Granules India Limited (532482) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Granules India Limited Q3 and 9 Months FY '26 Earnings Conference Call hosted by MUFG Investor Relations. [Operator Instructions] I now hand the conference over to Ms. Prachi Ambre from MUFG Investor Relations. Thank you, and over to you, ma'am.

Thank you, Danesh. On behalf of Granules India Limited, I extend a warm welcome to all the participants on the Q3 and 9 months 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 contains some of the forward-looking statements, which are completely based on our expectations, beliefs and opinions as of today. These 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 remarks. Over to you, sir. Thank you.

Thank you, Prachi. Good evening, ladies and gentlemen. Thank you for joining us today and for your continued interest in Granules India. We trust, you have had a chance to review the detailed presentation available on our website. Let me begin with our consolidated performance. Q3 FY '26 has been 1 of our strongest quarters despite a temporary loss at our Peptide CDMO business. We reported revenues of INR 1,388 crores, a 22% increase year-on-year. EBITDA was INR 308 crores, growing 34% over the same period last year. Margins improved meaningfully, driven by disciplined execution and better operating leverage. This momentum reflects the strength of our diversified business model and the progress we are making on multiple strategic fronts. Regulatory and quality upgrade. Regulatory excellence continues to be a critical priority for us. We made steady progress across all our facilities for this quarter. Gagillapur facility. Our remediation plan remains on track. We held a post-warning letter meeting with the FDA in early January. We will be submitting the requested documentation shortly. Importantly, to date, the agency has not raised any concerns regarding the adequacy or pace of our corrective action. We expect a formal feedback after our submission and remain confident about the pathway to resolution. As a prudent derisking measure, we have filed select products from our U.S. and GLS facilities. The site also received ANVISA Brazil GMP certification, reinforcing the improvement in our quality system. GLS at Genome Valley, the U.S. FDA conducted an unannounced PAS and GMP inspection from 15th to the 19th of December. We received 5 observations, none related to data integrity. Our responses were submitted within the stipulated time lines. Earlier in the quarter, GLS received a PAS approval on 10th November, and an EIR on 11th December, for the inspection held in August. We have also received a CBE 30 approval following the recent inspection. GPI in the U.S. Our GPI facility received EIR on 5th November, closing the PAS inspection from June. GCH, our U.S. packaging site. The U.S. FDA completed a GMP inspection on 4th December with 0 Form 483. Across the network, we continue to advance digitalization of manual operations. Several initiatives are already live at GPI. We expect to complete implementation at Gagillapur by the mid-calendar year, followed by rollout to other sites. While a lot of our consultancy costs have come down, we expect to invest into system enhancements, which will involve some CapEx and OpEx over the coming quarters. These steps will strengthen both the reliability and resilience of our operations. R&D filings. Our R&D and regulatory pipeline progressed well this quarter. We filed 1 EU dossier, which is DCP, 8 new product registrations in rest of the world markets through partners, 4 DMFs in rest of the world countries. Approvals included a tentative U.S. FDA approval for generic Adzenys from GPI, 1 approval in Europe, 2 approvals in ROW markets, 1 DMF approval in China. Our increasing focus on ROW markets supports our strategy to diversify beyond the U.S. and Europe. ESG progress. Sustainability continues to be a core part of who we are. This quarter, our CDP climate change rating improved to A up from B. Our S&P CSA score increased to 62 placing us among the top 10% of our global peers. We reinforced our commitment as a signatory to the UN Women's Empowerment Principles, UN Global Compact and PSCI. Our Gagillapur facility achieved zero waste to landfill, which is platinum plus with over 99% waste diversion. We continue to make measurable progress across Scope 1, 2 and 3 emissions, renewable energy, sustainable procurement and water neutrality initiatives. Preferential issue. During the quarter, we also took a strategic step to strengthen our balance sheet through the preferential issue, which saw strong support from shareholders in yesterday's AGM. The proceeds from this issue enhance our financial flexibility and will be deployed prudently to support capacity expansion, drive efficiency and pursue value-accretive opportunities while maintaining our focus on governance and capital discipline. We believe this capital raise positions the company well to accelerate growth and create sustainable long-term value for all shareholders. Strategic direction. As we noted last quarter, Granules has entered a phase of renewed momentum. Our strategic priorities remain clear: transitioning to higher complexity generics, normalization at Gagillapur following remediation and strengthening the quality systems holistically across all the facilities, strengthening our market presence across key geographies, scaling operations at GLS as regulatory milestones translate into commercial execution, building a differentiated peptide CDMO platform through Ascelis with rising innovator engagement. These pillars position us well for sustainable quality-led growth. For ease of understanding, we have broken down our portfolio strategy into integrated Rx, complex Rx and CDMO. The definitions and directions of which have been presented in our IR presentation. To conclude, this has been a strong quarter operationally, financially and strategically. We remain committed to building a high-quality innovation-driven global pharmaceutical enterprise supported by robust governance and a resilient multisite supply chain. With this, I now hand over the call over to Sanjay Kumar, who will speak about our peptides and CDMO growth platform. Over to you, Sanjay.

