Dr. Reddy's Laboratories Ltd

Ladies and gentlemen, good day and welcome to the Dr. Reddy's Q4 FY23 earnings conference call. As a reminder, all participant lines will be in the listen-only mode. 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 touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Richa Periwal. Thank you and over to you, ma'am.

Thank you. A very good morning and good evening to all of you. And thank you for joining us today for the Dr. Reddy's Earnings Conference Call for the quarter and full year ended March 31, 2023. Earlier during the day, we 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 Statements. The discussion today contains certain non-GAAP financial measures. For a reconciliation of GAAP to non-GAAP measures, please refer to our press release. To discuss the business performance and outlook, we have the leadership team of Dr. Reddy's, comprising Mr. Jiri Prasad, our co-chairman and managing director, Mr. Ismail Israeli, our CEO, Mr. Parag Agarwal, our CFO, and the entire 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. G.V. Krishan. Over to you, sir.

Thank you. Thank you very much. Good evening and good morning to all of you. Welcome to this annual earnings call. My best wishes to you. I am delighted to be here today along with the members of the executive team. As we have seen in our published results, this year has been an outstanding year for the company, a year in which we've set all tech highs in our reported sales, profits, and generated a healthy cash flow. And we continue to strengthen our core businesses while investing and building businesses of the future. Our sustained investments have been made to drive manufacturing excellence, strengthen our pipelines, and we continue to build efficiency and productivity in our R&D, as well as operations, and continue to augment reaching customers by opening new markets and new channels. Looking beyond the financial performance, during the year, we made great progress on multiple fronts, and we were recognized for these achievements. Noteworthy among these are the recognition by CNBC TV18 under the Master of Risk, Healthcare, and Pharma segment. And we secured leadership and scores from the CDP for the action on climate change and supplier engagement. We also featured in the Bloomberg Gender Equality Index the SNP's Global Sustainability Yearbook, the DGSI Sustainability Index in Emerging Markets category, and were also awarded by the Economic Times as being among the best organizations for women in the year 2023. Our largest was recognized by the World Economic Forum as part of its Global Lighthouse Network. These recommendations are an endorsement of our commitment to building a sustainable, high-performance organization focused on the needs of patients as well as society. I'm excited about how far we have come in the past few years and by the opportunities we have for the future as we continue to make efforts to bring to life our credo of good health can't wait. With this, I'd like to hand over the call to Parag for taking you through the financial performance of the company. Thank you Prathaj, greetings to all of you and I hope all of you are doing well. I am delighted to take you through our results for the quarter four and full year of fiscal 2023. FY23 has been a year of strong financial performance with the highest ever sales, record profitability and robust cash flow generation from operations. Let me provide you with a quick rundown of our Q4 and FY23 financials. For this section, all the amounts are translated into U.S. dollar at a convenient translation rate of rupees 82.19, which is the rate as of 31st March, 2023. Consolidated revenues for the quarter stood at rupees 6,297 crores, that is U.S. dollar 766 million, and grew by 16% on year-on-year basis and declined by 7% on a sequential quarter basis. Year-on-year growth was given by growth in both generics and CSCI businesses. This was further augmented with income from divestment of a few non-coal brands in India. Quarter-on-quarter decline was primarily due to sales volatility in the energy