Dr Reddy's Laboratories Ltd (RDY) 2009 Q1 法說會逐字稿

Ladies and gentlemen, good morning, good afternoon and good evening. Welcome to the Q1 FY '09 earnings conference call with the management of Dr. Reddy's Laboratories Limited.

I am Rochelle, the moderator of your conference. Please note that for the duration of this presentation all participant lines will be in the listen-only mode, and this conference is being recorded. (OPERATOR INSTRUCTIONS).

At this time, I would like to turn the conference over to Mr. Nikhil Shah. Thank you, and over to you Mr. Shah.

Thank you, Rochelle. Good morning and good evening, everyone, and welcome to Dr. Reddy's earnings conference call for the first quarter of financial year 2008/2009. We hope you have all had a chance to review our press release which was issued earlier this afternoon. The results are also posted on our website on the home page under the quick links item.

To ensure full disclosure, we are conducting a live webcast of this call and a replay of the call will also be available on our website soon after the conclusion of the call. Additionally, the transcript of this call will be made available on our website at www.drreddys.com under the quick links item.

Please note that all discussions and comparisons during the call will be based on US GAAP numbers, and the IR desk will be available to answer any query relating to the Indian GAAP immediately after the conclusion of the call.

To discuss the results and the outlook we have on the call today G. V. Prasad, our Chief Executive Officer, Satish Reddy, the Chief Operating Officer of the Company and Saumen Chakraborty, our Chief Financial Officer.

Please note that today's call is copyrighted material of Dr. Reddy's and cannot be rebroadcast or attributed in press or media outlets without the Company's express written consent.

Before we proceed with the call, I'd like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference call and the webcast.

I would now like to turn the call over to G. V. Prasad, our Chief Executive Officer.

Thank you, Nikhil, and I will thank all participants for joining for this call today. Before we discuss the Q1 numbers, we would like to highlight two important decisions which have an impact on our financial reporting.

First, we are moving to IFRS from US GAAP. We informed of about this decision during the last call and we have now started this transition exercise. While we are still reporting this quarter's numbers in US GAAP, we will move to IFRS reporting completely from the second quarter of this fiscal year on -- from the second quarter of this fiscal year. We will also be restating our Q1 numbers as per IFRS standards.

Secondly, reorganization and consequent change in business segment reporting is something that is coming into effect. If you recall, in the previous call we talked our businesses being grouped into three distinct segments; global generics, pharmaceutical services and active ingredients and innovative products. We have now completed this reorganization and, henceforth, our business segment reporting will reflect this change.

I would like to briefly explain the rationale for this reorganization once again. First, our scale of operations has expanded significantly over the last few years leading to increased complexity, both in managing operations as well as accounting. And making this simple has become a top priority for us now.

In terms of operations, we have to create global focus and scale and move away from local optimization. Over the last few years we have integrated the various teams focusing on development of finished dosages, globally, under the integrated product development organization.

We also combined all finished dosage manufacturing operations into formulation tech ops. Both these organizations cater to [enter] Global Generics business. Similarly, our chemical tech ops, including our Mexico site, cater to both API and CPS customers. Our previous business segment focus has been leading to conflicting priorities and, hence, the reorganization will remove this bottleneck.

In terms of markets also, our previous business segments have become less relevant. In view of the changing market structure, the different markets across the globe represent a combination of branded generics, INN, as well as hybrid models. The global generics industry is moving to harmonization of regulatory and intellectual property procedures, and our reorganization would help in preparing ourselves to better respond to this changing trend.

Now, moving on to the first quarter's performance, I am pleased to report that we are off to a good start for the year. Revenues have grown by 25% in rupee terms. EBITDA is at $63m, PBT is at $37m and PAT is at $31m. The EPS for the first quarter is at INR8.

Global generics grew by 25% to $241m. The Pharmaceutical Services and Active Ingredients segment grew by 27% to $107m. This was led by strong product mix across key markets and growth in the Services business.

Globally, we launched 26 new generic products and filed for 20 new products. And the integration of the two acquisitions we announced in April is progressing well, and the results are in line with our expectations.

Let me now cover the key revenue highlights in each of our strategic markets. In North America revenues grew by 62% in rupee terms. We benefited from the new product launches over the last 12 months and volume growth in some of our key existing products.

There was some pricing pressure in a couple of products but this is unlikely to more than -- this is likely to be more than offset by the new launches in the coming quarters. Shreveport added about $6m to our revenues over the last two months.

