In an interview to CNBC-TV18, Arun Kumar, Executive VC and MD of Strides Shasun said the company may sell off its API unit after enhancing its value.
Pharma company Strides Shasun reported weak set of first quarter earnings with net profit falling 52.4 percent to Rs 41.7 crore quarter-on-quarter (QoQ) and revenue dipping 8.9 percent to Rs 870 crore QoQ.
The company announced it will hive-off its API business as it requires a different level of focus. In an interview to CNBC-TV18, Executive VC and MD Arun Kumar said the company may sell off its API unit after enhancing its value.
He said the company can create more value with separate attention to its API business and despite weak numbers in this quarter, recovery is expected in emerging markets during the second half of this fiscal.
Below is the verbatim transcript of Arun Kumar's interview to Latha Venkatesh, Sonia Shenoy & Anuj Singhal on CNBC-TV18.
Anuj: Tell us the rationale behind having off the active pharmaceutical ingredients (API) business and what is the next plan for this business?
A: We have hived off only the API commodity business, so the strategic rationale behind the Shasun merger is intact. We retain several assets including IPs that we consumer ourselves. There are several products that Shasun's division produces where we consume little under 10 percent of the total production and that is something which makes a differentiated attention; it is a B2B model and not a B2C model that the company currently specialises in. So that was the strategic rationale. We continue to stay as wholly owned company and we believe that we can create value with a differentiated attention to that business.
Latha: Does differentiated attention at all mean another strategic partner or sale?
A: We do not think we will need any financial intervention here because we see a changing landscape in the API global domain. There are a lot of challenges coming out of China. The regulatory challenge Indian pharmaceutical has gone through is hitting hard the Chinese API manufacturers. We are seeing that, to be very profound, these few weeks, few months now. We see value in creating a large API platform but it needs to be a separate company, like we have done earlier when we created separate platform for injectable etc, and created a significant value proposition. We think over time, in three-four years, we could build this business to an important size and value and at that time we look at options but we are not doing this for raising cash in the near term or bringing in financial or strategic investor.
Sonia: The bigger concern is the results that you have declared and there are big problems visible in your emerging market portfolio and in your API business. At the call yesterday, you did mention that you are expecting a recovery in the second half of the year but what gives you the confidence that you would see a recovery because your API business has slowed down to a single digit growth versus double digit growth that you enjoyed for many quarters. How can you be so confident that there will be an immediate recovery in the second half?
A: My commentary on the call yesterday was about an immediate recovery on the emerging market play - that is already visible and we think we will bounce back very strongly, as early as this quarter if not fully in the next quarter, so we do not see any issues with that.
However, when it comes to the API business, I believe this will be slightly longer term. The reason is that we have significantly enhanced our opex cost to meet the latest requirements of compliance and governance especially that is required for regulated play. So our costs have gone ahead of our revenues, so we think it will take at least six-eight months in the API business for things to change. So we did not make any commentary on an immediate turnaround in the API business. We think it will be slightly longer as long as this financial year, whereas the emerging markets would be this quarter, if not for sure the next quarter.
Anuj: In hindsight, do you think any of the recent acquisitions was ill-planned considering that integration is taking much longer than what the market thought?
A: None of our nine strategic deals that we announced in the last 18 months have failed us in strategy. What we have failed is probably to understand the realities in synergies flowing through. Probably that is something that we would have underestimated. However, it has just moved by probably 3-6 months and you will see results. Our commentary when we build this business from USD 200 million to going out USD 600 million is that we are a sum of parts, we are consolidating several businesses, we need time to get some of the synergies placed. Yes, you are right in saying that synergies did not play out as quickly as we assumed, but there is absolutely no looking back on the strategic thinking behind all of those deals and we think every single transaction that we announce will play a significant role in us becoming a very important player in this space.
Latha: I wanted to extend what Sonia just asked you. What went wrong with the emerging markets business and why are you so confident for the second half? As well, you are also sounding confident about your US guidance, you are expecting a bunch of approvals. Some more colour on that?
A: I will take the easier one, which is the regulated market. It is one of our better performing businesses for several quarters and obviously, the US plays a very important role.
As you probably are aware, we do not do commodity generics. We have a very narrow niche focus in the US, so we are not impacted by too much of Indian competition. Several of our products, we tend to be the only Indian player. That helps with price behaviours. We do not do commodity pharmaceuticals.
So, we believe the US will continue to play an important role in our growth strategy. We have guided the market for 7-8 key product approvals, we have received three of them in the last many months and we believe that the launch of these products and some critical approvals that are expected in H2 will continue the momentum for the US business.
With the recent approvals for the creams and ointments facility, which we had a very successful Food and Drug Administration (FDA) inspection will accelerate dermatology and ointments business which is a key new domain for us. That will add to the momentum going forward.
Coming to the emerging market, if you go back and read through our transcripts and our analyst calls, we have been cost correcting the difference between our primary sale and secondary sale for several quarters now. To be honest, we thought that that was behind us in Q4 of last financial year and that did not happen. We had some more flux in the system, which we have now corrected and we had absolutely zero primary sales in Africa for several quarters.
However, we are the fastest growing company in Africa with regards secondary sales. So, it is not a function of lack of demand, it is a function of discipline and behaviours that we want on the channels.
Sonia: I know analysts on the call were trying to get the margin guidance out of you. You did mention that margins will improve in the second half, but some analysts believe that in the second half, it could get back to 20 percent levels. Is that a reasonable assumption?
A: We do not guide anymore, but what I did mention in the call yesterday is that we think Q1 is a temporary blip and we should be in the range of margins that we had last year which was 20 percent. So, you are right in inferring the way you asked me that question.