business. The revenue for the financial year 2023 stood at decrease from the 2005 APS growth, that is US dollars 2.99 billion and green by 15%. that growth was mainly driven by new product launches partly offset with price erosion. Consolidated growth profit margin for this quarter has been 57.2%, an increase of approximately 430 BPS over previous year, and decline of 210 BPS on quarter-on-quarter basis. Year-on-year increase was driven by new product sales with higher growth margin and for an exchange. Quarter-on-quarter decline was primarily due to product mix, and lower operating average, although partly offset by divestment income. Growth margin for the Global Generate and CSCI was 61.7% and 25.2% for the Quartic. Growth margin for Advice Institute 3 has been 56.7%, which is an increase of 360 BPS over Advice Institute. The increase was driven by new product sales, the high growth margin, High government incentives and favorable foreign exchange. Partly offset with the impact of price erosion. Growth margins for the global generics and CSAI were at 62.1% and 16.2% for the year. The SBA spend for the quarter is received $1,799 crores, that is $0.219 million, and increased by 15% by its domain class quarter and quarter. The year-on-year increase is largely on account of sales and marketing investments and the gross impact of forex translation. The annual spend for the year is between 6,803 crores, that is $828 million, and has grown by 10%. The annual cost as a percentage to scale was from the 7.7% and is lower by 130 basis points over previous years due to better operating leverage. The R&D spent for the quarter is reduced by 27 crores, that is US dollar 65 million, and is at 8.5% of sales. Our R&D efforts are focused towards building a healthy pipeline of new products across our market, including biosimilar. The R&D spent for FY23 is reduced by 1,938 crores, that is US dollar 236 million. R&D percentage of sales for the year is still at 7.9%. The EBITDA for the quarter is received 1,631 crores, that is US dollar 198 million, and the EBITDA margin is 25.9%. The EBITDA for the year is received 7,308 crores, that is US dollar 889 million. EBITDA margin for the year is at 29.7%, which is ahead of our aspirational target of 25%. Our profit report tax for the quarter stood at 1,326 crores, that is $1.51 million, and that for the year stood at 6,037 crores, that is $734 million. Our profit report tax for the quarter grew by 434% year-on-year, and for the year it grew by 87%. Effective tax rate has been at 27.6% for the quarter, And at 25.3% for the year. The effective tax rate was lower in FY23, largely due to changes in the company's jurisdictional mix of earnings. We expect our normal ETR to be in the range of 24% to 25%. Profit after tax for the quarter student received 959 crores, that is US dollar 117 million, and that for the year student received 4,507 crores, that is US dollar 548 million. Reported EPS for the quarter is received 57.52, and that for the year is received 270.85. Operating working capital reduced by received 364 crores, which is US dollar 44 million, against that on December 31, 2022, mainly supported by an improvement in receivables. Our capital investment stood at Rs. 258 crores, which is US$31 million in this quarter, and Rs. 1132 crores, which is US$138 million during the year. The free cash flow generated during this quarter was at Rs. 1596 crores, which is US$194 million, The free cash flow generated during this year was at Rs. 4,009 crores, which is USD $488 million. Consequently, we now have a net surplus cash of Rs. 5,046 crores, that is USD $614 million as of March 31, 2023. Foreign currency cash flow hedges in the form of derivatives for the US dollar are approximately US dollar 774 million, largely hedged around the range of rupees 82.4 to rupees 84.5 to the dollar, ruble 7380 million at the rate of rupees 1.045 to the ruble, and Australian dollar 4.2 million at the rate of rupees 57.8 to Australian dollar maturing in the next 12 months. With this, I now request Eray to take you through the key business highlights.

