Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Laboratories Limited Q1 FY 2021 Earnings Conference Call. As a reminder, all participants’ lines will be in a listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Agarwal. Thank you, and over to you, sir.

Very good morning, and good evening to all of you. Thank you for joining us today for the Dr. Reddy's earnings conference call for the quarter ended June 30, 2020. Earlier during the day, we have released our results and the same are also posted on our website. This call is being recorded, and the playback and transcripts shall be made available on our website soon. All the discussions and analysis of this call will be based on the IFRS consolidated financial statements. To discuss the business performance and outlook, we have the leadership team of Dr. Reddy's comprising Mr. Erez Israeli, our CEO; Mr. Saumen Chakraborty, our CFO; and the Investor Relations team. Please note that today's call is a copyrighted material of Dr. Reddy's and cannot be rebroadcasted or attributed to any interest or media outlet without the company's expressed written consent. Before I proceed with the call, I would like to remind everyone that the safe harbor contained in today's press release also pertains to this conference call. Now I hand over the call to Mr. Saumen Chakraborty. Over to you, sir.

Thank you, Amit. Greetings to everyone. During the current challenging times, I hope you all are keeping yourself safe and healthy. We are going through quite an uncertain and challenging business environment with volatility arising from both demand and supply side. I'm glad that our teams have responded very well to those challenges, and have been able to deliver quite healthy financial performance during this quarter. The key financial highlights for the quarter are: One, strong year-on-year revenue growth of 15%; two, healthy gross margin at 56%; three, EBITDA margin of 26.3% and EBITDA growth of 47%, adjusted for settlement income in last year; four, PBT margin of 19.9% and PBT growth of 74%, adjusted for settlement income in last year; five, strong free cash flow generation of Rs. 925 crore before payout for business acquisition from Wockhardt; and six, quarter one FY 2021 annualized return on capital employed of 23.6%. Let me take you through these in a bit more detail. For this section, all the amounts are translated into U.S. dollars at a convenience translation rate of Rs. 75.53, which is the rate as of 30th June 2020. Consolidated revenues for the quarter stood at Rs. 4,418 crore that is $585 million, and grew by 15% on a year-on-year basis and remained flat on a sequential quarter basis. Year-on-year growth has been supported by 88% growth in PSAI, 48% growth in Europe, 9% growth in emerging markets, 6% growth in energy, with a decline of 10% in India. Sequentially, the sales were impacted due to decline in volumes in our global generics business, which was offset with a growth in PSAI business. Consolidated gross profit margin for this quarter has been 56%, with an increase of 430 basis points year-on-year and 450 basis points quarter-on-quarter. This increase was driven by favorable foreign exchange rates, better product mix, and improved productivity. Gross margin for the global generics and PSAI were at 61.4% and 33.4% for the quarter. The SG&A spend for the quarter is Rs. 1,279 crores, that is $169 million, an increase by 6% year-on-year, 5% quarter-on-quarter. The increase is primarily attributable to higher freight due to shortage of carriers for export. The R&D spend for the quarter is Rs. 398 crores, that is $53 million, and is at 9% of sales. Most of the product development activities continued during the quarter, including the development of a few COVID-19 related products. The EBITDA for the quarter is Rs. 1,162 crores, that is $154 million, which is 26.3% of the revenue. EBITDA grew by 2% year-on-year on a reported basis and 47% adjusted for settlement income in previous year. Sequentially, EBITDA grew by 16%. The strong growth is reflective of improvement in gross margin and productivity. Profit before tax for the quarter is Rs. 879 crore, that is $116 million, with a year-over-year growth of 3% on a reported basis and 74% growth adjusted for settlement income in previous year. Sequentially, PBT grew by 23%. Effective tax rate for the quarter is at 34.1%. The ETR has been impacted due to discontinuation of weighted deduction on R&D and completion of tax holiday for one of our plants. As you know, we are continuing with the old tax rate for India due to availability of MAT credit in our books. We expect the ETR to be in the range of 25% to 27% for the full year. Profit after tax for the quarter stood at Rs. 579 crores, that is $77 million, which is 13.1% of the revenue. Reported EPS for the quarter is Rs. 34.86. Operating working capital decreased during the quarter by around Rs. 200 crores, which is $26 million. This decrease is due to reduction in receivables and an increase in trade payables, which have been partially offset by the plan to increase in inventory across the market. We invested Rs. 150 crores, which is $20 million, towards capital investment in this quarter. The free cash generated during this quarter was Rs. 935 crores, which is $122 million, before making the acquisition-related payment of Rs. 1,499 crore to Wockhardt. Thus the net free cash flow for the quarter stood at minus Rs. 574 crore, which is $76 million. Even after the acquisition-related payout to Wockhardt, our net debt as on June 30, 2020, was Rs. 336 crores. Our net debt-to-equity ratio is at 0.02 and continues to reflect our strong balance situation. Foreign currency cash flow hedges for the next 9 months in the form of derivatives for U.S. dollars are approximately $260 million, largely hedged around the range of Rs. 73 to Rs. 77 to the dollar. In addition, we have cash flow hedges of RUB 2,600 million at the rate of Rs. 1.045 to the ruble maturing over the next 9 months. With this, I now request Erez to take through the key business highlights.

