Q2 earnings conference call of Granules India Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks 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 star then zero on a touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Dr. Krishna Prasad Chigurupati, Chairman and Managing Director of Granules India Limited. Thank you, and over to you, sir. Thank` you very much. A very good morning, ladies and gentlemen. Thank you very much for attending our Q2 earnings call, especially on the weekend. I'm glad that we are meeting this time on the better condition related to COVID, and I sincerely hope that the worst is over and good times are a-ahead of us. Though the COVID situation had improved, we are now facing the aftershock of COVID on the economic front, especially in relation to pharmaceutical, chemicals and logistics. Though we are able to overcome the actual crisis, the aftereffects continue to negatively affect all of us for some more time. I'm sure all of you are fully aware of the disruptions in supply chain of various chemicals, intermediates and energy that are happening across the world, especially in China. These disruptions have led to huge price increase in various chemicals, leading to increased cost of production for our products. The PAP situation that you are all aware of had led to a 165% price increase, and global acetic acid shortage led to a price increase of 120% in the cost of acetic anhydride. Both these products are ASMs for paracetamol, which is one of our main products. While our costs have increased drastically, we were not able to pass through our cost to most of our customers in the last quarter. This has been the most challenging quarter in the recent past, but despite the challenges, we have taken various measures to improve cost efficiency to come up with a reasonable performance for Q2. One of the measures was the voluntary reduction in managerial compensation of the promoters by 40%. Though the performance for Q2 may look subdued, I am personally satisfied with the outcome, keeping in mind the extraordinary headwinds we are all facing. Though the challenges will continue for quite some time, I feel the worst is over and that we will see a substantial improvement in our performance in the coming quarters. We are continuously interacting with our customers, and we were able to get price increases with most of the B2B customers for Q3. We are making positive progress with the distributors in the U.S., and we see a willingness in them to accept the price increases, and we hope to start implementing them shortly. On the logistics front too, though we do not see any freight rate reduction as yet, we see a better availability of containers, which will help us reduce inventories and increase revenues. The availability of PAP is improving as we have qualified one Indian source and another non-Chinese source. Though the prices have not decreased, we at least have enough product to keep our plant occupied and generate increased revenue. As we continue to face many challenges in the short term, we will not be able to comply to our guidance for the year. Due to the continuing uncertainties, we cannot offer any new guidance either. However, as mentioned earlier, performance of H2 is substantially better than H1. All our initiatives for growth are on track. The new methocarbamol will start qualifications in December and validations in the new API capacity built at Unit-5 Vizag have started. Our ANDA, EU dossier, U.S. DMF and CEP filings are also on schedule. Based on the current scenario, we are reworking our plans for the proposed greenfield formulation facility to reduce the capacity and also the cost. We plan to spend the savings on setting up facilities for most of our KSMs and reduce our dependency on imports, especially from China. There will be a reallocation of CapEx towards backward integration, but definitely no increase. We are confident of reducing our dependency on China significantly by the end of 2024. I would like to end my speech on a confident note that we see exciting times and a great future ahead. I now request our CFO, Sandip Neogi, to take you through some of the important financials before we start our Q&A. Thank you, sir, and good morning to all of you. Let me now move on to the financials for the Q2 of FY 2022. We are happy with our performance despite the challenges posed by various business scenarios in the backdrop of COVID and logistic disruptions resulting in shortage of raw material and lower utilization of capacities, especially paracetamol, which has been explained in our CMD speech. Coming to the revenue, the second quarter revenue was INR 888 crore as compared to INR 858 crore in Q2 of FY 2021. Our increased sale from existing products and new launches, especially in the finished dosage vertical, has resulted in the increased top line. Revenue share from other molecules has increased to 19%, and revenue share of finished dosage has increased to 57%, consistent with our strategy. The sales breakup as per the business vertical and regions are presented in our investor presentation, which is available on the website. Coming to the gross margin. For the quarter, the gross margin contracted from 57.9% in Q2 of FY 2021 to 50.9% in Q2 of FY 2022, mainly due to reduction in margins on almost all products, especially paracetamol, due to increase in raw material prices and freight costs, and our short-term inability to pass on the input price increases to the customers. Going forward, we'll be able to pass on substantial portion of these increases to the customers and therefore it is likely that the gross margin percentage will increase. EBITDA and EBITDA margin percentage. EBITDA for the quarter was INR 151 crore when compared to INR 256 crore in Q2 of FY 2021. Apart from the gross margin drop, we have also seen increase in freight costs by INR 20 crore and increase in R&D costs by INR 25 crore when compared to Q2 of FY 2021. We expect that the freight cost should come back to normal around Q4 of FY 2022, and for Q3 of FY 2022, we are talking to our customers to recover some of these increased costs, which will reflect