The results for Q4 FY18 are just around the corner. Before the Q4 numbers start coming in, let us have a quick look at the numbers for Q3 FY18 for Granules. Before going through the numbers I suggest you go through the below links:

Financial Analysis

The Q3 FY18 numbers for Granules are given below. This was one more quarter of disappointment. Revenue grew by about 13% however this was better than the growth of 8.62% of Q2. In Q1 saw the revenue grow by 9.49%. The first 3 quarters have definitely been below par. The EBITDA have dropped by 7.5%. The PAT was down by 16%.  Again as we saw in Q2, even in Q3 the PAT margins were down significantly by 25.8%. In Q2 the PAT margins were down by 8.02%. EPS, it is down by 22.03%. In Q2 the EPS was down by 6.38%. I am definitely disappointed again with the Q3 numbers.

Management attributes de-growth in gross profits margins to the following reasons:

  • Increase in raw materials price (Oil).
  • Shortage of raw materials due to a fire in one of the raw material supplier
  • The new API plants are up and running. However the approvals from developed countries are still pending. So the API manufactured from these plants are being sold in Indian market where the margins are less.

The company tries to maintain the profit margins, but they come with a lag (i.e. the company absorbs the price rise in the current quarter and in the next quarter the price hike gets reflected).

YoY quarterly Results Growth Q3 FY18 (Crores) Q3 FY17 (Crores)
Revenue 13.15% 411.59 363.74
EBITDA -7.5% 74.89 81
PAT -16% 30.15 35.91
EBITDA Margin ( EBIDTA/Revenue) -18.28% 18.19% 22.26%
PAT Margin (PAT/Revenue) -25.8% 7.32% 9.87%
EPS -22.03% 1.38 1.77

The table below shows the contributors for revenue for Q3.  Contribution of Formulations has seen a decent growth in Q3. For Q3 FY18 the contribution of API has gone up because of commissioning of the new API facilities for Metformin and Paracetamol.

Contributors Q3 FY18 Q3 FY17
Formulations 40% 42%
PFI 24% 24%
API 36% 34%

Product wise breakup shows that the company has seen an increase in sale for Paracetamol and Metformin. The good thing is that Metformin has been seeing an increase in its contribution towards the revenue. Ibuprofen has seen a relatively lower growth in Q3. The increase in contribution from Paracetamol and Metformin can be attributed to the new API facility that has started to sell its produce.

Business Contributors Q3 FY18 (Crores) Q3 FY17 (Crores)
Paracetamol 144 118
Metformin 128 108
Ibuprofen 57 61
Guaifenesin 20 14
Metocarbamol 4 7
others 58 51

Expenses

The table below shows the comparison of year-on-year expenses for Q3. Now one item that I have not talked about in the expenses is the depreciation. As the manufacturing facilities age, depreciation starts to mount. For FY18 the company expects depreciation of about 80-85 crores and in FY19 the company will see the depreciation numbers to be around 95-100 crores. This makes up about 8% of the total expenses! So depreciation brings down the PAT numbers. When the oncology facility starts production, this facility will add to the numbers for depreciation thereby further reducing the PAT numbers. MD informed that the company is now changing its thought process and is concentrating more on operational cash flow rather than look at net profit and PAT numbers. But then I was wondering that the entire world looks at P&L PAT to assign a PE value to the company. If the company is now suddenly bothered about operational cash flow and not going to look at PAT numbers then the share price would stay depressed wouldn’t it ?

Expense Item Q3 FY18 (Crores) As a % of Revenue Q3 FY17 (Crores) As a % of Revenue
Raw Material 211.02 51.26% 183.61 50.47%
Employee Expense 41.53 10.09% 36.10 9.92%
Finance Cost 8.23 1.99% 8.36 2.29%
Other Expense 86.24 20.95% 73.91 20.31%
  • Raw Material: Year-on-Year the raw material expense as a percentage of revenue has remained constant. MD clarified that the raw material prices (oil) have gone up.
  • Employee Expense: Employee expense as a percentage of revenue has remained stable.
  • Other expense: Other expenses have remained stable with respect to Q3 FY17.
  • Finance Cost: As we noted in Q2, the company has long term borrowing and a huge short term borrowing however 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.

OmniChem JV

  • The revenue from the Omichem JV for Q2 was Rs. 85 crores (at JV level). The profit at the JV level was 12.8 crores. For Granules, the numbers would half of the above numbers. Cumulative sales from Omnichem for 9 months ending Q3 FY18 stood at 135 crores (at JV level).
  • Sales from Omnichem JV is not panning out as expected for FY18. The major reason being the delay in offtake caused by the major customer. The company was relying on one or two products for all of its sales from Omnichem. This was a major risk as the customer decided to delay the offtake that blew on the face for the company. Granules is now de-risking itself by adding five to six products. The Management expects FY19 to be a better year and FY20 should start seeing very good results from the JV.

Biocause JV

  • The revenue from Biocause JV was 23 crores. There was an EBIDTA loss of 3.2 crores. In Q3 the plant had a shutdown for maintenance.

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

  • As of Q3, the company is still on track to file 10 ANDAs by the end of the year. For the first 9 months the company has filed 5 ANDAs from Hyderabad and the Virginia facility. Out of these 10 filings, 6 will be from the Virginia facility and 4 will come from Hyderabad. All the 6 filings from Virginia shall be complex filings.
  • In Q2 the company had informed that the Virginia facility should see a stream of product approvals in calendar year 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

  • OTC: As of Q3 FY18 the growth in OTC has been slow. The company has got approvals for Cetirizine and also for Fexofenadine.

CAPEX

  • In the first nine months the company has seen a CAPEX of 420 crores. The first half of FY18 had seen a CAPEX of 348 crores and In Q1 the company saw a CAPEX was about 150 crores.
  • The company has been on a CAPEX spree over the past couple of years. In FY19 we will see the company consolidating and not taking on any additional CAPEX (other than a 50 crore OPEX).

Loans

The aggregate loan as of Q3 FY18 stood at 875 crores with short term borrowings at 510 crores and long term borrowings at 365 crores. The company availed ECB during the current quarter for the CAPEX. The company expects further ECB borrowings in Q4 and might end the FY18 with a total long term debt of 550 crores. This will results in a debt to equity ratio of about 0.8. So FY18 should see the debt numbers reaching 1000 crores. This will reduce to 9oo crores by end of FY19. Since the debt of Granules is mostly in Euro the interest rates are much lowers. So I am not too worried about the interest costs.

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

Summary

  • In terms of numbers, this was again a disappointing quarter for Granules. Both Revenue and PAT growth was very disappointing. EPS also saw a decline in Q3 FY18.
  • Omnichem sales continue to disappoint. Management does not see improvement for the next couple of quarters.
  • FY18 has been a low growth year for Granules. FY19 may see similar trend. The company expects the FY20 to be a year when the company will see better growth.

References

[1] Granules India Limited Q3 FY18 results

[2] Granules India Limited Q3 FY18 conference call

[3] Granules India Limited Q3 FY18 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.