Rubicon Research (NSE:RUBICON) Q2 2027 Earnings Call

0:00 Ladies and gentlemen, good day, and welcome to the Rubicon Research Limited Q2 FY 'twenty seven Earnings Conference Call. As a reminder, all participant 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. Tushar Manudani from Motilal Oswal Financial Services Limited. Thank you, and over to you, sir. Thanks, Steve. On behalf of Motorola Oswal Financial Services, I welcome you all for Q2 FY 'twenty seven results earnings call of Rubicon Research Limited.

0:49 From the management side, we have Mr. Parag Sanjati, Chief Executive Officer mister Nitin Rajodiya, chief financial officer and mister Sagarok, senior VP corporate development and strategy. Over to you, sir, for the opening comments. WICON's quarter two earnings call. We'll just start with the financial highlights. I'm on slide number five. If you look at all the parameters, revenue, EBITDA, impact, we had a strong performance. If you look from q two f y twenty six, our revenue was 412 crores. In q two FY twenty seven, our revenue was $5.77 crores.

1:37 EBITDA was 95 crores versus in the current quarter, $1.46 crores. That has increased from 54 crores to 90 crores. The FY twenty seven numbers reflect the Arena consolidation. So if you look at the footnote, the revenue of 19.4 crores is included, but contribution to EBITDA is not material in both the quarters. We can move to the next slide. I request Nitin to take you through the summary income statement. Thanks, Palat. Good evening, everyone, and I'm on the Slide six. So in the quarter two, our revenue from operation was $5.76 crores versus 412 crore in the previous year up by 40%.

2:36 And in the quarter 01/27, our revenue was $5.34 crore. Operating pre r and d EBITDA was 206 crore versus $1.41 crore in the in the previous year, and that translates into a pre r and d EBITDA margin of 35.8% in this quarter versus 34.1% in the previous year's same quarter. Our R and D expense for the quarter was at 62 crores, translating into 10.8% R and D expense, which is in line with the previous year same quarter and the q one of FY twenty seven.

3:25 Our operating EBITDA was $1.44 crore versus 94 crore in the in the previous year, a healthy growth of almost 53%. In the quarter one, our EBITDA was 129 crores, so even sequentially a strong growth. Including other income, our EBITDA was 146 crores in this quarter versus 95 crores in the the previous year. Again, a healthy growth of 54%. Our PAT for q two was 90 crores versus 54 crore in the previous year and 85 crore in the in the previous quarter.

4:13 In the previous quarter, quarter one, the PAT of 85 crore also included a onetime insurance claim of 3.6. So considering that, the PAT growth versus previous quarter is is very healthy. EPS for the quarter was 5.41 versus 3.47 in the in the previous quarter. On an half yearly basis, our h one revenue was 1,111 crores. Again, a healthy growth rate of 45%. Our EBITDA pre r and d was $3.94 crores translating into a 35.4% re r and d EBITDA.

5:08 Our operating EBITDA for first half was $2.73 crores, a healthy growth of $50.57.5 percent versus the h one previous year. And our path for the first half was $1.75 crores. Again, a healthy growth of 80% versus the h one of previous year. So just to summarize, in q two, we saw a strong sequential as well as y o y growth, both on top line as well as bottom line strength. Now moving on to the slide seven on on balance sheet. In balance sheet, movement in net debt, net of cash, as well as fixed assets versus March was primarily driven by our acquisition of Arena Life Science, our acquisition of New Jersey based manufacturing facility as well as CapEx.

6:12 So on the New Jersey facility, our CapEx or the figure set base grew by 85 kur, whereas the cash payout was 29 kuru. We had 55 kuru worth of noncash item in the form of right of use. Our working capital as on September 30 was a hundred and seventeen days. The improvement in networking capital to a hundred and seventeen days versus one twenty six days was primarily driven by quarterly fluctuation. And this net working capital should normalize in the in the range of one twenty five to one thirty days.

7:07 Our ROAC as on September 30 was healthy 36% in line with 36% in March 26. On ROAC, I would like to I would like to highlight that out of our total capital employed, almost 400 crore, which is slightly more than 25% of the capital employed, is is towards asset which are either pre revenue or yet to significantly or materially contribute to the revenue and the returns. So this includes the Pitampur facility, which should get operationalized soon, includes all the upcoming facility in Chattopadhyay, Tamarjinagar, or Angabad, and our New Jersey based facility. So these are three new manufacturing facility, and it also includes Arina Life Sciences.

