Nitin Agarwal: Hi. Thank you. Hi. Good afternoon, everyone, and a very warm welcome to Laurus Labs Q2 FY27 earnings call hosted by DAM Capital Advisors Limited. On the call today, we have representing Laurus Labs management, Dr. Satyanarayana Chava, Founder and CEO, Mr. V.V. Ravikumar, Executive Director and CFO, Mr. Krishna Chaitanya Chava, ED, Head CDMO, Mrs. Soumya Chava, ED, Affordable Medicines and Commercial, and Mr. Vivek Kumar, AVP, Investor Relations. Before we proceed, I would like to remind you that some of the statements made during the call today could be forward-looking in nature, and a safe harbor statement to this effect has been included in the press release that has been shared on the company's website. I hand over the call to Dr. Chava to make the opening comments, and then we will open the floor for questions. Please go ahead, sir.
Satyanarayana Chava: Thanks, Nitin. Good afternoon to all our stakeholders. We are pleased with the substantial progress company making across various business segments. We continue to report strong growth in CDMO business, steady momentum in affordable medicine portfolio because of the major advancement in our partners' clinical and commercial programs. The strong performance reflects sustainable, robust demand for our specialized capabilities, integrated offerings, depth of our customer relationship, and disciplined operational execution by our team. In line with our accelerating transformation strategy, we are actively investing into building scientific capabilities and capacities across complex and new modalities. The company's total reactor volume for small molecules API in operation has now reached over 9,000 kiloliters, and we are continuing to expand further.
Satyanarayana Chava: We are also pleased to highlight some of the important disclosures we have made in this quarter's investor presentation on the advancements we are making in our integrated peptide CDMO capability. We commissioned commercial scale peptide manufacturing block. Our current reactor volume for solid phase peptide synthesis is over 16,000 liters, and we have taken up a significant further expansions to meet diverse program requirements. We continue to strengthen the capacity of liquid phase peptide synthesis and several new technologies. We are also augmenting our capacities through disciplined business development. During the quarter, we have announced investment into two technology platform companies. The one is an agreement to acquire majority 60% stake in Canada-based Galenvs Sciences, specializing in oligonucleotide and precision magnetic nanoparticles-based purification.
Satyanarayana Chava: By leveraging Galenvs' expertise in early-stage oligo projects, process development, conjugation, precise purification, and fill finish, along with Laurus' large-scale expertise in complex chemistry, we intend to support clients with seamless journey from complex RNA/DNA-based therapies as a one-stop solution. Together, this will expand Laurus' position to participate in emerging high-growth oligo market. Second is an acquisition of a majority stake in SI&C Resins, a peptide resin technology-focused company based out of Hyderabad. This will allow us to enhance long-term supply security by insourcing critical solid support resins for peptide synthesis, and also chromatography stationary phases for large-scale peptide purification. This will bolster Laurus' manufacturing completeness and reliability with our current and future partners' programs. These acquisitions are aimed to advance Laurus' integrated scientific capabilities under one roof.
Satyanarayana Chava: These acquisitions are strengthened by Laurus' quality infrastructure that will cater to more complex customized projects, along with significant increase in future therapeutic demands. Moving on to our financial results. Laurus has maintained its growth trajectory and once again delivered a record revenue and profits for Q2. Total revenues were INR 2,206 crores, reflecting a continued strength of our CDMO platform, growing contribution from commercial-based supplies, and ongoing momentum in affordable medicines portfolio. Gross margins were also healthy and maintained around 63%, and EBITDA margins further expanded over previous quarters by 2.7 percentage points to 34.5%. Our product mix and operating leverage continue to do well, supporting healthy margins overall. I would request Mr. Krishnajeet Sinha to share key updates on our CDMO business.
Krishna Chaitanya Chava: Thank you. Coming to the small molecule CDMO, the business has continued to deliver robust operation execution in Q2, reporting an 86% growth with the sales of INR 875 crores. For the H1 of the current financial year, the division recorded INR 1,710 crores. That equates to about 77% growth. This performance was driven by successful delivery of critical late-stage programs, as well as commercial API supplies to multiple global partners. We also continue to see encouraging demand on the newly commissioned assets across both human health and animal health businesses, both in terms of the volumes and opportunities with existing partners, as well as with new client engagements. The company remains focused on enhancing our core capabilities and capacities to better meet customer demand, driven by continuous expansions.
Krishna Chaitanya Chava: As Dr. Satya highlighted in the opening remarks, we have commissioned our peptide manufacturing facility, and our investment towards other multiple large-scale API opportunities continues to take place in our Vizag site. Strategically, we are elevating client collaboration on complex new modalities, and our focus remains on securing fully integrated projects, seamlessly supporting partners from preclinical development, going all the way to finished drug product services. Driven by this end-to-end capability, our CDMO pipeline continues to expand. We are adding clinical programs across a highly diversified mix of manufacturing technologies as well as therapeutic indications. I would say with our capability expansion, deeper integration and expanding pipeline, Laurus is well-positioned to sustain a healthy business growth in the coming years. Now, moving on to Laurus Bio.
Krishna Chaitanya Chava: The Laurus Bio division reported a Q2 sales at INR 29 crores, and for the H1 of this financial year, that is at INR 64 crores. The year-over-year variation is primarily due to the campaign phasing, though our underlying pipeline momentum remains strong. We are actively increasing longer term strategic relationships with our major customers across both AOF as well as CDMO programs towards anchoring our future pipeline. On the capacity front, our commercial fermentation facility, Laurus Bio Four, is progressing as planned, and we expect this to be operational by the end of this year, and we are already advancing on customer capacity reservations for this facility. Now, I would request Saumya Chava to share key updates on our affordable medicines portfolio.
Soumya Chava: Yeah. Thank you. Revenues from the affordable medicines stood at INR 1,302 crores in Q2, which represents a strong 15% year-on-year growth. For the H1 of this financial year, we achieved a healthy growth of 13%. This growth was driven by continued expansion of our order book across various established portfolios, which was also supported by stable pricing in both our ARV portfolio and developed market portfolios. Looking ahead, we remain committed to investing in the business in line with evolving market requirements. The positive long-term outlook is underpinned by a robust pipeline of new product launches, integrated CMO engagements, and ongoing expansion of product registrations across key emerging markets, which is creating new business opportunities for us. I am also pleased to report that despite the heightened global volatility, our supply chain has demonstrated exceptional agility, enabling us to maintain highly reliable delivery performance for all our global partners.
