Operator: Ladies and gentlemen, good day and welcome to Strides Pharma Science Limited Q2 FY 2027 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note, this conference is being recorded. I now hand the conference over to Mr. Abhishek. Thank you, and over to you, sir.
Abhishek Singhal: Thank you, Nazneen. Very good morning, and thank you for joining us today for Strides' earnings call for the Q2 and H1 ended September 2026. Today, we have with us Badri, Managing Director and Group CEO, and Vikash, Group CFO, to share the highlights of business and financials for the quarter. I hope you have gone through our results release and quarterly investor presentation that have been uploaded on our website, as well as stock exchange website. The transcript for this call will be available in a week's time on the company's website.
Abhishek Singhal: Please note today's discussion will be forward-looking in nature and must be viewed in relation to the risks pertaining to our business. After the end of this call, in case you have any further questions, please feel free to reach out to the investor relation team. I now hand over the call to Mr. Badri to make his opening comments.
Badree Komandur: Thank you, Abhishek. Good morning, good afternoon, and good evening, everyone, and a warm welcome to the Strides Q2 and H1 FY27 earnings call. Thank you for joining us and for the trust and support so many of you have shown us over the years. As always, I will begin with the overview of the quarter, and I will share an update of our overall FY28 aspiration, followed by our US and ex-US business. Vikash will then take you through the financial performance in greater detail, after which we will be happy to take your questions. Q2 FY27 has been a quarter of firsts for Strides. We delivered our highest quarterly revenue, and for the first time in our history, our ex-US business became larger than our US business, a milestone we had set for FY28, and I have reached well ahead of the schedule.
Badree Komandur: Let me share the headline first. Our overall FY28 growth aspiration remains intact. Our rest of the business is accelerating faster than the US and well ahead of the schedule. Let me say that again. Our overall revenue ambition for FY28 is firmly in place. What will change is the regional mix, with ex-US accelerating more than the US. Our goal for ex-US was to match the US by FY28, and we have achieved that in the Q2 of FY27 itself. As we highlighted last quarter, we expect H2 to be stronger than H1. On the Q2 FY27 performance, I will cover the broad highlights.
Badree Komandur: With this, let me take you through the quarter, and I am delighted to report a strong second quarter. Revenue for Q2 FY27 reached INR 14,297 million, our highest ever, growing at 17% year-on-year and 13% quarter-on-quarter, led by our ex-US business and delivered against a challenging macro backdrop. Ex-US now contributes 49% of our revenues, up from 43% in Q2 of last year, a clear sign that our diversification strategy is delivering. Absolute gross margins grew a healthy 13% year-on-year to INR 8,003 million, and gross margins stood at 56% compared to 57.8% in Q2 last year and 60.9% in Q1 this year, reflecting a higher input cost linked to the geopolitical situation.
Badree Komandur: EBITDA grew 8% year-on-year to INR 2,509 million, crossing the INR 2,500 million mark in a single quarter for the first time, another milestone for Strides. EBITDA margin was 17.6% compared to 19% in Q2 last year and 18.2% in Q1, as we absorbed the high materials, freight, and logistics costs linked to the same geopolitical situation.
Badree Komandur: We are actively addressing these cost pressures through an alternative sourcing, procurement initiatives, and continuous cost optimization measures across the business, and we are confident in our ability to manage them. Operational PAT grew a strong 12% year-on-year to INR 1,358 million, and an operational EPS rose to 14.7 from 13.2 in Q2 of last year. Before I move to our individual businesses, let me step back and share an update on our FY28 aspiration, which many of you will have already seen in our presentation. Let me begin with our track record, because I think it tells our story better than any words I could use. Over the last 10 quarters, since the Q1 FY25, we have delivered a steady and predictable growth across key metrics. Revenue has compounded at about 14% and EBITDA at about 13%, and operational PAT at about 41%.
Badree Komandur: The consistency gives us a real confidence as we enter the next phase of our growth. We had shared an aspiration of about $375 million in US regional revenue by FY28. Given how the market has evolved, we now expect to reach this a little beyond FY28. The timing has moved, the ambition has not. Importantly, our growth ambition for the rest of the company remains fully intact. Our ex-US market is accelerating well ahead of the plan, and we expect Strides to sustain the overall top-line growth along with its profitability. On the US, the only thing that has moved is the timeline. The business continues to grow at a more measured pace, and the reasons lie in the market rather than in our commitment. A few things have changed since we set this aspiration.
Badree Komandur: First, the drug shortage opportunities in oral solids, which lifted the industry at that time, have largely normalized. Secondly, operating costs are higher with increased material cost and our decision to hold more inventory to sustain our industry-leading service levels. We also chose not to launch products that did not meet our margin profile to protect the profitability. Third, the growth in controlled substances is constrained by quota allocation, which we expect to improve progressively.