In Germany, revenues grew by 20% led by volume growth. Stockholders are down now significantly from 20% to 12% in May. This has helped us go after higher market shares. As of date, we have transferred 100 products out of Salutas, including 14 key products to India. Our dependence on Salutas is now down to under 5% of our total revenues.

In Russia, we continue to beat the market growth rate. In the first quarter we grew by 21%, carrying over the momentum of last year. The overall market grew by 17.5%.

In India, we grew by 9%. Some of the key brands witnessed a decline and we expect the growth rate to improve in the coming quarters. Overall profit margin is at 50%. The margin breakup is as follows.

Global generics segment is at 58% as against 59% in the same period in the previous year. And for the Pharmaceutical Services and Active Ingredients segment, the margin is at 34%, up from 31% in the same period last year.

R&D spend is in line with our guidance of 7% of revenues. At year end the expenses for the quarter are at [INR470]. We had an average quarterly run rate INR380 in FY '08. This represents a 25% growth in SG&A expenses for the quarter. Amortization expenses were at $9m. We recorded a tax expense of $8m for the quarter. The effective tax rate in the first quarter is at 17%.

Cash position as of June 30 is at $162m, including short-term investments. Overall, debt equity ratio has improved to 0.3821 as of June 30, as compared to 0.41 on March 31.

We would like to provide an important update from our Board Meeting today. The Board has approved the purchase of rights of the financial investors in Perlecan Pharma for a total consideration of $18m. Their original investment in Perlecan was $22.5m.

In the books of Perlecan we carry a cash of about $9.5m with some tax losses. We are evaluating how to utilize the tax losses. Considering this, we do not expect any significant arduous impact in our profit and loss.

Before we conclude, the outlook for the rest of FY '09. Our revenue guidance of 25% in rupee terms remains unchanged. We are hopeful to sustain a 50% plus gross margin and improve profitability overall.

We look forward to the launch of several new products across key markets in the coming quarters, including the launch of the authorized generic for sumatriptan in the third quarter. And we are on track to launch our Specialty business in the US in FY '09.

With this, we come to the end of our presentation today. We, once again, thank you for your time and attention, and we will be glad to take your questions now.

Rochelle, we can now take questions from the participants.

Sure, Mr. Shah. Ladies and gentlemen, we will now begin the question and answer session. (OPERATOR INSTRUCTIONS). The first question is from the line of Sonal Gupta from UBS. Please go ahead.

Hi, thank you. Just a question to begin with on Betapharm. We've seen the sales going up; that's primarily due to the euro appreciation. So I just want to ask you at this point in terms of broadly what is your view on the Germany generics market? And, in that context, how do you see Betapharm's growth and profitability?

The growth is not just due to the euro appreciation. It's also due to volume growth. But there has been some pricing pressure because of the new reference price listed there. We hope to increase our volume growth and maintain this as we go forward. So, while there will be pressure on pricing, I think the turnaround will happen because of volume growth in the market.

Right. And -- sorry, so do you reiterate your profitability coming back to FY '07 levels? Or do you think that may be difficult to achieve at this point in time?

EBITDA, what we have said earlier, we are hopeful that we will get back to FY '07 level of EBITDA.

Okay, thank you very much.

Thank you, Mr. Gupta. The next question is from the line of Ranjit Kapadia from Prabhudas Lilladher. Please go ahead.

Good evening, sirs, and just wanted to breakdown the domestic market. And the market is growing at 14%; you are growing at 9%. So which are the products which are brought down the growth rates, if you can highlight that?

Yes, sir. Some of the reasons why we didn't perform as well as well as the market expectations, so that still continues to be our goal for the rest of the year is the following. One is the new products that we have planned to be launched, or that we could launch a number of products. There was a delay in terms of those launches in the quarter so the full benefit will be seen starting this quarter onwards. That this is one reason.

Second reason is some of the older products, because -- which have been around in the market for quite some time, some of our lead products, have not faired as well as what we expected them to be, because these products come under a particular marketing division of which there was a little bit of restructuring that went on.

But outside of this, we still are confident that we should be able to beat the market growth rate in the coming quarters and still meet the growth rate that we planned in the beginning of the year.

So what was the growth rate of Nise during the quarter?

Nise, as a molecule itself, is still growing.

Okay.