Soumya Chava: With respect to our strategic KRKA joint venture, progress at the formulation facility remains firmly on track. The phase I production blocks are scheduled to commence operations in mid-2027, which will significantly enhance our commercial capabilities with a focus on high potent and general OSD manufacturing. On the filings front, we have cumulatively filed 92 DMFs to date. In developed market formulation business, we filed two dossiers and received two approvals during H1. Overall, we have cumulatively filed 96 products to date. Thank you.
Satyanarayana Chava: Thanks, Krishna and Soumya, for the overview on CDMO and affordable medicine segments. On the R&D front, overall spending to sales for the first half of this financial year was at 4.3%, increased by over 34% year-on-year, which has been exceptional, primarily on account of capability development efforts for our gene therapy ADC technology infrastructure. We maintain our commitment to investing portfolios focusing on product complexity, scale, and sustainable technology platforms. I would also like to share a brief on quality and ESG. In the first half, Laurus underwent 59 quality audits by multiple drug regulatory agencies and key partners, and has successfully cleared audit inspections without any critical findings. On the ESG front, we continue to drive sustainability initiatives with continued recognition by leading global rating agencies. Meanwhile, we are also making operational progress against our SBTi-validated near-term GHG reduction targets. You can see more in our IR slides.
Satyanarayana Chava: To conclude, we are pleased with the way we are executing our transformation strategy and the headway we are making into building a stronger foundation for future. By broadening our integrated capabilities, diversifying our pipeline, and advancing key commercial opportunities, we are well-positioned to accelerate our long-term growth trajectory. Now I request Mr. Ravikumar, our CFO, to share overall financial highlights.
V. V. Ravi Kumar: Thank you, Doctor. A very warm welcome to everyone to our Q2 and H1 earning call. Let me take quickly through the highlights. Total income from operations for H1 is at INR 4,233 crore, registering growth of 31%. We continue to deliver strong growth mainly due to continuing strength in CDMO execution and stable performance in affordable medicine. For the Q2, total income from operation is INR 2,206 crore, which is the highest from the beginning. Gross margin maintained at a healthy level for H1 at 62.9% and for Q2 at 63%, mainly due to better product mix and division mix, and improved operational efficiencies. EBITDA for H1 stands at INR 1,406 crore with a margin of 33.2%. For the Q2, EBITDA reported at INR 762 crore with a margin of 34.5%. This profitability is on account of improved operational leverage.
V. V. Ravi Kumar: Profit after tax for H1 at INR 809 crores and for Q2 at INR 441 crores. Our ROCE is moving upwards to 22.5% for the H1 versus FY26 of 17.7%. On the CapEx front, we invested close to INR 470 crores for the quarter and INR 864 crores for the H1. We are making good progress in executing ongoing key CapEx across diversified growth projects. Our net debt stood at INR 2,466 crores and debt-to-EBITDA is around 1.02x versus 1.28x for the last quarter on the back of strong internal cash flows. On the capital allocation front, our strategy remains unchanged and we will continue to prioritize investments into high-value business segments to drive near and long-term growth for all our stakeholders. You can refer our IR presentation for more details. With this, I would request the moderator to open the lines for Q&A. Thank you.
Operator: Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and 2. 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 comes from the line of Tushar from Motilal Oswal Financial Services. Please go ahead.
Tushar Manudhane: Thanks for the opportunity. Firstly, on the peptide large scale manufacturing block being started. As a trajectory, how to think about the commercial level revenue coming through, considering the customer might require certain regulatory approvals to come in place, or you will have the inventory buildup quantity. If you can just explain that business trajectory.
Satyanarayana Chava: Krishna, would you like to answer this question?
Krishna Chaitanya Chava: Sure. Thanks for that question, Tushar. As you rightly said, for every program, there is a certain runway towards commercialization, as you rightly identified, related to validations and regulatory approvals. With that being said, we have several programs in the pipeline, which I cannot really divulge too much about, but that are in various stages including development, scale-up validations. So we already have a visibility into how we would leverage these facilities and thereby having the visibility to invest more in furthering this capacity.
Tushar Manudhane: For the existing capacity, can you just, considering not getting into product specific or company specific, but in terms of timeline, where we see the commercial benefit starting to? And what could be the quantum for the existing capacity, maybe in terms of asset turn over a period of time, how to think about it?
Krishna Chaitanya Chava: For the commercial revenues, we expect somewhere around the 2029 timeframe for some of these peptide capacities that we are talking about today. But with that being said, in terms of utilization, even for some of these validation campaigns also, it will be fairly high for the asset itself.
Satyanarayana Chava: Tushar, as we mentioned in our investor presentation, we are also expanding our peptide capacity significantly.
Satyanarayana Chava: We will give you more details as and when the facilities are qualified.
Krishna Chaitanya Chava: Yeah.
Satyanarayana Chava: We have good visibility on the progress of the programs and the volumes requirement for those programs. We have visibility. One point I would like to add here is, our peptide manufacturing capabilities are fully integrated. In the sense, we are not making fragments, we are doing complete synthesis of the peptide purification isolation. We are offering an API, not just fragments.
Tushar Manudhane: Got it. That is really helpful on peptide side. On the overall CDMO side, considering multiple projects at multiple stages, is there any, maybe in the near term, where the inventory build-up has happened at the customer end, and hence there would be some buffer before the revenue picks up on the overall basis in the CDMO segment? Or we have certain projects which are yet to sort of scale up and hence we will continue to have growth in this segment, maybe over, let us say, next 12 months or six to nine months.
Krishna Chaitanya Chava: Based on what we know at the moment, we do not anticipate such a situation. With that being said, we have several programs that are commercialized in nature. These volume changes generally tend to balance out. We are not anticipating any such certain surprises, at least from the perspective that we have today.