8:13 So so considering that, a very healthy ROAC. Now moving on to slide eight on the summary cash flow statement. So for the quarter, we had a healthy net cash flow from operation of 99 crore. And... Sorry. Yeah. It is for the for the first half, not for the quarter. And in the first half, our cash flow in investing activity was $1.72 crores in primarily driven by acquisition of Arena Life Science, New Jersey manufacturing facility acquisition and CapEx.

9:03 And again, as I mentioned earlier, the cash component in the New Jersey facility was INR 29 crores and INR 55 crores was noncash right of use. Now now moving on to slide nine. So the purpose of putting this slide was was to showcase that how our r and d engine, our execution engine, and our compliance engine is is firing strongly, And that is getting reflected in this slide where the... Since listing, if you see, we've had a strong and consistent quarterly track record.

9:51 So I... I'll not go through each and every number, but I would like to call out or highlight our EBITDA number. So if you look at EBITDA has more than doubled in the last few quarter from 72.6 to $1.46.4. So it has grown in a strong and consistent manner in the last few quarters. So with this, I'll hand over to Parag. Thanks, Nitin. So just taking you broadly to the... Sorry. I'm on slide number 10, q two performance summary.

10:41 So just taking you through some of the key highlights, you know, so we've experienced 40% revenue growth, and the revenue growth is pretty much well balanced across products. If you would just see the top five, top 10, we have put the numbers across four sequential quarters, and they all range bound again, depicting a well rounded growth across products. Pricing continues to remain stable driven by our focus on specialty or differentiated products. Coming to the revenue, last quarter, if you remember, we discussed about that we had taken certain tactical measures that led to a pause in our sequential USD revenue growth.

11:27 And we had guided that, you know, the growth will be back in q two two. In that light, I'm very happy to share that this quarter, our sequential USD revenue growth is 5%, and we continue to see strong visibility in the coming quarters. Coming to operating EBITDA, which is at 25%, which is up over our q one number. If you see, I mean, your... You see our guidance history on operating EBITDA. If you remember, we... Last quarter, said it will be about 23% plus, which is over our '22 to 23% said earlier. We're happy to report that time we are guiding it to 24% plus for the for the full year.

12:16 So just wanted to emphasize, despite difficult use political situations, we still have been able to deliver very strong EBITDA growth. Cash flow was strong at nearly 99 crores. Coming to approvals, three approvals came in q two, and our commercialization rate is strong at nine... 84%. Want to call out one important aspect regarding commercial, you know, commercialization. The licensing process in India for and as well as other products have been revised. So now you can only apply for an export license once we get the FDA approval.

13:04 So earlier, we used to be ready, you know, but expecting the approval, we will be ready with the licenses and the manufacturer product to ship out as soon as we receive an approval. But as these regulations have changed, some of these approvals will be launched in the coming quarter. The specialty contribution to the gross profit is at 36%, again, underpinned by our specialty products and differentiated products. Moving to the next slide on slide 11. I'll just request to take you through the regulatory inspections at all of the states. Sure. Thanks. Thanks, Parag. So this slide really encapsulates the current regulatory status at our...

13:53 All four manufacturing locations as well as both of our r and d sites. Now as a regulated market focused business, these accreditations are obviously key enablers to our continued success. Both r and d facilities, as you can see, one was inspected. The Canada site was inspected earlier this year. We did not have any observations. The IR is in place. Likewise, for our Thane Headquarters R And D Center, which was inspected in March 2025. Coming to manufacturing, one of the four facilities, which is New Jersey, was inspected very recently just before our acquisition. So it was inspected by FDA in May 2026, and the EIR for that is is already in place.

14:44 Our two facilities, Amarnath and Satara, were actually inspected just in the previous month in October. So both of these were unannounced inspections. Was inspected in October. There were three observations with respect to systems improvement, two observations with regard to product application, which was under review by the agency. These are... You know, all these observations are procedure. None of them relate to data integrity. And this is a very recent inspection. This inspection is is literally days old, not even weeks old. And we are confident of working with the regulator to close this successfully and in a timely manner. Satara was inspected earlier in the month of October.