Badree Komandur: Our response is rooted in our core business philosophy and rests on three pillars. First, the profitability-led growth. We will protect our established profitability thresholds and drive margin-accretive revenues through selective launches and an expanding set of differentiated platforms. We will not compromise on the profitability or the quality of our business to chase revenue. Second, rebalancing our growth engines with a sharper focus on the ex-US to drive geographical diversification and accelerate overall growth.
Badree Komandur: Third, the US remains as a strategic growth market for us, with growth anchored in differentiated platforms such as nasal sprays, patches, films, and a steady, expanding controlled substance portfolio. While our US business has remained an anchor for us, the ex-US business has grown up right alongside it. This is where we are seeing a real acceleration. Our ex-US business grew 24% in H1 FY27. Our goal for ex-US revenue to match the US by FY28. The ex-US was 76% of the US business in FY25, 90% in FY26, and in Q2 FY27, it reached 102%, crossing the US well ahead of the schedule. That is a strategy patiently pursued for years and coming to life. Ex-US now stands equal with the US, not instead of it, but alongside it, and that makes Strides stronger as a whole.
Badree Komandur: With growing scale, operating leverage, and a better portfolio mix, we expect the continued margin expansion in the business. As a result, we now have two strong growth engines, both pointing in the same direction. Our US business is our foundation, with deep market leadership, a broad approved portfolio, and a growing pipeline of differentiated and controlled substance products. Our ex-US business is our accelerator, with a strong presence across Europe, UK, Nordics, Africa, a robust launch engine, and a long runway into new territories. Both are powered by the same discipline, a deep pipeline, steady launches, and a relentless focus on serving our customers. These two engines do not compete. They strengthen each other. They give us more ways to grow and make us more diversified and resilient. With that, let me take you through our US business.
Badree Komandur: Revenue for Q2 stood at INR 6,855 million, or $73 million, growing 9% year-on-year and 9% quarter-on-quarter. For H1, the US revenue was INR 13,137 million, up 7% year-on-year. As we indicated in our last call, we expected a softer H1, and I am encouraged by the healthy sequential recovery we delivered this quarter. Our B2B partner business saw a strong order book, and we secured meaningful new business wins during the year from a partnered product, our recent launches, and other key molecules in our portfolio. These wins will begin to show up in our performance over the coming quarters and underpin the better H2 we have been talking about. We continue to deliver industry-leading service levels to all our customers.
Badree Komandur: This is a real competitive advantage, and it is central to winning and retaining business with some of the largest customers and partners in the market. Our portfolio gives us a strong foundation. As of 26 October, we have filed 230 ANDAs, out of which 212 have been approved, covering 154 products. We also have a basket of ANDAs yet to be launched, and we will commercialize these at an opportune time. During the quarter, we launched three products, taking our commercial portfolio to 75 products, up from 72 at the end of Q1. We now hold top three positions in 38 products, which together contribute approximately 70% of our revenues.
Badree Komandur: As I mentioned earlier, our US portfolio is steadily shifting towards higher-margin differentiated products. We have more than 40 value-accretive products in our active pipeline, with filings and approvals planned in a phased manner and commercialization through FY30. Controlled substances is a key part of the strategy, and we see a much larger opportunity ahead. Our CS business saw higher customer orders in Q2, and today, our five commercialized CS products, all oral solid tablets, contribute to 6% of our revenues and address a market of around $750 million.
Badree Komandur: While this portfolio is constrained by quota allocation, we have more than 10 CS products in our pipeline across multiple domains, including nasal sprays, patches, films, which will expand our addressable market size to around $4.5 billion, about six times the market we serve today. Importantly, these niche products need only limited API quota. They can drive the ramp-up of this business even within today's allocations. We also hold an advantage that takes years to build.
Badree Komandur: Regulators require these products to be manufactured in the US, and our Chestnut Ridge facility already has the capacity and expertise to do exactly that. Beyond the controlled substances, we have more than 25 non-CS products to strengthen our core portfolio. Together, these products are set to broaden our addressable market, deepen our portfolio differentiation, and create exciting medium to long-term growth opportunities. Our near-term milestones are already in sight. We continue to invest in building our nasal spray portfolio, and as committed in our last call, we filed our third nasal spray, also a controlled substance, in September 2026. Our nasal spray has GDUFA goal date in H2 FY27, and we expect approval in Q4. In transdermal patches, we expect to launch a controlled substance patch in Q3.
