Prakash Agarwal from Axis Capital. Please go ahead.

Yeah, thanks for the opportunity and congratulations on good numbers.

Sir, first question on the sustainability of gross margins.

So clearly understand, you know, product mix as well as currency would have helped. Just trying to understand how would the API prices for us, you know, in terms of our cost cogs moving. As I understand, API prices have formed up further. And with rupee dollar moving up, our cost of procurement would also be higher. Could you help us understanding that? Is this understanding correct?

So I'll refer to the API. First, I think that we do see better sales traction of the API, and indeed the mix is more favorable and helps us in Partially in this growth in the gross margins. As we discussed in previous times, the gross margins is not a KPI that we are necessarily managed. Of course, we want it to be as high as possible, but we will not say no for a big business if it will come with 50% gross margin just to manage that KPIs. So for us it's a result and give or take we are within the framework that we have discussed in previous quarters as well. I believe that us, the more we will sell of the API, naturally it will favorably impact the gross margins as well because those products tend to have relatively higher gross margins. I do not see a specific trend not on pricing as well as not on procurement prices.

So my question was actually on re-procuring API at higher prices. Could the gross margin still be sustainable as I understand API prices have warmed up?

That's what I tried to answer. I do not see any specific trends on the procurement prices or on our prices. and I believe that again with fluctuation we should be in the same neighborhood that we are today. It could be a little bit less. So at the time we said that we want to, we are comfortable. It depends of course on the mix of the activities between let's say the 51% and 54%. Now we are a bit higher. I believe that we are still comfortable in the same area. and I believe that this area is sustainable which of course can be quarterly fluctuated.

Okay, understood. Fair enough. Thank you for that. And the second one is on the injectable portfolio that we have in U.S. Given the lockdown, how has that behaved? Has the volumes come down or is it at the same level? And also some color on pricing of U.S. It's coming up.

It is coming up.

It's coming up, okay. And the U.S. generic pricing in India, thanks to Voxone. That will be all. Thank you so much.

So Voxone is doing well. It is doing well and did well also in this quarter for us.

Okay. U.S. generic pricing, some trends, sir? How is it done?

Two questions only for our participants, please.

Thank you. I'll answer because I know it's of interest for many people. U.S. prices are more stable at this stage for us.

Thank you. We move to the next question. The next question is from Sayan Mukherjee from Nomura. Please go ahead.

Thank you. Sir, two questions. Firstly, on emerging markets, We are seeing some good traction outside of Russia, CIS. Anything that you would like to point out? Any specific market which did particularly well this quarter?

I mentioned China did well as well as some of the other markets I mentioned, Myanmar, Vietnam. So those markets did fairly well. The markets that are more related to, let's say, either hospital demands or government tenders did better than those markets that were impacted by patient-doctor demands like India or Russia. And this is very natural due to the lockdowns in the first quarter.

And so the second question on SG&A, because you mentioned there is freight charges which have gone up, but your sales promotion expenses would have come down. So how do you see that, you know, panning out in the subsequent quarters? And, you know, I remember you had a settlement this quarter. Has that been booked as part of SG&A? Which settlement you are referring to? There's a class actually. There was a $7 or $9 million settlement that you had announced this quarter.

U.S. settlement that was last which was announced.

So we can take this thing offline. So I am not being able to directly associate to what settlement I have gone to this quarter.

There is no first charge sign in this quarter.

Okay. I mean, sir, can you give some color on like how the various parts within SGN is moving and how should we think about, you know, like freight and other elements and anything can help us for the coming quarters?

So freight will depend on the rate of the carriers as more air bubbles opening up. We expect things to get normalized in coming quarters. So that will help. So, our sales promotion will depend on the kind of sales which we are going to have in the market, which is very dependent on sales promotion. Accordingly, we calibrate. Are you referring to the security class accident settlement?

Yeah, yeah, yeah.

Okay, so that, you know, normally for those kind of things, it comes out of your director and officer, the insurance that you cover. We pay insurance premium every year for those kind of things.

Okay. Thank you.

Thank you. The next question is from the line of Vishal Viray from Aviva Insurance. Please go ahead. Vishal Viray from Aviva Insurance. You may go ahead with the question.

Thank you. So what would have led to the 88% growth in the PSAI business?

Sorry, did you not capture the question, what led to the growth, you said?

