Let us have a quick look at the numbers for Q1 FY20 for Granules. But before that, have a look at the below results in case you have not seen the results:

Financial Analysis

The Q1 FY20 numbers for Granules are given below. EPS growth numbers are very encouraging. The management is sticking to its guidance of revenue growth of about 20% (for FY20) and PAT growth of about 25% for the next three years. Management is banking on higher FD sales to achieve these numbers. By the way for FY20, the company is guiding an EBITDA margin of 19 percent.

YoY quarterly Results Q1 FY20 (Crores) Q1 FY19 (Crores) Growth (%)
Revenue 597 468 27.6%
EBITDA 119  87.3 36%
PAT 83 52 59.6%
EBITDA Margin 19.9%  18.6%  130 bps
PAT Margin 13.9% 11.1% 280 bps
EPS (non-annualized) 3.27 2.04 60%

The table below shows the product wise contributors to the revenue for Q1 FY20. Over the past few quarters, there has been a gradual shift to high margin formulations business. The impact of this gradual shift is getting reflected in the EBITDA and PAT margins. However keep in mind that, based on demand, the company adjusts these outputs on a quarterly basis. So the numbers could be seasonal.

Contributors Q1 FY20 Q4 FY19 Q3 FY19 Q2 FY19
Formulations 48% 47% 49% 45%
PFI 16% 17% 17% 16%
API 36% 36% 34% 39%

In absolute number terms the table below captures the sale of these products.

Contributors Q1 FY20 Q4 FY19 Q2 FY19
Formulations (in Millions) 2,735 2,957 2,381
PFI (Metric Tons) 3,591 3,353 3,257
API  (Metric Tons) 5,853 5,577 6,344

Geography wise contributors to the revenue is captured in the table below. North America now contributes to half of the sales numbers.

Contributors Q1 FY20 (Crores)
USA 50%
Europe 22%
India 13%
LATAM 8%
Rest of the World 7%

Expenses:

The table below shows the comparison of year-on-year expenses for Q1 FY20.  Raw material cost as a percentage of revenue has dropped which is a good sign. Analysists generally crib about the high debt of the company. But when you look at finance cost, it is 1.1 percent of total revenue. Company debt is Euro denominated and pegged to Libor + x bps rate which is pretty low. I am not too worried about the debt levels of the company and I don’t understand the reason why people worry so much about an interest expense of 7 crores!! Other expense numbers are pretty good too.

Expense Item Q1 FY20 (Crores) As a % of Revenue Q1 FY19 (Crores) As a % of Revenue
Raw Material 326 55% 301 64%
Employee Expense 57 9.5% 50 10.6%
Finance Cost 6.9 1.1% 6.5 1.3%
Other Expense 124 20.7% 83 17.7%

OmniChem JV & Biocause JV

  • Omnichem and Biocause have contributed about 25.5 crores to the PAT for the company. Biocause had a revenue of 150 crores and generated a profit of 30 crores whereas Omnichem had a revenue of 8 crores and generated a loss of about 4. 5 crores.
  • In Q2 the Biocause plant may see a shutdown to conform to the new pollution guidelines. Hence Q2 may not see contribution from Biocause. However, even without any meaningful contribution from Biocause, the management is confident of achieving overall PAT of 300 crores for FY20.
  • The company has exited the Omnichem JV in Q2 (we may hear more from the management in their Q2 results). I guess the management does not see a way to get out of the cyclicality of the business. The JV has seen a lot of commitment from the Granules management since 2011. I am sure the management would have taken this decision after a lot of thought.

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

  • GPI saw sales of 195 crores with an EBITDA of 76 crores and PAT of 40 crores.
    • In FY20 the company plans to launch six products in US and all of them may come from GPI.
  • GPI is currently marketing four products under its own GPI label. The company plans to add another five or six products in FY20. For the rest of the products, the company relies on other companies to market them.
    • As the company starts to sell more products on its own, it will have to stock more of these items. This will end up locking its capital (and hence the working capital requirements will increase). So whatever free cash flow the company is able to generate, will eventually get used up for its working capital requirement. This is a cycle that is tough to break. The only way to break this is to have fewer inventory days and I believe this is possible only when the following happens:
      • Company manufactures more and more of fast moving medicines (for example Paracetamol based FD).
      • The company is able to price them competitively in developed markets.
      • The public at large (in US) starts to trust the product (for OTC medicines).
      • Doctors (in US) prescribe medicines manufactured by Granules (for Rx medicines).

This is a tough process which will take many quarters to materialize.

Other Information

  • ANDAs: Company received 2 ANDA approvals in Q1 and it has filed for three more approvals in Q1. As of Q1 there are 22 ANDA approvals pending.
  • Oncology: Management is expecting the inspection to begin somewhere at the beginning of next fiscal. Till then I guess the company will keep selling the Onco APIs in Indian market.
  • R&D: In Q1 FY20 the company spent 34 crores on R&D, out of which 16 crores was charged to P&L and the rest 18 crores has been capitalized.
    • In Q4 the management had informed that for FY20, the company expects to spend about 175 crores on R&D and expense close to sixty percent of this on the P&L.

CAPEX

No major capex is planned for FY20. Only Maintenance is planned and probable some CAPEX for the US unit. The company spent about 54 crores in Q1 (including the CAPEX for the US unit). For FY20 the company has planned 150 crore CAPEX.

Loans

  • The company managed to reduce its debt by 45 crores in Q1 and the net debt stands at 863 crores. The company plans to satisfy unexpected short term borrowings in FY20 via internal accruals. Management would also like to reduce the outstanding debt by about fifty to sixty crores in FY20.
  • By the way, Krishna Prasad indicated that they seem to be better off by not paying the debt back early. Their treasury management department generally maintains fixed deposits wherein they are earning more interest compared to the interest they pay for their debt. So, just by keeping the free cash in FD (instead of proactively paying back more debt) the company is earning some extra cash. This happens because its loans are pegged to Libor whereas its FDs might be in India currency (which generate higher interest). I am not sure if it is a good thing or not. On the one hand the company is earning some extra cash due to rate differentials, but then Granules is not a bank to earn money by managing the treasury. It should be earning money by selling medicines! I am not complaining though 🙂
Q1 FY20 Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18 Q3 FY17
Total Loan 962 990 1042 1120 1116 917 875 816 835 681

Summary

  • The P&L numbers were pretty good. The company was able show noticeable growth in revenue and PAT.
  • There was no major update on the Oncology facility this quarter. By the way, Biocause subsidiary had decent quarter.
  • The company has no plans for additional CAPEX in FY20. One can expect maintenance CAPEX of 150 crores.

Overall Q1 was an excellent quarter and the guidance gives a comfort that the coming quarters will be good as well. By the way the corporate tax rate cut should result in better numbers in Q2.

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.