Granules India Limited (532482) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Granules India Limited Q2 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Irfan Raeen from MUFG. Thank you, and over to you, sir.

Thank you Muskan. On behalf of Granules India Limited, I extend a warm welcome to all participants on Q2 and H1 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 Strategic 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 expectations, beliefs and opinion as of today. These statements are not 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, Irfan. Good evening, ladies and gentlemen, and thank you very much for joining us on our Q2 FY '26 earnings call. We appreciate your continued interest in Granules. We have uploaded a detailed presentation of our quarterly performance on our website. I trust you had a chance to review it. I will start with an update on the 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 the subsequent warning letter. As communicated during the last investor call, we have reached the eligibility milestone for a request for a meeting and reinspection, and we have now initiated formal engagement with the agency. We have been granted a meeting with the FDA in January 2026, which is Q4 and remain on track with all the required remediation measures in preparation of this interaction. We continue to submit monthly progress reports with the latest update provided on October 31, '25. In addition, multiple status reports have been shared to date, and the FDA has raised no concerns regarding the adequacy or pace of our corrective actions. Cross-contamination testing on more than 3,000 retrospective and concurrent samples have also shown no failures to date. Meanwhile, the Gagillapur site had received the GMP certificate from the German authorities, an outcome of the inspection completed in February '25. The sites had also completed 8 customer audits with no critical observations and received the UL certificate last quarter. The facility is now cleared by the German and Danish authorities with Denmark granting us the EU GMP certificate in July '25. Across our network, multiple regulatory milestones have been achieved. At GPI site located at Chantilly, Virginia, the U.S. FDA has issued an establishment inspection report for the unannounced pre-approval inspection conducted in June '25 for a first-to-file controlled substance ANDA. Our API Unit 1 facility at Bonthapally has received an EIR and has been classified as VAI by the FDA following the June '25 inspection. Our Greenfield GLS facility at Genome Valley, Hyderabad has received U.S. FDA approval for a product following the PAI conducted between July 28 and August 1, 2025. This marks the first FDA approval for the GLS site, strengthening our finished dosage capabilities and enabling multisite manufacturing. In the coming quarters, inspection for the GLS Genome Valley site inspection by the European authority is also scheduled. With these developments, we are confident of returning to the growth trajectory for our formulation business from India, free from delivery constraints. The successful U.S. FDA inspection of a Greenfield Formulation Facility at Genome Valley unlocks an additional 10 billion doses of formulation capacity, a 40% increase over the existing 26 billion dose capacity at Gagillapur. It also establishes a second source supply of finished dosage and PFIs to the U.S. from India. Supplies of monograph product to the U.S. have already commenced and ramp-up of prescription product supplies will follow with FDA approval. With remediation at Gagillapur expected to conclude in near future, post which we anticipate 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 for both the U.S. and EU, enabling us to fully leverage the growth potential of our formulations business from India. Additionally, 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 in Vizag creating a balanced platform for near-term performance and long-term growth. Our Peptide CDMO platform, Ascelis Peptides, built on Senn Chemicals strong Swiss legacy is progressing well through its integration and capability building phase. Our Swiss innovation, Indian scale model is resonating strongly with target customers, and Sanjay will take you through this later in the call. To conclude, we are entering the phase of reviving our growth with a 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. manufacturing operations, moving up the value chain in Europe and finally, expected normalization of operations and new product approvals from Gagillapur post completion of remediation. Over the medium to long term, our strategic expansion into high-value segments such as Peptides through Senn Chemicals and Ascelis Peptides alongside oncology and new dosage forms will further strengthen our competitive position. Supported by our sustainability commitments and disciplined execution, we are confident in delivering sustained value to all stakeholders. With that, I will 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, and good afternoon, everyone. Let me take you through the development and progress of our Peptide CDMO platform, Ascelis Peptides, which is being built on the strong foundation of Senn Chemicals in Switzerland. Ascelis as a separately managed subsidiary, maintaining an arm's length relationship with its parent that is Granules India Limited. The Swiss site at Senn Chemicals continues to function as our global R&D and CDMO hub, ensuring complete data confidentiality and IP protection for our customers. In parallel, Ascelis India is being developed as a scalable manufacturing and R&D backbone, creating a Swift innovation and Indian scale platform that differentiates us in the global Peptide CDMO landscape. A key milestone on the India side is the establishment of the Peptide R&D Center of Excellence at Indian Institute of Technology, IIT Hyderabad, which is now ready and will become operational this month. Over the past few months, the Ascelis team have collaborated closely across Switzerland and India on CapEx execution, quality initiatives and various other support functions. This has helped reshape the business into a true CDMO model focused on complex and emerging Peptide segments. At the same time, we have strengthened leadership, governance and performance management system at the site. Our quarterly performance was in line with the expectations, reflecting the ongoing transitions, integration activities and inherent variability of CDMO operations. Importantly, the underlying traction remains strong. We are in an integration and infrastructure upgradation phase and expect to turn profitable in Q4 of this year, while continuing to target FY '27 as the first fully synergized and profitable year for Ascelis. On the commercial front, customer engagement continues to gain momentum. Recent interaction at major industry events, including CPHI Frankfurt and ongoing Tides Europe in Brazil from where I'm speaking right now, have reinforced growing interest from leading Innovator Pharma companies, emerging Biotech and Cosmetic Peptides customers. We are seeing multiple feasibility programs, new inquiries and renewed discussion with several global innovators. Our LPPS Hybrid Chemistry capabilities and the India scale manufacturing narrative have been particularly well received by early-stage biotech companies seeking agility, responsiveness and cost-effective development pathways. Senn Chemicals deep expertise in Liquid Phase Peptide Synthesis continue to attract innovators looking for scalable and economical process development and manufacturing solutions. In the Cosmetics segment, Senn's [PFAS free] Peptide offering remains a unique differentiator valued especially by Europe-based innovators and brand owners. In summary, Ascelis is now emerging as a differentiated Peptide CDMO combining craftsmanship, Indian efficiency and global reach. With rising partnership interest, advancing technology collaborations and growing customer confidence, we are building a strong foundation for a credible and competitive Peptide CDMO platform. With that, I will hand over to Mukesh Surana, our CFO, who will take you through the financial performance.

