The results for Q3 FY19 should be out within the next few days. But before that, let us have a quick look at the numbers for Q2 FY19 for Granules which were released towards the end of October. Before going through the numbers I suggest you to go through the below link in case you have not done yet:

You can watch the video containing an abridged version of results for Granules India, below. Please read the below analysis as well for a detailed review.

Financial Analysis

The Q2 FY19 numbers for Granules are given below. Continuing the trends from Q1 of FY19, Q2 saw a fairly decent performance by the Company.

YoY quarterly Results Q2 FY19 (Crores) Q2 FY18 (Crores) Growth (%)
Revenue 585.04 399.39 46.5%
EBITDA 105 84 25%
PAT 60.26 40.33 49.41%
EBITDA Margin ( EBIDTA/Revenue) 17.94% 21.03% -309 bps
PAT Margin (PAT/Revenue) 10.3% 10.09% 21 bps
EPS 2.37 1.76 34.6%
  • Revenue grew at a very healthy rate of 46.5% compared to a 21% in Q1 of FY19. Revenue in Q3 FY18 had grown about 13% whereas Q2 FY18 had seen a revenue growth of 8.62%.
  • EBITDA growth was rather disappointing (considering the revenue growth numbers). The EBIDTA margin has dropped by 309 bps to 17.94% compared to 21.03% in Q2 FY18. In Q1 FY19 the EBIDTA margin was about 18.6%. The management would like to see the EBITDA margin to be around 19-20% for this year. Let us hope that the company is able to generate a decent margin. Management attributes the reason for lower operating margin to the following:
    • Reason 1: Rise in raw material cost (which will be passed to customer in subsequent quarter(s))
    • Reason 2: The Company has been selling APIs manufactured from the new plants into the domestic market which yields lower margins. Granules is forced to do this as it is waiting for USFDA approvals. Once approvals from USFDA is received the company should start selling in developed countries leading to better margins.
    • Management believes that this 18% EBITDA Margin can be treated as a base and in coming quarters the EBITDA should ideally increase.
  • PAT growth (at 49%) is in line with the revenue growth and the numbers are excellent. In Q1 FY19, the PAT grew by 40% whereas in Q3 FY18 PAT had seen a de-growth by 16%. The past two quarters have shown better numbers. PAT margin came in at about 10.3% which is marginally higher than Q2 FY18. In Q1 FY19 the PAT margin were abnormally higher at 16% whereas In Q3 FY18 the PAT margins were down significantly.  In Q2 FY18 the PAT margins was 8.02%.
  • EPS grew by about 35% to 2.37. In Q1 FY19, EPS saw a growth of 26% to 2.04. In Q3 FY18 the EPS was down by 22.03%. In Q2 FY18 the EPS was down by 6.38%. Clearly the past two quarters have seen better EPS growth.

The table below shows the product wise contributors to the revenue for Q2 FY19.

Contributors Q2 FY19 Q2 FY18 Q2 FY17 Q2 FY16 Q2 FY15
Formulations 45% 42% 37% 30% 33%
PFI 16% 24% 26% 28% 24%
API 39% 35% 37% 42% 43%
  • Formulations: Formulations growth has seen an increasing trend over the past five years. Formulations have higher margins hence the growth in Formulations share, is a positive sign.
  • API: Year-on-year there is a drop in the contribution of formulations and increase in the contribution of API. This is due to the recent expansion in API capacity which has led to a higher contribution from APIs. The company is waiting for approvals from USFDA for the new plants and hence it is channeling the APIs into the Indian market where profitability is currently low. This could be one reason for the lower EBIDTA that we are seeing in Q2 FY19. Once the company manages to get the necessary approvals, we should see the APIs being exported with better margins and hopefully some of the APIs get converted to formulations leading to even higher margins.
  • PFI: The drop in PFI should not be taken on the face value. Generally some of the PFI is consumed in house for the development of formulations. This is not captured in the table above. So, technically, the contribution of PFI remains same as previous quarters. Additionally, note that PFI is generally sold in Latin American countries and there was some pullback by the B2B customers when the company tried to raise the prices for PFI. The company is hopeful that these customers will come back after absorbing the price rise shock.

In absolute number terms the table below captures the sale of these products. One can notice the huge jump in the API sales in metric tons.

Contributors Q2 FY19 (Crores) Q2 FY18 (Crores)
Formulations (in Millions) 2,381 2,091
PFI (Metric Tons) 3,257 3,344
API  (Metric Tons) 6,344 5,192

Molecule wise breakup has thrown up interesting numbers.

