In the last week of April 2016, Granules came out with the results for Q4 FY16 as well as for financial year 2016. Below we look at the Q4 results as well as few selected aspects for FY16, a detailed analysis of full year performance will be taken up in a future article. Before you continue further I strongly recommend you to read the below post (if you have not read it yet) to get an understanding of Granules as a company:

The below link will give you the results analysis for Q3 FY16 that can act as a precursor to Q4 results.

Year-on-year performance for Q4 FY16

Continuing from Q3 FY16, on the path of downward revenue growth, Granules India saw a lower revenue growth (with respect to Q4 FY15) of 5% leading to a revenue of 373 crores for Q4 FY16. Management deftly tried to overcome this by projecting the EBIDTA and PAT growth numbers. EBITDA grew by a surprising 55% compared to Q4 FY15 and the PAT grew at 48%! Management tried to underscore the point that the growth in EBITDA is due to operational efficiencies. Moreover in [5] the management informed that the raw material cost came down resulting in better EBITDA.

When I looked back at Q4 FY15 I realized that Q4 FY15 seemed slightly different, the EBITDA and PAT for some reason had dipped. So the sudden jump seen in EBITDA and PAT in Q4 FY16 should merely be treated as a base effect (an aberration) rather than a trend. The 6% rise in EBITDA margin compared to Q4 FY15 also seems to be a base effect because due to a sudden drop of EBITDA margin to 14.55% from the usual 17% in Q4 FY15. Same is the case with PAT margin which had dropped to 6.19% from the usual 7.5% in Q4 FY15.

YoY quarterly Results Growth Q4 FY16 (Crores) Q4 FY15 (Crores)
Revenue 5% 373 355
EBITDA 55% 80 52
PAT 48% 33 22
EBIDTA Margin ( EBIDTA/Revenue) 6% 21.44% 14.64%
PAT Margin (PAT/Revenue) 2.65% 8.84% 6.19%
  • Granules wants to achieve EBITDA of at least 20% for FY17. Topline growth is planned at 10-15% and bottom-line growth is estimated to be above 20% for FY17.
  • The company MD, Mr. Krishna Prasad predicts that the company will see real growth from FY18. The growth would be beyond the 10-15% growth that we have seen over the past few years. This accelerated growth would purportedly come from new ANDA filings.

Now let us look at the key contributors to the revenue of the company.

Contributors Q4 FY16 (% of total sales) Q4 FY15 (% of total sales) Q4 FY16 (Crores) Q4 FY15 (Crores)
Formulations 32% 32%  119  114
PFI 27% 24%  101 85
API 41% 44%  153  156

The share of formulations (percentage wise) stayed at 32%. In absolute numbers we can see an increase in the revenue from formulations. Revenue from PFI has grown more in percentage terms compared to Q4 FY15. This is at the expense of APIs share in the revenue. This is a good sign as profit margins for PFIs is higher compared to APIs.

However I wonder if this argument of PFI being better that API (in terms of Margins) would still hold good when the company starts to manufacture the APIs for Omnichem JV. I have a feeling that the API margins from Omnichem JV might be higher than the PFI sales for mass market molecules like Paracetamol.  Let us wait and see when the JV gets USFDA and starts to manufacture the APIs.

Business Contributors:

The three main molecules for Granules are Paracetamol, Metformin and Ibuprofen. The table below shows the contribution of these molecules to the overall revenue. Collectively the share of these 3 molecules has dropped from 90% in FY15 to 79% in FY16. This is both a happy and a sad event. It is a sad event because these are major revenue generating molecules. On the flip side, this would be a happy news if the reduction in their contribution is due to an increase in the share of other high margin molecules. The share of other molecules/products stands at 12% for Q4 FY16.

Business Contributors Q4 FY16 (% of total sales) Full Year FY15 (% of total sales)
Paracetamol 38 % 41
Metformin 28 % 23
Ibuprofen 17 % 26
Guaifenesin 4 %
Metocarbamol 1 %
others 12 %
  • Krishna Prasad was mentioning in [5] that they have a new problem because of growth in volumes of other molecules. The inventory management has become an issue. When they used to sell only 4-5 bulk molecules they had a fairly efficient inventory management. But now they have ventured into low-volume high-margin molecules which has resulted in this problem. I am hoping that they will come-up with an efficient strategy for this as well.

