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, [indiscernible]. 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 thought 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 unfortune risks and uncertainties. With this, I would like to hand over the call to Krishna Prasad 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 as such, you have had a chance to go through the presentation we have uploaded. Let me now begin with a number. But with the conviction, Granules news today is no longer a company defined by volume and cost alone. It is becoming an innovation with complex and differentiated platform chemical platform that turns scientific debt into durable, high return cash back earnings. Everything as we shared this evening is in service of that 1 idea. We are moving up the value chain, and we are doing it with this business. Our approach has not changed. To realize responsibly through pioneering green times. What has become clearer is why this in? Few companies can do what we do end to end make the chemistry convert it into the combination and deliver it into the most demanding regulated markets in the world and do all of that with quality and artisan. That integration from molecules to the tablet is our real strength. This is not easy to build, and it is not receive copy. Let me give you a few fruits that this is real and not an to. In the U.S., our own manufacturing company has moved up to the 27th position among all U.S. generic companies from 74 to us 5 years ago. In the control subsell 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 with our strategies playing out well. Complex Generics, which were around 39% of our finished subsides a year ago are now 15%. And our newest engine, the Petrie CBMO bit around 10 grew more than 100% over last year. These are not this logs. This is our strategy showing up the numbers. Now the numbers in this. 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 5.6%. 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 3 or 7 times. 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 [indiscernible] and let me clarify. Our remediation work is essentially complete. We met a DA in January, and we have submitted every response on pricing. To date, the agency has not raised a single concern on the adequacy or the pace of our corrective actions. Seven of our 8 facilities now carry a clean EIR, every site except agile core, including our GPI facility in Bergen, 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 [indiscernible] to come, but we can be ready every single day, and we are ready. And great thing behind that clearance are 9 applications ready to launch. That said, these 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 part is clear, and we've already funded. We bring [indiscernible] across the line and unlock the launches waiting there. We scale up our new general value facility, which adds about 40% to our formulation capacity. We keep taking complex either they are already half of our initial sites, and we keep growing our ADHD and control substance products. Our oncology not just from a and a 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 defeated portfolio, 505(b)(2) products, first to file and day on launches. We are being early and being hard to copy both matter. We already have 2 sold first-to-file products in the public domain with litigation expected and a few more such opportunities in our pipeline. We are scaling off the site CDMO across our Swiss and India model, which places us in the cash growing subtracts. 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 process 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 approach them the way we approach everything linked to real demand careful with capital and only where they genuinely have the right movement. So with this, I pass on the mic to Sanjay, who will take you on the progress in the [indiscernible]. Over to you, Sanjay.

Thank you, Chairman. Thank you, Chairman sir. Good afternoon, everyone. Let me briefly update you on the progress of our precise 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 I've seen in previous years, we expect the second half to be 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 doing cosmetics, which have potential to grow over time and over the next few years. We also reengaged with customers on 2 previously discontinued products 1 of this, we are optimistic and could be reactivated during the current fiscal year as well. On the LNG front, our July and Hyderabad team are now operating as 1 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 of complementing our risk capabilities. Building on our success in a THC-free test side, we have now initiated work on tax-assisted precise 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 Diraside with additional solid phase reactions, large purification columns and littlization capacity expected over the next coming months. In parallel, we have now initiated the next phase of our India manufacturing footprint beyond R&D intrastate infrastructure that we already have with land now earmarked for our petite facility adviser. As stated earlier, our focus for FY '27, we been delivering a PAT positive performance on an annual basis, while recognizing the quarter-to-quarter variability inherent in a project-driven premium of 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 32% year-on-year and broadly stable sequentially over Q4. Growth was well balanced, led by credit dosages largely contributed to complex generics supported in North America and Europe, while feed continues to steal steadily. This performance indicates broader participation across our business with the revenue base becoming more diversified and dependable. The sales make up a for distance 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 to complete generate and higher value formulations enriched our product mix while operating environment continues to be influenced by geopolitical tension in test Asia, leading to inflation in selling comaterials pack input price and broadly supplying cost. Our opening inventory levels in the U.S. to ensure that we were a to return gross margins remain largely insulated from these questions broadly in line with Q4 prices. 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 389 million, up 37% year-on-year at a margin of 22.9%, an expansion of around 26 basis points. With our differentiated portfolio scale, profitability is improving steadily alongside it with focused step-up investment in complete ending, R&D for future growth. Q-o-Q EBITDA has marginally declined by 19 basis points. R&D expenses were $880 million, about 6% of sales and up 13% year-on-year. We view rather foundation of our special revenue focus on high barrier areas, CNS, oncology, [indiscernible] complex formulations where we can retail differentiated position. These investments are strategic convergent filings and a healthy law pipeline, including potential first-to-file opportunity. R&D expenses were 5.3% of scale. 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 '21 from INR 421 million at FY '26 close. This every balance sheet gives us a comfort to fund our growth capacity and R&D. Net working capital to sales improved to 29% in Q1 FY 2027 as compared to 30% in Q1 FY '26 and Q4 FY '26. Working capital investments and inventory at these levels are to support our growth while managing receivables will. Cash flow from operations. Operating cash generated from Q1 FY '27 is INR 3,874 million compared to [indiscernible]. Healthy cash generation supported with good profitability and disciplined working capital management. CapEx spend on Q1 FY '27 was INR 890 million compared to INR 100 million in moderated in Q1 FY '27 as renowned value investment completed, investment activities 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 and value facility and the prepaid platform is 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 Shanklesha from [indiscernible] Capital.

