Granules India Limited analyst Q&A

Thank you very much, sir. We will now begin the question -and-answer session. The first question is from the line of Rashmi Shetty from Dolat Capital. Please go ahead.

Yes, thanks for the opportunity. Our first question is on the remediation cost. You mentioned in the call that you all have hired third consultants. So for that any big expenses is supposed to be spent? I mean for -- in this year, in FY '25 basically in the second half of the year or it is already spent in the second quarter?

Rashmi, a little bit was already spent and we expect that this could be anywhere up to $2 million for this year.

$2 million and that will be sitting all in the other expenses, right?

Yes.

Okay. And so, you know, related to the facility observations, what are you gauging with the response, which is coming from the USFDA? Is it something you feel that it will get resolved in near term or you feel that it might take some time?

We are pretty confident that this will get resolved and it all depends on the EIR, which we expect will be coming in December. And we expect a positive outcome of that.

Okay. And the spillover, which you mentioned that third quarter will also have some sort of impact because of the shutting down of the lines at Gagillapur. So you know, in third quarter, can we expect that there would be -- it would be still better than quarter 2? I mean in terms of sales that got impacted in quarter 2 or you feel that it would be more or less similar.

In the sales, the impact of lost sales will be less than quarter 2.

Lesser than the quarter 2?

Yes, the lost sales, Yes.

Okay. And just to understand that you said that you will be doing more filings from the other facilities to de-risk basically. So just want to understand this thing that from the Gagillapur plant, we are just supplying the core products or we are supplying some other products, which are your non-core product where the contribution in the US is now going up. If you can explain that. Also, if you can explain that, you know, like the breakup sort of like you mentioned that the upcoming 7.5 billion dosage in Genome Valley will be consisting more of a CNS and ADHD products. But what about the older phase, the Phase 1, where we have already 2.5 billion dosage, what exactly we are producing and supplying from that plant and from the Vizag plant. Just want to understand that the MUPS product , control substances, these are the products basically supplied from which plants. If you can just explain us.

Rashmi, first of all, from Gagillapur, we have quite a few products. It's just not the core products. There are lot of MUPS products and many other products which have been supplying and this will continue to be supplied from there. We , all the new filings, we are doing some from GLS because there is a problem of capacity in Gagillapur. And also as a possible de-risking strategy, some of the important existing products also, we have filed some and will be filing some more from our GLS facility. And regarding our GPI facility, we have a lot of products, it's just not ADHD and CNS. We have a lot of other products, which also are good products and which have been contributing fairly well in the past. And on the Vizag, we have the Onco facility in the FD and these we have done some very interesting filings of Onco products, which will be launched in the near future on approval and expiry of patents, but we also do a lot of third -party manufacturer in Vizag, and that's picking up right now to manufacture for other companies.

Understood. So currently, just to have a little clarity, the product supplies are mainly from the finished dosages supplies are mainly from Gagillapur, your Genome Valley, which is the older phase and your Vizag -- sorry, Vizag is something which is something expected in the future from the Virginia. Is this correct?

Virginia, a little bit from GLS, Gagillapur and Onco also, there are products that are going on CMO basis.

On the CMO basis, understood. Got it. And one more question, if I may. Just on the API and the PFI side, like you mentioned that still the demand has not revised, inventory is still there in the market. You know, when can we expect this to turn-around? And is this thing which is happening only on the paracetamol side or on the other API products also which you are supplying, your other core API and PFI product?

It's mainly on the paracetamol and there also we see a little bit of easing. We saw some positivity in Q2 and we think that it will improve in Q3, but definitely not come back to normalcy.

Okay. It will not come back only.

In Q3. Q4 could be a normal quarter. We have to go and we have to see.

Understood. Okay. Thank you, sir. That's it from my side.

Thank you. The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.

Thanks for the opportunity. Sir, given the kind of measures we are doing at Gagillapur, but at the same time, do we have any product should come up for approval over the next three to five months, which could be from this site. Any market action date?

Priyanka, do you want to take that call?