Business Contributors Q2 FY19 Q2 FY18 Q2 FY17 Q2 FY16
Paracetamol 36% 34% 33% 37%
Metformin 19% 31% 30% 25%
Ibuprofen 19% 14% 13% 10%
Guaifenesin 5% 5% 5% 6%
Metocarbamol 4% 1% 3% 4%
others 17% 15%
  • Paracetamol has increased its share predominantly due to increase in API capacity.
  • Metformin is used to control the blood sugar levels and is generally prescribed for Type-2 Diabetes. Year-on-Year Metformin has seen a drop in its contribution to the revenue. This was rather surprising. Considering the prevalence of Type-2 diabetes around the world, I was expecting this to maintain a steady state contribution at around 30%. Management confirmed that the reduction in Metformin sales was due to lower profitability in domestic market and the capacity was used to manufacture Paracetamol in Q2 FY19.
  • Ibuprofen is both an analgesic and anti-inflammatory molecule that helps in many conditions like fever, pain in the teeth, headache, muscle pain, arthritis etc. Ibuprofen has seen a steady growth over the past few years.
  • Guaifenesin and Metocarbamol have maintained their share in the revenue.
  • The numbers in the others bucket is quite interesting. There is a noticeable increase here. The “Others” bucket comprises of the new molecules that the company is trying. There are high some low-volume-high-margin molecules and there are probably some Para IV molecules here as well. The company is pinning its hopes on these molecules for its future growth.

Expenses

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

Expense Item Q2 FY19 (Crores) As a % of Revenue Q2 FY18 (Crores) As a % of Revenue
Raw Material 342.61 58.56% 217.89 54.55%
Employee Expense 54.59 9.33% 42.25 10.57%
Finance Cost 7.59 1.29% 10.41 2.60%
Other Expense 108.02 18.46% 75.70 18.95%
  • Raw Material: Year-on-Year the raw material expense as a percentage of revenue has gone up. This either means that the revenues are down or the raw material expenses have gone up. If this is due to lower revenues, it might also (indirectly) indicate the contraction in margins.
  • Employee Expense: Employee expense as a percentage of revenue has remained relatively stable. We know that Granules is predominantly a generics manufacturer, hence its employee mix would not need many PhDs or specialized people. There could be an increase in the employee expense due to the Virginia facility but I am not sure if the company expenses it in the P&L here or it amortizes it and depreciates it later.
  • Other expense: Other expenses have remained stable with respect to Q2 FY19. In absolute number terms there is definitely an increase. The management attributes this to expensing the R&D on the P&L instead of capitalizing it. The other reason is the provisioning done for some bad debt to the tune of about 5 crores.
  • Finance Cost: The Company has more than 1000 crores of long term and short term borrowings, its interest cost has been less. At close to 7 crores of interest payments for Q2 FY18, the annual interest payments should be at the maximum about 40 crores. One reason for this seems to be the fact that the company predominantly has oversees borrowings.

OmniChem JV & Biocause JV

  • Biocause JV saw sales of 109 crores and a PAT of 31 crores. Granules would have seen its share of PAT at about 15.6 crores. The rise in PAT is mainly attributed to the price rise that the company undertook for Ibuprofen. The management is confident that for the near term (about a year), the higher prices are sustainable, but beyond that these high prices may not be sustainable.
  • Omnichem JV saw sales of 17 crores and PAT of negative 5 crores. Granules would have seen its share of PAT at about negative 2.5 crores. The JV currently makes 2 products. 5 more products are under validation. In the long run (say in four years) management predicts that the JV will see the revenue and profits grow by about 30%.

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

  • GPI saw sales of 46 crores with an EBITDA of 16 crores and PAT of 6 crores.
    • The above revenue is generated by selling three molecules: Methergine, Metformin ER and Methocarbamol
    • The above results are after considering the OPEX on to the P&L and accounting for depreciation as well as accounting for the R&D expenses. These numbers are still miniscule and in their infancy but they are definitely promising.
  • GUSA which is the marketing arm of the company in the US saw a loss of 6 crores due to writeoff for not being able to sell some of the stock.
  • GPI has launched Metformin ER and Methocarbamol Tablets in US. These were manufactured by the Indian Arm but GPI sold them in US under Granules Brand. With this move, the company has entered the RX market on its own in US.
  • Granules has ambitions for both Over the Counter (OTC) business as well as Doctor prescribed (RX) business. The management sees 10% of the business coming from OTC where as close to 90% of the business would be the RX part.

