Granules India Limited (532482) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Granules India Limited Q2 FY '21 Earnings Conference Call hosted by B&K Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Aarti Rao from B&K Securities India Private Limited. Over to you, ma'am.

Thank you, Faizan. On behalf of B&K Securities India Private Limited, I welcome you all for the Q2 FY '21 Conference Call for Granules India. From the management side, we have Mr. Krishna Prasad, Chairman and MD; Ms. Priyanka, Executive Director, GPI; and Mr. Sandip, CFO. We will have opening remarks from the management, followed by Q&A. Over to you, Richa.

Thank you, Aarti. Before we proceed with this call, I would like to take this opportunity to remind everyone that the replay of today's discussion and the transcript will be available on our website in coming days. I would like to take this opportunity to remind everyone about the safe harbor related to this conference call. Today's discussion may be forward-looking in nature based on management's current beliefs and expectations. It must be viewed in conjunction with the risks that our business faces that could cause our future results, performance or achievements to differ significantly from what may be expressed or implied by such forward-looking statements. After the call, if you have -- if you need any further information or clarification, please get in touch with me. With this, I would like to hand over the call to Mr. Krishna Prasad, Chairman and Managing Director. Over to you, sir.

Thank you, Richa, and a very good evening, ladies and gentlemen, and thank you very much for attending our Q2 investor call. I'm sure that all of you and your families continue to do well and stay safe. Though the situation regarding COVID had improved a bit, we at Granules continue to face many problems on a day-to-day basis. And as a team, the most important thing for us to do is keep solving these issues and prioritize the wellbeing of our employees. Coming back to the main agenda for the day. I'm very happy to announce that Granules had achieved the highest and best numbers on all parameters in the history of the company's growth story. This gives me great pride and satisfaction that our thinking and business model, that is a little differentiated from a typical pharmaceutical company, had been validated. Though today, we are no longer a 5-product company and have 22 products launched, we believe that we do not need to have a huge basket of products, but focus on a few, be the best in what we do and strive for continuous improvement. The growth trajectory at Granules is not just on track, but very much ahead of it. We had been guiding all of you for a bottom line CAGR of 25% to 30% for the next few years. But during H1 of the current fiscal, we had already achieved a PAT growth of 80% as compared to H1 of the last fiscal. We are very confident that this trend will continue for the rest of the year, and our PAT growth for FY '21 will be at similar levels as compared to FY '20. We are also confident that we will have a CAGR of 30% on PAT in the coming years post FY '21, with FY '21 as a baseline. This accelerated growth was mainly due to quicker than anticipated approvals of our filed ANDAs for which we were able to gain higher market share and also our ability to rapidly scale up production in the middle of the current pandemic. The EBITDA and PAT growth were higher than the revenue growth, which is due to the change in product mix, better sales of our -- higher sales of our U.S. produced products and our extensive focus on operational efficiencies. The ROCE also increased due to increasing utilization of our assets in Hyderabad and in the U.S. The new facility at the Vizag site is still not fully operational, and we expect that to happen next year. As of today, we have 32 approved ANDAs and 13 yet to be approved. Out of the approved ANDAs, we are yet to launch 6 products. With the ongoing pandemic, there are a lot of uncertainties we continue to face and have intentionally delayed our launches in some cases. We will continue to launch them in the coming quarters and will be able to maintain our growth trajectory. We also expect once -- 1 MUPS technology-based ANDA to be approved during Q3 or early Q4, and this will be launched in Q4 from a module we constructed over the last 6 months at our Gagillapur facility. The construction of the new MUPS block is on track, and we expect to commercialize it by Q3 of FY '22. By that time, we would have had 2 MUPS-based products approved from our Hyderabad facility and expect to utilize a significant capacity of the new plant from day 1. Our foray into high volume MUPS-based products manufacturing, supported with in-house APIs will be the next major growth driver for us. Ladies and gentlemen, the new launches, new approvals and new additional capacities are the key drivers for our continued growth, and I'd like to assure you that the last 2 quarters are not one-off and we can keep the growth momentum continuing in the years to come. Now I request Priyanka to take you through some detailed numbers. Thank you very much.

