We are less than a week away from Q3 FY18 numbers for Granules. Before the numbers come in, let us have a quick look at the numbers for Q2 FY18 for Granules. You can also go through the following links in case you have not been through them:

Financial Analysis

The Q2 FY18 numbers for Granules are given below. Numbers wise this was again a disappointing quarter. Revenue grew modestly by about 8.62% this was on top of a disappointing Q1 which had grown by 9.49%. EBITDA growth was again less at 7% compared to 6.9% in Q1. Like Q1 this quarter again saw a de-growth in PAT. The PAT was down by 1.2%. EBITDA margins were slightly down by 0.8% to 21.03%. Again as we saw in Q1, even in Q2 the PAT margins were down significantly by 8.02%. There was a decrease in gross margins and Krishna Prasad attributes this to three factors:

  • Increase in manpower costs (hiring has been done taking into account full capacity utilization which has not fructified yet),
  • Increase in raw material costs and
  • The product mix tilting towards less profitable products in Q2.

Management has clearly been at unease now to justify the near stagnant growth in the company’s P&L numbers. It appears that Omnichem JV is not bearing the fruits that was promised all this while.  More on this in the later sections.

With respect to EPS, it has gone down by 6.38% and EPS for Q2 stands at 1.76. I am definitely disappointed.

YoY quarterly Results Growth Q2 FY18 (Crores) Q2 FY17 (Crores)
Revenue 8.62% 399.39 367.68
EBITDA 7% 84 78
PAT -1.2% 40.33 40.82
EBITDA Margin

( EBIDTA/Revenue)

 -0.8% 21.03% 21.21%
PAT Margin

(PAT/Revenue)

 -8.02% 10.09% 11.10%
EPS -6.38% 1.76 1.88

The table below shows the contributors for revenue for Q1 for the past four years.  Over the years there has been a reduction in the contribution of API to the revenue. Contribution of PFI has been going up and down over the years. It is good to see the path of progress towards being more of a formulations based company. As we can see, the percentage of contribution from formulations has grown from 33% to 42% over the past 4 year.

Contributors Q2 FY18 Q2 FY17 Q2 FY16 Q2 FY15
Formulations 42% 37% 30% 33%
PFI 24% 26% 28% 24%
API 35% 37% 42% 43%

Product wise breakup shows that the company has more or less maintained the percentage of contribution from Paracetamol. Over the past couple of years Metformin has seen an increase in its contribution of revenue. Similar pattern can be seen for Ibuprofen as well. The company seems to have consciously decreased its reliance on metocarbamol.

Business Contributors Q2 FY18 Q2 FY17 Q2 FY16
Paracetamol 34% 33% 37%
Metformin 31% 30% 25%
Ibuprofen 14% 13% 10%
Guaifenesin 5% 5% 6%
Metocarbamol 1% 3% 4%
others 15%

Expenses

The table below shows the comparison of year-on-year expenses for Q2.

Expense Item Q2 FY18 (Crores) As a % of Revenue Q2 FY17 (Crores) As a % of Revenue
Raw Material 217.89 54.55% 163.76 44.53%
Employee Expense 42.25 10.57% 33.97 9.23%
Finance Cost 10.41 2.60% 8.28 2.25%
Other Expense 75.70 18.95% 68.20 18.54%
  • Raw Material: I was surprised to see a sudden jump in raw material costs. Also as a percentage of revenue the raw material was close to 55% compared to 45% in Q2 FY17. Then I looked at the balance sheet and I realized that the company saw an increase in inventories as well as a huge increase in trade receivables. So the company had to buy lot of raw materials to manufacture the products but is yet to receive the money for these items. Hence the revenue is currently down. Also the MD clarified that the raw material prices have gone up. This could also be one of the reason for the increase.
  • Employee Expense: Employee expense has been a little higher but then I believe, as a percentage of revenue, it is still manageable.
  • Other expense: Other expenses have remained stable with respect to Q2 FY17..
  • Finance Cost: Even though the company has long term borrowing and a huge short term borrowing it still pays much less as finance cost. This is because the company 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.

Actus (API division)

  • There was not much information shared about the Actus division. Looks like the Actus division has completely been internalized and market participants are no longer interested in revenue breakup for this API division.