So it probably would have taken about, say, something close to 5%.

It's been growing about 5%?

In the fist quarter, yes.

Okay, thank you.

Thank you, Mr. Kapadia. (OPERATOR INSTRUCTIONS). The first question is from the line of Mr. Nimish Mehta from MP Advisors. Please go ahead.

Yes, thank you for taking my questions. The first question is related to the SG&A expense. I am sorry if I missed earlier if you had mentioned about it. I would like to get some more color on the expense which has actually shot up for the quarter.

And the second question is related to the foreign exchange policy, how are you covered and do you have any mark-to-market losses on [the same]?

Your first question about the SG&A, our average quarterly run rate during the last year was 380 crores. And if you take that as a base, then our SG&A expense has gone up by 24%. But this is not a like-to-like comparison because we have now got both Shreveport facility and the Dow facilities in the UK. So, obviously, these two have had [now] cost structures while we are also getting revenue out of them.

In terms of -- if you look at from the quarter four, the increase from four of FY '08 to the Q1 '09 is just slightly higher than 10%.

Now, of course, SG&A -- leveraging SG&A to improve profitability is one of our priority and we will be continuing to focus on that. And there have been some increase both in manpower as well as in the legal cost and this is something we shall have to see how this can be well controlled.

Coming to the ForEx currency so far as hedging positions are concerned, we always have the policy of first hedging the receivables. That, we do as and when there are [inviting] there and we [look to receive]. So about $120m of receivables that we have got, that is completely hedged. And that is hedged closer to current dollar/rupee rate, almost INR43 a dollar.

But we also decided to hedge a percentage of our future sales over the next 12 months. And, there, we have almost $250m worth of hedging exposure, and that has been taken a different time, starting from 40.50 to 42. So this is our total ForEx explanation today, and we do that hedge accounting.

So there will be some balance sheet mark-to-market loss. So this will be unrealized. So unrealized mark-to-market loss on ForEx contracts is almost about 70 crores, but unrealized gain on advance to subsidiaries is around 37 crores. So net unrealized MTM loss will be around 33 crores. But in terms of the overall -- if you have see in the quarter report, we have got a ForEx gain close to 15 crores. I hope this goes to both your questions.

Yes. On the SG&A part, you said legal costs and manpower have been higher so -- and also that it is just about 10% over the coming sequential quarter. So do we expect the same going forward as a run rate, or how should we take it?

I think we can reasonably expect, with some variation to that, this could be the run rate.

This could be the run rate, sir?

But there could be always exceptions with SG&A in a specific quarter. Then we will have to then come back with those exceptions. But you can expect in a normal course that this could be the run rate.

I see. One more question I would like to ask, and it's about the amortization. This amortization does not include any goodwill amortization for Betapharm, am I correct?

Yes. There is a normal (inaudible) normal. It includes the normal amortization.

I see. And what do you expect the amortization to be for the year in general, because (inaudible)?

So it will be at this run rate.

It will be at this run rate?

Yes. I want to just qualify my previous statement because, when we did talk about the SG&A, part of SG&A is like freight and freight is definitely as a percentage of our sales. So it's about sales growth to that extent, this (inaudible) group.

Okay.

Mr. Mehta, do you have any further questions?

No, thanks a lot.

Thank you, Mr. Mehta. The next question is from the line of Mr. [Krishan Sude] from Sivik global Healthcare, please go ahead. Mr. Krishan Sude, your line has been un-muted. Please go ahead with your question.

There appears to be no response from the participant on this line. The next question is from the line of Neelkanth Mishra from Credit Suisse. Please go ahead.

Hi, thanks. Questions on Germany again. The Betapharm market share seems to have dropped from March '08 to May '08. I understand that March '08 was seeing a recovery from low levels; perhaps it was slightly overstated. But where do we think we will end the year, with what kind of market share? Because your peers, like Stada and Sandoz, even [Naturapharma], are seeing very strong recovery in their market shares. Where do we think we will end the year in terms of market share?

There has been a significant growth in the market share compared to last year. I think taking March as a benchmark may be not very accurate because of the fluctuations month to month, quarter to quarter, but we are seeing very strong volume growth. The total volume growth during this quarter was 23% and, hence, we do see a significant improvement in the market share.

We do have some [inner] challenges in terms of managing the supply chain with the new realities, supplying from India and attendant issues. But, overall, these should be ironed in a quarter or two and we should come back strongly into the market.

