Granules India Limited analyst Q&A

We will now begin the question & answer session. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.

Sir, just on this DCDA, now that plant is expected to start in Q4 FY24, so effectively stabilization and then meaningful contribution to profitability when should we start expecting?

Tushar, like I said in my remarks, the pilot plant from where we would be doing filings and also site transfers has already been inaugurated. Work is going on on the filings. Meanwhile, in the same block in another floor, we are putting up some compressio n machines and coating machines where we will be doing monograph products for the US, which doesn't need an FDA inspection to start with; they'll come later. Meanwhile, when we do new product filing and also site transfers, the FDA will come to inspect us even before the main block is ready. Once they inspect this pilot plant where there is some product running, the site is approved and then we are ready to go which will be in Q3 -Q4 of next fiscal. We can straightaway start production. Meanwhile, we will also look for expediting the European approval. So, rather than waiting for 1.5 to 2 years applying after the site starts, we are applying for an FDA approval from the pilot plant itself and also some production will happen there from Q2 of next fiscal – Q2 or end of Q1.

This is to do with DCDA, right? Not the FDA?

DCDA pilot plant trial runs will start in March of this quarter.

So, effectively, the commercial meaningful benefit will start hitting….

The commercial, again after the pilot plant run, we will have to possibly modify the main equipment a little bit if required and then erection and all that will go into FY26, Tushar. PAP will start in '25 but this will go into '26. That will happen in the big site in Kakinada with renewable power.

Sir, the LATAM business with this inventory in the channel, is largely that correction done or you can expect some more in the coming quarters?

It's a mix of inventory correction and also some of our important customers have lost certain government tenders. So, I'm not sure it will come back to normal, but it will definitely improve. And as of today, we are a little tight on capacity. In case we don't have too much PFI from LATAM, we will make it up for PFI from some other market. That's not a big issue. That's not going to hit us too bad.

Likewise, paracetamol as a product given that this quarter was not great as far as paracetamol in Europe is concerned, but how to think about it in the coming quarters?

I think our paracetamol, again, the inventory which have been built up by our customers, include Europe, and as we see and move into Quarter 4 and Quarter 1, I think the inventory levels are expected to come down, and then will start picking up the business in Europe for paracetamol. The trend will continue for some time in Quarter 4 because we bounced back to normalcy.

Basically, there has also been a sale price decrease in paracetamol. So, when you look at revenue numbers, they will come down, but the margins are intact since raw material prices also have come down.

Lastly, the metoprolol, when do you expect it to launch in the US?

It's on the sea, delayed by the ship going around the cape. Once it reaches, I think they will start.

Just a couple of questions. This recent dichotomy seen in your performance in your US and ex- US business; while I understand the situation with LATAM and the general trend of raw material prices going down, I just wanted to get a sense on your comment on both US as well as ex-US business. In the US, if you could give us a sense on how your volume has grown this quarter and some of the key products that have contributed to that? And similarly, if you could give us a sense on what really has happened in Europe and ROW business, maybe some commentary on the volumes there.

Actually, the US Finished Dosage business has grown and continues to grow, mainly driven by new products made from India and also products made at our US facility. The controlled substances business is growing and some of our new launches are also contributing. And as we launch a few more products, the revenues of FDs in the US are going to increase. Europe was mainly a paracetamol driven market and especially API. So, we had the sale price reduction in paracetamol and that's why the revenues have come down. And while volumes will be there, the revenue will definitely not catch up to the old level where after COVID, the prices were very high. I don't expect the price to go there. However, our formulations that we are launching in Europe are going to drive the growth in this region, and we see a steady increase in Europe too. So, while the US will be doing better than Europe in the short term, like I say 1 year or 1.5 years, after that, the growth rate in both geographies should sort of be equalized. LATAM, we are now trying to get into Finished Dosages in LATAM and it's going to take some time. While it will improve as a percentage of revenue, I don't think it will go back to those old levels because the US and Europe are growing very fast, and as a percentage, LATAM will continue to be low.

Just a follow-up; if I look at your dossier filings for Europe, right from June 2021 till December 2023, almost 2-1/2 years, the number has moved up from, say, 5 total filings to about 9 filings. How should we see this? Should the intensity or the speed of these filings i ncrease as we move forward?