in our added top line in Q3. R&D. Our R&D spend for the quarter stood at INR 47 crore compared to INR 22 crore in the previous year. We are in check with respect to our R&D goals. We are judiciously spending on R&D based on select products and are also among the most efficient companies in terms of R&D cost per project. We will spend more in R&D in line with our expansion plan and will continue to strike a balance between R&D spend in U.S. and India. Net debt. Our net debt increased by INR 82 crore on account of increase in our short-term borrowing due to significant increase in our inventories because of increased business requirements both on the raw materials and finished goods front. On the raw materials front, we stocked up due to potential COVID disruption and supply issues, and non-availability of containers has also increased the finished dosage inventory. Cash- to- cash cycle. Our cash- to- cash cycle increased by 25 days from 117 days in March 2021 to 142 days, mainly on account of planned increase in the inventory holding days, which is up by 25 days. Both creditors and debtors are same, are in the same range. Planned increase in the inventory, as I mentioned, is on account of non-availability of containers and raw material requirements that has been stocked up. Other ratios as referred in the earnings presentation is also showing a drop in the current quarter. We are confident that our performance will be substantially better in H2, we expect the ratios to turn better by the end of the year. In order to combat China supply issues, the company needs to build up inventories of significant raw materials and key starting materials. Operating cash flow for the quarter stood at INR 101 crore compared to INR 112 crore in Q2 of FY 2021. This was mainly on account of lower operational profit. We had a free cash of INR 32 crore, while it was INR 52 crore in Q2 of FY 2021. A fter spending INR 68 crore of CapEx for this quarter, c umulative CapEx spend for H1 of FY 2022 stood at INR 231 crore. With this, I would like to open the floor for questions. Thank you very much. We will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on the 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 a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Madhusudan Kela from MK Ventures. Please go ahead. Good morning, sir. First of all, congratulations to all of you for keeping up the momentum of performance, even though the numbers look subdued. I would like to ask two questions, sir. One, when you say that these disruptions are likely to continue for a long time, what do you mean by long time? And when do you think things will get back to normal? And the second part of my question is while we all understand the short-term implications of logistics, freight cost and some key raw material price increase, h ow does it change the medium-term outlook for the company? Basically, I'm talking of three to five years. Are there any positives in this crisis from the management perspective? First of all, Madhu, good morning to you. The first question is, how long will this last? This is a question which is up in the air for anybody, and I would not dare give a straight answer to this. However, in my opinion, maybe it should start improving a bit from next fiscal year and over the quarters it should improve drastically. A new normal would be set in terms of pricing. Pricing of raw materials will definitely not go back to old levels, and a normal will be set for finished product pricing too. The world has to accept that the costs have gone up, and they will have to pay more. We see this positivity in customers today. Customers who have refused to accept prices in the Q2 have started seeing reality because they are starting to see shortages. People who had excess inventories, companies especially in the U.S., were trying to get rid of their inventories and there was no pressure, b ut right now I see that there is willingness. So while the shortages of raw materials may continue, I think the performance of companies may not be in the same line. They would be better as better prices can be realized. Coming back to the question of medium-term, three to five years, we are on track. This year it looks like a blip, but under the new normal, I think everything will go on as planned. Our MUPS block, like I mentioned in my speech, is getting ready with our commercial operations, Q4. Also the APIs that we are going to use for all the MUPS products are also being validated in our API plant project and t hat will also give us a lot of comfort. In addition, I have also mentioned in my speech that, opening remarks, that our FD, the greenfield venture, we are going to slow down on capacity because we have some decent capacity from the MUPS block. The MUPS block not only makes MUPS products, it also makes other solid dosage products. The focus while we build a greenfield venture, which will be possibly half the capacity, we earmarked about INR 300 crore plus for that. We may end up spending only INR 150 crore and INR 150 crore saving, plus the other amount we earmarked for APIs will all go into APIs and also backward integration. We are working on various. I would say I would not like to expand too much, but I see that by the year 2024, we will not be, forget importing, we will not even be buying intermediates or KSMs. I see that we will be making products, everything ourselves in-house and also w e are working on differentiated technologies where we may not need these KSMs. We've already made one. We have an example of one of the products where the only supplier of one intermediate, not intermediate, one chemical used in the process is China. We were able to remove that chemical and come up with a process where we don't need that. There's a lot of work going on. A lot of work had gone on in the last eight years on this front. We were absorbing all the technologies, building various technology platforms, but the time has now come to implement all this, and the next few years will see this. Definitely the medium-term outlook is going to be quite bright. Would be fully backward integrated by 2024. While I