Granules announced its results for Q3 FY17. Let us have a look at the results. Before we look at the results I recommend you to look at the below links in case you have not gone through them:

Financial Analysis

The Q3 FY17 numbers for Granules are given below. The numbers are as per IndAS standard

YoY quarterly Results Growth Q3 FY17 (Crores) Q3 FY16 (Crores)
Revenue 11% 359 325
EBITDA 21% 81 67
PAT 34% 39 29
EBIDTA Margin ( EBIDTA/Revenue) 22.4% 20.6%
PAT Margin (PAT/Revenue) 11.4% 8.9%

Revenue seems to have grown at a much slower pace than the expected 15% growth rate. One thing to keep in mind is the fact that Omnichem and Biocause JV numbers are not reported in the revenue numbers. EBITDA has grown at a decent rate of 21%. Note that in Q3 FY16 the EBITDA had grown at 27% (i.e. Y-o-Y comparison with Q3 FY15). EBITDA margins have improved by 180 basis points to 22.4%. This is a good news. This essentially means that expenses are down (You can refer to the Expenses section to get more clarity on this). PAT seems to have grown at a very healthy rate of 34% which includes 50% of 1.5 crore profit from Omnichem JV and 50% of 4.7 crores profit from Biocause JV. What irked me was the PAT margin numbers. The company seems to be patting on its back for PAT margin improvements. But we know that the revenue numbers do not include the revenue from JV (Omnichem and Biocause) whereas PAT includes the profit from JV (Omnichem and Biocause). This skews up the PAT margin numbers on the higher side. Hence I re-calculated the PAT margins by removing the contribution of the JVs. The table below shows the calculations:

YoY quarterly Results Q3 FY17 “JV PAT” Included (Crores) Q3 FY17 “JV PAT” Excluded (Crores) Q3 FY16 (Crores)
Revenue 359 359 325
PAT 39 36 29
PAT Margin (PAT/Revenue) 11.4% 10% 8.9%

When we exclude the PAT contribution from the JV companies, the PAT margin reduces to 10%. This is about 100 basis points more than Q3 FY16 PAT margins. This is the number that Krishna Prasad was envisaging couple of years back. He wanted to see Granules earn a PAT margin around 10% (PAT margin in those days was hovering around 7%).

The table below shows the contribution of API, PFI and Formulations to the revenue for Q3 over the past three years.  There is a marked reduction in the contribution of API to the revenue. This is compensated by increase in PFI’s share in revenue. Formulations share has remained steady. I would have loved to see Formulations share going up as the margins are more than 20% in formulations. This seems to be seasonal (i.e. management’s choice of product mix for Q3) as the share of Formulations was 37% in Q2 FY17.

Contributors Q3 FY17 Q3 FY16 Q3 FY15
Formulations 35% 33% 34%
PFI 29% 27% 22%
API 37% 40% 44%

The table below shows the contribution of various generic molecules to the sales of Granules for Q3 Y-o-Y.

Business Contributors Q3 FY17 (Crores) Q3 FY16 (Crores)
Paracetamol 118 123
Metformin 108 78
Ibuprofen 61 68
Guaifenesin 14
Metocarbamol 7
others 51

Paracetamol sales have dropped whereas Metformin sales has improved Y-o-Y. As noted in analysis in the last quarter, the input costs for Paracetamol have come down and hence the revenue contribution is less from Paracetamol. Metformin seems to be shaping up really well. No wonder the company is doubling down on Metformin by more than quadrupling the capacity to 9000 TPA. Metformin is used as a first-line-of-defense for Type-2 Diabetes. I am hugely optimistic on Metformin as a molecule. With a total capacity of 3000 TPA, Granules is able to generate revenues close to that of Paracetamol which in-turn has a total capacity of 18000 TPA. Clearly Metformin has more bang for buck compared to Paracetamol.

Expenses

The table below shows the comparison of year-on-year expenses for Q3.

Expense Item Q3 FY17 (Crores) As a % of Revenue Q3 FY16 (Crores) As a % of Revenue
Raw Material 189.92 52.9% 190.56 58.63%
Employee Expense 36.10 10.05% 29.6 9.1%
Manufacturing Expense 24.39 6.79% 20.72 6.37%
R&D Expense 5.26 1.46% 3.10 0.09%
Other Expense 27.07 7.54% 25.29 7.78%

From the above table we notice that Raw material expense has noticeably come down to about 53% of revenue from a high of close to 59% in Q3 FY16. This is a very healthy sign. This shows that the revenue of the company is slowly moving towards high margin products. As seen in the analysis for Q1 and Q2, this could also be due to lowering of raw material costs. Employee expenses have increased marginally as a percentage of sales. Rest of the expenses have grown in-line with revenue growth. Hence Y-o-Y the expenses as a percentage of revenue have remained constant.

Actus (API division)

Actus contributed 28 crores to the revenue. However as we have noted before, Actus is turning out to be a captive plant hence its contribution to revenue may eventually be insignificant. Actus is also a trial ground for new experiments and hence these experiments take up some of the capacity.

OmniChem JV

Revenue from omnichem was 5.5 crores at JV level with a PAT of 1.5 crores. As expected Q3 revenues are less (on the same lines as Q2). Q4 revenues would be higher due to the current cyclical nature of the offtake by Omnichem from this facility. This cyclical nature should get corrected in coming quarters leading to stable revenue growth from Omnichem. Q4 should see revenue of close to 80-100 crores (at JV level) leading to an EBITDA of 16-20 Crores at JV level. Krishna Prasad gave revenue guidelines of close to 400 crore (at JV level) for FY19. This is twice the numbers projected for FY17.

