We are in the middle of the Q2 FY18 results. Before we get the results for Granules for Q2 FY18, let us have a quick look at the Q1 FY18 results.

Financial Analysis

The Q1 FY18 numbers for Granules are given below. Numbers wise this was a disappointing quarter. Revenue grew by 9.49%. EBITDA growth was much less at 6.9%. The quarter for the first time saw a de-growth with respect to PAT. The PAT was down by 5%. EBITDA margins were steady at 20%, but the PAT margins were down significantly at 9.59%.

YoY quarterly Results Growth Q1 FY18 (Crores) Q1 FY17 (Crores)
Revenue 9.49% 386.33 352.83
EBITDA 6.9% 77 72
PAT -5.1% 37 39
EBITDA Margin 20% 20.4%
PAT Margin 9.57% 11.05%
EPS -10.55 1.61 1.80

Management attributes the lower PAT numbers due to lower revenue and PAT contributions from Omnichem JV. Due to the cyclical nature of the JV, there was minuscule revenue and PAT from this JV. The expectation being that the revenue and PAT should get compensated in the coming quarters. Additionally, Q1 saw a high percentage of API sales compared to PFI and Formulations. This would have impacted the PAT number. Hence, I believe, PAT is down due to two reasons:

  • Omnichem JV had less orders (Q2 will see higher orders)
  • Product mix tilted towards APIs which has very low margins (about 10% I guess)

All this is still fine. What hits below the belt is the drop in EPS. The EPS reduced by 10.55% to 1.61. Again there are two reasons for this:

  • Reduction in PAT.
  • The warrants exercised by the founders for the 200 crores that was brought in by them.

I think all the bad things have come together in a single quarter leading to unexpected numbers

The table below shows the contributors for revenue for Q1 for the past four years.  There is a reduction in the contribution of API to the revenue. Contribution of PFI has been more-or-less constant at 24%. Formulations have margins of 20% for granules. I Hope to see the contribution of Formulations going up over the next few years.

Contributors Q1 FY18 Q1 FY17 Q1 FY16 Q1 FY15
Formulations 39% 36% 29% 34%
PFI 24% 24% 30% 24%
API 37% 40% 41% 42%

The table below shows the contribution of various generic molecules to the sales of Granules for Q1 Y-o-Y. It is good to see that the reliance on paracetamol is slowly coming down and other base molecules are picking up. The jump in Ibuprofen was a surprise to me. Considering that Granules depends on Biocause for Ibuprofen and the fact that the it is running at almost full capacity, I did not expect Ibuprofen to contribute more. In fact I was expecting Metformin to pick up. Apparently in China there is a huge demand for Ibuprofen and Granules was able to increase the price of the API as well as increase its sales volume leading to higher realizations.

Regarding Metformin, We may have to wait for the capacity expansion of Metformin to see the much needed revenue growth from this molecule (Granules will see a capacity expansion from 2000 MTA to 9000 MTA for Metformin in the coming quarters).

Business Contributors Q1 FY18 Q1 FY17 Q1 FY16
Paracetamol 34% 36% 42%
Metformin 26% 29% 27%
Ibuprofen 19% 11% 7%
Guaifenesin 5% 6% 7%
Metocarbamol 2% 3%
others 14% 14%

Expenses

The table below shows the comparison of year-on-year expenses for Q3.

Expense Item Q1 FY18 (Crores) As a % of Revenue Q1 FY17 (Crores) As a % of Revenue
Raw Material 192.25 49.76% 175.84 49.83%
Employee Expense 39 10% 33.9 9.6%
Finance Cost 8.2 2.12% 7.94 2.25%
Other Expense 82.77 21.42% 66.71 18.91%
  • Employee Expense: There is a rise in employee expense predominantly due to salary rise that all companies have to take in Q1. Management is confident that they will be able to maintain the expense at this level for the next 3 quarters.
  • Other expense: There was an increase in other expense for Granules. There were two reasons for the rise in other expense: (a) additional R&D expense (b) Some consignment had to be shipped by air leading to higher expenses. Company believes that they can contain these expenses in future.
  • Finance Cost: I believe Finance cost involves the interest paid on the short term and long term loans. The numbers are a little perplexing. For 835 crore cumulative short and long term loan, if the company pays 8.2 crore as interest in a quarter then it amounts to about 33 crores per year leading to an interest rate of 4%! How can corporate loan be at 4%. Probably part of the loan might have been taken towards the end of the quarter. Even if we assume outstanding loan amount of 700 crores, the interest rate would come to about 4.7%. Looks like my math has gone wrong somewhere.

Actus (API division)

  • Actus saw a revenue of about 36 crores.

OmniChem JV

Omnichem had a revenue of 16.4 crores. PAT was a loss of 5.2 crores. Profit earned from Biocause got offset with the loss from Omnichem JV. Management predicts that Q2 should see about 100 crores of revenue (at JV) level. By 2020 the company expects the JV to have a revenue of about 550 crores (Granules share should be about 225 crores).

Biocause JV

Biocause JV saw a revenue growth of 70 crores and PAT of 11 crores. Granules gets 50% of this. So Granules’s share of revenue and PAT are 35 crores and 5.5 crores respectively.

