Granules India Limited (532482) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Granules India Limited Q1 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Prachi Ambre from MUSG IR team. Thank you, and over to you, ma'am.

Thank you, Shruti. On behalf of Granules India Limited, I extend a warm welcome to all the participants on Q1 FY '26 financial results discussion call. Today on the call, we have Dr. Krishna Prasad Chigurupati, Chairman and Managing Director; Ms. Priyanka Chigurupati, Executive Director; Mr. Mukesh Surana, Chief Financial Officer; Dr. P.V. Srinivas, Chief Technology Officer; and Mr. Sanjay Kumar, Chief Strategy Officer. Before we begin the call, I would like to give a short disclaimer. This call may contain some of the forward-looking statements, which are completely based upon our beliefs, expectations and opinions as of today. The statements are not a guarantee of our future performance and involve unforeseen risks and uncertainties. With this, I would like to hand over the call to Dr. Krishna Prasad, sir, for his opening comments. Over to you, sir. Thank you.

Thank you, Prachi. Good afternoon, ladies and gentlemen. Thank you very much for joining us on our Q1 FY '26 earnings call. We appreciate your continued interest in Granules. [Technical Difficulty]. I was on mute. I don't know if somebody muted here. Can I start again?

Yes, sir, please start again.

Okay. Good afternoon, ladies and gentlemen, and thank you for joining us on our Q1 FY '26 earnings call. We appreciate your continued interest in Granules. We have uploaded a detailed presentation of our quarterly performance on our website, and I trust you have had a chance to review it. Let me start with U.S. FDA remediation at our Gagillapur facility. We are in the final stages of remediation following the August 24 U.S. FDA inspection and subsequent warning letter. Our fourth status report was submitted on July 31. And so far, no concerns have been received from the FDA on the adequacy or pace of our corrective action. We will reach the 6-month eligibility milestone for a meeting and reinspection in September and plan to engage with the agency at that time. Meanwhile, the site has cleared inspections by German and Danish authorities, with Denmark granting an EU GMP certificate in July '25. Across our network, multiple regulatory milestones have been achieved. At our U.S.-based GPI site, an unannounced FDA inspection was completed successfully with one observation and has been responded to within the stipulated time lines. Our API Unit 1 facility at Bonthapally completed an FDA inspection in June '25, also with a single observation and the response was submitted in a timely manner. A key milestone was achieved at our new formulations facility at Genome Valley under Granules Life Sciences, which underwent its first ever FDA pre-approval inspection from July 28 through August 1st. This was successfully completed with a single procedural observation and the response will also be submitted within the stipulated time line. These successful inspections across multiple sites reaffirm our commitment to strengthening quality and compliance across the organization. Our focus remains on embedding a proactive data-driven and sustainable culture of quality for the long term. Restarting the growth phase. With these developments, we are confident of returning to the growth trajectory of our formulations business from India, free from delivery constraints. The successful U.S. FDA inspection of our greenfield formulation facility at Genome Valley unlocks an additional 10 billion doses of formulations capacity, a 40% increase over the existing 26 billion dose capacity at Gagillapur and establishes a second source supply of finished dosages and PFIs to the U.S. from India. Supplies of monograph products to the U.S. have already commenced and ramp-up of prescription product supplies will follow FDA approval. In the coming quarters, inspections by European authorities for the Genome Valley site are also expected. With remediation at Gagillapur expected to conclude in the near future, post which we anticipate swiftly overcoming the production slowdown from additional protocols securing new product approvals and enabling the site to fully support our return to the growth trajectory. Together, these steps will free us from delivery constraints in both the U.S. and EU, enabling us to fully leverage the growth potential of our formulations business from India. Additional growth will come from CNS ADHD segment from our GPI facility in the U.S. Scale-up of large volume products in the U.S. and Europe, moving up the value chain in Europe as well as the oncology capacity monetization from Unit 5, creating a balanced platform for near-term performance and long-term growth. We have also taken a significant step into high-growth peptide therapeutics and CDMO space with Senn Chemicals and Ascelis Peptides. Sanjay, our Chief Strategy Officer, will elaborate on this strategic platform later in the call. On the sustainability front, Granules was named to the 2024 CDP Supplier Engagement A list for leadership in supplier climate action and value chain emissions management. We also joined the pharmaceutical supply chain initiative, furthering our commitment to transparency, sustainable operations and global supply chain excellence, building on our SBTi validated net zero targets and EcoVadis Gold Medal and CDP Climate score of B. To conclude, we are entering the phase of reviving our growth with a strong stronger quality foundation, expanded capacity and a more diversified portfolio. Near-term momentum will be driven by the ramp-up of prescription supplies from our Genome Valley facility, continued growth from our U.S. operations, moving up the value chain in Europe and finally, expected normalization of operations and new product approvals from Gagillapur post completion of the remediation. Over the medium term -- medium to long term, our strategic expansion into high-value segments such as peptides with Senn Chemicals and Ascelis Peptides alongside oncology will further strengthen our competitive position. Supported by our sustainability commitment and disciplined execution, we are confident in delivering sustained value to all stakeholders. With this, I now hand over the call to Sanjay Kumar, our Chief Strategy Officer, who will share more on our peptides and CDMO growth platform.

