Before we look at the Q3 FY16 performance of Granules I strongly recommend you to go through the following links:

The Q3 results for Granules India were out some time back. The below table shows the cumulative results for 9 months (Q1, Q2 and Q3 combined). A comparison with the 9 months for FY15 are shown as well. I noticed on discrepancy though. In the conference call MD mentioned that the revenue growth for 9 months was 15% however when I calculated the revenue growth it turned out to be 12.6%. I have retained my calculations. As usual the growth in PAT (as well as EBIDTA) is higher than the growth in revenue which clearly indicates that the company is able to contain its expenditures which underscores its efficient manufacturing hypothesis.

9M Results Growth 9M FY16 9M FY15
Revenue 13% 1057 938
EBIDTA 27% 205
PAT 24% 85 68.51

Year on Year performance for Q3

When we see the year on year performance for Q3 there were some unexpected surprises. What was even more interesting was the reasons for the surprises. Let us first look at the numbers first.

YoY quarterly Results Growth Q3 FY16 (Crores) Q3 FY15 (Crores)
Revenue 8% 345 320
EBIDTA 27% 70 55.3
PAT 15% 27 23.6
EBIDTA Margin ( EBIDTA/Revenue) 3.07% 20.4% 17.3%
PAT Margin (PAT/Revenue) 0.5% 7.9% 7.4%

The biggest shocker was the revenue growth rate. A company which has consistently grown its revenue at 15% grew at 8% in Q3. This was totally unexpected! Krishna Prasad, the MD of the company gave three reasons for the lower revenue growth, namely,

  • Reason 1: Conscious decision to discontinue 2 APIs from Actus bucket. This impacted the revenues.
    • Q2 FY16 API sales (actus) were ~ 45 Crores. Q3 FY16 it reduced to ~ 30 crores.
  • Reason 2: Raw material costs are down. So prices were brought down. However profit margins were maintained.
  • Reason 3: One customer in US had issue with their product (their fault). So API uptake was hit. Customer sorting out the problem (someone else’s problem can become our problem at times! This was news to me!)

The PAT has grown by a modest 15% which was a dampener for me. Considering the past record, I was expecting a PAT growth of at least 25%. From the management’s comments even this modest 15% growth seemed a challenge. In order to achieve this 15% PAT growth, the company had to tweak its product mix this quarter as described below:

  • Formulation sales went up from 108.8 crores to 113.9 crores which is a high margin business.
    • In this 113.9 crores, close to 50% of sales are because of Granules ANDA which mainly consists of Metformin and Ibuprofen.
  • Similarly PFI sales went up from 70.4 crores to 93.15 crores. PFI is a relatively higher margin business.
  • The sales of APIs was down from 140.8 crores to 138 crores. This is a low margin business.

So the reason for 15% PAT even with lower revenue seems to be due to higher sales of Formulations and PFI. If we were to tabulate these observations we get the following:

 

Contributors Q3 FY16 (% of total sales) Q3 FY15 (% of total sales) Q3 FY16 (Crores) Q3 FY15 (Crores)
Formulations 33% 34% 113.9 108.8
PFI 27% 22% 93.15 70.4
API 40% 44% 138 140.8

Business Contributors

As we have seen in the overview of Granules (click here) granules is a predominant manufacturer of Paracetamol, Metformin, Ibuprofen, Guaifenesin, Metocarbamol. Out of these 5 molecules, the first three make up a major part of the revenue. The comparison of Q3 Sales for these 3 molecules is listed below:

Business Contributors Q3 FY16 (% of total sales) Q3 FY15 (% of total sales) Q3 FY16 (Crores) Q3 FY15 (Crores)
Paracetamol 38% 44% 131 141
Metformin 24% 23% 83 74
Ibuprofen 21% 16% 72 51

In my overview on Granules (Click Here) I had mentioned in the summary that one should keep an eye on Paracetamol sales. Any decrease in sales is a warning sign. In this quarter there is a decrease in Paracetamol sales. However one need not worry at a quarterly sales drop. One should keep an eye on the yearly sales for full financial year. A drop in sales in absolute numbers would be worth pondering about.

Individual Products:

We have already seen the sales figures for three molecules above. However there is some additional information available for other individual products as well.

  • Multiple sclerosis product that was announced in Q2 will generate revenue only in 2019-20. Granules will provide the API for this.
  • Metformin API Capacity to go from 2000 tons to 9000 tones by FY19. It will happen in 2 stages.
    • Stage 1 additional 3500 ton capacity will be added by Q3 FY17.
    • Stage 2 will have additional 3500 ton capacity addition.
  • Abacavir sales for this quarter (Q3 FY16) was Rs. 4.18 crores.

JV and Subsidiary performance

Actus (API division)

Actus which was bought by Granules last year has morphed into the API division for Granules. All the future APIs that granules shall produce, will come out of this division. The Q3 FY16 sales for Actus were about 30 crores with a profit of 20 lakhs. In Q2 FY16 Actus had sales of about 45 crores.

Ibuprofen Rx was USFDA approved in Sept 2015 and sales have started. Ibuprofen Rx had a Revenue of about 17 crores in Q3 FY16. Market size is 2 to 2.5 billion doses which translates to 400 crores of sales. There are only two major players for Ibuprofen Rx “Amneal” in the United States and Dr. Reddy’s Laboratories. Hence Granules has a better chance of increasing sales on this.

FY17 will see many ANDA filings from the Actus division. Actual sales from these ANDA filings will commence much later. The plan for Actus division is to produce high quality APIs that can be used by Granules to create formulations and file ANDAs for these formulations. Real growth from Actus division is expected after two to three years.