Thank you, Parag. Good morning and good evening to everyone. As Prasad highlighted, we have delivered strong financial performance in FY2023. We closed the financial year with double-digit top-line and bottom-line growth, with EBITDA and ROC margin exceeding the 25% levels. This impressive performance was reflected in our cash flow, and we continue to have a strong balance sheet. We progressed well on our strategic priorities and were able to invest in our organic capabilities and business development opportunities to thrive and deliver on our purpose over the long term. Let me take you through some of the key highlights of the year. One, we witnessed underlying growth momentum in FY20 across all businesses adjusted for COVID products contribution during last year. Two, revenue in North America generics and branded markets of Indian EM crossed the $1 billion mark for the second consecutive year. Three, we divested certain non-core brands in India to focus on strengthening the core. Our EBITDA is at 30% and our ROCE is at 35%. We generated a strong free cash flow leading to a net cash short loss of $640 million. We also see positive momentum on BD slash MNAs with the acquisition of Novartis cardiovascular brain systems in India, Main Pharma U.S. generic prescription product portfolio, and Eton's branded and generic injectable products in the United States. Significant progress also made in our biosimilar businesses. We see a launch of biosimilar stimulus effend, which is PEG-3 by FreseniusCab in the U.S., We completed and we saw the completion of clinical studies of reduximal biosimilars, and we already filed in US, Europe, and the UK MHRA. We saw the completion of phase one study of biosimilar tocilizumab, and global phase three study was initiated. Recently, we received... approvals for three products in China, namely Sevalamer, CIDAC15, and Carboprost, and our partners got GA approval for several line tablets. We are also progressing well in our digitalization, as well as our EFG journey. Our diversified global presence, capability, and strong balance sheet make us a partner of choice. we continue to work towards threatening our position as a partner of choice, including in Horizon 2 spaces. From Horizon 2 perspective, we signed some strategic licenses in the next 23, including the below, with cardiac care for the wearable, for arterial fibrillation treatment, with Iranica for the wearable in management of migraine, with the New Zealand-based WZETL, to bring the third-generation CAR-T asset for clinical trials in India. We joined Shoei Bioscience to bring Toripa NIMAB to India and other markets. We are investing in developing trials of this DTX CAR-T biosimilar asset in keeping with our stated Horizon 2 strategy. We see them as the future growth drivers. Now let me take you through the key business highlights for the Q4 and April 23. Please note that all the reference-to-be numbers and defections are in respective local currencies. Our North America generic business recorded sales of $312 million for the quarter, with a strong growth of 18% year-over-year and 17% decline on a sequential basis. On a full-year basis, we recorded sales of $1,268,000,000 with a growth of 26% over the previous year. This growth is largely led by new product launches such as Ligamide, Sorafenib tablets and Timor gel and growing market share in certain key existing products which more than offset increased price erosion. We launched six new products during the quarter and overall 25 products during the year. We expect the launch momentum to further improve in April 24th. Our year of business recorded sales of 56 million this quarter, with the year-over-year growth of 7% and sequential quarter growth of 9%. On a full year basis, the sales of 210 million has grown by 9%, driven by base business volume and new product launches. We launched 15 products during the quarter and certified for the full year in Europe across all markets. We expect this growth momentum to continue and effort in the future. Our energy market business recorded sales of 1,114 crore rupees with a year-over-year decline of 7% and a sequential quarter decline of 15%. On a full year basis, emerging market sales have been roughly flat at 4,550 crore rupees. However, the sales have grown in certain percent adjusted for the COVID-related products and the investment income in April 2022. We launched 10 new products during the quarter and 94 new products during the year across various countries of the emerging markets. Within the EM segments, the Russia business in Q4 declined by 34% on a year-to-year basis and 17% on a year-to-year basis in constant currency. In FY23, Russia business declined by 9% in constant currency. The decline is attributed to divestment of non-core brands during the previous year. During the year, there has been normalization in the channel customer stocking level after the uptick seen in Q4 FY22. We have been navigating the evolving geopolitical uncertainties and have managed the ruble currency fluctuation with effective hedging. Our India business recorded Q4 sales of 1,293 crores rupees with a year-over-year growth of 32% and sequential increase of 40%. On a full year basis, our sales were 4,893 crores rupees with a growth of 17%. Excluding the benefits of the divestment income and adjusted for COVID-19-related products, year-over-year sales growth for the quarter has been 11%, and for the full year has been 13%. As per our IQ report, we are ranked number 10 at MIT March 23 level. India remains our priority market, and we are committed to continue to grow this business at a healthy rate. Our PCI business recorded sales of $95 million, with a year-over-year decline of 4% and fled sequentially. On a full year basis, the sales were $362 million, with a decline of 12%. The decline was primarily due to high base effects of COVID-related products, We expect this business to grow during April 24th. Our R&D efforts are focused on developing value-accretive products, including several generic injectables and biosimilars where there is a patient need. We have done 195 global generic filings, including 12 ANDAs filed in the U.S., and 130 drug master files filed globally, including 12 drug master files in the U.S. During FY23, we are on track to accelerate on this in FY24. We are progressing well in development of our similar products and working on some niche opportunities and Horizon 2 initiatives. Our strong balance sheets provide us financial flexibility to support future growth, invest in this development opportunity, and we will continue to maintain a disciplined approach to cash management, and acquisitions. We continue to focus on optimizing workplace efficiency and productivity. We remain focused on strengthening our core generics and API business and delivering more and more strong foundation. We are building a pipeline of products to meet the evolving needs of patient and healthcare professional investment in internal R&D as well as strategic acquisitions. 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 a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handouts while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Balaji Prasad from Barclays. Please go ahead.