Other Information

  • ANDAs: As of Q2 FY19, the company has filed 23 ANDAs out of which 10 have been approved. The company wishes to file 12 ANDAs in FY19.
  • Oncology: The completion of oncology facility is on track. The validation of the APIs is in progress. The validation of FDs for oncology should begin in Q4 of FY19. Current plan is to tie up with Indian partners for immediate sale. In the long run the company plans to sell in US, Europe and Canada and the company would start the filing process in FY20. It is heartening to note that the company is putting all its efforts to make the oncology facility a success. I am eagerly waiting to see the sales and performance numbers from this business. Oncology is an important business area!
    • The management plans to file 4 ANDAs from the oncology facility in FY20.
    • Management is expecting better sales for its Oncology products form Europe and Canada. US seems to be third in line as far as priority is concerned.
    • The company does not see price erosion as a threat to its plans. The company believes that it is a low cost manufacturer which integrates lower costs in its planning process itself and factors in the price erosion aspect as well. We will have to wait and watch the revenue and PAT numbers to conclude on this aspect.
  • R&D: Capitalization of R&D is a debatable topic. Some believe that R&D expense should be expensed and other believe that it should not be capitalized. Granules seems to follow a certain methodology as far as R&D is concerned. If the outcome of R&D work seems to indicate that the company will be able to productize the efforts, then it capitalizes the R&D expense and will amortize it as the sales from this R&D start to kick in. However, if the output of the R&D does not seem to move in the direction of productization then the management treats the R&D as a failed attempt and expenses it on the P&L statement. This seems like a fair approach to me.
    • As an example, when GPI was developing Methergine, it had capitalized the R&D expense. Now that GPI is selling this product in the market, the company is amortizing the expense.
    • Note: In FY19 the company plans to spend about 100 to 110 crores on R&D and the decision to capitalize or expense it will depend on the scope of productization.

CAPEX

  • No new CAPEX is being initiated for rest of FY19 or for FY20. Only a maintenance CAPEX of 15-20 crores in planned for FY19 (which should ideally be handled by internal accruals).
  • GPI: Management expects GPI might need minor CAPEX in the range of about $15 million in the next 12 months. This is predominantly due to new approvals being received from USFDA leading to new product manufacturing that would need additional manufacturing space. Management expects GPI to fund its own CAPEX in the future and additional cash is not expected to be sent from the parent company in the future.

Loans

The aggregate loan as of Q2 FY19 stood at 1120 crores. The company managed to reduce the long term debt by $2 million and short term debt by $7 million. In spite of the reduction, the total loan is higher due to the depreciation of Indian rupee in Q2 FY19. Hence, even though, there is a decrease in debt in dollar terms it does not get reflected in rupee terms. Management reconfirmed that they would like to bring down the net debt to about 900 crores by FY20. Hence we should see the debt drop by about 200 crores by March of 2020.

Note that the net debt of the company is 1008 crores (i.e. Total debt of 1120 crores – cash of 112 crores). In Q1 FY19 we had noted that the company had cash of 200 crores. So, out of the 200 crores of cash, the company has utilized 88 crores for its CAPEX. Good to see that part of the capex is being funded by internal accruals.

Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18 Q3 FY17
Total Loan 1120 1116 917 875 816 835 681
Long term Loan 365 305 330 219
Short term Loan 510 511 505 462

Summary

  • The P&L numbers were very encouraging with very good set of numbers for revenue and PAT. EBIDTA is down due to increased raw material prices and low margin API sales in India. Margins are expected to improve post the USFDA approval.
  • The samples from Oncology block are undergoing evaluation. The company may start local sales in the next financial year and may also start filings in Europe, Canada and the US. The company is hopeful of higher sales in Europe and Canada.
  • Biocause JV generated more profits predominantly due to price rise which is sustainable only in the near term. Omnichem did not have any profits due to the cyclical nature of the revenues right now. Company hope to generate sustained revenue in another three to four years from this JV.
  • No additional CAPEX planned in FY19 and FY20. Management plans to pay off close to 200 crores of loans by the end of FY20.
  • GPI division has shown profits in this quarter. Management is sanguine on this unit’s performance and expects the profits to increase as more approvals are received from the USFDA.

Overall this was a positive quarter and the company seems to be on path to achieve consistent 25% PAT CAGR by FY20.

References

[1] Granules India Limited Q2 FY19 results

[2] Granules India Limited Q2 FY19 conference call

[3] Granules India Limited Q2 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.