SMS Pharmaceuticals Ltd — Call Transcript 2023

May 31, 2023

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Date: 31[st ] May, 2023

To, The Manager, Corporate Filings Department, BSE Limited, Phiroze Jeejeebhoy Towers, Dalal Street, Mumbai- 400 001

Security Code: 532815

The Manager, Listing Compliance Department, National Stock Exchange of India Ltd. Exchange Plaza, Plot no. C/1, G Block, Bandra-Kurla Complex, Bandra (E), Mumbai - 400 051.

Symbol: SMSPHARMA

Dear Sir/Madam,

Sub: Transcript of the Conference Call held on 26[th] May, 2023.

Pursuant to Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, please find the attached transcript of the Conference Call held on Friday, 26[th] May, 2023 for the fourth quarter and financial year ended 31[st] March, 2023.

A copy of the said Transcript is being uploaded on the website of the Company www.smspharma.com

Kindly take the same on record and disseminate on your website.

Thanking you

Yours Faithfully

For SMS Pharmaceuticals Limited

Thirumalesh Digitally signed by Thirumalesh Tumma Tumma Date: 2023.05.31 18:09:18 +05'30'

Thirumalesh Tumma Company Secretary

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“SMS Pharmaceuticals Limited

Q4 FY2023 Earnings Conference Call”

May 26, 2023

Disclaimer: E&OE - This transcript is edited for factual errors. In case of discrepancy, the audio recordings uploaded on the stock exchange on 26[th] May 2023 will prevail.

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– MANAGEMENT: MR. VAMSI KRISHNA POTLURI EXECUTIVE DIRECTOR – MR. LAKSHMI NARAYANA TAMMINEEDI CHIEF FINANCIAL OFFICER – MR. THIRUMALESH TUMMA COMPANY SECRETARY

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SMS Pharmaceuticals Limited May 26, 2023

Moderator:

Ladies and gentlemen, good day and welcome to SMS Pharmaceuticals Limited Q4 FY2023 Earnings Conference Call. This conference call may contain forward-looking statements about the company which are based on the belief, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involved risk and uncertainties that are difficult to predict. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing ‘*’ then ‘0’ on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Vamsi Krishna Potluri, Executive Director of SMS Pharmaceuticals Limited. Thank you and over to you Sir!

Vamsi Krishna Potluri : Good morning everyone. Thank you for joining the earnings conference call to discuss the financial performance for the quarter year ended March 31, 2023. I hope everyone must have got an opportunity to go through our financial results and investor presentation which have been uploaded on the stock exchanges as well as our company website.

In Q4 FY2023, the company delivered a healthy operational result, generating a revenue of around Rs.149 Crores and achieving a sequential PAT growth of 53% at Rs.8 Crores. Sequentially, there was an expansion in operating margins with Q4 FY2023 EBITDA margin reaching 16.4%, a gain of 246 basis points.

Despite facing severe headwinds in form of low offtake of ARV products which had a profound adverse impact on our Q1 FY2023 numbers, we are pleased to still have managed to retain the topline numbers in FY2023, that we had achieved in last fiscal year. This is despite having minuscule contribution from ARV segment which contributed just 3% of our total revenues in FY2023 as compared to 40% in FY2022. This was on account of our ability to successfully pivot to more lucrative product segments. Anti-diabetic product segments contributed about 38% of the total revenue in FY2023 as compared to less than 3% in 2022. The growth in anti-diabetic drug was driven by the expiration of numerous gliptin patents. Also the contribution from anti-inflammatory products doubled to about 14% in FY2023 from 7% in FY2022. So, all-in-all, launch a new products, expansion of high value product range and robust demand in non-ARV segments led to better performance in second half of FY2023.

Our FY2023 margins were however impacted especially in initial quarters because of us entering into new product line, change in product mix along with structural industrial issues

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in form of higher raw material cost and volatility in price realization. Towards the end of the year, company has witnessed growth and margin traction. This uptrend in operational performance is likely to improve in the coming quarters. Importantly, also the ARV business has bottomed out and is likely to make a significant contribution to our revenue and profitability and growth in FY2024. We are expecting healthy orders of ARV products at least for next two, three quarters. Our regular portfolio of therapeutic categories like antimigraine and anti-ulcer are also performing very well.

