Granules India Limited (532482) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Q3 FY '20 Results Conference Call of Granules India Limited hosted by Emkay Global Financial Services. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Praful Bohra from Emkay Global. Thank you, and over to you, sir.

Good evening, everyone. I would like to welcome the management, and thank them for giving us this opportunity. We have today with us, Mr. Krishna Prasad Chigurupati, Chairman and MD; Ms. Priyanka Chigurupati, Executive Director, GPI; Mr. Jason Hanks, President, Commercial Operations, GPI; and Mr. Sandip Neogi, Chief Financial Officer. I would now like to hand over the call to Richa Singh for the disclaimer. Over to you, Richa.

Thank you, Praful. I would like to mention that some of the statement made in today's discussion may be forward-looking in nature. The nature involves a number of risks and uncertainties that may lead to different results. So with this, I would like to hand over the call to management for their opening remarks, which would be then followed by question-and-answer. Over to you, sir.

Thank you, Richa. Very good evening, ladies and gentlemen. Thank you very much for attending our earnings call for the third quarter of fiscal '20. I'm very happy to announce that we are continuing on our anticipated growth plans and reap the benefits of our recent investments. Our continued performance validates our growth strategy and also the trust that you and other stakeholders had placed on us. I would like to mention a few highlights during the quarter in discussion. Number one, we have started conservatively expensing out total R&D spend, including the filing fees for ANDAs and DMFs starting from Q3. As you all know, the future growth of the company will be driven by the new DMFs and ANDAs, which we file and get approved. During this quarter, we have expensed off a total amount of INR 22.79 crores. However, the past spend on R&D will be capitalized as and when we get approvals, and certain ANDAs that we feel may not have great potential will be amortized in a very accelerated way from time to time. One such example is in this quarter, one of the ANDAs that was recently approved, OXY/APAP, which is an opioid product, we felt there was a certain level of uncertainty due to taxes being imposed in certain states on suppliers and wholesalers. And due to this, we decided to amortize the entire spend on this ANDA, which amounts to $1.2 million. Number two of the highlight is, we are expecting a little more than INR 200 crores net of TDS from the sale of both our JVs, and the Board had decided to reward the shareholders and approved a buyback of shares of the company at a price of INR 200 per share and had earmarked an amount of INR 250 crores net of the buyback tax for this purpose. Now going back to numbers. On the gross revenue, in this quarter, we have achieved a revenue of INR 704 crores, which is 11.4% growth year-on-year basis. The revenue growth for YTD FY '20 was 19.98% on a year-on-year basis. Our sales were primarily driven by finished dosage sales that constituted 54% of our revenues followed by API sales at 30% and PFI sales at 16%. As usual, North America was the key driver constituting 52.93% of the revenue, followed by Europe and Latin America. On the gross margin front, we had a gross margin of INR 357 crores, which was 50.7% of revenue, which has improved both yearly and sequentially. This is the outcome of increased revenues at GPI, our U.S. subsidiary; the product mix at Granules India, especially the new APIs that are being produced in our Unit-IV at Vizag. We are very confident that our gross margins at this level are sustainable. We had achieved an EBITDA of INR 163 crores, which is 23.2% compared to INR 113 crores, which is an increase of 44% compared to the same period last fiscal. This shift in EBITDA is on account of the positive contribution at gross margin level with minimal increase in fixed operational expenses. Quarter-on-quarter, EBITDA grew by 14% or 20.5% from INR 144 crores in Q2 FY '20. Net profit. This quarter, we had a onetime write-off of INR 32.03 crores as an impairment loss from the sale of our joint venture in China, Granules Biocause. Net of this value, our PAT stood at INR 64 crores, a 6% growth year-on-year. Without this exceptional item, our PAT stood at INR 96 crores. Cash flow. Free cash flow during this quarter was INR 59 crores versus INR 35 crores from the previous quarter. Operating profit was INR 179 crores, out of which INR 32 crores were spent on increased working capital requirements, advanced tax was INR 38 crores, dividend was weighting INR 8 crores and CapEx was INR 42 crores. For the 3 quarters of the current fiscal, we generated a free cash of INR 154 crores, and we will definitely cross our internal target for this year. On the debt side, gross debt at the end of Q3 was INR 902 crores as compared to INR 1,043 crores at the end of Q3 FY '19. Net debt by the end of Q3 '20 was INR 789 crores as compared to INR 941 crores at the end of Q3 '19. Net debt-to-EBITDA by the end of current quarter was 1.4x as compared to 2.4x by end of Q3 FY '19. We have already improved on our year-end target of 1.5x, and are very confident that we will keep on improving further in the current quarter. ROCE at the end of current quarter was 22.67% as compared to 18.09% by the end of Q3 FY '19. And ladies and gentlemen, I would like to once again strongly emphasize that free cash flow and ROCE are going to be the key drivers going forward for the company. Cash-to-cash cycle has also marginally improved and was 103 days during the current quarter as compared to 106 days by the end of Q2 of the current fiscal year. However, going forward, due to the increased working capital requirements at GPI, which directly markets our products to the distributors in the United States, there would be an increase marginally of the cash-to-cash cycle. The total R&D expense for this quarter was INR 22.79 crores compared to INR 32.33 crores during the same period of the previous fiscal year. This stands at 3.24% of the sales for the quarter. We have expensed the entire R&D spend for this quarter. Product pipeline and launches. We have received 3 ANDA approvals and filed 2 ANDAs during the quarter-end discussion. As it stands today, there are a total of 19 filed ANDAs awaiting approval. We expect to receive 1 or 2 approvals by the end of the current fiscal year. Joint ventures. The holding company has, during the quarter ended December 31, 2019, entered into a definitive agreement for divestment of its stake in this joint venture, Granules OmniChem Private Limited, for an agreed consideration of INR 109.85 crores. The sale will be concluded once the required regulatory approvals are received, pending which the investment is carried in the -- is carried at the carrying value of the investment in Granules OmniChem, which is INR 50.08 crores. The holding company has, during the quarter ended December 31, 2019, entered into a definitive agreement for divestment of its sale in Granules Biocause Pharmaceutical in China, having a carrying value of INR 143.65 crores for an agreed consideration of INR 111.62 crores. Pending final disposal, the investment is recorded at the lower of the carrying value and fair value in accordance with Ind AS 105. The impairment loss arising on this investment held for sale of INR 32.03 crores has been recorded in the consolidated results for the quarter and 9-month period ended December 31, 2019, which is disclosed as an exceptional item. It is evident that as we complete these transactions in Q4, this provision of INR 32.03 crores will be netted off against gain of INR 59.77 crores from the Granules OmniChem deal. So this INR 32.03 crores loss impact in Q3 PPT will not impact the stakeholders or the company as the fiscal year comes to an end. At GPI, our U.S. subsidiary, we achieved a revenue of INR 88.72 crores, an increase of 11.48% from the corresponding quarter of the last fiscal. EBITDA stood at INR 19.38 crores and PAT at INR 3.45 crores. With this, ladies and gentlemen, I would like to open the call for questions. Thank you very much.