don't want a specific number, how will our margin trajectory change, when we are fully backward integrated? Is it safe to assume that the margins will improve at least by 200-300 basis points? Yes, Madhu. The basic thing here is when we are backward integrating, we are not integrating in the traditional process. What we have developed over the last three years or eight years in green technology with the highest atom efficiency and least carbon footprint. I think I mentioned this briefly in some of the previous calls. As you increase atom efficiency and reduce wastage as carbon footprint goes down, automatically the costs come down, the usage of materials come down. There will be a very decent improvement in costs. I cannot say about percentage today, but as we commercialize some of these operations, we will start seeing them. Yeah, like I said, the future looks exciting. A slight change in our approach, reducing a little bit focus on finished dosages, but strengthening ourselves by integrating all the way backward it doesn't mean that not importing from China. We buy something from India, or we make something from India, an intermediate. The raw material for the intermediate again comes from China, so that doesn't mean anything. We are totally going backwards all the way to raw materials, starting from basic building blocks, and from there, we are going to work on coming out with final products. It's not only our core products we are working on, also new products. Everything will be based on the new technologies and the new approach. Okay, sir. Thank you so much. All the very best, sir. Thank you so much. Thank you. Thank you. Thank you. you. The next question is from the line of Ashwini Agarwal from Ashmore Investment Management. Please go ahead. Hi, good morning, sir, and congratulations for a reasonable set of numbers in a very difficult operating environment. Continuing from the question asked by Madhu, I just want to get a sense that there are two aspects to the question. One is what happens near term and what happens long term. What I gather is that in the near term, what you're suggesting is that the September quarter was probably the bottom in terms of operating performance, operating margin, because going ahead, we should start to see some price escalations coming through to compensate for higher raw material prices and higher freight costs. That's the medium-term question. While I understand you don't want to give guidance, but if you could at least, you know, help us understand that trajectory. Second is that the flavor of CapEx going ahead has changed with greater focus on backward integration, efficiency and carbon footprint versus new product development, finished dosage, dosages and, so on. Because from what I understand, you're gonna keep the CapEx outlay the same in order to minimize the drag on your cash flows or keep within, the cash flows that are being generated by the company. If you could just comment on these two aspects? Okay. Again, good morning, Ashwini. Near term, I think you have it right. The improvement is not going to come from reduction in prices of raw materials, which could be a positive thing if it happens. Mostly it's going to come from our customers accepting reality. Though we do not see an immediate great benefit in this quarter, but going month-on-month, as everybody is facing the same problem, there's no way anybody can supply at these old prices. There will be an improvement. As we see B2B customers today, most of them have accepted. B2C customers, especially in U.S., it is a challenge. The good news is that they also have started accepting reality. Also the stocks that people had are getting used up. Definitely this quarter will see some improvement, and the next quarter will see some more improvement from our U.S. distributors. Coming to the CapEx and outlay, definitely the outlay continues to be the same. We actually had enough money, like, even if we are only taking about INR 150 crore from the greenfield facility. Other than that, we have earmarked about INR 300+ crore for APIs in the past. We'll be having about INR 450 crore to spend on APIs and backward integration. As I repeatedly say, one of my favorite things is carbon footprint. A lot of work is going on, and one small block actually for one small product is actually being built right now. We'll be going in with more and more of these products. I'm not sure I've answered all your question. Maybe if it's not clear, you can again ask me, Ashwini. Yeah. No, no. That provides me what I was looking for. One follow-up question I had, while raw material prices, shipping costs were kind of challenges during the quarter under review. Was there also a destocking at the end of your customers, especially in the U.S., that hurt revenue b ecause that's the commentary we are hearing from some other peers in the pharmaceutical industry. I just want to get a sense of what you are seeing. I think Priyanka is on the line in the U.S. I think it's best she answers. Let's hear it from the horse's mouth. Priyanka? This is Ashwini. Ashwini, could you just explain what you mean by destocking? What we heard is that there were several customers and distributors who had bought a lot of inventory over the last six months, anticipating potential disruptions in supply chain, anticipating shortages, anticipating greater demand for base products like paracetamol, ibuprofen in particular, given the pandemic. Now, as things are returning to normal, the inventory in the system is being run down. As a result, the primary sales from producers like yourselves are getting impacted a little bit. Are you seeing that at all? Yes, Ashwini. There's actually a mix of what you mentioned in terms of overstocking by our customers, as well as overstocking by suppliers. That said, like you rightly said, things are getting back to normal in terms of having normal levels of inventory. That will still take some time. We're still not there at that critical point yet. Over the next quarter or two, we'll start to see a significant impact on the inventory levels, where we should be able to pass on some of our price