Raw material prices which remain eliminated for majority of FY2023, have also started stabilizing now and are quickly restoring back to normalcy, as the Chinese market has opened up post the shutdown owing to their zero-COVID policy.

The key areas of focus in FY2023-FY2024 is to improve profitability on each product category. For the same, company will be aggressively focusing on R&D in this fiscal year, with an aim to achieve cost optimization of our existing products. In addition to this, these healthy demand for Ibuprofen and we are adding new customers across various geographies, which usually takes around 6 to 9 months. So, by the end of FY2024, we are anticipating a good traction for Ibuprofen product as well. We also have decided to undertake vertical integration of some of our high-volume products with an objective to improve the overall margins in the coming years.

Now for API segments highlights: Q4 & FY23 revenue for the API segment stood at Rs.146.1 Crores and Rs.502.4 Crores, respectively. Q4 & FY23, API segment contributed approximately 97.8% and 96.2% to the consolidated revenues. Within the API segment, 15% of the revenue came from the domestic market and 85% from the export market, including deemed exports for Q4 FY2023. Within the therapeutic areas, anti-diabetic contributed to 26%, anti-migraine 21%, anti-ulcer 13%, anti-epileptic 3%, anti-ED function around 8%, anti-inflammatory 17%. The rest contributed to around 12% of the total sales for Q4 FY2023. The contribution of ARV therapeutic category was almost negligible.

Our company is strategically positioned to capitalize on that market opportunities and it is fully dedicated to providing long-term value for all our stakeholders through it sustained focus on operational efficiency and core competitiveness. I am very pleased to say that the outlook of the company remains very optimistic and we are on track towards accomplishing our progress. Finally, I would like to emphasize that our dedication to sustainable growth and delivering value to all our stakeholders remains unwavering. You can now begin question and answer session. Thank you.

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Moderator : Thank you very much. We will now begin the question-and-answer session. We have our first question from the line of Nehal Jain from SK Securities. Please go ahead.

Nehal Jain :

Thank you for the opportunity. I had a few questions. First, what are your thoughts on the overall outlook for the pharmaceutical industry in FY2024?

Vamsi Krishna Potluri : Thanks for your question. I think it is a bounce back, but like it would not be completely back to pre-COVID, but it is slowly in an upward trajectory is what I could say the entire pharmaceutical industry and it depends on the segment-to-segment like we have focused mostly on API segment. so API segment is starting to see a little more stability in terms of raw material prices, because like now China which was shut down completely, it has now completely opened up. So now we are seeing more manufacturers of raw materials come in, so we see some stability in the solvent prices as well and some key raw materials as well. So for API manufacturers, I think it is definitely going to be a good year going forward.

Nehal Jain : Okay, so what will be the key growth drivers for the company?

• Vamsi Krishna Potluri : As I mentioned in my short speech, so I think company this year will be focusing on cost optimization mainly, because we were in spite of having lost ARV business which contributed to 40% of our topline, but still we are able to maintain topline of that business I mean topline which was just over last year as well. Profitability came down owing to various issues. Now this year, the focus of company is to invest more into R&D and into cost optimization, trying to backward integrate. Especially some of the big products, we want to manufacture most of KSMs in-house, not depending on China or any other source wherever possible and try to be more flexible and get a better realization, profit - that is the focus of the company.

Nehal Jain : Okay, understood sir. Thank you.

Moderator : Thank you. We have our next question from the line of Naitik Mohata from Sequent Investment. Please go ahead.

Naitik Mohata : Thank you for the opportunity Sir. My first question would be a CRAMS business so what is the outlook for CRAMS business in FY2024?

Vamsi Krishna Potluri : With respect to the ARV segment or CRAMS in general.

Naitik Mohata : In general.

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Vamsi Krishna Potluri : Generally CRAMS business is a very small contributor to our revenue. In the past it used to be there when we were, a few years back, but generally CRAMS is a smaller contribution in our revenue. It will probably be less than 3%, 4%.