Thank you, Chairman, sir. Good evening, everyone. Let me briefly update you on the progress of our Peptide CDMO platform, Ascelis Peptides and Senn Chemicals. As anticipated, performance in the Q3 was modest, but consistent with the transition phase we have discussed earlier. Having said that, Q3 was an execution and activity intensive quarter, focused on executing key projects, increasing utilization and strengthening delivery readiness for the Q4. Also during the quarter, Q3, we incurred high operating costs on account of planned maintenance activities and additional shifts towards the key customer project. The benefit of this increased activity are expected to translate as deliveries conversion in the next quarter, that is the Q4. From an execution standpoint, Q4 is anchored on delivering key projects where work carried out over the last quarters is now moving into delivery stage. Accordingly, Q4 is tracking towards a meaningful improvement in performance, supported by ongoing project deliveries. Our focus remains on disciplined execution, predictable delivery and strengthening customer confidence. On the R&D front, we are seeing active collaboration between our Switzerland and India teams working together on live customer projects after operationalization of our Peptide Center of Excellence at IIT Hyderabad. The India R&D setup has begun contributing directly to the customer projects, including development and execution responsibility. The R&D team is also making progress on TFA-free peptide chemistries, reinforcing our technology differentiation, particularly in the cosmetics segment. On the commercial front, our focus over the next couple of quarters is on progressing feasibility discussions with our customers, seeding samples with those select customers, particularly in amino acid derivatives and complex peptide fragments and responding to the RFQs and RFPs across the active pipelines. These activities are focused on building a conversion pipeline for the coming financial year and beyond the current financial year -- the next financial year. With that, I will hand over to Mukesh Surana, our Chief Financial Officer, who will take us through the financial performance.

Thank you, CMD and Sanjay. Let me take you all through key financial highlights for Q3 FY '26. Revenue. The third quarter revenue were INR 13,879 million as compared to INR 11,377 million in Q3 FY '25, a growth of 22% and revenue sequentially grew by 7% as compared to Q2 FY '26. Revenue growth was broad-based with strong contribution of formulation business in North America and Europe. The sales breakup as per business division and geographic region are presented in our investor presentation, which is available on the website. Gross margin. We delivered a gross margin of 63.9% in Q3 FY '26 representing an improvement of 216 basis points year-on-year and decrease of 183 basis points sequentially. Year-on-year, gross margin improved with a better product mix for the finished dosage segment. EBITDA and EBITDA margin. EBITDA for the quarter was INR 3,081 million, that is 22.2% of sales as compared to INR 2,303 million, that is 20.2% of sales in Q3 FY '25, meaningful improvement of 196 basis points from Q3 FY '25 despite EBITDA loss of Ascelis Peptides of INR 248 million. Quarter-on-quarter increase in EBITDA loss of Ascelis Peptides is due to regular and preventive maintenance taken up in December '25 at Senn Chemicals facility. EBITDA as a percentage of sales for Q3 FY '26 has improved by 75 basis points from Q2 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 689 million, that is 5% of sales as compared to INR 568 million, that is 5% to sales in Q3 FY '25 and INR 705 million that was 5.4% to sales in Q2 FY '26. We will continue to spend similar amounts to support long-term strategic growth. Net debt. Our net debt stood at INR 10,151 million as compared to INR 10,241 million in Q2 FY '26. Cash-to-cash cycle. Our cash-to-cash cycle has slightly improved to 202 days in the current quarter as compared to 204 days in Q2 FY '26. Net working capital as a percentage to sales was at 27%, improved from 33% in the year beginning. Cash flow from operations. Cash flow from operations for the quarter was INR 2,187 million as compared to INR 1,937 million in Q2 FY '26. CapEx spend during the quarter was INR 1,298 million as compared to INR 2,112 million in Q2 FY '26. ROCE. ROCE for Q3 FY '26 is 16.8% as compared to 16.2% in Q2 FY '26. ROCE has improved with the improvement in operating profit quarter-on-quarter. With this, I open the floor for questions.