Badree Komandur: This product came to us as a part of the ANDAs we acquired, and we expect its full benefit to flow in FY28. Overall, we expect a better H2 for the US business. We are committed, we are invested, and we are building for the long term, growing in a disciplined way that protects the quality of our earnings. Moving to the ex-US markets, our accelerator, the most exciting part of our story, the ex-US market for Q2 reached INR 6,963 million, an outstanding 31% growth year-on-year. For H1, the revenue was INR 12,838 million, up 24% year-on-year. Importantly, even as ex-US markets grew faster than the company average, we maintained the profitability of this business. What encourages me most is how broad the growth is.
Badree Komandur: Every ex-US market continues to show healthy momentum, driven by new product launches and expansion of our core base into new geographies and with new partners. In Q1, we had said that certain shipment delays were a matter of timing and not demand. I am pleased to say that with the robust supply chain execution, we delivered Q2 without any spillovers on demand, and order books across our key US markets have remained very healthy. In the UK, our prescription business delivered a strong performance with healthy pricing, volume momentum across several key molecules. We continue to deepen our relationship with the leading wholesalers in the market, positioning us as a dependable supply partner. We expect launch momentum to pick up here and drive the next leg of growth. In Europe, our partnered business delivered a strong performance on the back of higher customer uptake.
Badree Komandur: Our private label business, OTC business in Germany, continues to grow strongly with wider pharmacy reach and an expanding product portfolio. We are adding new customers across several countries and multiple new out-licensing deals we signed in the first half, which will further strengthen our momentum. Focused R&D investments and a broader customer base will continue to fuel growth in that region. The Nordics delivered a strong quarter-on-quarter growth led by our base portfolio. Our branded prescription business is showing very encouraging early signs in market uptake, with some of our branded products now positioned as first-line treatment across several regions in Denmark, and more regions expected to follow. Together with the increasing launch momentum, our branded portfolio is expanded to drive growth in the Nordics in the second half.
Badree Komandur: In Australia, the supply contract improved meaningfully, and we have agreed on new projects with our key partners, which are now at various stages of implementation. In Africa, our branded business in Francophone Africa delivered a stellar growth, and we continue to outpace the underlying market. Our deal with Sandoz is now awaiting antitrust approvals in few countries, and we expect it to close in Q3. In South Africa, we saw a strong momentum in the independent pharmacy channel and added new products and new business with a leading retail pharmacy chain. Overall, the strong launch pipeline and an expanding customer base and a significant regulatory filings is underway across all our territories. We expect the full ex-US business to keep growing faster than the company average. Before I close, I am delighted to share an important governance update.
Badree Komandur: We are pleased to welcome Mr. Biren Gabhawala to our board as an independent director. Byron is a chartered accountant with more than three decades of experience in financial reporting, audit, taxation, and corporate governance, and has chaired the audit committee of eClerx Services and 3M India. His appointment will further strengthen the board's financial oversight, and with it, independent directors is now to make up six of our 10 directors. Byron, welcome to Strides. Before I hand over to Vikash, let me leave you with one clear message. Our overall growth story is intact. While our US aspiration will take a little longer, our focus on growth is unchanged. We will continue to pursue top-line growth across geographies without compromising on profitability. Our commitment to US is equally unchanged.
Badree Komandur: It remains a core market, central pillar of our growth, and a home to some of the most exciting opportunities in our pipeline. Our US business is strong, our ex-US business is accelerating, and together they give us the more ways to grow than at any point of time in our history. With that, I will hand it over to Vikash to take you through the financial performance. Vikash, over to you.
Vikesh Kumar: Thank you, Badri. Good morning, good afternoon, and good evening, and thank you all for joining us. Badri has taken us through the headline performance for the quarter. I will focus on the drivers behind our profitability, cash flows, and balance sheet metrics. Starting with gross margins, our material costs rose to 44% of revenues in Q2 from 42.2% last year, reflecting the increase in raw material costs that Badri described. This moderated our gross margins to 56% for Q2. Importantly, for the H1, gross margin stood at a healthy 58.3%. Our ex-US businesses, where we have maintained profitability even as it scaled, continues to support the quality of our margins. With cost increases now moderating and our cost improvement programs, including alternate sourcing and procurement initiatives gaining traction, we are confident of sustaining our H1 gross margins going forward.
Vikesh Kumar: Even in this challenging environment, we remain committed to our margin discipline, launching only products that meet our profitability threshold and continuing to focus on the quality of our revenue growth. Our EBITDA for the quarter was INR 251 crores, our highest ever, at a margin of 17.6%. Higher material, freight, and supply chain costs linked to the geopolitical situation compressed our margins and tempered the flow-through of our very strong revenue growth. It did not hold back the growth in our absolute profitability. With the two growth engines, US and ex-US, now contributing in balance, our earnings base is more diversified and resilient than ever before.