Naitik Mohata : Okay sir and my second question what are the prices for Ibuprofen right now and what kind of scenario does it look for in Q1 as well as what was it in Q3 as well?

Vamsi Krishna Potluri : Ibuprofen when we had launched late last year, I think the prices for. The thing is that we are new entrants in this market, not an established player commanding a significant market share, we were new entrant in the market. So obviously, we had to go aggressive try to get some market share. Now the prices have sort of stabilized right now for Ibuprofen and obviously I think we are now on the qualification of many other customers in U.S., Europe - across many geographies in the world. So this will take around six to nine months’ time to completely finish qualifications, approvals from respective authority and they start taking commercials. So our price, all these regulated customers pricing is not the question to answer because each market has a different pricing. So other generalized answer that I could give you like what is the price - so in that $10 range plus or minus based on market, but it is range of $10.

Naitik Mohata : What kind of trend do we see like do we see the price is increasing?

Vamsi Krishna Potluri : So it will probably stable, to be honest. I think it will be as we are right now and again we cannot predict but there could be a couple of months where there could be some shortage or any issues with any other suppliers then suddenly it could be a good month where Ibuprofen prices could reach $12 or $13 and again could come back to again $10, so it is a cycle that happens typically. So, you cannot completely predict, but we will be ready, we are focused on this particular product, especially because we have invested quite a lot on this product and we really want to make this product a very strong growth product.

Naitik Mohata : Okay, thank you sir.

Moderator : Thank you. We have the next question from the line of Akash Mehta from Capaz Investments. Please go ahead.

Akash Mehta : Good morning and thanks for the opportunity. I had a couple of questions. First thing, do we intend to develop any new capacities or undertaking any sort of Brownfield or Greenfield expansion going forward?

Vamsi Krishna Potluri : Can you please repeat your question. I think we were unable to hear your question.

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Akash Mehta:	I was saying do we intend to develop any new capacities or undertake any sort of
	Brownfield or Greenfield expansion?
Vamsi Krishna Potluri:	We have no plans to undertake any Greenfield or Brownfield projects at this point of time.
	As a company we would like to consolidate before our next project at this point of time.
Akash Mehta:	Any details on the capital expenditure for FY2024? If you can elaborate?
Vamsi Krishna Potluri:	It is a regular normal plant capex, nothing extraordinary out of this, regular maintenance
	capex.
Akash Mehta:	Do we intend to increase the percentage of our API revenue from the domestic markets
	going forward?
Vamsi Krishna Potluri:	Your question is currently increase API revenue from the emerging market, is it?
Akash Mehta:	Yes.
Vamsi Krishna Potluri:	Definitely. I think especially alfuzosin we are trying to use as a key driver, because we will
	get entrance into new countries that is critical aspect, we will definitely go. We are targeting
	a lot of semi-regulated and non-regulatory countries as well with our alfuzosin. This also
	opens channel for some of other products to go ahead in the same channel.
Akash Mehta:	Alright. That helps Sir. Thank you.
Moderator:	Thank you. We have a next question from the line of Dhiraj Sachdev from Roha Asset
	Manager. Please go ahead.
Dhiraj Sachdev:	In different segments that we are operating which includes ARV, CRAMS, APIs, Ibuprofen
	and the margin volatility can happen in either of the segment. So based on the capital
	investment that we incurred couple of years back which was pretty heavy, on an overall
	basis, what could be the blended sustainable conservative bottom margin that we can
	expect. I know it is very difficult to predict across, but then on a conservative basis what are
	the things that we are looking at considering at $10 Ibuprofen prices as well?
Vamsi Krishna Potluri:	I think there will be growth we are expecting growth of around 20% to 25% on margins
	upfront this year compared to last year.