Tushar Manudhane: Got it, sir. Thanks a lot. That is it from me.
Krishna Chaitanya Chava: Thank you.
Operator: Thank you. The next question comes from the line of Sajal Kapoor from Antifragile Thinking. Please go ahead.
Sajal Kapoor: Yeah. Congratulations. Am I audible?
Satyanarayana Chava: Yes, you are.
Sajal Kapoor: Hello, am I audible?
Satyanarayana Chava: Yes, you are audible.
Operator: Yes, sir.
Sajal Kapoor: So congratulations, Dr. Satya, Ravji, and team. Well deserved. I have three questions. First, Dr. Satya, if you remember in April 2023 on that NDTV Profit interaction with me, you agreed that a bigger surface area would mean better growth. Since then, CDMO has grown about four times. What can Laurus do for customers today that it couldn't three years ago? Thank you.
Satyanarayana Chava: As years pass by, we are not just adding reactor volume, we are also adding various technical capabilities. See, our first commercial scale biocatalysis happened in 2021, and then flow chemistry happened later on, flow hydrogenation happened later on, fermentation happened later on. So we are adding technical capabilities over a period of time. Today, if any partner comes with a tech pack, we will not say no because we don't have capabilities, except monoclonal antibodies and the cephalosporins and penicillins. Those are the areas we don't have right now. Other than that, we can offer any chemistry, any modality, any scale, any potency also. So we just commercialized an OEB5 facility for payload linker now. So we are adding capacity and capabilities over a period of time. In 2023, we don't have this many capabilities. Now, we have capacity and capabilities.
Operator: Sorry, you are not audible.
Sajal Kapoor: Dr. Satya, thank you. So my sense is execution. No, I am. I think there is slight delay, but I think I am audible, so thank you. So my second question is, execution to my mind is earning customer trust, and trust is bringing more complex programs, something you alluded to in a private function at the CPHI. Over the next five years, what is most likely to break this winning loop? That is my second question. And I have got one more. Thank you.
Satyanarayana Chava: It is difficult to predict, Sajeev Kapoor. We are putting our best efforts to keep our service level constant, if not increased. Our ability to take projects, we are very cautious not to compromise on our service levels. Our project abilities, we are choosing where we will add value to our customer, not deplete value to our customer. That is where we would like to maintain service level. Business will not come today, it will come tomorrow. We do not want to spoil partnerships or relationship by taking too much that we cannot handle.
Sajal Kapoor: No, that is helpful. Finally, Dr. Satya, alongside the large CapEx, you are making small bets across peptides and oligonucleotides. Which one could become a flywheel for Laurus in, let us say, 5 years, give or take? Thank you.
Satyanarayana Chava: Our investment in peptide resins is not going to give so much of financial benefit, but it will strengthen our position in our peptide synthesis. Our investment in oligo peptide startup, Galenvs in Canada, we have no customer right now in oligos. We believe that will add significant value in the near to medium-term future. Yeah.
Sajal Kapoor: I think, Dr. Satya, is that exactly the loop that we have been playing over and over again? We try and control the full value chain integrated, and I think what we did with ARV, we are kind of, in my view, and correct me if my understanding is wrong here, we are just playing the same playbook of integrated end-to-end value capture in the entire pharmaceutical space and new modalities are. The thinking for the new modalities is along the same playbook as we have already executed over the period of time. Is that how one should look at this transaction? Because you are not spending too much into this, but the capability that you are getting is meaningful, perhaps 5 years, 6 years out, if not immediately. Thank you.
Satyanarayana Chava: Thank you. I think I would say it is not same, but maybe similar. The scale is also not same. Scale could be different. ARV is a memo, but I do not expect the oligos will go to ARV level in the next four to five years. We are investing because our customers are asking. It is not that we are investing, we are liking. Our customers are asking us to get there, so we invested. Yeah, that is the message I can give you right now, Sajeev. Yeah.
Sajal Kapoor: Sure. Thank you. That is all. Wish you all the very best. Thank you. I am done.
Operator: Thank you. The next question comes from the line of Chirag Shah from White Pine. Please go ahead.
Chirag Shah: Yeah. Thank you for the opportunity, and congratulations for the set of numbers. Sir, I have, first, a very short-term question. If I look at Q1 to Q2 on the CDMO side, can you give some color, what has driven such a strong ramp-up sequentially? Is it on large size molecule which you have supplied, or is it some projects have moved from either phase I to phase II or phase II to phase III that has driven, or is it sheer number of molecules for which the supply has happened is driving it? So it would be helpful if you can give some more granular, whatever you can share on qualitative side.
Krishna Chaitanya Chava: I think it is a meaningful growth between Q1 of this year and this quarter. But as we have highlighted in the Q1 conference call, we expect this to be pretty consistent, is what we have alluded to also in the last call. But to answer your question, there is no specific one-offs that we are looking at in this case.
Chirag Shah: Okay. It is not about one-off, it is about the quality and the nature that is driving it. Is it more molecules getting added or it is some large molecule or some phase II, phase III movement which is driving this? I am just trying to understand that side.
Krishna Chaitanya Chava: I think if you look at the increase in Q1, Q2, the INR 200 crores is because of the overall revenue increase. The CDMO revenue increase only contributed by INR 40 crores, but the rest of our affordable medicine increased by INR 160 crore. It is the overall performance.
Chirag Shah: Fair point. And sir, second on the peptide side, can you just indicate the kind of capacities that we have currently and the infrastructure, what kind of capacity addition that can happen? That is one. And I presume you already have soft commitments or soft confirmations from customers, or that is also yet to happen because it is a new facility. That is why I am asking.
Krishna Chaitanya Chava: On the capacities for the peptides, on the only quoting the SPPS synthesizer capacities as we captured in our investor presentation, it is a little over 16K. LPPS, I do not want to quote at this point in time, but like we have always maintained, we will provide a meaningful update whenever we reach that stage. Yes, generally, we tend to shy away from quoting too much information, which might not be meaningful or translate into actual numbers. Again, I think we will keep you updated on peptides as and when there is some updates there. Yes, that is something that I can share at the moment that we continue to invest extensively in enhancing the capacity further.
