Eyeing M&A opportunities aggressively, Lupin looks to expand in complex injectables space in the United States. The company's CFO S Ramesh expects complex injectables to contribute significantly in 3-4 years.
Currently, the pharma major has Rs 800-900 crore of cash on books. In addition, it has maintained a CAGR of over 30 percent in the past seven years on topline as well as bottomline, Ramesh says in an interview with CNBC-TV18's Sonia Shenoy and Anuj Singhal.
On his expectations from the upcoming Budget, he feels it is unrealistic to anticipate any exemptions on Minimum Alternate Tax (MAT).
Below is the edited transcript the interview:
Q: Just take us through these investments that you have made for the long-term and how it could contribute to your revenue stream?
A: We have been trying to up our scale on various fronts. On the technology platform front, we bought in a company called Nanomi Technologies that is based in Netherlands. This is to get us into the complex injectables space. There are a host of products that we believe could contribute tremendously to revenues in the long-term and this would be one of those technology platforms that will help in deliveries of injectables.
Besides, we are working on a whole set of things in other parts of the globe as well. For example, we have recruited new work skill sets in America, we have setup up our research lab out there for the respiratory space itself, we are trying to get into control substances, getting more complex injectables in US itself, and getting into the dermatology space. The idea is to transform Lupin into more of a speciality company over a period of time and these will be the building blocks which would get us onto the next orbit over the next few years.
Q: I am just looking at UBS report saying that within unlevered balance sheet and strong cash flows M&A could be a significant trigger and you are looking to acquire assets in US in particular. If you could give us some plans on how that is going to fructify and what would be the deal size that you would be looking at?
A: We have not been cagey about our M&A aspirations and I have always placed it into three buckets. The first bucket where I could be looking at various geographical spread in terms of looking at various countries for acquisitions and this would encompass countries like Latin America, certain parts of Europe which include Russia, potentially bolt-on acquisitions in Japan, America, India and so on.
In the second bucket, I could place technology platforms and you saw something going on in Nanomi couple of quarters ago. The third bucket where I would be looking at brands in various parts of the globe, which could principally be in America and in Japan and India of course. So, we have been aggressive looking around but not necessarily meeting with success till date. The fact of the matter is that the balance sheet is unlevered; in fact, we are cash surplus.
Q: What is the cash currently?
A: We have got about Rs 800-900 crore on the balance sheet. It will be possible for us to easily raise about a USD 1.5 billion and that does not necessarily mean that we would be looking at acquisitions of that size. We would be looking at in tranches over a period of time but for sure we are looking at acquisitions aggressively.
Q: You said that you want to get into the complex injectables space in a big way, how will that actually help you in terms of increasing your revenue profile. So, far it has been solid 20 percent growth quarter after quarter. However, for FY15 do you think you could see incremental performance?
A: Not necessarily in the immediate run bit potentially over the next three to four years we do believe that complex injectables could contribute significantly to our topline as well as bottomline and that is the reason why we are getting into that in a big way. It could potentially be through the organic routes but there is a regulatory pathway to follow there but for sure we are looking at inorganic stocks also to bolster, to give us the boost out there.
Q: Over the next three years what kind of compounded annual growth rate (CAGR) can investors expect from Lupin in terms of sales and profit?
A: The last seven years the CAGR has been well over 30 percent on the topline as well as much more on the bottomline. If you look at that track record, we would expect it to deliver as much. For sure the base is coming much bigger. However, 15-20 percent would be a very realistic expectation so to speak; more on the topline but certainly much more on the bottomline.
Q: Since we are on the cusp of the Budget, I am going to ask you what the expectations are. I was reading some analysts put together note where they say that the pharma industry is still expecting exemptions of Minimum Alternate Tax (MAT) but given that the new government is very focused on fiscal consolidation, etc do you think we could see actually a cutting down on the exemptions of certain taxes?
A: It is a difficult question that you are asking me and as a CFO of a large company, I would certainly say that any exemptions of this kind would certainly be welcome especially if it is export oriented. However, that said I do realise that it is going to be a little unrealistic given the kind of fiscal deficit the government is facing and the kind of budgetary constraints that they would be in. In fact there is this government actually talking about cutting down on exemptions so it would be kind of unrealistic on my part to put too much of expectations on MAT going off. It would be a little wishful thinking but if the government does that it will certainly be welcome to the industry.
Q: Two part question; one is that your India business was weak last quarter. What kind of growth are you focusing on for India business going forward and second your emerging market business did quite well especially in countries like South Africa and Latin America; what is the outlook there?
A: First on the India business, the whole of last year was pretty lacklustre in terms of performance and that would potentially be because of the ecosystem around the Indian healthcare system itself. The first quarter we had issues relating to the National List of Essential Medicines (NLEM) and because of that the entire trade was kind of destocking. The quantum of stocks went down from 29 days to about 18 days so there was obviously an impact to the entire industry and we were not very different.
The second quarter we had issues on the trade margins front. A lot of products got onto lower commission band and that was not acceptable to the trade and for that reason they are kind of boycotted the industry and we are also again impacted because of that.
Third quarter was fairly okay but the fourth quarter has always been a weak quarter and for that reason in fact we suffered. It is also in comparison with fourth quarter in previous year. However, that said we are fairly confident that we would be able to sustain pretty good growth rates going forward and we do expect the growth rate to perk up in this quarter itself and it is the IMS data which kind of reflects that.
Second question relating to emerging markets, we have done very well in economies like Philippines, South Africa and India and in the past we did very well. If you look at in fact our portfolio of countries about 50-55 percent comes from advanced markets including Japan and America but 45 percent comes from in fact the emerging markets. We would like to keep it that way because it is a two-speed economy as you would know. The advanced markets don't grow as much whilst the emerging markets grow at a faster pace and we like it that way. In the emerging markets, we are not so much into Latin America as yet but that is one of our growth aspirations and that we would do over the next few quarters.
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