Dr. Reddy’s Laboratories - Q1 20/21
July 29, 2020
Transcript
Operator (participant)
Ladies and gentlemen, good day and welcome to the Dr. Reddy's Laboratories Limited Q1 FY21 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Agarwal. Thank you, and over to you, sir.
Amit Agarwal (Head of Investor Relations)
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 ended June 30, 2020. Earlier during the day, we have released our results, and the same are also posted on our website. This call is being recorded, and the playback and transcript shall be made available on our website soon. All the discussions and analysis of this call will be based on the IFRS consolidated financial statement. To discuss the business performance and outlook, we have the leadership team of Dr. Reddy's, comprising Mr. Erez Israeli, our CEO, Mr. Saumen Chakraborty, our CFO, and the investor relations team. Please note that today's call is a copyrighted material of Dr. Reddy's and cannot be rebroadcast 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. Saumen Chakraborty. Over to you, sir.
Saumen Chakraborty (CFO)
Thank you, Amit. Greetings to everyone. During the current challenging times, I hope you all are keeping yourselves safe and healthy. We are going through quite an uncertain and challenging business environment, with volatility arising from both demand and supply side. I am glad that our teams have responded very well to those challenges and have been able to deliver quite healthy financial performance during this quarter. The key financial highlights for the quarter are: one, strong year-on-year revenue growth of 15%; two, healthy gross margin at 56%; three, EBITDA margin of 26.3% and EBITDA growth of 47% adjusted for settlement income in last year. Four, PBT margin of 19.9% and PBT growth of 74% adjusted for settlement income in last year.
Five, strong free cash flow generation of INR 925 crore before payout for business acquisition from Wockhardt. And six, quarter 1 FY21 annualized return on capital employed of 23.6%. Let me take you through these in a bit more detail. For this section, all the amounts are translated into US dollar at a convenience translation rate of INR 75.53, which is the rate as of 30th June, 2020. Consolidated revenues for the quarter stood at INR 4,418 crore, that is $585 million, and grew by 15% on a year-on-year basis and remained flat on a sequential quarter basis.
Year-on-year growth has been supported by 88% growth in PSAI, 48% growth in Europe, 9% growth in emerging markets, 6% growth in North America, with a decline of 10% in India. Sequentially, the sales were impacted due to decline in volumes in our global generics business, which was offset with a growth in PSAI business. Consolidated gross profit margin for this quarter has been 56%, with an increase of 430 basis points year-on-year and 450 basis points quarter-on-quarter. This increase was driven by favorable product rate, better product mix, and improved productivity. Gross margin for the global generics and PSAI were at 61.4% and 33.4% for the quarter.
The SG&A spend for the quarter is INR 1,279 crores, that is $169 million, an increase by 6% year-on-year, 5% quarter-on-quarter. The increase is primarily attributable to higher freight due to shortage of carriers for exports. The R&D spend for the quarter is INR 398 crores, that is $53 million, and is at 9% of sales. Most of the product development activities continued during the quarter, including development of a few COVID-19 related products. The EBITDA for the quarter is INR 1,162 crores, that is $154 million, which is 26.3% of the revenue. EBITDA grew by 2% year-on-year on a reported basis, and 47% adjusted for settlement income in previous years. Sequentially, EBITDA grew by 16%.
The strong growth is reflective of improvement in gross margin and productivity. Profit before tax for the quarter is INR 879 crore, that is $116 million, with a year-on-year growth of 3% on a reported basis and 74% growth adjusted for settlement income in previous year. Sequentially, PBT grew by 23%. Effective tax rate for the quarter is at 34.1%. The ETR has been impacted due to discontinuation of weighted deduction on R&D and completion of tax holiday for one of our plants. As you know, we are continuing with the old tax rate for India due to availability of MAT Credit in our books. We expect the ETR to be in the range of 25%-27% for the full year. Profit after tax for the quarter stood at INR 579 crores.
That is $77 million, which is 13.1% of the revenue. The reported EPS for the quarter is INR 34.86. Operating working capital decreased during the quarter by around INR 200 crore, which is $26 million. This decrease is due to reduction in receivables and an increase in trade payables, which has been partially offset with a planned increase in inventory across the market. We invested INR 150 crore, which is $20 million, towards capital investment in this quarter. The free cash generated during this quarter was INR 925 crore, which is $122 million, before making the acquisition-related payment of INR 1,499 crore to Wockhardt. Thus, the net free cash flow for the quarter stood at minus INR 574 crore, which is $76 million.
Even after the acquisition-related payout to Wockhardt, our net debt as on June 30, 2020, was INR 336 crores. Our net debt to equity ratio is at 0.02 and continues to reflect our strong balance situation. Foreign currency cash flow hedges for the next nine months in the form of derivatives for US dollar are approximately $260 million, largely hedged around the range of INR 73-INR 77 to the dollar. In addition, we have cash flow hedges of RUB 2,600 million, at the rate of INR 1.045 to the ruble, maturing over the next nine months. With this, I now request Erez to take through the key business highlights.
Erez Israeli (CEO)
Thank you, Saumen. Good morning and good evening to everyone. Hope you and your families continue to remain safe and well in the midst of this pandemic. I thank all of our associates across the world whose relentless efforts and hard work have helped to ensure continued availability of medicines for our patients and customers across the geographies. The strong results of the current quarters in terms of sales growth, improvement in EBITDA margin, and healthy cash cash generation, reflects our continued commitment to the organization's purpose while consistently improving our business performance, irrespectively of the challenging circumstances. While many of our markets have been impacted by reduction in demand due to COVID-19-related lockdowns and economic slowdown, we continue to work toward mitigating the risks to focus on increasing market share, launch of new products, and improvement in productivity.