Thank you. Good evening, and good morning, everybody. Before we move on to the financials, I'd like to provide a few updates. Metformin. In Q1 FY '21, we had accounted for recall costs of about $2 million for metformin 750 mg, or the Glucophage ER. This quarter, post reconciliation, we have reversed $1 million into our books. At this point, we do not estimate the cost of recall to exceed $1 million. We continue to increase market share on the 500 mg and are working towards relaunching the 750 mg soon. COVID. We continue to focus heavily on running the facilities without any disruptions, but the priority remains to be the safety of our employees. This quarter, we have incurred an expense of INR 9.9 crores, which brings the expense in H1 of FY '21 to a total of INR 19.3 crores across various areas. While we continue to work without any disruptions, we have intentionally delayed the launches of some of our products to ensure supply security. Due to the uncertainties around the time lines of COVID, we're actively working towards consciously building inventories at a product level, so we do not have any disruptions in the market once the project -- products have actually been launched into the market. Supply security remains our 3 -- key priority. We will see soft launches of these products in Q3 and Q4 and annualized numbers in FY '22. Financials. Now -- I'm very happy to say that in spite of extremely challenging situations, we had a record-breaking revenue, EBITDA margin, PAT margin and ROCE, the best and the highest in the history of Granules. The second quarter revenue stood at INR 858 crores compared to INR 700 crores in Q2 FY '20, an increase of 23% year-on-year. Sequentially, we saw an increase in revenue from INR 736 crores in Q1 FY '21 to INR 858 crores in Q2 FY '21, an increase of 17%. The primary reason for the increase was due to increased penetration of markets by acquiring new customers across our markets and new launches at GPI. The sales breakup as per business verticals and regions are presented in our investor presentation, which is available on our website. For the quarter, the gross margin moved from 48.6% to 57.9% year-on-year due to new launches, increased finished dosage sales and product rationalization, primarily in the PFI and finished dosage segments. Utilization of our own metformin API from the Bonthapally plant has also led to increased margins. Our EBITDA for the quarter stood at 30% compared 20.5% in the corresponding quarter of the previous year, a growth of 9.4%. Q-on-Q, our EBITDA grew by 5% from 25% in Q1 FY '21. As mentioned above, an increase in capacities through operational efficiencies paved the way to an increased -- to increased production with a non-linear increase in cost. If you adjust for the recall cost and COVID expenses, our EBITDA stood at 30.2% this quarter. More details around adjusted EBITDA is stated in the IR presentation on the website. In addition to this, our focus on product rationalization based on profitability alone has enabled us to achieve this growth. Our PAT for the quarter stood at INR 164 crores compared to INR 96 crores, a growth of 71% year-on-year. The PAT of INR 164 crores included a reversal of a provision on the account of metformin recall of INR 7.53 crores. As mentioned over the last call, we continue to focus on a strategic shift from top line to bottom line, and we'll continue to remain focused on profitability to drive shareholder value. This quarter -- gross debt. This quarter, we have reduced our gross debt from INR 870 crores from the previous quarter to INR 861 crores in the current quarter. Out of this, our term debt is INR 480 crores, and short-term debt is INR 381 crores. Our short-term borrowings went up by INR 33 crores in Q2 to fund the increase in working capital requirements. R&D. We spent INR 22 crores this quarter on R&D, all of which has been written off. We filed 4 DMFs, continued to make progress towards our ANDA filings and dossier filings, and received approvals of 4 products this quarter. We also expect our first EU approval to come through over the next month and are looking at launching the product in Q4 or early Q1. In H2, we will also be launching -- receiving approvals for 2 products that we have acquired recently. With this, we expect the total number of launches to be between 3 and 5 in H2. These are medium- to high-volume products that we will be launching from our GIL site and GPI site. Our cash-to-cash cycle has increased from 103 days in Q1 FY '21 to Q4 this quarter, a marginal increase due to increase in receivables. We constantly endeavor to improve our working capital cycle, and we'll continue to negotiate with our key customers and vendors to further improve the cycle. Free cash flow. Total cash before working capital changes -- I'm sorry, generated this quarter was INR 281 crores. We spent INR 107 crores on increased working capital and INR 62 crores in taxes. INR 20 crores out of the INR 62 crores was paid towards long-term capital gains on the sale of Granules OmniChem. The operational cash at the end of Q2 stood at INR 112 crores. We incurred INR 60 crores in CapEx in Q2, which brings us to a total of INR 105 crores in H1 FY '21. Free cash generated from our business stood at INR 52.2 crores in the current quarter, an increase from INR 37 crores in the previous quarter. From the free cash generated, the buyback tax paid this quarter stood at INR 33 crores. We also paid the final and the first interim dividend this quarter, which stood at INR 12 crores. We also repaid long-term borrowings, which stood at INR 52 crores this quarter. Looking ahead, we will continue to work on launching our approved products over the next couple of quarters, and we'll continue to ensure we have minimum supply disruptions in our end markets despite the ongoing pandemic. Our key growth drivers for GIL for the next 2 years will be: one, launches and new approvals in the U.S. and further penetration in the U.S. market. We have 12 products yet to be approved and about 6 yet to be launched; acquisition of new ANDAs that fit into our strategy of the company with a focus on global market size and integration; launch of filed and approved products in the European and other markets, we expect to launch our first product in Q4, early Q1 and are awaiting approval for 3 more dossiers; approval of -- approval and launch of the MUPS technology-based products; and continued focus on operational efficiency. Our increased revenue, PAT and EBITDA numbers reflect the yields from the CapEx we've incurred over the last 3 years. These investments have just begun to yield and will continue to contribute to the numbers over the next couple of years. Again, I'd like to end the call by reiterating that we will continue the momentum we've had in H1 through the rest of the year. Thank you very much. With this, I'd like to open the floor for questions.

[Operator Instructions] The first question is from the line of [ Amarnath ] from Oman Government Sovereign Funds.