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 are. 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.

[indiscernible] that we've done INR 890 million of CapEx in this quarter. So then give some sense on the total CapEx for the next year?

Nishita, as I clarify, the Q1 is not -- Q1 is moderated because the major investment when completed. Now the CapEx is impacted to pick up with some other digitalization projects and some growth projects which we have taken now. So rest of the year, we have guided earlier INR 600 crores, we still remain INR 600 crores is already spent.

Okay. Okay. Understood. And our margins, are they going to stay in this large?

Yes, Nishita. We expect that to continue.

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

My first 1 is again on gross margins. I think I know you're cautioned about RM pressures, but I think partly the mix change in favor of complex generic 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 might see? How should we think about GM going forward?

Yes. You've got it right. Test arm pressures are quite high. There's a lot of challenges we are facing. But like we said, the mix is really helping us and more towards more complex generic ending us, and we have a reason to believe that it will continue.

Okay, sir. And the second 1 on Europe and ROW, I think even excluding SAM, 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 formulation because I think earlier, but also mentioned that the CPI transition could also play out in Europe and other markets. So just trying to understand what is driving the growth in soft U.S. market?

Priyanka, you want to take that?

Sure. This is on planned growth in Europe. Like you said, ex of the CDMO business as well, this is increase in both the API business and the semi-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 grow in an upward actually going forward.

Got it. Just the last one, if I could squeeze in. So just on [indiscernible], 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 I also wanted to share with some of the newer filings which we are making, I think he made filings this quarter. So are those being made from this facility or some color around that?

Yes, there is general value facility is trailing up and by the end of the year, I mean, when I say optimal, it's not that we are close to full capacity, but maybe more than 50%, 60% and they need that extra capacity. We just cannot utilize all capacity if we have to size that we are to start building another plant to pay. And the findings, Priyanka, you would like to answer that just on filings?

Sure. So we have a lot of filings done from -- sorry, notice product extensions done to GLS to make sure that we have an ultimate site to manufacture our existing products from. So GDP, while we've mentioned in the past, of course, is going through a warning at the situation, the demand has always been very high. And now 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 but we've also got some risk mitigation activities by transferring these products to GPI and also GMS facilities.

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

Hello, Dr. Krishna. Growing -- yes, I'm very well, 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 interview a 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. Yes. So first is, can you give 1 example where Granules' 1 business because of capability rather than manufacturing cost because our ore before COVID at least was scale economies of scale and cost whereas if I read or if I read the annual report, the recent 1 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 being the benefit from are difficult to make products very, very difficult. We understand also the -- some of the ADC products in the U.S., the each product comes with a trend and ready loads and consistency in manufacturing is very difficult. So a lot of people, it's not only because of quota, they go out of stock because they've had manufacturing issues, and we continue to consistently make and suite products. And the biggest proof is if you -- if I may say so, is the sodium oxybate filing, which we did recently, which we sold [indiscernible], that's a very, very complex product. A lot of people have been trying and are not very precise. And they have also been very confident that we were overcoming the IP barrier.

