FDC Ltd. — Call Transcript 2022

Aug 8, 2022

“FDC Limited Q 1-FY23 Earnings Conference Call” August 05, 2022

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FDC TEAM: MR. NANDAN CHANDAVARKAR – JOINT MANAGING DIRECTOR MR. AMEYA CHANDAVARKAR – CEO, INTERNATIONAL BUSINESS & EXECUTIVE DIRECTOR MR. SANJAY JAIN – CFO MS. VARSHARANI KATRE – COMPANY SECRETARY & COMPLIANCE OFFICER MR. MAYANK TIKKHA – AVP (BUSINESS DEVELOPMENT & COMMERCIAL EXCELLENCE) MR. HARSHAL JAIN – MANAGER, CORPORATE STRATEGY

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FDC Limited August 05, 2022

Moderator:

Varsharani Katre:

Ladies a n d gentlemen good day and welcome to FDC Limited Ear n ings Conference Call for the quart e r ended June 30[th] , 2022. As a reminder all participant line s will be in the listen-only mode an d there will be an opportunity for you to ask questions after the brief highlights of the financials from the management. Should you need assistance during t he conference call, please signal an operator by pressing ‘’ then ‘0’ on your touchtone ph o ne. Please note that this conference is being recorded. I would now like to handover the con f erence to Ms. Varsharani Katre – C ompany Secretary and Compliance Officer of FDC Limited. Thank you and over to you mad a* m.

Thank yo u . Good afternoon, everyone and welcome to all of you. Gl a d to connect with you all for this q u arter ended earnings call. We have already disseminated t h e financial results of first quarter e n ded June 30[th] , 2022 and the investor presentation as w e ll. Now I would like to introduce the FDC team present in this earnings call. We ha v e with us Mr. Nandan Chandav a rkar – Joint Managing Director, Mr. Ameya Chandavar k ar – CEO - International Business and Executive Director, Mr. Sanjay Jain – Chief Finan c ial Officer, Mr. Mayank Tikkha – AVP, Business Development and Commercial Excelle n ce. Mr. Harshal Jain – Assistant Manager, Corporate Strategy.

We will b egin the earnings call with the highlights on the financial r esults of the company by Mr. Sanj a y Jain – CFO, followed by an interactive Q&A session. There might be certain forward-l o oking statements. These statements are subject to certa i n risks and uncertainties since the y are based on certain assumptions and expectations of futu r e events. I would request all the s p eaker participants to restrict their queries to 5 minutes o nly and avoid repetitive queries to save upon the time. With this I shall now handover to Mr. S anjay Jain.

Sanjay Jain:

Thank yo u Varsha. Good afternoon All ! So, I will take you through the financial results for the quart e r ended in June 30[th] , 2022 and will try to summarize all t he key points during the quarters. S o, to begin with, the company has delivered the overall re v enue growth by 11%. We are happ y to inform you that all the verticals have contributed for the quarter on a positive note.

On the d o mestic formulation business, company has continued its growth trajectory and it has given the growth of 8% in spite of the high base of the last year w h en we have achieved the growth o f 68% in our domestic formulation business. Also, to be n oted that in the last year sales whi c h includes sales pertaining to the COVID related product s . If we exclude that then the real g rowth would have been somewhere around 15% for o ur domestic formulation business. However, having said this, this growth has been largely d r iven by our major brands like Zifi, E lectral and Enerzal and also by some of our food range o f products apart from the other for m ulation products. We are also pleased to inform you that o u r Electral brand has now moved to 34[th] rank in our IPM on MAT June ‘22 basis as against 3 7 th rank of last year same period.

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On the e x port business front from the standalone perspective, reven u e on YOY basis is up by 42% for formulation business and 25% for API business. The in c rease in the formulation business i s largely on account of increased supplies to our US custo m ers apart from the other markets. We also wish to inform you that company is filed a n ANDA application for Olopatad i ne Hydrochloride ophthalmic solution 0.2% during the qua r ter.

Now co m ing to the gross margin side; if you have gone through o u r results, you will notice that there are some impacts on account of gross margin. In terms of p ercentage, it's around 5% for the q u arter which on account of the elevated prices of raw and p acking material prices, in terms of a bsolute value it has impacted by its 34 crores for the quarte r . However, with inflation is getting stabilized and our supply chain getting normalized. We m a y see some respite in the elevated C OGS level going forward. This will further ease means t he COGS level will ease with our increase in the finished goods sales price as we have tak e n the sales price on our schedule d formulation at around 10% plus which will have a posit i ve impact on our margin going for w ard as well.

On the e m ployee cost, we have maintained at around 20% of our r evenue which is slightly lower tha n the last year same period. However, in terms of the absol u te cost it has gone up, as you might be aware we have launched a new division in our dom e stic formulation business and also o n account of the annual appraisal cycle.

Coming t o be operating expenses, which includes the temporary p r ovision for the fair value impact o n our financial instruments which is around 15 crores on ac c ount of the mark-to-mark impact w ith the hardening of debt instrument yields and correct i on in the NAVs of the financial i nstrument. But however, these are up to 30[th] June but with the current rebounding of market le v els, the entire provision has been returned back with the s o ftening of the yields and improve m ents in the NAVs. Apart from this in the operating cost, there are increase in the sales and marketing, production and logistics costs which are due t o increase in the overall revenue b ase. With this all impacts the overall EBITDA margin n o w stands at 20% for the quarter a s against the last year 31%. So, is the reason for the decre a se in the overall profit as compare d to the last year same period. Thank you.