Vikesh Kumar: On operating costs, other operating costs, excluding freight, increased by INR 47 crores year-on-year due to higher manufacturing and other operating costs in manufacturing, and freight costs increased INR 21 crores year-on-year to 5.5% of revenues. Even with these cost increases, operating leverage is still visible as total operating costs improved by 40 basis points to 38.4% of revenues. In terms of cost line items below EBITDA, our depreciation and amortization was at INR 57 crores for the quarter, and net finance cost was at INR 43 crores, slightly higher due to the higher average working capital borrowings we had during the quarter. Operational PAT grew a healthy 11.5% year-on-year to INR 136 crores, with an operational EPS of INR 14.7 per share.
Vikesh Kumar: Our EBITDA to operational PAT conversion remained steady at 54%. Our reported PAT at INR 134 crores for the quarter, with a reported EPS of INR 14.2 per share. From a H1 perspective, the first half delivered steady growth across all our key metrics. H1 FY27 revenues grew 15.1% to INR 2,695 crores. EBITDA grew 6.9% to INR 481 crores, with a 17.8% EBITDA margin. Operational PAT grew 9.8% to INR 259 crores, with operational EPS of INR 28.1 per share. Reported PAT for the first half was at INR 300 crores, which was up 26.4%, and this included the gain on Pivot Path divestment, which we recognized in Q1. Moving to working capital, our cash-to-cash cycle stood at 137 days. This is up 13 days from March 2026, with absolute working capital increasing by INR 307 crores during the first half.
Vikesh Kumar: This reflects two components, investment in inventory to counter the elongated supply chain timelines, and the working capital which supported our growth. Approximately INR 174 crores reflects the 14 days increase which we have seen in our inventory levels from Q4. This has been due to the higher transit and lead times due to the geopolitical situation, and we also had a deliberate increase in our finished goods inventories at all our front-end locations.
Vikesh Kumar: This has helped us get back to the industry-leading service levels in our top operating environment. These service levels have been central to the new business wins we secured in the US in this quarter, and also delivering growth on our ex-US markets. The remaining INR 133 crore increase in working capital is on account of the 15% revenue growth we achieved in H1. We remain steadfast in our efforts to continuously improve our cash-to-cash cycle and get them back to our historic levels. On net debt, as we had earlier indicated, the inventory build-over, over the last two quarters, was expected to lift our net debt-to-EBITDA ratio temporarily. The ratio now stands at 1.72x, reflecting the INR 211 crore increase in net debt during H1, driven by working capital.
Vikesh Kumar: At the same time, we continue to invest in our future, deploying INR 208 crores in CapEx and intangibles to support our growth platforms, including our nasal spray and transdermal patch programs. These investments are directed at the differentiated pipeline Badri outlined, including our controlled substances opportunity, which will broaden our addressable market and support margin accretive growth. As inventory normalizes and H2 launches and business wins begins to contribute, we remain focused on growth and improving our cash-to-cash cycle.
Vikesh Kumar: With this, we expect our net debt-to-EBITDA ratio to stabilize and improve by the end of the year. This net debt is not adjusted for the retained investment we hold in OneSource, which is now valued at approximately INR 290 crores. On ROCE, our trailing 12-month ROCE was at 14.4%, remaining in the 14% to 15% range. As our growth continues and recent investments mature, we expect these returns to improve.
Vikesh Kumar: To summarize, Q2 delivered record revenues and EBITDA in a challenging cost environment, and H1 saw steady growth across all our key metrics, with both our US and ex-US business contributing in tandem. As we enter the H2, our priorities are clear: build on our growth momentum across these markets, preserve our gross margins, improve our cash-to-cash cycle, and strengthen our net debt-to-EBITDA ratio. With the overall growth aspiration for FY28 being intact and operating leverage playing out, we continue to maintain that bottom line should accelerate ahead of top line. We are confident in the strength of our business and in our ability to deliver on these priorities. Thank you, and we are now happy to take your questions.
Abhishek Singhal: Nazli, we open for Q&A, please.
Operator: Yes, sir. 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 their touch-tone 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 Nitin Agarwal from DAM Capital. Please go ahead.
Nitin Agarwal: Thanks for taking my question. Badri, you already talked about in opening comments around the pickup which is happening in the non-US markets. Two things. One is, A, if you can just give us a sense on what is leading to this improved momentum in the non-US markets. Two, what kind of growth is possible in these markets over the next two to three years period, especially taking into account the Sandoz transactions we had closed, as you said, sometime this year?