15:30 We had one observation there, which is again procedural. The response for that has already been submitted to the agency, and the EIR for that is omitted. Pitampur was inspected in July. There were two observations as we had informed the stock exchanges. The response was submitted in the same month as the inspection. And here again, we expect the AIR. So I think the key call out here is if you see all four of our manufacturing locations have now been inspected within the last, you know, six months. And I think that for us is is obviously it's a key point because because of sort of the the criticality of regulatory inspections here. So with that, I'm gonna move ahead to slide 12.

16:22 And slide 12 provides a historical perspective on our r and d space. So what we've always focused on in our previous calls as well is we've tried to provide insight on the productivity of our r and d space. And from this quarter, we've we've made a slight change to how we are presenting this. So we've now presented two slides to give better perspective on both the history of our r and d spending and how that is shaped, as well as how the productivity of that r and d spending has has sort of evolved. So if you see going back to fiscal year twenty twenty one when our spending on r and d was around 95 crores, In fiscal twenty two, that that went up to nearly $1.25 or $1.24 crores.

17:10 And the key point here is is that it was almost 40% of our revenues in that year. So it was really a breakout year in many ways for our r and d spends, r and d programs. In these two years, as you can see, our spending on r and d relative to sales was was significantly high from 30 to 40% of revenues. And this really allowed us to build momentum in in sort of r and d programs. We have since normalized this to a 10 to 11% of operating revenue range. It still, however, remains materially higher than than peers. For the half year ended September, r and d spend was 10.8% of consolidated operating revenues. And all of our r and d expenses are are charged off to the parents while while, you know, we we almost look at them in some ways as investments. These expenses are all passing through the period.

18:09 So from sort of the 40% spending in FY '22 now at sort of, you know, it's been fairly within range at 10 to 11% in relative terms. But what you would see is absolute r and d, whether you see for FY '24, '25, '26, r and d spend per year has has almost sort of doubled from FY '24 to FY '26. It was about a 107 crores in FY '24 and and nearly $1.94 crores in FY '26. For half year, it's been a 120 crores. And I think as we move on to the next slide, we'll talk a little bit about what the guidance is for for the coming... For the full year as well as going forward.

18:57 So I'm now on slide number 30. So here is where I think the previous slide spoke about our historical r and d spend. I think here what you see is the correlation between that r and d spend to our incremental revenue growth. Now just to recap our construct of r and d productivity, we are comparing incremental revenue over a three year horizon. So if I start with the first set of data points on screen, fiscal year twenty twenty one product sales of just just under 300 crores. Going through to fiscal year twenty twenty four where it grew to 839 crores, It's an incremental revenue of $55.40 crores just about.

19:44 And against this, we are looking at r and d spend incurred in, you know, two years preceding. So fiscal year twenty and twenty one plus quarter one of fiscal year twenty two. And the rationale for that being, you know, the development spend on programs that was completed up to fiscal twenty one with an additional quarter going beyond would begin to meaningfully impact in revenues over sort of a three year horizon. Now this ties in with what we have stated before in terms of our approach to commercialization, which is to say that we our preference has always been to ramp up new products in a steady way, in a way that that sort of allows us... Allows margins to be stable. So when we compare the the impact of r and d, we are comparing it out over a three year horizon. So we're comparing fiscal twenty one to '24.

20:38 The $1.65 crores of r and d that we spent in the reference period gave us an r and d productivity of 3.3 times to generate incremental revenue of about 540 crores. Now this is a rolling analysis. So as we roll this forward one cycle, we're now comparing '22 to '25. Revenues increased from 293 crores in fiscal twenty two by $9.69 crores to reach $1,002.62. Against reference r and d spend of two thirty seven point nine, $2.38 crores, the productivity went up to 4.1. And if you go forward '23 to '26 and '24 to '27, you'll see that productivity has gone up further to 5.9.