Thank you, Chairman, sir. Good afternoon, everyone. I'll take you through one of the most exciting strategic development at Granules, our foray into the peptides CDMO space through the acquisition of Senn Chemicals and the creation of our wholly owned subsidiary, Ascelis Peptides. Peptides have rapidly emerged as a cornerstone of advanced therapeutics with applications spanning diabetes, obesity, oncology, cosmetics and theragnostic. The advent of GLP-1 drugs such as semaglutide and tirzepatide has been transformative for the obesity market, fueling unprecedented revenue forecast and exceptional consumer interest. With the global peptide market driven in part by GLP-1 receptor agonists now at a run rate of $78 billion per annum and projected to surpass USD 130 billion by 2030, this segment represent a compelling long-term growth opportunity. It is reshaping industry and buzzing with innovative activity worldwide, creating a growing need for a credible CDMO partner. Ascelis anchors Granules' transition from a primarily small molecule oral solid doses focused business to a diversified platform encompassing peptides and in time oligonucleotides. Senn Chemicals is a Swiss-based CDMO with more than 6 decades of expertise in both liquid phase and solid-phase peptide synthesis backed by a strong regulatory credentials and a proven track record in peptide synthesis with a leading innovator company. This expertise forms the foundation for Ascelis, as a full spectrum CDMO solution provider, serving innovators across pharmaceuticals, cosmetics and theragnostic with flexible, high-quality manufacturing solutions. The team at Senn includes more than 80 highly qualified professionals with more than 50% of the managerial roles in R&D, manufacturing, quality and business development held by PhD graduates, demonstrating the depth of expertise that drives our CDMO capabilities. Our execution road map for Ascelis Peptides is anchored on 4 strategic pillars. First, we are prioritizing the CDMO arm of Senn Chemicals to deepen engagement with the top innovators. This involves prioritizing flawless execution of ongoing CDMO projects, expanding the customer base to more innovators, enhancing service offering and leveraging Senn's long-standing reputation for delivering complex high-quality peptides. Second, we are creating the backbone of amino acid derivatives and peptide fragment out of India to serve multi-segment applications across target peptide markets. This capability will ensure a wide range of therapeutic and specialty applications, ensuring that we have the essential building blocks for both the current and the future customer needs. Third, we are building a dual site manufacturing network for high-value peptide ACIs, leveraging Switzerland for small-scale high-complexity production and India for large-scale cost-efficient manufacturing to serve global markets. This structure provides both flexibility and scale, enabling us to meet the diverse requirement for innovative customers in the CDMO space. In addition to the pharmaceutical peptides, Senn Chemicals operate in 2 niche but attractive segments, cosmetics and theragnostic forming the fourth pillar. In cosmetics, Senn and Ascelis are positioning as an early mover and a credible player in the cosmetic industry's transition towards a TFA-free peptide actives, addressing both performance and sustainability expectations of the customers. In theragnostic, peptide serves as a precise targeting agent that can be radio labeled for imaging and conjugated with therapeutics for treatment, offering strong potential in oncology, rare disease and personalized medicine. The path forward. As I mentioned, we are advancing on 2 parallel fronts, enhancing Senn capabilities to target more number of high-value CDMO projects through customer expansion and integrated R&D manufacturing capability, while simultaneously establish a robust India-based R&D and manufacturing infrastructure for amino acid derivatives, peptide fragment and eventually full length peptide. A key milestone of this journey includes the peptide R&D facility and center of excellence at the Indian Institute of Technology, IIT, Hyderabad, scheduled to become operational by October of this year. and a commercial scale peptide manufacturing facility in India targeted for completion by the end of the next financial year. The integration of Senn Chemicals into the Ascelis platform is progressing well with cross-functional teams driving synergies across R&D, engineering, quality and regulatory function, while harmonizing systems, strengthening governance and accelerating business development. These initiatives are aimed at positioning Ascelis as a credible midsized CDMO player in tight modality over the next 3 to 5 years, serving as an innovation-aligned growth engine for the next decade. With this, I will now hand over the call over to Mukesh Surana, our Chief Financial Officer, who will take you through the financial performance.