Badree Komandur: Yeah. As far as the non-US market is concerned, this is a market we are invested for a very long period of time. The portfolio expansion in the new territories drives these markets. There are B2C markets, there are B2B markets, and we see an increased demand. We believe that these are the main two reasons where we really feel that this market can expand. We have got a portfolio in place, products in place. Regulatory is very minimal from that standpoint for the commercial revenue. We are also investing in domains which are in these markets. Overall, I think it is all adding up quite well. That is the first part. As far as the growth in this market, we will continue to grow at much above than the company average on all of these markets.
Badree Komandur: On the higher side, we always said that this market will grow faster than the US market in the last few conversations. We think that trend will continue, and this trend is bound to continue for the near long term. With Sandoz adding in, it will definitely lead to a very, very meaningful size in the next 1 or 2 years. We are very sure of the mirroring the US market in terms of the aspiration. That was an aspiration which we kept about 2 years back from INR 375 million perspective. With the latest trends that is coming in the non-US markets, it should be upwards of that.
Nitin Agarwal: Bob, it should be upwards of INR 375 million as 2028 is what you meant, if I got it right?
Badree Komandur: That is correct.
Nitin Agarwal: And the growth in this market, is it driven by some specific products, or is this like a broad-based product portfolio which is driving it?
Badree Komandur: It is a broad-based portfolio. As I said, there are B2C markets, B2B markets. I think the good part is like, it is very sticky, it is very consistent. So once you reach a particular size, the stickiness will be much, much more. Our product strategy has played out in all of these markets. B2C markets, in fact, a lot of markets are in different stages of evolution, that is what is driving the growth. Some markets are less than 25, 30 million, where the growth rates can be much higher, some markets are upwards of 50 million, where the growth rates can be maybe in the mid-teens. So, that is what is driving the entire growth. It is a broad-based growth. We are happy with the progress what we have achieved on the ex-US markets.
Nitin Agarwal: And, buddy, on the profitability front, how do these markets compare versus the US as a block?
Badree Komandur: It should be slightly higher than the company average in terms of the EBITDA, because it depends on the B2B as well as the B2C markets. Overall, I think the gross margins and the EBITDA are good in these markets.
Nitin Agarwal: Okay. Secondly, on the US, you talked about things sort of catching up with a bit of a lag, and the focus being more on some of these differentiated products. When do you see the meaningful contribution from these new differentiated products beginning to deliver?
Badree Komandur: It will be in FY28-29, for sure. That is what we are aiming for. It is only a slight delay by about 3, 4 quarters, and we should be able to get to that milestone by FY29.
Nitin Agarwal: Okay. Thank you so much.
Badree Komandur: Thank you.
Operator: Thank you. Next question is from the line of Pranav from JM AMC. Please go ahead.
Pranav Chawla: Hi, good morning, sir. Am I audible?
Badree Komandur: Yes, you are audible.
Pranav Chawla: First question is on gross margins. We have seen a sequential gross margin slip, and you are alluding that H2 gross margin would be a tad bit better. What gives you the confidence? Has anything particularly changed over here vis-a-vis Q2?
Badree Komandur: Yeah, Vikash, you would like to take it up?
Vikesh Kumar: Yep. From a quarter perspective, a lot of the purchases that if you would see which came in Q4 at the height of the geopolitical disruptions, those did get consumed in this quarter. We have also had a lot of cost initiatives that we had already put in place when the geopolitical disruptions happened. Those have started playing out. We see them internally, and that is what we expect. It should start to play out from H2 as well, which is why we are confident that the margins at 58% are sustainable.
Pranav Chawla: Just extending over here, do you think Q3 will be better than Q2 and Q4 better than Q3? Do you expect a sequential improvement or a sharp bump up in the fourth quarter or something like that?
Vikesh Kumar: See, the way I would say is our focus remains on EBITDA and PAT, and that is what we will continue to focus on. We have grown our focus over the last many quarters has been to drive sequential growth, and we will continue to focus on that. When you look at a longer-term trajectory, you will see us growing quarter on quarter.
Pranav Chawla: Okay. Second, on the guidance front that we have deferred to FY28, does your guidance hinge on, say, a particular set of products? If yes, can you call out the products?
Vikesh Kumar: First of all, it was not a guidance. What we mentioned was an aspiration.
Pranav Chawla: Aspiration, sir. Yeah, aspiration. That will be correct.
Vikesh Kumar: That this was an aspiration for us to get to FY28, so that is what we were chasing. With the geopolitical disruptions that have happened over the last few quarters and the fact that the shortages are no longer as much in the US in the product portfolio that we operate in, and we did not want to launch products compromising our fabric of profitability discipline. That is the reason we felt that it is better to protect the quality of margins and focus on profitability, drive the profitability and EPS margin accretion that we have been known for the last many quarters. That is what we remain focused on.