Thank you, Saumen. Good morning and good evening to everyone. I hope you and your families continue to remain safe and well in the midst of this pandemic. I thank all of our associates across the world whose relentless efforts and hard work have helped to ensure continued availability of medicines for our patients and customers across the geographies. The strong results of the current quarters in terms of sales growth, improvement in EBITDA margin and healthy cash generation reflect our continued commitment to the organization's purpose while consistently moving our business performance irrespective of the challenging circumstances. While many of our markets have been impacted by reduction in demand due to COVID-19 related lockdowns and economic slowdown, we continue to work toward mitigating the risks through a focus on increasing market share, the launch of new products, and improvement in productivity. Despite current challenges, we continue to progress well to implement our strategy and explore more avenues of growth for each of our business. During this quarter, we successfully completed acquisitions of select business from Wockhardt, and we are gearing towards reviving these brands back to a growth trajectory. We also executed the licensing deals for two key products related to COVID-19 treatment, Avigan or Favipiravir tablets and Remdesivir injections. We are actively working towards launching these products to cater to patients in various markets. Now let me take you to the key business highlights for each of our businesses. Please note that all the references to the numbers in this section are in respective local currencies. Our North America Generics business recorded sales of $229 million for the quarter. Sales declined by 2% year-on-year and 8% on a sequential quarter basis. In Rs. terms, the sales grew by 6% year-on-year. The sequential decline was largely due to forward buying in the previous quarter, the reduction in new prescriptions, drop in footfalls for new retail stores, and the reduction in elective procedures in the hospitals. We launched 6 new products during this quarter, including abiraterone acetate tablets and colchicine tablets. We are on track to launch more than 25 new products in this fiscal, including some niche and limited competition products. Our Europe business recorded sales of EUR 43 million with a strong year-to-year growth of 13% and a decline of 1% sequentially. The year-on-year growth was seen across markets and was driven by improvement in both base business and new product launches. During the quarter, we launched 7 products in Germany, 2 products each in the U.K. and Spain, 4 products in Italy, and 1 product in France. Our emerging markets business recorded sales of Rs. 798 crores with a year-on-year growth of 9%, a decline of 1% sequentially. Within the EM segment, the Russia business declined by 15% in constant currency, both on a year-on-year basis and quarter-on-quarter basis. The decline was primarily due to the impacts of COVID-19 related lockdowns, resulting in an overall reduction in demand. In the rest of the market, we witnessed mixed patterns of sales performance. China, Vietnam, Myanmar, and Kazakhstan are among the markets that performed well this quarter. During the quarter, we launched 29 new products across emerging markets. Our India business recorded sales of Rs. 626 crores with a year-over-year decline of 10% and a sequential quarter decline of 8%. Here again, the sales were negatively impacted owing to reduction in doctor-patient interaction and prescription generation as a result of the COVID-19 related lockdowns. As various parts of the country are in different levels of reopenings, we expect the sales trend to sequentially move from this quarter onwards. We launched 4 new products in the India market in this quarter. We are preparing to launch both Avigan tabs and Remdesivir injection in India in the next few weeks. During this quarter, we integrated the business acquired from Wockhardt and registered sales for a few days. We are placed at a market rank of 12th position as per IQVIA on a mostly MAT June 2020 basis, an improvement by 1 position after the Wockhardt integration. Our PSAI business recorded sales of USD 113 million, with a strong year-on-year growth of 74% and a sequential growth of 14%, with an improvement in order book across markets. We expect this business to positively benefit as various companies globally look for a strategic and reliable partner for the supply of active ingredients. On the R&D front, we continue to strengthen our pipeline of products across the markets. During this quarter, we filed 18 formulation products across global markets, including 5 ANDAs in the United States. As of June 30, 2020, we have 101 cumulative filings pending for approval within the US FDA, including 99 ANDAs and 2 505(b)(2) NDAs. We also filed 16 master files globally, including 1 filing made in the U.S. market. We are also working on a few molecules related to COVID-19 and doing our part in this global effort. Following the recent approval of oral liquid celecoxib formulation NDA, ELYXYB, we recently secured the approval of our first NCE under the 505(b)(1) pathway. We are actively working to commercialize both products through partners. Overall, we are making good progress in building and advancing a strong pipeline of high-value, globally relevant assets. We are continuing our efforts to monetize select assets through partnership and licensing transactions that maximize their value. On biologics front, the Phase III trial for rituximab is progressing well. In parallel, we are working on the next wave of biosimilar products that are at different stages of development. Over the years, we have made significant investments in digital capability and see it as one of our major value contributors. Our strong digital infrastructure allowed us to seamlessly enable work from home and connect with doctors and business partners during these times. It also helps us to be more productive and efficient in several of our business operations. The current business environment remains highly uncertain and volatile. However, these challenges are also unfolding new opportunities to grow our business and improve our productivity further. While the journey in the next few quarters is going to have its own set of challenges, the investments we have made in building core foundational capability give me the confidence that we are well-equipped to successfully ride through this phase and sustain our growth momentum. We continue to focus on creating more opportunities with less risk and attaining sales sustainability for each of our businesses.