increases. Okay. All right. Okay. Thank you, Priyanka. Thank you, sir. I'll come back to you with more questions. Thank you. Thank you. The next question is from the line of Rahul Veera from Abakkus. Please go ahead. Hi, sir. Good morning. Just a quick question from my end. Some of the alternate sources to China, for example, if we have empaneled Valiant or probably Sadhana Nitro Chem, whose plants of PAP are about to come in a quarter or so. Sir, does it require for us to resend the revalidation batches in terms of change of sources of raw material from the client side? Is there any process required? No, can you come again? Let me ask you this, ask you for detail. You said in view of other sources going to manufacture PAP in India like Sadhana and possibly Kutch, is there any change in our strategy or what was the question? If we are sourcing it from Sadhana from year one, once the plant starts, does it require any validation batches or approval from a customer end? Yes. You, you're right. Yeah, definitely. First of all, let me answer this question, then I'll add something else. This is a KSM. Any new KSM, actually we will also have to file to the U.S. FDA. In view of the current circumstances, it could be a quick acceptance. Customers and FDA also have to accept. The product we make out of the KSM has to be again validated at our end, and the finished product users also have to validate it themselves. For our own tablet manufacturing, it becomes easier compared to other customers. Coming to Sadhana Nitro Chem, I don't know what's happening with them. They say they're coming online. God only knows. The other good news is Kutch has started manufacturing. They're having a few teething issues, but we are also helping them streamline their processes, and they should stabilize very quickly. Sure. Sir, Sadhana, I believe, is coming through an alternate route. Like, 90% of the PAP is still produced by one route and Sadhana is opening for another alternate route. How do we see the stability of our molecules given the process of Sadhana is little bit different than the normal PAP production? The process that Sadhana is going to use is the best process available in the world. There's only one company which makes it today, that is Mallinckrodt in the U.S., and nobody else was able to succeed so far. Right. I'm not sure. A few other companies in India, I don't want to name them, have tried this, but they have not succeeded. I don't know what's happening with Sadhana. I wish them all the best. If they do that's going to be great. I would like to add here, we have worked in the last eight years on this technology, and we had a pilot plant running for one year, producing this day in, day out. We have been very successful in producing right from the basic material, nitrobenzene. Like, people, the current people use PNCB. PNCB, again, you need to buy nitric acid, you need to buy chlorine, you need to buy benzene. There are so many other things. Then you get o-nitrochlorobenzene. So many issues. Here it's a clean thing starting from benzene, no byproducts. We go straight into PAP. We have the process ready, and if other people are not able to stabilize their production, it's in our plans to quickly set up a plant. We also have the designs ready. We may be able to set up a plant quickly if others fail. I wish others succeed, and we don't have to put our CapEx into that. Sure, sure. Fair point, sir. Thank you so much for the update, sir. Thank you. A reminder to the participants, to ask a question, please press star and one. The next question is from the line of Cinderella Thomas from Centrum Broking Limited. Please go ahead. Hi, team. Thanks for taking my question. Sir, if you could help us understand in terms of our top three products, paracetamol, ibuprofen, and metformin, how are we seeing the disruption at this level from the raw materials side, especially on the PAP side? What is the status, what improvements we have seen? Then on the demand side on these top three products, if you could comment and help us understand what is the scenario presently, how has it improved? I mean, if you could just help us give some color on these. Good morning, Cinderella. Let me start with PAP, paracetamol. We just discussed that PAP availability has improved, though the cost has not decreased. Actually, the cost is going up a little bit month-on-month. Acetic anhydride, again, which is made from acetic acid and acetic acid made from methanol. There is a global shortage of methanol today. It's not just China. That has impacted acetic anhydride prices, so which has gone up more than 120%-150% these products. Looks like they're becoming stable now, not any more price increases, and the acetic acid sees a slight downward trend. Again, as I said, prices will not go back to normal. The only way is for us to get some price increases, and we're glad that people are accepting this. With regard to paracetamol, the good news is we have material to utilize the capacity. Coming back to metformin, we have increased our metformin capacity drastically, and we are also trying to improve our share in the world market. There is a challenge in supply of DCDA, one of the key raw materials for metformin. Other products are not too bad, other raw materials are not too bad. DCDA is challenged, but Granules has de-risked itself a little bit by buying from the only non-Chinese source in Europe at a much, much higher price long before the disruption in China happened. We were very proactive, and we said we'll pay a higher price to get DCDA rather than suffer a shortage. That also we are covered, though at a higher price, but we have supplies. Other products, ibuprofen, there seems to be a surplus capacity in the world today, and that's not at all a problem. We get whatever we need for our formulations. That's going well. There are disruptions in other products, ethyl chloride for guaifenesin. Prices have gone through the roof and some other product. One more raw material from China has gone through the roof. Like I mentioned a little earlier, the raw material that has gone through the roof and they keep in short supply from