As I said in my brief, the focus is on global product development and we are getting into the filings across the chosen geographies in the globe. Europe is a preferred destination. Already we have started working on more filings in Europe and you will see this numb er increasing very rapidly each quarter from Quarter 4 onwards, and we will to be able to see a lot of traction in Europe on the dossiers and also a lot of focus on the launches of these dossiers which we have filed sometime ba ck. So, Europe is going to be definitely a value -added formulation supply business through dossiers. That is the focus of the organization. And also the portfolio that we have created in the last 1.5 years, I think all those are also destined to be filed in Europe in the next 2 to 3 quarters of time.

The next question is from the line of Sajal Kapoor, an individual investor. Please go ahead.

Mr. Kapoor, the number will be given by Mukesh in terms of rupees. But the Vizag site at unit #5, the onco and the other APIs, due to delay in approvals of some of our formulations, which will be using APIs from that site, that have been idle for a long, long time. And also, onco block has been idle. You just heard Dr. Ram Rao say that there are lots of very exciting plans for onco, APIs, and FDs. And we also expect with some approvals for some of the MUPS products formulations we have filed, the APIs will start being manufactured in that site; and maybe within a year or so, we should start seeing some good revenues from there. In terms of gross block, Mukesh will answer that question.

The net block is about Rs. 350 odd crores where we use commercial as well as R&D. So, partially it is commercial and partially it is R&D.

Dr. Prasad, I just wanted to understand, as a percentage, by the sound of what you just explained in the response, it seems like a significant or a material part, if not significant, of the gross block is still fairly underutilized but the fixed costs are already flowing through the P&L. Is that a fair assumption?

You are perfectly right, Mr. Kapoor. That still forms a sizable portion of our net block.

And the second related question is, what could be the EBITDA on about 70% capacity utilization assuming no material change in product mix and no material change in the cost of raw material? With 70% capacity utilization, we keep the same product mix as in the current quarter, let's say, assumption, of course, and the cost of material also remains kind of largely stable. I'm just trying to get a sense on what could be the optimal EBITDA margins and ROCE because the current numbers are not giving a true reflection of the business potential.

Currently, we still have a lot of room for capacity utilization both in Gagillapur as well as Bonthapally which are our largest plants. And there the utilization is higher than 70% but still we have room to go up to 90% to 95%. And also, we are continuous ly investing on debottlenecking and also improving production. It's a continuous process. And currently, we have in Gagillapur, the capacity in the range of 23 billion to 24 billion. With various improvements, we can further increase. And we are also adding one more facility, Granules Life Sciences. So, always it will be ever evolving. We will continuously add capacity. We will always have some capacity to be utilized.

Just a small clarification. Yes, I get that Mukesh. On a dedicated capacity, we expect no less than 95% steady state utilization. But on the fungible capacity, is it difficult to go beyond, let's say 85%? So, capacity utilization on a blended basis on a steady state will be hovering between, let's say, 85% and 95%, including both fungible and dedicated capacity. Assuming we don't do any fresh CapEx which is not correct – I know that what I'm trying to understand is, can we get to 25% EBITDA ma rgin when we get to optimal capacity utilizations across dedicated and fungible capacities? Or can we even breach 25% with the improvement in the product mix? That's the sense I'm trying to get here.

I understood that Mr. Kapoor. And basically, with optical product mix it can definitely go up to, a few percentages than what we are doing now, not 25% but close to that. B ut the product mix will happen with the new launches. So, new launches, we have to see how they go in the market, we are quite excited, but we have to see how they perform . Definitely, the margins will go up. And again, another thing to add here is if you, if we remove Unit-V, where you rightly said, a lot of assets is not being utilized. Definitely our EBITDA levels will be higher than what you are saying. That means when that asset is utilized we can see some much better numbers.

Thank you. The next question is from the line of CA Nihar Shah from Crown capital. Please go ahead.

I have two questions. One is on margin, though our margin has seen a good jump this quarter, like we are around 21.5% to 22% level. So, what are the sustainable rate at which we are looking at going ahead?

