Improvement in gross margins likely to continue: Ipca Labs

Our branded formulations this quarter has grown up by 15 percent and overall for the first nine months of the current year this business has grown by 17 percent

AK Jain

ED 

Ipca Labs

Last week, Ipca Laboratories  reported net profit of Rs 87.89 crore for the quarter ending December 31, 2012 on the back of strong sales across domestic and international markets. AK Jain, ED, Ipca Laboratories told CNBC-TV18 that the margins are going to remain in the regions of around 32 percent plus. "Slight impact is expected on account of certain additional cost which is taking away 1 percent of EBITDA because of the additional cost. There is an improvement in overall gross margins and that trend would continue," adds Jain.

Below is an edited transcript of AK Jain's interview on CNBC-TV18

Q: Give us an update with regards to your Indore facility. The US Food and Drugs Administration (USFDA) inspection has been delayed, can you give tell us why there was a delay?

A: I think there is some issue related to travel schedule of the inspector. It is just postponement of around a month's time, so it is going to be in the month of April now instead of February end.

Q: Were there any one-off costs that you incurred because of the delay with regards to the USFDA inspection that showed up on your P&L this time?

A: There is nothing of that type. On P&L, there is another additional cost which is on account of certain fees required to be paid to USFDA, because USFDA came out with the guidelines to pay fees on our pending abbreviated new drug application (ANDA) files and also the drug master file (DMF) files which are already permitted. So, there is a huge one-time cost on that filing.

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We have incurred additional Rs 10 crore on R&D because of certain special project which is going on right now, some additional expenditure has come, but in spite of those expenditure we are maintaining healthy EBITDA margins of almost around 22.59 percent for the quarter and also for the first nine months it is around 22.74 percent, that is more or less in line.

Q: What about your margins? They were marginally lower at 22 percent. What were the reasons for the shortfall and will you be able to improve your margins? A part of the margin shortfall was hidden by the higher other income, but how will margins perform hereon as well?

A: Margins are going to remain in the regions of around 32 percent plus. Overall, margins are more or less intact, there is no change. Slight impact is expected on account of certain additional cost which is taking away 1 percent of EBITDA because of the additional cost from filing fees and from certain special R&D projects which are right now going on, we have incurred a huge cost on that account. There is an improvement in overall gross margins and that trend would continue.

Q: What is the run rate that can be seen in the domestic business? You have lost some contract manufacturing business in the nutraceutical space this time around, but you clocked in a 13 percent growth which is pretty much in line with the industry. What is the trajectory that we can expect for the domestic formulations business and domestic business as a whole?

A: Our branded formulations this quarter has grown up by 15 percent and overall for the first nine months of the current year this business has grown by 17 percent. Except for the anti-malarial which is having a very low growth in this quarter as well as in the second quarter of the current year, we are having good growth and our pain segment is growing much faster than the market. In cardiovascular, we are growing at market rate and our other therapies like dermatology, urology are growing much faster. So overall, in domestic market we should be able to post around 17 percent growth for current financial year.

Q: There was a one-off this quarter on your UK business. Do we expect it to bounce back? What would your guidance be on your international business there?

A: Temporarily for a month, month and half there was a disruption in production in UK because of certain issues at our distributor front. The supplies could not be shipped because of certain issues at their end. Though it took some time, but those issues are resolved by the party and we will also have good business growth coming from the UK now.

Q: Can you give us some details on your financial matters? How much of your export earnings have you sold forward? What is the dollar earnings vis-à-vis rupee earnings or non-rupee earnings? How much of it is sold forward? What is the debt situation?

A: We have a policy of hedging our net foreign exposures to around 40-60 percent. Currently, for next one year around 47 percent of our net exports are hedged and that hedge rate is almost around Rs 56 or so, so that is the overall hedge that we are having. As far as the debt position is concerned, overall debt in the balance sheet at March end would be lower than last year's debt, so there is no increase in the debt in the current financial year. As far as outstanding or External Commercial Borrowings (ECB) are concerned that is going to be in the region of around USD 72 million by March end and is currently around USD 76 million which will be around USD 72 million at year end.