China, we were able to avoid that and quickly validate our process. We're working on various fronts. As of today, I think we are good on all our five products. Also products, some of the products that we are validating also, we appear to be quite good. This is helpful, sir. Just on an industry-wide, if the supply is normalized, then the prices also should normalize going forward, right? Is that a correct understanding, specifically on the raw material side? Raw material side, again, it's not just a question of supplier. Supplier also has his own inputs, his own raw materials. With the energy situation in China and also for methanol, I mean, let's say, there's going to be a big time lag before new capacities come up. Again, in my humble opinion, the world has not really looked at increasing capacities of most of the key materials, key chemicals. That's changing now. It's going to take a while. Meanwhile, I feel the prices of raw materials will be continuing to be high. Energy. The disruption in China in terms of energy, again, that's a little black box. We don't know what exactly is going to happen, especially with the Winter Olympics coming up in the short term. Even in the long term, we just have to see what's going to happen. Absolutely. Sir, just one more thing. I mean, if we have to look at the overall scenario on the supply side, when we are looking at the demand side, what is giving us confidence to call it out that gradually at least we should start seeing a better performance? I heard your commentary where you also mentioned that, you know, people are ready to accept a higher pricing or we are able to pass on a bit. In terms of our contracts, how are we placed? Where do we see we can forward these pricing? Is it led by demand revival or how should we look at it? Okay. First of all, let me separate this. On the B2B side, customers who were trying to get away from contracts in the past, and most of them have got away because there was a surplus of raw materials, are now coming back to us and asking us for long-term contracts, and we are negotiating with them based on raw material prices. So we see B2B customers come accepting these contracts, b ut when it comes to the distributors in the U.S. for finished formulations, it's a different ballgame. It doesn't work like that. Fixed contracts don't work in that system. They give you an award, but once they award you the business, if somebody goes lower, they have the right to cancel our award and again go for a fresh quotation, a fresh offer. If you need more details on that, I think Priyanka can explain, but I think in short, this is the whole gist. It's all supply and demand. Everybody has a similar price increase, every manufacturer. There's no way one manufacturer can give it a lower price. It's like I again keep saying it's a new normal that's going to happen. Thank you, sir. Actually, thank you. Thank you. The next question is from the line of Tushar Bohra from MK Ventures. Please go ahead. Yeah. Thank you for the opportunity, and we appreciate the, you know, detailed situation that the management has explained on the business side and also the performance in light of the issues. Just couple of points. There is one positive read-through on the other molecules, you know, where we've seen on the higher revenue this quarter, other molecules have increased the share. I understand there are quite a few initiatives you are looking at beyond the core molecules. If you can just detail out some of these initiatives and the, you know, the outlook on other molecules. Also, you know, how are you seeing the things on a specific product, any positives that you can highlight? Yeah. We are really trying to get, you know, a good leadership position in some of the molecules, mainly in the prasugrel segments and in the APIs. Of course, there are products like in the formulation side, products like KCL and dexamethasone, prednisone which we make in the U.S. which we make in the U.S. These are some of the products we think we can keep getting better market share as we go by. On the API side, again, coming back, one of the products where we see good potential today is losartan. Losartan, I'm sure most of you know there have been these azido impurities, which may result in some recalls going forward. Everybody has stopped purchases of losartan, and they're looking for losartan with no azido impurities. We have a process. Our process does not create these azido impurities, so we have given undertakings to all our customer, most of the new customers, that our product does not have these impurities, and we have given them samples. We have given them our route of synthesis, also, evaluated all patents that we are not infringing any patents on these things. Looks like losartan is really going to take off for us. We have also integrated backwards in losartan. Our dependency on China for losartan used to be there. It doesn't have to be there anymore today. Losartan is one product that appears quite good in the coming few quarters, short term. Many other products we are working on improving those technologies and capabilities. I mean, products like cetirizine and all, there's a lot of work going on. These products also will continue to grow. Just on the same question, if you can highlight how many new launches you have done this quarter over the last couple of quarters and you know how the traction is picking up in some of these molecules. Any guidance? APIs we have not done any new launches, but FDs. Priyanka, you want to say in the U.S. what launches we have made? Sure. In the last quarter, Tushar, we did about four launches. We have a decent market share for all the products that we have launched, barring maybe one or two smaller products. The bigger products, it's a matter of timing. Like, we've said multiple times, we don't want to crash prices in the market, so we wait for a little bit. Like, some of our biggest products, we are very close to the target market share that we wanted within the first year. Without getting into product specifics, yes, most of the products that we have, we've been able to hit decent market shares. Overall