Varsharani Katre:

Moderator:

Ahmed:

Thank yo u Sanjay. So, now I request moderator to initiate the Q&A s e ssion. Over to you.

Thank yo u very much. We will now begin the question-and-answer s ession. The first question is from the line of Ahmed from Unifi Capital.

My first q uestion is on the domestic business. Considering that we h a ve grown a very high rate consideri n g the base we had in last few ones, can you help us underst a nd a break-up of revenue growth? W hat is the volume growth? How much is the price hike?

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Sanjay Jain:

Our grow t h overall has been 11.5%, the volume growth is 7.6%, the price growth is 2.1% and the new p r oduct growth is 1.8%. so, you will understand from here t h at still our majority of the growth is coming from volume growth. There's unit wise growth on o ur products.

Ahmed:

My question is the entire 10.7% NLEM price hike is effective fro m April or there is some portion t h at will come in the Q4 only?

Mayank Tikkha:

As Sanja y mentioned that we have taken a price rise that is effectiv e from April but honestly speaking t he price rise is still to go in the market first quarter, only 5 0% products would have gone wit h the price hike because we had inventories in the pipeline. So, for our major brands Electral a n d Zifi, the price rise has gone effective from the month o f May and June. You can say there would be some impact of it but not much of it because th e price rise still shows as 2.1%. As we move forward in the second quarter or maybe the th i rd quarter, this price rise growth w ould be still higher. As Sanjay mentioned that we have taken a 10% hike on an average. S o, by the end of second quarter probably the entire price rise would be visible.

Ahmed:

On the gr o ss margins front, so there is about 5% YOY decline, so c a n you help us in terms of what per c entages because of increase in the fall in prices, raw material prices and the packagin g portion and how do you see it going forward for the next t w o or three quarters?

Sanjay Jain:

So, the o v erall impact in terms of percentage on the margin is arou n d 5% which is purely on account of increase in the raw material and packing material prices. S o, going forward we will not like t o comment as of now. So, as I mentioned if the inflation re m ains at the same level, we might se e some stabilization in the margin but with the inflation cooling off and the prices coming d o wn we might see some improvement in the overall gross m argin.

Ahmed:

Just last q uestion to understand the freight cost and the marketing e xpense, can you quantify what percentage marketing expenses we are doing for Q1?

Sanjay Jain: In terms o f percentage the current it is around 8% of overall revenu e which costs somewhere around 6. 7 5% of the last year.

Ahmed:

Last year which means, till the full year or with just Q1?

Sanjay Jain:

No Q1.

Ahmed: And what percentage it was in Q4?

Sanjay Jain: So, Q4 w a s maybe lower than the 6.75 considering the overall base o f our revenue.

Moderator:

The next q uestion is from the line of Amit Doshi from Care PMS.

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Amit Doshi: So, you m entioned that the price hike was like whatever May and J u ne, so 2 months and that too for t w o big products. So, still the price hike is reflecting as 2.5%, I am just unable to reconcile that line.

Mayank Tikkha:

Amit Doshi:

So, when I said the goods got released, actually there is a time lack f r om when we released the goods fro m our warehouses and actually get consumed from where i t gets picked up. So, exact time we w ill not be able to mention because there are a lot of invent o ries at the stockiest level because w e have a huge network of stockiest. So, we give you wh a t I mentioned in my last answer was that we started releasing the goods from May and Jun e , so the impact would be very-very partial. So, histor i cally our margins have been in the range of 20%-22%-25 % . Do you believe we'll be back to t h ose levels and if yes by when? I know you don't give guidance but I'm just trying to understand because there is a significant consistency of margins in p ast 10 years versus last 1 year prob a bly this quarter.

Sanjay Jain:

This qua r ter probably the impact is more because of these inflati o nary reasons. But if the prices co m ing down back to the normal level, we might see the i m provement in the overall margin b a ck to the earlier years.

Amit Doshi:

How do w e plan to use our cash? Do we intend to buy brands or wha t kind of strategy we have in terms o f using of cash to pick up the growth plan?

Sanjay Jain:

I think if you have attended our last investor call, we have answere d the way like that in the March ‘2 2 we announced a handsome buyback amount to the extent o f 170 odd crores which is almost 5 0 % or more than 50% of our PAT and we have alway s been rewarding to our shareholders by way of either buyback or dividend. Apart fro m this rewarding to the shareholders we have also invested in our ophthalmic line at our Wa l uj plant, so there also the CAPEX t o the tune of 70 to 80 crores will be invested. These are the bigger ones where we are using our cash.

Amit Doshi:

Any outl o ok on export business which you can share or our plans ab o ut exports?

Ameya Chandavarkar:

So, what i s the question, Amit?

Amit Doshi:

Basically, export we've been doing decent enough and the API mark e t is also there. So, are we significa n tly planning to increase the export share in our top line o r what is the plan on the export fr o nt?

Ameya Chandavarkar: So, yes, w e definitely want to increase our sales grow faster, so w e will continue to invest wherever possible and we will continue to take advantage of opportunities that seemed attractive to us after ensuring that the risks are also not significant.

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Amit Doshi: But this e x ports business would you believe will be margin improvi n g, could it be the liver for margin i m provement, or no?