Thank you very much. We will now begin the question-and-answer session. The first question is from the line of Rajesh Kothari from AlfAccurate Advisors. Please go ahead.

Good evening sir. My first question is with reference to the new regulations in the U.S.A. where details are probably not available, but it would be great if you can give your view on how do you see those rules depending upon your understanding of those rules? And what kind of impact do you think it can have for your company over the medium to long term? My second question is related to R&D and SG&A put together, how do you see that number in absolute terms over the next FY 2021, FY 2022, FY 2023, whatever you can give guidance?

So on the U.S. regulations, I'm assuming that you are referring to the localization of production. Is this correct?

I'm talking about the recent norms, which Trump has been talking about, in which he has talked about the generics and pricing, and I'm referring to the news from the last 2 weeks.

Sure. So in the United States, you have two agendas. One is related to pricing and the agenda you just have spoken of, and the second is about the localization of products. Both discussions are in place. On the first part, I do not envision a big impact on us in both short and long term. We actually believe that a company like us is the solution for this as we are providing access to affordable medicines. I believe it will be more impactful for innovative products in the United States. And also the chapters that arise from that, I believe, have certain opportunities to actually increase access for generics even further. So in this respect, no major concerns. On the localization piece, we are actually looking at this situation, we appreciate that there is a certain need to produce some products in the United States. At the same time, it's unclear what will be the mode of payment or the pricing of those. So as it unfolds, we will evaluate it. But at this stage, we do not have any specific actions.

Okay. And my second question was regarding the SG&A and R&D combined, how do you see that total overall expense?

