Granules India Q4 FY24 earnings call

What moved the numbers, as management explained it

• Q4 revenue down 2% YoY to ₹1,175.8 cr due to paracetamol API volume decline and price erosion, partially offset by FD growth including GPI-manufactured products.
• Q4 EBITDA grew 12% YoY on value-added percentage rising to 60.1% (from 47.8% in Q4 FY23) on higher FD sales and lower material costs.
• R&D spend rose to ₹609 mn in Q4 (vs ₹369 mn in Q4 FY23); full-year R&D at ₹1,986 mn (~4.5% of sales).
• Freight costs increased by ₹128 mn QoQ in Q4 due to Red Sea surcharge (₹75 mn inventorized on US dispatches — an accounting period shift).
• Full-year FY24 EBITDA declined 6% YoY to ₹856 cr; cyber attack during the year was a one-off drag on full-year performance. (one-off)
• Cash-to-cash cycle expanded to 161 days (from 132 days) on new launch inventory build-up and Red Sea issues — working capital distortion to watch.

The numbers management led with

• FD (formulation) share of revenue: 65% in FY24 vs 50% in FY23; 73% in Q4 FY24
• New product share of revenue: 25% in FY24 vs 15% one year ago
• FY25 capex: INR600 crore; half for Granules Life Sciences expansion, rest for other projects and maintenance capex
• USFDA inspection outcome Unit V: Zero 483 outcome from Unit V Vizag USFDA inspection in April 2024

Guidance on this call

Filed figures are summed from the company's own quarterly results for the whole period (EBITDA excludes other income); where one sits against what was guided is arithmetic, not a judgement.

By business

Balance sheet, capex and funding

• Net debt ₹8,421 mn (₹842 cr) at year-end vs ₹7,671 mn at start; up by only ₹750 mn despite capex.
• Net debt-to-EBITDA target: maintain below 1 (internally 1-1.1 level is comfortable).
• Q4 capex ₹1,006 mn; FY24 capex ₹3,823 mn (GLS ₹1,560 mn, CZRO ₹565 mn).
• FY25 capex estimated at ₹600 cr (half GLS expansion, half other projects and maintenance).
• Cash flow from operations Q4 ₹2,150 mn; FY24 ₹4,394 mn (vs ₹7,387 mn in FY23) — declined on lower EBITDA and higher inventory days.
• ROCE FY24: 16.5% (vs 21.2% in FY23) — decline on lower EBIT, capex investments and higher inventory days.

The industry, as management sees it

Management sees generic demand environment as healthy across all products except paracetamol; expects single-digit to low double-digit volume growth in mature molecules like paracetamol and ibuprofen, with growth driven by market-share capture rather than price. Biosimilar-style competition not discussed.

Risks management named

• Paracetamol API pricing erosion from overstocking and excess capacity to persist through FY25
• Higher employee cost and other expenses from new facility ramp-up and US team build-out
• Red Sea freight surcharges lifted Q4 freight cost by INR128 mn QoQ
• ROCE declined to 16.5% in FY24 from 21.2% in FY23 on lower EBIT and inventory build
• Cyber incident during the year impacted FY24 performance
• Net debt to rise with capex; interest cost dependent on US Fed rate trajectory

Not answered directly

• Quantitative revenue guidance for FY25 - declined per company policy
• Specific ADHD product names - declined on competitive sensitivity grounds
• Ibuprofen market share in Europe - no presence today to estimate
• Granules Incorporated (GPI) breakdown of intangibles vs fixed asset return - deferred

Asked for a number, answered without one

• FY25 revenue growth guidance: We'll definitely do better. But how much better, I don't want to mention anything. We have taken a decision not to give any guidance.
• Ibuprofen market share in Europe: There are different forms, OTC, Rx window, it is a little difficult to estimate. We do not have a presence today but we will be getting a detailed market share as we go forward in Europe.
• ADHD product names in pipeline: We have many products lined up but I don't think we should talk about them.
• Specific net debt reduction in FY25: Not really. We would positively manage the net debt to EBITDA. Ratios is not worsening, it is improving. Not planning to bring it down drastically.

