High raw material, int cost effect bottomline: Surya Pharma

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Surya Pharmaceutical posted a 21.3% surge in its net profit at Rs 19 crore versus Rs 15.7 crore for the second quarter in the financial year 2010 (Q2 FY10). The sales were up 58% at Rs 272.8 crore versus Rs 173 crore.

In an interview with CNBC-TV18, Hari Om Bhatia, President of Finance, Surya Pharma spoke about the results and his outlook for the company.

Below is a verbatim transcript.

Q: Your sales were up nearly 60%, could you take us through what categories contributed the most to your topline?

A: Surya Pharmaceutical is into the field of active pharmaceutical ingredients (APIs) and mint-based products. We started APIs in 1992 whereas the mint-based products were started last year. So the major contribution out of this performance is being received from APIs. But menthol as a category has started contributing significantly and out of this Rs 480 crore turnover, menthol during this half year has contributed about Rs 175 crore.

Q: While the topline growth is great, there has been quite a bit of pressure on your operating profit margins, why is that and what do you see it recovering to?

A: The topline has definitely grown because of the consistent marketing efforts and contribution from menthol during last six months. But the bottomline has definitely been lower than what it was last year because of three reasons-one is the increased raw material cost because of weaker rupee for most part of the first half, though the rupee has recovered now and we see this contributing handsomely to our revenues in the latter part of the year.

Second is the interest cost which has gone up significantly because the company has been into expansion mode and some of the expansions were completed during the year and the interest cost thereon has started now hitting the profit and loss (P&L). But the next half and furthermore those new projects will start contributing both towards topline as well as the bottomline.

Third cause is that we have increased our focus on research and development. The cost on R&D has gone up significantly from 1.78% last year to 3.5% during the first half of this year. So that cost again is something which is going to contribute to the company's performance in the next few quarters.

One more factor which has contributed to this lower profit is the higher incidence of tax because the minimum alternative tax (MAT) rates have gone up and that has increased the tax burden.

Q: I understand you are expanding into the retail pharmacy business as well via a subsidiary, is this a 100%-owned subsidiary and what kind of revenue addition could that add for you?

A: It is a subsidiary of Surya Pharmaceutical Ltd. We launched the operations only this year in April 2009 by launching first five stores in Delhi and National Capital region (NCR) and today we have 12 stores and by March we should be having more than 70 stores. In three years time, we intend to be PAN India pharmacy trend with more than 500 stores. The retail segment currently is almost at Rs 35,000-37,000 crore a year and predominantly contribution is coming in from the unorganised sector or the so-called neighbourhood chemist, the modern trade pharmacies have contributed just about 3%. So I see this share going upto almost 20% in next three-four years time and we at Surya Pharmaceuticals are definitely looking at garnering a significant share out of it.