[Operator Instructions] The first question is from the line of Subrata Sarkar from Dalmia Securities.

Sir, a few clarification. This sales figure -- sales number is quite weak this quarter this has been asked further, so it's totally [ rectifying ] with respect to the -- like other quarters, which were much stronger. So is this because of the adjustment on subsidiary level? Or is this quarter is relatively lower from a Y-to-Y basis?

Can you please repeat this question, again, please? It's all garbled. Can you speak a little slower?

Sure. Hello? Am I audible? Yes...

You are better now.

Yes. So first question is, sir, this sales this time Y-o-Y sales is around 11.4%, which is relatively lower than our last 2 quarter sales growth. So is this because a impact of sell-down of a subsidiary? Or is for any reason this quarter revenue is relatively weaker growth with respect to the last 2 quarter? And if so, then what is our expectation in at least next quarter, sir?

Okay. Let me answer this. The first quarter, as a policy, the revenues of the JVs were never taken into our consolidated accounts. It was only the profit and loss that was consolidated. So that has 0 impact. Last quarter, we had a very good increase in revenues. This quarter, it was not comparable to last quarter. But like you said, there could be a variation from quarter-to-quarter. However, our projected 20% CAGR growth of 3 years stands good and possibly we'll do better than that. And also, especially for this quarter, we were concentrating more on the bottom line. And certain products which do not contribute a good bottom line, especially certain APIs within India, we went slow on those. And that's one of the reasons revenues did not grow as anticipated. But overall, it preserves our working capital, and it's actually beneficial to the company.

Okay. Sir, second question regarding the U.S. -- this observation on U.S. plant, if you can just clarify. Although you have mentioned, it's a minor observation, but still, if you can help us to understand that will be [ good ].

I think Priyanka is here today, she'll answer that.

This was a clear audit for some of the approvals -- some of the ANDAs that we have filed. We had 3 minor observations related to the ANDAs, and we should be able to clear them very shortly. We're going to be able to submit our response within the next week, and we should be able to clear them.