Yeah, what was the driving factor to achieve this 90% growth for the API business?

It was across businesses and countries, so it was not related to a specific product. I believe that it's a combination of... The following one that people needed to de-risk themselves as related to lockdowns and to ensure that they have enough inventory of API. Second is the companies that are looking for additional reliable sources if they were dependent on others or wanted to de-risk it. So we did see big traction of that. API that we send for launch of products as well as R&D products. So it's a combination of all the above. In general, I do see a very healthy growth of the business. I attribute it to the decisions that we made two years ago to focus on the API and to make it a significant global business. And we are starting to bear the fruit on that.

Sir, do you expect this trend to continue for the coming two quarters at least?

Without giving guidance, it is absolutely an expectation for this business to continue to grow.

Okay. And just one last thing on the CRL for any updates on the CRL of Copaxone and URN?

On the Copaxone, we submitted the CRL. and we did not submit yet the CRL code, but we are still working on it.

Thank you very much.

Thank you. The next question is from the line of Damian Tikirai from JPMorgan. I beg your pardon, that's Damian Tikirai from HSBC. Please go ahead.

Hi, thank you for the opportunity. Sir, you mentioned API growth has resulted due to our investment in the segment for last two years. So my question is on the India part, like where we are hearing that government is now incentivizing manufacturers to scale up production of certain products. So do you have plans to participate here or not?

Not at this stage, these specific products are not in our lines of activity. This is primarily antibiotics and we are not into antibiotics. So at this stage, we do not have plans as such.

Sure. My second question is, can you talk a bit about your strategy to leverage upon product filing and launches for multiple markets? Say in last three-four quarters, how many such products we have developed and filed in multiple geographies?

So, naturally, we are expanding those products. I believe that I mentioned that we had 29 products, for example, of launches in the For example, in emerging markets, 25 new launches that we are going to have in the United States, etc. This space is also going to be reflected in the R&D. So we are gearing the R&D to enable somewhere between 10 to 25 products per year per geography, and most of these products will be leveraged. Meaning that we are going to use the same products for multiple markets.

Okay, so 10 to 25 products per year is our target for different markets, right?

In general, in general. Depends, of course, on the markets and the activities.

Okay, sure. I have more questions. I'll get back to you. Thank you.

Thank you. The next question is from the line of Neha Manpuria from J.P. Morgan. Please go ahead.

Thank you for taking my question. My first question is on the gross margin. Now you mentioned three things on the gross margin improvement, FX, product mix and productivity. I just wanted to understand which of these factors contributed largely to this. Was there disproportionate contribution from one factor versus the other. How do you view something like a product mix or productivity? Productivity, I can understand. Is product mix linked to the fact that we were selling more, let's say, injectable products or hospital-linked products in this quarter?

I will take this question. Now, our gross margin has improved both year on year. As well as sequential. Now if you take a factor, for example, a currency rate. Now the currency rate year on year, the contribution to the improvement will be higher compared to the sequential. So if one would have just not, you know, neutralized the currency impact, that means even sequentially, that means there would have been more which has come out of Other factors such as product mix, such as the productivity and also other things because I have been always maintaining in the past that in our industry and specifically for our company, there would be fluctuations quarter on quarter due to multiple reasons. Sometimes you may take some inventory right off, there could be some quality problems, there could be some penalty for, you know, and many such things can happen. So that's why it is very difficult to have a consistent kind of a gross margin. There will be always fluctuations. Now, when you really talk about a product made, because what we really ultimately put it is a resultant weighted average. But in terms of the margin, if you go by There will be different buckets. There will be buckets which is far higher than the total reported gross margin of the credit and there will be products which is also quite lower than that. So if we are being able to sell products in a particular quarter or products with much higher contribution, then definitely that has an impact in the gross margin. And traditionally, depending on market and also business segment where the margin varies, So that will also have an impact in terms of the business mix on that. The overall, when we really talk about the productivity, it is the leverage that you get, you know, with a better capacity utilization or, you know, with the same manufacturing overhead, if you are going to be able to produce more. And that's where the productivity factor comes in and it helps in terms of the growth and improvement. So that is respond to your question Neha.

Just to follow up on that, you know, I agree on the effects. On productivity, I would have assumed given the lockdown and volumes coming off, our utilizations would have been lower. So I'm just trying to understand if the product mix was linked to the fact that COVID benefited certain sale of certain type of products or certain bucket of product. Would that be a fair understanding?