Biocause JV

Biocause saw sales of 49.7 crores at JV level which results in 24.85 crores at Granules level. The EBITDA was 7.4 crores at JV level (i.e. 3.7 crores at Granules level) and a PAT of 4.7 crores (i.e. 2.35 crores at Granules level).

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

The number of ANDA filings by Granules stands at eight, out of which five are approved and three are pending approval. These are filed by both US and India facilities. In Q4 Granules is planning to file 4-5 ANDAs from India and couple of them from Virginia facility in USA.

Other Information

  • Capacity: Granules is facing capacity constraints for API and PFI. The company is in the process of capacity augmentation. The augmentation should reduce the bottleneck by Q2 FY18.
  • The FD capacity utilization stands at around 50-60%. The maximum capacity utilization can be about 80%. Granules is expecting to hit this limit somewhere in FY19. Expect some more CAPEX requirement for FD capacity expansion beyond FY19! Sigh!
  • Granules has spent about 19 crores on R&D in nine months in FY17. In Q3 FY17 the company spent 5.26 crores on R&D.

Region Wise Sales

Region Wise Sale Q3 FY17  Q3 FY16 Q3 FY15
Regulated Market (US, Canada, Europe) 68% 59% 58%
Unregulated Market (India, Latin America, ROW) 32% 41% 42%

Y-o-Y the contribution from regulated markets has increased. Within the regulated market, in Q3 FY17, the company got 46% of sales from North America (US & Canada) and 22% of sales from Europe.

CAPEX

For this year and next year, the total CAPEX planned stands at 900 crores. 230 crores has been spent on CAPEX this FY so far. And taking last year’s capex as well, in all 360 crores has been spent. Rest 540 crores CAPEX is required in the next 15 months! Granules is evaluating whether to do an equity infusion or a mix of debt and equity. The company is comfortable with debt-to-equity up to 1.5. I feel that 540 crores is a huge amount! I was definitely not prepared to see such a huge number. Whether we go via equity way or via debt, it is going to be a huge damper on EPS for FY18 at least. I am disappointed with this news.

From [3] I notice that the company is predominantly going for a debt based CAPEX with some equity or internal accruals. Out of the planned 540 crores, roughly 450 crores would be via debt. And out of this 450 crores, International Finance Corporation (IFC) will finance about 318 crores. For this CAPEX of 540 crores, we will see Metformin capacity shoot up to 9000 TPA from current 2000 TPA. Guaifenesin capacity to more than double from 1200 TPA to 3200 TPA. Paracetamol capacity to go up by 33% to 24,000 TPA. Additionally a Greenfield API plant will come up in Vishakhapatnam. Warehouse capacity expansion is on the anvil. Some of the money might go into R&D expenditure as well.

Loans

Total loan as on 31st December 2016 stands at 681 crores. Out of this long term loan is 219 crores and short term loan is 462 crores. Let us compare the loan growth seen by the company. Over the past one year the short term loans have shot up drastically. The company has managed to pay back some of the long term loans though. On a Q-o-Q basis the total loan has gone up predominantly due to an increase in short term loans.

Q3 FY17 (Crores) Q2 FY17 (Crores) Q3 FY16 (Crores)
Total Loan 681 617 462
Long term Loan 219 212 348
Short term Loan 462 405 114

Individual Products

  • Q3 FY17 saw Abacavir sales at 2.1 crores.
  • Multiple Sclerosis drug’s DMF filing is done by granules. Granules’s partner will be filing ANDA for this in March 2017.
  • Paracetamol is a mature product. However Metformin is a growing product. Granules is seeing a growth of 14%-16% in case of Metformin. The total market for Metformin is about 60,000 metric ton. Granules has a market share of about 5% i.e. 3000 metric ton. And out of this 3000 TPA, about 2000 TPA is manufactured by Granules and rest 1000 TPA is procured from others. The API expansion that is planned in future can offset these outsourced quantity.

Summary

  • Due to IndAS accounting methodology, going forward, the company may keep showing moderate revenue growth but very good PAT growth because the Omnichem and Biocause JV’s revenue cannot be shown as Granules revenue, but the PAT from JV can be added to the overall PAT of the company. Hence, in future, bottomline growth would be higher than topline.
  • The Company sees four areas that shall contribute to the future growth of the company. The immediate trigger is the Omichem JV. The new API augmentation will bring in additional revenue. The ANDA approvals should result in FD production and sales resulting in third source of revenue growth. The fourth source of revenue growth would be the API plant being developed for Oncology products as well as sterile products (with a CAPEX of 260 to 270 crores). There are enough triggers to keep the revenue and PAT growth ticking for the foreseeable future.
  • For FY19 Krishna Prasad was hinting at standalone revenue numbers around 2000 crores (and hence it should ideally be excluding revenue from JVs). At PAT level the numbers should be good (considering the bottom-line would include profits from the JVs).
  • Q3 FY17 was a decent quarter with below average revenue growth and fairly good PAT growth rate.
  • CAPEX for the next 15 months is pegged at close to 540 crores which will be met predominantly via debt based funding. This may result in moderate PAT growth due to higher interest costs.
  • Next quarter (Q4 FY17) will see omnichem JV contributing to the bottom line (after a gap of two quarters). I am expecting a very good PAT growth in Q4 FY17.

References

[1] Granules India Limited Q3 FY17 results

[2] Granules India Limited Q3 FY17 conference call

[3] http://www.business-standard.com/article/companies/pharma-major-granules-india-to-invest-84-million-in-expansion-117022000181_1.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.