And if you recollect, we had a similar PI audit a few months ago, and there was 1 observation, and we got that cleared within less than a month and we haven't anticipated any issues here.

Okay. Perfect, sir. Sir, last, just one thought, although you have helped to understand, but still like rather than, sir, going for a buyback, won't it be more prudent if we have come down the date, the -- particularly the -- like, still, it is almost INR 800 crores in -- on net level. So just your view on that, sir.

Okay. Today, the net debt is INR 789 crores. And out of that, INR 361 crores is short-term debt, which is based on receivables. The concerning thing is only the long-term debt, which is INR 441 crores and that is also going to rapidly come down. The Board in all its wisdom says that the shareholders who have been with us should be rewarded. And that is the reason we decided to do a buyback. And finally, debt. We have a very good potential for a lot of free cash flow. Like I said, our main focus is going to be free cash flow and ROCE, we do not see any great challenge in servicing our debt.

Next question is from the line of Cyndrella Carvalho from Centrum Broking Limited.

Sir, if you could help us understand the kind of margin improvement that we are seeing in the business? And in terms of the revenue growth that we are seeing, how should we look at that as we go ahead? And what could be the key drivers of the same?

Revenue growth, like I said, our focus today is going to be on bottom line. However, the revenue growth of 20% CAGR will continue. And regarding the bottom line, it's all going to be driven by product mix and new launches, both in GPI in the United States. As we have explained a few times in the past, the gross margins on GPI products are much better than the gross margins of GIL products. And also, our Unit-IV in Vizag, which we purchased about 4 years ago has started yielding good profits. That's another contribution to the bottom line -- increased bottom line. And finally, the metformin facility which we built more than a year ago, which was operational, we got approval from the FDA recently. And we stopped buying metformin from outside parties. We are using our own metformin. That has also added more to the bottom line. And all these factors: product mix, GPI products, Unit-IV products and metformin are the main drivers for increased bottom line.

So you have given a guidance of 1% margin improvement every year, so that include these -- the increased contribution from the formulation side. And going ahead, if you could slightly more highlight on the working capital benefit that we are receiving?

The -- yes, if I think I heard you right, you were a little faint, but let me go ahead and answer this. So margins, like you said, will be mostly driven by finished dosage formulations, especially in the United States. And since we do our own marketing, there's a lot of working capital requirements in the United States. We also need to carry a lot of inventories because any failure to supply will cost penalties. And also the credit periods, the charge back, the rebate, it's a very complex structure in the United States. It will take up a lot of working capital. However, we're doing our best to control our working capital requirements. And like I said in my opening remarks, there would be a slight increase in our working capital requirements. The INR 103 crores cash-to-cash cycle base may go up. But we are doing our best. And margins will keep improving, a little increase in working capital is not really going to matter. However, we are also working on the possibility of factoring some of these bills, factoring without the cost. And that would also bring down our debt.

Okay. And sir, as the earlier participant also asked, I mean, just want to understand your debt repayment commitment and the plan going ahead, because the buyback that you have announced, we also felt that it could have been far better if we could have repaid the debt, but we understood what you have already. If you are...

That is correct, are you saying how we are going to pay out debt or can you please repeat that question again? I think there's something wrong with the line?

Okay. Is this better, sir? Can I go ahead with my question?

Yes, please. And please, speak a little slowly, so that -- okay.

Yes. Sir, I was saying that as the earlier participant also highlighted that we would have found it much better if you could have repaid the debt faster. So we just want to understand your plan and commitment towards repaying the debt going ahead over 1 or 2 years, if you could help us with that would be one thing.

Okay. I think, again, like I said, if I think I heard you right. So your concern is why buyback instead of quicker repayment of debt? And if that is the question, buyback has 2 important things to the equation. One is rewarding shareholders, number one. Number two, also that helps me to clear up my pledge, which is a big hanging fruit. And every call, the most important criteria that was being discussed was my pledge. So this is one way of getting out of this. And we are very, very confident of cash flow, so we are not -- we did not hesitate to do a buyback. We are going to have some very good cash flows going forward. And we will be paying down debt as we go by.

An acceleration in terms of credit would not give us any additional kind of financial benefit vis-à-vis the...

And also my CFO here says, acceleration in payback of debt may not give us a great benefit because our interest rates also, like I always keep repeating, are very, very low. We hardly pay 1.5% interest rates. So that in brief is the answer to your question.