Thanks so much. Just a quick follow up on that. In terms of your strength of portfolio now, I see no reason why in this environment where between the portfolio -- the size of the portfolio is a differentiator, and you already have a fairly decently-sized sales force, you shouldn't be looking to maybe double if not triple your market shares. I am just wondering if you, at the size of your product portfolio, is it comparable to that of the three larger peers?

It's comparable in breadth, but it's one-off than the top three. We are not present in certain segments, but we are looking at other allied segments, like hospitals' oncology, and we will be entering them as and when we complete our plan.

Okay, thanks so much. I have more questions, but I will join the queue again.

Thank you, Mr. Mishra. The next question is from the line of Rina Chandran from Reuters. Please go ahead.

Mr. Prasad, I had a question on the overall landscape for Indian pharma companies. Following the Ranbaxy deal, there has been a lot of speculation that other pharma companies might be next in line. So I want to get a view from you on what you see the landscape as being for Indian pharma companies, as targets.

I don't know if I can say that we see a pattern here. I think the Ranbaxy case is a unique case. It was India's largest pharmaceutical company and, hence, it created all this interest in India.

But what we see is a very strong renewed interest in the emerging markets from several players across the world. A lot of the international large pharma companies are looking at growth from emerging markets, and this has been publicly stated by companies such as GSK.

And there is a strong renewed focus on India, China, Russia and other emerging markets, because these are the markets which are expected to grow at more than double the rates at which the mature markets are growing.

So we are seeing an extraordinary interest in emerging markets. If anything, this is what my observation is on this landscape change.

Okay, thank you.

Thank you, Miss. Chandran. The next question is from the line of Rahul Sharma from Karvy Stockbroking. Please go ahead.

I just wanted to know the acquisition of Perlecan would be effective from when? And do you think we'll have -- there will be a sizeable support in R&D expenses for the quarter and for the year going ahead?

The transaction has not been completed yet. We just got Board approval today. In the next few days, maybe in a couple of weeks, we should complete the transaction. Consequent of this, I don't see a significant raise in R&D expenses. The R&D expenses should remain at the current levels.

(Inaudible) you are going to drop those molecules which were with Perlecan, or what is the status?

One of the products has been terminated. One product, 10945, which we have taken to through Phase I we are looking at licensing out. That means we won't be spending anything on the development of that compound.

The other two are still R&D programs. We are working on back-up candidates to further improve the efficacy and safety province of the other two assets. So it's just a little incremental R&D in these two programs that will be --

So you maintain your 7% to 8% guidance for R&D?

7%.

Okay, thanks.

Thank you, Mr. Sharma. The next question is from the line of Sonal Gupta from UBS. Please go ahead.

Yes, I've got a couple of questions from my side coming back. First thing, could you walk us through how you've combined the API and the -- I mean the CPS business? Because I think if you just add like on like, how does Mexico get added into the system? I just would like to understand.

Are you looking for a breakup of the numbers?

No, I am looking at -- if you look at last year's number, they don't -- in terms of the geographical segments that you have given within that, they don't seem to -- I want to know where has Mexico been added. Is it purely North America, or has it been distributed?

No, no, it's part of the PSEI business.

No, so, that I understand, but it's not within any one of these categories.

How could it be is dependant on where the product is sold, so bulk of the production from that goes to Europe.

Okay.

So it's probably Mexico is largely reflected in Europe and to some sales in North America also.

Right, okay, great. Coming back to this Perlecan question, I want to understand how would you be accounting for that. And before that -- what do you see as the rationale for buying back the stake really speaking? Was there a clause and where you had to buy this back?

There was no clause; it was a negotiated arrangement. As part of the Perlecan process, Perlecan had many rights to R&D from Dr. Reddy's, so they had first right on the right of refusal on products. And the back-up programs to all these four assets were part of the Perlecan process.

So it severely limited our flexibility to conduct our licensing and R&D programs. So we felt that it was worth reacquiring the shares and integrating Perlecan into our R&D structure.

Right. And how will the transaction be recognized?

It will be a share purchase so there is $9.5m cash in Perlecan. So we are going to pay $18m to the investors to acquire that; the assets and the cash and the rights.

There is some tax loss also.

Yes.

So the impact on the P&L will be minimal.

Okay. And, finally, I just want to understand are there any elements of a one-time nature because of the acquisitions in this quarter which are there in the SG&A expense?