Chirag Shah: Is your fair assumption the lead time are longer in peptides versus small molecules? It is a fair assumption, right, sir?
Krishna Chaitanya Chava: It depends. It is not a statement that is always true. It depends on the complexity of the small molecule, the number of steps involved, and also the complexity of the peptide, if you are doing the fragments, if you are doing the API. It has a question that has probably three, four follow-on questions. Yes, I think at a high level, maybe you could say that, but it might not be always true.
Chirag Shah: Perfect. Thank you very much and all the best, sir.
Krishna Chaitanya Chava: Thank you.
Operator: Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all the participants in the conference, please limit your questions to two per participant. The next question comes from the line of Shekhar Kadiyala from Family Office. Please go ahead.
Shekhar Kadiyala: Hello.
Operator: Yes, sir, you are audible.
Shekhar Kadiyala: Yeah. Thank you. Dr. Chava, congratulations on not just for this quarterly numbers, but I think the journey that Laurus has been giving all of the investors quarter after quarter. My question is primarily on the peptides, although many questions were already there, but I think I wanted to get a broader color from you or from Mr. Krishna. So, in the peptides world, I think what we have been hearing about is the solid state, liquid state, hybrid, and then, of course, I also read somewhere that fermentation-based peptides are the cheapest one in terms of manufacturing. So what I would like to understand from you is how do you see this whole scenario emerging in terms of how over the next three to five years, would it be the hybrid that will probably drive most of the manufacturing, or could it be fermentation?
Shekhar Kadiyala: How Laurus is preparing as we are building the peptides capacities, the fact that we also have the fermentation capabilities, how we are preparing for this three to five-year sort of a story. If you could throw some color. I don't need any numbers, but just the color around peptide manufacturing and how we are developing our capabilities. Thank you.
Satyanarayana Chava: The use of fermentation and peptide synthesis depend on how many amino acids, natural amino acids, are there in sequence. If the sequence is small, nobody will go to fermentation-based. Currently, the programs what we have, mostly SPPS, LPPS or hybrid. So that's where our capacity expansion is also going on.
Krishna Chaitanya Chava: Just to add on to that, I think every program in the peptide space is unique and comes with its own unique requirements. So it's not very easy to say that five years down the road, there will only be a certain type of programs. We believe there will continue to be a space for SPPS, LPPS, hybrid, and as you've said, for the fermentation-based as well, that they will continue to play a meaningful role because they offer unique characteristics depending on the peptide requirements.
Shekhar Kadiyala: Thank you. My second question and the last question is, if you could throw some light on the fermentation, in terms of our facilities, if they are GMP approved. Do they have any limitations, so to say, or they could do any type of a fermentation requirements that our customers may have?
Satyanarayana Chava: See, we have one GMP facility in Bangalore that will do up to 5,000 liters fermentation. We have a food grade, industrial grade facility in Tumkur with 200,000 liters fermentation capacity. We are building 500,000-liter facility, which will be operational in this quarter. That is also food grade and industrial grade, not a GMP grade. We are also building a GMP grade fermentation facility for some of the products in animal health. That will be operational H2 of next year.
Shekhar Kadiyala: Okay, great. Thank you and all the best.
Satyanarayana Chava: Thank you.
Operator: Thank you. The next question comes from the line of Foram Parekh from BOB Capital Markets. Please go ahead.
Foram Parekh: Yeah, thank you for the opportunity. My first question is on the CapEx. We have announced INR 3,000 crore CapEx over a period of 2027 to 2028, and it is across various modalities. Could you give us some color which modalities would have higher contribution, or would the CapEx be equally distributed amongst oligo peptides? Some color there.
Satyanarayana Chava: It is difficult to break into several segments for competitive purpose. We are investing significantly in growth CapEx, and majority into API. Hmm.
Foram Parekh: Okay. My second question is on the EBITDA margin. While on a sequential basis, I see gross margin is almost flat, but on EBITDA has increased, EBITDA margin has increased, and I see that is largely because of R&D cost rationalization. Just wanted to understand, why has R&D come down steeply on a QOQ basis, and how sustainable is it?
Krishna Chaitanya Chava: I think for Q1, we have filed some ANDAs, so there is a reason the cost has gone up in Q1. It is not that we are refocusing on our R&D expenditure.
Satyanarayana Chava: There is operational leverage as well. From Q1 FY2027 to Q2, we also achieved INR 200 crore extra revenue. Our EBITDA margin improvement, not just through lower R&D cost, but higher operational leverage.
Foram Parekh: Sure. Sir, any guidance on the sustainable run rate of EBITDA margin because 34% seems to be the highest ever. Now CDMO segment is also stabilizing at 40% contribution. What is the stable EBITDA margin we can expect for the year?
Satyanarayana Chava: At the beginning of the year, we already indicated we were comfortable in maintaining over 60% gross margin and over 30% EBITDA. I think we still stick to our guidance. That is the number you should take in your mind. Yeah.
Foram Parekh: Sure. My last question is on the, again, custom synthesis side. Sir, some color, or some dynamics, like how many molecules have we commercialized and how many molecules are there in phase III?
Krishna Chaitanya Chava: Unfortunately, that is not something that we are in a position to divulge, ma'am, because of various confidentiality reasons. Also, like we've alluded to in the last call as well, at least internally, we believe that number does not necessarily translate into the actual numbers in terms of revenue. Because one program might give, let's say, $1 million versus another program could potentially give $100 million. So that number, at least from our end, we believe, does not paint a full picture, and that's why we've always refrained from quoting that number.
Foram Parekh: Okay. Sir, lastly, if you can give us the number on the CC, constant currency growth and the percentage exports of the total sales.
Krishna Chaitanya Chava: Percentage exports, I think we'll check. I think majority is there. Actually, I think domestic must be less than 20%. The constant currency on a sequential basis is not a significant number, on a sequential basis. It's about INR 12 crores.
Foram Parekh: Sure. Gotcha.
Krishna Chaitanya Chava: Yeah, on a sequential basis.