Instead, this is a [ complement ] towards future business, which is basically kind of ensuring that we have got enough confidence that we'll be accelerating cash flow, so that this repayment always takes the priority as and when it is due. So it is not required to maintain money in our bank accounts for kind of fixed purpose. And it's better to kind of get it back to the shareholders and kind of allow them to feel good about it that they have invested in a company which is going in right direction.

Sir, so just 2 clarifications. So the promotor group would be participating in the buyback? And second, we would be repaying the debt as per the reschedules? We would not be paring it down earlier? Is that the correct understanding?

Absolutely. So all the debts will be paid on price as per their due date, and that's the plan. And with that only we have projected our cash flows to be confident about the final number.

Okay. And the promoter group could be also participating into the...

Yes, yes. The promoters would be participating in the -- in tendering their shares. And like I said, that is going to help in bringing down the personal pledge.

The next question is from the line of Bharat Celly from Equirus Securities Private Limited.

Congrats for good set of numbers. Sir, just wanted to understand...

Bharat, sorry to cut you off, can you please speak a bit louder?

Yes. So sir, just wanted to understand what is happening in the formulation side because our -- over the last 2 quarters, our formulation contribution has increased from almost 48% to 54%. So just wanted to understand what is leading to this higher growth in that -- in the formulation business?

So I'll take that question. Some of the growth in the formulation business came from an increase in some of our core molecules and some of it came from increase in sales for our GPI molecules in addition to new launches at GPI. In addition to that, we also had a few OTC molecules approved over the past few quarters, that also contributed to an increase in finished dosage sales.

All right. So if we have to pick the one in terms of the major contributors, so which one would it be?

Yes. It's mostly all new launches, and one product that we can definitely talk about is the -- we had a recent launch of a product called Ritalin LA, which is doing really well and all other products are also picking up. I don't think we can name too many products specifically, but all new launches are picking up well, at least, I would say, 85% of the new launches are doing well.

All right. Sir, actually our sales is up by almost $15 million over the last 2 quarters. So from -- so it is up by almost INR 100 crores. So just wanted to understand how this happened? Because all these molecules, which you are referring to are relatively very smaller ones and given that these molecules are smaller ones it will be very hard for someone to make more than $1 million or $2 million in each ANDA annually. So I think there was some mismatch there?

One thing is, if you have seen our past history and also if you have -- I'm sure you were there in many of the -- on almost all the investor calls, I always said, we are gaining market share on all our products. And whatever products we take up, our market shares are growing, and that is what is really contributing, not only the new launches, but even the existing products are growing. Of course, there'll be a limit to which we would like to capture the market. We don't want 80% of the market or 90% of the market, but we still have some distance to go and we will see more potential out of the existing products. And even the new products, some of the new products, at least one new product which we launched, we already have 60% of the U.S. market within 6 months. So we see good business going forward.

Which one you said?

Let's not get into too many products. One product, we have 60% already.

Understood. And sir, second thing I wanted to know is what is the contribution of core 5 molecules at this moment?

As of now, it's about 85%. The 5 core molecules contribute to 85% of the revenues.

Next question is from the line of [ Vaibhav ] from Ashmore Group.

Congrats on a good set of numbers. Sir, do you think the EBITDA margins are sustainable at current level of, say, 23%?

Sorry, we didn't hear your question. Can you repeat that?

Sir, do you think the EBITDA margins are sustainable at the current levels going ahead?

Yes, very much. And I think it's in my opening speech, I said we did 23% this quarter, I said it's sustainable. And I always maintain that we will always do 20% plus and definitely, I stand by that 20%-plus EBITDA are sustainable. Yes, we could be possibly more, but I would stand by 20% plus.

What sort of peak debt numbers can we reach given that the buyback is on the cards?

I don't think the debt will go up. It will be at the same level, if not come down a bit.

So at gross level you are saying?

Gross level could be -- net debt gross won't increase. Gross would come down because there are some repayments that are going to happen. And I would say, both at the gross and net level, definitely no increase. There could possibly be a slight reduction even after the buyback.

Okay. So if we look at Granules, it has been a relatively new player in the U.S. market. So how has the market perception of Granules' been so far? And how would you describe your experience so far in U.S.?

I think this is a question. Today, we have Jason Hanks, who heads our commercial operations in the U.S., I think I'll let him answer this question. Jason?