Ameya Chandavarkar:

Right no w , it is definitely attractive from a margin perspective parti c ularly because of our US business. Going forward as volumes go up depending on which mar k ets, we cater to, margins can vary. We are definitely keeping a close watch on margins.

Moderator: The next q uestion is from the line of Maanvardhan Baid from Laurel I nvestment Advisors.

Maanvardhan Baid:

My quest i ons largely got covered but just to understand since we've launched a number of new brands, s o just wanted to understand how is our focus towards thos e brands and what are we intending ? I mean now that what is the marketing spend that is being done on the newer brands and whic h ones are our key focus areas besides the marquee ones tha t are already there?

Mayank Tikkha:

A similar question we addressed in our last call also, just to correct y ou we have not launched multiple o r more brands. In fact, from the last year we are consolid a ting our business. So, we are focus i ng on our top 10 brands out of which most of the brands are giving us good delta moving f o rward. We are focusing heavily on our parent therapy b a sket of antibiotics and as well as E l ectral, Enerzal therapy, apart from this as Sanjay also ment i oned we have launched a couple o f divisions in the last 1.5 years and we have started focu s ing on our nutraceutical portfolio i n a big way. Along with that now we are also focusing on a derma basket. These are already a r eas where FDC was always present. We had a good base b u t from the last 1 year we are cons o lidating our positions into these markets. Having said thi s yes, once we achieve a threshold and we stabilize these expansions what we have unde r taken in the last 1 year probably we will be pushing some new launches but as of now t h e new launches are very minimal i n the last 12 months.

Maanvardhan Baid:

And sort o f outside the three big brands that we have and that is top three, so what other next three are a s of focus for us and where do we see, I mean the next 2 0 0 crores brand would be what do y ou internally expect it to be?

Mayank Tikkha:

So, very g ood question, just to give you a backdrop Zifi and Elect r al are already in the 300 basket. If you ask for the next brand which can make to a 200 list is Enerzal where we are already a b ove 100 crores landmark. So, this becomes the natural c hoice which goes up the ladder. A p art from these top three, we also have Vitcofol, Zathrin b y the Azithromycin brand, Zifi CV, Z ocon and Zifi-O. These are the next five brands which a r e in the vicinity of 50 to 100 cror e s and gradually with the focus of various verticals on to t hese SKUs or molecules definitely we look at these molecules to be climbing up the ladder.

Moderator: The next q uestion is from the line of Chirag from DSP IM.

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Chirag: So, versu s secondary market data our India business revenue seems t o be far stronger, higher. Anything that is changing over there in terms of the way discount i ng that you were giving, rebates th a t you were giving, what is the change here?

Mayank Tikkha : We have not changed any discounting structure. We are traditionall y going the way we have been ope r ating from historical past. There's no change whatsoever w hat we have made in our top 10 br a nds.

Chirag: So, then t his is an aberration. Do you agree that secondary data is a l so showing much weaker than prim a ry performance that you’ve reported? Mayank Tikkha: No, I do n 't know from where you are interpreting this because ou r secondary data is pretty strong, if you're looking at the market numbers from IQVIA, our gr o wth rates are far better as compare d to the IPM. And it is not an aberration because as Sanjay mentioned in the opening remarks a lso, for last quarter we had a very handsome and high growth. On top of that this quarter a l so, we have shown a double-digit growth. Can you speci f y what difference you're talking a b out? Chirag: I am seei n g a 1% growth for the quarter that IQVIA is showing and w hile our primary data that you’ve re p orted suggests a 9% growth YOY which is why I was j u st highlighting if there is any chan g e. Mayank Tikkha: No, I do n 't think so. The secondary market growth is 1% because most of the brands have reported a double-digit growth. Our MAT reflections are pretty h igh. If I can give you a number m aybe as per the June MAT, our growth rate is 11.5 comp a red to the IPM growth of 8.3. Chirag: So, there is nothing that you want to highlight. Fair point. The other question was on the field force inc e ntives. Can you quantify field force incentives for FY21 an d ‘22? Sanjay Jain: So, in ter m s of value for the year ‘22, it was around Rs. 61 crores. Chirag: And ‘21? Sanjay Jain: ‘ 21 aroun d 25 crores. Chirag: Do you s e e this number dramatically changing as a percentage of sal e s as we go? Sanjay Jain: The ince n tive is purely a function of sales, so as the sales grow up t he quantum of incentives will natu r ally go up. But not directly proportional to sales but with the growth percentage of the sales. So, higher the growth of the sales, the percentage to sale s incentive will be by and large the s ame but the quantum will increase.

Chirag: But as a p ercentage of sales, it will remain the same?

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Sanjay Jain: Yes by a n d large it will remain the same because we have certai n guidelines in which we operate o u r incentive policy.

Chirag:

Is our India business margin higher or lower than the company avera g e margin?

Sanjay Jain:

Definitel y India business margin is better than the overall business margin considering the product t h at we have.

Moderator:

The next q uestion is from the line of Aditya Khemka from InCred P M S.

Aditya Khemka:

You men t ioned that you have taken a 10.7% price increase in th e NLEM portfolio, is the NLEM p o rtfolio roughly around 40% to 43% of our India sales? W hat is the kind of price increase t h at we have taken in the non-NLEM portfolio?

