Granules is a large-scale vertically integrated company that manufactures API, intermediates and finished dosages and has seven manufacturing facilities along with B2B & B2C marketing & distribution. Revenue mix FY22 Formulations – 52%, API (API+PFI) – 48%.
Granules India: Revenue from paracetamol jumps 46.8% compared to 33% in Q2FY22
Top five products (Paracetamol, Ibuprofen, Metformin, Methocarbamol, Guaifenesin) contributed 81% to FY22 revenues.
The operational cash flows increased to ₹2.18 bn for Q2FY23 vs. ₹1.81 bn in Q1FY23. FCF increased to ₹1.24 bn in Q2FY23 vs. ₹980.0 mn in Q1FY23. The company has completed the buyback offer and incurred ₹3.10 bn towards it, including taxes and other expenses.
While in the US, price erosion continues, the company intends to offset it with expansion in other geographies and operational efficiencies. While the downward trend in the raw materials costs is evident at a slower pace, cost of energy continues to be high.
The supply of DCDA and PAP, some of the KSMs, has stabilized and is expected to improve here-onwards. The company has developed enzyme and fermentation-related products and completed proof of concept for a couple of those. Also, the company has made good progress on the continuous process development efforts and hopes to commercialize it over the next couple of years.
Revenue from Operations for Q2FY23 stood at ₹11,507 mn, growth of 30% YoY. Revenue share from USA increased to 57.8% when compared to 53.8% YoY.
During the quarter we filed two ANDAs, two US DMFs, three CEPs, and received two US ANDA approvals. Active Pharmaceuticals Ingredients (API), Pharmaceutical Formulation Intermediates (PFI) and Finished dosages contributed 29%, 20% and 51% of revenue from operations respectively.
Free cash flow increased to ₹1,240 mn for Q2FY23 as against ₹324 mn for Q2FY22. ROCE for Q2FY23 increased to 25.0% as compared to 21.8% YoY.
Granules’ revenue growth in this quarter has beaten our estimates, mainly driven by higher paracetamol sales in the US, increased market share and new launches. Contribution of revenue from paracetamol increased 46.8% compared to 33% in Q2FY22.
API sales contribution also increased to 29% vs. 21% in Q2FY22. EBITDA margins were better than our estimates.
They are recovering (up 36 bps QoQ) on account of higher sales and Granules reducing R&D expense to 2.1% of revenue vis-à-vis 3.1% in Q1FY23. Granules remains a decent player with clear vision to play on its strength of economies of scale and gradual expansion into more complex products/forms to improve margins.
The company expects R&D spend to rise here onwards and is expected to be in the range of ₹400.0-450.0 mn, each quarter. R&D spend was ₹250.0 mn in Q2FY23 vs. ₹470.0 mn in Q2FY22.
Net debt was ₹5.53 bn in Q2FY23 vs. ₹6.13 bn in Q1FY23, as the company has repaid the long-term debt. Focus on working capital management led to robust cash generation. Capex was ₹940.0 mn in Q2FY23.
The target EBITDA margin is around 25.0% over the next 2 years.
Ability to pass on input cost inflation and margin improvement through focus on cost management. Extending its core products via additional strength/different forms in US, launching in other geographies is likely to provide better operating leverage.
In the US, it also focuses on select small but high value launches where competition is less, which bodes well in a crowded generics market. Timely completion of new block construction in Gagillapur and other expansion activities along with rationalising R&D portfolio.
Supply of PAP and DCDA is stable and improving. R&D spend in Q2FY23 was 25 crores vs. 45 crores in Q2FY22. Guided for R&D spend at 40-45 crore in coming quarters.
Total 529 crore of sales in Q2FY23 vs. 293 crores in Q2FY22. Capacity utilisation of paracetamol was at 90-95%. GPM for paracetamol is low compared to other products.
There is no one-off in paracetamol sales. Increase in sales is due to raw material (PAP) prices being high last year and availability not being enough. Launch of paracetamol formulation is expected in Q3FY23.
The management has aspirational EBITDA margins target of 25% to be achieved over five years. There is no pent-up demand in paracetamol. Customers were waiting for the raw material situation to normalise. There is a shift from a competitor to Granules for paracetamol.
Granules has some loyal customers in the US. The company is trying to convert them from Paracetamol API to formulation.
Granules imports DCDA and PAP from China. There was shortage of PAP in China, but the situation has normalised.
Indian manufacturers also started manufacturing PAP while other international manufacturers came up. For DCDA, they had suppliers from Europe but now energy costs have gone up. Hence, Granules is buying it from China.
Company is confident that after taking this amount and future capex into account they will end up with a positive cash flow and reduced net debt by the end of the current fiscal year as compared to March 2022. Going forward, Granules will be built with a focus on R&D, technology, and sustainability.
The company plans on creating a strong R&D engine for both API finished formulations and chemicals intermediates, while strengthening their core business. Granules has made progress on enzyme and fermentation technology driven product development and completed proof of concepts for a couple of projects. Commercialization of DCDA (a step towards backward integration) is expected in the next two years.
Shuchi Nahar is a Certified Research Analyst. She can be found on Twitter at @shuchi_nahar
Note: This article is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related investment-related decision.
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