Yes, I'll take that question. We have about three approvals pending from Gagillapur in Q4.

Okay. And would you also share some thoughts on this generic toprol and metoprolol succinate? How has been the traction or sort of the business from that product?

Tushar, can you come again? Yes, go ahead Priyanka.

We're doing well, much better than we expected on the product. And we are continuing to supply. I mean, you can look at the IM S data. It shows -- it just reflects our launch quantities. But I would say that we did really well on that product right now in terms of market share.

what kind of like price discount is sort of taken to get the business.

Let's not get on to those details, Tushar. That's too much information.

Alright. Thank you. That's it from my side.

Thank you. And the next question comes from the line of from Harshit Dhoot from Dymon Asia. Please go ahead.

Hi, thanks for taking my question. My main question is on Gagillapur. Sir, given the same inspector who did the inspection of In tas and ultimately the plant got ended with import alert. So what is the -- what do you think that is giving confidence to the management for resolving this matter?

Yes, sure, sir. Sir, given the same inspector who did the inspection for the In tas and ultimately, they did import alert to the plant. So what is -- what are the things that giving confidence to the management for resolving the matter and getting the plant clear from FDA?

Okay. Now still the question was not clear, but I think I broadly understood the tone of the question and let me attempt answering it. Ye s, I thought the question was what gives us confidence on being able to resolve the key issue.

Am I audible, sir? Am I audible?

But it's getting a little, you know, maybe if you speak slowly, we should be able to hear you better.

Can you hear me now, sir?

Is my assumption correct? What I said your question was about--

No, sir. My question was that given the same inspector who did inspection of Intas and ultimately the inspector gave the import alert to the Intas plant. So what are the things that are giving confidence to the management that this plant will get clear or matter will get resolved? Considering the critical nature of the inspections which were mentioned in the 483.

Okay, got it. Got it, Harshit. Okay, the same inspector in some other company would have resulted in a warning later, but with the same inspector in some other company has resulted in a VAI. So it doesn't -- it all depends on how the company is responding, what are the actions the company is taking and how we communicated to the FDA. So we are pretty confident about the actions we have taken. And also the very fact that with no compulsion or no instructions, we ourselves took a voluntary pause and then did a thorough risk assessment, not only by ourselves, even by using third-party consultants and only after satisfying ourselves that things are good to go, with concurrence from the US-FDA, with their consent, we restarted sales and production. That itself is a good sign that we are very proactive and not reactive and this goes very well with our quality culture and nature of our response and the actions we have taken, the actions we are continuing to take gives us a lot of confidence that things should be in control.

Okay, sir. But the 483 observations are largely similar in terms of GMP document and all the things. So that was the key things because the observations were very critical. That's why?

They are critical but we have good responses to that. I would like to explain, but unfortunately I cannot go into details.

Okay, sir. No problem. Thanks. Does that answer your question, Mr. Harshit?

Thank you. Next question comes from the line of Tarang Agrawal from Old Bridge. Please go ahead.

Hi, good evening, sir. Am I audible?

Yes sir, you are.

Yes. Sir, a couple of questions. One, on the gross margin for Q2 FY '25, a fantastic gross margin delivery. Is it a function of any one-off development, I mean, pricing advantage in some of our products or it's really just a function of the mix change in terms of the marketplace and in terms of skewing more towards formulations?

It is a mix towards, I mean, skewing towards formulations, which is a very high percentage this quarter. And also within the formulations, it's a product mix. If we did our entire sales possibly the margins would have come down a bit because there are less profitable products. So it's more that the more profitable products were sold that they made a better margin. However, the increase in margins is on the upward trend. While I say that it was profitable products that contributed, it doesn't mean our gross margins will fall drastically.

Sure. If I recall correctly from our last conversation in the previous earnings call, five products were launched in H2 of FY '24, that was supposed to drive growth for FY '25. Has that at all been impacted because of developments in Gagillapur?

No, some of these products went out on time and they will continue to grow and they will definitely drive the growth in '25. And some of these products are the growth drivers in margins.

So there has been a partial impact. Would that be the right way to look at it?