Pranav Chawla: Okay. On that aspiration front, does your aspiration hinge on a particular product or particular large opportunity?
Vikesh Kumar: It does not hinge-
Pranav Chawla: Or it is broad-based?
Vikesh Kumar: It does not hinge on a particular product. It is more broad-based, and we also spoke about the portfolio that we are building out, which will start to play out from FY29.
Pranav Chawla: Got it. And sir, what gives you the confidence that your quota allocation for controlled drug substances will improve in the coming year?
Vikesh Kumar: In fact, when you look at the last couple of years, we have seen progressive improvement in the quota allocations that we have received. And quota allocations happen twice a year, and every time we have gone back with quota allocations with the history of our sales and the improvement in our sales, we have been able to get improved quota, which is effectively what is reflecting in the business today, which has grown from 0% to 6% in the last couple of years. It is a very different model than the regular retail products where you can get to a 20%, 30% market share overnight.
Vikesh Kumar: This takes time, but then once you are in there, it remains sticky. And what we are also doing is having learned from this, we are building a portfolio around this entire controlled substance space. Plus the new product that we are building, they need very limited API quota. That would also give us an ability to ramp up much faster than the ramp-up that we have had over the last couple of years on the existing portfolio.
Pranav Chawla: Got it. Perfect. Thank you so much, sir, for answering my questions. Have a good day.
Operator: Thank you. A reminder to all the participants, anyone who wishes to ask a question may press star and one on their touch-tone telephone. Next question is from the line of Akshaya Shinde from Centrum Broking. Please go ahead.
Akshaya Shinde: Yes, thank you for the opportunity. The ex-US revenue has surpassed the US business. How should we look at the change in geographical mix from the margin perspective? Does the higher contribution from ex-US market have a structural impact on gross margin going ahead?
Badree Komandur: Yes. As far as the overall gross margin is concerned, Vikash highlighted that we will be in the range of 58% to 60%.
Badree Komandur: We will continue to maintain that range. As far as the ex-US markets are concerned, there are different types of markets, B2B markets, B2C markets at various levels of profitability. We believe that overall, every market will be healthy in terms of margins, and we will be within the range at the company level.
Akshaya Shinde: Understood. As the company is now maintaining higher inventory to navigate the in-place supply chain, should we expect that working capital requirements to remain elevated, or do you see the cash conversion cycle improving over the next few quarters?
Badree Komandur: Yeah, cash conversion cycle definitely will improve in the coming quarters. As we know that last six months has been difficult for every company operating in this space, with the lead times increasing for the raw materials, plus the key starting materials. The main objective of most of the companies, including all of us, is to maintain the business continuity and keep the growth intact. That's the reason we have increased the inventory levels. We believe that it will form a new normal in some point of time. What we are seeing is slightly at an elongated level at this point of time, but this will all moderate as we go along and we complete this year. We believe that the cash cycle engine should be back in the next quarter itself.
Akshaya Shinde: Okay. Sir, lastly, on the interest cost. Given the higher working capital borrowings and the resulting increase in interest cost during the quarter, should we expect this finance cost to remain elevated for the H2 FY27 as well?
Badree Komandur: It will be within a range between that INR 40 to 45 crore. It can be within that range. I think this quarter was about INR 46 crore, I think, if I remember right.
Vikesh Kumar: 43.
Badree Komandur: 43, yeah. It will be within that 40 to 45 range.
Akshaya Shinde: Understood. Thanks. That is it from my side, and all the best.
Badree Komandur: Thank you.
Operator: Thank you. Next question is from the line of Karan Shah from JC. Please go ahead.
Karan Shah: Hi, thank you for the opportunity. Two questions. I guess we alluded on the Q1 call that there was some deferment in revenues in the ex-US business. Would it be possible to quantify how much could have been the flow-through to the Q2?
Badree Komandur: Yeah. The flow-through has been. We have said, I think there is a slight, I need to give you more clarity on this. Between the Q2 to Q1, there have been certain supply issues. All that has been sorted out, and that is what is being reflected in the growth. If you really see, it is a very sticky business, and we have sorted out for all the revenue recognition issues, whatever we had because of the long lead times, because of which we could not reach the products on time. That has all been normalized, and it is back to growth.
Karan Shah: Can this be considered as a new run rate ex of Sandoz?
Badree Komandur: Yes.
Karan Shah: Got it. Sir, second question on CapEx. Any guidance for FY27 and FY28, what would be our CapEx?
Badree Komandur: Vikash, you would like to take that up?