Sanjay Jain:

The NLEM portfolio would be somewhere around the 45% to 5 0 % with the increase and decrease i n the sales. You rightly mentioned we have taken price ris e of 10.7%. What we were discussin g in the earlier calls, the effective of those 10.7% increa s e will be coming in the second q u arter as well because in the first quarter the new priced p roduct may not be in the pipeline. S o, the full impact of the price rise will be seen in the Q 2 of this current financial year. An d as far as the non-NLEM portfolio is concerned which we h ave mentioned in the last call as w e ll, so for non-NLEM the price increase on a 12-month rolling basis, so as and when the products get completed their 12 months period, we are eligible t o take the price rise. So, it’s not o n an entire financial year-to-year or on the 1[st] April basis, it' s getting due on every 12month co m pletion period.

Aditya Khemka:

In that case what is the kind of price increase we are planning or f o r the products where, the non-NLE M products which we would have probably taken price in c rease till now from April to July, what is the average price increase we are seeing in the non-N L EM basket?

Mayank Tikkha:

So, I will answer that question. Maybe normally we have maintained in the historical class our affordabl e marketing strategy but this year because of the overall inf l ationary conditions in the economy of India that we have gone ahead with the 10% rise which is permissible. But again, as we sai d that we cannot give the rough number because as Sanjay mentioned the percentage averaged out on the quarterly basis, on a YOY basis is very difficu l t to comment as of now. But in all our products wherever possible, wherever the competitiv e scenario allows us to do we have d one that.

Aditya Khemka:

I appreci a te that. Thank you so much for that. Second on our export business although we are growing f rom our very weak base of last year but when we spoke a bout the export business last year, I think your commentary was that FY22 was more of a n aberration, we should consider F Y21 as the base and the effort from FDC will be to gro w from the base of FY21 export nu m ber. Is that still your ambition or do you think basis Q1 re s ults it doesn't appear that

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we'll be a b le to outperform our export sales in FY21? So, just wanted to understand, if we want to restate your ambition in the export business for FY23?

Ameya Chandavarkar:

So, FY21 was also an aberration when it comes to our US business and very specifically the US business profit share. I think we explained that we had a sit u ation where two of our competit o rs in Timilol Maleate eyedrops got out of the market. I am not sure, we went into so much det a ils but these are the facts and therefore we were in FY21 able to take advantage of that situa t ion where we got significant additional market share as well as we were able to increase p rice. So, yes, from a sales perspective excluding profit sh a re you can use FY21 as a base but w hat happened in FY21 in terms of profit share was an a nomaly. So, that's really where thi s year we find it very challenging to hit that same profit s h are number. Now we do not as a p o licy share the breakup of sales and profit shares because t h at is not really something we are co m fortable doing at this stage, but I think have I answered y o ur question.

Aditya Khemka : Yes, you h ave answered, In fact I was just about to make that reco m mendation on disclosures that even if you are not comfortable let us say disclosing sales and profit share separately it would be very good from the management if you look at what y our peers disclose on a quarterly b asis they give a very neat clean table on geographical brea k up of revenues and let us say if yo u r profit shares comes entirely from the US ANDA busine s s you can maybe include the profit share you can add the two of profit share and revenue and report it as one line item, but to ha v e a very clean table where India, US, other exports and EP I these four are broken on a quarter l y basis that would be very useful for your current inv e stors and your potential investors otherwise we have to keep hunting for data includin g your press release and sometimes we just might arrive at the wrong conclusion as to w hat is happening in the business?

Ameya Chandavarkar : Fantastic so point very well taken we will work on this. Sanjay wants to add something.

Sanjay : So, Adity a if you look at press release which we have submitted the export revenue which are showing d ebt includes the profit shares as well. Ameya Chandavarkar : What he i s saying is give a breakup of US and wherever possible in specific countries like USA, U K so we will work on it. Any companies that you recommen d we benchmark with.

Aditya Khemka : Thousan d s I mean you can look at Sun Pharma, Lupin, Glenma r k, Dr. Reddy’s in every company of your size and bigger have a very neat clean way of rep o rting the top line breakup every qu a rter which makes it very easy and practical for the invest o r community again both existing a nd potential to understand how your business is evolvi n g and then in the Q&A session o n such calls we can focus on what is important rather than j u st exchanging facts. So, I would re c ommend India, US, other exports and API has four differ e nt line items because we go into s e parate geographies within other exports it will be a very l o ng table and the numbers will be v e ry menial for some of those geographies which we would n ot be able to sort of give much col o r I leave it to you obviously but that is my recommendatio n .

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Ameya Chandavarkar : Then it w i ll become a geography discussion.

Aditya Khemka :

Which is w hy other companies also avoid that they give US and othe r s. So, US is one line item other exp o rts is another line item where you can sort of club three o ther geographies. So that was my r ecommendation one more question on the other expense s so obviously mentioned your frei g ht cost have gone up and so has the promotion cost, so pro m otion cost going up from 6.5% to 8 % of sales is that purely a function of the additional division that we launch or is there a in c rease in the advertising rates that we are witnessing?

Sanjay Jain : So, our b u dget for the sales and marketing cost is as a percentage to o ur revenue. So, when you look at t h e absolute number so with the increase in the revenue the budget or the actual expendit u re.

Aditya Khemka :

Sir I am a sking that 6.75% of sales going to 8% of sales so there is a increase as a percentage of sales a l so from 6.75% to 8%, so that is my question specific to the percentage only?