Hi, this is Kayla on for Balaji. Thanks for taking our question. Just wondering if you could provide a bit more detail around your deal with Junichi. It's discussing what responsibilities will look like on both ends. And just what really convinced you about their asset and its potential? Thanks.

Balaji, we were not able to hear you well. I'm afraid you will have to repeat the question. Can you repeat this?

Sure. Sure. Is this better? Can you hear me better now?

Yes, it is.

Okay. Hi. This is Michaela on for Balaji. Thank you for taking our question. We're just wondering if you could provide a bit more detail around your deal with Junshi, just discussing what responsibilities will look like on both ends. And also just wondering what convinced you about their asset and its potential. Thanks.

Thank you. So strategically, we are looking for unmet needs, especially in India. And we believe that we are in a great dialogue with the innovation industry in China. And we are trying to bring products that we believe that we can bring value to. And we believe that this product shows very, very nice results and can be absolutely considered a standard of health. And we can bring it to India in a very affordable price versus the alternatives. And this is our purpose. We are trying to bring great health in affordable terms. And that's what was the main incentive behind this gift.

Thank you. The next question is from the line of Surya Patra from Phillip Capital. Please go ahead.

Yeah. Congratulations for the great set of numbers, sir. So my first question is on the U.S. business plan. So is it possible to share that what is the sequence in growth in the U.S. as we would have seen ex of Reblimid in the current quarter?

So we cannot give guidance for a product with or without, as you know very well. But what I can say is that we are very consistent. So likely that we are going to continue to see growth in all of our spaces, including the United States, with and without the product. And the... and it will be driven primarily for the organic activity. Specifically for the United States, besides the Revilamed, we are going to launch somewhere between 25 to 30 products, as well as the contribution of the recent acquisitions, and likely that we will see also additional activity through the year.

Sure, sir. Sir, is it possible to give some extra color on the launch momentum that you have mentioned in your opening remark for the U.S. market, which you believe that to be strong enough in the current financial year?

Yeah, I think that the investment in R&D and especially on products that are that's hopefully or likely to have less competition than the others is paying off. And as well as the type of patent click that we will see in the next 24, as well as the years after. So right now, the numbers that I mentioned, 25 to 30 products, some can be meaningful launches with less of a competition. And And we will continue to accumulate this kind of product also in the years after. So it's absolutely a strategy in the U.S., and we will continue to focus on that.

Okay. Sir, my second question is on the composite question. We are seeing a strong cash accumulation, and simultaneously we are seeing multiple M&A activities by us. to improve our focus on the domestic formulation business, which is now achieved around 20% of the total revenue base. And we are mentioning that this is going to be one of the focus market for us. So could you share your thought process or the kind of capital allocation to build this business in the near future and the Ultimately, what is the kind of a business mix that you want to make, achieve it for domestic formulation, considering the potential growth and all that? If you can say.

Yes, absolutely. So in India, our primary growth will come from, one, focusing on our brands. We identify the focus therapeutic areas as well as the focus brands, and we are bubble down on that. by increasing our footprint, by going to more cities, etc. So this is one goal. Specifically to your question, the second one is that we are collaborating with the innovation industry in the United States, in Israel, in China, and other places as well, of course, with companies and institutes in India to bring innovation to India. We are doing it both with internal R&D as well as with external R&D. Some of the deals I mentioned in my script and more to come. We are doing it both on Horizon 1 as well as Horizon 2. And our path of growth is people see us as a very attractive partner. being compliant with all the international norms, giving our reputation in the marketplace, and we are leveraging it to bring more and more innovation into India. And that's also part of the capital allocation will go to a deal like this. In addition, we are always looking for opportunity also for acquisitions. There is nothing that we can report at this stage, but it is absolutely something that we are open to do all the time. For the initial part of the capital allocation, all of our spaces, including U.S., Europe, India, etc., are B2B businesses. We are looking for potential complementary deals. The type of deals that we are looking for is complementary. We are looking for products that we don't have or capabilities that we don't have. Unlikely that you are going to see mega deals or this kind of stuff. This is not our comfort zone. We are looking for primarily unmet needs or complementary products that will fit our portfolio in that way. So yeah, please.

Yeah, sure, sure. So that is really great to know. And just lastly, any color that you can add to the expectations in the progress post-launch?

Sorry? Yeah, the product, as you know, is marketed by . So I don't have any expectation or anything like that. We, as a partner, have a certain arrangement with them, and if they will be successful, we will be successful as well.

Sure, sir. Wish you all the best. Thank you. Thank you.

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

Hi, thank you for the opportunity. My first question is on the U.S. patient. You have been obviously very consistent in terms of new launches, but can you talk a bit more about the kind of price erosion which we are seeing in your existing product? And my second part of the question is, compared to oral solids and injectables, what kind of price erosion we're witnessing?

Yes, so the nature of the U.S. did not change in the last quarter. It's a similar structure of the market and similar behavior of players. Specifically for the quarter, the mix of products that we had, we saw less of a price erosion than maybe quarters before, but the fundamental structure of the market did not change so likely When we face competition in certain products, then we see an erosion. That's the nature. But specifically, we saw a better mix this time. Comparing injectables to overall solids, both are very competitive, so it's more of a function of how many players are attracting the customers and so both injectable as well as oral solids can see a high level of erosion but also from time to time product with less competition and therefore better pricing situation.