Foram Parekh: Yeah. Thank you. Those were my questions.
Operator: Thank you. The next question comes from the line of Rahul Bharadwaj, an individual investor. Please go ahead. Sir, you are not audible.
Rahul Bharadwaj: Can you hear me?
Operator: Yes, sir.
Rahul Bharadwaj: Hi, yes. Thank you for the opportunity.
Operator: Please go ahead.
Rahul Bharadwaj: My question is primarily to understand the CDMO space a little better. You probably have around 100-plus active programs. Can you give us some color into what percentage of the commercial-stage supplies, say, they are originating either from let's say a phase I, II development versus late-stage tech transfers?
Satyanarayana Chava: I think it is difficult to give that granular answer for this question. As Krishna mentioned, the number of projects may not give you right color of where revenue comes. We have projects from $200,000 to several tens of millions dollars. If we give, say, we have 200, 300 projects, whether you multiply that number by $200,000, multiply that number by $10 million. I think that may not give you right picture to our investors, so we refrain from giving that number.
Rahul Bharadwaj: Thank you. I do not have any further questions, sir.
Satyanarayana Chava: Thank you.
Rahul Bharadwaj: Thank you, and good luck ahead.
Operator: Thank you. The next question comes from the line of Dhawal from Jefferies. Please go ahead.
Dhawal Khut: Hi. Thank you for taking my question. Joining the peptide bandwagon, what is the gross block of the peptide facility that we have put up? Is there any very broad high-level estimate what peptide business can generate in terms of peak asset turn whenever we achieve, but very high level?
Satyanarayana Chava: I think after a lot of deliberation internally, we agreed to give the reactor volume. I think beyond that, we are not going to give you how much of CapEx we have invested, what is the asset turnover ratio we are going to get. That is, unfortunately, we were not able to give you further details.
Dhawal Khut: Okay, sure. In the call earlier, it was mentioned that even the validation batches will require significant capacity and will drive a good utilization. Is there any broad timeline when these validation batches, you think could begin for the peptide facility?
Satyanarayana Chava: See, in the modalities like peptides, the complexity of synthesis is very high. Nobody would like to do validation at some scale and scale up later on, or move reactor, or move facility, move manufacturing block. For these modalities, the commercial-scale facilities are needed for the validation itself. We have built facility not just do validation, but also meet our customer commercial demands from the same manufacturing block.
Dhawal Khut: Yeah. Definitely. Got the concept. But any broad timeline you think when these validation batches could begin?
Krishna Chaitanya Chava: Broadly speaking, 12 to 18 months is the number that you can take, but again, in clinical programs, things can move around, but you can assume that number.
Dhawal Khut: Okay. Last question. It seems like we are trying to do some backward integration in SPPS manufacturing by investing in resin facility and resin capabilities. Again, approximately how large is resin cost when the peptide is getting manufactured using SPPS or hybrid? Again, it can vary a bit, I understand, depends on how large the fragment is, how much is SPPS, how many LPPS. But very broadly given you guys are doing investment, what is the typical resin cost versus the total cost of manufacturing the peptide using SPPS?
Satyanarayana Chava: I will be able to give a range. The smaller the fragment, the cost of resin is higher. The longer the peptide, the resin contribution is less. You can take in the cost of manufacturing, raw material cost of peptide, it will vary between 10% to 20%.
V. V. Ravi Kumar: Raw material cost.
Satyanarayana Chava: Raw material. Not the sale price.
V. V. Ravi Kumar: Yeah.
Satyanarayana Chava: The raw material cost to a peptide resin contribution vary between 10% to 20%, depending on the length of the fragment of the peptide.
Dhawal Khut: Got it. Understood. Very helpful. Any other major cost beyond resin which is involved? Is it all the regular solvents and typical raw materials, nothing specific beyond resin that one should be aware of?
Satyanarayana Chava: We will not give you that granular answer.
V. V. Ravi Kumar: Hope you are not building a model here, cost model.
Satyanarayana Chava: I think it is difficult for us to go that granular.
Dhawal Khut: Sure. Okay. Thank you.
Operator: Thank you. The next question comes from the line of Vivek Agrawal from Citigroup. Please go ahead.
Vivek Agrawal: Thanks for the opportunity. One question is on CapEx. This year for this as well as the next year, you have guided INR 3,000 crores CapEx. How good you are in terms of completion of this amount, given that in the H1, the run rate is slightly on the lower side. Second, a related question, how you see investment or the overall CapEx, let's say, even beyond these two years, even 2028. If we want to look at, let's say, another three years, so 2029, 2030, 2031.
Satyanarayana Chava: Vivek, your voice is not clear. Can you just remove your speaker?
Vivek Agrawal: Should I ask this question again?
Satyanarayana Chava: Yeah. Now it is better.
Vivek Agrawal: Yeah, thanks. So, in terms of CapEx, we have guided INR 3,000 crores CapEx for this as well as the next year. Given that current run rate is slightly on the lower side, how good you are in terms of completion of this? Second, even beyond these 2 years, if you want to build the model, let us say, for another 3, 4 years, what kind of the investment or the overall CapEx you are envisaging? Thank you.
Satyanarayana Chava: Although the H1 the number is less, most of the investments are going on track. So, as we guided INR 3,000 crores CapEx for 2027, 2028, is the right number. Second, we expect the investments will continue at that range in the years to come. So around INR 1,500 crores per year capital expenditure based on the current understanding. It may go up if the opportunities come, but otherwise it will be in that range.
Vivek Agrawal: Understood. If I look at asset turns, you are consistently saying that asset turns are moving up. What is a fair level of asset turns, let us say, you are expected to reach in the next couple of years? At what level you think that overall asset turns can stabilize?
V. V. Ravi Kumar: See, the average asset turn even for six years is 1.1. We are at one. Definitely we can move up to 1.1. Our peak asset turn was 1.4. We also wish we should go there, but somewhere in between it will go. It is over a period of time based on the maturity of the projects, so it depends.
Vivek Agrawal: Understood. One question on peptide. When you are expecting the commercial revenues to kick in of this 16,000 liter capacity, how much, in your view, it has only been committed? What percentage of the capacity is already been committed by the customer?