Despite current challenges, we continue to progress well to implement our strategy and continue to explore more avenues of growth for each of our businesses. During this quarter, we successfully completed acquisitions of select businesses from Wockhardt, and we are gearing toward reviving these brands back to on growth trajectory. We also executed the licensing deals for two key products related to COVID-19 treatment, Avigan or favipiravir tablets and remdesivir injections. We are actively working towards launching these products to cater to our patients in various markets. Now, let me take you through the key business highlights for each of our businesses. Please note that all the references to the numbers in this section are in respective local currencies. Our North America Generics business recorded sales of $229 million for the quarter.
Sales declined by 2% year-on-year and 8% on sequential quarter basis. In INR terms, the sales grew by 6% year-on-year. The sequential decline was largely due to forward buying in previous quarter, reduction in new prescriptions, drop in footfall in retail stores, and reduction in elective procedure in the hospitals. We launched six new products during this quarter, including abiraterone acetate tablets and colchicine tablets. We are on track to launch more than 25 new products in this fiscal, including some niche and limited competition products. Our Europe business recorded sales of EUR 43 million, with a strong year-on-year growth of 30% and a decline of 1% sequentially. The year-on-year growth was seen across market and was driven by improvement in both base business and new product launches.
During the quarter, we launched 7 products in Germany, 2 products each in the UK and Spain, 4 products in Italy, and 1 product in France. Our emerging markets business recorded sales of INR 798 crore, with a year-on-year growth of 9% and decline of 1% sequentially. Within the EM segment, the Russia business declined by 15% in constant currency, both on year-on-year basis and quarter-on-quarter basis. The decline was primarily due to the impacts of COVID-19 related lockdowns, resulting in overall reduction in demand. In the rest of the market, we witnessed mixed patterns of sales performance. China, Vietnam, Myanmar, and Kazakhstan are among the markets that performed well at this quarter. During the quarter, we launched 29 new products across the emerging markets.
Our India business recorded sales of INR 626 crore, with a year-on-year decline of 10% and a sequential quarter decline of 8%. Here again, the sales were negatively impacted, owing to reduction in doctor-patients interactions and prescription generation as a result of the COVID-19 related lockdowns. As various parts of the countries are in different levels of reopening, we expect the sales trend to sequentially improve from this quarter onwards. We launched four new products in India market in this quarter. We are preparing to launch both Avigan tabs and remdesivir injection in India in the next few weeks. During this quarter, we integrated the business acquired from Wockhardt and registered sales for a few days.
We are placed at market rank of 12th position as per IQVIA, on monthly, on MAT, June 2020 basis, an improvement by 1 position after Wockhardt integration. Our PSAI business recorded sales of $130 million, with a strong year-on-year growth of 74%, and a sequential quarters, a growth of 14%, with an improvement in order book across markets. And we expect this business to positively benefit, as various companies globally look for strategic and reliable partners for supply of active ingredients. On the R&D front, we continue to strengthen our pipeline of products across the market. During this quarter, we filed 18 formulation products across global markets, including 5 ANDAs in the United States.
As of 30th of June 2020, we have 101 new molecule filings pending for approval within the U.S. FDA, including 99 ANDAs and two 505(b)(2) NDAs. We also filed 16 master files globally, including one filing made in the U.S. market. We are also working on few molecules related to COVID-19 and doing our part in this global fight. On our proprietary products business, following the recent approval of Elyxyb formulation NDA, we recently secured the approval of our first NCE under 505(b)(1) pathway, Xeglyze. We are actively working to commercialize both products through partners. Overall, we are making good progress in building and advancing a strong pipeline of high value, globally relevant assets.
We are continuing our efforts to monetize select assets through partnership and licensing transactions that maximize their value. On biologics front, the phase 3 trial for Rituximab is progressing well. In parallel, we are working on the next wave of biosimilars products, which are at different stages of development. Over the years, we have significant investment in digital capability and see it as one of our major value contributors for us. Our strong digital infrastructure allowed us to seamlessly enable work from home and connecting with doctors and business partners during these times. It also helps us to be more productive and efficient in several of our business operations. The current business environment remains to be highly uncertain and volatile. However, these challenging times are also unfolding new opportunities to grow our business and improve our productivity further.
While the journey in the next few quarters is going to have its own set of challenges, the investment we have made in building the core foundation capability gives me the confidence that we are well equipped to successfully ride through this phase and sustain our growth momentum. We continue to focus on creating more opportunities with less risk and attaining self-sustainability for each one of our businesses. With this, I would like to open the floor for questions and answers.
Operator (participant)
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask questions 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 handsets while asking questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask questions, please press star and one. The first question is from the line of Rajesh Kothari from AlfAccurate Advisors. Please go ahead.
Rajesh Kothari (Founder & Managing Director)
Good evening, sir. My first question is, with reference to the new regulations in USA, where details are probably not available, but it would be great if you can give your view on how do you see, those rules, depending upon your understanding of those rules, and what kind of impact you can think it can happen for your company over medium to long term? And, my second question is with related to R&D and SG&A, put together, how do you see that number, in absolute terms over next, you know, FY 2021, FY 2022, FY 2023, whatever way you can give guidance? Thank you.
Erez Israeli (CEO)
So as for the U.S. regulations, I'm assuming that you are referring to the localization of production. Is this correct?