Expenses:

The table below lists the expenses that the company incurred in Q4 FY16. As expected the major expense is the raw material cost. Granules being a low value manufacturer has to sell tons of bulk drugs and hence needs tons of raw material. However the raw material cost as a percentage of revenue has come down. This is one of the reason why EBITDA has increased this quarter. The employee expense has marginally increased and so has the other expense. Manufacturing expense has been steady as a percentage of revenue.

As the company moves to complex molecules the raw material cost as a percentage of revenue should decrease resulting in better EBITDA and higher profits. I shall wait for that day to come. Also I hope that does not get offset by higher employee cost due to the requirement of specialized personal.

Expense Item Q4 FY16 (Crores) As a % of Revenue Q4 FY15 (Crores) As a % of Revenue
Raw Material 213.20 57.15 % 220.30 62 %
Employee Expense 30.85 8.27 % 25.71 7.2 %
Manufacturing Expense 23.13 6.2 % 21.64 6.1 %
Other Expense 25.60 6.9% 17.55 4.9 %

 Individual Products:

  • If you remember, Granules has a multiple sclerosis product/solution. From [5] I gathered that the multiple sclerosis samples have been taken by one potential customer. The customer will generate formulations out of it. He will file ANDA for USFDA approval. The Patent related to this will expire in 2020-21. Customer will launch the product around that time.
  • Abacavir sales for FY16 was about Rs. 13 crores.
  • In Q3 result analysis we saw that the company is in the process of expanding the capacity of Methformin. The manufacturing plant for Methformin Phase I will be ready for sampling. Approvals from regulated market will take about 12-18 months. Till the USFDA approvals are received, Initial sales might be done to non/semi-regulated markets. Methformin Phase II should be ready by the time USFDA approval is received for Phase 1 for formulations (In 2 years).
  • The product being developed with Par Pharma should launch in July 2016. I am hoping that FY17 will see some revenue from this product.

JV and Subsidiary performance

Actus (API division)

Granules acquired Actus couple of years back. Actus had a USFDA approved manufacturing plant (in Vizag) and 14 APIs in its kitty. The company has 22 regulatory filings via Actus that include 8 European filings, 4 USDMFs, 3 South Korean DMFs, 3 IDL China, 2 Health Canada, 1 Italy and 1 Spain. Actus has APIs in important segments like antihistaminic, anti-hypertensive, antithrombotic and anticonvulsant. Post the acquisition, Granules has done away with few of the APIs and added new APIs to the basket. Granules wants Actus to become the API hub for the company. The vision for Actus is to generate complex APIs and file ANDA for them. The plan is not to focus on specific therapeutic areas, but to concentrate on complex molecules. APIs for complex molecules will be developed in Actus India division and the API will be shipped to US to create the formulations from these APIs. Company wants to avoid getting into simple APIs and formulations business and concentrate on complex APIs and formulation.

5-6 ANDA filings are planned from India unit in FY17.  As a company, Granules plans to file about 8 ANDAs in FY17 (this includes 2 ANDAs from GUSA/GPI as explained below). In Q4 Actus achieved a revenue of 38 crores with a profit of 0.4 crores. Out of the 450 crore capex that was planned for FY16 and FY17, 150-160 crores is earmarked for Actus expansion. This shows the company’s commitment to focus on complex APIs that can be used for formulation development and ANDA filings.

OmniChem JV

At the JV level, for FY16, a revenue of 50 crores was seen for the JV. However, out of the 50 crores, only 15 crores was booked (rest of it was initial samples that cannot be booked). Hence at the company level the revenue generated from this division was 7.25 crores. The management believes that, at JV level, the sales for FY 17 should be about 200 crores. (It could be a little more than that as some sales could not be booked in Q4 FY16 which will spill over into FY17). No CAPEX is planned for Omnichem JV in FY17 (the plant is already shipping intermediates. So additional CAPEX is not required). Currently the JV is working on 4-5 products. Sales from this JV should add to the topline this year. This is an area to watch out for, for Granules.

Biocause JV

The company does not have anything new to report on this JV for Q4 FY16.