[Operator Instructions] Our first question comes from the line of Krisha Kansara from Molecule Ventures.

Am I audible?

Yes, ma'am, you are.

I joined the call a bit late. So pardon me if the answer to my question has already been answered in your opening remarks. But my question is on our Gagillapur facility. So in the last quarter, you informed that we were going to meet the FDA in January month. So could you please update your investors regarding the same? Have we met them already? And if yes, could you please outline the next steps that we as a company are required to follow before we clear this warning letter? This is my question.

Krisha, we had a meeting with the -- virtual meeting with the FDA early January, and they have requested us for some more documentation, which we'll be submitting shortly. The most important part is the agency has not raised any concerns regarding the adequacy or pace of corrective action. So once we submit our response and further information, we will see what the FDA comes back with, but we are -- that's it, yes.

Right. So would you be able to put a time line to it, like when are we expecting the final reinspection from there end?

We cannot put a time line to that, but we will be submitting the response quite early in the very near future. But we'll have to see how the agency and then what time lines are going to come out. But again, like I mentioned, we have also been derisking. Some of the filings have been happening in our U.S. facility and also at our GLS facility. And some products are being site transferred to a GLS facility here, too. Slight amount of derisking is happening. Even if it takes a little longer, it should not be a major problem.

Our next question comes from the line of Bino Pathiparampil from Elara Capital.

A couple of questions from my side. One, there is this INR 25 crores of loss from the peptide franchise, which you have given in the investor presentation. How has this moved across quarters from 1Q to 3Q? And what is the outlook for the next few quarters?

I think it's a good idea Sanjay take this call. Sanjay? Sanjay is responsible for the peptides business and anything regarding peptides, he will be answering.

Yes. So Bino, so the numbers are comparable to the financial performance of the previous quarter. In terms of outlook, this is a typical of a CDMO business where the quarter-to-quarter variation happens. And as I covered as a part of my early commentary, while the financial performance was lower and as anticipated, the quarter itself was activity intense and our projects progressed through the execution, which typically take a couple of quarters. And the outcome of the last quarter will be reflected in the Q4, and we are expecting a very meaningful improvement in the Q4 performance. And we do have a visibility over the next set of quarters, and the numbers are significantly improved over the past 2 quarters on the revenue basis.

Understood. Just to follow up on that. When you say improvement in performance, are you referring to breakeven and a positive EBITDA sometime soon?

Yes. I exactly mean that, and that is something that we covered in the last con call as well that we expected Q4 to go above the neutrality on EBITDA that you asked. So we remain confident, and we are on track to get to that position.

Q4 as in next quarter, right, this coming quarter?

Yes, the current ongoing quarter.

Okay. And what will drive that? Is it transfer of manufacturing to India or additional projects that you have taken up? What is leading to this sharp turnaround?

So I won't put it as actively as that. Like as you would assume the lead time to execute these projects go beyond a quarter. So we did have the visibility on the execution time line for this, and we understood that those deliveries will happen in Q4. Again, the quarter-to-quarter variation is very unique to the CDMO business. So we did have the visibility. We were executing during the Q2, Q3, and we continue to execute through the Q4 and some of the key customer deliveries are happening in the Q4.

Understood. And can we also assume that it will remain in the positive EBITDA territory through the quarters in FY '27 as well?