Rajesh Kothari (Founder & Managing Director)
This, I'm talking about the recent, you know, norms, which, you know, Trump has been talking about, in which he has talked about the generics and the pricing and, you know, I'm talking about the last two weeks back, the news which got broke out.
Erez Israeli (CEO)
Sure, sure. So in the United States, you have both agenda. One is related to the pricing and the agenda you just have spoken, and the second is about localizations of products. So both discussions are in place. On the first part, I do not envision a big impact on us, on both short and long term. We are actually believe that a company like us is actually the solution for this, as we are providing access to affordable medicines. And I believe it will be more impactful for the innovative products in the United States.
Also, the chapters that arrive from that, I believe, have certain opportunity to actually increase access for generics even further. So, in this respect, no major concerns. On the localizations piece, we have actually looking at this situation. We appreciate that there is a certain need to produce certain products in the United States. At the same time, it's unclear what will be the mode of payment or the pricing of those. So as it will fold out, we will evaluate it, but at this stage, we will not take any specific action.
Rajesh Kothari (Founder & Managing Director)
Okay. And my second question was with regard to SG&A R&D, you know, combined, how do you see that total overall expense?
Erez Israeli (CEO)
So as you know, we are not giving the guidance. In general, and we said it also in previous times, we want more products, and we want them in more countries. So overall, nominally over time, we want to spend R&D to develop those. At the same time, we are also asking ourselves to be more productive while we're doing that. So I believe that this year we will spend some more money. We are not giving yet guidance for the years after.
Rajesh Kothari (Founder & Managing Director)
Great! No worry. Thank you, sir. I'll come back in queue.
Operator (participant)
Thank you very much. Before we take the next question, we'd like to inform participants that in order that the management is able to address questions from all participants in the conference, please limit your questions to two per participant. Should you have a follow-up question, we request you to rejoin the queue. We take the next question from the line of Prakash Agarwal from Axis Capital. Please go ahead.
Prakash Agarwal (President)
Yeah, thanks for the opportunity, and congratulations on good numbers. So first question on the sustainability of gross margins. So clearly understand, you know, product mix as well as currency would have helped. Just trying to understand how would the API prices, for us, you know, in terms of our cost COGS moving, as I understand, API prices have firmed up further, and, with rupee dollar moving up, our cost of procurement would also be higher. Could you help us understanding that, is this understanding correct?
Erez Israeli (CEO)
So, I'll refer to the API. First, I think that we do see better sales structure of the API is in, and indeed the mix is more favorable, and helps us partially in this growth in the gross margins. As we discussed in previous times, the gross margins is not a KPI that we are necessarily managing. Of course, we want it to be as high as possible, but we will not say no to the big business if it will come with 50% gross margin, just because to manage that KPI. So, for us, it's a result, and give or take, we are within the framework that we have discussed in previous quarters as well.
Anubhav Agarwal (Research Analyst)
I believe that as the more we will sell of the API, naturally it will favorably impact the gross margin as well, because those products tends to have relatively higher gross margins. I do not see a specific trend, not on pricing, as well as not on procurement prices.
Prakash Agarwal (President)
So, my question was actually on we procuring API at higher prices, could the gross margin still be sustainable? As I understand, API prices are gone up.
Erez Israeli (CEO)
That's what I tried to answer. I do not see any specific trends on the procurement prices or on our prices. And I believe that again, with fluctuation, we should be in the same neighborhood that we are today, it could be a little bit less. So at the time we said that we want to, we are comfortable, it depends of course on the mix of the activities between, let's say, the 51% and 54%. Now we are a bit higher. I believe that we are still comfortably in the same area, and I believe that this area is sustainable. With of course, it can be quarterly fluctuated.
Prakash Agarwal (President)
Okay, understood. Fair enough, thank you, for that. And the second one is, sir, on, you know, the injectable portfolio that we have in U.S. Given the lockdown, how has that behaved? Has the volumes come down, or is it at the same level? And also some color on pricing of U.S.-
Erez Israeli (CEO)
It's coming up.
Prakash Agarwal (President)
And Suboxone.
Erez Israeli (CEO)
It is coming up.
Prakash Agarwal (President)
It's coming up, okay. And the U.S. generic pricing in general and Suboxone trends, sir. That will be all. Thank you so much.
Erez Israeli (CEO)
Suboxone is doing well. It is doing well, and did well also in this quarter for us.
Prakash Agarwal (President)
Okay. U.S. generic pricing, some trends, sir. How is it done Q-on-Q?
Amit Agarwal (Head of Investor Relations)
Two questions only per participant, please.
Prakash Agarwal (President)
Thank you,
Erez Israeli (CEO)
Just, I'll answer, because I feel I know it's of interest to many people. US prices are more stable at this stage, for us.
Operator (participant)
Thank you. We move to the next question. The next question is from Saion Mukherjee from Nomura. Please go ahead.
Saion Mukherjee (Head of Equity Research)
Yeah, thanks. So two questions. Firstly, on emerging markets, we are seeing some good traction, you know, outside of Russia, CIS. Anything that you would like to point out? Any specific market which did particularly well this quarter?
Erez Israeli (CEO)
I mentioned China did well, as well as some of the other markets I mentioned, Myanmar, Vietnam. So those markets did fairly well. The markets that are more related to, let's say, either hospital demands or government tenders, did better than those markets that were impacted by patient-doctor demands like India or Russia. And this is very natural due to the lockdowns in the first quarter.
