Granules India Limited (532482) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Granules India Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Prachi Ambre from MUFG Investor Relations. Thank you, and over to you.

Thank you, Atharva. On behalf of Granules India Limited, I extend a very warm welcome to all the participants on the Q1 FY '27 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. PV 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 Krishna Prasad sir, for his opening remarks. Over to you, sir. Thank you.

Thank you, Prachi. Good evening, ladies and gentlemen, and thank you very much for joining us today. I appreciate your continued interest in Granules, and I trust you have had a chance to go through the presentation we have uploaded. Let me not begin with a number, but with a conviction. Granules today is no longer a company defined by volume and cost alone. It is becoming an innovation-led complex and differentiated platform -- pharmaceutical platform that turns scientific depth into durable, high return cash-backed earnings. Everything I will share this evening is in service of that one idea. We are moving up the value chain, and we are doing it with discipline. Our purpose has not changed to real life responsibility through pioneering green signs. What has become clearer is why we win. Few companies can do what we do end to end, make the chemistry, convert it into the formulation and deliver it into the most demanding regulated markets in the world, and do all of that with quality and cost discipline. That integration from molecule to the tablet is our real strength. This is not easy to build, and it is not easy to copy. Let me give you a few thoughts that this is real and not just talk. In the U.S. our whole manufacturing company, GPI, has moved up to the 27th position among all U.S. generic companies from 74, just 5 years ago. In the controlled substance space, we are now the fourth largest player, and I'm personally more satisfied to see our mission to sustainably supply critical ADHD medicines to patients without shortages, playing out well. Complex Generics, which were around 39% of our finished dosages a year ago are now 50%. And our newest engine, the peptide CDMO built around grew more than 100% over last year. These are not just slogans. This is our strategy showing up in numbers. Now the numbers and reps. This is our strongest first quarter ever. Revenue grew 22% over last year to about INR 1,477 crores. Gross margin stayed healthy at around 65.6% and EBITDA grew 37% to INR 339 crores, and profit after tax grew 60% INR 180 crores, but the number I'm most pleased with is our return on capital, which has improved to 18%. Our net debt to EBITDA is now almost nothing, 0.07x. So for all practical purposes, we are debt free, and we generated over INR 387 crores of operating cash this quarter. Let me come to the question, I know many of you have Gagillapur, and let me clarify. Our remediation work is essentially complete. We met the FDA in January, and we have submitted every response on time. To date, the agency has not raised a single concern on the adequacy or the pace of our corrective actions. Seven of our eight facilities now carry a clean EIR, every site except Gagillapur, including our GPI facility in Virgiinia, which received its clearance in June. Over the last 2 years, we have gone through more than 330 customer and regulatory audits without a single critical observation. We cannot tell the FDA when to come, but we can be ready every single day, and we are ready. And waiting behind that clearance are 9 applications ready to launch. That said, we will continue to improve and maintain our quality systems across all sites with the implementation of digitalized systems across the network. So where do we go from here? I want to be honest about the difference between what we have committed to and what we are still exploring. You deserve both. In the near term, the path is clear and is already funded. We bring Gagillapur across the line and unlock the launches waiting there. We scale up our new Genome Valley facility, which adds about 40% to our formulation capacity. We keep taking complex generics higher. They are already half of our finished dosages. And we keep growing our ADHD and controlled substance audits. Our oncology launches from Vizag and our fast-growing business in Europe and the rest of the world. In the medium term, our growth comes from doing the most difficult things. We are deepening a differentiated portfolio 505(b)(2) products, first to file and day 1 launches. We're being early and being hard to copy, both matter. We already have 2 sole first-to-file products in the public domain with litigation expected. And there are a few more such opportunities in our pipeline. We are scaling of the tight CDMO across our Swiss and India model, which places us in the fast-growing peptide space. And in the long term, we are setting a few larger opportunities. And I want to be clear, these are under consideration, not commitments. We are looking at several select nonsolid dosage areas to enter each of which would take the same core strength, our chemistry and our manufacturing into a much bigger market. There are several exciting opportunities which when more concrete will be communicated. We'll approach them the way we approach everything linked to real demand careful with capital and only where we genuinely have the right to win. So with this I pass on the mic to Sanjay, who will take you on the progress in the peptide sector. Over to you, Sanjay.