Thanks for that. My second question is As you continue to invest in your business and long-term growth drivers, how do you see R&D and SG&A costs moving from here on? And you obviously have, I'll say, done better than your aspirational EBITDA margin for this year. But on a more sustained basis, how do you see this margin trajectory moving forward?

So we are maintaining the 25-25 as a long term, and we discussed it in previous meetings, and there will be years and quarters that we will exceed it, but there will be maybe also years that it will be below, which has happened also in the past. But we are very much there. What we are doing is that we are allocating the extra results that we invest, and especially in R&D. The R&D likely to be somewhere between 89% and also going forward and it's naturally nominal will grow because we are growing the cells and this is allowing us to invest in biologics, it's allowing us to invest in our products that we are partners with others and we need to do some clinical trials and of course very important on the generic R&D, especially focusing on products that matter, products that are likely to have less competition.

Okay. Thank you. I'll get back in the queue.

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

Thanks for taking my question, sir. On the ROW markets, you know, historically, if I exclude the last year because of, you know, COVID impact, we have grown that market north of, you know, 20 or 25%. As we go forward, you know, should we see the ROW market, you know, going back to those levels of growth? And this is, you know, excluding Russia. That's my first question. And second, on the India business, you know, business, Could you quantify the divestment income in the current quarter? And excluding that, how should we look at growth? Is there more divestment that we see from the India perspective? Or do you think this is the base on which we should grow? And do you think you can grow in line with the market in India?

On the ROW question, Yes, the answer is yes. We are aiming for our traditional growth and also give or take without guidance that range of growth that we saw. And indeed, when you are taking out all the one-offs and the fluctuation of currency, we are growing very, very nicely. This is primarily as we are accelerating the the development and the filings of products in all these markets and also focusing on the footprint, especially on the hospital business. So yes, the answer is that we will see growth and some of those markets even accelerated versus the past. As for India, the divestment was 264 crores. And that's the value we got. And specifically, we see more, yes, from time to time, but nothing significant that we are going. And what we are also very busy with is actually to bring more and more products. And we are enhancing the collaboration discussions and the BBBs that we'll will be for India, so it's a kind of organic plus inorganic, but most of the inorganic will come from collaboration rather than kind of M&A acquisitions of other companies.

And, you know, just to extend the India question, do you think we can go in line with the market, you know, keeping aside the collaborations, et cetera, because, you know, that would take time to reflect the numbers just from the effort that we've been putting in the business over the last few years. Could we see Redis go back to or at least try to get in line with IPM growth?

We believe that we should be better than the IPM growth.

In FY24 itself?

In FY24 and after.

Understood. And one last question, if I may. On the Russia business, I didn't quite catch what you mentioned in the quarter. Was there any specific impact from channel inventory being cleared in the quarter? I'm not sure what you mentioned.

No, no.

So, Neha, the impact is actually in the base. If you remember when the conflict started, at that time, there was upstocking. And to that extent, in Q4, same time last year, the base was high. And that's impacting the year-on-year growth.

Okay, there's nothing specific in this quarter.

Yeah, so nothing specific happened in this quarter. And most of the sequential decline stuff is primarily timing. of product, there is a specific timing of tenders of the biological product and stuff like that. So we can say that in Russia it's business as usual.

Got it. Thank you so much.

Thank you. The next question is from the line of Ankush Mahajan from Access Securities. Please go ahead.

Thanks for the opportunity, sir. So my question is related to the G development that has added an incremental revenue for U.S. business. Could you throw some light on it? What is the sustainability run rate for this molecule in upcoming quarters? And excluding the G development, how do you see the beta margins for the U.S. business?

So on the product itself, which is going to continue to be a meaningful product format, may fluctuate from quarter to quarter, but it is going to be there probably for the entire agreement timelines. The fluctuation is primarily patterns of ordering, but as you know, it's a limited volume arrangement, and we believe that it will serve as well to the entirety of the agreement. As for the activities outside of it, it's going to continue to grow. I mentioned just a previous discussion, all the time we have products that have less competition than others. Naturally, this product is bigger than the others, but slightly Because in the future, we are going to see products like this, and that's what we are also focusing on. And so the profitability as well as the growth of our U.S. markets will continue to be in the same range also in the years to come, in quarters to come.

And so what are the beta margins that we – sustainable beta margins –

Like I mentioned, we are going to sustain the 25-25 on the long-term basis. We are not guiding for a big upper market, as you know. And from time to time, we'll be more than that. There will be many times about it. It's also a function of how much we want to put into the R&D. Likely that there will be higher through the time that we will have the and the combination of other low-competition products.