Saion Mukherjee (Head of Equity Research)
And so the second question on SG&A, because you mentioned there is freight charges which have gone up, but your sales promotion expenses would have come down. So how do you see that, you know, panning out in the subsequent quarters? And you know, I remember you had a settlement this quarter. Has that been booked as part of SG&A?
Erez Israeli (CEO)
Which?
Saumen Chakraborty (CFO)
Which settlement you are referring to?
Saion Mukherjee (Head of Equity Research)
There's a class action-
Saumen Chakraborty (CFO)
Yeah, which settlement you are referring to?
Saion Mukherjee (Head of Equity Research)
There was a $7 million or $9 million settlement that you had announced this quarter.
Speaker 17
U.S., settlement, that was last quarter, which was announced.
Saumen Chakraborty (CFO)
We got an entry. So, ma'am, we can take this thing offline, so I am not being able to directly associate to what settlement has gone to SG&A this quarter.
Speaker 17
There is no surcharge signed in this quarter.
Saion Mukherjee (Head of Equity Research)
Okay. I mean, sir, can you give some color on, like, how the various parts within SG&A is moving, and how should we think about, you know, like, freight and other elements, and anything can help us for the coming quarters?
Saumen Chakraborty (CFO)
So freight will depend on the rate of the carriers. As more air bubbles opening up, we expect things to get, you know, normalized in coming quarter, so that will help. So our sales promotion will depend on the, you know, kind of, sales which we are going to have in the market, which is, you know, very dependent on sales promotion. So accordingly, we calibrate.
Erez Israeli (CEO)
Are you referring to the, sorry, were you referring to the securities class action settlement?
Saion Mukherjee (Head of Equity Research)
Yeah, yeah, yeah. Yeah.
Erez Israeli (CEO)
Okay. So that, you know, normally for those kind of things, it comes out of your, director and officer, the insurance that you cover. We pay insurance premium every year for those kind of things.
Saion Mukherjee (Head of Equity Research)
Okay.
Erez Israeli (CEO)
Okay?
Saion Mukherjee (Head of Equity Research)
Yeah. Thank you.
Operator (participant)
Thank you. The next question is from the line of Vishal Biraia from Aviva Insurance. Please go ahead. Vishal Biraia from Aviva Insurance, you may go ahead with the question.
Vishal Biraia (Research Analyst and Assistant Fund Manager)
Thank you. So what could have led to the 88% growth in the PSAI business?
Erez Israeli (CEO)
Sorry, I did not capture the question. What led to the growth, you said?
Vishal Biraia (Research Analyst and Assistant Fund Manager)
Yeah. What was the growth drive, what was the driving factor to achieve this 90% odd growth, for the API business?
Erez Israeli (CEO)
It was across businesses and countries, so it was not related to a specific product. I believe that it's a combination of the following: One, that people needed to de-risk themselves as related to lockdowns and to ensure that they have enough inventory of API. Second is companies that are looking for additional reliable sources, if they, if they were dependent on on others or wanted to de-risk it. So we, we did see big traction of of that. API that we, we sent for launches, launch of products, as well as R&D products. So it's a combination of all of all the above. In general, I do see a very healthy growth of the business.
I attribute it to the decisions that we made two years ago to focus on the API and to make it a significant global business, and we are starting to build the fruits on that.
Vishal Biraia (Research Analyst and Assistant Fund Manager)
Do you expect this trend to continue for the coming two quarters at least?
Erez Israeli (CEO)
Without giving guidance, it is absolutely an expectation for this business to continue to grow.
Vishal Biraia (Research Analyst and Assistant Fund Manager)
Okay. Okay. Just one last thing on the CRL for any updates on the CRL of Copaxone and NuvaRing?
Erez Israeli (CEO)
On the Copaxone, we submitted the CRL. And we did not submit yet the CRL for NuvaRing, we are still working on it.
Vishal Biraia (Research Analyst and Assistant Fund Manager)
Thank you very much. I'll come back with you.
Operator (participant)
Thank you. The next question is from the line of Damayanti Kerai from J.P. Morgan. I beg your pardon, that's Damayanti Kerai from HSBC. Please go ahead.
Damayanti Kerai (Equity Research Analyst)
Hi, thank you for the opportunity. So you mentioned API, growth has resulted due to our investment in the segment, for last 2 years. So my question is, on the India part, like, where we are hearing that government is now incentivizing manufacturing to scale up, production of certain products. So, do you have plans to participate here or, or not?
Erez Israeli (CEO)
Not at this stage. These specific products are not in our lines of activity. This is primarily antibiotics, and we are not into antibiotics. So at this stage, we do not have plans as such.
Damayanti Kerai (Equity Research Analyst)
Sure. My second question is, can you talk a bit about your strategy to leverage upon product filing and launches for multiple markets? Say, in last three, four quarters, how many such products we have developed and filed in multiple geographies?
Erez Israeli (CEO)
So, naturally, we are expanding those products. I believe that I mentioned that we had 29 products, for example, of launches in the, for example, in emerging markets. 25 new launches that we are going to have in the, in the United, et cetera. This space is also going to be reflecting the R&D. So we are giving the R&D to enable somewhere between 10 products-25 products per year, per geography, and most of these products will be leveraged.
Damayanti Kerai (Equity Research Analyst)
Okay, so-
Erez Israeli (CEO)
Meaning that we are going to use the same product for multiple markets.
Damayanti Kerai (Equity Research Analyst)
Okay, so 10 products-25 products per year is our target for different markets, right?
Erez Israeli (CEO)
In general. Depends, of course, on the markets and the activities. Yeah.