So not really. First of all, we did not lose much output because of COVID. So our people found a way to make the relevant output almost uninterrupted, almost undisrupted. So relatively to that, and this is again, I want to thank my colleagues, my associates for doing that. Second, there is no real correlation between COVID and the mix of products we send to the customers basically what they needed. I think it's more of the fact that we are leveraging more and we are doing it more efficiently.

And it always helps if there are more new products. The normally new products will be retired for the week. Yeah, we can move on.

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

Yeah, hi, good evening. One question on the acquired portfolio from Vocard. Just wanted to get some sense. Now you would have had a deeper look at the portfolio. In your first assessment, where do you see this portfolio lacking? More in promotion approach

I believe that the main opportunity is that the brands were not fully utilized or the brand recognition as workers did not have the means due to their financial issues. to invest in them in order to get the full brand recognition. So the primary learning course will be about branding and about investing in them. I believe that there is a strong potential, big potential in those brands. Okay.

So investment brand means you mean to say, are you referring to... It's a branding, it's a combination of messaging as well as reach.

As these brands by and large are complementary for activities that we already did, so naturally now we can enable higher reach in terms of a number of customers as well as better messaging because we can invest in the branding and the ability to explain this product better and the combination of branding as well as search.

That's very helpful. One more question I have was on the BSI business, on the API portion. You mentioned about customers trying to de-risk and looking for additional reliable resources. When you look at your product market and when you look at the addressable market there, just very broad understanding with this kind of move by customers, this addressable market rough strength has become 2x, has grown by 50%. What's your estimate over there?

Sorry, I did not... Yeah, can you repeat the first set once again? We didn't get it very clearly.

Sorry. I was saying that on the PSA business, with several of our customers now looking for more additional reliable source of supply, trying to do this, certainly the opportunity set for us and the products that we are playing has increased. So I was just trying to get a... Some measures of how much of our addressable market has increased by, let's say, is what the portion you got X earlier, has it become 2X now, 1.5X, etc. Just trying to understand that kind of metrics. Because I appreciate that in one year we cannot see all kinds of growth, but that may translate to our growth in the next two or three years.

So it's not working exactly like this. As you know, there is time in which The qualifications of products are coming. So I think the way you need to see it on the API is that we will have more and more molecules that will have two types of contribution to our strategy. One, that they will gain more market share as we are becoming more efficient. At the same time, we have a better integration and this is a help to continue to improve our gross margin. This is the two contributions of the API. As for the risk, indeed there was certain tractions that came, but this is the way we normally do, that we are trying to see those areas or those opportunities in which companies do not have or have one supplier so maybe we want to risk certain products and then we are trying to qualify an alternate source at this time also in this quarter and we'll continue to do also in the future. Overall, I think what you're looking for is to know whether this business will grow and I believe it will. Sure. Thank you, Erez. Thank you.

Thank you.

The next question is from the line of Sushmit Petodia from Motilal Oswal Asset Management. Please go ahead.

Hi, good evening everyone. Hope everyone is safe. Thank you for the call. Wanted to check a couple of things. Is there any part of the work card numbers that is integrated in this portal? Because the transaction concluded on the 10th of June.

Yeah, for 20 days, sales and profits are there in this.

So for 20 days it is there, right? Yeah. And just one request on WalkHard, whenever you get the opportunity and time, if you could take us through the WalkHard portfolio separately on a call, it would be great, just to understand where we are on that journey. That's just a request from us to the management. And secondly, sir, you said tax rate will be 25 to 26% while the benefit that has gone away is on a plant. So if you can explain to us how this will come down from the current tax rate of this quarter.

So what I gave guidance of 25 to 27% for the full year. For the quarter, of course, it was at 34.1%. Now, the main contributory factor is the weighted deduction on R&D which used to be there. It is no more available now. Now, of course, with the weighted deduction on R&D going away and other tax incentives going away, the government of India has also reduced the tax rate. That is a new tax rate. That is an option one could have taken, but for us, It didn't make sense because we had quite a bit of max credit available in our books. So we want to wait for utilizing them because this is something with a higher tax implication that you can utilize. Once we utilize them, we will switch over to the new tax rule, which will be the lower. Till that time, you don't get the tax incentive. So one of the major contributions is weighted deduction on IndyGun. Second is in one of the plants where we had the time period for which the time period got over. So both these factors combining led to the 34.1% tax rate for the quarter.