Vikesh Kumar: Yeah. I mean, it should be around the INR 300 crore mark. I mean, if you look at our spend have reduced from Q1 into Q2, and we expect it to be more closer around the INR 300 crore mark by the end of the year.
Karan Shah: And the same thing for FY28?
Vikesh Kumar: Yeah. FY28 can be slightly lower.
Karan Shah: A lot would go towards the intangibles, because I do not think we will be requiring much apart from maintenance.
Vikesh Kumar: There is maintenance CapEx that continues. It will be maintenance CapEx and then some parts to intangibles, yeah.
Karan Shah: Okay. Thank you for the opportunity.
Operator: Thank you. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. Next question is from the line of Prateek from Unique PMS. Please go ahead.
Pratik Kothari: Hi, good day, and thank you. The H1, we see about INR 265 crores of CapEx as per our cash flow. Does this include the IP purchases? Does it flow through here?
Vikesh Kumar: Yes, so the difference between the INR 200 crores and the INR 260 crores is the INR 60 crores of payments were for all the investments that were done last year. The cash flows went out in the H1.
Pratik Kothari: Okay, but this INR 200, does it include IP purchase or this is
Vikesh Kumar: Yes, this includes IP purchase as well. This includes IP purchase as well as the investments that we are doing in nasal sprays and patches.
Pratik Kothari: Correct. Even last year, we had done a few IP purchases, a few external R&D partnerships, Sandoz. All of that, when does that start contributing? Sandoz, I believe, will get to, but the rest, when does that come in?
Vikesh Kumar: Some of them are for our global markets, and they are playing out as far as the ex-US is concerned. Some of the specifics for US will come through. In fact, we are going to launch our first patch later this year, which was an acquired IP last year. Some of these will start to flow through as far as the US is concerned over the next 18 months or so. As far as ex-US is concerned, it is already playing out.
Pratik Kothari: Correct. Fair. Effectively, in the last six, eight quarters, we have kind of upped our investments, be it CapEx, IP purchases, the acquisitions, the R&D programs. That has kind of kept our debt levels in a ballpark range. We earlier had some aspiration of being debt-free or net debt-free in a certain time. Has that changed? Are we pushing that out? I mean, are we now choosing to invest more rather than pay down debt, and maybe we are at comfortable levels? FY28 or FY29, I think used to be our earlier guidance or aspiration.
Vikesh Kumar: Yes. That aspiration has not changed. If you really look at the increase in debt level, it has been largely working capital-driven than CapEx-driven, right? The increase in our working capital in the H1 has been about INR 300 crores, and almost INR 170 crores of it was on account of the geopolitical disruptions, which was more like a one-off. Surely, this is not a permanent thing. Our aspiration remains, our growth on a consolidated basis is intact. While the mix between US and ex-US has changed, on a consolidated basis, it is intact, and that will reflect in our cash flows and debt. It will largely remain working capital debt as we get to FY29.
Pratik Kothari: Correct. But this debt-free plan that we had included working capital debt, right? Or was that ex of that?
Vikesh Kumar: Yeah. I mean, if you run the cash flows, you will get to that answer, right?
Pratik Kothari: No, I will just question it in last. Yes.
Vikesh Kumar: See, effectively, what you are seeing, the increase, if you see over the last four or five quarters, our debt have consistently reduced every quarter, right? This is the first quarter where you are seeing a debt increase. That debt increase has largely got to do with the working capital. So, if we adjust for that one-off, you will start to see the cash flow, and the cash flow that we deliver will continue over the next many quarters as growth continues.
Pratik Kothari: Right. Fair. Last, again, in this cash flow statement, we see INR 70 crores of some inventory obsolescence cost that we have charged to P&L. So anything on that?
Vikesh Kumar: Oh, there is nothing specific as that. I mean, some of those are elements of the businesses that we operate in. I think on an overall basis, it is about 1% to 2% of COGS.
Pratik Kothari: No, INR 70 crores, right? For H1.
Vikesh Kumar: Because it is not, I mean, it is a movement of provision. It is more from a reporting requirement that has been called out separately. So it is a cumulative number.
Pratik Kothari: Will that pass it through cash flow statement?
Vikesh Kumar: The corresponding adjustment is in the inventory line, in the inventory movement. Earlier, historically, that inventory movement was net. Now it has been grossed up for that line. I think it is more a presentation change.
Pratik Kothari: Oh, is it? Okay, fair. Great. Thank you. All the best. Thank you.
Operator: Thank you. Participants, you may press star and 1 on your touchtone telephone to ask a question. Next question is from the line of Kusum Agarwal, an individual investor. Please go ahead.