Damayanti Kerai (Equity Research Analyst)
Okay, sure. I, I have more questions. I'll get back with you. Thank you.
Operator (participant)
Thank you. The next question is from the line of Neha Manpuria from JPMorgan. Please go ahead.
Neha Manpuria (Senior Analyst)
Thank you for taking my question. My first question is on the gross margin. Now, you mentioned three things on the gross margin improvement: FX, product mix, and productivity. I just wanted to understand which of these factors, you know, contributed largely to this? Was there a disproportionate contribution from one factor versus the other? And, you know, how do you view, you know, something like a product mix or productivity? Productivity, I can understand. Is product mix linked to the fact that we were selling more, let's say, injectable products or hospital-linked products in this quarter?
Saumen Chakraborty (CFO)
Okay, I will take this question. Now, our gross margin has improved both year-on-year as well as sequentially. Now, if you take a factor, for example, a currency rate. Now, the currency rate year-on-year, the contribution to the improvement will be higher compared to the sequentially. So if one would have guessed, not, you know, neutralize the currency impact, that mean even sequentially, that mean there would have been more, which has come out of other factors, such as, product mix, such as the productivity, and also other things, because I have been always maintaining in the past that in our industry, and specifically for our company, I have noticed, there will be fluctuations quarter-on-quarter due to multiple reasons.
Sometimes you may take some inventory write-off, there could be some quality problem, there could be some penalty for, you know, failure to supply. Many such thing can happen. So that's why it is very difficult to have a consistent kind of a gross margin. There will be always fluctuation. Now, when you really talk about a product mix, because what we really ultimately put it, is the, result and weighted average. But, in terms of the margin, if you go by product, there will be different buckets. There will be buckets which is far higher than the total reported gross margin of Dr. Reddy's, and there will be products which is also quite lower than that. So if we are being able to sell products in a particular quarter or products with much higher contribution, then definitely that has an impact in the gross margin.
Traditionally, depending on market and also business segment, where the margin varies, so that will also have an impact in terms of the business mix on that. The overall, when we really talk about the productivity, it is the leverage that you get, you know, with a better capacity utilization or, you know, with the same manufacturing overhead, if you are going able to produce more, and that's where the productivity, factor comes in, and it helps in terms of the gross margin improvement. Does it respond to your question, Neha?
Neha Manpuria (Senior Analyst)
So just to follow up on that, you know, I agree on the effects. Just on productivity, I would have assumed, given the lockdown and volumes coming off, our utilizations would have been lower. So I'm just trying to understand if the product mix was linked to the fact that COVID benefited certain sale of certain type of products or certain bucket of products. Would that be a fair understanding?
Saumen Chakraborty (CFO)
I think the whole thing. Yeah, please, Erez, go ahead.
Erez Israeli (CEO)
So, not really. First of all, we did not lose much output because of COVID. So our people found a way to make the relevant output almost uninterrupted, almost undisrupted. So, relatively to that, and this is again, I want to thank my colleagues, my associate for doing that. Second, there is no real correlation between COVID and the mix of products we sent to the customers basically what they needed. I think it's more of the fact that we are leveraging more, and we are doing it more efficiently.
Saumen Chakraborty (CFO)
And it always helps if there are more new products. The normally new products will be with higher contribution. Yeah, we can move on.
Operator (participant)
Thank you. The next question is from the line of Anubhav Aggarwal from Credit Suisse. Please go ahead.
Anubhav Agarwal (Research Analyst)
Yeah, hi, good evening. One question on the acquired portfolio from Wockhardt. Just wanted to get some sense, now you would have had a deeper look at the portfolio. In your first assessment, where do you see this portfolio is lacking? More in promotion efforts, more in distribution reach, promoted by too many reps? Where are the one or two low-hanging fruits in the system?
Erez Israeli (CEO)
I believe that the main opportunities that the brands were not fully utilized or the brand recognition, as Wockhardt did not have the means due to their financial issues to invest in them in order to get the full brand recognition. So the primary low-hanging fruits will be about branding and about investing in them. I believe that there is a strong potential, big potential in those brands.
Anubhav Agarwal (Research Analyst)
Okay. So investment brand means, you mean to say, are you referring to, let's say, reach? Were they not going to enough doctors? Because my understanding was the reps was, actually, maybe too many reps are pushing, small portfolios. So just can you elaborate on that investment of less in the brand?
Erez Israeli (CEO)
It's a branding, it's a combination of messaging as well as reach. So, as these brands, by and large, are complementary for activities that we already did. So naturally now we can enable higher reach in terms of a number of customers as well as better messaging... because we can invest in the branding and the ability to explain this product better, and the combination of branding as well as search.
Anubhav Agarwal (Research Analyst)
Sure. That's very helpful. One more question I have was on the API business. On the API portion, you mentioned about customers trying to de-risk and that and looking for additional reliable sources. When you look at your product basket, and when you look at the addressable market there, just very broad understanding, with this kind of move by your customers, with this addressable market, rough sense, has that become 2x, have grown by 50%? What's your rough estimate over there?
Erez Israeli (CEO)
Sorry, I did not-
Anubhav Agarwal (Research Analyst)
Yeah, see,
Erez Israeli (CEO)
Sorry?
Saumen Chakraborty (CFO)
Yeah, can you repeat the question once again? We didn't get it very clearly.