Sanjay Jain :

The reas o n being the accounting of the expenses is based on actu a l receipt of the material related to the promotional item. So, that can be a 1% here or there m ay be in the Q1 or in the Q2, but w hen we look at the year end. So, by and large everything g ets clear and also as you rightly m e ntioned the increase to some extent is on account of the ne w division as well.

Aditya Khemka :

Just one l ast question Sanjay sir in his comments mentioned inflati o n in freight cost, can you give us a rough ballpark number as to how much inflation we woul d have seen in our freight rates?

Sanjay Jain : So as a p e rcentage I would say half a percent increase in the overall logistic cost as compared to same p e riod last year.

Aditya Khemka :

And sir o u r annual report when is it due?

Sanjay Jain :

I think wi t hin the next few weeks you will get it.

Moderator :

Thank you. The next question is from the line of Neelam Punjabi f rom Perpetuity Ventures. Please go ahead.

Neelam Punjabi :

My quest i on was related to gross margins so as you mentioned that your gross margins have declined b ecause of raw material price inflation and packaging mater i al price inflation and you did menti o n that the full impact of WPI linked price hike is not yet r e flected in this quarter and it will be coming in next quarter should we expect a gross margi n should go up from the current le v els and if you could quantify how much would that be in t h e next quarter?

Sanjay Jain : Can you p lease repeat your question?

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Neelam Punjabi :

My quest i on was related to gross margin so given you all mention e d that the full impact of WPI link e d price hike is not reflected in this quarter and the second quarter would be a better reflection would we see an increase in gross margin and if you can q u antify what kind of gross margin c a n we see with the price hike in the next quarter?

Sanjay Jain :

The exac t quantification we will not be able to do as of now, bu t I can give you a broad guidance on that considering the fact the goods which have been s o ld in the Q1 are partially from the carry forward of the March quarter inventory and partiall y from the Q1 inventory. Now wh a tever inventory which are going to be get sold in the Q2 almost purely of a Q1 inventory means the inventory with the increased sales price. So, wi t h this increase sales price the margi n s will obviously improve in the Q2 as compared to Q1 margin but having said this we also h ave to wait and watch any further impact on the raw mat e rial and packing material prices if t he same whether remains stable or it drop or increase further. So, there will be a combinat i on of the two parameter on one side with the sales price an d on the other side the raw and packing material, but the broad guidance will be that we do not see any major increase in our cost l e vel on overall basis.

Neelam Punjabi :

My seco n d question is on other expenses so we have seen a sharp ju m p during the quarter and you mentioned one of the reasons is 15 crores of fair value impa c t on account of mark-tomarket, b u t even if we exclude that the growth on a YoY basis in the other expense line item is almost 2 5 % versus our overall top line growth of about 11%, so i f you could highlight any particular reason why the expenses have gone up?

Sanjay Jain :

So, if yo u are comparing on a June-to-June quarter basis the increa s e in the overall operating expendit u re is around 36 crore out of which if we exclude that about 15 odd crore the remainin g I would say around 20 odd crores are largely because of t h e other expenditure, other operating expenditure which includes about 10 odd crore increase on account of sales and marketin g cost, about 3 crore to 4 crore on account of the production related cost and a balance related to the logistic and the export related cost.

Neelam Punjabi : So, is thi s like the sustainable way of going ahead or are we envisa g ing further increase from here?

Sanjay Jain :

In the previous call we answered we are accounting for the expendit u re of the promotion is on the basis of the receipt. So, in some of the quarter when the recei p ts are on the higher side expendit u re can go up but coming on the next quarter if the overall p rocurement on the lower side the cost can go down as well, but we can look at year-to-year b asis where the overall all the cost a s a percentage to revenue get nullified.

Neelam Punjabi:

My next q uestion is that during the quarter I see that our Medical Representative count has increased from roughly 3,242 last as on March to 3,615 this as o n June, so is this mainly because o f the new division that has been added and if you can p lease highlight what this revision i s and what the strategy for this division going forward?

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Mayank Tikkha: In our las t call also, we did mention that we have launched Zocon di v ision as a new division so we have a dded almost 400 odd people in this division. Now as I me n tioned earlier that we are focusing o n the derma basket through this division because Zocon i s a flagship brand and we have segregated the derma therapies from other divisions mainly P r oxima and Lumina these are the t w o divisions which were looking after these therapies. Ou r overall strategy moving forward i s that this is one area probably FDC would like to focus on apart from our antibiotics Electral- E nerzal and Nutraceutical which I mentioned. This is one of the growth drivers for the next couple of years which we are targeting.

Neelam Punjabi:

Wanted t o understand our exports business have grown quite bett e r this quarter on a YOY basis so w hat drove this growth in this business? Almost 23% if I i n clude exports and export formulati o ns in API.

Sanjay Jain:

It's mainly on account of the increased supplies to our US mark e t. US revenue alone has increased by 7 crores on YOY basis and compared to the last year Ju n e ‘21.

Neelam Punjabi:

Are we e x pecting this kind of a growth trajectory to continue for the r est of the year?

Sanjay Jain:

By and la r ge yes, I would say.