Sir, though the profitability -- first of all, very congratulation to fantastic set of numbers beyond what the management guided even before. My question -- first question is relating to the cash flow. Though the profitability has increased so much, there's a lot of piled up of cash in inventory as well as in the receivables side. Is this an onetime? Or can you please explain this cash holding up into the working capital?

So, [ Amarnath, ] as -- I'm sure you are aware that we used to work with partners for marketing our products in the U.S. in the past many years. But last year, we've been very aggressively operating through our own front end, which would require lot of inventory in the U.S. and also the payment cycle, the receivable days from our customers are not very attractive. However, these little disadvantages will be compensated by a little extra margin, which we will not have to share with our partners. So as a very conscious decision, we have started our own front end, and this would definitely need extra working capital towards receivables and also inventories. So this is not a onetime affair. As we grow, as our growth continues, the working capital also will increase. We are very conscious of this, and we are trying to balance our cash flow, our existing cash generation, along with our increased working capital, and also increasing CapEx. As you're aware, we are also investing in CapEx. Both these things, we are confident we should be able to manage with our internal accruals. And that's the reason you see that our internal accruals do not increase.

Yes. That is clear, as the sales grow and the business grow, the working capital requirement needs to grow. But we can see that growth is very substantial in this quarter. The amount blocked in inventory is around INR 158 crore, amount blocked -- receivable is INR 158 crores, blocked in inventory is around INR 184 crore, which is probably the -- much, much higher than what we have saw. Of course, there is a revenue increase and other -- but do you mean to say this kind of cash locking in inventory and receivable will continue?

This will not be a continuing thing at this level, [ Amarnath. ] But basically, if you understand, due to a few uncertainties in COVID, we have had extra stocking in the U.S. We had to keep extra inventories. And also, there are a lot of new launches that are happening. And whenever we are making a launch, they need to build a lot of inventory before launching. Suppose, we get a big award and if we say if we fail to supply, then we are going to be in trouble. You have to pay failure-to-supply penalties. So normally, for any launch, ideal quantity is 3 to 5 months of inventory. So this will happen, but not at the same rate going forward.

Okay. I think my second question is relating to your key raw material. Is this -- even last conference call, we heard that your dependence on the key raw material from the China. Can you please update the status? Is that dependence has been reduced or increased? Or is there any alternative been found relating to that?

Okay. Let me repeat this once again as I'm not sure if you have heard me in the last quarter. We are dependent on our key raw material, para-aminophenol for paracetamol from China. And the availability is absolutely no problem. There's plenty of capacity in China. But however the prices keep fluctuating a bit. We have been working on new technologies for this for the last 8 years. We have some very good technologies, which are clean, green and also efficient. However, we have restrained ourselves from investing in this because the CapEx is so high, we were thinking of conserving our cash. However, in today's situation, we felt it was a good idea to derisk ourself a little bit from China. So we have encouraged some other manufacturers. This is a chemical, actually. It's not a pharmaceutical. And we feel we are a pharmaceutical company and not a chemical company. So we have worked out a deal with a few companies where we give them the technology and they manufacture the product for us with a buyback arrangement. So not only on PAP, on few other products we are doing the same -- the same scenario continues. We are encouraging other people to make some KSMs and some of these raw materials for us.

[Operator Instructions] We'll take the next question from the line of Ritesh Bhagwati from Rockstud Capital.

First of all, congratulations on great set of numbers. So I have a very basic question. So like one of them being like, what is the revenue contribution from our core molecules as of H1? And do we have any trajectory in place going ahead for these products, like we'll have the dominant status in our total sales? So that is one.

Yes, go ahead.

Our contribution from the core molecules this quarter is about 70%.

If you see, it's slowly coming down. And over a period of time, the core molecules will keep coming down and our newer molecules, as we have these launches, will keep going up. At some point in time, we see that this products will be around 50% in spite of being able to adding new geographies. So far, if you have seen our history, we have been concentrating only on the U.S. And just now, we started entering into new geographies as our new dossiers are getting approved.

Okay. And secondly, like on the margins, like obviously, the margins are at one of the peaks. So can we expect these to be like new normal? Or can we expect further improvements given the fact that new plant kicks in and even the new manufacturing technology is coming into play?

We, as a company, believe in continuous improvement. However, there has to be some limit to what we can achieve. Definitely -- one thing let me address about gross margin. Gross margin is a combination of product mix and also the inventories, which we build up and so many other factors. But I can definitely assure you with regard to EBITDA and PAT, we will at least continue these margins, if not grow. And definitely, the PAT growth, which I have said, will continue at 80% for this year and 30% CAGR for the next few years will continue. We would definitely work towards increasing margins, but these are good margins and there is -- it's going to take some more time as new approvals come in to improve these margins.

The next question is from the line of Tushar Manudhane from Motilal Oswal.

Congrats for the great set of numbers. Just on this -- the product, which you have referred in the presentation for this under MUPS technology. If you could also share what could be the competitive scenario? In the sense, are there already approved companies for this product?

I'll take that question. So we have 1 product that we are expecting approval for at the later part of this year. The addressable market size is about 205 generic value. We have -- there's about 4 to 5 players in the market, but the active number of players is about 3 to 4. And we have a significant advantage in terms of our positioning -- our cost position. So I'm very confident that we'll be able to capture our target market share.