today we have 19 products in the U.S. market. Yes. Thanks. My second question is you know, just try to get a sense on you know, how much of the current performance you know, can be taken as a short-term or a transient change. We've historically you know, over the last three quarters, we were stabilizing at 57%-60% kind of gross margins. This quarter we are down a good 600-700 basis points. Is it fair to say, without thinking of guidance, is it fair to say that you know, once things normalize, our gross margins should inch up back to you know, at least what was the normal earlier, if not higher, and also the revenue trajectory should continue to move up? It should, Tushar. We should definitely see improvement in gross margins. Definitely. No doubt about that. But what level will it go to? It depends on many other factors. And then, Q2 of last year was a very good year in terms of gross margin. Whether we'll go back to that level, may not, but if we want to, we can. But the choice we have is to get a bigger market share with a little lesser gross margin or lesser market share with a bigger gross margin. So that's a trade-off. So we will take the call based on product by product. Definitely gross margins will improve, but we cannot say to what level. If I may just stick on this and just try to get this clarified slightly better. See, you know, we had last quarter on a YoY basis, I think we had also an MEIS impact and if I take the impact from paracetamol, which hopefully is clearly a one-off, you know, for a couple of quarters. If I were to look at the revenue, you know, we did this quarter, and hopefully we are able to build a you know growth on this in subsequent quarters. It would be fair to say that the run rate in profitability that we had achieved on a YoY basis. You know, adjusting for MEIS, we should be able to achieve that level of profitability again in the next year. Sandip, do you want to answer that or should I? You can. No, I definitely, we should be able to do that, as long as things don't go again out of control. Yes, I see visibility on that. Yeah. Great. Thank you, sir. I'll join back in. Thank you. Thank you. The next question is from the line of Harshil Patel from Sharekhan. Please go ahead. Good morning, sir, and thanks for the opportunity. Most of my questions have been answered, but just need one clarification. I think I missed on that comment from your side. Sir, in the U.S. markets, we're seeing some bit of higher inventory and stocking across channels. We're simultaneously the second point would be more towards gross margins where we're seeing that some bit of price increase needs to be taken. Sir, would that be a fair assumption to make till the time these stocks or the restocking exercises won't really complete, the gross margins would be at similar levels to what we've seen right now in Q2? Thank you. Priyanka, do you want to answer that? It's mainly because of the U.S. markets. Yeah. I think, yeah, you're right. I do see that happening. The gross margins will continue to remain at existing levels until we start passing on the prices. Okay, thanks. Thank you. That was it for my side. Thank you. The next question is from the line of Surya Patra from Phillip Capital. Please go ahead. Yeah, thanks for the opportunity, sir. Just on the azido impurities issue, which could come up for the losartan. Same is the situation even for the metformin, I believe. Would that maybe have a kind of a concern for us as well? Was there any indication or was there any kind of guidances that we have received about it to ensure our supply capability of those products going ahead from regulatory side? I'm sorry, I didn't understand the full question, but let me just start with the first part and you can ask me again. Yes, sure. On the metformin, I mean, we have been quite good. We have, I think, amongst all the most of the suppliers of metformin, we were one of the few that did not have any issues on the nitrosamine impurities. Except one product, which is 750 mg extended-release metformin tablet, which was a very small product. We were very good on that and we continue to be good on metformin. Absolutely no issue. Losartan, the azido impurity is a new issue that has come up. For us, because we believe in the highest quality, we were already clear of azido impurity, and we think that is going to give us a great advantage in the market today. We don't have to do anything to remove that impurity. Right. That's with regard to these two products. Maybe I missed the next part, if you can ask me again. That was related question only on that impurity issue. My second question is how the gross margin and the overall margin for the company. What I'm seeing that, okay, if we consider last year was a high base in terms of revenue and all that. To some extent it is in the similar lines only, despite of the challenges. The product mix or the market mix or the category of the product mix, all that we consider, it has either remained same or improved. Despite that there is a kind of tough correction in the gross margin. Is it because- Go ahead. Is it because of the higher volume of material supply at an elevated cost? Meaning, the spread squeeze that was witnessed, that is one. Along with the revenue, what we are seeing, maintained revenue, it is driven by higher volumes at an elevated cost level. That is why the situation that we are witnessing. Your question somehow we know that it's changed. I'm not able to really understand, but at least the first part. Maybe, go ahead. We believe that from Q2 onwards the revenue also will increase and there will be definitely some improvement in the gross margin. If we are able to, we will be able to be consistent with our expenditure run rate also. We believe that there will be improvement in our performance, both in terms of top line and bottom line. Gross margin also will be improved. Let me just add to that, because when the previous participant was asking the question, it was not very clear to me. Gross margins for this year will definitely not go back to old levels. They can only improve from last quarter. Quarter -on- quarter, we