The results for Q1 FY20 should be out within the next few days. But before that, let us have a quick look at the numbers for Q4 FY19 for Granules.

Financial Analysis

The Q4 FY19 numbers for Granules are given below.

YoY quarterly Results Q4 FY19 (Crores) Q4 FY18 (Crores) Growth (%)
Revenue 615.19 513.49 19.8%
EBITDA 99 53.3 87%
PAT 69.01 20.32 239.61%
EBITDA Margin ( EBIDTA/Revenue) 16.09% 10.37% 572 bps
PAT Margin (PAT/Revenue) 11.21% 3.95% 726 bps
EPS (non-annualized) 2.52 0.81 211%
  • Management is expecting a topline growth off 20 percent and a bottomline growth of 25 percent for the next three years starting FY20.
  • EBITDA Growth: Management also asks investors not go on the face value as far as EBITDA and PAT growth is concerned. This is due to the fact that in FY18 the R&D expenses was accounted in P&L for the first time. Additionally the company started to provision for non-moving goods which had further impacted the EBITDA for the first time in FY18.
  • PAT Growth: Regarding PAT growth, the management informed that the legacy PAT saw a growth of 16 percent. On the other hand the US sales (from GPI) saw a PAT growth of 52%.

The table below shows the product wise contributors to the revenue for Q4 FY19.  I have added Q2 FY19 as a reference to shows the changes since H1 FY19

Contributors Q4 FY19 Q2 FY19
Formulations 47% 45%
PFI 17% 16%
API 36% 39%

In absolute number terms the table below captures the sale of these products. The numbers for Q2 have been provided for reference. There is a drop in API sales and an increase in the formulations. This could be one reason for higher PAT growth even when the revenue growth was modest. The drop in API is due to lower API sales in India. There was a deliberate reduction in Indian sales to avoid low margin business.

Contributors Q4 FY19 (Crores) Q2 FY19 (Crores)
Formulations (in Millions) 2,957 2,381
PFI (Metric Tons) 3,353 3,257
API  (Metric Tons) 5,577 6,344

Geography wise contributors to the revenue is captured in the table below. FY19 saw higher growth in sales from America and India due to the following reasons:

  • USA: There was a substantial push by the company to sell its own Rx and OTC products which resulted in higher sales.
  • India: The API capacity expansion has resulted in higher production of APIs. Since these APIs are yet to be approved by USFDA, the company ended up selling them in Indian market leading to higher Indian sales. By Q4 the company has consciously started to reduced Indian sales to maintain its margins.
Contributors FY19 (Crores) FY18 (Crores) Growth (%)
USA 1,111 661 68.07%
India 457 337 35.6%
Europe 403 408 -1.22%
LATAM 198 197 0.5%
Rest of the World 110 89 23.59%

Expenses

The table below shows the comparison of year-on-year expenses for Q4 FY19.

Expense Item Q4 FY19 (Crores) As a % of Revenue Q4 FY18 (Crores) As a % of Revenue
Raw Material 357.62 58.13% 281.73 54.86%
Employee Expense 51.33 8.34% 42.38 8.25%
Finance Cost 6.84 1.11% 6.20 1.20%
Other Expense 132.81 21.58% 108.07 21.04%
  • As a percentage of revenue, the expenses have remained steady on a year-on-year basis.
  • The other expenses is higher because the R&D expenses are being charged to the P&L. The company is also provisioning for unsold inventory that is not likely to move.

OmniChem JV &Biocause JV

  • Together, the two JVs contributed 19 crores to the PAT in Q4 FY19.
  • Biocause JV is running close to full capacity. When the plant was shutdown for two quarters for maintenance, an additional capacity was added to the plant. Management expects Biocause JV to perform on par in FY20 as well.
  • Omnichem has been an underperformed because the management misjudged the single largest customer and the sole product that they planned to produce for this customer. The entire business was banking on one customer – one product and the customer moved the product to his own plant in Singapore. They are now trying to de-risk by simultaneously working on six low margin products to have a continuity of revenue and profits. Sad to see the current state of this JV. The company on its part is not able to enforce a contract which can penalize the customer if they do not take the supply. This clearly shows that the company is in a very soft\weak spot and cannot enforce anything.

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

  • GPI saw sales of 195 crores with an EBITDA of 76 crores and PAT of 40 crores.
    • GPI has filed 17 ANDAs till date. 9 of them were filed in FY19 out of which only two have been approved (Methergine and Methadate. Sales of Methadate are expected to start in July). The company is waiting for the others to be approved and it is hopeful of getting approvals for three to five of them in FY20.

Other Information

  • ANDAs: Company files 12 ANDAs in FY19 and expects to file 12 more in FY20.
  • Oncology: The validation of Oncology APIs is in progress and the validation of Oncology FDs has started. The strategy for FY20, as far as oncology is concerned, seems to be the following:
    • APIs: Keep generating a basket of APIs till the end of the year (It takes time to complete the research and come up with quality APIs). This will act as the pipeline for future FDs. The company is working on five APIs
    • FDs: In the meantime file an ANDA for one FDs with US FDA and the European regulators. This will trigger the inspection. Since the regulatory approvals will take their own time the company is expecting the approvals to come in by FY21. By the way the company is working on three formulations.
    • Sales: Till the regulatory approvals are received from the US and Europe, the company plans to sell the APIs as well as the FDs in semi-regulated markets like India.
  • R&D: In Q4 FY19 the company spent 41 crores on R&D out of which 32 crores was charged to P&L and the rest 9 crores has been capitalized.
    • For FY20 the company expects to spend about 175 crores on R&D and expense close to sixty percent of this on the P&L.
  • Market Dominance: The company has a 50% market share in US for Metformin and 30% market share in regulated markets for Paracetamol.
  • Capacity Utilization: The company is using 60% of the new Paracetamol and 15% of the new capacity of Metformin. The Guaifenesin capacity is waiting regulatory approval. Hence there is room for revenue and PAT growth in future once the unused new capacity starts to get utilized.

CAPEX

  • No major capex is planned for FY20. A nominal CAPEX of 80 crores is planned for GIL for FY20. The US arm (GPI) is expected to spend about 70 crores for its expansion plans. In all the company has plan to spend Rs. 150 crores on maintenance CAPEX.
    • This 150 crores does not include the likely CAPEX for R&D activities. If one includes the CAPEX for R&D, the total CAPEX for FY20 would be around 279 crores.

Loans

The company managed to reduce marginally , the outstanding loans, in Q4 FY19.  The company plans to satisfy unexpected short term borrowings in FY20 via internal accruals. Management would also like to reduce the outstanding debt by about fifty to sixty crores in FY20.

Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18 Q3 FY17
Total Loan 990 1042 1120 1116 917 875 816 835 681

Summary

  • The P&L numbers were pretty good. The company was able show noticeable growth in revenue and PAT. GPI division had better profit growth compared to the legacy business of the company.
  • The samples from Oncology block are undergoing evaluation. In FY20 we might see the company selling the products in Indian market and once it receives USFDA approval, we may see the Oncology APIs and FDs being sold in developed markets sometime in FY21.
  • Biocause continues to work at full capacity. Omnichem continues to underperform.
  • The company has no plans for additional CAPEX in FY20. One can expect maintenance CAPEX of 150 crores.
  • Capacity utilization of the new blocks for legacy products is yet to pick up. Hence there is enough room for future growth in revenue and profits.

Overall this was a positive quarter and the plateau that we saw in FY18 and FY19 seems to be behind us and company seems to be on the path to achieve consistent 20% revenue growth and 25% PAT growth starting FY20.

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.