Thank you, Chairman, sir. Good afternoon, everyone. Let me briefly update you on the progress of our peptide CDMO platform. Q1 performance was broadly in line with our expectation at CHF 5 million. Revenues improved on a year-on-year basis while moderating sequentially after a strong quarter 4. I've seen in previous years, we expect the second half to be the stronger than the first and remain confident of delivering meaningful year-on-year growth, both in H1 and in H2. During the quarter, we initiated 3 new customer projects, 1 in pharmaceutical, 2 in cosmetics, which have potential to grow over time and over the next few years. We also reengaged with customers on 2 previously discontinued products, one of which we are optimistic and could be reactivated during the current fiscal year as well. On the R&D front, Zurich and Hyderabad team are now operating as one integrated R&D organization, supporting active customer projects while expanding our technology portfolio. The Hyderabad center is contributing directly to process development and project execution, complementing our Swiss capabilities. Building on our success in a peptide, we have now initiated work on TAG assisted peptide synthesis, where encouraging early laboratory results have the potential to further strengthen our technology platform and support future customer opportunities. We continue to progress on infrastructure upgrades at the Zurich site with additional solid phase reactors, large purification columns and lyophilization capacity expected over the next coming months. In parallel, we have now initiated the next phase of our India manufacturing footprint beyond the R&D infrastructure that we already have with land now earmarked for our peptide facility at Vizag. As stated earlier, our focus for FY '27 remains delivering a PAT positive performance on an annual basis, while recognizing the quarter-to-quarter variability inherent in a project-driven CDMO business. With that, I'll now hand over the call to Mukesh, who will take you through the financial performance.

thank you, CMD and Sanjay. Good evening, everyone. I will now walk you through the financial performance Q1 FY '27 revenue. Q1 FY '27 revenues stood at INR 14,768 million, up 22% year-on-year and broadly stable sequentially over good Q4. Growth was well balanced, led by finished dosages largely contributed by complex generics, supported in North America and Europe, while peptide CDMO continued to scale steadily. This performance indicates broader participation across our business with the revenue base becoming more diversified and dependable. The sales breakup as per business divisions and geographic regions are presented in our investor presentation, which is available on the website. Gross margins. Gross margin was healthy at 65.6% and expansion of 74 basis points year-on-year, led by complex generic and higher value formulations enriched our product mix, while the operating environment continues to be influenced by geopolitical tensions in West Asia leading to inflation in select raw materials, packing inputs, freight and broadly supply chain costs. Our opening inventory levels in the U.S.A helped to ensure that Q1 FY gross margins remain largely insulated from these pressures broadly in line with Q4 FY '26. We continue to closely monitor the situation and where appropriate, pursuing calibrated pricing actions and cost pass-through mechanism with customers to mitigate the impact of sustained cost inflation for the upcoming quarters. EBITDA and profitability. EBITDA was INR 3,389 million, up 37% year-on-year at a margin of 22.9%, an expansion of around 256 basis points. With our differentiated portfolio scale, profitability is improving steadily alongside it, with focused step-up investments in complex generics, R&D for future growth. Q-o-Q EBITDA has marginally declined by 99 basis points. R&D expenses were INR 880 million, about 6% of sales and up 30% year-on-year. We view R&D as the foundation of our future revenue, focused on high barrier areas, CNS, oncology, and complex formulations where we can build a differentiated position. These investments are steadily converting into filings and a healthy launch pipeline, including potential first-to-file opportunities. Q4 FY '26 R&D expenses were 5.3% of sales. PBT before exceptional items. PBT before exceptional items grew 41% to INR 2,404 million year-on-year basis. This was supported by gross margin expansion. Net debt. Net debt stands at INR 1,012 million in Q1 FY '27 from INR 4,021 million at FY '26 close. This healthy balance sheet gives us the comfort to fund our growth, capacities and R&D. Net working capital to sales improved to 29% in Q1 FY '27 as compared to 30% in Q1 FY '26 and Q4 FY '26. Working capital investments in inventory at these levels are to support our growth while managing receivables well. Cash flow from operations. Operating cash generated from Q1 FY '27 is INR 3,874 million compared to INR 1,003 million in Q4 FY '26. Healthy cash generation supported with good profitability and disciplined working capital management. CapEx. CapEx spent on Q1 FY '27 is INR 890 million compared to INR 1,000 million in Q4 FY '26. CapEx moderated in Q1 FY '27 as the Genome Valley investment completed, investment activity is expected to pick up gradually driven by digitalization and modular growth projects at existing facilities. ROCE. ROCE stood at healthy 18% on a steady upward trajectory compared to 17.6% in Q4 FY '26. For a capital-intensive business, this is an important measure of how well we are converting our strategy into value. As Genome Valley facility and the peptide platform scale up in the medium term, we expect this to progress steadily. With this, I open the floor for questions. Thank you.