21:26 Now 24 to 27 is, you know, deserves mention for a couple of reasons. I think you saw the outsized r and d spending that we had... That we noted on slide 12 in fiscal year twenty two when we spent 40% of revenue on r and d. And I think do you see the impact of that showing up in the absolute r and d spends of the 22 to twenty five and twenty three to 26 cycles here on screen, $2.38 crores and $2.26 crores? And what that means is the... If you look at the twenty four to twenty seven cycle, that's actually coming off the lowest absolute r and d spend in the recent four cycles.

22:11 So while our spending has increased, I think the impact of of sort of a much higher spend a few years back means that as we look at r and d productivity, which has improved with time, the base for that r and d productivity in the current cycle is the lowest it has been in the last three cycles. So where we are at two hundred and eighteen point point seven. Now the productivity for twenty four to twenty seven, we've called that out on slide, the 5.8 x number. Now the 5.8 x number is is just to, you know, clarify here. The revenue figure for FY '27 that you see bottom of slide, that is 2,105. That is an arithmetic annualization of the first half revenue, excluding excluding Arena.

23:01 Now as we have seen this year and in the preceding quarters that I think we we walked through, Growth in revenue in the remaining two quarters of the year will will mean that this multiple also will correspondingly increase as we get through as we get through the remaining part of the year. Now as we look ahead, if you look at the next two cycles, fiscal twenty eight over fiscal twenty five and fiscal twenty nine over fiscal twenty six, what you'll see is that the r and d spend for these reference periods is materially higher than it is in the current cycle. And I just like to call out here that this r and d spend of $2.75 and $3.84 crores has already been completed.

23:47 So if you see '25 versus '28, the reference r and d periods for that are '24, '25, and q one twenty six, which is complete as of last year. And if you see in '26 versus '29, that's the r and d spend of '25, '26, and q one of twenty seven, totaling to $3.84 crores, which is worth pointing out. It's it's slightly less than double of what it is in the current cycle, and that spend has been completed also. Now coming to guidance for the current spending period, which is 2627 in q one twenty eight, we guided to an r and d spend of 500 crores. So if we look at fiscal year thirty versus fiscal year twenty seven, on sort of the fiscal year twenty seven revenue base, we would expect 500 crores of incremental r and d at a productivity rate of that r and d to drive incremental revenues to f y thirty.

24:46 Now off the 500 crores of r and d, we are well on track to achieve that guidance. We have already completed total spend of 313 over six quarters, and we have good visibility towards completing the remaining 500... To get to the 500 number over over the remaining three quarters. So so, essentially, current cycle leading up to FY '27, you know, in in many ways, if you were to treat this, if you were to look at this as as sort of an engine, I mean, it it has probably the least coal in the fire. And going forward, I think the next two cycles where we have already completed materially higher r and d expense. So in many ways, I think we are we are now building up steam for that for that uptick that we that we pointed out here.

25:38 So based on this, you know, I think we've tried to represent this a little bit differently just to bring out the various aspects of this. So I hope it's easy to appreciate the visibility on revenue growth for 2930, and beyond is pretty strong for us. So with that, I'll hand it back to Parag. Thanks, everyone. Thanks, Rajat. I think we are open to question and answers. We'll hand it to the moderator. Moderator. Yeah. Thank you, sir. We will now begin the question and answer session. Participants are requested to use handset while asking a question.

26:36 Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question comes from the line of Nikhil Mathur with HDFC Mutual Funds. Please go ahead. Yeah. Hi, everyone, and happy to work in advance. I mean, great set again, so many congrats on that. The first question I have is on... I just wanted to understand that when you incur R and D over the period that you have talked about, do you have any metrics to talk about what percentage of R and D doesn't contribute to revenue or what percentage of R and D goes based? I mean, might be some elements of R and D which are inefficient, right? There might be some certain cases, certain products that fail.

27:32 So any thought process on what has been historical run rate of R and D that usually goes waste and going forward, will that method be any different? Nikhil, thank you for that and and happy Diwali in advance to you as well. So I think our approach on r and d spending has always been... You know, we follow a very rigorous stage gated approach to spending on r and d. And I think the key output of that is before we commit significant capital to any project, I think the the derisking exercise and the stress testing exercise take place before. So, essentially, what ends up happening is before we commit significant capital to any particular project, I mean, we go past all of those derisking hurdles or stage gates, if you will.