Got you. And the investment which you have referred to on the same slide, INR 240 crores, so that's a part of overall CapEx guidance which was given, say, last year -- I mean, last quarter, about 3.5 billion to 4 billion for FY '21? Or is it over and above that?

This is what we mentioned last time. It's the same guidance.

It's a part of this overall guidance?

Yes.

The next question is from the line of Ashwini Agarwal from Ashmore.

Congratulations to the management team for delivering such an excellent performance. So one of the questions that I had was that the increase in working capital because of the new product launches and the inventory buildup, et cetera, a significant part of it has been financed through payables as well. So you've managed your cash conversion cycle quite well, and that's been very stable at about 104 days. So is that going to be something that we should continue to look forward to, i.e., the supplier credit can finance the working capital -- the inventories and the finished goods? Or should we expect some changes in that -- in these matrices as we go along?

First of all, thank you very much, Ashwini. Let me explain this. Working capital, like you said, will continue to go up and part of it has been funded through payables. And this will be an ongoing process. We are continuously negotiating with our vendors for late payment terms and also with our customers for early payment terms. So -- and also reduction in inventories. However, there are limits to this. We are at a decent position of 104 days. We will strive to get better and better. But part of it has to be managed through increased payable days, reduced receivable days and also internal accruals. We are confident, for the next 1 or 2 years, we should not have an issue. We should be able to manage this with our internal accruals.

No, that's excellent, sir. And the margin -- I mean, again, Priyanka in her opening remarks mentioned that operating leverage has played a big role in delivering these margins of 30%. But given that you have new product launches lined up for the second half and you have new capacity available as well, we should expect these margins to sustain and revenue growth to sustain as well, which would, for at least the next few quarters. Would that be a fair assumption?

It is definitely, Ashwini. The same thing will continue to sustain and definitely our guidance will be met.

The next question is from the line of [ Deepak Mehta ] from [ MetLife Insurance. ]

I hope everyone is doing well at your company. So my question is around the CapEx. So for the next 3 to 5 years, what kind of CapEx you are seeing due to this going trend and demand for API, sir?

First of all, thank you very much, Deepak. We are all doing well here and hope that you and your family continue to be safe, too. And regarding the CapEx. Overall CapEx, we have already mentioned that between this year and next year will be about close to INR 400 crores. And about INR 80 crores of that will be for APIs and the rest will be for the new MUPS block and also an increase in capacities for FDs. And this CapEx, along with the CapEx already incurred, should see us through for a few more years. However, to keep up our continued growth plans, we will have to invest at some point in time. So maybe next year, we'll have a better understanding of how much CapEx we'll have to incur going forward. But to answer your question and be fair, it's definitely -- it's going to be a continued CapEx. It's not going to stop. Growth needs some CapEx. But our ROCE, we are very conscious of that, and we will make sure that our ROCE doesn't fall below certain levels in spite of whatever CapEx we do. And most -- and our CapExs are always a mix of quick yielding projects and some late yielding projects, which will make sure that our ROCE is maintained with decent levels.

And this will be internal cash flow, right, sir? All this CapEx?

Yes, it will be met with internal cash flows.

The next question is from the line of Abdul Puranwal (sic) [ Abdulkader Puranwala ] from Anand Rathi Securities.

Congratulations on good set of numbers. Sir, my first question is in regards to R&D. If we see the first half as well as the current quarter, the R&D expenditure for us has constantly coming down in the last 2 quarters. So sir, any guidance you would like to give there? How should the full year number and next year should look like on the R&D front?

I'll take that question. The R&D, maybe as a percentage of the overall revenue has been declining, but in absolute terms has been increasing, especially last 2 quarters has definitely gone up. We have our targets, and we've stated it in our presentation as well that we'll file between 7 to 8 ANDAs per year, and we'll file a few DMFs. So I think this is a good number to take us -- to allow us to meet our targets over the next couple of years.

Sure. And I also refer to you the presentation, Slide 14 and 15, where you're mentioning about the market size and amount of products you're trying to file. So by when would we actually start seeing the products which have been filed, say in, FY '20 and '21? When would the actual patent expire? Or how soon this could materialize into the numbers?

So whatever products that we have filed, I've stated that we have about 12 to 13 that are still pending approval and about 6 to 7 that are still pending launch post approval. So those numbers have not been factored into FY '20. They have been factored into FY '21. The addressable markets are on the presentation that's been provided. And the move from FY '21 to FY '23 will have a few projects that we are in process, so obviously, all the products that are in the pipeline and also products that we're looking to acquire, and also products that are still pending to be approved.

The next question is from the line of Anupam Agarwal from Lucky Investment.

Sir, I just wanted to ask you about the recent news of takeover of our company. If you could just give us some sense of what is happening? Is it true or is it just a rumor?

Anupam, this question has been asked to me in the media and by many people. And my standard answer is this is something which I cannot comment on. I don't want to deny it or accept it. But however, whatever we have to follow as per the requirements of SEBI or stock exchanges will be followed. And I would like to assure everybody the most important thing for us is the value creation to all our shareholders and at no point in time that will be compromised.