Anubhav Agarwal (Research Analyst)
Sorry. I was saying that on the PSA business, with several of our customers now looking for more additional reliable source of supply, trying to de-risk, certainly the opportunity set for us and the products that we're selling has increased. So I was just trying to get a, let's say, some measure of how much of our addressable market has increased by, let's say, if our opportunity was X earlier, has it become 2x now, 1.5x, et cetera? Just, just trying to understand that kind of metrics. Because I appreciate that in one year we cannot see all kind of growth, but that may translate to our growth in next two or three years.
Erez Israeli (CEO)
It's not working exactly like this, as you know, that there is time in which the qualifications of products are coming. So I think the way you need to see it on the API is that we will have more and more molecules that will have two types of contribution to our strategy. One, that they will gain more market share as we are becoming more efficient. At the same time, we have a better integration, and this is a help to continue to improve our growth margin. This is the two contributions of the API.
As for the de-risk, indeed, there was certain attractions that came and, but this is the way we normally do, that we are trying to see those areas or those opportunities in which companies do not have or have one suppliers or maybe want to de-risk certain products, and then we are trying to qualify an alternate source. And this helps also in this quarter and will continue to do also in the future. Overall, I think what you're looking for is to know whether this business will grow, and I believe it will.
Anubhav Agarwal (Research Analyst)
Sure. Thank you, Erez. Thank you.
Operator (participant)
Thank you. The next question is from the line of Susmit Patodia from Motilal Oswal Asset Management. Please go ahead.
Susmit Patodia (Director and Portfolio Manager)
Hi, good evening, everyone. Hope everyone is safe. Thank you for the call. Wanted to check a couple of things. Is there any part of the Wockhardt numbers which is integrated in this quarter? Because the transaction concluded on the tenth of June.
Saumen Chakraborty (CFO)
Yeah, for 20 days, sales and profits are there in this quarter.
Susmit Patodia (Director and Portfolio Manager)
For 20 days it is there, right?
Saumen Chakraborty (CFO)
Yeah.
Susmit Patodia (Director and Portfolio Manager)
Okay. And, now just one request on Wockhardt. If, you know, whenever you get the opportunity and time, if you could take us through, the Wockhardt portfolio separately on a call, it'd be great, you know, just to understand where we are on that journey. That's just a request from us to the management. And, secondly, sir, you said tax rate will be 25%-26%, while the, benefit that has gone away is on a plan. So if you can explain to us how this will come down from the current tax rate of this quarter?
Saumen Chakraborty (CFO)
So what I gave a guidance of 25%-27% for the full year.
Susmit Patodia (Director and Portfolio Manager)
Yeah.
Saumen Chakraborty (CFO)
For that quarter, of course, it was at 34.1%. Now, the main contributory factor is the weighted deduction on R&D, which used to be there. It is no more available now.
Susmit Patodia (Director and Portfolio Manager)
Right.
Saumen Chakraborty (CFO)
Now, of course, with the weighted deduction R&D going away, and other tax incentive going away, the government of India has also reduced the tax rate. There is a new tax rate. That is an option one could have taken, but for us, it didn't make sense because we had quite a bit of MAT Credit available in our books, so we want to wait for utilizing them because this is something with a higher tax implication that you can utilize. Once you utilize, then we will switch over to the new tax route, the new tax rule, which will be then lower. Till that time, you don't get the tax incentive. So one of the major contribution is weighted deduction on R&D gone. Second is, in one of the plants where we had, you know, the time period for which-
Susmit Patodia (Director and Portfolio Manager)
Yeah.
Saumen Chakraborty (CFO)
you would have got the tax, the time period got over. So both these factors combining led to the 34.1% tax rate for the quarter.
Susmit Patodia (Director and Portfolio Manager)
So you did use the MAT credit for this quarter, is that correct? Which you will use for the next quarter.
Saumen Chakraborty (CFO)
It all depends on the year basis, Matt. You know-
Susmit Patodia (Director and Portfolio Manager)
Yeah
Saumen Chakraborty (CFO)
Sometime there will be a fluctuation. If you recall last year, overall, our ETR was negative. At the beginning of the year, we said that normally it would have been, you know, 21%-23% in this range. We are normally, with the last year, it just happened that because of multiple things, it became a negative. So this year we have started on a higher, but hopefully for the year, we can manage it 25-22. That's what we expect.
Susmit Patodia (Director and Portfolio Manager)
Sir, if I can squeeze in one more question, please?
Saumen Chakraborty (CFO)
Yeah, please.
Susmit Patodia (Director and Portfolio Manager)
Yeah. Sir, you know, there are a couple of other companies which have reported the first quarter numbers, and the India business margins have gone up significantly because of lower marketing spend. So is it fair to assume that your India business margins would also gone up significantly quarter-over-quarter, and the other expenditure not going down is maybe entirely due to the freight cost and servicing of foreign orders?
Erez Israeli (CEO)
First, we don't report geography-wise, you know, the margin.
Susmit Patodia (Director and Portfolio Manager)
Yeah.
Erez Israeli (CEO)
Like, we report the sales. But it will be fair to say that even though there has been a decline in sales, it didn't necessarily mean a decline in absolute margin that we would have got from India.
Susmit Patodia (Director and Portfolio Manager)
Got it. Okay. Thank you.
Erez Israeli (CEO)
I leave it there. Yeah.
Susmit Patodia (Director and Portfolio Manager)
Yeah. Thank you, sir. That's good.
Operator (participant)
Thank you. The next question is from Vishal Manchanda, from Nirmal Bang. Please go ahead.
Vishal Manchanda (Research Analyst)
Thanks for the opportunity. I have a question on Revlimid. Could you share when is the trial hearing scheduled?