It will be around this number Nihar definitely, and like I always say that we are always aiming for above 20% and every quarter, or maybe year-on-year, we will see the EBITDA levels going up. Definitely and as like I said, when discussing with Mr. Kapoor, the product mix which when it becomes optimal definitely the margins will go up. But it will take maybe a few quarters to see the effects.

Understood. And also our revenue this quarter went down on quarter -on-quarter basis like slightly. So, we are looking to improve from this at what rate and how can we look the revenue outlook for next year?

Next year should be quite decent. But again, to answer your question for this quarter, the revenue I won’t say de-growth, no growth in revenue was caused because of prices of Paracetamol, like I said the margins were there. If you see the value -add was fairly good. But the revenue came down and next year definitely we will see an upward trend. Also, this year, if you see we also lost the first quarter. So, this quarter, this year is going to be not so exciting, but next year seems to be going great.

So, any ballpark figure, what kind of revenue are we looking for next year or any year-on-year growth rate which you would like to give?

No, we made it clear a few quarters ago that we will stop giving guidance . But you will see the improvement Nihar.

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

Sir, basically on the US business and just to understand more on the gross margin side, the entire gross margin expansion, that we are seeing a sharp jump from quarter-to-quarter as well as on Y-o-Y basis, it is mainly driven by this US business only or some other factors are also contributing it?

It’s a mix, actually it’s a mix of product mix, which we are selling in the US. So, you are right, it is the US business that is giving us a higher value add.

Okay. So, if I try and understand, what is the volume growth currently, which you are seeing in the US business and what is the kind of price erosion that we are seeing in the US?

We have multiple products; some are in metric tonne and some are in tablets so it is difficult to give.

On an average if you can give something, some ballpark number just to understand?

So, currently we are much higher in terms of volume compared to the value. So, just to give some ballpark number, the price erosion range ranges from 6% to 10% at selling price levels. Raw material level will be much higher.

Got it. And, what, I understand that the FD sales contribution has seen a sharp jump if I just compare nine months data to nine months data of FY 23 from 50% contribution it has gone to 61% and our API and PFI segment has actually come down. So, whether this kind of performance will be there in the subsequent quarter also or we will see some fluctuation going ahead?

There will be some fluctuations Rashmi, but definitely they will be at the same sort of at these levels with minor fluctuations.

Okay, but this from 61%, any aim or anything which you are targeting that in next two years the FD contribution to overall sales to go to any particular number?

I cannot give you a number, but definitely our objective is to have an increased FD contribution because the FDs gives us the best margin. So, we are aiming for a higher percentage, and we definitely see the number growing, I cannot give you an exact numbers.

Okay. And what is the outlook on the API and PFI business because we have seen a big decline this quarter, this year which I understand is due to the pricing and also due to the Paracetamol pricing on higher base. But going ahead, have you seen that most of the impact has already come in and now the prices are stable, or do you feel that we are going to see much more impact in the coming quarters also?

Rashmi, just to add to that, can we say the percentages that remain same, but the volume growth will be quite significant, which means in terms of absolute numbers, you will see an increase primarily on the larger volume API . There has been a little bit of inventory stock ing that happened because of COVID for some molecules, which as we go increase, because our customers will be depleting in the existing inventory. So, we do have some capacity available for them and we will be utilizing that going forward.

Okay. And in your FD business, how much does US geography contribute, as of now. Now the US has become a big business , so you can at least give some idea. Only in your FD segment, how much is the US contribution, followed by Europe?

Majority of our FD business is from US, Rashmi so as major part, Europe is growing now.

Okay. And how many launches have we done till date? Till date in the sense for this year in the US business only for this year?

We’ve done about four to five launches this year. But some of them have been soft launches like CMD indicated in his speech earlier. Some of them have been delayed because of logistics issues. But those will be resolved because we are building inventory in th e US before we take on new businesses and we will see our continuous stream of launches going forward. In Q4, we estimate to launch between three to four products and Q1 in addition to gaining more market share from the existing products we’ll be launching about three to four products.

So, this year you will end up by eight to 10 launches?

No, we will have about four or five launches yet another three launches about seven new launches.