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Dhiraj Sachdev:	But I am talking about from a quarter basis because we did about close to 15%, what could
	that number be?
Lakshmi Narayana T:	That 15% EBITDA margins, we are going to be increase by may be another 250 to 300-
	basis points.
Dhiraj Sachdev:	Okay and on a volume basis, what are the things that we are looking at, what kind of
	volume growth we are looking?
Lakshmi Narayana T:	You meant to say the topline?
Dhiraj Sachdev:	Yes, volume growth.
Lakshmi Narayana T:	I have already told.
Vamsi Krishna Potluri:	From a topline front, I think we will be retaining more or less, more than what we did in
	current quarter, so the trajectory is on upper side only.
Dhiraj Sachdev:	Okay.
Vamsi Krishna Potluri:	On a year by year, I think we are looking at least 20% growth this year compared to
	FY2023.
Dhiraj Sachdev:	Given that ARV was virtually low as a mix, if it comes back, are you still confident of
	maintaining margins higher by 200-basis points?
Vamsi Krishna Potluri:	Of course, last year I think there were low ARVs, but still we managed to retain topline. But
	now I think ARV is coming back and getting good orders and we aim to get better
	realization of topline and the margins as well.
Dhiraj Sachdev:	And what will be the overall capacity utilization at this point of time?
Vamsi Krishna Potluri:	At this point will be around 70%, approximately 65% to 70%.
Dhiraj Sachdev:	So you are talking about finally virtually about 20% kind of topline growth with about 17%
	blended margins right?
Vamsi Krishna Potluri:	Could you repeat that question?

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Dhiraj Sachdev : So you are finally talking about 20% topline growth and close to 17% EBITDA margin?

Vamsi Krishna Potluri : Absolutely, yes.

Dhiraj Sachdev : I may have missed it, but what is the capex or new product or anything that we are talking?

Vamsi Krishna Potluri : We have not planned any major capex this year, because we want to consolidate cash flows and get some good revenues out of it. And then we probably may be in FY2025 may be we might plan for capex, based on FY2024. Dhiraj Sachdev : Okay. Thanks and all the best.

Moderator : Thank you. We have a next question from the line of Sajal Kapoor an Individual Investor. Please go ahead. Sajal Kapoor : Thanks for the opportunity. I have got a couple of questions. How much of our asset base is fungible. So we have got 3,000 KL at Vizag and much lower capacity at Hyderabad. More interested on the Vizag side, how much of that 3,000 KL is fully fungible and we can switch between molecules?

• Vamsi Krishna Potluri : So our Hyderabad site is almost close to from 85% to 90% fully optimal. I do not think we will doing any more expansion there or we will be adding any new products there, so it is almost like 90% is occupies. So coming to the Vizag side, there is a big space, it definitely depends on the product mix right, so based on the product growth. We have 65% I think right now is the current occupancy in that plant.

• Sajal Kapoor : I am not interested in the current capacity utilization of that 3000 KL Vizag side. I am interested to know whether you can switch, for example, if in a given reactor, you are making Sitagliptin today, can you use the same reactor to make Levetiracetam.

• Vamsi Krishna Potluri : We have multiple blocks with multiple like we have A line, B line, C line and D line multiple lines there. Each has its own like one of the lines has four clean rooms, one has two clean rooms with two products parallelly can be run something like that, so it is a different mix and combination that we can definitely take up there, based on the scheme in which reactors are suiting for which product?

Sajal Kapoor : Exactly. So if we lose competitive, so there is no demand for a certain API let us say scenario that happened with the ARV.

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Vamsi Krishna Potluri : The reactors can be used for other products as well.

• Sajal Kapoor : Exactly and we are going to maintain the R&D intensity to make sure that we continuously innovate and continue to diversify and we actually do not go back to the same scenario where we got dependency on a certain class of products like ARV. We have done good work in sort of diversifying going away from ARV.

• Vamsi Krishna Potluri : Absolutely. So again our R&D is generally working on a lot of products and different therapeutic categories as well. So if you see out this year segment type, I think it is almost for example, like this year contribution from anti-diabetic was 26%, anti-migraine was 21% and anti-ulcer around 14%.,anti-epileptic 3%, anti-inflammatory 17%, - so that essentially is Ibuprofen, so we are looking to grow that up to 35%. So if you see more or less everything , so we are working on different segments. We expect ARVs to come back to around 20% again. So we are diversifying and we are at a single point of time focused on multiple therapeutic categories.