Yes. Thank you for your question. So I think since GPI entered the U.S. market about 1.5 years ago. We've maintained an excellent service level in terms of supply for our customers. The customers have recognized the strong performance and even rewarded the strong performance. This is a positive reflection on the current awards, and it's going to help us for future awards as well. I would say that across the U.S. generics supply chain, service levels are soft below historic levels. In many cases, they are below 90% of the wholesale level. We've been able to achieve 100% service level with all of our customers on all of our products. While we've made investments in working capital priority, and we'll continue to make those investments to keep sufficient levels of inventory in support of our customers. And then I would say, secondly, a positive feedback is our product collection is very strong. We've had strong uptakes on all of the products we brought to market, and we're well represented across the customer base in the U.S.

Next question is from the line of Chirag Dagli from HDFC Mutual Fund.

Sir, what is current outstanding intangible level, intangible asset, what we've capitalized about the...

Yes. So we have INR 190 crores of total intangible. Out of that INR 150 crores is intangible under development and INR 40 crores is intangible, which is already capitalized and started getting amortized. So all this INR 150 crores which is there, that will be basically kind of all the ANDAs that we have filed and waiting for the approval. As and when the approval comes, we'll go by the merit of each case and then take a decision whether that will be further capitalized or it will be just to revenues as per our revised kind of thinking and decision about the process which we -- the amortization will be taken going forward.

On the INR 40 crores, sir, how much is the amortization that we are currently taking?

Yes. INR 40 crores is getting amortized over a period of 6 to 7 years.

6 to 7 years. All right. And sir, what is the 9-month CapEx? I'm sorry, you mentioned it in one of your comments.

CapEx?

9-month CapEx?

CapEx, as of now, we have spent INR 129 crores for the 9 months.

And targets for '20 and '21?

Target for year-end is INR 150 crores.

And that should be stable for the next couple of years, sir? Or do you think it will gradually increase?

It should be stable. And that, again, we will pick up -- yes, we'll take a position as and when the situation comes. As of now, it is stable. Our plan is to be stable.

Yes. Let me also take this question. Yes, we are very much focused on working capital. We do not intend to spend too much money on working -- on CapEx. However, if you see some projects, which have something like a 5-month payback or a 1-year payback, we see some opportunities like that, we would invest there. And ultimately, that would not have a big impact on our cash flows. INR 150 crores is stable. You can take it as stable INR 150 crores.

Is this largely maintenance, sir?

Sorry?

Is this largely maintenance CapEx, INR 150 crores?

Maintenance CapEx. Maintenance, yes.

Yes. This will also include maintenance CapEx.

Okay. And sir, you mentioned in your opening comments, INR 22.8 crores we've expensed out. But when I look at the absolute rupees crores in the consolidated financials on a quarterly basis, I don't see a sharp increase in neither in the employee line -- expenses line item or in the other expenses line item. So I am -- so what is it that is actually offsetting this increase that on an overall basis, the numbers have not increased?

So was the question like what is the offsetting impact of the increase in...

Sir, you said in -- so in the second quarter of FY '20, there was some element of capitalization of R&D, correct?

Yes.

My understanding, it was roughly INR 60 crores per annum, so INR 15 crores a quarter or thereabouts.

It was relevant last quarter?

11 crores.

11 crores. Yes, yes.

11 crores. Okay. So -- but I can see in the third quarter, you've not capitalized, you've expensed it fully, but still the absolute rupees crores spends have not increased materially.

They are rationalizing that.

But that's just the nature of R&D. You can't -- if you have a set amount that you're going to spend on R&D a year, the amount per quarter depends on the stage the product is at. So by next year -- sorry, for next quarter, we will be filing a few products. You will see an increase in R&D, but also, there is a lot of product rationalization that happens and that's why the R&D spend has come down for this quarter.

Okay. Fair point. And post the buyback and once you get the capital, how much will your -- at a personal level, how much will your leverage go down by, sir?

I think I will just be having about 5% to 6% of my shareholding pledge at that point in time.

Okay. Fair point. And the last question, sir, how many would you file in the U.S. in terms of ANDAs, say, over the next 3 years? If one looks at this '19 pending ANDA pipeline, how -- what would it look like, let's say, 3 years out?

See, right now, we have about 18 products in the pipeline. So we do plan on filing about 20, 25 products over the next 3 years.

[Operator Instructions] Next question is from the line of Harith Ahamed from Spark Capital.

Can you talk a bit about the new API facility in Vizag? What are the time lines for commissioning? And would you be also be able to give the CWIP related to this facility? What is the amount now? And also, if you could tell us the preoperative expenses that is getting capitalized at this facility on a quarterly basis?

Sandip, the amount we spent on it and the preop so far.

So, so far, the preoperative expenses has been INR 61 crores that we are actually kind of put it under construction, and we have to get a trigger to capitalize it.