Not in terms of the acquisitions itself, but there are some legal costs which could be one-time.

But would you be able to quantify those or --?

It's difficult to quantify because every quarter there will be some exceptions.

Okay. Thank you very much.

Thank you, Mr. Gupta. The next question is from the line of Rajesh Vora from ICICI Securities. Please go ahead.

Good evening, gentlemen. I just wanted to know why there is a significant difference in profit after tax between US GAAP and Indian GAAP consolidated. It's about 40% and about 43 crores.

40%?

It's INR92 and INR135.

So you are looking at consolidated or --?

Consolidated, yes. Indian GAAP consolidated is INR92.

Yes. The difference is -- that is on account of the amortization treatment which is different under the two GAAPs.

So you mean the whole difference is because of that?

Every quarter you see the difference. Even in the fourth quarter there is a difference between the profits of US GAAP which is higher than Indian GAAP consolidated.

Yes, but the differences for FY '08 is hardly about 9%, 10%. This quarter it is 40%.

Yes. So for FY '08 a couple of quarters will not give you the right perspective because of the exceptional tax gains that we had in US GAAP. But fourth quarter gives you the difference -- well, the difference was quite high between the two GAAPs and so is against this first quarter. The difference here is largely on account of the amortization treatment which is different between the two GAAPs.

Okay. And, Saumen, you were talking about those balance sheet related ForEx and mark-to-market losses INR70 and then, again, INR37.

Both are unrealized.

Yes, sure. So where does that get reflected in your P&L?

That doesn't get reflected in P&L. That is balance sheet.

Okay. So even -- okay, the whole amount. So INR50 of the gain that you mentioned is the realized one?

That's correct, Rajesh. And in balance sheet it goes to the equity and reserves, other comprehensive and commerce, for the US GAAP accounting procedures.

And (inaudible) is not realized. There will be always some realized and some unrealized. It will be a breakup of that also.

Okay. Thank you so much.

Thank you, Mr. Vora. The next question is from the line of Jesal Shah JM Financial. Please go ahead.

I just wanted to actually get some idea about how Mexico CPS. Tell me how the CPS business has done in this quarter.

The CPS from India is doing quite well. The Mexico plant witnessed a slowdown because of there has been a slowdown in the offtake of naproxen for the OTC product.

Going forward, I think we will not see the large volumes that we saw a couple of years ago. There has been a slowdown in naproxen and we will use that capacity for other products. There are a number of opportunities in the pipeline which the plant will be utilized for.

Right. So is that a sequential growth that you've seen? The Mexico business, is it sequentially the same level as it was in the fourth quarter last year?

We don't have the data to (inaudible) with us now.

No problems.

We can take it later.

Sure. The other question was what's your sense -- because the reorganizations are difficult for us, we get a sense on how the gross margins have moved the way we used to track them in the various other forms. So it would be very useful if you can give us some idea about how the gross margins have moved in the original classification.

This is the way now we will be doing the business segment reporting (inaudible). So, basically, what we are doing is -- it's like a global optimization that we are doing. So because the -- even approval earlier we would report a branded formulation, the gross margin was an aggregate of various products at multiple levels of gross margin. I think we'll have to get into this now. Overall global generics we have 58% gross margin, so that can be the base and, quarter on quarter, one can track that.

Yes, okay. And about Germany, you've talked about how the margins will improve back to FY '07 levels. Are you -- have you seen that already in the first quarter?

We are hopeful, at the EBITDA level, we will get back to the FY '07 level.

Sure, but have you seen some of that indication (multiple speakers)?

Yes. If we wouldn't have seen, we will not be able to make that statement.

Okay, that's good. And the last question is on the tax thing. It's actually just up to 17%. What's the full-year guidance now on tax?

17% is [non-GAAP], whereas, U.S. GAAP I think is around 15.2% or something. [There is that effect].

So is that the guidance that we should be looking at for the full year?

That is the effective tax rate. The effective tax rate is taken always for the full year, (inaudible).

Okay. I see, okay. Thank you.

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

Good evening, everyone. I was wondering if you can just share with us what should we expect once you transition from U.S. GAAP to IFRS; sales, operating level and net profit.

So next quarter when we present that, you will obviously understand the difference, because we'll restate the Q1 numbers in IFRS, and the US GAAP number is already disclosed now. There is at -- there could be something which will go either way. Overall effect for the year, we don't anticipate much of a change, but there could be something which will go into higher depreciation and amortization.