Kusum Agarwal: Hello, sir. My question was regarding the visibility of H2 US launches. The deck says that H2 will be stronger because of new launches. I just wanted to get clarity on how many approvals and launches do we expect in the second half of the financial year?
Badree Komandur: Yeah, Vikash, you want to pick it up?
Vikesh Kumar: Yeah. We expect to launch 4 to 6 products, but more importantly, the products that we already launched will also see revenues in H2, and therefore, we expect our H2 to be stronger than H1. The H2 launches to flow into FY28, right? Where we will have a full year benefit for FY28.
Kusum Agarwal: Okay, sir. That answers my question. Thank you so much.
Operator: Thank you. Ladies and gentlemen, you may press star and 1 to ask a question. Next question is from the line of Jay from Equitas. Please go ahead.
[Analyst] (Equitas): Hi, Hitesh. Sorry, I am back. I just wanted to check, our US business on dollar terms has actually been flat this quarter. Is it that we are seeing a lot of price erosion, or is it that we have discontinued few products because of margin requirements? What is the reason for the revenue being flat year-on-year?
Vikesh Kumar: Well, from a revenue perspective, while on a dollar term, it is flat, it has got to do more with the mix of products. Two is, the pricing in the market also gets adjusted to the currency depreciation that happens with the competitive forces. Because, as you know, in the US market, the customers constantly want the best pricing. That does get adjusted, and which is where we remain focused on delivering the gross margin and having the pricing discipline and the profitability threshold as a framework as we run our P&Ls.
[Analyst] (Equitas): It is mostly price erosion, right? That is being offset by our probably new launches?
Vikesh Kumar: And the cost improvement plans that we put in place.
[Analyst] (Equitas): Yeah, but that will be on the bottom line. I am talking about the top line pick.
Vikesh Kumar: Right.
[Analyst] (Equitas): So $73 million was $73 million. So we are basically fighting off price erosion with new launches. That is it, right?
Vikesh Kumar: It will not be price erosion. It will also be some volumes, some volumes also that we give up, right? So it is a combination of both. So, it may not be as much price erosion.
[Analyst] (Equitas): Okay. Got it. Like somewhere in the PPT you mentioned that we are seeing that the drug shortages have normalized. Do you think that is or do you think those shortages could
Abhishek Singhal: Jay, we lost you a bit. We cannot hear you well. Can you please repeat your question?
[Analyst] (Equitas): Yeah. I just wanted to check, like in the PPT we mentioned that the drug shortage opportunities have largely been dissipated. Are we expecting that to remain like that, or do you see that shortages could come back when price erosions occur?
Vikesh Kumar: Well, I mean, see, that would be more tactical at this point of time, which is where we are building a more strategic portfolio orientation. As far as the shortages are concerned, supply levels across the industry have significantly improved over the last couple of years. The number of regulatory approvals have improved, which is effectively what has led is very minimal shortages across most of the oral products that are there. I mean, the shortages that we see are either in injectables or in patches that continue to have shortages. At this point, we are more focused on building that portfolio that can carry us and give most predictability of our growth.
[Analyst] (Equitas): Got it. That is it. Quickly on the controlled substance front. When we say, whenever we are going back to the regulator and asking for a higher quota, and we have always got it. That additional volumes that you are getting, is it because the market is taking away share from other players in the market?
Vikesh Kumar: Your voice is breaking out.
[Analyst] (Equitas): Can you hear me now?
Abhishek Singhal: Yes, we can.
[Analyst] (Equitas): Hello? Yeah. So, quickly on the controlled substance, when we say that whenever we go to the regulator twice a year and we get higher quotas, is it that the market is expanding or do you think that has got to do more with market share gains from other players in the market?
Vikesh Kumar: It has got to do more with market share gains in the market that we have had.
[Analyst] (Equitas): Got it. Thank you. Just lastly, quickly on the LATAM front, just wanted to understand how do you view LATAM? Do you think it could be meaningful over the years? What is the competition intensity in those markets? We know that there are few listed players that are very strong in those markets, but what is our strategy going into the Latin American markets?
Badree Komandur: I can answer that question. We are in this regulatory phase of this market, and it will take a couple of years for us to build. If at all, we have started building those markets. I do not think so it will contribute meaningfully to any growth till about 2029, 2030 maybe the first year. We are in the process of building the portfolio.
[Analyst] (Equitas): Got it. That is it from my side. Thank you.
Badree Komandur: Thank you.
Operator: Thank you. That was the last question for today. I now hand the conference over to the management for closing comments.
Badree Komandur: Thank you, everyone, and good day to you. Thank you.
Vikesh Kumar: Thank you.
Operator: Thank you. On behalf of Strides Pharma Science Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