• Sajal Kapoor : That is helpful and the other question that I have is if you go back to pre-COVID era, so I am talking about 2018, 2019? Our gross margins were very similar to what we have reported in the March quarter in FY2023 and our operating margin back then were 19%, 20%. So the question is has the industry structure changed so much that we cannot go back to those pre-COVID margins or given the product diversification and the R&D that we have done since we are confident that once we start fully utilizing our asset base, we can actually get to 20% margins where we were before COVID?

• Vamsi Krishna Potluri : Yes definitely, it will not happen overnight, it is a gradual process obviously because of COVID, lot of stocks being high for the customers and lack of demand from the customer side. With further reduction in prices we tried to move the inventory from our side. Because all of this we were not able to get those post COVID numbers in terms of margins, but over next one to two years, I think it is definitely possibility of going back to 20% EBITDA margin.

Sajal Kapoor : How many scientists do we have in total today between the CMO and our own filing, put together.

• Vamsi Krishna Potluri : How many.

Sajal Kapoor : How many scientists, how many people we have on the R&D side between the CMO. So we do CMO for B2B business as well as we have our own filings, right now.

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Vamsi Krishna Potluri : 30 people in process R&D and around 20 people in analytical R&D.

Sajal Kapoor : Okay and how do you read the emerging opportunity in the CDMO space. A lot of companies like Tube investments and Nirma who are traditionally not in the API manufacturing, so they have got no past experience in the API manufacturing, they are now talking about entering into the CDMO space working with the innovators on the intermediate price to begin with and then eventually graduating from intermediate to APIs. And given our track record of three decades, why is it that we are not actively looking at?

• Vamsi Krishna Potluri : No, in the next two years I think that is also one of our major goal, we also are evaluating on that space, so which segment would be the right choice for us we are still debating that internally. But definitely I think we are also having plans to look at those opportunities as well. So first for next two years we will see our plans progressing in that direction. Obviously, our bread and butter probably will be the API sales, but definitely I think, that’s good stream to add another revenue. So we definitely have plans to move into this in the next couple of years.

• Sajal Kapoor : Wonderful. Thank you so much for all the responses, all the very best. Moderator : Thank you. We have our next question from the line of Jigar Shah from AK Securities. Please go ahead.

• Jigar Shah : Good morning Sir. So I have a couple of questions, how is the company planning to improve profitability on each product category and can you please elaborate more on the company's plan for vertical integration?

• Vamsi Krishna Potluri : I think the plan to increase the profitability once the product is, natural it is probably doing a backward integration and trying to make most of the intermediates and keep starting materials in-house. So that is what the company, so this year most of our R&D focus will be in that direction and process R&D trying to better the process that we currently have and increase the margins going forward. So that is the major aim of the company this year to increase the profitability.

• Jigar Shah : Correct. Sir, my next question is that what are our FY2023 R&D expenditures and what are our key focus areas for R&D in FY2024?

• Vamsi Krishna Potluri : The major focus from R&D is cost optimization. Second, the thing is we are planning, we are looking at a little new therapy categories again, obviously existing therapeutic categories I think we are dominating in some of the segments. Apart from this, we are

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looking at some new therapeutic categories and that we are looking at so probably may be a new product list will be in our R&D product list.

Jigar Shah : Correct. Thank you sir. That is all from my side.

Moderator : Thank you. We have our next question from the line of Jiya Shah from Wealth Securities. Please go ahead.

Jiya Shah : I have a couple of questions. The first thing on the capacity utilization, so what is the projection for FY2023 and what are the target levels for capacity utilization for 2024?

• Vamsi Krishna Potluri : I think we have already answered this question. Right now I think it is around 60% to 65% capacity utilization. I think target is to do a total of 5 to 80% next year before going on any other Greenfield project going forward.

• Jiya Shah : Okay. I also understand that some of our raw material prices have stabilized in the recent past, so how has this impacted our cost structure and how will it impact our margins in the coming quarters?

• Vamsi Krishna Potluri : So again as I saying now it has stabilized, the raw material prices, the solvent prices, because of the war there was a lot of fluctuations and now they seem to have stabilized right now. So at this point of time definitely I think we are working towards 20% EBITDA margin that we had pre-COVID time, so definitely as we have mentioned to the previous caller also, I think it will not happen overnight, but in the next two years’ time I think we definitely should be there.