Basically, acquisition accounting (multiple speakers).

Yes. It's because of the acquisition accounting which is considerably different. We'll come back to you at the end of quarter two. But overall, for FY '09, there -- we do not expect any -- much of a significant difference between what would have been in US GAAP versus what would be in IFRS. But if you have to do the FY '08, then there would be a significant change.

And that would be -- for FY '08, where would the change be?

We will come back to you next quarter when we have the exact numbers.

Okay. Just one final point on this. For fiscal '09, different elements of guidance, that would not undergo a change?

We are not changing anything whatever we have told you last quarter.

No, no. Under the new accounting --

Under new accounting, we don't think --

No, we are not.

Okay. Second thing is about in the earlier plans of issuing warrants to the promoters, if you can just update us where do we stand now with that?

This has to be taken to the EGM tomorrow.

Okay. So it goes to EGM tomorrow?

Yes. We have, in our Annual Report if you see, there is a particular item in our notice to the shareholders.

And what would be the -- after that, what would be the key milestones?

If promoters want to exercise it, in terms of full or part, it is at their discretion, but they have a limit up to that much, they can do it. Then, they'll have to pay 10% of that within the next 15 days.

Okay. And the pricing would be --?

Around 697.7, something like that. I can get back to you on the exact. It will be around that.

Okay. And after EGM, would you require any other regulatory approvals or --?

No. The EGM will be the final approval. Of course, all (inaudible) guidelines and all other requirements have to be met.

Okay. And just one final point. Is the Company seeing anything out of expectation as far as the input cost inflation is concerned, material costs or wages, or something that you would -- you think could be at risk?

Yes. Some of the material costs definitely we have witnessed pressure, inflationary pressure and also materials which are coming from China. But what you have seen our gross margin is after that.

Okay. And anything that you want to share on the wages side, salaries side?

Salary effect has already happened, so the effect is there on the new SG&A line now.

Okay, perfect. Thank you so much.

Thank you, Mr. Baisiwala. (OPERATOR INSTRUCTIONS). The next question is from the line of Mr. Neelkanth Mishra from Credit Suisse. Please go ahead.

Yes, thanks. This is more of a blue sky kind of question. The implications of Teva acquiring Barr and Teva seems to be growing bigger and bigger. Now, how does that change your strategy and how would you be positioning yourself? I think there was a time when there was still a chance for most of the Indian big companies to at least acquire the scale to be in the top five. Now the top three, four seem to be running away. Does that in any way change the way you approach it and how --? What would be your strategy going forward, at this kind of a level?

On a lighter note, we probably will get there without doing much because companies are being acquired by Teva.

No, that's true, but does that -- sorry, go ahead.

There's certainly going to be a lot of -- there is a significant amount of market power that Teva is acquiring and they really control the entire chains. But there are a whole [slur] of customers which they are not servicing right now whom we can serve and serve them profitably. So I think there is space. Customers also want an alternative to Teva because they see they were getting so strong that they are a little worried about that. So I think there is room for play in that space.

Yes, sir. One of the advantages, I guess, you had -- for example, looking at the UK where Teva completely dominates, the US which is the same, one advantage I guess you had in Germany was that you were much bigger than them, but now it's -- after acquiring Barr, I guess they're -- I don't remember the exact ranking, but they mentioned they were somewhere in the top 10. Does that in any way reduce your advantage in Germany?

No. In Germany, they're not a big player. [Cleva] -- through Cleva they had a presence.

Yes.

So it's not that significant.

Okay, okay. And just the growth in international formulations outside of Russia, despite depreciation of the rupee, 19% is not bad. But I think, compared to the growth rates we were used to in the past, this -- is there some one-offs? Should we expect growth to recover going forward?

We are seeing growth in many markets like Ukraine, Romania and all of those places, so we should continue at that about 20% growth overall.

Okay, thanks.

Thank you, Mr. Mishra. The next question is from the line of Saion Mukherjee from Lehman Brothers. Please go ahead.

Yes, hi. This is Saion from Lehman. I actually just wanted to understand, when you're saying the profitability will increase going forward, now SG&A is growing at 24%, more or less in line with your top line. What are you -- are you indicating an increase in margins or ROE going forward? And if that's the case, what's the kind of target that you have in mind?