Thank you, CMD and Sanjay. Let me take you all through the top financial parameters now. Revenue: The second quarter revenue were INR 12,970 million as compared to INR 9,666 million in Q2 FY '25, reflecting a growth of 34% and revenue sequentially grew by 7% as compared to Q1 FY '26. Year-on-year growth was primarily driven by the formulation business in North America and Europe. In Q2 FY '25, the company had voluntarily paused production in Gagillapur plant to reassess the potential risk on account of the U.S. FDA observations. The sales breakup as per 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 65.7% in Q2 FY '26, representing an improvement of 368 basis points year-on-year and 82 basis points sequentially. Gross margin improved primarily because of improvement in operational efficiency and product mix. EBITDA and EBITDA Margin: EBITDA for the quarter was INR 2,782 million, that is 21.5% of sales as compared to INR 2,033 million, that is 21% of sales in Q2 FY '25, an improvement of 42 basis points from Q2 FY '25 despite EBITDA loss of Ascelis Peptides of INR 200 million. EBITDA as a percentage of sales for Q2 FY '26 is improved by 106 basis points from Q1 FY '26. The improvement in EBITDA was primarily due to sales growth and margin expansion. R&D: R&D expenses for the quarter were INR 705 million, that is 5.4% of sales as compared to INR 524 million, that is 5.4% of sales in Q2 FY '25 and INR 678 million, that is 5.6% to sales in Q1 FY '26. We will continue to spend similar expenses to support long-term strategic growth. Net Debt: Our net debt stood at INR 10,241 million as compared to INR 9,480 million in Q1 FY '26, primarily due to increase in CapEx spend in the quarter. Cash to Cash Cycle: Our cash-to-cash cycle was 204 days in the current quarter as compared to 205 days in Q1 FY '26. Cash Flow from Operations: Cash flow from operations for the quarter was INR 1,937 million as compared to INR 2,806 million in Q1 FY '26. CapEx: CapEx spend during the quarter was INR 2,112 million as compared to INR 1,137 million in Q1 FY '26. ROCE: ROCE for Q2 FY '26 is 16.2% as compared to 16% in Q1 FY '26. With this, I open the floor for questions.

