The results for Q4 FY19 should be out within the next few days. But before that, let us have a quick look at the numbers for Q3 FY19 for Granules which were released towards the end of January 2019. Before going through the numbers I suggest you to go through the below link in case you have not done yet:

Below is an abridged version of the results overview captured visually. Please go through the video and the below analysis.

Financial Analysis

The Q3 FY19 numbers for Granules are given below. Continuing the trends from Q1 and Q2 of FY19, Q3 saw some exciting set of numbers !

YoY quarterly Results Q3 FY19 (Crores) Q3 FY18 (Crores) Growth (%)
Revenue 632 412 54%
EBITDA 119 75 59%
PAT 60 35 72%
EBITDA Margin ( EBIDTA/Revenue) 18.82 18.2 62 bps
PAT Margin (PAT/Revenue) 9.49 8.49 100
EPS 2.37 1.38 72%
  • Revenue grew at a very good rate of 54%. This was in continuation from the previous quarter where revenue grew at 46.5% and in Q1 the revenue growth was at 21%. Comparing these numbers to the previous financial year, revenue in Q3 FY18 had grown about 13% whereas in Q2 FY18 it had seen a growth of 8.62%. Clearly FY19 has turned out to be an excellent year for the company. Management expects the company to grow its topline by 20 percent for the next three years.
  • EBITDA growth surpassed the revenue growth and came it at 119 crores which is a 59% increase compared to Q3 FY18. The last time the company showed such a growth in EBITDA was in Q4 FY16. This quarter saw the EBIDTA margin improved by 62 bps to 18.82. In Q2 FY19 it had dropped by 309 bps to 17.94%. In Q1 FY19 the EBIDTA margin was about 18.6%. The local business is generating lower margins (due to higher raw material prices) which is offset by the higher margins from the US generics business. The management would like to see the EBITDA margin to be around 19-20% for this year.
  • PAT growth was outstanding. With a growth of 72% in PAT one couldn’t have ask for more. In Q2 the company had seen a PAT growth of 49% and In Q1 FY19, the PAT grew by 40%. Again, FY19 is turning out to be a better year for the company. By the way the PAT margin improved by 100 bps to 9.49. The management expects the profits to grow at 25 percent every year for the next three years.
  • EPS growth was inline with the PAT growth at 72% to 2.37. Q2 had seen a PAT growth of 35% to 2.37. In Q1 FY19, EPS saw a growth of 26% to 2.04. The management is projecting an annualized EPS of 9 based on the 9 months results.

Overall a very positive set of P&L numbers.

The table below shows the product wise contributors to the revenue for Q3 FY19.

Contributors Q3 FY19 Q3 FY18 Q3 FY17
Formulations 49% 40% 42%
PFI 17% 24% 24%
API 34% 36% 34%
  • Formulations: Formulations are a high margin business and they now make up close to fifty percent of the sales. This is a good news as it directly impacts the EBITDA. The recent push by the company to sell FD in US markets seems to have led to the increased contribution of formulations to the sales.
  • API: APIs are the second largest contributors to the revenue. However these are low margin products. At thirty four percent they have remained steady over the past few quarters.
  • PFI: The contribution of PFI is debatable. Part of the PFI output is consumed in house to manufacture the formulations or FD hence the share of PFI keeps varying with every quarter. By the way the company is now moving towards manufacturing pellets which is generally used in producing slow release formulations. Also pellets generate higher margins. An interesting paper on how pellets are manufactured can be read at [4]

In absolute number terms the table below captures the sale of these products. An interesting aspect to note that in million units the Formulations have decreased but their contribution to revenue has infact increased. This can only mean that the company is now manufacturing and selling high margin formulations and hence it is able to earn more even after lesser number of formulation tablets compared to Q3 FY18. In case of APIs, due to capacity expansion there is an increase in the output of APIs which is visible in Q3 FY19 numbers.

Contributors Q3 FY19 Q3 FY18
Formulations (in Millions) 2,437 2,747
PFI (Metric Tons) 3,294 3,497
API  (Metric Tons) 5,720 5,667

Molecule wise breakup was not provide by the company for this quarter. However the management informed that year-on-year, the core molecules have grown by 33 percent and they contributed to 82 percent of the revenue.