see an improvement. Okay. When I said we'll do substantially better compared to Q2. Overall, like I said, the year will not be in line with our values. Definitely there will be an improvement quarter-on-quarter. Next year we see that things may sort of get back to our normal growth path. Okay. Is it large part of the issue just the cost elevation or it is also on the revenue front there is issues in terms of realization on the broader basis? I'm not asking about a U.S. specific pricing pressure or something like that, but whether on your realization front for your portfolio also you are seeing some correction. No, the cost is the main issue. Cost has gone up. Due to that, revenues, people are not buying as much as they would like to. It's always a wait and watch. It's just in inventories for them also. Hence our actual quantities have come down a bit, but because of price inflation, the revenues seem to be the same level or going up. As the demand and as the pickup improves, the revenues will definitely go up a lot. Though the EBITDA absolute number may come to a decent level, the margins may be slightly less, made up by higher volumes. Sorry to interrupt. May I request Mr. Patra to please rejoin the queue. We have participants waiting for their turn. Thank you. Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants, please limit your questions to two per participant. The next question is from t he line of Rashmi from InCred Capital. Please go ahead. Yeah, thanks for the opportunity and good morning management. Just want to understand out of your total raw material cost, how much currently, you know, we are importing and especially from China. From China, the imports are roughly about 35%, Rashmi. From the rest of the world, from Europe and other places, it's going to be another 10%, maybe about 45%, 43% or so is total imports, and 35% from China. Out of 35% from China, 27% is only from PAP. That's the past. Now with PAPs, we can get half of our PAP from India itself, and that will just bring it down by 13% straight away. Okay. Like, out of 35%-27% is from PAP. The rest is for the DCDA we are dependent? DCDA, like I said, we are not totally dependent on China. We also have another source, but we are dependent. We do buy from China. Okay. We don't have too many products from China. We have substituted most of those other products. We with domestic vendors who are making in-house as well. Two important products are only PAP and DCDA. PAP, I see as one of the in a year or so, PAP can be totally de-risked. DCDA will continue to be a little bit of a problem, but that also we are working on some plans. Okay. What I want to understand is basically this PAP and acetic anhydride, as you said that, you know, you will be starting sourcing from the Indian source. That's going to start from third quarter itself or, you know, it will take little time? The PAP we have already started buying from one source in India and one non-Chinese source elsewhere. The Indian source is still stabilizing their production. Quarter-on-quarter, they will definitely be able to supply more. I see that shortly more than 50% of our requirement would be coming from the Indian source itself. On acetic anhydride, we always work with an Indian source. A very small percentage from a Gulf source. Otherwise mostly was Indian source. Again, Rashmi, this is a very complicated world. When I say we are buying from Indian source, the manufacturer of acetic anhydride imports acetic acid from Gulf or some other place. That's how it works. Luckily not from China. Second question was related to backward integration, which you mentioned that, you know, for all your core molecules, you know, or at least you will plan for getting into the manufacturing of the KSMs and all. This would include DCDA also because that would require a huge capital outlay, like manufacturing that molecule in our country would require a bigger land parcel, clearance from pollution board is also challenging. So is it that, you know, you would pick that particular product and go for the other molecules? Another thing related to that is that for all these molecules, would you go through PLI scheme and all? What would be the capital outlay total? Like, you know, earlier we planned for INR 400 crore this year, INR 300 crore in FY 2023 and then for that at INR 200 crore. Would the CapEx remain same that would include this backward integration? Or, you know, we would require more CapEx. We have enough funds there, Rashmi. We provided more than INR 300 crore for APIs in our CapEx plan of 1,000 crore over three years. Now we are trying to save INR 150 crore from our greenfield formulation plan. We still will have INR 450 crore to spend over the next two and a half years to on just the KSMs and APIs. That should be definitely enough. Okay. Sir, regarding the backward integration of these four molecule products- BCBA? Yeah. Actually BCBA slipped my mind. The BCBA you have hit it on the head. It's a highly polluting process, and it's a process that as it looks today, may not be feasible to be made in India. PLI scheme may be there. Got it. Definitely it's not an easy nut to crack. For us, we've been seeing on BCBA is increasing our market share from our non-Chinese source. We have a very good relationship. We, as a company, pay them a much higher price compared to China, not looking at short term. The relationship is strong, and maybe we can get the maximum requirement from this source, and Chinese dependency will be minimal. Okay. My last question is on, you know, your B2B and B2C. What share of your revenues, total revenues that comes from B2B and what revenues come from B2C segment? B2B, sorry? Can you repeat it please? No. I'm asking about your total revenue share that comes from B2B customers and from B2C segment. Okay. I think B2C today is about 35%-40%, and 60% is from B2B. 60%? 