Krishna Chaitanya Chava: Unfortunately, Vivek, for both of those questions, we will not be able to give you an answer primarily because of confidentiality reasons and also for strategic reasons. I am sorry about that.
Vivek Agrawal: No problem. You also talked about that you are also looking to expand the peptide capacities. Is it an aspirational statement or do you already have some visibility from some of the customers that you are looking to expand the capacity? Or is it like, that it depends on the execution in the existing capacity projects, et cetera, you are expecting more products and that can drive the expansion. I am just trying to understand the thought process behind the statement that you are looking to expand the peptide capacity.
Satyanarayana Chava: The current capacities we foresee may not be enough for us to cater to the requirements in the near to mid-term. We are significantly increasing capacities because we see some of the programs in the early clinical phases. When they move to validation phase, we wanted to move those programs to a commercial manufacturing block. That is the intention we are building new capacities.
Vivek Agrawal: Are you also involved or, let us say, do you sense any opportunity to be involved in some of the existing GLP-1 products, approved peptide GLP-1 products?
Satyanarayana Chava: We do not want to comment. We reserve all our. Yeah.
Vivek Agrawal: No problem at all. Just dragging here a bit more. In terms of backward integration, how important it is? You are building the reagents, et cetera, but in terms of building blocks and amino acids, how backward integrate you are on these aspects, or are you also looking to add capacities in building blocks, amino acids, et cetera?
Satyanarayana Chava: See, these programs will have multiple sources of amino acid suppliers, including us. These partners' programs are so large, they do not want to depend on one vendor for any of the key amino acid derivatives also. We have programs where our derivatives will go into the validation, like, we buy some amino acid derivatives from the other party, third vendors also.
Vivek Agrawal: Understood. Sir, one question I have on affordable medicine. This quarter you have logged a decent number and for 12 around 13 and so. What drove the sharp uptick this time around, how sustainable it is, and how you think that this finished those formulation revenues can pan out, let us say, in the next one to two years once this KRKA project becomes live?
Soumya Chava: For the formulation revenue, as mentioned earlier, we are doing product registrations in multiple countries. We see our formulation revenues will continue to grow in the upcoming quarters as well. Regarding the pricing for the APIs, they have stabilized. Though there is a lot of geopolitical pressures, our supply chain resilience has helped us stabilize those prices.
Vivek Agrawal: Thank you. That is all my side.
Krishna Chaitanya Chava: Thank you.
Operator: Thank you. The next question comes from the line of Nayan Patshala, an individual investor. Please go ahead.
Nayan Patshala: Hello. Hello, am I audible?
Krishna Chaitanya Chava: Yes, you are audible, Nayan.
Nayan Patshala: Good evening, sir. Regarding the KRKA joint venture, how is the business progressing and when can we expect it to make a meaningful contribution to Laurus Labs revenue and profit?
Soumya Chava: The KRKA formulation facility is getting ready, and we will start validations for products mid-2027. We are already working towards validations. Once the validations are done, we will do the filings. So 2028, 2029, we should see meaningful revenues.
Nayan Patshala: Yeah. Thank you, ma'am. Secondly, you mentioned around 125 active CDMO projects. What is the current number?
Krishna Chaitanya Chava: That number is a very dated number, but we do not want to say further. But yeah, you could assume 125 even today. But we do not want to expand further on that.
Nayan Patshala: Okay. No problem. Thank you, sir.
Krishna Chaitanya Chava: Thank you.
Operator: Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all the participants in the conference, please limit your questions to two per participant. The next question comes from the line of Shrikant Akolkar from Nuvama. Please go ahead.
Shrikant Akolkar: Yeah, thanks for taking my questions and congratulations to the management for the good set of numbers. I have two questions. Firstly, on the peptides, is it possible for the management to quantify ballpark number that they have invested in solid phase, liquid phase, isolation, purification, and amino acids, total investment in this?
Krishna Chaitanya Chava: Unfortunately, we would not like to divulge that information due to strategic reasons.
Shrikant Akolkar: Understood. But any ballpark number or any quantification, like a percentage of total investment that we have incurred so far? Without giving any proper numbers?
Krishna Chaitanya Chava: I am sorry, but we are not able to provide that color. As Dr. Satya mentioned and Ravi mentioned, even this peptide capacity that we have created, we have shared after a lot of deliberation and feedback from a lot of investor community. But even beyond that, we are not in a position to share at this point in time.
Satyanarayana Chava: If we can share, we will share to all investors, not be selective.
Krishna Chaitanya Chava: Yeah.
Satyanarayana Chava: Please bear with us.
Shrikant Akolkar: Okay. No problem. Again, on peptides. I know that you do not want to talk on any GLP-1 opportunity in the near term, but do you think that in the next 5 years, there will be a right for us to get any peptide GLP-1 related contract?
Krishna Chaitanya Chava: Yes. I think given the capabilities and the capacities that the company is investing in, I think we certainly expect to play a very meaningful role in that whole business.
Shrikant Akolkar: Understood. The last question is, now recently, this is broader industry level question. Recently China has banned the export of any technologies outside China, and US has also banned some of the investment that will happen in Chinese biotech. Now, what kind of opportunities or new industry trends that will emerge because of this?
Krishna Chaitanya Chava: From a geopolitical standpoint, I would not want to comment on this call at the moment. Yeah.
Shrikant Akolkar: Okay, understood. Thank you so much.
Operator: Thank you. The next question comes from the line of Krish Mehta from Enam Holdings. Please go ahead.
Krish Mehta: Thank you for taking my questions. I have two questions. The first is on understanding the sustainability of this quarter's revenue and EBITDA margins run rate. If I were to look out, say, to FY28, would it be a fair assumption to assume that what we have done this quarter can be repeatable in terms of looking at something like a broad INR 10,000 crore revenue at 35% EBITDA margin? Or should we kind of normalize this current quarter's run rate? That is my first question.
Satyanarayana Chava: The one we are always answering without giving any guidance, two things we are committing. One is we will be able to maintain 60-plus percentage of gross margin and 30-plus percentage of EBITDA. We are comfortable to guide all our investors. Beyond that, it is very difficult to give any guidance at this point in time. Yeah.