So our target is always to turn positive from next financial year. But again, I keep on saying the quarter-to-quarter variation will remain a characteristic of this business. But on a year basis, we are turning towards neutrality and profitability for sure.

Got it. And second, is there any cost related to Gagillapur facility remediation still sitting in the P&L in Q3?

Yes, Mukesh. This side, Bino. The remediation cost has substantially come down. So it will be in these normal levels for a few quarters and then will be negligible. It has come down substantially.

Got it. And 1 last question on the U.S. If I look at your U.S. revenues in dollar terms, the last couple of years, we have added like $40 million to $50 million, somewhere between $40 million and $50 million every year to the U.S. revenue. Is that something which we can kind of look forward to in the coming couple of years as well?

That's what we aspire for, and we are confident of that.

Our next question comes from the line of Tushar Manudhane from Motilal Oswal Financial Services.

Sir, just on the Ascelis Peptide, how much of the revenue would have been in this quarter or, let's say, 9 months?

So this quarter is INR 33 crores, Tushar.

Okay.

And quarter-on-quarter, last quarter, it was INR 28 crores and the previous quarter also around INR 28 crores, INR 29 crores. This quarter, INR 3 crores, INR 4 crores higher. And the loss has gone up, which Sanjay also has clarified, I also clarified. Primarily, we have taken higher execution activities, both on the -- some of the active projects where the revenue will further come in Q4. And also, we have taken up regular and preventive maintenance cost in December.

So effectively, that maintenance cost will reduce and then there will be scale up in the revenue, which is why the EBITDA breakeven for Ascelis Peptides...

You are right, Tushar, yes.

Even if I leave aside or even if I -- so if I exclude, let's say, Ascelis revenue and the EBITDA loss with respect to the Ascelis, the ex of that business has also scaled up both in terms of revenue as well as profitability. So how that piece of the business will improve subsequently, maybe like fourth quarter onwards or in FY '27, given that the regulatory issue-related expenses are actually at least largely behind, we might wait for inspection -- reinspection for Gagillapur site. But ex of that, how to think about the growth in the business in FY '27, if you can shed some light on that?

Tushar, we are looking at sequential improvement, both on the sales and margin side.

And that would be driven by?

That will be driven by 1 expenses, operational leverage, for sure, and more than that, in fact, revenue as well.

But this is to do with our, let's say, core products or the new approvals and which geographies, if you can give more color.

Tushar -- Priyanka, go ahead, you can answer that.

Yes. Tushar, I'll answer that. A few things, well, the last couple of quarters like we mentioned in our past con calls also, we -- while we were producing, we weren't producing to the full of our capability. So right now, we are going to be increasing capacities and catering to all the awards that we have in the U.S. and to the other markets. So just the operational efficiencies will increase, productivity will increase, and that will certainly increase the numbers going forward. In addition, if all goes well with Gagillapur, we have our launches in place. That will also facilitate the growth. We have a few CD30 approvals and some PAS approvals from the GLS side, which we plan on launching, that will also facilitate growth.

Our next question comes from the line of Yashika Gogia from Nizar Ent.

I just had one question. I wanted to gain some clarification on lisdexamfetamine. What's the product status? As we heard previously that GPI received FDA approval for the same chewable tablets in December '24 and then in January '25, the capsules. Is there any revenue recognition also, I just wanted to gain some insight for lisdexamfetamine.

Priyanka, can you take that?

Yes, sure. Yes. It's been 4 quarters since we've launched lisdex caps and tabs, and it provides a meaningful revenue addition to our U.S. business.

All right. So could you clarify some numbers or the revenue for the same?

No, we don't get into product specifics, unfortunately. But I will tell you that we have -- we were a late entrant to the market, but because of our quota history and our compliance history with the DEA, we were able to get meaningful share, and we plan on increasing it as we keep going further.

All right. So will it be feasible for you to tell how much incremental demand this will signal since you mentioned that the quota for U.S. -- the quota for lisdexa has been improved. And in '24, it was around 26,000 per kg, whereas in '25, it was increased to 32,000 per kg. And in September '19 also, it was raised. So can we see any numbers from our and what benefit we can see?

I'm sorry, can you please repeat your question?