So as you know, we are not giving guidance. In general, we mentioned also in previous times that we want more products, and we want them in more countries. Overall, nominally, over time, we want to spend R&D to develop those. At the same time, we are also asking ourselves to be more productive while doing that. I believe that this year we will spend some more money. We are not giving guidance for the years after.

Thank you very much. We take the next question from the line of Prakash Agarwal from Axis Capital. Please go ahead.

Yes, thanks for the opportunity and congratulations on good numbers. Sir, first question on the sustainability of gross margins. I clearly understand product mix as well as currency would have held. Just trying to understand how would the API prices for us in terms of our cost COGS moving? As I understand, API prices have gone up and with rupee dollar moving up, our cost of procurement would also be higher. Could you help us understand whether this understanding is correct?

So I'll refer to the API. First, I think we do see a better satisfaction of the API and indeed, the mix is more favorable and helps us partially in this growth in gross margins. As we've discussed in previous times, the gross margin is not a KPI that we are necessarily managed. Of course, we want it to be as high as possible, but we will not decline a big business if it comes with a 50% gross margin just to manage our KPIs. So for us, it's a result. We believe that as we sell more API, it will favorably impact the gross margin as well because those products tend to have relatively higher gross margins. I do not see a specific trend on either pricing or on procurement prices.

So my question was actually on re-procuring API at higher prices; could the gross margin still be sustainable as I understand API prices have gone up?

That's what I tried to answer. I do not see any specific trends on the procurement prices or on our prices. And I believe that, again, with fluctuation, we should be in the same level that we have discussed in previous quarters as well. I believe that we are still comfortable in the same area. And this area is sustainable, but there can be quarterly fluctuations.

Okay. Understood. Fair enough. And the second one is on the injectable portfolio that we have in the U.S., given the lockdown, how has that behaved? Has the volume come down? Or is it at the same level?

It is coming up. It is coming up.

Okay. And the U.S. generic thing in tender and works transfer. That will be all.

Copaxone is doing well. It is going well, and did well also in this quarter for us.

Okay. And U.S. generic pricing some trend, sir? How's it done Q-on-Q?

Two questions only per participant, please.

Just I'll answer because it will be of interest to many people. U.S. prices are most stable at this stage here for us.

Thank you. We move to the next question. The next question is from the line of Saion Mukherjee from Nomura. Please go ahead.

Yes, thanks. Sir, two questions. Firstly, on emerging markets, we are seeing some good traction outside of Russia, CIS. Anything that you would like to point out? Any specific market, which did particularly well this quarter?

I mentioned China did well as well as some of the other markets, I mentioned Myanmar, Vietnam. So those markets did fairly well. The markets that are more related to hospital demand or government tenders did better than those markets that were impacted by patient-doctor demands like India or Russia. And this is very naturally due to the lockdowns in the first quarter.

And sir, so second question on SG&A because you mentioned there are freight charges which have gone up, but your sales promotion expenses would have come down. How do you see that panning out in the subsequent quarters? And I remember you had a settlement this quarter. Has that been booked as part of SG&A?

Which settlement are you referring to?

There was a $7 million or $9 million settlement that you had announced this quarter.

U.S. settlement that was the last quarter which was announced.

So we can take this offline. So I'm not being able to directly associate what settlement we have done to the SG&A quarter.

There is no such charge here, Saion, in this quarter.

Okay. I mean, sir, can you give some color on how the various parts within SG&A are moving? And how should we think about freight and other elements, and anything can help us for the coming quarters?

Freight will depend on the rate of the carriers as more rare bubbles open up. We expect things to get normalized in coming quarters. So that will help. Our sales promotion will depend on the kind of sales which we are going to have in the market which is very dependent on sales promotion. Accordingly, we calibrate. Are you referring to the security class action settlement?

Yes, yes, yes.

Okay. So for those kinds of settlements, it comes out of your Director and Officer insurance that you cover. We pay insurance premium every year for those kinds of things.

Okay. Sir, thank you.

Thank you. The next question is from the line of Vishal Biraia from Aviva Insurance. Please go ahead.

Thank you. So what would have led to the 88% growth in the PSAI business?