Expenses

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

Expense Item Q3 FY19 (Crores) As a % of Revenue Q3 FY18 (Crores) As a % of Revenue
Raw Material 337.67 53.42% 211.02 51.28%
Employee Expense 53.63 8.48% 41.53 10.08%
Finance Cost 7.47 1.18% 8.23 2%
Other Expense 105.68 16.72% 86.24 20.93%
  • Raw Material: Year-on-Year the raw material expense as a percentage of revenue has gone up. Not a good sign but then the quantum of growth is marginal hence it is not an alarming sign.
  • Employee Expense: Employee expense as a percentage of revenue has gone down. We know that Granules is predominantly a generics manufacturer, hence its employee mix would not need many PhDs or specialized people. Hence it is expected from granules to have a lower employee expense.
  • Other expense: Other expenses in absolute terms has gone up. This would be due to the fact that the company is now expensing more R&D cost in its P&L and most of it gets accounted as other expenses.
  • Finance Cost: The company has more than 1000 crores of long term and short term borrowings, its interest cost has been less. Since the company has predominantly oversees borrowings which have lower rates of interest, the finance costs are much lower for the company.

OmniChem JV &Biocause JV

  • In Q3 FY19, Biocause saw a revenue of 63 crores with a profit of 10 crores. The Omnichem JV saw abismal revenue of 10 crores and the JV made a loss in Q3. Put together the JVs generated a net profit of 2 crores.
  • Management cites couple of reasons for the sad performance of the JVs. The China JV was closed for few weeks due to the regular maintenance and due to cyclical nature of the Omnichem business. Management is expecting a significant improvement in the numbers in Q4 as the company should see orders from Omnichem and the biocause JV continuing uninterrupted production during Q4.

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

  • GPI saw a revenue of 77 crores with an EBITDA of 40 crores. The PAT came in at 27 crores. In Q2, GPI generated revenue of 46 crores with EBITDA of 16 crores and a PAT of 9 crores. Clearly GPI has started to contribute in a very significant way! In the first nine months of FY19 GPI has seen a revenue growth of 13 crores with a PAT of 47 crores.
  • By the way the management expects FY19 and FY20 to generate a revenue of about 230 crores. BY FY21 the management is expecting the revenue to grow to about 500 crores from GPI when all the planned ANDAs get converted to products and start selling in US market.
  • Prasugrel and Methergine are two products that are being manufactured at GPI. Granules is using 3rd party partners for marketing the product and the company is supplying the product to its marketing partner.

Other Information

  • ANDAs: The company continues to maintain that it will file 10-12 ANDAs this year. Management expects USFDA approval for four products in the next three to six months. Once the approvals are received, the company is capable of launching them in the market within one month of approvals. Granules shortlists the ANDAs that it would like to file based on three different criteria:
    • Criteria 1: The ANDA should result in a high volume product where the company has expertise to manufacture on a large scale.
    • Criteria 2: If the ANDA is for a low volume product then there should be low level of competition
    • Criteria 3: Controlled substances and sustained release products.

Over a medium term, the company would like to have about 50 approved ANDAs from GPI.

  • Oncology: On one hand the oncology API validation is under progress and on the other hand the oncology formulations facility is undergoing qualification and the validation of the formulations shall begin towards the end of Q4 FY19. The initial products will be diverted to emerging markets (till approvals from Europe and US are received). Subsequently the products should find their way into EU and US markets.
  • R&D: The company incurred R&D expense of 32 crores in Q3 FY 19 (Q2 had seen an R&D expense of 25 crores). Out of the 32 crores, the company has charged 14 crores to the P&L and the rest 18 crores is amortized (to be deprecated when the products start selling in the market).
  • Ibuprofen: The company has a 30 percent market share for Ibuprofen in US. The market share increased from around 18 percent see in FY18. Clearly the bet by the company to go solo is making an impact on its sales. By the way BASF has retreated from the Ibuprofen market (till Q4 and may take time to come back to the market).
  • Markets: Close to 49 percent of the sales are realized from US. Over the past few quarters the share of European business has been coming down and as of Q3 FY19 it stands at 13 percent. When asked about the European business, Management informed that they do not want to spread out to wide and thin. They would like to consolidate their business in US and once the planned steps of going solo matures in US they would like to go solo in Europe as well. But that needs to wait for some more time. The contribution from sales in India seems to be abnormally high this is because the output of the API capacity expansion is not approved by regulators in US and Europe. Once the approvals come in, the company will be able to divert this to developed market where the margins are higher.