So you did use the mat credit for this quarter, is that correct? Which you will use for the next year?

So it all depends on the year basis mat. Sometime there will be a If you recall last year, overall our ETR was negative. Normally it would have been 21-23% in this range. Last year it just happened that because of multiple things, it became a negative. So this year we have started on a higher, but hopefully for the year we can manage it 25-27%.

Sir, if I can squeeze in one more question please. Sir, there are a couple of other companies which have reported the first quarter numbers and the India business margins have gone up significantly because of lower marketing spend. So is it fair to assume that your India business margins would have also gone up significantly quarter on quarter and the other expenditure not going down is maybe entirely due to the freight cost and servicing?

First, we don't report geography-wise the margin. We report the sales. But it will be fair to say that even though there has been a decline in sales, it didn't necessarily mean a decline in absolute margin that we would have got from India. Thank you, sir.

Thank you, sir.

Thank you. The next question is from Vishal Manchanda from Nirmal Bang. Please go ahead.

Thanks for the opportunity. I have a question on Revlimid. Could you share when is the trial hearing scheduled?

We haven't got the date. We haven't got the date. Right. And any sense on how long can the judgment take after the trial hearing?

We shall see. We shall see how it will fall out. It's very hard. Okay.

Thank you. That's all from my side.

Thank you. The next question is from Nitin Agarwal from IDFC Securities. Please go ahead.

Thanks for taking my questions. Sir, two questions. One is A on the COVID drugs that you mentioned. How should we view these opportunities? Are these specifically largely domestic opportunities or do you see opportunities for meaningful export opportunities in these two products?

We are going to have them both domestically as well as in emerging markets. How big it's going to be, I don't know. In a way, the way we see it, it's a combination of both our contribution to fight COVID as well as business opportunity. It's hard for me to say how big it is going to be because it's primarily a fraction of how fast we can effectively register this product in emerging markets. In the case of Avigan, If we will have good results on the Kuwait trial, which we will know probably by October-November, then we can potentially globally include the United States. But we should see the results of this trial first.

Would we be supplying to Fuji also for their stockpiling in Japan?

Right now, they are making the products for Japan. We are not producing for Japan. But the plan is if these products will pick up well, that we will be the global producer of these products, globally. At this stage, we are not making for Japan.

Got it. Thank you. And my second question is, you talked about the opportunities for the PCI business. From an investment perspective, does it entail for us significantly increasing our investments in PCI going forward? How are we looking at the CapEx part of it?

PCI is absolutely a space in which we are investing primarily on R&D. At this stage, we have enough capacity, so I don't envision putting more sites or stuff like that. We are looking from time to time for business development if this is certain capabilities that we do not have. But overall, the main investment in API is in R&D.

If I can squeeze in one last associated question on that, what opportunities do you see in the CDMO space in the BSAI business, in the custom services business, which you've now put out into a separate subsidiary? How has that been performing?

It is performing well and I see it as a growing business force.

Okay, thank you and best of luck.

Thank you. The next question is from the line of Sameer Vaidhyawala. Morgan Stanley, please go ahead.

Hi, thanks and good evening everyone. Sir, is it possible for you to update us on the India business and Russia business? In July, how is it doing versus pre-COVID levels?

In both cases, I believe that as certain areas, certain cities are opening up, we see positive fractions on both. On both countries, as you know well, the cities, the areas, the provinces are are in different shape and form that's related to fighting COVID. Some of them are still in lockdown, some of them opened up. So in those places that are opened up, we see positive traction. Okay, great.

And the second question is on lowering. When do you expect to do refiling with USFT?

We...

It's going to be within the next few months. We do have a delay in the submission. We are still working on some time on it.

Okay, and with your permission, last one from my side, and that is, how are you thinking about more M&A opportunities?

Anything that you can outline with geographies, which assets you're looking, and would these be more sizable than Wokard or around the same ballpark?

So we do see a... Next quarter, we believe we'll go back to a short place of cash. So we do have a lot of financial capacities in the same lines that we introduced in the last few quarters, which means that we potentially can risk up to two times EBITDA if we find the opportunity for that. The type of transactions that we are looking at are primarily Thank you. Thank you.

The next question is from the line of Anmol Ganju from GM Financial. Please go ahead.