Sorry, I did not capture the question, what led to the growth you said?

Yes. What the growth – what were the driving factors to achieve that 90% growth for the API business?

It was a combination of cost business in certain countries. So it was not related to a specific product. I believe that it's a combination of the following: One, that people needed to de-risk themselves due to lockdowns and ensure that there is enough inventory of API. Second is the companies that are looking for additional reliable sources if they were dependent on others or wanted to de-risk. So we did see substantial traction of that API that we sent for launches – launch of product as well as R&D products. So it's a combination of all the above. In general, I do see very healthy growth of the business. I attribute it to the decision that we made 2 years ago to focus on the API and to make it a significant revenue business. And we are starting to bear the fruits of that.

Sir, do you expect this trend to continue for the coming 2 quarters at least?

Without giving guidance, it is absolutely an expectation for this business to continue to grow.

Okay. Okay. And just one last thing on the CRL for – any updates on the CRL of Copaxone and NuvaRing?

On the Copaxone, we submitted the CRL. On the – we have not submitted yet the CRL for NuvaRing; we are still working on it.

Thank you very much. I will come back in the queue.

Thank you. The next question is from the line of Damayanti Kerai from HSBC. Please go ahead.

Hi, thank you for the opportunity. Sir, you mentioned that API growth has resulted due to our investment in the segment for the last 2 years. So my question is on the India part, where we are hearing that the government is now incentivizing manufacturers to scale up production of certain products. So do you have plans to participate here or not?

Not at this stage. These specific products are not in our lines of activity. This is primarily antibiotics, and we are not into antibiotics. So at this stage, we do not have plans as such.

Sure. My second question is, can you talk a bit about your strategy to leverage upon product filing and launches for multiple markets? Say, in the last 3, 4 quarters, how many such products we have developed and filed in multiple geographies?

So naturally, we are expanding those products. I believe that I mentioned that we had 29 products, for example, of launches in the emerging markets, 25 new launches we are going to have in the United States, etc. This space is also going to be reflected in the R&D. So we are gearing the R&D to enable somewhere between 10 to 25 products per year per geography. And most of these products will be leveraged. Meaning that we are going to use the same products for multiple markets.

Okay. So 10 to 25 products per year is our target for different markets, right?

In general, in general, it depends, of course, on the markets and the activity.

Okay, sure. I have more questions. I will get back in queue. Thank you.

Thank you. The next question is from the line of Neha Manpuria from JPMorgan. Please go ahead.

Thank you for taking my question. My first question is on the gross margin. Now you mentioned three things on the gross margin improvement: FX, product mix, and productivity. I just wanted to understand which of these factors contributed largely to the – was there disproportionate contribution from one factor versus the other? And how do you view something like a product mix of productivity? Is productivity, I can understand, is product mix linked to the fact that we were selling more, let's say, injectable products or hospital linked products in this quarter?

I'll take this question. Our gross margin has improved both year-on-year as well as sequentially. If you take a factor, for example, currency rate, now the currency rate year-on-year, the contribution to the improvement will be higher compared to the sequential year. So if one would not have neutralized the currency impact, that means sequentially, that there would have been more which has come out of other factors such as product mix, such as the productivity. There could always be fluctuations quarter-on-quarter due to multiple reasons. Sometimes you may take some inventory write-off. There could be some quality issues. There could be some penalties related to supply. Many such things can happen. So that's why it is difficult to have a consistent gross margin. There will always be fluctuations. When we really talk about product mix, we really ultimately put it as the resulting weighted average. But in terms of the margin, if you go by, it will be in different buckets. There will be some which is higher than the total reported gross margin of Dr. Reddy's, and there will be products which are also quite lower than that. So if we are able to sell products with much higher contributions, then definitely that has an impact on the gross margin. Traditionally, depending on the market and also business segments where the margin varies, that will also impact the business mix. Overall, we really talk about productivity, that is leverage that you get with a better capacity utilization or with the same manufacturing overhead if you're able to produce more. That's where the productivity factor comes in and it helps in terms of the gross margin improvement.