28:26 And so the the outcome of that is it allows us to keep nonproductive r and d spend down to, you know, as little as we can, which is not to say that, you know, we don't have any spend. Yes. There are some projects that get paused or stopped later in their life cycle as well. But but I think if you look at our increasing trend of r and d productivity, it's it's sort of reflective of the fact that, you know, we are... We... We've been continuously getting a little bit better at it with time. And going forward also, I think you will see this... I mean, it's it's cultural for us. You will see this approach and philosophy will will continue, and we will look to keep sending it even further as we go along. Okay.

29:13 So the the current r and d to revenue ratio, which is on an uptrend, Is it is it only because of your revenue per molecule is going up? Or is it also an element of that you have gone more efficient over the years and hence, you're able to convert more of your r and d into revenues? So it will be a combination. I think, Miguel, great question. I think it's... It will definitely be a combination of both. Okay. And so the further up trend that you're talking about on this metric, again, you have visibility and and line of sight on the kind of products that you are launching, and the realization or the or the positive per product is kind of going up.

29:58 That's how one one should look at it? Over years, I think the color of our portfolio has has definitely changed. I think if you if you look at the year that we've laid out on slide 13, starting with sort of... I'll run the risk of saying relatively simpler products, immediate release tablets going back to 2021 and so on. But as you move forward and closer to 2627, I think you see drug device combinations, products that present sizably large individual opportunities as well. Now all of this is still within the context of of, you know, there being no hero products as such. So I think perhaps said earlier that, you know, if you look at our top five, top 10 products, those have not moved outside sort of a fairly narrow band, and I think that continues. I mean, the approach is to be broad based on portfolio and to keep driving both efficiencies as well as keep... Continue with the focused product selection approach.

30:57 Got it. Understood. I have one clarification on the Slide 13. So the... If I look at, let's say, the current year revenue buildup, which is FY 'twenty seven, now you are talking about FY 'twenty four base revenues of INR $8.39 crores. Yes. Is that... But but when I look at audited numbers, the base year revenue is around INR $8.54 crores. And and same, there's some difference in the previous year as well. So are we missing something here? Because to project future, we might need some accuracy on what base year revenue we are looking at. So these... The the numbers on this slide, Nikhil, are actually product sales, which is why there is a... I mean, between There will be a service element as well in the report. Yeah.

31:43 Absolutely. Okay. That's... Okay. Got it. And finally, have this this coming to this slide. Sorry. Just just to call out also just for completeness sake, although the numbers are not very large, is that this is this is still sort of the regulated market revenue and r and d. This doesn't include the arena numbers. So if you're trying to reconcile the numbers. That end... That end. Yep. And on on Slide number seven, the pre revenue manufacturing site breakup that you have given. So does this mean that all of these four sites, including Arena, they're not contributing to any revenues as of now? Or Arena revenues is part of this particular CapEx?

32:29 Yeah. So the pre revenue manufacturing sites, Nikhil, that is correct. As you know, Pitampur was in All the three sites are not contributing anything in revenue right now. And also from an ROA perspective, point is that all these four facilities units are not sort of having a meaningful contribution to bottom line. Okay. And if you look at out of these four cities, we don't put CSN and New Jersey, we are incurring expenditure and the revenue is there to kick start. So for RUBICON, the RUBICON has sort of come into the capital employed.

33:15 But as we've been saying, I think that we 're working on sort of getting that business onto the trajectory that we want. So it's still not contributing to the the numerator side of the return on capital. But but, yeah, that will change going forward. Okay. So just to understand it completely, I mean, it's zero to very low utilization across these four line items. The pre op expenses are being rooted through the P and L and operating leverage will possibly get realized once these get commissioned and fix up. Sure. Sure. It should. Should. It should. Actually, correct. The expenditure is going through the P and L and the sides are not yet revenue profit. So basically, just to summarize, basically, all these sites are adding to the, basically, the capital employed.

34:12 Okay. So these are included in the denominator. And the numerator, the return is... We have to begin, meaning only. Got it. This is very helpful. Thank you so much. Thanks. Thanks, Migit. Thank you. The next question comes from the line of Babandeep Singh with Doon Funds. Please go ahead. Sir. Am I you? A little soft, if you could speak up, please. Yes. Okay. Congratulations on the great set of numbers. Mr., could you please use your handset? Hi. I think it should be better now.