Right. Right. And second question is to Priyanka. In your opening remarks, you alluded to a relaunch of our 750 mg metformin. Can you give us the time line of by when -- which quarter can the relaunch happen?

So Anupam, we're in correspondence with the FDA now, and it could happen anywhere between 1 quarter to 2.5 to 3 quarters. So it all depends on how our correspondence with the FDA goes. That said, I'm very confident that we will be able to relaunch this. It's just a matter of some stability being conducted.

Right. And for our core molecules, you mentioned we -- that contributes around 70%. Across the core molecule basket, what sort of market share do we have for our products?

Okay. I don't want to talk about market shares on this call, but it really depends on the region that you're talking about. You can find all the details that you want on IMS, so we can address it offline. But I just don't want to discuss our competitor -- I mean, details of the market share on the -- product level details.

The next question is from the line of [ Agastya Dave ] from [ CAO Capital ]

Congratulations on an excellent performance, sir, and thank you very much for your hard work. Sir, one clarification. It's on the MUPS statement that you have made and then reiterated in this call. The addressable market you're saying is 204 million. That's just for 1 molecule, right? Or is it for multiple molecules?

First of all, thanks, Dave. That is only for the molecule, which we are expecting an approval in Q3 or early Q4. It's only 1 molecule.

Did I hear Priyanka say that there are 4, 5 existing -- competing players in -- for that molecule?

Yes. I said there are 4 to 5 players who are actively present in the market. But if you look at market share and presence over the last couple of years and quarters, it's 3 to 4 active players.

Right. right. So Madam, I have like 2 questions. These are referring to the slides 16 onwards. This MUPS and the Onco block that you have come up with, ma'am, again, can you -- sorry for this, like probably it's a repetition for you. But probably, if you can take us through the entire opportunity set, and at peak utilization of whatever CapEx you have done in these 2 blocks, at peak utilization, what kind of revenues will we see? And how will the ramp-up actually happen? And on the Onco side, what exactly is our capability there? And how long do the approvals generally take there? Because, I believe, the timings are slightly different there. The requirements are slightly different. So if you can give some qualitative as well as quantitative recap of where we stand today? And when do we see the ramp-up happening? That's it from my side.

Okay. The opportunity -- once again, [ Mr. Dave, ] the opportunity for MUPS, the addressable market size is huge. Especially in the U.S., it's about $2.8 billion. And like I said, so everything cannot be -- I mean, we would not be able to exploit everything ourselves. Like I said, a combination of all these things put together will ensure that in the coming years, not the current year, minimum 30% growth in PAT will be achieved. I would not be able to say how much each product will contribute. And coming back to Onco, our capabilities in Onco, to be very, very candid, were not great when we started, but we have built up very good capabilities now and slowly we expect to launching a few products. But however, our total plan is a mix of everything. So while a big market exists in Onco and other APIs, we may not be fully concentrating on that because we'll have to make -- we have to be choosy, and we'll have to conserve our cash and put our foot where the money is or where the opportunities are.

One thing I'd just like to add to that is the Units 4, 5 multi-API block is heavily linked to the MUPS block as well. We have a lot of products that we are going to be integrated on. So I think the Unit 5 and Unit 4 APIs would be a great support function to our U.S. generics business and our MUPS technology business.

Perfect. And ma'am time lines for Onco, when do we launch and how do we scale up? Any guidance on that? Or is it too early to say as of now?

Oncology product, we've already launched a few APIs. But to get to a point where it adds to a significant amount of both top and bottom line will definitely take some time. But again, I've mentioned this a few times last call and the call before. This is a multi unit -- multi-API and oncology facility.

[Operator Instructions] We'll take the next question from the line of Cyndrella Carvalho from Centrum Broking.

Congratulations on good set of numbers. Sir, would you please help me understand the core product demand drivers that we are experiencing in this quarter and in the remaining -- remainder part of this fiscal? Plus, if you could help elaborate the same in terms of our next year and 2, 3 years ahead growth? I understand we have Onco, MUPS, both these as well as other products that we've been talking about. But if you could just help us connect this -- put this picture on a platter, would be very helpful and with the demand drivers and focus.

I'll take that question. This quarter, we have seen an increase in the absolute numbers of our core business products. But let me just tell you that we have not seen any COVID-related demand for any of our products. Maybe it's timing, but an increase in -- the only product that you could potentially link to COVID, paracetamol, came from increased penetration of one of our key markets and gaining some new strategic customers. And of course, our finished dosage products that we have launched into the market. We've launched a few -- we've launched 1 big product over the last couple of quarters from this molecule itself. And increased penetration and gaining market share for that product itself has given us increased revenues. We would have had this demand pre-COVID and -- I mean, even in spite of COVID. It's primarily dependent on the competitive landscape. Now when it comes to core business, one thing that I'd like to purpose this conversation with is that the core molecules are massive in size. So today, we might be at a certain level. Going forward, as a percentage, you'll certainly decrease. But in terms of absolute numbers, these products will continue to be heavy contributors because of the global expansion that we're doing for our core molecules. Now that said, going forward, we estimate it to go down -- today, it's about 70-something level. But going forward, we estimate it to go to almost 50% by FY '25.