Sir, just a follow-up on that. I agree on the FX. Just on productivity, I would have assumed, given the lockdown and volumes come and go, our utilization would have been lower. So I'm just trying to understand, if the product mix was linked to the fact that COVID benefited certain sales of certain types of products or certain buckets of products? Would that be a fair understanding?

I think the whole thing – yes, please, Erez continue.

So not really. First of all, we did not lose much output because of COVID. Our people found a way to make the relevant output almost uninterrupted, almost uninterrupted. So relative to that, and this is, again, I want to thank my colleagues and associates for doing this. Second, there is no real correlation between COVID and the mix of products; we send to the customers basically what they needed. I think it's more of the fact that we are leveraging more and doing it more efficiently.

And it always helps if there are more new products. Normally, new products will be with higher contributions. Yes, we can move on.

Thank you. The next question is from the line of Anubhav Agarwal from Crédit Suisse. Please go ahead.

Yes, hi. Good evening. One question on the API portfolio from Wockhardt. Just wanted to get some sense. Now you would have had a deeper look at the portfolio. In your first assessment, where do you see this portfolio lacking? More in promotion efforts? More in distribution reach? Promoted or too many reps? Are there one or two low-hanging fruits?

I believe that the main opportunities are that the brands were not fully utilized or the brand recognition as Wockhardt did not have the means due to their financial issues to invest in them to get the full brand recognition. The primary focus will be on branding and investing in them. I believe there is strong potential, big potential in those areas.

Okay. So investment in the brand means, are you referring to, let's say, each not going to enough doctors? Because my understanding was the rep was actually maybe too many reps are pushing a small portfolio. So just can you elaborate on that investment was less in the brand?

It's branding. It's a combination of messaging as well as ensuring these brands, by and large, are complementary to the activities that we already did. So naturally, now we can enable higher reach in terms of the number of customers as well with better messaging because we can invest in the branding and the ability to expand this product better.

Sure. That's very helpful. One more question I have was on the PSA business. On the API question, you mentioned about customers trying to derisk and that – and looking for additional reliability. When you look at your product market and then you look at the addressable market there, just a very broad understanding, with this kind of move by your customers, has the addressable market in that sense become 2x, or has it grown by 50%? What's your rough estimate over there?

Sorry, I did not – Saumen?

Yes. Can you repeat the first set once again? We didn't get it very clearly.

Sorry. I was saying that on the PSA business, with several of our customers now looking for more reliable sources of supply and trying to derisk, the opportunity set for us in the products that you're saying has increased. I was just trying to get some measure of how much of our addressable market has increased, by let's say, if it was opportunity or x earlier, has it become 2x now, 1.5x, etc.? Just trying to understand that kind of metrics. I appreciate that in 1 year, we cannot see all kinds of growth, but that may translate to our growth in the next 2 or 3 years.

So it's not working exactly like that. As you know, there is a time in which the qualification of products are coming. The way you need to see it on the API is that we will have more and more molecules that will have two types of contributions to our strategy. One is that they will gain more market share as we are becoming more efficient. At the same time, we have a better integration. This helps continue to improve our gross margin. This is the two contributions of the API. As for the derisking. Indeed, there was certain traction that came. But this is the way we normally do that we are trying to see those areas or those opportunities in which companies do not have or have one supplier or maybe want to derisk certain products. Then we are trying to qualify an alternate source and this it is also in this quarter, and we'll continue to do also in the future. Overall, I think what you are looking for is to know whether this business will grow, and I believe it will.

Sure, thank you, Erez. Thank you.

Thank you. The next question is from the line of Susmit Patodia from Motilal Oswal Asset Management. Please go ahead.

Hi, good evening everyone. I hope everyone is safe. Thank you for the call. I want to take a couple of things. Is there any part of the Wockhardt number which is integrated in this quarter? Because the transactions concluded on the 10th of June?

Yes. For 20 days, sales and profits are there in this.

For 20 days, it is there, right?

Yes.