Granules USA (GUSA) and Granules Pharma Inc (GPI)

Two Products were filed with USFDA and the action/response from FDA is expected in January and March of 2018. Granules plans to file for approval with FDA for 5-6 filings from USA and another 5-6 filings from Hyderabad unit. Though I am not very sure about the approval timelines for these (considering the timelines for above two filing which may get stretched till March). Out of these 10-12 filings, none were filed in Q1. Q2 might see 2-3 filings.

Other Information

  • Capacity: Capacity expansion for Paracetamol, Metformin and Guaifenesin is in progress. FY18 should see some revenue from the incremental expansion. Meaningful addition shall be seen only in FY19. Specifically, Paracetamol capacity addition should get over by Q4 FY18. Metformin capacity addition should be complete in a quarter or two after Q4 FY18. These two are slated to see significant expansion in capacity. Current capacity of Paracetamol is 18000 tonnes, Metformin is about 3800 tonnes and Guaifenesin is about 1200 tonnes.
  • OTC: The OTC sales have been steady. This will take some more time to see volume growth. Granules mainly sells products for pain, cough, cold and fever. Currently Granules gets 3-4% of its revenue from OTC products and it hopes to see OTC contributing about 100 crores in the next three to four years.
  • R&D: The R&D expense that goes to P&L is about 6 crores. However the company spends about 100-110 crores in a financial year and Q1 should have seen an expense of about 25 crores towards R&D. This is predominantly from its US facility and Granules Capitalizes this expense. Hence the overall R&D expense appears to be fairly less (6 crores v/s the actual spending of probably 25 crores).

Region Wise Sales

Region Wise Sale Q1 FY18  Q1 FY17 Q1 FY16 Q1 FY15
Regulated Market (US, Canada, Europe) 67% 68% 64% 59%
Unregulated Market (India, Latin America, ROW) 33% 32% 36% 41%

Y-o-Y the contribution from regulated markets has remained the same. However over the past four years the trend has been to concentrate more on the regulated market with the share of regulated market increasing from 59% in Q1 FY15 to 67% in Q1 FY18.

In the regulated market pie, North America make up 38% and Europe is about 29%. In the unregulated market pie, India forms 17% and Latin America forms 12%. Rest of the world is about 4%

CAPEX

Q1 saw a CAPEX of about 150 crores. This is just the beginning 🙂 . FY18 is the year of CAPEX!

Loans

In the past two quarters the company has taken on a higher portion of long term loan as well as short term loans. The aggregate number stands at 835 crores. The interest outgo is going to be significant. This worries me. All the good work done in increasing the revenue will be nullified by the higher interest outgo leasing to lower PAT.

Q1 FY18 Q3 FY17
Total Loan 835 681
Long term Loan 330 219
Short term Loan 505 462

Individual Products

The first product from the USPharma collaboration, i.e. Prasugrel, should see a launch in November timeframe. Granules has a 12.5% stake in USPharma and has a first right of refusal on USPharma products. I believe for Prasugrel, Granules is a marketing agent.

Summary

  • Revenue growth at 9.49 percent was less than my expectation. PAT saw a de-growth of 5% which was a surprise to me. This can be attributed to 3 factors:
    • Lack of omnichem’s contribution. In fact Omnichem nullified the profit seen in Biocause JV!
    • Q1 saw the product mix tilting towards low margin API business
    • Expenses saw a rise due to other expenses (additional freight charges, R&D expense) as well as yearly salary hike.
  • FY19 should see increased revenues due to capacity expansion in PFI as well as key base molecules (Paracetamol, Metformin). Capacity utilization should further boost the revenue and (hopefully) PAT.
  • That leaves the question on what should one expect for FY18? I personally feel Q2 will see higher revenue and PAT numbers due to Omnichem. Q3 should see a slight dip (assuming less omnichem orders) and Q4 should again should see higher numbers due to omnichem orders as well as Paracetamol expansion contributing to the revenue.
  • My major grouse with Granules is with respect to EPS numbers. On one hand the company has taken on debt and on the other hand it has gone ahead with the QIP to fund the planned expansion. Debt with hit the PAT and EPS and the increase in shareholder equity will hit the EPS. In essence, even if FY18 sees higher revenue or PAT, the EPS is going to take a hit and I am not too happy about this.

References

[1] Granules India Limited Q1 FY18 results

[2] Granules India Limited Q1 FY18 conference call

[3] Granules India Limited Q1 FY18 Investor presentation

Disclaimer:

I am not a SEBI registered research analyst. The information provided above is my subjective view based on what I have read on different websites, annual reports, and quarterly reports of various companies which I assume to be accurate. The above information should not be treated as an offer/advise to purchase a specific stock/investment instrument. Since these are my subjective opinions, I could be wrong in my understanding or presentation of information. I do not claim that the above information is complete or can be relied upon as such. I cannot be held responsible for any loss or damage caused due to any inadvertent error in the above information. I will not be liable for investment decisions made by readers of this article based on the above information. I am not an investment advisor. I may or may not have position in the above company. Please consult your investment advisor for all your investment needs.