CAPEX

  • No new CAPEX is being initiated for rest of FY19 or for FY20. For FY19 a minor manintenance CAPEX is planned. By the way company MD has kept the door ajar for CAPEX sometime in FY21. He says in order to scale up the company, it will have to plan CAPEX after couple of years. I am happy to hear that for the next couple of years the CAPEX would be minimal (this will help in EPS growth!) and I am also happy with the plan for future CAPEX (I cannot see a company stagnate). So overall I am satisfied with the CAPEX plan of the company.
  • GPI: Management expects GPI might need minor CAPEX in the range of about $10-15 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.

Loans

The aggregate loan as of Q3 FY19 stood at 941 crores. The company managed to reduce the long term debt by Rs. 32 crores and short term debt by 46 crores sequentially.  The growth in revenue is helping the company to cut down on its short term loans. In Q2 FY19 the company was indicating that it would like to bring down the net debt to 900 crores by FY20. The company is on its way to achieve this goal much before the end of FY20.

Personally, I am not really bothered a lot about the company loans. All its loans are external borrowings marked against the LIBOR rates. The interest rates on these external loans are fairly low. In fact if you see the interest costs in the P&L statement, it is quite evident that the interest outgo does not have a material impact on the bottomline of the company.

Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18 Q3 FY17
Total Loan 941 1120 1116 917 875 816 835 681
Long term Loan 562 365 305 330 219
Short term Loan 481 510 511 505 462

Looking Ahead

Management believes that they had added the required capacity for the next three years and they should now be able to leverage the capacity expansion. The company sees three drivers for future growth:

  • Utilization of the capacities that have been built for its major molecules.
  • US generics business. Note that the company has chartered an independent path in the US generics market and it expects higher profits from its solo expedition. The company hopes to generate 500 crores of business from the GPI.
  • The Oncology facility

I am surprised that the Omnichem JV does not figure in this list of growth drivers. Couple of years back the Omnichem JV was being seen as a major driver. I hope the company is able to break the cyclical nature of the JV business and is able to generate sustained revenues.

There was one interesting thing that the company MD mentioned that I really liked. He said that they do not want to utilize the new capacities and manufacture low cost and low margin products, they would like to use the existing facilities to manufacture high margin products. For example, instead of manufacturing plain vanilla Metformin or Ibuprofen tablets, the company wants to manufacture sustained release Metformin and Ibuprofen tablets that have higher margins. This will increase margins and improve the EBITDA in future.

Summary

  • The P&L numbers were very encouraging with very good set of numbers for revenue and PAT. Revenue, EBITDA, PAT and EPS are all up. Great quarter for the company!
  • Formulations now makeup a significant part of the revenue. Additionally the company is earning more by selling fewer formulations which indicates that the company seems to be selling high margin complex formulations.
  • GPI (the US facility) has started to impact meaningfully to both the topline and bottomline. Quarter on quarter the revenue growth was 67% and the profit growth was more than four folds. I agree that these numbers are on a much lower base, but then one cannot miss the fact that the PAT from GPI now makes up 66 percent of the consolidated profits of the company! That is quite significant and worth noting and tracking.
  • The APIs from Oncology block are undergoing validation and the Formulations are undergoing qualification and may begin validation from next quarter. I feel that the Oncology block is on track and can contribute meaningfully in FY20.
  • Biocause and Omnichem JV did not contribute much to the topline and bottomline. But lookout for Q4 where both the JVs are expected to make a meaningful contribution.
  • No additional CAPEX planned in FY19 and FY20. By the way the company paid off a decent part of the outstanding loans in Q3 FY19.

Overall this was an excellent quarter and please expect and outstanding Q4 FY19 due to additional revenue and profits that will come from Biocause and Omnichem JVs.

References

[1] Granules India Limited Q3 FY19 results

[2] Granules India Limited Q3 FY19 conference call

[3] Granules India Limited Q3 FY19 Investor presentation

[4] Pellet Manufacturing process: https://www.researchgate.net/publication/307736108_Pellets_and_pelletization_techniques_A_critical_review

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.