60% is from B2B. Got you. Okay. Thank you so much, sir. That's it from my side. Thank you. Thank you. The next question is from the line of Anirudh Gangahar from Avendus Wealth Management. Please go ahead. Good morning. Thank you for the opportunity. Two questions from my side. One, could you help us with the status of the U.S. FDA inspections of your plants which have been due? Have they started? Could you update us on the status? Secondly, just a housekeeping question on the other opex which we see this quarter. It's up about 25% from the June quarter. Is this largely due to the fixed forex costs or is it any other element which should probably normalize? Thank you. What was the second question? Can you please? First one was, you said regarding FDA inspections. I'll come to that, but what was the second question? The second question was that if I look at your other operating expenses, it is INR 208 crore. Other operating expenses, yeah. In the second quarter versus INR 164 crore. Okay. Sandip will answer that. On FDA inspections, what I understand from the question is, are they inspecting, or are they likely to inspect shortly? If that is the question, yes, FDA has started physical inspections. They were doing virtual inspections, online inspections for some time. Actually we went through one of those for our Vizag facility, and we went through quite well. Of late they've been doing physical inspections, and many plants in India have started getting inspected. In the U.S. of course, we had some online inspections, two online inspections and one physical inspection so far after COVID. Sir, has physical inspections of our facilities started in India as well? Only one facility was inspected online. We are ever ready. One of our key strengths is the FDA compliance. We always are very happy to say we will never have any data integrity issues. We may have some other problem, but never data integrity issues. All our plants are in good shape. Okay. Operating income, I think Sandip wants to respond. Regarding the operating expenses increase from the last year similar quarter, the main contributors are R&D expenses has gone up by INR 20 crore. Freight increase is around INR 20 crore. There is a one-time consultancy expenses which is incurred in this year is almost INR 6 crore. So- That difference is maybe between last year-over-year or is little more than quarter-over-quarter? This is year-over-year. This is June quarter was INR 160 crore. Between June quarter and- Between June. ...Yeah. Between June quarter and this quarter, R&D expenses have gone up by INR 20 crore and t hen freight has gone up by INR 9.5 crore. There are other manufacturing costs, some of the doubtful debt settlements, then, Forex loss, conversion charges, repairs and maintenance, small increases. These are like, some of the things which had to be incurred in this quarter. If you see the overall kind of a run rate, from the last year to the current year, if you exclude all the one times and exceptions, it is likely that the run rate will be going up by 10%-12%. Right. Anirudh, follow up. You can take another. Thank you. The next question is from the line of Abdulkader Puranwala from Elara Capital. Please go ahead. Yeah. Hi, sir. Thank you for the opportunity. Just one question on that. Considering that you know in the first half we have faced certain challenges with regards to squeezing of margins and the working capital is also going high. As you mentioned earlier in the call, we are spending close to, you know, INR 200 crore-INR 400 crore this year and similar amount next year. How do we see the debt position of the company? I mean, do we still remain confident that, you know, much of this CapEx should be driven by internal accruals, or we will have to raise debt in the near term? Internal accruals will be the source for funding our CapEx for this year and future. There is no doubt about it. The other thing is that, since our long-term debt is coming down, because of continuous repayment which is happening, even if there is a little bit of increase in the working capital requirement based on the increased demand or kind of a strategic decision about making bigger inventory build up, at a net level, the debt position should not change that big time. It should be enough. Sure, sir. Thank you so much. Thank you. The next question is from the line of Praful Bohra from Systematix. Please go ahead. Yeah, hi, sir. Sir, you highlighted the possibility of price hikes on the B2B segment. Can you also throw some light on the B2C segment? Yeah. B2C already we have explained that they've just started looking at price increases. B2C is all in the U.S. today for us. Again, Priyanka, you want to expand on that? Sure. The thing is right now, like somebody earlier mentioned, there is a lot of stocking in the U.S. Today, there are people who are just about starting to see the impact or starting to understand what the impact would be over the next few months or quarters. Based on that, they are looking at strategic customers, especially for our products. This is based on the history we've had. They do think of us as a strategic customer with the market share that we have. We are looking at discussing the cost increases that could translate into price increases with the customers but there will be a lag. Even if we do pass on the prices today, it will still take us a few months to be able to see that actually affect our numbers. Okay, got it. Secondly, sir, the spike in the R&D spend this quarter is it more of a timing issue or this is gonna be the new normal now? Are you talking about the target R&D spend? Yes. The INR 47 crore number. Again, R&D spend is in line with our plan, so it's not that there is any brought forward from the earlier quarter. This was the planning and, as we kind of progress, this will be our run rate for the rest of the year. Understood. Okay. Thank you. Thank you. Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to Dr. Krishna Prasad Chigurupati for closing comments. Once again, ladies and gentlemen, I sincerely thank you for being with us on the weekend and spending your time away from the families. Again, I would like to end this conference on a very positive note that we will be seeing improvements quarter- on- quarter. Though this year is going to be a blip, we see the future to be quite exciting and encouraging. Thank you very much once again. Thank you.