35:00 Yeah. Thank you. Yep. Okay. So congratulations on the great set of number and happy Diwali to everyone. Sir, my question is on the three factories that you were talking about. So from when do you expect them to start contributing in the revenue? So if I understood correctly, I think you're asking about the three facilities that we said are not contributing right now because there's no revenue generation. Is that correct? Yes, sir. So from when do you expect the revenue generation to come in place? Yeah. So for Indore, we already said that it will be FY '28 onwards for that. CSN, right now, we are not putting a exact timeline to it.

35:53 But... And and for New Jersey, as we had already mentioned, again, it will take us... You know, before we... Revenue starts, we'll have to do filing, putting the products, an FDA inspection. So right now, we'll refrain from giving an exact date for that. Got it, sir. And secondly, sir, what would be our revenue growth on the constant currency terms? 5%, I think, was the quarter sequential growth. Yes, 5%. Got it, That's about it. Thank you, Congratulations, guys. Thank you, Bharat. Thank you. Before we take the next question, we would like to remind participants that you may press star and one to ask a question.

36:50 The next question comes from the line of Harsh Gurnani with Diamond S Alpha. Please go ahead. Yeah. Hi, Parag, Sagar and Nitin. Congrats on good set of numbers. A couple of questions. First one is on the margin side. So this is the third quarter of gross and EBITDA margin expansion. So how how much of this, you know, would you attribute of... To letting go of the lower margin products versus, you know, specialty increasing as a percentage of gross profit or, you know, the operating leverage playing out? And did this quarter also have the impact of rationalization of low margin products?

37:43 So, Harsh, I think it's a combination of the fact that all you mentioned. But, you know, the last last quarter when you mentioned that the revenue growth or sequential revenue growth was not there because of the tactical measures we've been taking, I think more or less those measures have been completed few... Might be completed in the next one or two quarters. So that's, I think, on the on the revenue side. And I think... Sorry. I missed your second... I think what was the second question? Just wanted to understand that, you know, the reason for margin expansion. Like, was was that low margin products or more or less, you know, specialty increasing as a percentage of GP or the leverage that is playing out? No. So I think that's also based on the products the products gaining market share, our legacy products getting market share. So it's based on... Across what I just said is well rounded. It is not only about old products or new products. It's all about the portfolio we have and the way we have designed the portfolio.

38:52 So that is playing out. And, Harsh, just to add to... As Parag mentioned earlier, it's a it's a combination of various things as a share of specialty in the gross margin has been has been healthy, as you mentioned, operating leverage. And also this also factors in that the improved gross margin and EBITDA margin is after factoring in the cost associated with the whole geopolitical situation, etcetera. So it's a combination of Understood. Impacted positively, few impacted negatively.

39:40 Understood. And just wanted to get an update on the Arena integration and, you know, where do you think, you know, the Arena margins could be, say, you know, in the medium to long run without, you know, any guidance or anything? But where where do you envisage the margins should be? So, Harsh, as we mentioned that, Alina, we are in a phase in a in a phase wherein we are putting the growth lever in place, and our focus is investing behind the growth and getting the growth back on track. And in the next phase, we are looking at meeting the IPM growth. And then we'll start focusing on profitability.

40:30 So we are sometime away from that phase. Okay. The idea is to the idea is to put RUBICON on the growth trajectory and start beating the IPM growth. And and just to add a first, I think we... So guiding, we believe in doing... And then I'm not talking. And first, again, the focus and message that would be on revenue and then on margins. But we still... These are early days for that business. Understood. Understood. Thanks a lot for this, and happy Diwali to the team. Happy Diwali. Thanks, Josh. Thank you. Ladies and gentlemen, that was the last question for today.

41:17 I now hand the conference over to the management for closing comments. So on behalf of all of us at Rubicon, we'd like to thank all of you for attending this quarter's earnings call. We'd also take this opportunity to wish all of you very best for the festive season. Have a happy Diwali, and thank you. Thank you, sir. On behalf of Motilal Oswal, Financial Services Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.