OmniChem JV

Production (of N-1 and N-2 intermediates) started in Sept 2015. Granules share of the Q3 saw sales of 1.7 crores. Customer did not want part sales to be invoiced. Hence the sales figures cannot be taken on the face. It resulted in a loss of 1.3 crores.

For FY17, Granules is projecting sales at the Joint Venture level sales of about 180-200 crores. So Granules share of sales should be about 90-100 crores with expected EBIDTA margin of 15-20%. For FY17 Granules will be supplying intermediates. The final aim for the JV is to produce API that Omnichem will use to generate Formulations for US based pharma companies. It will take time before API production starts as plant approval from USFDA will take time. So 20% EBIDTA margins are for intermediate sales. When the plant starts API sales the EBIDTA margins could improve. This is an area to watch out for in future.

For the 9 months (Q1 to Q3) total sale at JV level is 11.92 crores with a loss of 3.62 crores. For FY16 the JV sales is seen at 90-100 crores. But all of it cannot be billed as most of it will be trial batch. At the JV level only 45-50 crore can be billed this year.

Biocause JV

The joint venture with Biocause saw sales of about 67 crores resulting in a profit of about 4.3 crores.

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

Granules USA (GUSA) and Granules Pharma Inc (GPI) are the two subsidiaries of Granules in USA. In January 2016, Granules USA entered into an agreement with Par Pharmaceuticals for OTC product Omeprazole and Sodium Bicarbonate. Market size for these products is about $40 million. Granules has set FY17 sales target for these two products at $4 – 5 million. USFDA approval for these two products is expected by June 2016. It is a generic version of Zegerid from Merck. Par will manufacture the product and Granules will market this as an OTC product. A new division called GCH has been created by Granules in US for handling OTC products.

OTC business in US is dominated by two American manufacturers (I think there are many sellers but they all go to these two major manufacturers). Granules has an opportunity to grow in OTC business and become the 3rd largest manufacturer. Currently four products are being sold as OTC by Granules(I think two of these are Paracetamol and Ibuprofen. I could not get information on the other two). Plan is to expand it to 8-10 products in the next few years.

For Granules, the OTC sales in USA used to be 100 crores in previous years. At that time Granules used to sell these products using support from 3rd party. Since Granules has started direct sales (white label sales to customers who in-turn sell it to end users), Granules decided to discontinue the sales via 3rd party hence this year the OTC sales numbers are negligible. Sales will pick up only by FY18 as the customers generally give a very small order to check commitment from Granules. Bigger orders come only after 3-4 years of sales to customers. This is another area to watch out for in future.

Granules USA sales were 83.1 crores with Profit before tax of 1 crore. Granules pharma (GPI) was under renovation. The renovation work is now complete. Hirings are completed as well. R&D and Formulation development has started in the GPI plant. Trial batch production should start by March 2016.

Region Wise Sales:

The below table provides region wise sales for Granules. From the table it is clear that Granules has consistently maintained higher sales in developed countries that have regulated markets. Selling in regulated markets is tough as the products have to go through regulatory approvals and their plants have to go through frequent inspections.

 

Region Wise Sale Q3 FY16

(% of sales)

 Q3 FY15

(% of sales)

 Q3 FY16

(Crores)

 Q3 FY15

(Crores)
Regulated Market

(US, Canada etc)

 59% 58% 204 186
Unregulated Market 41% 42% 141 134

Loans:

Granules has consolidated Long term loans of Rs. 348 crores. This year it plans to pay back Rs. 50 crores. Short term loans i.e. Working capital loans stand at Rs. 114 crores.

CAPEX Plans:

As described in the conference call for Q2 FY16 the CAPEX (Fund) requirement for FY16 and FY17 is about Rs. 450 crore. Out of this Rs. 212 crores is coming from promoters via the warrants converted to equity shares. Balance amount should come via internal accruals. If you look at the Annual report for FY15 the company has sufficient General Reserves. The profits from this year should add up and hence I am of the opinion that Granules might be able to support the CAPAX plans without any additional loans. If however, Granules goes for loans then it will have an impact on the bottom line as the interest cost will eat up the profits.

Out of the Rs 450 crore capex that Granules has planned for, 150 crores will go towards new Granules lifescience API plant to be setup in Vizag. Rs. 70 crores would be spent on increasing Metformin capacity. Rs. 80 crores would be spent on the US plant. Rs. 90 crores would be spent on filing new ANDAs in US.

Other Titbits for Q3:

This quarter saw a higher interest outgo for the loans. Management attributes this to the one time processing fee charged by SBI as Granules decided to move its working capital loan account to SBI.

Management believes that the Tax rate for Granules would be about 32% for FY16 and it would go up to 34% in FY17. I was a bit disappointed with the higher tax numbers. Companies like Ajanta Pharma are able to contain their tax outgoes by setting up their manufacturing units in SEZ and in north eastern states. I personally feel that Granules should try to minimize its tax by taking help of various government incentives.

In Q2 FY16 USFDA had 3 observations (form 483) about Jeedimetla plant. Management has confirmed that these are merely procedural observations and should not have an impact on exports. There were no data integrity related observation in this round of USFDA inspection. Vizag plant was inspected as well and it did not result in any observations.

Summary:

Overall this was a lackluster quarter for Granules that saw lower sales and moderate PAT growth. My hopes lie in higher revenue from Onmichem JV and higher OTC sales from the US subsidiary in the coming quarters. Any new APIs from Actus or additional revenue from approved ANDAs would be a welcome addition to the bouquet.

References and Quick Links:

[1] An overview of Granules India

[2] An overview of Pharma Sector

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