[Operator Instructions] The first question is from the line of Nishita Sanklesha from Sapphire Capital.

Hello, am I audible?

Yes, Nishita.

Yes. So I wanted to understand, we've done 22% Y-o-Y growth in Q1 FY '27. And like for the last 2, 3 quarters also, we've had the same similar growth trajectory. So what sort of growth can we see in FY '27 on an overall year basis?

Nishita, we are quite excited and positive that the growth will continue. It's -- yes, we are confident it will continue.

Okay. And you mentioned that we've done INR 890 million of CapEx in this quarter. So give some sense on the total CapEx for the year?

Yes, Nishita, as I clarified, the Q1 is not -- Q1 has moderated because the major investment Genome Valley is completed. Now the CapEx is expected to pick up with some other digitalization projects and some growth projects which we have taken up. So rest of the year, we have guided earlier INR 600 crores. We still remain INR 600 crores, INR 89 crores is already spent.

Okay. Okay. Understood. And our margins, are they going to stay in the similar range of 22% to 23%?

Yes, Nishita. We expect that to continue.

The next question is from the line of Shashank Krishnakumar from Emkay Global.

My first one is again on gross margins. I think I know you'd cautioned about RM pressures, but I think partly the mix change in favor of complex generics also seems to have helped. So next 1 or 2 quarters, would you expect the favorable mix impact to sort of offset any RM pressures you might see? How should we think about GM's going forward?

Yes. You've got it right. Shashank, the RM pressures are quite high. There's a lot of challenges we are facing. But like you said, the mix is really helping us. Move towards more complex generics is helping us. And we have every reason to believe that it will continue.

Got it, sir. And the second one on Europe and ROW, I think even excluding, I think the Y-o-Y growth has been pretty strong. So what is it that is playing out in these markets? Is it API or formulations? Because I think earlier, we also mentioned that the API to FDF transition could also play out in Europe and other markets. So just trying to understand what is driving the growth in ex of U.S. market?

Priyanka, do you want to take that?

Sure. This is all planned growth in Europe. Like you said, ex of the CDMO business as well, this is increase in both the API business and the finished dosage business. There is a lot of demand coming in from the products that we've filed in the past in Europe. And this is only going to go in an upward trajectory going forward.

Got it. Just the last one, if I could squeeze in. So just on Genome Valley, how is that ramping up? Are we on track to sort of get closer to the optimal utilization levels probably by the end of this year? And also wanted to check if some of the newer filings which we are making, I think, have made 5 filings this quarter. So are those being made from this facility? Some color around that.

Yes, Genome Valley facility is scaling up. And by the end of the year, when I say optimal, it's not that we are close to full capacity, but maybe more than 50%, 60%. And believe that extra capacity, we just cannot utilize all capacity if we have to utilize that. We have to start building another plant today. And the filings, Priyanka, you would like to answer that question on filings?

Sure. So we have a lot of filings done from -- sorry, a lot of product extensions done to GLS to make sure that we have an ultimate site to manufacture our existing products from. So GGP, while we've mentioned in the past, of course, is going to a warning letter situation, the demand has always been very high, and we're able to cater to some of the demand through the approvals that we've received in GLS. In terms of new filings, there have been a few filings that we've done from GLS, but the majority is still from GGP, but we've also done some risk mitigation activities by transferring these products to GPI and also GLS facilities.

The next question comes from the line of Sajal Kapoor from Antifragile Thinking.

I was just saying that growing from INR 1 crore annual PAT in 2001 to INR 600 crores is an achievement very few pharma companies can match and many promoters talk and give interviews and they are available and visible in all sorts of shows and interviews. Very few deliver, actually. So talk is cheap as they say, and execution is expensive or rather very expensive. And I have a couple of questions, if I may. So first is, can you give one example where Granules won business because of capability rather than manufacturing cost because our forte before COVID, at least was scale, economies of scale and cost, whereas if I read or if I read the annual report, the recent one and even the previous couple of years, we have been pivoting. Is there any evidence that you could help us out with where the capability was the driver for winning the business rather than our low-cost manufacturing?