OmniChem JV

  • The revenue from the Omichem JV for Q2 was Rs. 35 crores. There was no profit made from the JV.
  • In Q1 the management had predicted that Q2 should see about 100 crores of revenue (at JV) level. But this did not materialize. Management says that they have the material ready to be shipped but the end customer is not ready to take the material due to its own compulsions. This is not a good sign.
  • In Q1 the company had estimated that by 2020 the JV may have a revenue of about 550 crores (Granules share should be about 225 crores). But then in Q2, Mr. Krishna Prasad has moderated his estimates. He said and I quote: “We are confident on the long-term business visibility of this business, but in the short to mid-term, there is a possibility of rationalizing our initial estimates.” Ok so this 550 crore figure no longer seems to hold good.
  • He however feels that in 5 years’ time the JV (or rather the CRAMS business in general) should see a CAGR of 27-28% from the CRAMS business. I would definitely like to wait and watch for this day to come.

Biocause JV

  • The revenue for the Biocause JV was 67 crores. And Granules share from the profits was about 5 crores.

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

  • The company is on track to file 10 ANDAs by the end of the year. In Q2 the company filed 2 ANDAs from Hyderabad facility and one ANDA from the Virginia facility .
  • From the Virginia facility the first product (i.e. Prasugrel) will be launched in Jan 2018. Then there would not be any product launches in 2018. In the meantime the Virginia facility should see a stream of product approvals in 2018. And in 2019 all these product approvals should eventually turn into products. This seems to be the roadmap for the US facility till 2019.

Other Information

  • Capacity: The new API facility for Paracetamol and Metformin was under validation and should have been ready for commercial supply by December 2018. December should see the new paracetamol API facility to start working at almost 70% of its capacity. So Q3 should see some additional revenue due to the capacity additions. In case of Metformin API the sales should have started in November itself. So Q3 should see some additional sales from new Metformin capacity as well.
  • R&D: Theexpense from Virginia facility that the company generally capitalizes is now marked as “intangible assets under development” in the balance sheet. I notice that for Q2 this capitalized expenditure has shot up to Rs. 191 crores from 137 crores in Q2 FY17. These capitalized expense is predominantly the cost incurred for the entire process of filing the ANDA.
    • Pure R&D cost that was capitalized was 25 crores. Another 7 crores of R&D was expensed in the P&L.
  • Region Wise Sales: Developed markets continue to be the major source of revenue for the company. In Q2 the company sold 66% of its products to regulated markets in developed countries.
Region Wise Sale Q2 FY18  Q2 FY17 Q2 FY16 Q2 FY15
Regulated Market (US, Canada, Europe) 66% 63% 53% 61%
Unregulated Market (India, Latin America, ROW) 34% 37% 47% 39

CAPEX

  • The first half of FY18 has seen a CAPEX of 348 crores. In Q1 the company saw a CAPEX was about 150 crores. So Q2 saw a CAPEX of close to 200 crores. Most of the money was spent in bringing up the additional API and PFI capacity.
  • The company is also building an Oncology facility in Vizag. Some CAPEX was spent for this facility as well. The company expects sales from the Oncology plant to start by end of Q3 or starting of Q4 FY19.

Loans

The aggregate loan as of Q2 FY18 stands at 815 crores. Quarter on quarter the number seems to have come down but on absolute terms it is still higher.

The management believes that the company should see the long term borrowings to reach about 500 crores and short term borrowings also to gravitate to 500 crores. So for the entire loan the company expects to pay about 40 crores as finance cost (long term borrowing is at LIBOR + 275 bps and short term borrowing is at LIBOR + 50 to 75 bps).

Q2 FY18 Q1 FY18 Q3 FY17
Total Loan 816 835 681
Long term Loan 305 330 219
Short term Loan 511 505 462

Individual Products:

  • The first product from the USPharma collaboration, i.e. Prasugrel, should come in the market by Jan 2018. the market size for this product is about $650 million. There are currently 4 players waiting to launch the product (including Granules).

Summary

  • In terms of numbers, this was another disappointing quarter for Granules. Revenue growth is modest. EBITDA growth was disappointing. PAT growth was very disappointing. EPS saw a decline in Q2 FY18 comapred to Q2 FY17.
  • During the Q1 Analysis I was hoping the PAT would be higher in Q2 due to the expected Omnichem sales. But there was an unexpected delay in customer offtake of the product leading to very less sales. This was one more cause of disappointment.
  • Now what does this mean for the rest of FY18? The new API plants should see some sales and add up to the revenue and PAT numbers. If the customer of the Omnichem JV picks up the pending order then this will result in some more addition to the revenue and profits. Hopefully Q3 should see a decent revenue and profit growth.

References

[1] Granules India Limited Q2 FY18 results

[2] Granules India Limited Q2 FY18 conference call

[3] Granules India Limited Q2 FY18 Investor presentation

[4] http://www.moneycontrol.com/news/business/earnings-business/do-not-require-capex-for-next-3-4-years-says-granules-2435257.html

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.