Okay. And just one request on Wockhardt. Whenever you get the opportunity and time, if you could take us through the Wockhardt portfolio separately on a call, it would be great, just to understand where we are on that journey. And secondly, sir, you said tax rate will be 25% to 26%, while the benefit that has gone away is on a plant. So if you can explain to us how this will come down from the current tax rate of this quarter?

So what I gave guidance of 25% to 27% for the full year. For the quarter, of course, it was at 34.1%. The main contributory factor is the weighted deduction on R&D, which is no longer available. With the weighted deduction on R&D going away and other tax incentives being removed. The government of India has also reduced the tax rate. There is a new tax – there is an option one could take. But for us, it didn't make sense because we had quite a bit of MAT credit available in our book. So we want to wait for utilizing them because this is something with a higher tax implication that you can utilize. Once we utilize that, we will switch over to the new tax rule, which will be at level 1. Till that time, you don't get the tax incentive. So one of the major contributions is the weighted deduction on R&D gone. The second is in one of the plants where we had the time period for which you would have gotten the tax incentive. So both these factors, combined, led to a 34.1% tax rate for the quarter.

So you did use the MAT credit for this quarter, is that correct? Which you will use for the...

So it all depends on the year basis, MAT, sometimes there will be fluctuation. If you recall, last year, overall, our ETR was negative. All the projections for the year, we said normally should have been 21% to 23% in this range, we are normally in the last year; it just happened, that's because of multiple things, it became negative. So this year, we have started on a higher, but hopefully, for the year, we can manage 25% to 27%.

Sir, if I can squeeze in one more question, please.

Yes, please.

Yes. Sir, there are a couple of other companies that have reported the first quarter numbers. And the India business margins have gone up significantly because of lower marketing spend. So is it fair to assume that your India business margins would also have gone up significantly quarter-on-quarter? And the other expenditure not going down is maybe entirely due to the freight cost and services of foreign models...

First, we don't report geography-wise, the margin like we report the sales. It will be fair to say that even though there has been a decline in sales, it didn't necessarily mean a decline in the absolute margin that we would have got from India.

Got it. Perfect. Thank you, sir and...

Thank you.

Thank you. The next question is from Vishal Manchanda from Nirmal Bang. Please go ahead.

Thanks for the opportunity. I have a question on REVLIMID. Could you share when is the trial hearing scheduled?

We haven't got the dates.

We haven't got the dates.

Right. And any sense on how long can the judgment take after the trial hearing?

We shall see. We shall see how it will unfold. We do – it's very healthy to you. Okay.

Thank you. That’s all from my side.

Thank you. The next question is from Nitin Agarwal from IDFC Securities. Please go ahead.

Hi, thanks for taking my questions. Sir, two questions. One is, a, on the COVID drugs that you mentioned, how should we view these opportunities? Are these mostly domestic opportunities? Or do you see opportunities for meaningful export in these two products?

We are going to have them both domestically as well as emerging markets. How big it's going to be? I don't know. It's a combination of our contribution to the fight against COVID as well as business opportunity. It's hard for me to say how it is going to be because it's primarily a fraction of how fast we can effectively register this product in emerging markets. In the case of Avigan, if we have good results on the Kuwait trial, which we will have probably by October, November, then we can register it potentially globally, including the United States. But we should see the results of this trial first.

And are you going to raise – would we be supplying to Fuji also for their stockpiling in Japan?

Right now, they are making the products for Japan. We are not producing for Japan. But the plan is if these products pick up well that we will be the global producer of this product globally. At this stage, we are not making for Japan.

And my second question is on – you talked about the opportunities for the PCI business. Does it really – from an investment perspective, does it entail for us significantly increasing our investments in PSAI going forward? How are we looking at the CapEx part of it?

So PSAI is absolutely a space in which we are investing primarily on R&D. At this stage, we have enough capacities, so I don't envision putting more sites or stuff like that. We are looking from time to time for business development, for certain capabilities that we do not have. But overall, the main investments in APIs are in R&D.