[Operator Instructions] The first question is from the line of Tarang from Old Bridge Asset Management.

Congrats for a strong quarter and the compliance outcomes that we've seen for a couple of your facilities in the last quarter. I had a couple of questions actually. One, just to get the health of the organic, the base business ex Shaw, there any positive or negative one-off in this quarter?

So, you are, Tarang, one-off with respect to the overall Granules group, you're asking or any

Yes. I mean, were there any special onetime opportunities or some onetime expenditures that you incurred in this quarter?

So, the U.S. FDA consultancy expenses is continuing. Other than that, it is more or less similar. Of course, post-acquisition of Ascelis, there is a full quarter loss in the current quarter.

Okay. Second, given that this was the first full quarter of Ascelis getting consolidated, would it be fair [Audio Gap] associated with Ascelis are now baked into your current quarter and this is how it should perhaps reflect from future quarters?

I think we lost you in between, Tarang. Can you repeat that question?

I'm saying with the first 2 quarters of, all integrated into the business, would it be fair to presume that all the fixed costs associated are baked into your P&L, and this is the trend that we should see going forward? Or we could see further escalation in your cost structures?

In terms of fixed cost, Tarang, full quarter expenses have been considered. So, it will be similar going forward, maybe some additional, if at all, if you want to hire a headcount. And with respect to the revenue and the profitability visibility, Sanjay has already covered in his discussion. Sanjay, you want to add on.

Yes. So Tarang, is the same thing as Mukesh confirmed. There could be minor headcount-related expenditure as we build our operations in India going forward. But from the revenue and the cost perspective, the things are expected to get better from here.

And just last 2 follow-ups. [Audio Gap] final outlay for this transaction, my sense is there must have been some adjustments that might have been incurred at the time of outlay. So just wanted to get the final outlay. And second, I think there's a German subsidiary that's been if you could give us a sense[Audio Gap] [Technical Difficulty]

Your voice is not clear properly, Mr. Tarang.

I'll join back the queue. I think there's some problem queue.

The next question is from the line of Ritwik Sheth from One Up Financial.

Sir, a few questions from my end. Sir, firstly, Ascelis includes Senn Chemicals, right?

Yes.

Okay. So this INR 20 crores is related to completely Senn Chemicals, would that be a right understanding?

Yes, it is largely Senn Chemicals only. Ascelis, we have just started some of the R&D infrastructure segment.

Okay. Got it. And sir, in your opening remarks, you mentioned that you expect to turn profitable in Ascelis Peptides. So what kind of revenue trajectory should we expect going forward in Ascelis Peptides and Senn Chemicals combined? And what is the base right now, if you can give us that figure for Q2?

Sanjay, why don't you go ahead with that. But basically, I don't think we don't give guidance. But Sanjay, you can give an idea.

So sure. Happy to jump in. See, we will be unable to diverge the details at a quarterly split level, but it's safe to assume that the base which we acquired is just under 20 million. And the growth will be multiple around that. We're not looking at incremental growth around it. But we'll not be able to provide you a quarter-to-quarter guidance per se and current base business is in no way reflection to what we intend to build given the excitement in the Peptide space and the encouraging new inquiries that we're receiving basis our Swiss and India play. So we'll leave it at qualitative at this moment. Yes, that's where I stop.

Sure. And just to, sorry, to harp on Ascelis Peptides and Senn Chemicals, what would be the capital employed as of September 2025 on this business?

Sorry, we lost you again.

Okay. Am I audible now?

Yes. Yes.

So what is the capital employed in Peptide and Senn Chemicals?