Erez Israeli (CEO)
We haven't got the date.
Vishal Manchanda (Research Analyst)
Right. And any sense on how long can the judgment take after the trial hearing?
Erez Israeli (CEO)
We shall see. We shall see how it will fall out. We don't... It's, it's very hard to say.
Vishal Manchanda (Research Analyst)
Okay. Thank you. That's all from my side.
Operator (participant)
Thank you. The next question is from Nitin Agarwal, from IDFC Securities. Please go ahead.
Nitin Agarwal (Research Analyst)
Hi, thanks for taking my question, sir. Sir, two questions. One is, A, on the COVID drugs that you mentioned, how should we view these opportunities? Are these specifically largely domestic opportunities, or do you see opportunities for meaningful export opportunities in these two products?
Erez Israeli (CEO)
We are going to have them both domestically as well as in emerging markets. How big it's going to be, I don't know. It's in a way, the way we see it, it's a combination of both our contribution to fight COVID as well as business opportunity. It's hard for me to say how big it is going to be because it's primarily a function of how fast we can effectively register this product in the emerging markets. In the case of Avigan, if we will have good results on the Kuwait trial, which we will know probably by October, November, then we can register it potentially globally, including United States. But we should see the results of this trial first.
Nitin Agarwal (Research Analyst)
are we gonna raise... Would we be supplying to Fuji also for their stock stockpiling in Japan?
Erez Israeli (CEO)
Right now they are making the products for Japan. We are not producing for Japan. But the plan is, if these products will pick up well, that we will be the global producer of this product, globally. At this stage, we are not making for Japan.
Nitin Agarwal (Research Analyst)
Got it. Thank you. My second question is on you talked about the opportunities for the PSAI business. Does it, you know, really, so from an investment perspective, does it entail for us significantly increasing our investments in PSAI going forward? How are we looking the CapEx part of it?
Erez Israeli (CEO)
So, PSAI is absolutely a space in which we are investing primarily on R&D. At this stage, we have enough capacity, so I don't envision putting more sites or stuff like that. We are looking from time to time for business development if this is certain capabilities that we do not have, but overall, the main investment in API is in R&D.
Nitin Agarwal (Research Analyst)
Okay. If I can squeeze one last associate question on that, what opportunities do you see in the CDMO space, in the PSAI business, in the custom services business, which you've now put out into a separate subsidiary? How has that been performing?
Erez Israeli (CEO)
It is performing well, and I see it as a growing business for us.
Nitin Agarwal (Research Analyst)
Okay. Thank you, and best of luck.
Operator (participant)
Thank you. The next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.
Sameer Baisiwala (Analyst)
Thanks, and good evening, everyone. Sir, is it possible for you to update us on the India business and Russia business? Like, you know, how is it doing versus pre-COVID levels?
Erez Israeli (CEO)
In both cases, I believe that as certain areas, certain cities are opening up, we see positive traction on those. On that, on both countries, as you know well, the cities, the areas, the provinces are in different shapes and forms as related to fighting COVID. Some of them are still in lockdown, some of them opened up. So in those places that are opened up, we see positive traction.
Sameer Baisiwala (Analyst)
Okay. Okay, great. Second question is on NuvaRing. When do you expect to do refiling with U.S. FDA?
Erez Israeli (CEO)
It's going to be within the next few months. We do have a delay in the submission. We are still working on some trials on it.
Sameer Baisiwala (Analyst)
Okay. With your permission, sir, one last one from my side, and that is: how are you thinking about more M&A opportunities? Anything that you can outline, which geographies, which assets you're looking, and would these be more sizable than Wockhardt or around the same ballpark?
Erez Israeli (CEO)
So we do see next quarter, we believe we'll go back to a surplus of cash. So we do have a lot of financial capacities in the same lines that we introduced in the few quarters, in the last few quarters, which means that we potentially can risk up to two times EBITDA, if we'll find opportunity for that. The type of transactions that we are looking are primarily in emerging markets, primarily within emerging markets in India. So the Wockhardt type of a deal is the type of deal that we like, meaning get the product, get the assets, and integrate it relatively fast into your business. That's the type of businesses we are looking for.
Sameer Baisiwala (Analyst)
Okay, great. Thank you so much.
Operator (participant)
Thank you. The next question is from the line of Anmol Ganjoo from JM Financial. Please go ahead.
Anmol Ganjoo (Research Analyst)
Yeah, hi, thanks for taking my question. Most of my questions have been answered, but just if I was to have a follow-through on the API business, that is, most of the factors that you alluded to for the superlative performance for API seem to be sustainable. We all understand that you can never rule out, you know, quarterly aberrations, but is it fair to assume that this quarter's run rate seems to be some kind of a new base when we look at our API business? Because whether it's productivity improvement, whether it's customers de-risking supplies, none of this looks like should disappear in a quarter or two. So are we talking about structurally a business which is 60%-70% higher from where we were last year?
And then, quite a few, our investments and focus on this, we should be able to grow from that base for the next year.
Erez Israeli (CEO)
So, you know, I cannot give you guidance, but, I do believe that we can have bigger base even in the future, and I believe that we will achieve it.
Anmol Ganjoo (Research Analyst)
Okay.
Erez Israeli (CEO)
I'm very confident about our ability to grow the API business. I agree with you that all the trends are sustainable and they are positive for us.
Anmol Ganjoo (Research Analyst)
Thank you. Thank you. That was it from my side.