Neelam Punjabi:

Mayank Tikkha:

Neelam Punjabi:

Mayank Tikkha:

Moderator:

Saket Kapoor:

Lastly m y question is on the domestic business. You mentioned that d uring the quarter our new product i n troduction contributed about 1.8% to our overall growth. C ould you highlight what are these n ew products? These are mainly line extensions of our existing brand, couple of wh i ch are Electral Z what we launched. We have also extended EnteroPlus which I mentioned last time also. We had EnteroPl u s sachets only. We had launched capsule in the last quarte r . We have mainly one by line extension and we have not entered into a new molecule set up as of now. For the d o mestic business it’s pretty heartening to see us growing at almost 10% on a high base. Sho u ld this business continue to grow, there is still mid-teens f o r the rest of the year? Yes, we a re very positive about it because as I said that from a his t orical standpoint now we are not d e pendent only on the Top 3. In fact, all our Top 10 brands a re firing in double digits and we a r e focusing on these Top 10 brands through various divisi o ns and separate verticals. We are v e ry optimistic that this growth trajectory we would be able t o continue. The next q uestion is from the line of Saket Kapoor from Kapoor & C o mpany. I would second the views of our earlier participant on going o n with further detailed presentation for the benefit of investing community at large. And i f you could give us some more und e rstanding on what is the vision of the company going ahead in the product profile in

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terms of t h e market share and the size of the business which we are e yeing going ahead. Also, what are t he key variables for the business that affects the margins?

Ameya Chandavarkar:

That's a v ery broad question and probably will require a very long a nswer but in a nutshell if we want t o continue this both momentum that we have gained in t he domestic business, in export business so overall growth is very important. We continue t o focus on our key areas which a r e so oral rehydration, drinks, the anti-infectives, op h thalmic. We invest in strengthe n ing our brands. We will invest in markets where we see p o tential for us to get larger market share, expand our margins so in general we will just be very f o cused on growth.

Saket Kapoor:

About th e variables part? What should be kept in mind for our bu s iness the variables in the industry w hich result in the fluctuation for the margins?

Ameya Chandavarkar: Are you r e ferring to how recently there was an increase in…..

Saket Kapoor: Yes, for r e cent. When we look at your quarterly performance it is for investing community, we look at t h e continuity and the sustainability of the numbers to valu e a company. For us how should w e look when we look at your numbers and what factors should we investors and analysts s hould be looking for so that we can understand in much d eeper and also, we have more pre d ictability on your numbers. That was my point. Since y ou mentioned about the COVID f a ctor when we are comparing your last June ‘21 with curr e nt June you did mention that there was a benefit of COVID factor for that quarter. Even if y ou could quantify for us what was the impact on the bottom line because of that one-off item t h at would also suffice.

Ameya Chandavarkar: Two-part s , I think one is variables in general and second is speci f ically on the one-off for write-off f or Favipiravir and.

Sanjay Jain:

On the o ne-off kind of Favipiravir where we had last year Jun e ‘21, we had a sale of somewhe r e around 17 crores odd, so this was purely at ready produ c t at that time. Margin by large was very low but from the top line perspective if we want to ta k e the guidance then what I said the overall revenue growth which we are looking at in the cur r ent quarter is somewhere around 8 b ut had it been that sale was not there in the June ‘21 qua r ter the real growth would have bee n somewhere around 15%. I think from the revenue pers p ective that should be the guidance for the future perspective and looking at the actual n u mbers versus the actual excludin g the one-off item in the last year. On the other variable like write-offs which we have already d o ne in the March ‘22 order where we had certain inventory related to the Favipiravir so that w r ite-off we have already taken. We don't see any further w r ite-off on that side which are in the nature of one-off item.

Saket Kapoor:

Kindly c o rrect me if I'm wrong. You told 17 crores was the impact f rom the COVID part that too on th e trading that impacted the revenue but the margins were lo w er.

Yes.

Sanjay Jain:

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Saket Kapoor:

Sanjay Jain:

Saket Kapoor:

Sanjay Jain:

Saket Kapoor:

Sanjay Jain:

Saket Kapoor:

Sanjay Jain:

Saket Kapoor:

Sanjay Jain:

Then ho w should we understand the 127 crores bottom line for June ‘21 and 90 crores bottom line for J u ne ’22? How to make good of this? Because the top li n e even if we remove the trading a s pect, the top line was 445 crores for June ‘21 and this tim e the 493 crores. Whereas the differ e nce in the profitability there's a huge change. If you could explain what factors have enabled t h at has resulted in these margin speculation, lower margins?

You righ t ly mentioned there was a profit of around 127 crores on a P BT basis in the last year June ‘21. Now as we discussed in the previous call on the last year profitability and this year profitabil i ty the major impact was on account of the increase in the raw and packing material which ha s impacted our overall margin. This was we can see one of t he major items which has eaten aw a y our profitability for the June ‘22 quarter. Secondly in the l ast year the other income portion w as significantly higher considering the market conditions whereas in the current quarter t h e same was not there because of the market condition. I a lso mentioned that these correctio n in the market has already been reversed post June. These are the two major factors apart fro m the other overall increase in the operating cost which a re around 20 crores odd. These ar e two or three variables which has impacted the overall p rofitability for June ‘22 quarter.

So, the p a ckaging cost was 20 crores, that is what you quantify? The impact of packaging cost from Jun e ‘21 to June ‘22?

22 crores is the overall increase in the operating costs as compared to the previous year June ‘21 quart e r.