Sorry? Partial? So go ahead.

Yes. So, I mean, the conclusion would be there has been some partial impact, maybe not a significant impact, but a partial impact, correct?

Yes. You're right.

Okay. Sir, between the sales that have been lost owing to the voluntary shutdown, additional spends on remediation, would it be fair to presume that on the bottom line, the hit would be close to about $25 million?

Yes, I have not understood how you are computing it. If it is only remediation expenses, the Chairman has clarified it could be close to $2 million.

Are you also computing loss of sales?

You are referring to Q2, right? Or is it going to be for the year?

Q2. And I mean overall for the year. So between Q2 and Q3.

It's a -- probably I will give a little judgmental number over here, let's say, close to INR200 crore of sales and close to INR50 crores-60 crores of profit.

Sure. And the last question, I mean, what utilization was Gagillapur running prior to the inspection and my sense is a large part of September and some part of October has been lost. So what utilization was it running prior to the audit? What utilization i s it running at today? And would it be safe to presume that we've lost about 1.5 months of revenues.

So it was running at around 90% of the capacity and we are close to that way back and close to that as on today. It's only the 45 days or 40 days that we had an impact. We are back to the original number.

Super. Thank you, sir, all the best.

Thank you. And the next question comes from the line of Bino Pathiparampil from Elara Capital. Please go ahead.

Hi, good evening. Just a follow-up question. You know, I have -- in your financial statements, I see that your revenue across geographies are impacted, not just the US. So when you say there was a shutdown of lines, are the lines very common across the US, other emerging markets, semi-regulated markets, India, etcetera?

We have only one facility for all these markets and when we said that we took a voluntary pause, we have a different perception of quality. It's quality for everybody that has to be the same. It's not for different markets. So we took a pause for all markets and having satisfied ourselves that there is no possibility of risk to product and contaminat ion, we release it across. So , to answer your question, the pause has affected sales through all products from this plant.

Got it. And sir, when you say it is starting in a phased manner from October, is that same for all markets again or is it that our markets can ramp up faster than US supplies?

Yes, as of today, we give -- because US continues to be a very big market for us. The priority goes to US and other -- we have ramped that up quickly and other markets are ramping up now. There is a backlog which also has to be cleared. So the ramp-up in other markets will be a little slow.

Understood. Thank you very much.

Thank you. The next question is from the line of Harith Ahamed from Avendus Spark. Please go ahead.

Hi, thank you for the opportunity. So my first question is on Granules Life Sciences, the new facility. You mentioned that you're undertaking validation activities there. So how should we think in terms of the timelines for starting commercial supplies from the tablet block that we have there. So can that be expedited given some of the issues that we have at Gagillapur? That's what I'm trying to understand.

Let me answer this first, Harit. The commercial supplies from GLS have already started. And in fact, last month also we did ship product out and that will keep continuing. It is especially to the US with monograph products, which don't need a facility insp ection and approval. So this is going on. The 2.5 billion capacity, we expect to hit a run-rate of about 1 billion in possibly two months' time and then ramp it up. We could have hit a bigger number, but we don't have packaging capacity till the main plant comes up. Main plant is expected to go commercial possibly in Q1 of next fiscal and we are doing everything possible to speed it up. And also lot of new filings are going to happen from here and some site transfer products are also happening.

Okay, got it, sir. And on Gagillapur, you mentioned that we've reached utilization levels which we had before the inspection currently. But the 45 days when we were impacted, was it a complete shutdown or did -- were we operating at a lower utilization level?

So we were just finishing products which are WIP, but granulation has stopped.

Okay, okay. And then in terms of next steps on the -- from the USFDA side the final classification and if there are any further steps, how should we think about the timelines for those?

Typically, it takes about 90 days and normal limit from completion of inspection. EIR is expected and that's what the FDA is supposed to give, but it could be delayed a bit. We have to see how it goes. And meanwhile, it's not only our response, but we are in constant communication and updating the FDA on various development programs we are doing, various initiatives and the results that are happening here. And like I said, we are doing everything that we think is the right way to go ahead and we are confident that this could result in a lot of positive results.