And any view in terms of how do we see this demand going in there?

Which demand? Are you talking about the paracetamol demand?

Yes.

It will go up for sure. And that's primarily because we have acquired a new customer. We're working with a new customer in the U.S. It's a strategic customer that we've been working with for a long time. And we will certainly work towards growing our business and, of course, increased launches will also enable us to get more business.

And Cyndrella, let me just clarify here. Paracetamol is a function of what is available. We do not have -- we sell our full cost production and we do not have any immediate plans to increase paracetamol capacities. Again, like I said, we'll have to put our money where better opportunities lie. Maybe once we're comfortable, we may increase that. So we do not see any increased revenues or demand from paracetamol going forward.

Outside of our -- the new dossier that we're filing in expanded geographies.

Sir, just to put this together. So what we are saying is the demand drivers for our future growth could be lower from our core molecules and driven largely by -- with the newer opportunities that we are aiming at, including Onco, including MUPS, including other new launches and market expansion?

Yes. You're perfectly right, Cyndrella. And also, I would like to add, our margins improvement also will come from the newer products.

[Operator Instructions] The next question is from the line of Ranvir Singh from Sunidhi Securities and Finance Limited.

Sir, 1 clarification, sir. Provision we made for product recall, INR 15 crore, in last quarter and INR 7 crore we have reversed. So it is now INR 7 crore is already book loss or some reversal may happen in subsequent quarters?

We have to see how everything goes. As of now, we're limited to INR 7.3 crores. But -- and I think it will remain at that level.

Okay. And second one. On API business, how the growth is distributed in different geographies? So whether major portion came from U.S. or Europe or ROW? How is this in API business?

Yes. Just give us 1 second. See, the growth, I would say, came from the U.S. market because of the new customer that I said, we acquired this quarter. And in terms of the breakup, just give me 1 second. In terms of breakup, the majority of the growth came, like I said, for the U.S. market and also from some of the newer APIs that we're selling in the Indian market at this point. Like I said, we are working on many new ANDAs. We've been taking a lot of validation batches. That along with core APIs, which are -- sorry, not the core APIs, other APIs that we're working on in Unit 4, like the losartan, cetirizine, fexofenadine, et cetera, have also increased.

And even in PFI, we saw growth in Latin America only? Or we -- growth was from different other geographies also?

That came primarily from Europe.

The next question is from the line of Tushar Bohra from MK Ventures.

Congratulations for an excellent set of numbers. I was just looking at the presentation. Europe, is there about INR 500 crore in FY '20, and it's mentioned that it will be about 30% or 28% of the total by FY '23. A quick back of the envelope calculation tells me that we are looking at INR 1,400 crores, INR 1,500 crores kind of revenue in Europe by FY '23. So I would just like to understand where does this delta of that INR 900,000 crore come in Europe? Where are we seeing -- whether it's new product launches are also increasing our core business? What is driving this growth in Europe?

See, every product that we pick -- sorry, Tushar. Sorry, every product that we pick, we are now looking at the global volumes. Because when we pick a product, we pick the API and that we integrate it on this. We pick the API and the finished dosage. So we definitely want to reduce dependency on the U.S. and increase dependency on the rest of the world market. So we are -- we have been filing our core dossiers. And going forward, every -- most of the products that we file, especially from GIL side, will have a global presence, and that's the growth that's coming from.

So essentially, the U.S., where we continue to see a good growth and yet will decrease in market share, which means that the overall growth will also be significantly contributed to by the new geographies, maybe including Europe as a key driver?

Europe will be the key driver amongst all the other regions. The U.S., again, it might go to about 40%, 45-ish percent by FY '23, but would continue to remain our key market.

Absolute numbers, U.S. will continue to grow, Tushar.

Yes. Fair enough, sir. And we don't expect this growth -- the shift in sort of segmental growth to be margin dilutive. We are confident that 30% is a good baseline going forward for us.

I would say anything above 27%, 30%, yes, possible. But now I would [indiscernible] to 27% minimum. And again, but the PAT margin doesn't have -- the PAT growth will not suffer because of that. There are so many other factors which will contribute to growth of PAT. So 27% minimum, I think is something we can definitely look forward to, and 30% is something which we can infer.

[Operator Instructions] We'll take the next question from the line of [ Amarnath ] from Oman Government Sovereign Funds.

See, here at Page 11 of your presentation, it seems that the -- our share in U.S.A. is continuously going down from 51% to 50% and are now in FY '22 expected to 43%. And Europe and LatAm is picking up. Now just need to understand if the margin profile as well as the risk of receivable, all those things are better on those other regions in LatAm and Europe where we are increasing the share at a cost of reducing in U.S.A.?