The SG&A which has gone up is due to multiple reasons. Some of those reasons won't continue, but some will. We will also see greater margin in some segments of our business. And, certainly, certain higher-margin products are being -- going to be launched in the second half of the year. So, overall, we expect to improve profitability.

So you expect the growth in SG&A to slow down going forward?

Yes, we do. We expect to see growth -- a slowdown of growth as well as leverage on the SG&A already, which means generating more growth out of the investment in SG&A.

Okay. Okay, thanks.

Thank you, Mr. Mukherjee. The next question is from the line of Nitin Agarwal from IDFC SSKI. Please go ahead.

Hi, good evening. I just want to check, if you were to take a two, three-year view out, not especially looking at the current year, in terms of the first-to-file filings, is there any of those opportunities that are relatively based upon (inaudible) expiries and all which are going to happen and where there's no -- there's not really (inaudible) involved that one can look at some of those potential FTF active launches over the next two or three years?

Yes, Nitin, one is -- if you're -- taking a two to three-year view, we have a combination of opportunities which are both FTF driven as well as difficult to make products. We discussed this on the previous call.

Just listing them, one is omeprazole OTC. That's an FTF opportunity. We are currently in litigation. So that's something that, if you are taking a three-year timeframe, that's something to look out for. The other thing is fondaparinux. That's a product that we are developing with Alchemia. We talked about this earlier. That's, again, a difficult to make product.

And then, if you look slightly in the outer years, we have rosiglitazone as an opportunity where it's a shared exclusivity. It's just Dr Reddy's and Teva. And finasteride, where we have settled with a one-year [lowly] launch in that particular product. And plus we have a few other opportunities which we obviously can't share at this point in time. So, as we reach critical milestones, we'll talk about them.

Okay. Thank you.

Thank you, Mr. Agarwal. The next question is from the line of Sonal Gupta from UBS. Please go ahead.

Yes, thank you. Just one more question from my side was you've added the Shreveport facility to your Generics side. Isn't that a contract manufacturing unit and shouldn't it be on the [BPSEI]?

Yes, today, the business from there is primarily contract manufacturing for other OTC companies. But, going forward, our emphasis is to use that as infrastructure to serve our North American Generics business and also our North American OTC business. So it's really part of that unit.

Right. So in terms of -- if you were to split it up, at full capacity, how much of that capacity would be utilized by contract manufacturing versus by you on your own?

Today, the revenue is around $40m. It's not -- there's significant capacity and room for expansion there, so it's hard to put a number to the capacity -- revenue from the capacity. It depends entirely on the product portfolio, but it is more than enough to service our North American Generics' needs for the near future.

Right. Okay. Thank you very much.

Thank you, Mr. Gupta. The next question is from the line of [Beno Batibaramto] from [IAFL Capital], I'm sorry. Please go ahead.

Yes, hi. I was looking for a little more color on the US business, the US Generics business. Excluding the Shreveport facility, it seems like it grew more than 40%. So can we get a little color about where this growth exactly is coming from and how sustainable, going forward, this would be?

Yes. The growth is a combination of the volume growth that we are seeing in some of our key products and this is driven by, in some of the products like [semfastatin] and fexofenadine, we are seeing an improvement in the volumes. Semfastatin, it's also to do with the terrible tax rates that the underlying volumes are increasing, so we are benefiting from that. And also in terms of the new product launches in the last 12 months.

So it's a full-year effect of the launches last year plus in the first quarter of this year. We're seeing that impact the growth, so we are benefiting from that. And plus, if you recall, OTC is something that we launched in the second quarter onwards, so that's also benefiting us in the first quarter.

You can see it, quarter on quarter, how it is growing, so maybe the Q4 of FY '08 if you see, and then you compare it to now to give you a better perspective.

Right, but how is the competitive scenario for these -- in these key product areas? Is competition catching up faster that you may risk losing some market share?

It is a competitive market. Nothing there is in a situation where the competition is of low intensity.

But the new launches that we have put there, we are also getting good market share.

But they're all multi-player products.

Right, right. (Inaudible), I was looking for a little more clarity on the ForEx policy. It seems like some of the contracts you have included in the P&L, which includes both realized as well as unrealized, while some of them go to the balance sheet. So what is the policy exactly?