Hi, thanks for taking my question. Most of my questions have been answered, but just I also have a follow-through on the API business. Most of the factors that you alluded to for the superlative performance for API seem to be sustainable. We all understand that you can never rule out quarterly aberrations, but is it fair to assume that This quarter's run rate seems to be some kind of a new base when we look at our API business. Because whether it's productivity improvement, whether it's customers de-risking supplies, none of this looks like it should disappear in a quarter or two. So are we talking about structurally a business which is 60-70% higher from where we were last year? And then, courtesy of our investments and focus on this, we should be able to grow from that base for the next year.

So, you know, I cannot give you guidance, but I do believe that we can have a bigger base even in the future, and I believe that we will achieve it. So I'm very confident about our ability to grow the API business. And I agree with you that all the trends are sustainable and they are positive for us.

Thank you. Thank you. That was it from us.

Thank you. We will take one last question. The last question is from the line of Surya Patra from Philip Capital. Please go ahead.

Thanks for this opportunity, sir, and congrats on the great number. Two things that I wanted to understand. One is the strong cash flow, what we are generating, and the kind of positions that we are having. Hello. We hear you with an echo. Okay, so I'm just continuing, sir. With the strong cash flow that we are seeing and there is a kind of strong base that we are having, so can you just give some clarity or indication about your future capital allocation either towards the kind of Sohman, should you take us over? Yeah, so our main lever for future growth is R&D. And so this is something which

We are trying to improve productivity but at the same time we will keep a very high focus on continuing R&D on multiple markets in terms of first liberating the global portfolio and then come up with new products. Then we have a lot of appetite for inorganic growth and already Erez has talked about it If we get a Bhopat kind of target in India, we will be very interested to pursue. But beyond India also, there are other strategic spaces and specific kind of targets that we have. At any point of time, we are doing a lot of diligence. So we'll have to see whether we are being successful or not, but that is a possible idea. There's a huge ROI that we can get out of digital... You know, investment on the digital capability and the platform that we have built in the past and we are continuing to do so even now and in the future. That is another area. CapEx, I already alluded to earlier that we would be spending more than thousand crores for the year for specification in specific areas. For the quarter, the cash outflow was much less at only 150 crores. But this year we will still have that kind of capital allocation. But there are multiple areas including we have increased our capital allocation for dividend distribution this year and we also focus on the literacy development. So there are multiple areas on which we plan and that we always review. For us it is a dynamic allocation depending on our strategy and we want to ensure that we are being able to execute on our strategy and capital allocation doesn't come in the way. Okay. Did I respond to your question?

Yeah, yeah, greatly so. Second question was around also the point that you have mentioned about the digital capability what you are trying to enhance. So whether that will have a kind of meaningful impact on the overall margin scenario for the company, one. And secondly, despite having seen a kind of sequential revenue decline on our branded business like here in India as well as Russia, and also to some extent sequential decline in the US business because of the COVID factor, the gross margin scenario has sequentially improved. Although we have discussed a lot about the gross margin factor, but you can, if the branded business are declining, what is really supporting, whether it is the raw material price correction is quite significant because of the growth factor, price factor or something else. What is helping and how influential is this digital capability for margin improvement? If you can just talk.

So digital helps in multiple ways. Definitely it helps in productivity improvement and consequently your margin. But digital also helps in better quality and you know there is so many internal things that you can do. Digital helps in terms of improving your speed and agility. So overall, the whole idea is that, you know, how can we be much more lean, agile, how can we select seamlessly across the value chain and how we optimize end-to-end each and every process that ultimately creates value for the company. So that way we have been, you know, having a lot of platform thinking within the organization. There are a few areas where we have made significant progress even in the past. There are a few areas which we are focusing now. And I believe that these will contribute significantly in terms of our customer-facing processes, our new product development processes, our employee satisfaction, agility, speed on every count. So next is a sequential increase. First, I would like to correct you that our emerging market, which is primarily branded markets, The contributory factors, of course, unlike in year-on-year, the sequential margin increase Thank you very much. Thank you very much.

We'll take that as the last question.

I would now like to hand the conference back to Mr. Amit Agarwal for closing comments.

Thank you everyone for joining us today for the earnings call. In case of any further queries, please reach out to the investor relations team. Thanks.

Thank you very much. On behalf of Dr. Reddy's, that concludes the conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.