Major of i t is because of the packaging aspect?

This 22 i s over and above the increase in the raw and packing materi a l cost.

So, could you quantify how much was this impact?

So, if yo u want the impact on account of raw and packing material w hich is around 5% of our top line. W e have a top line of 491 crores so total impact on acc o unt of the prices will be somewhe r e around Rs. 25 crores.

N ow wit h the increase, the price hikes which we have taken, of the total portfolio, what percentag e of our sales would be benefited from the increase in th e 10% increase which we have take n ? What would be its impact, it will be going down to our b ottom line or it will look after first the cost will get nullify? If you could explain since for t his quarter, we have the inventory in the pipeline?

The price rise which we have taken is for the scheduled formulatio n which is our 45% of our overall p o rtfolio which may get benefit in the going forward.

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Saket Kapoor:

Sanjay Jain:

Saket Kapoor:

Sanjay Jain:

Saket Kapoor:

Sanjay Jain:

Saket Kapoor:

Sanjay Jain:

Saket Kapoor:

Sanjay Jain:

Saket Kapoor:

Mayank Tikkha:

This 10% hike will, what portion would go into the incremental mar g in and how much will we be nullify i ng the cost as such?

The price is purely, is directly going to the bottom line unless there a re the other factor which are like i n the nature of raw and packing material price increase whic h can nullify otherwise all price hik e s goes directly to the bottom line.

You expl a ined that 45% of our total revenue there's an impact of 10 % that is attributable to the bottom li n e if the other variables are remaining the same as have been this quarter, this is correct u n derstanding?

45% of o u r domestic formulation business.

Can you q uantify the number, the total sales with domestic?

For the c u rrent quarter June ‘22 its somewhere around 423 crores.

Out of th e 493 crores?

Yes.

On the ot h er income part you did mention but if you take the impact from June ‘21 it is to the tune of o n ly Rs. 4 crores it was 23.4 and this year 19.4 so 4 to 5 c r ores is the impact that is mainly b e cause of the hardening of yields that you have mentioned m ark-to-mark?

Yes. And the correction dynamics.

We hope for more discussion and also to have a better understa n ding in the form of the presentation being giving more color and more illustration. T h at would give us more understanding and more material to discuss and we look forward for the continuity of the calls from the m anagement team and all the best. For the seasonality part, l ast point I will forget, for the seaso n ality part if you could give some color do seasonality par t plays for the business of the comp a ny? There is lumpiness in the numbers or we have a line a r trend for the remaining nine-mon t hs?

Maybe si n ce we are mainly dependent on our antibiotic sales so seco n d quarter normally is the highest o r most potential from our overall business standpoint but h aving said this since we have wor k ed on our other portfolio by and large third quarter woul d be slightly lean or rather off-seaso n kind of a scenario where antibiotic sales goes down s l ightly and also the ORS category o f product energy drink goes down. All our three flagship b rands if we talk about the third qua r ter is the leanest. But second quarter it is maybe very pro m ising for all our top three brands.

The next q uestion is from the line of Devraj, retail investor.

Moderator:

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Devraj: Thank you for the opportunity. Is it possible to get to know that t h e Rs. 475 buyback price, how that w as arrived, is it possible to?

Sanjay Jain:

So, If yo u look at the buyback prior to we announced the last buybac k which was priced at 450 and mark e t price of our FDC was somewhere around between 350 to 400. We applied some premium based on the last 12 months rolling returns of that price. T his is the broad formula which we applied to arrive at the Rs. 475.

Devraj:

In future a lso we will be over the next 10-year period we will be co n tinued this buyback now different a mounts?

Sanjay Jain:

We can't comment as of now. If anything is there on that side, we w ill surely update you on that.

Moderator:

The next q uestion is from the line of Dhruv Bheda from Jai Ram Sto c k Brokers.

Dhruv Bheda:

Sanjay Jain:

We have overall grown by 11% in revenue terms and 7.5% in volu m es terms. And the major growth is contributed by our Top 3 products Enerzal, Electral and Zifi. Can you tell us the growth in these three products in terms of volumes and their contribu t ion to the total sales? For the q u arter Zifi has grown by 11%, Electral by 32% and Enerzal b y 22%.

Dhruv Bheda:

In terms o f volume?

Sanjay Jain:

Dhruv Bheda:

For the r u pee’s overall revenue on account of Zifi is around 7 crores, Electral by 27 crores and Enerzal b y 8.7 crores. By this a m ount we have grown?

Sanjay Jain:

Sorry?

Dhruv Bheda:

By this a m ount they have grown? This is not their contribution.

Sanjay Jain:

Incremen t al sales over the last year quarter.

Dhruv Bheda:

What we r e the factors that during this growth? This seems to be exce p tional growth.

Mayank Tikkha:

Last year there was a COVID upsurge which was experienced by the whole IPM not only FDC, bec a use last year the entire country was taking medicines due t o COVID and though our therapies were not directly into COVID but overall antibiotics Ener z al-Electral had very high sales. So, to be on a positive side we had planned this strategy at the start of this financial year itself that we will go very aggressive with our Top 5 brands and we h a ve chalked out a strategy how to m ove about and that is why probably we had gone with th e expansion of which we mentione d . So, I did mention that we came up with the Zocon division but by virtue of that

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expansio n we could streamline our overall therapy basket within t h e parent divisions. Now Electral w e went very aggressive with and we changed our seconda r y tactics into the market. This was one opportunity which we leveraged just to combat the hi g her volumes which were there in t h e last year first quarter. The strategy was such that we d id try and milk Electral, Enerzal a n d the market was also very supportive. If you might've see n the IPM itself except for maybe co u ple of therapies it rebound pretty well. It was a various th o ught of strategy executed well by t h e sales team in the market.