Okay, if I can squeeze in one last associated question on that. What opportunities do you see in the CDMO space in the PSAI business? Is the custom services business which you've now put out to a separate subsidiary? How has that been performing?

It is performing well, and I see it as a growing business for us.

Thank you. The next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.

Thanks and good evening everyone. Sir, is it possible for you to update us on the India business and Russia business, like in July, how is it doing versus pre-COVID levels?

In both cases, I believe in certain areas, certain cities are opening up; we see positive traction in those. In both countries, as you know well, the cities are in different shapes and forms related to hiking COVID. Some of them are still in lockdown; some of them opened up. So in those places that have opened up, we see positive traction.

Okay. Okay, great. And sir, second question is on NuvaRing, when do you expect to do refiling with the U.S. FDA?

It's going to be within the next few months. We do have a delay in the submission. We are still working on some trials on that.

Okay. With your permission, sir, one last one from my side. And that is, how are you thinking about more M&A opportunities? Anything that you can outline with geographies, which assets you're looking for? And would these be more sizable than Wockhardt or around the same ballpark?

So we do see next quarter, we believe we'll go back to a surplus of cash. So we do have a lot of financial capacities in the same lines that we introduced in the few quarters – in the last few quarters, which means that we potentially can look up to a 2x EBITDA if we find opportunities for that. The type of transaction that we are looking for is primarily in emerging markets, primarily within the emerging markets in India. The Wockhardt type of deal is the type of deal that we like, meaning we have the products, we get the assets and integrate them relatively fast into the business. That's the type of business we're looking for.

Okay, great. Thank you so much.

Thank you. The next question is from the line of Anmol Ganjoo from JM Financial. Please go ahead.

Yes, hi. Thanks for taking my question. Most of my questions have been answered. But just if I was a follow-through on the API business. Most of the factors that you alluded to for the superlative performance for API seem to be sustainable. We all understand that you can never rule out quarterly aberrations, but is it fair to assume that this quarter, the run rate seems to be some kind of a new base when we look at our API business because whether it's productivity or customers are derisking supplies, none of this looks like – should disappear in a quarter or two. So are we talking about structurally a business which is 60%, 70% higher from where we were last year? And then we have to see our investments and focus on this, we should be able to grow from that base for the next year.

So, you know I cannot give you guidance, but I do believe that we can have a bigger base even in the future. I believe that we will achieve it. So I'm very confident about our ability to grow the API business. I agree with you that all the trends are sustainable and they are positive for us.

Okay, thank you, thank you. That’s it from my side.

Thank you. We will take one last question. The last question is from the line of Surya Patra from Philip Capital. Please go ahead.

Yes, thanks for this opportunity sir and congrats on a great set of numbers. Two things that I wanted to understand. One is the strong cash flow what we are generating and the kind of position that we are having, so can you just give some clarity or indications about your future capital allocation catered towards the kind of acquisitions or towards a kind of new asset area or new product portfolio? Something – some direction and indication would be helpful here.

Saumen, should you take it or should I?

Yes. So our main lever for future growth is R&D. We are trying to improve productivity. But at the same time, we will need a very high focus on continuing R&D on multiple markets in terms of leveraging the global portfolio as there are some out new products. We have a lot of appetite for inorganic growth, and Erez has already talked about it. If we get a good target in India, we will be very interested. But beyond India, there are also other strategic spaces and specific type of target that we have. At any point in time, we are doing a lot of diligence, so we’ll have to see whether we are being successful or not, but that is a possible area. There's a huge ROI that we can get out of the digital investment and the platform that we have invested in the past, and we are continuing to do so in the near and future. I mean that is the relevant area.

Yes. Yes. Sir, please, can you quantify the ForEx element in the quarter, sir? ForEx gain even in this quarter.

That is very easy for you to do that because you know the currency rate. And you know what sales and how it would have impacted.

Yes, thank you. Wish you all the best.

Thank you.

Thank you, everyone, for joining us today for the earnings call. In case of any further queries, please reach out to the Investor Relations team. Thanks.

Thank you very much. On behalf of Dr. Reddy's, that concludes the conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.