Sorry, if I do my calculations, excluding the development, base business is still on the lower side in terms of growth. So any strategy for the base business?

I don't share that observation.

Thank you, sir.

Thank you. The next question is from the line of Kunal Damesha. from Macquarie. Please go ahead. Thank you for taking my question. So the first question on strategy to liberate our US funding portfolio for Europe and other markets. And we have seen significant growth in Europe geography over the last two, three years. But in your view, how far along we are in that journey? Let's say in US, we have roughly around 140, 150 products. how many products we would have already launched in Europe, how many in pipeline, and if you can throw some light there, it would be helpful.

Yeah, we decided to focus on Europe when we took the decision on the diversification. This is working well for us. And in terms of where are we in the journey, somewhere in the beginning. So I do see that most of the growth in Europe are ahead of us and not... We are planning to launch many products in Europe in the next coming years, as well as to make other moves, including inorganic. So we see Europe as a focus market, especially around Germany. So Germany will be the focal market, and, of course, the rest of the big countries in Europe, we believe that we have to offer, including biosignature. So likely that you continue to see growth in Europe also in the next 10 years, including the next year.

And this liberating of portfolio, you know, when you launch same product, does it kind of become highly ROIC-accretive in your view, even beyond what our aspirational target is, or it helps us achieve that 25% ROIC target?

Yeah, it's absolutely attractive because it's primarily leveraged. And obviously, it's a piece in the puzzle. Europe is still relatively small compared to the other spaces, but over the time, it's getting more and more positive impact on the overall average. But yeah, it's attractive.

Sure. And the second question on the CTO1 observation, what's the kind of nature of observation? And Manu, have we submitted the response to USFDA or are we in the process of submitting a response?

It's a minor observation. We will address it. And we did not submit it yet. We just got it. I think we have 15 days left. So we will submit it in time. I believe that this will be okay.

Sure. Thank you and all the best. Thank you. Thank you. The next question is from the line of Madhav Marda from FIL Industries. Please go ahead.

Hi, good evening. Thank you so much for your time. Just had one question. Basically, you know, we've accumulated a lot of free cash flow in recent times and I think have been doing some M&A activity already. Just wanted to understand, given, you know, I think, In general, a lot of the peers have good free cash flows and net cash balance sheets in the industry. So when we're looking at M&A, aren't good assets very aggressively bid? We've seen that in the past as well in the industry. So I just want to understand that for a good asset, is it easy to get it at a good IRR? Or how should we think about M&A opportunities given we have a good cash pile available today?

Yeah, so if you recall, it was part of our strategy to close the debt and accumulate cash, anticipating the situation, anticipating at the time the increase in the interest rate and the inflation. So we are now looking for opportunities that, one, will, of course, fit our strategy. And second, will be a good valuation. So now I think the There are certain areas and certain types of products that potentially can get a good multiple, and that's what we are looking for. In addition to that, we are using that money for the type of licensing and type of boosting the portfolio also for the future. And the money will be used also for that. We are not the type of company that is seeking... what we call transformational acquisitions that are unlikely that you'll see in our case. But we will see, hopefully, more deals than we saw in the past.

So basically, M&A will be more bolt-ons, the kind that we've done in recent times as well. That's the idea? Yeah.

Let's call it business development, which is including licensing and including product acquisitions, collaboration with companies, and also... Okay, thank you.

Thank you. The next question is from the line of Cinderella Thomas Curvalo from GM Financial. Please go ahead. Thank you for the opportunity.

Am I audible?

Yes, you are audible. Please go ahead.

So just wanted to clarify this on, sorry for asking again, but is the higher volume share reflected in this quarter or will it be reflected next quarter?

If you are talking about the lenadolamide, we cannot share in quantity numbers. And what he said, it continues to be meaningful to us and in accordance to the elementals that we have.

Okay, thank you. And in your opening remark, you highlighted about the Chinese product approvals that you have received. When and where should we start reflecting these into earnings and what is our outlook here? if you can help us understand.

Yes, this is a reflection of the efforts that we had through the years by submitting all the products and China focusing on those products so that we can get GA status and be one of the early entry for the market. So I think getting forward programs in China In the next couple of weeks, it's a big achievement for a company like us. What we see, we see pick up all the time. It has a significant impact on our results. We will see more about, let's say, from starting in April 24, but more likely we'll see bigger numbers in 25 and 26, fiscal, as the submissions and the approval and the timing of those GOPs will take place. That's what we anticipate. And right now we are in the phase of 50 to 20 product submissions per year, and naturally with the cycle of approval that happens in China and the timing of the GOPs, it will be more meaningful. But let's say the strategy so far is working well because it's a leveraged strategy in which we have an outlet for a very, very important market to our directly from this approval.