Every question, with its answer

1. 1. Formulation capacity ramp

   Ashish Soni, Individual Investor

   Question. Regarding the new capacity build, when do you think optimally it can be used within this year or next financial year?

   Answer, Dr. Krishna Chigurupati, Chairman and Managing Director. Ramp-up of new formulation facility will start in July; by August we should be touching ~100 mn per month and over the next eight months, into April-May of next fiscal, we should be able to touch 4-5 bn annualised capacity.

   Follow-up. How much can the new product approvals contribute to revenues going forward this year and next year?

   Answer. Priyanka Chigurupati (Executive Director) replied that new products are expected to contribute about 7% to 10% of next year's revenues.

2. 2. DCDA green chemistry

   Ashish Soni, Individual Investor

   Question. How is the progress on DCDA green chemistry right now?

   Answer, Dr. Krishna Chigurupati, Chairman and Managing Director. Started pilot plant production in March 2024; commercialised from pilot and a lot of trials and variations happening; first-of-its-kind proprietary patented technology worldwide; arrangements for commercial production at Kakinada being put in place.

3. 3. Margin trajectory FY25

   Darshil Jhaveri, Crown Capital

   Question. With improvement in gross margins, what kind of margin trajectory would you see in FY25? Can we see ~24-26% EBITDA range?

   Answer, Mukesh Surana, Chief Financial Officer. Gross margin moved from 48% (FY23) to 55% (FY24); last two quarters in 57-60% range driven by higher FD sales and lower raw material costs. Sustainability seen in 55-58% range. Krishna Chigurupati added that very conservatively 22-23% EBITDA margin is possible and is what has been maintained throughout.

   Follow-up. With higher interest costs, what trajectory should we expect for the next year or two?

   Answer. Mukesh Surana: Largely dependent on SOFR rate; net debt has not gone up despite capex investments. Based on current conditions, Fed rate not expected to come down in next six months; upcoming two quarters should see similar interest cost to Q4.

4. 4. Revenue guidance FY25

   Darshil Jhaveri, Crown Capital

   Question. Any quantitative or qualitative guidance on revenue growth for FY25?

   Answer, Dr. Krishna Chigurupati, Chairman and Managing Director. Will definitely do better but how much better not specified - decision taken not to give any guidance.

   Follow-up. How is the demand environment currently? Is it buoyant?

   Answer. Demand for all products is quite good; as new geographies are added, sales are increasing; very healthy demand for all products except paracetamol which had some challenges in the last quarter.

   Not answered directly.

5. 5. Paracetamol API pricing

   Nirali Shah, Ashika Stock Broking

   Question. Paracetamol API sales are declining and witnessing price erosion. Where do you see this stabilising?

   Answer, Dr. Krishna Chigurupati, Chairman and Managing Director. Demand softness is partly due to overstocking by large brand leaders - should start stabilising from Q3; also excess capacity built post-COVID is causing price erosion; this year most of this may continue, FY26 onwards things should stabilise; quarter-on-quarter some improvement this year.

   Follow-up. On the debt side, where do you see a comfortable net debt number over next 2-3 years?

   Answer. Mukesh Surana: internally wants to manage net debt-to-EBITDA at 1.0-1.1x level.

6. 6. New formulation capacity revenue

   Aditya Sen, RoboCapital

   Question. How much revenue do you foresee from the new formulation capacity in this fiscal and coming year?

   Answer, Mukesh Surana, Chief Financial Officer. CMD already answered: 100 mn per month expected from July 2024 onwards; next fiscal year (FY26) looking at 4-5 bn. Krishna added that revenues depend on which products get commercialised there.

7. 7. Product mix and margin shift

   Nirali Shah, Ashika Stock Broking

   Question. With product mix shifting from 25% new products to 25% legacy products, when can we see the margin shift?

   Answer, Dr. KVS Ram Rao, Joint Managing Director and CEO. Already seeing shift in business model from API to finished product; CFO has explained margin improvement; new products launching now and approvals in next 1-2 years will add to FD mix shift; positive moment on FD side should help deliver better and more sustainable bottom-line margins.

   Partly answered.