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

The Virginia facility will produce only R&D samples for FY17 and at least 2 ANDAs are planned from this facility for FY17. As a company, Granules plans to file about 8 ANDAs in FY17. R&D on 25 products are in progress in US out of which 10 products have been prioritized for this year. OTC business is on a slow growth as customers still need to gain confidence on Granules. They cannot suddenly stop existing supplies from suppliers and transfer it to Granules as they fear if Granules cannot supply then their revenue will be hit. So confidence can be gained only over time. Krishna Prasad believes that the OTC business will become a major source of revenue in the next three to four years. As described in the Actus section, Virginia facility will receive the complex API from Actus and manufacture formulations and file ANDAs. Hence Actus will act as feeder to the US facility. This is an Area to watch out for, for Granules.

Region Wise Sales

In Q4, the company saw 68% of its sales coming from regulated markets like the US, Canada and Europe. The rest came from unregulated/semi-regulated markets like India.

Region Wise Sale Q4 FY16
Regulated Market (US, Canada, Europe) 68 %
Unregulated Market (India, Latin America, ROW) 32 %

Loans:

The Consolidated debt for the company stands at 474 crores. Granules plans to reduce the debt by 60 crores every year going forward. This is good news. As the debt goes down, the interest costs for the company goes down and this directly adds to the bottom line.

Debt-to-Equity:

The current debt-to-equity ratio stands at 0.7 (with a net worth of 666 crores and debt of 474 crores) which is again slightly outside the comfort zone. However it is better than FY15 when it was 1.1 (with a net-worth of 431 crores and debt of 482 crores). The company is adding to the general reserves at a fairly healthy pace and reducing the Debt by 60 crores every year. So I am hopeful that the debt-to-equity will come down over the years due to these two factors. But then there is wrench being thrown in this assumption. The company has a capex plan of Rs 300 crores this year and some of it is coming via internal accruals. I am sure the company will dip into the general reserves leading to a reduction in net-worth and a slight increase in debt-to-equity. I hope I am proved wrong. Let us keep a watch on this.

CAPEX Plans:

CAPEX (Fund) requirement for FY16 was 135 crores and for FY17, the CAPEX planned is 300 crores. The best part is that additional debt will NOT be taken for the CAPEX. Money received from warrants and internal accruals should take care of CAPEX requirements.

Taxes:

Tax rates were 37% for Q4 FY16 (Holy cow!!). The company wants to achieve the tax rate of 33% for FY17. I wish the company looks at setting up factories in SEZs to avail tax benefits. Additionally, the expenditure on R&D can be claimed for tax rebate as well. I am not sure why the company does not do so (or probably it does, but the tax rebate is too low to make any material impact).

Other Titbits:

PFI Capacity: The PFI capacity right now stands at 18400 tons. Further 3600 tons is planned for the Gagillapur facility.

R&D Expenses: 100-112 crores on formulations alone. This shall be capitalized and the sales shall start much later. To me this is the uncomfortable part of analyzing a company. It will capitalize the expense now and when the sales start, it will slowly amortize it. Hence, the expenses does not shoot up now but it gets slowly nibbled over the years. Though this is as per the accounting standards, I am not a big fan of this. R&D expense on APIs shall be added to P&L (thankfully!)

USFDA Inspection: In Q2 FY16, the Jeedimetla plat has received 3 observations from USFDA and Granules had provided appropriate response. On 31st of May, the company received Establishment Inspection Report (EIR). USFDA seems to have accepted Granules response which is a good development. The Jeedimetla facility is an important facility that manufactures Metformin, Guaifenesin, Metocarbamol.

Summary:

On the revenue front this was a very disappointing quarter, considering the fact that Q3 was bad as well. However the EBITDA and PAT saw a healthy growth, thanks to lower base effect.

For FY17, the bulk molecules should keep the revenue ticking. Omnichem JV might make meaningful contribution in FY17, so should the Store Brand OTC and Rx business in US. These revenue enablers would get offset by the CAPEX plans. So overall I am guessing that the company will see a 10-15 % of revenue growth (on the same lines as last couple of years) and 20% EBITDA growth with about 30% PAT growth for FY17. Omnichem needs to get USFDA approval to start manufacturing APIs (currently it is manufacturing only intermediates). This would further boost the topline and bottomline.

Please note that I have intentionally not analyzed the yearly performance for Granules for FY16. This shall be done in a subsequent post.

References and Quick Links:

[1] Granules India – An Overview

[2] An overview of Pharma Sector

[3] Granules India – Results Overview – Q3 FY16

[4] Granules India Results Press Release

[5] Granules India – Conference call – Q4 FY16

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.