Seven to eight launches and next year how much are we targeting?

With the visibility we have across the regions we will have between four to eight launches with the current visibility.

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

So, in recent months, you had some interesting approvals like generics of Toprol-XL, Protonix and a few others. So, can you give an update on launches of these products and how the market shares have ramped up and also try to understand if there is a chan ge in the contribution from our top five core molecules, which has historically been above 80%?

So, like I mentioned just now when Rashmi was speaking to us, we have delayed a few launches intentionally because of logistics issues. Now that said, we have already launched four to five products we will be launching during a soft launch of three products in this Q4. And going forward, we ’ll be doing the remaining launches. Sorry, what was the second half of your question?

Given these are molecules outside our core, top five molecules . I was trying to understand if, there will be a change in the contribution or decrease in the contribution from top five molecules when we launch these products?

Yes. So, as we have always committed, if you see our numbers over the last couple of years in quarters, our core contribution has always been around 85%. As of this quarter, it’s about 72%, so this goal is always to increase the contribution from the new products, and you will see that going forward as well.

Harith to add to that also, the margin contribution from the new er products is quite decent compared to the older products as of today.

Did I hear correctly that the core molecules this quarter contributed 72%?

Priyanka, yes.

Sorry, you cut off for me.

She is right, around 72%.

Okay, 72% of the overall revenues?

That’s right.

Not the FD revenues?

No. Overall.

Okay. And when I think of CAPEX in FY25, in FY 24, we are tracking around Rs. 400 crores, estimated for the full year. Now when we are starting phase two at Kakinada how should we think about CAPEX in FY25 and this phrase two at Kakinada approximately, how much will be the overall spend and over what timelines?

Harith, I will give you a complete perspective on the CAPEX, as of now for first three quarters we have spent Rs. 283 crores and we are expecting to spend for the full year around Rs. 500 crores so that is the reduction in the capital expenditure primarily Granules C zro and that Kakinada as Chairman has explained in will start in F25 and commercial will start in F26 so there will be some deferment of capital expenditure but not so much substantial in the next year as well. Next year, we are planning for overall Rs. 600 crore CAPEX, Rs. 200 would be regular and Rs.400 crores would be on the growth project like Granule Life Science and Granule Czro and few other projects which we are exploring.

Thank you. The next question is from the line of Bino Pathiparambil from Elara Capital. Please go ahead.

Just a quick one on raw material. So, when you say the decline in raw material prices helped margin, are there any two or three key raw materials which has mainly contributed to this?

The main thing is the biggest product for us today are Paracetamol and Metformin. And the raw material for Paracetamol is PAP para-aminophenol and Metformin is DCDA. So, both these products prices have come down drastically . Of course, so as the selling price grew, but these are the two main products that have contributed.

Understood. And what do you attribute this reduction in prices to and how do you think it will remain though?

Sorry, I lost you, I didn’t get you.

What would you ascribe this reduction in prices of these raw materials to , is there a specific reason and how you think it will sustain at those levels?

During COVID that this price has shot up, there were shortages and now after COVID new capacities also were added and as of today their surplus material and I do have every reason to believe with the surplus capacity available the prices should hold on for a few years. Plus, or minus some percentage.

Thank you. The next question is from the line of Nagesh M an Individual Investor. Please go ahead.

Just wanted to know your viewpoints on dollar INR how it works in future. And what is your hedging policy, because for the last six, eight months the dollar has been stagnating it around 83 only?

Mukesh will answer that.

So, dollar-INR there are divergent views, our internal view is, in this range for next quarter and also next year in this range of 8 2 to 83. And as a hedging policy, we have a risk management policy and also we have a clear hedging policy in terms of whatever net exposures are there we take time to time coverage.

Okay. What will be the average dollar rupee for your entire nine months period this y ear, realization?

Okay. One more question is, is there any chances of getting a bonus shares, because the company has not issued any bonus?

Nagesh we did two buybacks , and that was really something we thought we were doing something very good. So, now with all the CAPEX and other things that we are doing, we may not do a buyback at least another year or two. Bonus shares, we have not thought of it, and we don’t think I can commit at this moment in time.