So that's very heartening to note, Dr. Krishna. And my second question is peptide, 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 is strategically promising?

Sanjay, why don't you take that?

Sure. So Sajal, our approach towards the price medium is never incremental, but it's a multiplier, and we have taken out a goal of 5x the revenue in 5 years. But I think the intermediate milestone, if I have 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 the year. 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 I appreciate that. No, can you just -- is it the USD number? And what kind of ballpark? Again, in the CDMO, we can never be stay with the business is lumpy, as we all know, but all part kind of a milestone that we can at that [indiscernible].

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

Yes. Tushar, 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 reduce the receivables with the higher sales in U.S.A. So there's records of USA as we been including the working capital and with no increase in working capital and lesser increase in CapEx, overall free cash flow has been better EBITDA.

So pre-CapEx [indiscernible]. .

Sorry, Tushar?

So CapEx was INR 89 crores. So it's basically a so basically substantial reduction in receivable days has helped to get higher.

That's right.

So, I mean the target of the [indiscernible] revenue, $50 million in what time in 2.5 years. Is that understanding for it?

[indiscernible].

So the question was targeted towards what our view in a 5-year period, and I said that a validation of that number should come in the middle of that business.

And lastly, in the opening comments, Zurich upgrading of tin terms of solid peers and iconization capacity capability was mentioned. If you could just help us help me on the amount we would finance that would be spent for the [indiscernible].

So I can give you a nature of the investment. So can Chemicals has been no else leading in the ectasis and it has a very small footprint, whereas some of the other capacity like solid sales capacity perfection columns and life lining capacity. So we have actually already ordered and the deliveries of these equipment, some of the vesting in the infrastructure bouquet will happen over the next few months. And integration of that, there will be a 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 we are now scaling up the gas in the infrastructure with a credible capability along colitis, tarification columns and the lilization companies.

Okay. And while not decision given the -- that capacity wireline of scale are we sort of putting up for the colorization.

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

Got it. And just lastly from my side, with 1 comment with respect to certain product extension done through GLS probably to offset the moment impact on the Gilat facility. Just to understand, while the ones where the existing business continues to be on track or we have reduced certain production itself on the available technical the get the clearance from the U.S. FDA and the product extension, which we are referring to where these products already approved, but just as a matter of caution [indiscernible]? That was my questions.

Yes, you're right.

So we mentioned this multiple times since day 1 of the letter of the 483 to be side. We've only taken an intentional software a couple of days. Post that, we never continued -- sorry, we never stopped production in our site till date. Demand has always been very supply always been there. The only thing that stopped with approval of new products, which we hope will resume immediately after the FDA visitors, and we are 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 move them to that patent also some 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 the regulatory then.

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

So on this side and CMDO 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 50 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 on PAT positive for this year is the target that we are taking.

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

So there will be a valuation quarter-on-quarter. But if you're multiplying that also to get your annual number [indiscernible].

Has remain. Got it. And in terms of EBITDA, okay, right, I understood that you will become bad 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, as you know, 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, part positive is the biggest ambition that we have for the year and focus on that. We cannot be beyond this. Of course, every comment is positive on that fact positive numbers. But I think it will reflect in as far as numeric goes on to these 2 numbers.

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

Priyanka?

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

This 9 to 13 products that you said is up in the [indiscernible], right?

In the oral service base, correct.

Okay. And Priyanka, one more question related to the U.S. launches. How many are we planning to even together on CLA, DPI, 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 line of which will be launched immediately after the FDA clear GDP 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 Molecule Ventures.

Yes. Am I audible?

Yes.

Sir, firstly, congratulations on a good set of numbers. Two questions on the peptide side. So firstly, what is the amount of FX that you've budgeted for the site intermediate plan that we plan to set up in India? And secondly, we had achieved a positive EBITDA level in the site 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.