Well, this follows as per the US GAAP hedge derivative accounting policy. In terms of our hedging policy, I can explain to you what we do. We hedge our current receivables and we take a maximum 12 to 18-month window. We don't go beyond that. And whatever future dollar sales that we are expecting, we only hedge 20% to 25% of that.

That's fine, but what goes to the balance sheet and what goes to the P&L?

So as per the US GAAP accounting of derivative accounting, then -- ForEx contracts and your advance to subsidiaries these are things, whenever there is unrealized mark to market, that goes to the balance sheet. And then, in terms of whatever hedging we have taken for the future and, on that, whenever it is getting realized during the quarter, it will come onto the P&L side.

Okay. So where exactly is the ForEx gains in this quarter coming from?

One has to get into details of accounting, then. I -- unfortunately, I don't have [that data] in front of me right now.

Okay, but --

But one can explain to you later.

Okay, no problem. Thanks.

Thank you. The next question is from the line of Nimish Mehta from MP Advisors. Please go ahead.

Yes, hi. I just -- in fact, I got a little confused on the SG&A part, because Saumen mentioned that the number -- this run rate is going to be the same for the next quarters, and Mr. Prasad mentioned about that probably coming down. So can you just explain that?

No, what we -- what Prasad mentioned, that we are going to leverage SG&A more and more in coming quarters. And when somebody asked the question about the current SG&A, what we have put in this quarter, whether the run rate would be similar in coming quarters, we said there could be some variation, because there are always some exceptions in any specific quarter.

And one element of SG&A which is freight, which is directly linked to the total volume of product that we supply, if there is volume growth, then the freight will obviously go up. So, given all these things, we expect that, as a percentage of revenue, SG&A to come down in future.

I see. In FY '09?

Within FY '09.

I see. So it will be not 31%, as it is today, is what you mean to say.

We expect.

Okay. And -- fine. Once again, on the foreign exchange part, if we were to account the foreign exchange as per the Indian GAAP, what could be the MTM losses or whatever it is you would have been reporting?

I don't have that data.

Can I say it may be around INR35 of the net unrealized loss that you mentioned in my previous question?

No, that goes to balance sheet. That doesn't come to P&L.

That is as per the US GAAP, right?

Yes.

So as per the Indian GAAP, that would be coming to Indian P&L. Is that a fair statement?

Can we check and get back to you on this question?

Okay. Okay, thank you.

Thank you, Mr. Mehta. The next question is from the line of Mr. Neelkanth Mishra from Credit Suisse again. Please go ahead.

Hi. This is a question on the OTC business in the US. Your sales this quarter were INR237m versus, if I remember right, about INR216m last year. This is a fair -- a decent acceleration. What should we expect the run rate to be, say, a year down the line? And are you benefiting from the bankruptcy of [Lynell Health]?

Okay. In fact, we have launched this business last year, so there are more aggressive targets compared to last year on the OTC business. Obviously, the space vacated by Lynell is something we are going after, but all -- actually, if you see the opportunity in the OTC space itself, I think there's tremendous value that we can create and we are definitely going after it right now. And if you also see some of the opportunities that we have, Nikhil just mentioned it earlier, the omeprazole OTC reversal with us, which offers a significant opportunity to scale up on this business.

Right, but hasn't that been launched at the (inaudible)?

Yes.

It is.

[Perigord] has launched a tablet -- a capsule version of it and we have the other version.

Okay. And you can launch by December '09, is that correct?

It depends on the legal situation. We're still working through that.

Okay. So trying to assess is it going to be -- I know it's going to be a very -- it is a very large opportunity, but trying to assess if this will be a $30m opportunity a year down the line, or a $50m opportunity, or a $10m opportunity. I'm just trying to --

It's more like the $50m opportunity.

A year down the line?

Yes.

Okay, thanks.

Thank you, Mr. Mishra.

Rochelle, we'll take one last question.

Sure, sir. Let me repeat the announcement. (OPERATOR INSTRUCTIONS).

So if there are no further questions, Rochelle, we'd like to end the call.

Sure. Mr. Shah, I'd like to hand the floor back over to you and the management for your closing comments.

Thank you. We thank all the participants for joining us on the call today. If there are any further clarifications, please feel free to get in touch with the IR desk either on mail or on phone. Thank you.

Thank you, gentlemen of the management. Thank you, Mr. Shah. Ladies and gentlemen, thank you for choosing the Chorus Call conferencing facility. Thank you for your participation and you may now disconnect your lines. Thank you.