Yes, Sajal. Most of the complex products that we have today, we think the benefit from are difficult to make products very, very difficult. These are -- and also the -- some of the ADHD products in the U.S., the each product comes with at and very low dosages and consistency in manufacturing is very difficult. So a lot of people, it's not only because of quotas, they go out of stock because they've had manufacturing issues, and we continue to consistently make and supply these products. And the biggest proof is if you -- if I may say so, is the sodium oxybate filing, which we did recently, which is sold first to file. That's a very, very complex product. A lot of people have been trying and are not very successful. And they have also been very confident that they were overcoming the IP that year.

So that's very heartening to note. Dr. Krishna. And my second question is peptides, CDMO contributes only 4% of revenues today, yet it occupies a central place in your strategy. What operating milestone would tell you and us as the investors and analysts that the platform has become structurally self-sustaining rather than simply strategically promising?

Sanjay, why don't you take that?

So Sajal, our approach towards peptide CDMO is never incremental, but it's a multiplier, and we have stated out a goal of 5x revenue in 5 years. But I think the intermediate milestone, if I had to answer your question directly, would be a $50 million revenue and delivering it with an EBITDA margin, which is consistent with such play would be the first proof point, and we see somewhere in the mid of this journey of 5 years. So that's point number one. I missed any other part of the question that you have.

No, that's a very hard number, Sanjay and appreciate that. So can you just -- is it the USD number? And what kind of ballpark? Again, in the CDMO, we can never be specific where the business is lumpy, as we all know, but a ballpark kind of a milestone that we can track like yes.

So that's very clear, USD 50 million revenue with 30% plus EBITDA, somewhere in the third year from now, mid of third year from now, should be our run rate. I think associated with that is some of the customer wins I count customer wins only if they get into a potential annual size of $10 million plus. I think 3 wins there, and I think that should be the proof of the concept.

That's a conservative stance.

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

Sir, first question on cash flow from operations. If you can explain the significant rise for the quarter, the reason for the same?

Tushar, Mukesh this side. I'll try to clarify. One, the sequential revenue growth is not there. That means there is no additional investment in working capital. In fact, we have not only increased little inventory, but actually substantially reduced the receivables with the higher sales in U.S.A. So the receivable days of U.S.A is better. So that has been improving the working capital. And with no increase in working capital and lesser increase in CapEx, overall, free cash flow has been better EBITDA.

Okay. So pre CapEx, it would be how much?

Sorry, Tushar?

So CapEx was INR 89 crores. So basically -- I got it. So basically substantial reduction in receivable days has helped to get higher CapEx, I suppose.

That's right.

Sir, I missed the target of the peptide CDMO revenue, $50 million in what time frame? 2.5 years? Is that understanding correct?

Sanjay?

So the question was targeted towards what's our view in 5-year period? And I said that a validation of that number should come in the middle of that journey.

Okay. And lastly, in the opening comments, upgrading of facilities in terms of solid phase reactors and lyophilization. Capacity capability was mentioned. If you could just help us -- help me know the amount -- the finance that would be spent for these.

So I can give you a nature of the investment. So chemicals has been known as a leading player in the liquid phase peptide. And it has a very small footprint, whereas some of the other capacity like solid sales capacity columns and lyophilizing capacity. So we have actually already ordered and the deliveries of these equipment, some of these missing in the infrastructure bouquet will happen over the next few months. And integration of that, there will be subsequent installation costs attached to that. These are not very high numbers. The components have been already been ordered in the past and the procurement has been done over the last -- more than 6 months now. We are -- what we are giving you a picture of that, that we are now scaling up these gaps in the infrastructure with a credible capability along the solid synthesis, purification problems and the lyophilization capacity.

Okay. And why not disclosing the amount given the -- but capacity-wise, could you highlight like what kind of scale are we sort of putting up for the solid phase of lyophilization?

Yes. So we cannot go into each equipment capacity, but it's sufficient to say that it addresses the customers demand that we have been facing in the past.