Thank you. This is helpful. And coming to the PSAI business, compared to your peers, we have not seen the top-line growth. However, the gross margins have definitely improved. So how should we see the outlook for this business? We've been positive on growing this business, but does anything change here at this point in time, or is it some seasonal impact that we have seen in this quarter and we should start seeing growth from next fiscal year onwards? How should we read this?

We will see both. We will see growth and we will see improvement of profitability. For us, this market also in the past, and I'm excluding also in this segment we used to record also COVID sales. So if I'm excluding the COVID, what we saw is at the time it was a decrease in prices of some old portfolios as well as increase in some of the raw material. Now we see the reverse. What we see is that we are launching new products, and most of the sales are to more territories, especially in Asia. And we see also a better mix of products. And we see an ease on the supply chain and to a certain extent procurement. So actually now I see a positive momentum that is building on both growth as well as profitability.

But we should see this gross margin level sustaining.

That's the... I hope that it will be even enhanced. Not just sustained for sure, but we are aiming for enhancing it.

And the top line, any number that you would like to share, like all you double-digit, commit double-digit, anything, any color would be helpful.

No, we are aiming for double-digit. We are not guiding, but we are aiming in double-digit for all of our markets, including our DCI.

Thank you so much. Chantran, back to you.

Thank you. The next question is from the line of Dushar Manudane from Motilal Oswal Financial Services. Please go ahead.

Yes, thanks for the opportunity. Sir, again on North America series, given that FY23 had certain strength-related exclusivity as well or generally prevalent and competition to some extent kicking in in the coming quarters. So considering this aspect, just would like to understand, will we still grow in FY2014 U.S. sales, North America flow?

I believe that we will grow not just because of the product. We will grow because we are also launching 25 to 30 products, and the combination of all the techniques should grow.

Okay, sir. Thank you.

Thank you. The next question is from the line of Ashish S. Tavkar from IIFL Asset Management. Please go ahead. Yeah, thanks for the opportunity. As I had this question since we have been maintaining this 25% EBITDA margin guidance. But if you just try to strip off some one-time big opportunities and say some one-off non-recurring items, you know, the EBITDA margins on the core business seem to be, you know, lower versus worse. we were earlier guiding for. Azot, if you could help us understand, you know, for FY24, as we're going to FY24, would you like to provide some color as to directionally what we as investors can expect?

First, I don't share the observation that it's less than what we got. So that's a starting point. And we may need to clarify it. we are maintaining the 25-25 message on the long-term basis, which will allow us both to grow, give great return on the shareholders, as well as to finance the future. And what you see is that we are building a bigger and better portfolio as time goes by. And plus, the balance sheet is probably the best ever in terms of both cash flow as well as no additional substantial risk that exists in the balance sheet. So this is, of course, allowing us, and much better also, utilization of the local capital. So this will allow us better ROC also in the future.

Yeah, fair enough. So lastly on this India business, You did mention that, you know, F524, you expect to beat the IPM growth. And we have been acquiring assets, you know, trying to strengthen our portfolio. What gives you the confidence that F524, we can beat the industry growth? I just wanted to have some understanding on that.

I'm confident that we'll do it. And we need to recall that for me, I know that we are looking at external sources like Alcube, etc., But the most important for me is what is our bottom line growth. And that should be very healthy. So the answer is that I am confident, and I believe that we will grow the bottom line even faster than we will grow the top line.

Okay. Fair enough. Thanks. All the best. Thank you. The next question is from the line of Nitin Agarwal from Dam Capital Advisors. Please go ahead. Thanks for taking my question. It is on the main portfolio that we acquired in the U.S. Can you give us some more color on what opportunities you see in that portfolio in terms of the growth of the portfolio from the current size?

Yes, it's a portfolio that has a certain level of lower level of competition, especially in women health. So we are, it's allowed us to get back to movement, something that was missing for us, as you know, through the years. And it's also, there were many products in the pipeline that did not launch, and something that we'll be able to do in the future. So if you wish, we have a critical impact, one we believe that we can do well. with this product, second, we will be able to launch more products, and third, we can launch some of these products in other markets. And relatively, the economy of the deal is relatively attractive for us. So we are very pleased so far with the progress of the main acquisition.

So I think it's fair to assume, given the new product launches, that you have opportunities that you have we see possibilities for growing the business from where we acquired it.