Krish Mehta: Sure. Thank you. My second question is on if you could provide the breakup of your ARV API and ARV FDF for this quarter.
Soumya Chava: ARV API for this quarter is INR 625 and FDF is INR 677.
Krish Mehta: Okay. Thank you so much.
Operator: Thank you. The next question comes from the line of Alankar Garude from Kotak Institutional Equities. Please go ahead.
Alankar Garude: Hi. Good evening, everyone. Sir, first question on peptides. Within peptides, how important do you think will be purification as your programs move from clinical to commercial over the next 2 years? This is particularly for the longer peptides.
Krishna Chaitanya Chava: I think, yeah, purification is similar to synthesis, the downstream, which includes the isolation. Purification and isolation are equally important as complex. Yeah.
Satyanarayana Chava: Just to break the complexity. Synthesis, purification, isolation, all three will be equally important. Maybe one third, one third, one third kind of situation. Yeah.
Alankar Garude: From a complexity.
Satyanarayana Chava: Complexity point of view. Yeah.
Alankar Garude: Understood, sir. Where are we in that journey when it comes to scaling up both, say, downstream purification or isolation capacity in parallel to creating the overall reactor capacity?
Krishna Chaitanya Chava: Like we've mentioned in our investor presentation, when we say we've created peptide capacity, that includes the entire value chain of synthesis, purification, and isolation.
Alankar Garude: Got it. Just one follow-up there. From, say, 2,000 liter currently, are there any plans to move to 3,000 liter synthesizers? If yes, possible to give any timeline for that?
Krishna Chaitanya Chava: I would not like to answer this question at this point in time. Yeah.
Alankar Garude: Fair enough.
Krishna Chaitanya Chava: Yeah.
Alankar Garude: Sorry to ask that. Yeah. No problem. Just one final question. Given that you have been working on various modalities, as Dr. Satya mentioned, pretty much all capabilities except maybe mAbs and cephalosporin, penicillin. In terms of talent availability, how would you assess the current situation? There are multiple companies working on multiple modalities, adding capacities. Just from an industry standpoint and your own talent hiring standpoint, do you assess any challenges? Where are we in that journey?
Satyanarayana Chava: As you have seen in this quarter earnings presentation, we signed a definitive agreement to invest in oligonucleotide company because we believe talent is there.
Satyanarayana Chava: Whereas we can manufacture, because oligonucleotides manufacturing, purification, isolation, are similar to peptides, so we have that expertise. But synthesis-wise, we do not have R&D wise, we invested there. Like that, we invested in a solid support resins company because we do not have talent right now. So we are trying to build the gaps in our technology development by investment in these companies. Like we invested in Laurus Bio to get expertise in enzymes and fermentation. So our investments are to build the capabilities where we do not have right now. Although we are not investing in capacities, if you have seen for the last several years, we build capacities, we bridge the gaps by acquiring technology-based companies.
Alankar Garude: Understood, sir. That's very helpful. That's it from my side. Thank you and all the best.
Satyanarayana Chava: Thank you.
Operator: Thank you. The next question comes from the line of Yasir Lakdawala from M3. Please go ahead.
Yasir Lakdawala: Hi. Good evening team, and before that, wish you all a happy Diwali in advance. My question was on the CDMO side, is there any color you could give in terms of, for H1, our mix between animal health, crop science, and human pharma?
Krishna Chaitanya Chava: Firstly, happy Diwali in advance to you as well. Coming to the breakup, while we've not given a split between our human health and animal health side of things, what I can say is crop science, we continue to discuss with several partners and hope to have meaningful contribution from that, but that's still minuscule compared to our human health and animal health initiatives.
Yasir Lakdawala: Mm-hmm. As you said, we've got more than 100, 120 odd customers. Would you say that, or could you perhaps give us some sort of color on, is there any customer concentration, like say, are there five or 10 customers who are responsible for a larger pool of the CDMO revenue? The reason I just ask that is in case there is some destocking event or there is a competitive program that replaces the dominant customer, would that have sort of a material impact on our revenues going forward? Just to understand the concentration of the CDMO business. I think that would be helpful.
Satyanarayana Chava: Currently, we don't have a significant concentration of customers or programs. We are managing. Actually, we're not managing. We were lucky that the projects are coming like that. I'll put it that way. Second, we don't foresee any significant supplies for launch and then destocking events. So we don't have that problem because we've visibility for next 18 to 24 months. Yeah.
Krishna Chaitanya Chava: In addition, fortunately, in the space that we've been in, we're not necessarily looking at any patent cliff for any of the programs that we support. So there's a fair bit of good visibility for some of these programs that we've successfully commercialized.
Yasir Lakdawala: That's very helpful. Thank you for that. I think lastly, as we look at some of these newer modalities, be it peptides, ADCs, in terms of when we look to announce these capacity additions, how do you weigh that? Because a lot of these new modalities don't tend to be very high volume products, right? If I've got that understanding right. So how are you balancing on one side capability addition and on the other side capacity addition? If you could help us understand that would be great.
Krishna Chaitanya Chava: Let's say from an ADC perspective, like you rightly said, these might not be large volume, like it will not be in multi-metric ton scales.
Krishna Chaitanya Chava: But from a value point of view, it will be quite significant from a general value point of view in the commercial side of things.
Yasir Lakdawala: Absolutely.
Krishna Chaitanya Chava: From an investment point of view, it can also be sizable, given the type of modality and how complex it can get.
Yasir Lakdawala: Mm-hmm. Fair enough, sir. Thank you.
Krishna Chaitanya Chava: Welcome.
Yasir Lakdawala: Appreciate it.
Satyanarayana Chava: Thank you.
Operator: Thank you. The next question comes from the line of Arindam Mukherjee, an individual investor. Please go ahead.
Arindam Mukherjee: Good evening. Am I audible?
Satyanarayana Chava: Yes.