Yes. Tarang, there is no major change from what we have said in the last earnings call. It is a total INR 440 crores of appreciation, debt plus equity. And additionally, we have invested another INR 100 crores for additional scaling up of CapEx.

Sure. Okay. And what could be the asset turn that you would have going forward once you completely integrate this over the next 2 years? Can you give some sense on that?

It's a CDMO business. So CDMO business asset turn would be completely different than the normal business and also the margin profiles will be completely different. So we are generally not giving sales guideline. But what Sanjay has clarified already is there is a base, and we are not looking at simple incremental growth. It will be a multiple of the base.

Got it. And what is the internal time line to scale this up? Would it be 2 years? Would it be 3 years or sooner than that? Just to get a qualitative sense on that?

Sanjay, can you answer that?

Sure. So the first year, we want to just make sure that we turn profitable. And FY '27, that's the target is to turn it profitable. In terms of a build-out, the CDMO business is typically a long lead item, but it doesn't mean that we have to wait out 3 years to get to what we realize. I think we'll be in good shape in starting with 6 months from now to an 18-month period, that's where we start converting some of the inquiries into the real businesses for ourselves. And we keep our investment proportional to the kind of projects that we start getting in. So again, stopping short of guidance, but we are not looking at a very, very long term beyond 3-year horizon, but the real build-out happens from a 1- to 3-year period itself in, again, a multiplier function, not an incidental function.

Got it. And sir, I have one more question. Can I go ahead?

Yes, go ahead.

Yes. So if you see in the last 2 to 3 years, we have been around this ballpark top line of approximately INR 1,100 crores to INR 1,200 crores per quarter. And earlier, we are in the last phase from 2014, '15 to 2022, we have grown at double digit. So would you think that with all these remediation and the new site getting approvals one by one, would you suggest that we would start growing at double digit from FY '27 onwards on the top line on the base business and plus Peptide business?

Yes, I think you are right, Tarang. We were constrained by certain things last few years. But now like I said in my opening remarks, we are going to have a breakout and get back on our growth track.

[Operator Instructions] The next question is from the line of Tarang from Old Bridge Asset Management.

I was lost in the middle. So the last few questions were not made from someone else. Sir, just to get a better sense of the German subsidiary that's been incorporated, what's the thought process there? And number two, we saw very strong traction in both your Europe business as well as your U.S. business this quarter. So has that got to do anything with paracetamol coming back?

A little bit, Tarang, not totally paracetamol. But now your first question about the German subsidiary, we need to, we are focusing on EU growth now, and we need to have an arrangement for stocking and selling. So that's the reason we are starting the subsidiary there. It will not be a big effect, but slowly, we see growth there. And regarding the growth, EU is doing as per plan. We had a little dull slowdown in the last quarter, but it's on track now. And of course, U.S., as we anticipated mentioned many times, we are expecting a very strong growth from our U.S. manufacturing, especially more than Indian products sold in the U.S. GPI as a stand-alone unit has picked up and doing quite well, and we anticipated good growth from there.

Has that meaningfully contributed this quarter?

Yes. Yes.

The next question is from the line of Priti Agarwal from SK Associates.

I would like to know what were the key drivers behind the increase in EBITDA.

Yes. So the key driver is largely operational efficiency. Operational efficiency, of course, includes various things in terms of yield improvement and some of the leveraging on the packing side, et cetera, and also product mix. And this EBITDA margin could have been further higher if EBITDA loss of Ascelis Peptides was not there. So the product mix and operational efficiency has helped us in improving EBITDA.

Understood. And how is the INR 200 million EBITDA loss from Ascelis Peptides affect overall profitability?

So the turnover we have already covered in the presentation. So it is almost similar number of turnover quarter-on-quarter in Ascelis, INR 28 crores, INR 29 crores. And the EBITDA loss is about INR 20 crores from Ascelis.

The next question is from the line of Maitri Shah from Sapphire Capital.

Just on the Peptide business, so we said that we'll turn profitable. Are we expecting to turn PAT profitable or EBITDA profitable by Q4?