Anyway, let me take this, Harith. We spent about INR 280 crores, INR 270 crores -- INR 287 crores...

Sir, the total is INR 287 crores, out of that INR 61 crores is the precapital -- preoperative expense.

Okay. Now what is going to happen is, we made our first sale from this facility this month. And from this quarter onwards, the depreciation, everything will be charged off and also the expenses will be charged off and no expense from that unit will be capitalized anymore. And going forward for the plans of that unit, we -- it's going to take some time for that unit to become profitable. And I always maintained, its '21, '22, where we will see some very good profit numbers from this unit. However, in 2021, we will see some numbers and possibly hope to break even. And also, we were waiting for regulatory approval from these sales. And recently, we had a fairly good audit from the European authorities, and we expect their approval within a month. And once that happens, I think more products can start being made from there. Okay? I didn't mention the good inspection in my opening speech because we thought we will wait till we get the approval before we say that, but it was a very good inspection. We expect approval shortly.

Okay. So the depreciation and amortization for the quarter is around INR 39 crores versus INR 30 crores rupees in Q2. So is the increase due to the commissioning of this facility and the depreciation charges coming from this facility?

Yes. That is because of the accelerated amortization of the products that we have started in this quarter.

Okay. And the preop on an annualized basis is INR 60 crores. Is that correct?

No, no, preop, so far, the total accumulated preoperative expenses which will be capitalized is INR 61 crores.

For quarter versus the -- there won't be anymore.

No, no. That is the total.

Yes.

So on a quarterly basis, how much will that be? So just trying to understand the incremental expenses that we'll see in the P&L from next quarter onwards?

Right. So from the P&L perspective, from next year when the next quarter thing comes up, we will have an impact of INR 14 crores in Q1 of next year.

Okay, okay. This is excluding depreciation?

Including depreciation.

Including depreciation. Okay. And on the intangible assets, I think, to a previous question, you said the total intangible assets on your balance sheet is around INR 150 crores, but when I look at last quarter's consolidated balance sheet, I see around INR 180 crores of intangible assets under development and additionally, intangible assets of INR 200 crores, so the total is around INR 390 crores. There's some disconnect here, can you help us here?

So intangible, it will divided to 2 parts, one is the intangible, which is product related intangible and the product under development. And apart from that, we have softwares and also site development as intangibles, which is nice in the balance sheet, which is getting amortized.

So what would be the total intangibles on the balance sheet as of December, including the intangible assets under development?

Okay. So this should be around INR 300-plus crores, INR 376 crores.

INR 376 crores. Okay. That's helpful. Yes, and can you repeat the GPI number, the top line number, which you disclosed earlier? The sales at GPI level?

GPI revenue was INR 88.72 crores and PAT was INR 3.45 crores. The EBITDA was INR 19.38 crores.

Next question is from the line of Tushar Bohra from MK Ventures.

Yes. Congratulations for an excellent set of numbers. Sir, just being following up on your guidance over the last few calls, we have maintained a guidance of, say, about 25% at a PAT level, CAGR is what we've been aiming. I believe, we've done much better over the last 2 years, starting FY '19. FY '20, if I just extrapolated the 9-month numbers to full year, we'd probably be in the vicinity of INR 350 crores. Would it be -- given the fact that a lot of our CapEx is still to yield results, including the oncology CapEx and even some of the stuff that we've done at Virginia plant, would it be fair to assume that we can maintain at least that 25% profitability or something in that vicinity for, say, the next 2 to 3 years? Or what would be the outlook that the management can share?

Yes. Tushar, definitely, the 25% bottom line growth, we will be able to maintain.

So -- but then should we rebase the baseline number to FY '20 and say that over next 3 years, we can still assume a close to 25% CAGR on that?

More or less, I would say.

Okay, great. Second, sir, just wanted to understand what could drive, let's say, for next 4 to 6 quarters, what are the key areas, or let's say, the key product that could drive this growth for us? And also on the same lines, just want to understand how much of the benefit from the metformin new facility is being captured in terms of the improvement in gross margins and the cost improvement?

We are still not utilizing the plant fully, Tushar. We are getting more -- so far, we have not grown our metformin finished dosage and PFI business because we did not have enough API. But now that we have enough API, we will be starting to use more and more of our own API. So I cannot place a number today, but definitely, that's going to be a good contributor to our bottom line. And also, there are a lot of unutilized or underutilized effects. We still have a little paper capacity, which is free, and we have a Unit-V, the new onco facility, which has to start yielding. And also, all the investments we made on our filing are also have to start yielding. As we get approval, we will be generating enough revenues and profits from this and these are going to be the biggest growth drivers. And of course, we can't keep quiet, we have to keep finding a few more to keep up the growth rate, and we will also need to keep investing small amounts. We are not going to do any major amounts. Like we said, with INR 150 crores to maybe INR 170 crores, we'll be doing small investment, line balancing to increase capacity. And all these are going to be the growth drivers for the next, I would say, 4 to 6 quarters.