Okay. And last one, on the pantoprazole launch that you mentioned during the quarter, can you share some color on the market opportunity here and the competitive intensity and what market shares you've been able to achieve as of currently?

Priyanka, you want to take that?

Sure. Hi. Give me a second. In terms of pantoprazole, the overall market size is about $100 million genericized -- well, sorry, gross value. But if you talk about the market share, we've already taken some market share. We've launched the product, but we haven't completely reached our target market share yet. So we want to grow slowly because this is a high v olume product. So we want to make sure that we don't crash prices in the market and grow slowly on this product.

And Harit, just to mention that we are fully integrated on this product, even though we have launched the product with bought-out API, third-party API, now we have approval received last week, accepting our in-house API. So that should add to some strength in the product.

Okay. Understood, sir. Thanks for taking my questions.

Thank you. The next question is from the line of Foram Parekh from BOB Capital. Please go ahead.

Thank you for the opportunity. My first question is on margins. Since we expect a spillover effect of the facility shutdown even in the next -- Gagillapur facility shutdown even in the next quarter and we see that the base for the margin base in the -- is higher at 22%. So how much impact do you see of this facility a spillover effect or impact on the margins at an EBITDA level?

Foram, I will talk about the gross margin, maybe then you can arrive at how you are looking at EBITDA. Gross margin, you know, the next quarter, the spillover is there and there is a reduction in the formulations also of Gagillapur. So there can be some favourable margin from formulation, not to the extent of Q2, slightly better from Q1, but at the same time, API also will catch-up in a little bit. So overall, you can look at not as high as Q2. Probably would have to consider a moderate margin in Q3.

So revenue would increase, but margin may fall a little bit.

Okay, got that. And my second question is on the API side. I see this massive decline both on a Q-o-Q and Y-o-Y basis. So is it because of some price realization, I mean lower price realization or what has led to such massive decline?

It is the price erosion on one side and lower sales also on the other side. This lower sales are due to customer inventory buildup. And just to give you a little bit of history, what we -- our analysis is and discussions with our customers based on our discussions with the customers, people were very worried, especially paracetamol during COVID time, they built up huge inventories. They also expected their sales will continue at the same level. And their sales dropped of finished dosages. In fact, even consumers have stocked up. So they also were not buying and that resulted not only in lost sales for us, it's also the pricing pressure because there were no sales, there was competition offering better prices. So it's a result of -- and then came the Red Sea. Once the Red Sea probl em came up, again, there was panic buying and stocking up. So that led to this continued excess inventory. But like I mentioned earlier, we see a little softening. And Q4, I think things will be in very good shape – better shape I would say, much better shape.

Decline won't be there. It will definitely be a growth over the current quarters, but whether it will touch Q2 of last year, it may not, but at least in the next fiscal, it will definitely go to that level.

Sure. And my last question, if I may. So the formulation sales has -- is showing muted growth, but overall, the geographies I see have declined massively. So could you just explain the reason why Europe, India continues to you know decline steeply.

Basically like I said we have prioritized US sales during the slowdown also during the falls and we give priority to US. Now there are a lot of European sales which are catching up so -- and other markets. That's where there is a big decline. So overall de cline, we mostly had it into Europe and other places.

I just want to add one thing to this. US, as you can -- I'm sure you know that it's primarily B2C business, right? So we had -- we always maintain enough safety stock in the US, which we could immediately release post communication with the FDA and push ou t into the market versus having to manufacture the entire product and release to Europe and rest of the regions. So that's why we were able to increase the US sales because of our safety stock.

Okay, got that. Thank you.

Thank you. The next question is from the line of Rashmi Shetty from Dolat Capital. Please go ahead.

Yes, thanks for the follow-up. Just want to understand on the PFI side of the business. You know when you temporarily stop the production at Gagillapur, was PFI block was also the part of it.

Yes, granulation, we stopped. PFI we sell as a product and we also use PFI for our tableting. So it's mainly granulation that has stopped. And WIP, we continued to compress and coat but not – PFI.