Arindam Mukherjee: Good evening, team. Firstly, congratulations on the fabulous set of numbers. My first question is, H1 operating cash flow fell 26% on strategic inventory, and free cash flow after INR 864 crores of CapEx was slightly negative, and the net debt rose a bit. What are those inventories? When do they convert to cash? Is FY27 free cash flow positive after CapEx and the investments you have announced?
V. V. Ravi Kumar: The inventory is a regular inventory. We are not saying the extra inventory. There is some additional absolute number inventory as of 30 September. That will be, what you call, utilized in the current quarter and the coming quarter. Coming to the free cash flow. Yes, last year only we have a free cash flow. When you are making that kind of a CapEx investment, we have taken a call between the free cash flow versus the growth capital, and then we are investing growth CapEx. I think we may not be worried on the free cash flow front because if you look at our net debt by EBITDA is still at a very healthy level of one, around one. I think we will manage. We will see how it can move.
Arindam Mukherjee: Got it. Thank you for the clarification. I just have one more question. Laurus Bio did INR 64 crores in H1, and it is down 16% against the roughly INR 200 crore base you cited in July. With LB4 commissioning this quarter and customers reserving capacity, what are the reservation terms take or pay or advances, and what does H2 look like? If you can throw some color on that.
V. V. Ravi Kumar: We expect Laurus Bio will be on good track from Q1 next financial year. Although facility will be qualified this quarter, we will only do trials in the Q4 of this financial year. The actual commercial supplies may start in Q1 of 2028. Although there is a reduction in the revenues, that is as part of our some customer allocations or projects scale-up from the customer side, from our side. The prospect looks good. Hello, are you there?
Arindam Mukherjee: Hello. Sorry, I think there was some connection issue. Just one more follow-up. Minority losses suggest that Laurus Bio's net loss is around INR 50 crores for H1. Is that about right? What is the EBITDA breakeven?
V. V. Ravi Kumar: I think we will provide offline.
Arindam Mukherjee: Yeah. Okay.
V. V. Ravi Kumar: Please write to Vivek, our investor relations. We will get back to you on that. Yeah.
Arindam Mukherjee: Okay. Sure. Thank you. Thanks a lot.
Operator: Thank you. The next question comes from the line of Tushar Manudhane from Motilal Oswal Financial Services Limited. Please go ahead.
Tushar Manudhane: Yeah. Thanks for the opportunity again. Just to understand how the asset turn would improve from, say, 1.1 to 1.4, what are the, let us say, key factors that would drive this scale up?
V. V. Ravi Kumar: I think that is one year we achieved 1.4. That is actually based on the large purchase order. I think in future, I think a lot of unlocked assets are there. We are not generating up to the fullest extent. Once every asset is being generated, I think there is a possibility. I am not saying that we will reach a 1.4, but we will inch towards it.
Tushar Manudhane: But given the ongoing CapEx, we will continue to have certain assets or let us say certain investments in the gross block, which will then sort of suppress this asset turn, which is why I was trying to ask that how or let us say, over what period we think that even if the incremental investment that happens, still we will be able to do the asset turn of 1.4.
V. V. Ravi Kumar: You are right, but we also have a greenfield and brownfield CapEx. Like now we are investing a lot of investment in our unit 4 that is a brownfield CapEx, and then our unit 2 investments are a brownfield CapEx, which are going to do better. But we will see. But as I said, our first target is 1.1, which is our average of last six years.
Tushar Manudhane: Got it. And just lastly, while many questions on peptide, just one last from my side. Unlike in other set of products, is the validation batch also similar to that of a commercial size batch in what we are manufacturing in the peptide block?
Krishna Chaitanya Chava: That is generally the case, Tushar. But generally you could say that, yes.
Tushar Manudhane: All good. That's what I see. Thank you.
Operator: Thank you. The next question comes from the line of Dhawal Khut from Jefferies. Please go ahead.
Dhawal Khut: Hi, thanks for the opportunity. Last quarter, you guys had mentioned about a small molecule project about to go commercial. So what's the status on it? Do you think it will be a meaningful growth driver given, generally in first year there is a significant supply that happens? Is that a growth flavor in the CDMO business given, now we have a really large base or is it more like a typical smaller projects that we work on?
Satyanarayana Chava: I think there are several programs at NDA filing stage, NDA filed stage even now. We feel comfortable with the projects at various scales we have right now. We are not able to give you more granular than this. Yeah.
Dhawal Khut: Sure. No problem. Second question. Maybe it could be a bit technical, but just want to understand the concept behind it. You guys emphasized quite a lot that you are doing API, not just fragment. And you have full API capability. Let us say, there is an API, whatever is the chain length, let us say 10 is the chain length. How does the realization vary, API versus a fragment which is half the size? Let us say a five amino acid fragment versus a full 10 length API. Just ballpark range, just to understand the significance of having a full API capability.
Krishna Chaitanya Chava: It can be small, or it can be quite drastic. While I know the answer, I do not want to go into too much details as to in our cost model and all that, but
Satyanarayana Chava: It is difficult to give. The reason is, if five fragments uses all unnatural amino acids
Krishna Chaitanya Chava: Yeah
Satyanarayana Chava: cost could be very significant.
Krishna Chaitanya Chava: That's right.
Satyanarayana Chava: If the 15 amino acids are all natural, then cost is very significant lower. So it gives a wrong signal. Any answer, it is project specific.
Krishna Chaitanya Chava: Yeah.
Satyanarayana Chava: As you mentioned, your question was very technical. We do not want to give a very generalized answer for such a complex question.
Krishna Chaitanya Chava: Yeah.
Dhawal Khut: Okay, sure. Thank you.
Satyanarayana Chava: Thank you.
Operator: Thank you. Ladies and gentlemen, we will take this as the last question for today. I now hand over to the management for closing comments. Over to you, sir.
Satyanarayana Chava: Thank you, ma'am, all the stakeholders for your active participation in the call. Thanks for asking very interesting detailed questions. In advance, we wish you Happy Diwali for all the stakeholders. Thank you.
Krishna Chaitanya Chava: Thank you.
Operator: Thank you. On behalf of Laurus Labs, that concludes this conference. Thank you for joining us. You may now disconnect your lines.