Sir, the depreciation that has increased, say, by about INR 9 crores this quarter. The entire increase is essentially due to accelerated amortization?

So as you have heard CMD's comments earlier, he mentioned that we had to write-off $1.2 million for OXY/APAP and a majority of that amount came from this product.

Okay. On that note, I also just wanted to understand, again, the opening comments made on R&D policy. So what I understood is that going forward and beginning this quarter, we will be expensing out R&D on a quarterly basis, the entire R&D would be expensed out. But then you mentioned something more about amortization and on capitalization, could you just repeat that, maybe just clarify that first?

Okay. Starting this quarter, all the expense incurred on R&D and filings will be expensed out, but there is some amount or a decent amount, which is under development. And also some which is capitalized. So these will be capitalized, whatever is under development we will not [ capitalize ], but we will try to get into an accelerated rate of amortization based on the potential of each product. And one example being OXY/APAP. It's still not a price that one would write-off because some states are imposing a tax, some states are not. But since there is a certain level of uncertainty, we were very conservative in writing off the entire spend on that product, which was $1.2 million. So we will be trying to amortize as much as possible. And also, our focus is to bring down the intangibles as much as possible.

Sir, just to understand, what would be the number that we would have taken under development, say, for this quarter? And how was this being treated earlier, let's say, in Q2, how was the treatment different? Just to clarify.

In Q2, we had -- out of the total R&D spend of INR 30 crores, we charged INR 19 crores to P&L and we capitalized INR 11 crores. This quarter, we spent INR 22.79 crores, and we wrote off the entire amount.

And between -- we are seeing that there has been some -- there would be some production under development where we would continue to capitalize the expenses, what would that number be for Q2 and Q3, let's say?

See, yes, so we will be evaluating each and every product, and then we will take a conservative approach in terms of charging it off to the P&L. If we believe that the product has got enough kind of revenue in future and it's worth capitalizing, we'll capitalize within our accounting policy.

Okay. And sir, just a quick -- one last quick clarification on the debt and the amounts to be received from the sale of JVs. So we are doing a INR 250 crores buyback, the net of tax expected amount from JVs, I understand, is close to INR 200 crores, right? And including tax, the total outgo for the buyback would possibly be closer to INR 280 crores, INR 290 crores?

Yes.

So the difference of INR 90 crores we are seeing essentially would be through cash flow from operations, we won't need recourse to a higher debt. And we are...

Not at all. It is -- as per the act also you cannot do that. So we have to get into a kind of process and methods of getting into our own money generated. So we will generate enough cash to do that.

But moreover, Tushar, we have fixed deposits in banks. We have enough cash in the bank, and we will be generating more as we go by. And we have a few months to complete this buyback, and we are sure we can generate enough. And there's already enough cash to take care of this.

Next question is from the line of [ Vaibhav ] from Ashmore Group.

Sir, what will be the impact of operationalization...

[ Vaibhav ], sorry to cut you off. You're sounding too distant from the phone.

Sir, what would be the impact of operationalization of Vizag from this coming quarter on the items above EBITDA and on the items below EBITDA?

Yes. So it will be per quarter INR 6.5 crores.

INR 6 crores?

Yes.

Above EBITDA?

Yes.

And say, INR 10 crores below EBITDA?

Above EBITDA will be INR 7.5 crores, below EBITDA will be INR 6.5 crores, sorry, yes, per quarter.

Next question is from the line of Tarang Agrawal from Old Bridge Capital Management.

Hello?

Yes, Tarang, very audible.

Yes. Sir, just wanted to check what are your R&D spends going to be going forward?

We've given a guidance of INR 150 crores per year. And -- but this year, we should be much below that. Going forward, depending on the number of filings, we will cap it at INR 150 crores per year. It also depends on the opportunities that we get in the market. Based on that, we will, like I said, cap it at the INR 150 crores per year.

[Operator Instructions] Next question is from the line of Tanush Mehta from Dalal & Broacha.

Hello?

Hi.

Yes, Mehta?

Yes. Sir, can we throw some light on the inventory position as of the end of the quarter?

Inventory position. So inventory was around INR 394 crores at a personal level.