[ Amarnath, ] actually, the margins in Europe and U.S. do not change too much. However, coming -- and also LatAm, we were selling PFIs and APIs in the past. Now we are also launching our formulations in LatAm. In fact, we've got 1 approval in one of the Latin American countries, which should be launched very quickly. And we are launching a lot of our formulations across the world, South Africa, all the way to Australia. So the margins on formulations in LatAm are better than PFI. So we do not see any issue. And coming to the risk of receivables, in Europe and other places, we are going to work with partners and we will not have a front-end to start with. Or next few years, we will not have front end. And actually, this will improve our receivable situation because with our partners, we can always negotiate 30 to 60 days, we don't have to keep inventory. So it's actually going to improve our receivable situation.

And the second question, if you allow. This -- you said at the beginning that one of the driver of the better result is the company get good market share and increase in the market share. Is this increase in market share in our core molecules? Or if you can give some more light. What kind of increase in market share, without mentioning the product name, but just to get a sense that what kind of increase in market share we are observing? And is it sustainable?

See these are all multiple products. It's not just pertaining to 1 product. And are the -- is the market share sustainable? It certainly is. We just started supplying to these customers. And as we perform, as we keep going over the next couple of quarters, we certainly expect this to be a large chunk of business coming to us. And it certainly is sustainable.

[Operator Instructions] We'll take the next question from the line of [ Sonal ] from Edelweiss.

Kunal here. So my question is actually on the API side of things. Given that there's been a lot of turmoil on the China front, do you see this more as [Technical Difficulty] how longer term sustainable and a much profitable opportunity [Technical Difficulty] of the business...

Mr. Kunal, your audio is breaking, sir, from your line. It's not clear.

Sorry. So my question is on the API side of things. So given the turmoil in China, do you think it's more like a sustainable longer-term, higher-margin opportunity now and not a opportunistic business going forward? But I believe in your presentation also, you have given quite a detailed outlook for the next couple of years, the number of molecules that you are going to launch, the market size and so on. So -- and you still seem very confident. I just would like to know the source of your confidence.

Okay. Basically, we are an integrated company, and our final product is the finished product. And API is also 1 intermediate or raw material for our final product. Though we sell APIs, most of our APIs are used for internal consumption. And again -- most of the products, again, that we are developing today in formulations where they'll need our APIs, we will be making most of those APIs ourselves. But some of those, we still will buy from China. And I am a strong believer in always saying that we are always dependent on each other, and we cannot avoid China or some other country totally, though we have been developing lot of Indian players and Indian partners, I strongly believe each country is interdependent and a country cannot live with any other country.

The next question is from the line of Joe Samuel from Geojit Financial Services.

So I just had a question related to the number itself. So I have seen a decline in the sequential employee cost, where there is a decline of about 5% on a Q-on-Q basis. So -- because we've seen a sort of steady increase sequentially in the employee cost. So I was just wondering why the sudden decrease in this quarter?

Just give us 1 second, please.

So the question is regarding the linearity of the employee cost?

The employee cost. Yes, sir, I've just seen a decrease on a Q-on-Q basis in the numbers. So just wanted to know if there was any one-offs over there.

So the employee cost has seen some -- little bit of fluctuation because of the increment being paid in the second quarter, whereas the provision was made in the earlier quarter, and the approximation of that provision was trued up in the second quarter. So therefore, there is a small deviation. But going forward, we need to take a run rate at an average level. That will be our flat cost going forward for rest of the process also.

The next question is from the line of [ Dev Daga ] from [ VT Capital. ]

Congratulations on the numbers that you posted this quarter. My first question is on the capacity utilization front. So if I'm not wrong, in the last quarter's call, you said that a large part of the current capacity would be fully utilized by this year. So I just wanted to know the current levels that we're at? And by when can revenue from the new capacities start to come in?

First of all, thank you very much, Dave. And yes, we -- in fact, we ran out of capacity, but we built capacity very quickly. In the last -- at the height of COVID, we did invest quite a bit of money by adding extra equipments and doing a lot of balancing. And we were able to build up capacity, which will last us through at least the end of next year. And by that time, we would have had the new finished dosage blocks, which is the MUPS and also other products come up. And that will take care of our growth for the next another 1 or 2 years or 3 years. And APIs, again, similarly, we started investing, and that will also take us through a few more years.

So the amount of current capacity, we have to ensure that there's no supply disruption even in the short run, in this case, the demand side of [Technical Difficulty]

No, we are well covered. And we have been very nimble-footed and quick to respond. And we only wish that if situation comes where we'll be running a lot of capacity so that we can be very good at creating some extra capacity and exploiting the situation.

Okay, sir. And then next question would be on the emerging market business. So in the opening remarks, you mentioned that your growth driver would be the emerging markets. I just wanted to know the kind of revenues that you expect from that market. And also the kind of product you want -- you would be willing to commercialize in those markets?

I'll take that question. In terms of the revenue breakup, we have provided it in our presentation. Give me 1 second. The revenue breakup will be -- by FY '23 will be about 28% from Europe, 43% from the U.S., 12% from LatAm and 17% from the rest of the world. Today, we're 50% for the U.S., 23% from Europe, 11% in LatAm and 16% in the ROW markets.

Okay. [indiscernible] revenue and the kind of products that you were going to launch in those markets in the recent coming years?