Okay. And any chances of the pledge of shares being totally released because you have done the reduction for a very long time and now it is stagnated?

It will be totally released. You will see that shortly.

Thank you. The next question is from the line of Vikas Sharda from NT Asset Management . Please go ahead.

You mentioned that the raw material prices for like PAP and DCDA have fallen quite sharply this year. So , I was just wondering when you are talking about backward integration in your, Czro subsidiary. So, how does the viability of those projects change with say the changes in the prices or are these not really linked , h ow do you look at that prospect of that backward integration?

Even though the price dropped, when we make a product, going based on current yields, and other data we have now, we should still be profitable, not an exorbitant profit, but we will be profitable. And we have been able to justify our investment. More than just this, I’ve mentioned many times, the entire world is dependent on China for DCDA, and the geopolitical crisis somewhere there can lead to global shortages of Metformin. So, once we make the DCDA ourselves, it’s a lot of self-reliance and customers would prefer to buy from a company which is fully integrated, and the other advantages. We will have the lowest carbon footprint when we make our DCDA, our product Metformin will be green compared to anybody else. Even though you don ’t see it today, a few years from today, you will see the effects. And people , every company in the world pharma company, distribution company, including Walmart’s and all have taken targets for achie ving net zero, and the only way they can achieve that number is to buy products with less carbon footprint. And they do believe there will also be a premium for having products with carbon footprint . To Sum it, its self-reliability and also premium price based on green chemistry, in addition to nominal margin.

So, it depends on a lot of product combinations and also a new metric ton ne and tablets. On average, from lower side to the higher side 5% to 6% to 10% range of price erosion has been there.

Thank you. The next question is from the line of Saurabh Shukla, an Individual Investor. Please go ahead.

Actually, I have two questions. The first one is, like related to this R&D section, which is research and development. So, may I know how much increase we can see in the R&D spending in the upcoming quarters for the financial years and in addition to this, is there any specific new products in the pipeline that is going to be adding new portfolios?

R&D expenditure, we are spending 4% of sales, this quarter we have spent about 47 crores. In the Q4 we probably would be spending much more than the 47 crores. As a percentage to sales also, we will increase our spend in Q4. A lot of filings are in process in the next two months. So, expenditure is going to go up and some new launches.

So, on the new product launches, Priyanka has just spoken. So, we have done about four to five launches now. New products in R&D. So, as I said in my brief, regarding the new products in R&D, we do 10 to 12 filings every year. And this you will see, based on our R&D expenditure that we are already slated for Q4, we will be ramping up around 10 to 12 every year, not only in the US, but I’ve also mentioned that this is a global product development. And we will be looking at not only filing in the US, but extending these filings into the chosen geographies, including Europe. So, overall, we will be looking at as Chairman has pointed out earlier, more of converting assets into a good finished dose players in markets outside the US along with the API sales. So, it will be 10 to 12 products every year in the R&D for at least the coming couple of years.

A lot of development oncology also is happening in the R&D as of today and will continue.

Okay. One more question, like as I said, as I saw there are two si tes that are being, Vizag and Kakinada apart from that, is there any other like other new sites that Granules India basically going into find out in India or any other geographies in the upcoming years or upcoming quarter itself. And I just wanted to please emphasize that part, that is the question.

Let me try to understand your question a little better, it wasn’t clear. So, are you asking if other than Kakinada are we having any other expansions in different geographies?

Correct.

Okay, we have a lot of investments going on right now. And even though Kakinada is delayed, it’s not going to be small. And also, we have this in Genome Valley, which is a different site other than current form ulation facility, about 500 crores of investment is going on there. And recently, we have started a packaging unit at a fairly high investment in Virginia, in addition to our GPI facility. So, we have already invested in we have made plans for some more . And as I see it today, I don’t think any other geography is visible.

Thank you. Ladies and gentlemen that was the last question of the day. I now hand the conference over to Mr. Krishna Prasad for closing comments.

Ladies and gentlemen, thank you very much for attending this call. And I hope that you have got all your answers. And if you have any other questions, please feel free to reach out to our team Puneet or Mukesh , and we will be glad to clarify. So, once again, thank you very much. And have a good evening.

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