Okay. And sir, from the financials, the line item changes in inventory, we have around INR 1 crore of -- some INR 17 lakhs something, so sir, is it indicating that whatever we've produced, we've sold and we don't have -- we didn't have any inventory?

Can you please be a little louder with your questions?

Hello?

Yes, please.

Yes. So can you explain me, like, why is the line item changes in inventories of work in progress and finished goods that's INR 17 lakhs, so does that indicate we have almost sold what we've produced?

So this is basically [ double entry ] in finished goods. The variation between 2 balance sheet debts.

Okay. And sir, can you throw some light on key focus area for Granules going forward?

One of the key focus areas for Granules going forward will be to continuously file ANDAs, that fall within the Granules strategy to commercialize all the ANDAs that we have filed and continuously work on gaining market share without compromising profitability as much as we can. And like the APIs from Unit-IV, commercializing and developing more high-value ATMs, like we have commercialized a few this quarter. And those are 3 most important areas of focus, excluding Unit-V. Obviously, Unit-V going forward will also be one of the key areas of focus.

Next question is from the line of [ Ravi Sundaram ] from [ Sundaram Family Investments ].

Congratulations for the wonderful set of numbers. I have a couple of questions. My first question is the buyback size is around INR 250 crores and with about 43% holding, I think promoter should get around INR 100 crores to INR 110 crores, so how much of personal pledge would this reduce from the current 30 percentage pledge as of Q3 shareholding participant?

Well, it will go down to something like 25 -- by 25%, 26%, and I'll have about 4% to 5% left.

Okay. So that says -- I mean, just to understand this better, you probably have some INR 130 crores of debt, I mean, out of which INR 110 crores goes away. So hardly 5 percentage of your entire holding will be pledged. Is that a correct understanding?

Yes. Approximately, you're right.

Okay, okay. My second question is, another simple question. So with the current completed capacities in place, how long can we sustain this 20, 25 percentage kind of growth before we start our next CapEx cycle? Because renewals, we have been following for the last many years, if we start with a good Capex, we -- I mean, sweat the assets, and then we start with a fresh CapEx cycle, which just ended last year, I think. So when do you expect a fresh CapEx cycle to start before we spread these assets?

Okay. The current investment and whatever capacities we'll build up with a little tweaking here and there, some line balancings will last more than -- a little more than 2 years. But other, after 2 years, if you want to continue this rate of growth, you need to keep investing. And we have been very carefully planning and I said this INR 150 crores, plus or minus a few percentage should take care of the continuous investments. But however, maybe after another 3, 4 years, there could be another major CapEx. But we could -- with this little investments, we could carry on for 3 to 4 years.

Okay. The reason I asked this question was I'm trying to tie that up with your debt reduction schedule. So right now, I think we have around INR 740 crores of net debt. So are we -- can we say we can probably get -- I mean, reduce a significant amount of debt in a couple of years. Is that a -- is that too fast, 2, 3 years, the rate at which we are generating free cash flow?

Yes, yes, yes. So our long-term debt will come down each year as and when the repayment schedule comes up and that will be taking care of almost a reduction of INR 100 crores every year of debt. Opportunity will go up. And -- because as we -- this is kind of for the CapEx, we will be having -- after spending those debts also we will have enough internal accrual to fund our CapEx to the extent of INR 150 crores, as you said. So we should be okay.

Again, let me clarify. I think if you have followed my previous calls, we don't intend to take on more debt, except for a -- possibility for a little bit of working capital. Whatever expansions we do will be mostly done out of our internal accrual. However, once our debt-to-EBITDA ratio goes down below 1, so we may want to take a little more debt. That's -- and this is a great opportunity. At that level of debt-to-EBITDA below 1, I don't think it's any concern. But as of today, there is no real plan to take on more debt.

Okay. Sir, if I can summarize it, basically the idea is probably to maintain the leverage at a comfortable ratio. If we get -- I mean, in the long term, if we become debt free, okay. But however, depending on the growth opportunities, we continue to invest. That's the summary, right?

Yes, maintaining a current, a very good leverage, yes, we will continue other. You're right.

Ladies and gentlemen, due to time constraint, that was the last question for today. I will now hand the conference over to the management for closing comments.

So thank you very much, ladies and gentlemen, for participating in this call. It's been a very interesting discussion. And if any of you have any further questions, please feel free to reach out to us. You have the names of persons, Richa, Sandip, our CFO, all these people are available to answer any questions any time. Please feel free. And once again, thank you very much.

Thank you very much. On behalf of Emkay Global Financial Services, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.