Thank you, Chairman, sir and Sanjay. Let me take you all through the top financial parameters now. Revenue, the first quarter revenue were INR 12,101 million as compared to INR 11,799 million in Q1 FY '25, reflecting a growth of 3% and revenue grew by 1% as compared to Q4 FY '25. This also includes the revenue generated from Senn Chemicals AG of INR 291 million. North America had a year-on-year growth and Europe grew sequentially. Lower sales in ROW was primarily because of PFI supply backlog from Gagillapur. The sales breakup as per the business divisions and geographic regions are presented in our investor presentation, which is available on the website. Gross margin, we delivered a strong gross margin of 64.9% in Q1 FY '26, representing an improvement of 593 basis points year-on-year and 148 basis points sequentially. Gross margin improved primarily with consolidation of Senn Chemicals AG. EBITDA and EBITDA margin, EBITDA for the quarter was INR 2,467 million, that is 20.4% of sales as compared to INR 2,593 million, that is 22% of sales in Q1 FY '25, a decline of 159 basis points from Q1 FY '25. The decline in EBITDA was primarily due to increase in professional expenses incurred for consultancy and remediation efforts in responses to U.S. FDA observation. EBITDA as a percentage of sales for Q1 FY '26 is down by 69 basis points from Q4 FY '25. EBITDA percentage is impacted on account of higher manpower costs with consolidation of Senn Chemicals AG. R&D, R&D expenses for the quarter were INR 678 million, which is 5.6% to sales as compared to INR 620 million which is 5.3% to sales in Q1 FY '25 and INR 665 million, which is 5.5% to sales in Q4 FY '25. We will continue to spend similar amounts to support our long-term strategic growth. Net debt, our net debt stood at INR 9,480 million post-acquisition of Senn Chemicals AG as compared to INR 7,061 million in Q4 FY '25. Cash to cash cycle, our cash to cash cycle was 205 days in the current quarter as compared to 202 days in Q4 FY '25. Cash flow from operations, cash flow from operations for the quarter was INR 2,806 million as compared to INR 3,183 million in Q4 FY '25. CapEx, CapEx spend during the quarter was INR 1,137 million as compared to INR 1,598 million in Q4 FY '25. ROCE, ROCE for Q1 FY '26 is 16% with increased capital employed post-acquisition of Senn Chemicals AG as compared to 16.6% in Q4 FY '25. With this, I open the floor for questions.

[Operator Instructions] The first question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.

Sir, now that measures are more or less done, we have got ramp-up of Genome Valley as well. So for FY '26, sort of what kind of revenue growth and EBITDA margin one can think of...

Tushar, remediation, we are going to meet the FDA next month. And by the time they come and reaudit us and clear this could take up till end of December. So we see good -- and also for the new GLS site, the approval we expect in another 40 days or whatever, 35 days. So after that, only the real growth would start. And also, the new approvals that are pending with U.S. FDA for Gagillapur site will also be cleared and they'll take some time to revamp. So you can see FY '27 as a very good growth year starting from last quarter of this year.

Got it. Sir, this peptide segment, what kind of investment one should sort of think of for FY '26 to start with? And then over a period of time overall, what kind of amount are we sort of parking for this space?

Tushar, [indiscernible] we have acquired this business equity plus debt overall enterprise value of about INR 450 crores. And this year, we are looking at additional investment of probably close to INR 100 crores in Switzerland and also another INR 20 crores, INR 30 crores or so for the back end in India for R&D lab. This is for the financial year '26. And the financial year '27, we may want to spend a little CapEx on the back-end manufacturing capability. We are still estimating that.

Got it. Sir, just thirdly on the EU sales, it seems slight uptick for FY '25 to be sort of muted. So as we are also moving up the value chain, so what kind of growth prospects can be sort of for Europe business?

I think I'll let the experts answer that. Priyanka, are you there?

Yes, I'm here. I can take that question. Europe, yes, there was a small uptick this quarter. There continue to be an uptick. This is essentially because of our [Technical Difficulty] and we're getting more offers based on the amount that we're catering. So going forward...

