The results for Q2 FY19 are just around the corner. Let us have a quick look at the numbers for Q1 FY19 for Granules. Before going through the numbers I suggest you to go through the below link in case you have not done yet:

Financial Analysis

The Q1 FY19 numbers for Granules are given below. This quarter was much better compared to many of the past quarters. Revenue grew by about 21%. Revenue in Q3 FY18 had grown about 13% whereas Q2 FY18 had seen a revenue growth of 8.62% and Q1 had seen a growth of 9.49%. EBITDA margin is hovering around 18-19%. The management would like to see the EBITDA margin to be around 19-20% for FY19.

The PAT, for a change, grew by 40% whereas in Q3 FY18 PAT had seen a de-growth by 16%.  PAT margins saw a positive growth in Q1. PAT margin grew by 16% whereas in Q3 FY18 the PAT margins were down significantly. In Q2 FY18 the PAT margins were down by 8.02%.

In Q1 FY19, EPS saw a growth of 26% to 2.04, whereas in Q3 FY18 the EPS was down by 22.03%. In Q2 FY18 the EPS was down by 6.38%.

Optically this looks good, but then this performance is not merely due to the growth in business and operational efficiencies. There are two other reasons for this ‘better-than-expected’ performance:

  • Forex gains due to weakening of rupee has led to better numbers. The company earned about 11 crores (in the form of ‘other income’) due to forex gain.
  • Additional interest income was also seen in this quarter. The company has a fixed deposit of 167 crores and the company earned about Rs. 3 crores interest.

Year-on-Year the numbers look good but quarter-on-quarter, there was decrease in sales. The management attributes this to two factors:

  • Company is waiting for approvals for Metformin from US and EU regulators. Since regulatory approvals are not complete, the company was selling Metformin in local market for lower margin. However in Q1 of FY19 the company decided not to sell Metformin at lower margins, hence the production was reduced this resulted in lower revenue for the quarter Q-o-Q.
  • The second reason for reduced sales was the fact that raw material for Paracetamol (acetic anhydride) was in short supply and production of Paracetamol had to be stopped for few days. In order to de-risk supply shortages, the company has signed on an additional supplier.

By the way, the company MD reaffirmed that there was a price increase seen in this quarter which has been passed on to the customers. But the impact of passing on the price increase would be visible only in the next quarter. So the next quarter should see further increase in profitability.

YoY quarterly Results Growth Q1 FY19 (Crores) Q1 FY18 (Crores)
Revenue 21.21% 467.98 386.06
EBITDA 13.37% 87.3 77
PAT 40.73% 51.79 36.80
EBITDA Margin ( EBIDTA/Revenue) -6.46% 18.65% 19.94%
PAT Margin (PAT/Revenue) 16.05% 11.06% 9.53%
EPS 26.70% 2.04 1.61

The table below shows the contributors to the revenue for Q1 FY19.

Contributors Q1 FY19 Q1 FY18 Q1 FY17 Q1 FY16 Q1 FY15
Formulations 40% 39% 36% 29% 34%
PFI 20% 24% 24% 30% 24%
API 40% 37% 40% 41% 42%

Product wise breakup has thrown up an interesting candidate. Paracetamol has more or less maintained its share in revenue, as expected Metformin saw a drop. Ibuprofen, Guaifenesin and Metocarbamol have maintained their share. The point to note is the “others” bucket. There is a noticeable increase here.  This is due to sale of six new products sold in this quarter.

Business Contributors Q1 FY19 Q1 FY18 Q1 FY17 Q1 FY16
Paracetamol 35% 34% 36% 42%
Metformin 21% 26% 29% 27%
Ibuprofen 18% 19% 11% 7%
Guaifenesin 4% 5% 6% 7%
Metocarbamol 2% 2% 3%
Others 20% 14% 14%

Expenses

The table below shows the comparison of year-on-year expenses for Q1.  Mr. Chigurupati mentioned that their auditor has suggested that the company should be expensing more on the R&D front in their P&L instead of capitalizing the expense. So the company has started to do that and the same trend would continue for the next few quarters. However I didn’t see this getting reflected in the P&L. The other expense did not seem to have increased meaningfully and neither would other line items below absorb the R&D expense. So where have they expensed the R&D costs? Then I looked at the results for Q4 FY18. There was a substantial increase in other expense. Mr. Chigurpati has mentioned that they plan to take the R&D hit on P&L in a single quarter for the whole year. So probably Q4 FY18 has already absorbed the costs for this calendar year.