It will be a mix of our core molecules, our medium- to high-volume molecules. And every product that we acquire and whatever products that are in our pipeline right now will be extended to the European market as well. In addition to that, we'll also have some new PFIs coming up that we'll launch in Latin America and rest of the world market.

The next question is from the line of Darshit Shah from Nirvana Capital.

Sir, congratulations for the great set of numbers you have posted. In fact, this quarterly profit of this quarter is higher than the full profits we made in FY '18. So that's the kind of scale the management has achieved and you need to be congratulated for that. Sir, my question pertains to -- sir, general industry as well as Granule. Sir, we are seeing great momentum in lot of midsized pharma companies in India. They're doing really well. And that luckily has coincided with COVID. And now people are trying to correlate that this -- probably it is due to COVID Indian pharma players are doing really well. So sir, just would like to know your thoughts. What has actually changed in last 2, 3 quarters for Granules and industry in general? Is like U.S. pricing has improved or probably Indian players are getting more preference? And even the margin profile of a lot of players, including us, has kind of dramatically improved and now most of the players are confident of maintaining this kind of margins. Sir, I would like to know your thoughts on this question.

Okay. Generally -- normally, I would like to talk about Granules, but not industry in general. I don't consider myself a great expert on the industry. But what I see today is the Indian pharma industry is in a very, very sweet spot. There is a lot of goodwill being given to Indian companies today. Though, I mean, I can definitely say not extra pricing, but the price erosion has slowed down a bit. And basically, the preference is partly because of supply security. People know they can depend on Indian companies. And also, it is the regulatory compliance of most Indian companies today. Even though we have seen a cycle of warning letters in the last few years, there's a lot of improvement. And when I said preference, it's also geopolitical whatever is happening. The least said the better. I don't want to comment too much on that. And margins, again, as far as Granules goes, we were able to increase our revenues, and it's a mix. It's kind of keep our expenses at the same level. And that has really added our margins and also the product mix and the type of products which we have launched recently. COVID is a coincidence, at least for Granules. And definitely, I can say, like Priyanka was mentioning a little while ago, paracetamol is the only COVID-related product we have. And that too, the margin we make on paracetamol, gross margin, is just about 15% of our total gross margin. So even if there's fantastic increase there, it's not going to totally reflect on our overall margin.

Great, sir. And sir, my second question was on MUPS technology, which we are kind of building and probably it will be also vertically integrated to a lot of APIs. Sir, so wanted to -- is there any other Indian competitor who is present in this technology because we haven't heard about MUPS technology so far?

Every company or most of the companies use MUPS for making extended-release products. It's not -- nothing new. It's been there around for a while. And just to give you an example, a product like omeprazole extended-release is made with MUPS technology. However, what we do at Granules is, some of the high volume products, we specialize in them and we do certain innovations, which give us definitely an advantage in terms of operational efficiencies. And though our price -- we don't get an extra price in the market, we are able to squeeze out a little extra margins because of our efficiency. And if you see our old products, like simple products like metformin, we were able to make some margins. It's not because the customers were paying us high, because we are being efficient. The same thing we expect to do in MUPS.

The next question is from the line of [ Deepak Mehta ] from [ MetLife Insurance. ]

Sir, my question is around PLI scheme. If you can throw some light on PLI? And what's your ingestion and thoughts about it?

See, PLI actually gives me great satisfaction that the government is finally seeing or trying to do something about self-reliance. Actually, this started quite many years ago, but the real push had come recently. So it's an excellent scheme to appreciate what the government has done. But definitely, it's not going to give a great advantage to many companies. The other thing the government could have done, in my opinion, is also concentrate more on building infrastructure. Even though there's a lot of talk of building [indiscernible] parks, I think more focus on that where we get infrastructure, which is similar to what is available in China will give us a much more competitive advantage rather than a subsidy on sale price. So this is welcome. And some of the suppliers whom we are encouraging to make products for us, they seem to be excited about the subsidy on PLI. So I'm sure this is definitely going to bring in a lot of self-reliance.

Okay. And what is the dependency of our company on China for raw materials, sir?

One of the biggest products we import from China is PAP. And like I said earlier in the call, we are already in final stages of agreements with 2 companies who make the product for us exclusively with a buyback arrangement. And also there is a lot of spare capacity in China too at this point in time.

Right, sir. And my last question is around the [indiscernible] scheme. So government is going to provide subsidy on new APIs or it will be on existing...

There is a given list of APIs with different percentages. And -- but it has to be a greenfield, which again is a little disadvantage. If somebody has some existing capacity, he could make one of these products and definitely for 1 or 2 products there's no point in setting up a greenfield venture. So it's only for greenfield and a certain set of products.

Ladies and gentlemen, due to time constraint, we will take that as a last question. I would now like to hand the conference over to the management for closing comments.

So once again, ladies and gentlemen, thank you very much for all your best wishes. And we wish and hope that your best wishes continue to be there with us. And we will definitely do well, and we will not let you down. Once again, thank you very much for spending time on this call. Thank you again.

Thank you.

Ladies and gentlemen, on behalf of B&K Securities India Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your