• Jiya Shah : Okay and just last question on Ibuprofen if you could throw some light on the current capacity, the expansion plan the pricing and the volume growth that you are expecting in domestic as well as an export market?

• Vamsi Krishna Potluri : Right now, we are commercially operating at 300 metric ton right now and in the next six months we are looking at around 700 tons per month and this is very minor estimate I think we can take it up to close to 900 tons.

Jiya Shah : Thank you.

• Moderator : Thank you. We have our next question from the line of Dipti Kothari from Kothari Securities. Please go ahead.

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Dipti Kothari:	Good morning sir. Thank you for the opportunity. My first question was that can you
	provide more details on the factors that led to the sequential improvement in operating
	margins in Q4?
Vamsi Krishna Potluri: Yes, as we had mentioned earlier definitely this stabilization of raw material prices and
	obviously the product mix that that we changed and as year has gone by, we are working on
	some KSMs, some raw material trying to get that in-house to reduce the raw material cost
	of the product, so those led for better margin profile.
Dipti Kothari:	Okay and second question is on the antibiotic segment. So the antibiotic segment revenue
	share has been exhibiting significant growth in the past few quarters. So what is your
	outlook for the performance of this segment in FY2024?
Vamsi Krishna Potluri: Definitely, it is a very good segment. We are one of largest exporters out of India of this
	segment. So definitely I think we have good projection going forward as well.
Dipti Kothari:	Okay and sir, you mentioned that ARV business has bottomed out and it is likely to make a
	significant contribution to your revenue and profitability growth in FY2024? So can you
	provide more details about your plan to grow this business?
Vamsi Krishna Potluri: We have recently added more customers as well on ARV space and now I think slowly the
	orders have started flowing in, so again we could see a decent contribution and we would
	like to limit that contribution of around 20% only. So definitely decent contribution started
	happening in the next couple of quarters. So now I think ARV it looks to be on track.
Dipti Kothari:	Can the ARV business achieve scale similar to pre-COVID levels?
Vamsi Krishna Potluri: That we cannot guarantee, but definitely as I said slow process, it will take some time, but
	at this point of time we cannot comment on that, because it is tender. We do not know who
	will be awarded the tender and there is lot of ambiguity about who will get the tender and
	things like that. So based on that we cannot commit to it saying that it is coming back to the
	pre-COVID level.

Moderator : We have a question from the line of Vibhor Tomar an Individual Investor. Please go ahead. Vibhor Tomar : So I have one question which is regarding the growth potential which you have from the other APIs and from the ARV segment. So you mentioned that around 20% growth is expected for FY2024. So will it be on the steady state business or does this also include the ARV contribution.

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Vamsi Krishna Potluri: Both, from our existing growth as well, as also our ARV business and our anti-diabetic	Vamsi Krishna Potluri: Both, from our existing growth as well, as also our ARV business and our anti-diabetic
	segment and Ibuprofen will also be improving quarter by quarter as well, adding on more
	customers, so I think it is a combination of all these, I think we are expecting the 20%
	growth.
Vibhor Tomar:	Okay and what will be the margins of the ARV segment?
Vamsi Krishna Potluri: EBITDA around 15%.
Vibhor Tomar:	This is mainly tender driven business right, so you are expecting to win some tenders or you
	have already won?
Vamsi Krishna Potluri: Yes, we are not bidding for the tenders, we are just API players, so formulators will bid for
	the tenders.
Vibhor Tomar:	Got it. Understood. That is all from my side. Thank you.
Moderator:	Thank you. Ladies and gentlemen that was the last question for today. I would now like to
	hand over the call to Mr. Vamsi Krishna Potluri for closing comments. Over to you sir.
Vamsi Krishna Potluri: Thank you everyone for joining us on this call. Please reach out to our consultants Strategic
	Growth Advisors or us directly via our website if you have any further queries. Thank you
	so much.
Moderator:	Thank you sir. On behalf of SMS Pharmaceuticals Limited that concludes this conference.
	Thank you for joining us and you may now disconnect your lines.

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