Expense Item Q1 FY19 (Crores) As a % of Revenue Q1 FY18 (Crores) As a % of Revenue
Raw Material 301.05 64.32% 192.25 49.79%
Employee Expense 50.25 10.73% 39.04 10.11%
Finance Cost 6.54 1.39% 8.20 2.12%
Other Expense 83.24 17.78% 82.50 21.36%
  • Raw Material: Year-on-Year the raw material expense as a percentage of revenue has gone up.
  • Employee Expense: Employee expense, as a percentage of revenue, has remained stable. Granules is predominantly a generics manufacturer. Therefore its employee mix would not need many PhDs or specialized people. Hence its employee expense has always been on the lower end.
  • Other expense: Other expenses have remained stable with respect to Q1 FY18. The R&D expense for Q1 FY19 was about 8.6 crores compared to 7.9 crores in Q1 FY18. And 2.3 crores of R&D expense was capitalized.
    • By the way the company is sitting on about 129 crores of R&D expense that has been capitalized. The management hopes to amortize this over the next couple of years as these molecules enter production and start garnering sales.
  • Finance Cost: Even though the company has substantial long term and short term borrowings, its interest cost has always been less. This is because the company predominantly has oversees borrowings. The long term borrowings are at the rate of LIBOR rate + 275 bps and the short term borrowings should be LIBOR rate + 50 to 75 bps.

OmniChem JV & Biocause JV

  • Omnichem had a JV level revenue of 97 crores (at Company level it would translate to about 48.5 crores) and a profit of 16 crores at JV level (which would be about 8 crores at company level).
    • The revenue from Omnichem JV will continue to be lumpy. One quarter may see sudden sales and the next one might not see any sales.
  • Biocause revenue at JV level is at 77 crores and PAT at 13 crores. Which translates to 38.5 crores revenue and 6.5 crores of PAT at company level.
    • The revenue from Biocause JV will continue to be predictable. As a part of this JV the company manufactures Ibuprofen and there has been no new product additions to the JV.
  • With respect to the product mix from the Omnichem JV, the company is currently manufacturing six intermediates and it hopes to convert one of them into an API supply. I am rather disappointed with this. When omnichem was conceived the company was planning to sell APIs from the JV. But even after many quarters the company is still supplying intermediates (Intermediates have lesser margins compared to APIs).
    • Out of these six intermediates one is an anti-parkinson and the rest are anti-viral.

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

  • The generic version of Methergine (Methylergometrine) was commercialized in this Quarter from the Virginia facility. At present the company has a market share of more than 50% for this product. Methylergometrine helps in stopping the bleeding from the Uterus after the child birth.
  • The generic version of Metformin extended release is planned to be commercialized in Q2 FY19.
  • An income of 13.2 crores was realized from the US facility during the quarter. The EBITDA was 5.2 crores but there was no profit realized in Q1.
  • In Q2 FY18 the company had informed that the Virginia facility should see a stream of product approvals in calendar year 2018. And in 2019 all these product approvals should eventually turn into products. The company seems to be on track with respect this expectation.

Other Information

  • OTC: Fexofenadine and Cetirizine have started sales from this quarter. Two more OTC products would be launched in FY19.
  • In all the company will be launching 6 products this year out of which four have already been launched and two more will be launched probably by the end of Q2 FY19. The company is expecting to earn 100 crores from these products in FY19 and about 250 crores in FY20.
  • Oncology block completion is on track. The qualification of samples from this block are under evaluation. I am not able to quantify the expected sales from the Oncology plant. Need more clarity on this.

CAPEX

The company does not foresee any major CAPEX this year. About 50 – 60 crores is planned for Oncology which will be met through existing cash (the company has about 200 crores in bank). Also the ongoing planned expansion should get over as well.

Loans

The aggregate loan as of Q1 FY19 stood at 1116 crores and the company has about 223 crores of cash. So the net debt stands at 893 crores. The company would like to bring down the net debt to 900 crores (this includes using up the cash on Oncology CAPEX as well as other CAPEX). In essence the company wants to bring down the debt by about 200 crores in the next couple of years

By the way in Q3 FY18 the debt stood at 875 crores with short term borrowings at 510 crores and long term borrowings at 365 crores. Since the debt of Granules is mostly in Euro the interest rates are much lower. So I am not too worried about debt and the interest costs. This is reflected in P&L as well wherein the finance cost is much less compared to the total outstanding loans.

Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18 Q3 FY17
Total Loan 1116 917 875 816 835 681
Long term Loan 365 305 330 219
Short term Loan 510 511 505 462

Summary

  • The planned launch of 6 products is encouraging and the expectation of Rs 100 crores of revenue from these products is a good news. Also the expectation that in FY20 the company would see Rs. 250 crores from these six products is another good news.
  • The CAPEX cycle seems to be coming to an end (for the near term) and as per the management the borrowings should ideally have peaked as well in Q1 FY19. This is another good news. This gives some visibility on the finance costs. If management is able to stick to the above statement then the P&L numbers should continue to improve over the coming quarters.
  • Revenue and PAT growth were encouraging. The company has not seen such number for quite some time now.
  • Virginia facility (GPI) has started to generate revenues. The margins are better as well. Hope to see more products from this facility.
  • Omnichem JV is still struggling to reach the 200 crore sales (at JV level). It has not moved beyond manufacturing intermediates.

Overall a much better quarter compared to previous quarters. I hope the company is able to improve on top of this in the coming quarters.

References

[1] Granules India Limited Q1 FY19 results

[2] Granules India Limited Q1 FY19 conference call

[3] Granules India Limited Q1 FY19 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.