That's what we are aiming to, yes.

And from a profitability perspective, is it a business which is higher than our corporate profitability right now?

I cannot share information about the specific profitability of products, but we believe that the nature of the products in the mix The tablet competition is always favorable versus those with a high level of competition. This is the nature of the establishment.

And besides this acquisition that you made, this investment that you made in the U.S. genetics, do we still are open to investing more money in U.S. genetics by way of acquisition, or this is more of one of our special case transactions which came our way?

We are... We will continue to look for opportunities in the U.S. market, including generics, if it will fit to the financials and if it will be complementary to what we do. So we will continue to look for opportunities, both organic and inorganic, in the U.S., not just now, also in the future. It is a very important market for us. Thanks. Thank you.

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

Yeah, hi, good evening. Thanks for the opportunity. Just if I heard that right, just wanted to, you know, reconfirm that you mentioned that you expect double-digit growth from across markets, including the U.S. Would that be correct?

I do. Not necessarily every quarter and not necessarily every... all the time. But absolutely, this is the long-term aspiration for us, including in the... Absolutely, that's what we are aiming for in the short term, but I cannot promise you that it will happen every quarter and every four months and every situation, obviously.

So, sir, I think for fiscal 24 specifically, sir?

Specifically, that's what we are aiming for.

We are aiming for double digital growth. And excluding the acquisition with the base portfolio and someone else, it is possible as what you see.

I believe that it's possible.

Okay. Okay. That is helpful. And just a follow up on this, you know, the US generic market. I mean, many companies have been talking about while price erosion remains more or less similar, there is a lot of volume opportunities that is coming. new business opportunities, etc. So would you say that we would have also got these in the last three, six months given there are some USFJ issues with the peer set?

I'm not sure I understand the SBA comment. Can you clarify that?

Yeah, so what we hear from some of the peers is that they are getting some volume opportunities like new business opportunities, NBOs. where they need to supply a few of the products where earlier they were not contracted, largely due to the USFJ issues by the peers. So are we getting some volume-based opportunities to supply in the US market?

We do from time to time. I'm not considering it as a strategic issue, but we do from time to time have a situation. So give or take... if I saw correctly, about 10 to 15% of the SQ in the United States in some sort of a shortage from all kinds of reasons, not just the SQ, but all kinds of reasons. And in those situations, you are always in opportunity for one-time buy and stuff like that.

And have you seen anything, you know, incremental in the last quarter is what I'm trying to get some color on? I mean, given we have seen some large companies having some... Yeah, so nothing that I see as strategic.

In general, we are not building ourselves on failures of others. We are trying to build ourselves with our own capabilities.

Fair enough. And lastly, on the, you know, the run rate that you see in the past, it was, you know, 225 million and then it came back, you know, on the base business side to 50 and then we saw some, you know, big jumps. And now things are normalizing and you still maintain it is going to be volatile but material. And I also understand that market share of these Revlimate are, you know, it changes, right? It increases every 6-12 months or maybe calendar year. So would it be fair to say that, you know, with the new launches that you spoke about and Revlimate continuing and this is, you know, an addition to the first question. So that is the key to grow double-digit, would that be a fair assessment, that on that development base also you will grow?

The growth in the United States will be from your products as well as volume from other products, as well as better costing. All of that will contribute, absolutely. But I cannot guide you on with and without or this kind of stuff. I will not be able to do that.

Okay, lovely. And lastly, while you spoke about growth across markets, would you say that this kind of launch and product visibility across markets, these kind of margins could be sustainable?

Yes, I believe so. I believe that that's why we are guiding for the 2025, which will enable us even to finance horizon 2. So if you recall, we said that about 50 to 100 debt is formed on Horizon 2, and we are able to cater that within the margins. So we are strategically positioned well that we are able to finance the future and at the same time to provide these margins and ROC to the shareholders.

But we are doing better than what we are guiding, right? That's what I'm asking. Will we be able to continue with this kind of performance?

Now we are doing better and maybe there will be also periods of time it will be not better. But right now we are doing better, yes.

Okay, lovely. Thank you and all the best. Thank you.

Thank you. We will take that as our last question for today, ladies and gentlemen. I would now like to hand the conference over to Ms. Richa Periwal for closing comments. Over to you, ma'am.

Thank you. Thank you, everyone, for joining us today for the earnings call. For any further queries, please reach out to the investor relations team. Thank you. Have a great day.

Thank you. On behalf of Dr. Reddy's Laboratories Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.