Ma'am, couldn't hear you.

Your line dropped…

I'm sorry. Can you hear me now?

Yes, ma'am, we can hear you. Please go ahead.

Over the last year, I'll just repeat myself. Over the last year, we've actually had orders for Europe. So now that we've started increasing -- well, slowly freeing up our capacity, we started supplying more products to Europe. In addition to that, some of the approvals that we got earlier, we started launching them in Europe through some partners. that's essentially it. Going forward, you'll see this getting to about 15%, 20% of the revenue.

Our next question is from the line of Maitri Sheth from Choice Institutional Equities.

Just a couple of questions. One is on the CDMO and the peptide segment, which has now...

Sorry to interrupt. Maitri, ma'am, your voice is coming very low. Can you please take the device close to you and be loud.

Is this better now?

Sorry, ma'am, can you please repeat? Yes, ma'am. Now it's better.

Hello, is this better?

Yes, ma'am.

So I just had question on the CDMO and peptide segment. Now that it has started contributing to the revenue, how much total revenue contribution in...

Maitri ma'am, sorry, your voice is breaking when you are speaking. Our next question is from the line of Madhav from Fidelity.

I just wanted to understand that for this peptide CDMO franchise, which we are looking to invest in, generally, CDMO businesses have a slightly longer gestation period to get the pipeline with the innovators and build it up. Just wanted to understand where we are in that journey in terms of client relationship or projects in the pipeline? And how much time does it take before we see some of these molecules commercializing and scaling up for us? So if you could give some time line there, it will be helpful just to understand where we are in the cycle here.

I think Sanjay will answer that, Madhav.

So Madhav, you are right. The CDMO business by very nature is a long gestation project by itself. But having said that, Senn chemicals already have a book of business and ongoing projects at various levels. though at a small scale, that gives us some revenue visibility right again. What we are seeing today is both from the innovator company and other players in the CDMO supply chain geared towards serving the innovator customers, we are seeing inquiries and demands all across the spectrum, and we are responding to those. We believe with Senn legacy, its own customer connect, both for with the innovators and with the other pharma partners, we are in a good shape. So the priority is first on to execute well on the ongoing CDMO project that we are partnering on some of the in clinical assets and simultaneously execute well on all the RFP, RFQ that we are receiving through them. So we do have a visibility and the story of legacy of Senn backed by the backbone infrastructure that we're creating also out of India in a cost-efficient environment is the story that has been getting traction through our initial conversation with the customers. So I will stop short and we'll stop there and we will be able to provide additional visibility in the coming quarters. However, it's sufficient to say that we have an existing book of business and existing set of inquiries that we are responding to, giving us a good visibility on the expected business that we can expect in the future quarters.

Just a quick follow-up. In terms of projects in the pipeline, generally, peers in the space, they give a breakdown in terms of how many projects they have in Phase I, Phase II, Phase III, something like that. Is there any -- are there any projects which are in Phase III today? Or are we doing more Phase I, Phase II kind of projects? If you could give some color, so we can make some assessment there.

So Madhav, we are bound by confidentiality on these assets, and we are not at the freedom to disclose those. But yes, these are in clinical early stages...

[Operator Instructions] Our next question is from the line of Krisha Kansara from Molecule Ventures. Krisha, ma'am. Ladies and gentlemen, as the current participant is not answering, we'll move to the next question. The next question is from the line of [ Devanshi Shah from SGA Finance ].

Yes. Sure. So I had a few questions. First one was with the new peptide R&D facility and integration of Senn Chemicals, what is the road map for scaling peptide APIs and CDMO services? And how do you see this contributing to differentiated growth in regulated markets?

So Devanshi, we -- in an earlier question, I alluded to the ongoing traction that we have on the CDMO side with a few existing projects in line and additional inquiries that we received. I can provide additional color on the nature of those inquiries. Some of these are linked to the early stage in clinical asset and some of these are by the big innovator company to check for our capabilities as they ramp up their pipeline and more and more assets are expected, they are scouting for the right kind of assets and capabilities, asking the partners to demonstrate these capabilities in specific peptide segments. So we are getting those tractions as well. In addition, there are needs for amino acid derivatives and small peptide fragment, which is a common element across most of the players, and they're looking for a reliable and a cost-efficient source outside of China. That is another tailwind that industry is facing and Senn Chemicals is well suited with this Ascelis platform to serve those demands.