Operator (participant)
Thank you. We'll be able to take one last question. The last question is from the line of Surya Patra from PhillipCapital. Please go ahead.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Yeah, thanks for this opportunity, sir, and congrats for great set of numbers. Two things that I wanted to understand. One is the strong cash flow, what we are generating, and the kind of cash flow position that we are having. Hello? Hello. Hello.
Erez Israeli (CEO)
We hear you with an echo.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Okay. So I'm just continuing, sir. With the strong cash flow that we are seeing, and there is a kind of strong base that we are having. So can you just give some clarity or indications about your future capital allocations, either towards the kind of acquisitions or towards kind of a new asset area or new product portfolio? Something, some directional indication would be helpful here.
Erez Israeli (CEO)
Saumen, should you take it? So I-
Saumen Chakraborty (CFO)
Yeah. So, our main lever for future growth is R&D.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Mm-hmm.
Saumen Chakraborty (CFO)
So this is something which we are trying to improve productivity, but at the same time, we will keep, you know, very high focus on continuing R&D on multiple markets, in terms of first leveraging the global portfolio as it is, come out with new products. Then we have a lot of appetite for inorganic growth, and already Erez has talked about that if we get a pocket kind of target in India, we will be very interested to pursue. But beyond India also, there are other strategic spaces and a specific kind of, you know, targets that we have. At any point of time, we are doing a lot of diligence, so we'll have to see whether we are being successful or not, but that is a possible area.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Okay.
Saumen Chakraborty (CFO)
There's a huge ROI that we can get out of digital, you know, investment on the digital capability and the platform that we have built in the past, and we are continuing to do so, even now and in the future. I mean, that is another area. CapEx, I already alluded to earlier, that we would be spending more than INR 1,000 crore for the year for capacity creation in specific areas. For the quarter, the cash outflow was much less at only INR 150 crore.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Yes.
Saumen Chakraborty (CFO)
But, the year we will still have, you know, that kind of, you know, capital allocation. And so but there are multiple areas, including, you know, we have increased our capital allocation for dividend distribution this year, and, we also, you know, focus on the leadership development. So there are multiple areas on which we plan and but we always review. For us, it is a dynamic, you know, allocation, depending on our strategy, and we want to ensure that, you know, we are being able to execute on our strategy and, capital allocation doesn't come in the way.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Okay.
Saumen Chakraborty (CFO)
Did I respond to your question?
Surya Patra (SVP and Pharma and Healthcare Analyst)
Yeah, yeah. Greatly, sir. Second question was around the, also the, the point that you have mentioned about the, the digital capability, what, you are, you are trying to enhance. So whether that will have a kind of meaningful impact on the overall margin scenario for the company, one. And secondly, despite having seen a kind of sequential, revenue decline, on our branded business, like, here in India as well as Russia, and also to some extent, sequential decline in the US business because of the COVID factor, the gross margin scenario has sequentially improved. Although we have discussed a lot about the gross margin factor, but, if you can, if the branded business are declining, what is really supporting?
Whether it is the raw material price correction is quite significant because the crude factor, crude price factor or something else, what is helping? And how influences this, digital capability for margin improvement, if you can just talk.
Saumen Chakraborty (CFO)
So digital helps in multiple ways. Definitely it helps in productivity improvement and consequently on margin. But digital also helps in better quality, and, you know, there is so many interlocking that you can do. Digital helps in terms of improving your speed and agility. So overall, the whole idea is that, you know, how can we be much more lean, agile, how can it select seamlessly across the value chain, and how we optimize end-to-end each and every processes that ultimately create value for the company. So that way, we have been, you know, having a lot of platform thinking within the organization. There are a few areas where we have made significant progress even in the past.
There are a few areas which we are focusing now, and I believe that these will contribute significantly in terms of our customer-facing processes, our new product development processes, our employee satisfaction, agility, speed on every count. So next is the sequential increase. First, I would like to correct you that our emerging market, which is primarily branded market, has grown. You know, it is only in Russia that you have seen there is a decline, but both in RCIS as well as rest of the world, sequentially, it has grown quite a bit. So it is not correct that it has declined, but our overall margin has gone up. But the contributory factors of course, unlike in year-on-year, the sequential margin increase didn't have that much of currency impact.
It has more in terms of the product mix, productivity, but also, you know, better quality and lesser kind of a inventory provisionings and all those things for FTS. Combination of many things helps in terms of the gross margin.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Okay.
Saumen Chakraborty (CFO)
As you have seen, in terms of the reported gross margin of global generics and PSAI, the PSAI segment gross margin has gone up significantly.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Great.
Saumen Chakraborty (CFO)
All these contributions. Okay?
Surya Patra (SVP and Pharma and Healthcare Analyst)
Yeah, yeah. So can, sir, please, can you quantify the Forex element in the quarter, sir? Forex gain element in the quarter.
Saumen Chakraborty (CFO)
That is very easy for you to do that because you know the currency rates, and you know our sales and how it would have impact.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Sure.
Saumen Chakraborty (CFO)
Okay?
Surya Patra (SVP and Pharma and Healthcare Analyst)
Yeah. Thank you.
Saumen Chakraborty (CFO)
Thank you.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Wish you all the best.
Operator (participant)
Thank you very much. We'll take that as the last question. I would now like to hand the conference back to Amit Agarwal for closing comments.
Amit Agarwal (Head of Investor Relations)
Thank you, everyone, for joining us today for the earnings call. In case of any further queries, please reach out to the investor relations team. Thanks.
Operator (participant)
Thank you very much. On behalf of Dr. Reddy's, that concludes the conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.