Got it. And just lastly from my side. Just one comment with respect to certain product extensions done through GLS, probably to offset the warning letter impact on Gagillapur facility. Just to understand, while the is that the existing business continues to be on track or we have reduced certain production itself from the Gagillapur facility till we get the clearance from the U.S. FDA? And the product extension, which we are referring to where these products are already approved but just as a matter of caution we have shifted to GLS. That's both my questions.

Yes, you're right. Okay. Go ahead.

So we mentioned this multiple times since day 1 of the warning letter, of the 483s to be precise. We've only taken an intentional stop for a couple of days. Post that, we never continued -- sorry, we never stopped production in our site till date. Demand has always been there. Supply has always been there. The only thing that stopped was approval of new products, which we hope will resume immediately after the FDA visits, and we're very positive about a positive outcome. And with respect to your question on GLS, it's a combination of both products, products where we wanted to mitigate risk and moved them to that side and also some new filings. And more importantly, filings also from different regions, so we can get all the regulatory agencies to come and audit the site and have them regulatory value.

The next question comes from the line of Rashmi Shetty from Dolat Capital.

So again, on this peptide and CDMO part, while you have given the target for 3 years, but how should we look at this year? We have already done a quarterly run rate of INR 60 crores and last 2 quarters have been very good. And you said that the second half will also be stronger. So in terms of entire year, how should we really look at it?

This is Sanjay. I'll take that question. So our objective is a very single force. Turn PAT positive for this year -- that we have taken.

Okay. But in terms of revenue, the quarterly run rate should be maintained for next 3 quarters also? Or we will see a big pickup in the second half?

So there will be a variation quarter-on-quarter. But if you're multiplying that by 4 to get to annual number, that's the minimum that we expect.

That's the minimum. Understood. Got it. And in terms of EBITDA, okay, like I understood that you will become PAT positive this year. And you said that quarter 4 in last con call, you all said that you all have turned breakeven in terms of EBITDA in this business. This year, there would be a decent margin with the ramp-up, or it would be just a few basis points above the margin that is high single digit or something with that?

Rashmi, I think we will stick to these 2 numbers. Turning PAT positive is the biggest ambition that we have for the year and we'll focus on that. We cannot defer beyond this. Of course, EBITDA remains positive on that, PAT-positive numbers. But I think we'll as far as numeric goes on to these 2 numbers.

Okay. All right. And my second question is related to oncology segment. Just want to understand that where do we stand currently from the Vizag plant in terms of API filings, API launches or oncology formulation, oncology exhibit batches, where are we ramping up? If you can give a broad picture on that part?

Priyanka?

Sure. The buyback facility was till date used for CMO activities. And also, we have in the past, developed some APIs, and we were selling APIs that were both customer base, customer APIs and also our own APIs. The growth -- the numbers and contribution from the oncology business has been fairly minimal so far. Going forward, though, starting in FY '28, '29, we launched our first developed product, which is fully backward integrated, and it will have geographical presence -- geographical expansion. So we'll be launching it across many countries. And currently, to add to that, we have close to 9 to 13 products in different phases of development. So oncology is a huge area of our growth, today within oral solid ranges -- within the oral solid dosage platform. And most of the products, it's not all the products, we are fully backward integrated on. So this is going to be a huge growth driver for us.

This 9 to 13 products you said it's in the oral solid space, right?

In the oral solid space, correct, today.

Okay. And Priyanka, one more question related to the U.S. launches. How many are we planning to everything together, unit GLS, GPI, everything together, how many launches are we planning for this year?

This year, if -- pending the FDA approval, we are expecting about 9 launches. And overall, we have about 18 approvals that are still pending, 9 of which will be launched immediately after the FDA clear GGP and plus another 1 product from GPI and the remaining are IP-based. So we have about 18 products that are pending approval.

[Operator Instructions] The next question comes from the line of Krisha Kansara from Molecule Ventures.

Yes. Am I audible?

Yes, yes.

So firstly, congratulations on a good set of numbers. Two questions on the peptide side. So firstly, what is the amount of CapEx that we have budgeted for the peptide intermediate plant that we plan to set up in India? And secondly, we had achieved a positive EBITDA level in peptides business in the last quarter. However, the current quarter shows a loss of INR 12 crores. I just wanted to understand the reason. Is this because of a lower revenue base on a quarter-on-quarter basis? Or did we have some kind of a one-off cost which were related to particular projects? These are my 2 questions.