Okay, got it.

And now those PFI lines have already started, I mean from the October onwards, everything back to normal as of today.

Got it. Okay. And, you know, earlier we were saying that in the PFI segment, we will be adding -- we are seeing more customer increase in LatAm markets and all. So what is the update over there? I understand that one quarterly impact we have. But just on a, you know general terms, what are you seeing demand from those geographies.

I'll take that question. There has been an increase in demand for our PFI segment. We've been redirecting that business. And so you can see the absolute numbers of PFIs in LatAm go up gradually. In addition to that, we are also qualifying new customers but as, you know, registrations in Latin-America take some time. So we're building a strong BD pipeline for our existing PFIs and also some new PFIs.

Okay. Another question to Priyanka. You know, just on the launches side, we were expecting that for the US business this year, we will be doing around eight to nine launches. But because of this Gagillapur impact, do you think that the number of launches f or this year would come down or you feel that at the end of the year, you'll be able to launch around eight to nine products in the US market?

So we've also launched about I would say about three products in so far and the remaining half of the year, we have another five launches -- four launches planned for the US, which are on track. Now, if all goes well by the end of March, we'll receive another two approvals, but either way, they won't come into this year sales. They'll float into next year sales.

But there will be some products that are getting approved from GPI, which will be launched.

Okay. Okay. Got it, sir. Thank you so much.

Thank you. The next question is from the line of Tarang Agrawal from Old Bridge. Please go ahead.

Hi, Priyanka, in response to one of the participants, you suggested that three approvals are pending from Gagillapur in Q4. Is it Q4 FY '24 or Q4 -- sorry, Q4 FY '25 or Q4 CY '24?

In fiscal '25.

Okay. Thanks.

Does that answer your question, Mr. Tarang?

Yes.

Thank you. The next question is from the line of Sahil Vora from M&S Associates. Please go ahead.

Yes. I just had some questions. Just a second. Yes. Sir, with the softer input costs this quarter contributing to gross margin expansion and the major molecules being backward integrated, how sustainable do you anticipate these margins to be going forward.

Yes, we have already clarified that the Q2 margins are little higher because the USFDA issue was there. So we have prioritized and sold favourable margin products in terms of priority. But at the same time, the margin will not fall significant ly in Q3, Q4. So we will be able to have a good margin run-rate.

Okay, got it. And could you provide more insight into the new product launches during the first half of FY '25?

What would you like to hear from us on that front?

We launched three products in this fiscal year, both from GPI and GIL and like I mentioned in my previous call, we launched about three products at the end of fiscal '24, which kind of extended into this year. So if you consider about six products, we've m ade decent inroads into every single product. But again, all of them have room to grow. And if you look at IMS data, etc etera, whatever data source that you look at, you'll just start seeing small numbers because we just launched them into the market. So going forward, as production ramps up, we'll be taking over -- we'll be actually supplying in full and taking on more market share. And also, I just want to clarify something to the participant from earlier. When I mentioned that we have about four launches coming up the rest of this year and also three to four launches that were -- sorry, approvals that we're expecting in Q4, these are not linked. The two out of the four launches or three out of the four launches that we are expecting to do are from products that have been approved a while ago that we're launching now because the market opened up in a very good way for us. So they're not linked. I just wanted to clarify that.

Okay, okay. Understood. Thank you for the detailed answer. And lastly, could you provide an unexpected -- sorry, expected timeline for the Gagillapur facility to resume operations?

Gagillapur has already resumed operations and clarified a few times in this call that things as of today, we are producing at normal capacity.

Okay. Thank you for the clarification and all the best. Thanks.

Thank you, sir. As there are no further questions from the participants, I would now like to hand the conference over to Krishna Prasad for closing comments. Over to you, sir.

Once again, ladies and gentlemen. My sincere thanks for your interest in Granules and for joining us in this earnings call today. I wish you all a great time ahead. Thank you.

Thank you everyone. On behalf of Granules India Limited that concludes this conference. Thank you for joining us and you may now disconnect your lines.