Dhruv Bheda:

Can we e x pect this growth to continue in subsequent quarters?

Mayank Tikkha:

Again, w e are planning in nice fashion. We are very aggressive but a s I said that all these plans are plans till the times you don't get the execution right and also t he results right. But yes, having th i s the trends are very encouraging. We have continued good run. The only thing is the secondar y factors always there. If you want to grow in the mark e t, market also should be buoyant. As you know these days conditions do change. We hav e seen in the last 2 years COVID t h e ups and downs in the IPM overall but having said this if the IPM continues the stable ru n in the future, we definitely are working on outperforming t h e market.

Dhruv Bheda:

How we d id in export market as far as Electral is concerned?

Ameya Chandavarkar:

It's going on, we are continuing to sell Electral in Myanmar and UA E and some of the markets where we have launched the brand.

Dhruv Bheda:

So, did it grow at the same rate or more than the domestic rate?

Ameya Chandavarkar: The base i s lower at the same time we don't have large field forces i n the markets. It's difficult to give y o u a clear guidance on this.

Moderator:

The next q uestion is from the line of Neelam Punjabi from Perpetuity Ventures LLP.

Neelam Punjabi:

Sanjay Jain:

I just wa n ted to know what is our net cash as on June? Its some w here around 750 crores.

Neelam Punjabi:

What wo u ld be strategy for cash deployment going forward? Yo u mentioned that we are expandin g our one ophthalmic line and investing 70 to 80 crores t here but what about this remainin g cash?

Sanjay Jain:

We did a n swer this question in the last call as well where I mentio n ed that we are doing the these rew a rding the shareholders by way of either buyback or by w a y of dividend. And apart from that we also do the required CAPEX wherever we require. Wh i ch I mentioned about the ALP 4 pr o ject where we are going to spend about 70 to 80 crores odd and any other operating CAPEX w hich are required as a part of replacement and upgradation.

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Moderator: The next q uestion is from the line of Maanvardhan Baid from Laurel Investment Advisers. Maanvardhan Baid: Just want e d to understand this CAPEX that we're doing on the oph t halmic side. What would be the asset turn on this CAPEX? What kind of top-line do we expect out of this CAPEX? Sanjay Jain: As of no w we will not be able to give any number on this CAPEX si d e. But once we have any guidance o n that we will surely share with you. Maanvardhan Baid: I mean u s ually what is in the current ophthalmic line what are the a s set turns that are there? I mean this would be similar right? Management: Sorry? Maanvardhan Baid: On the c u rrent ophthalmic line what would be the asset turn that w o uld be there? This would be in som e thing in line with those asset turns only? It won’t be differ e nt, right? Mayank Tikkha: Can you r epeat that question? Maanvardhan Baid: Sure. On the current ophthalmic line what would be our asset turn o n the current ophthalmic line? I m e an my understanding would be that this would be similar to the existing asset turn only just t o? Mayank Tikkha: See we h a ve a few lines so I'm not sure which one you are referring t o and as far as to capacity utilizatio n is concerned, we are nothing has changed. I don't think a n ything will change going forward. Maanvardhan Baid: I will lea v e it to maybe at a slightly later day to come back on this q uestion. One more aspect that I wa n ted to get your views on is our online platform that have c o me and how much are we contributing to our sales? What is the approach that we are taking to w ard these platforms? Mayank Tikkha: Again, o n line platforms which are there they are selling our product s but as of now we are not directly a s sociated with any of the online platforms. They are purcha s ing from the open market and catering to the consumers. This is our traditional prescription bas e d. What online platforms are norm a lly doing is they're replacing the chemist, your nearby chemists and supplying directly t o those consumers. But definitely when a demand gets gen e rated or orders placed on the onlin e platform for any of our brand, they source the product f r om some of our stock is based on their convenience. It doesn't have any impact on our bu s iness neither positive or negative a s of now. Maanvardhan Baid: In terms o f increasing visibility or in terms of sort of funneling order s towards FDC’s brand, is there so m ething that can be done or something that is possible on the online side? Mayank Tikkha: As I said t hat we have brands like Electral and Enerzal where we wo r k on visibility aspect also apart fro m our traditional prescription business. But apart from t hese two brands we are

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complete l y dependent on our prescription sales and we don't go in f o r any visibility of any of our bran d s. Electral-Enerzal are only exception where we do use so m e visibility tactics along with our traditional business.

Moderator:

Varsharani Katre:

Moderator:

Thank yo u . As there are no further questions from the participants. I now hand the conference over to M s. Varsharani Katre, Company Secretary for closing comm e nts.

Thank y o u. Thanks to all the participants of this earnings call of FDC and thank you for expressin g your views and recommendations. In case if you have a n y concerns, please reach out to us o n investors@fdcindia.com Thank you again. Over to you m oderator.

Thank yo u . Ladies and gentlemen on behalf of FDC Limited that c o ncludes today's earnings call. Tha n k you for joining us and you may now disconnect your line s .

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