8. 8. Operating leverage

   Madhav, Fidelity

   Question. Employee cost and other expenses up 20-25% this year from new plants and Virginia packaging facility - is there scope for operating leverage as revenue scales up?

   Answer, Dr. Krishna Chigurupati, Chairman and Managing Director. Yes, new facilities and expansions led to manpower cost increase - R&D, GPAC US packaging, US manufacturing capacity, marketing team build-out, customer-specific reps, high-calibre people added across services. Going forward cost will not grow at this rate - this was a big one-time shift this year.

   Follow-up. CNS/ADHD, MUPS and Metoprolol products - will they start contributing materially from Q1 FY25?

   Answer. Krishna Chigurupati: Not heavily from Q1; FY25 will see good contribution but FY26 should be the year of marked difference.

9. 9. FY25 capex

   Madhav, Fidelity

   Question. Capex expectation for FY25?

   Answer, Dr. KVS Ram Rao, Joint Managing Director and CEO. FY25 capex estimated at INR600 cr; half for Granules Life Sciences expansion, other half for other projects and maintenance capital. Krishna added that CZRO is going slow on a cautious stage-gate approach.

10. 10. Formulation share target

    Foram Parekh, Sharekhan

    Question. Value-added products now 65% of sales - what percentage do you envisage going forward? When? Is EBITDA margin 22-23% in one year or two?

    Answer, Mukesh Surana, Chief Financial Officer. Formulation was 73% in Q4 and 65% overall for the year; looking at around 70% moving forward, possibly a little more. Krishna: 70% in one year's time; EBITDA 22-23% reached as early as possible, with upside always possible.

    Follow-up. Geographically Europe, LatAm, India and ROW have not all performed - why?

    Answer. LatAm, ROW and Europe sales were mostly profiled by paracetamol API and PFI; prices collapsed from INR600-650 to INR250-300, driving decline; FDs in Europe have compensated to some extent.

11. 11. Ibuprofen demand

    Foram Parekh, Sharekhan

    Question. With ibuprofen prices down and not expected to return to COVID levels, how do you see ibuprofen sales ramping up?

    Answer, Dr. Krishna Chigurupati, Chairman and Managing Director. Ibuprofen can only ramp up via volume, not value; market grows single-digit or low double-digit; growth is via market-share cannibalisation; some European approvals secured and sales contracts signed; will improve share mainly in US.

    Follow-up. What is the market share for ibuprofen in the European market?

    Answer. Different forms - OTC, Rx - makes it difficult to estimate; do not have a presence today but will get a detailed market share view going forward in Europe.

    Not answered directly.

12. 12. MUPS capacity utilisation

    KVKS Choudary, Individual Investor

    Question. On MUPS Block - what is the current capacity utilisation?

    Answer, Dr. Krishna Chigurupati, Chairman and Managing Director. MUPS Block contributing well to revenue and profitability; MUPS products specifically at 40-50% capacity utilisation; expected to go up to 70% by end of this fiscal year.

    Follow-up. Granules Inc (GPI) - ramp-up not commensurate with approvals. What is current investment and asset turnover / EBITDA in GPI?

    Answer. Mukesh Surana: GPI asset turnover is in excess of 5x on fixed assets; some launches in next couple of years will drive return on intangibles.

    Partly answered.

13. 13. Controlled substances launch

    KVKS Choudary, Individual Investor

    Question. Controlled substances are not under patent - isn't it possible to launch them immediately?

    Answer, Dr. Krishna Chigurupati, Chairman and Managing Director. GPI US facility already set up to concentrate on these products; a lot of controlled substances being sold from GPI; will sell more going forward.

    Follow-up. What are the products lined up for ADHD?

    Answer. Krishna Chigurupati declined to share product names - we have many products lined up but I don't think we should talk about them.

    Not answered directly.

14. 14. Metoprolol outlook

    Tushar, Motilal Oswal

    Question. On Metoprolol and subsequent potential products for FY25/FY26 - any colour? Any price erosion on Metoprolol from competition?

    Answer, Dr. Krishna Chigurupati, Chairman and Managing Director. Metoprolol has very good potential, ramping up for US market; Europe approval received, going for national phase, sales in Europe will start this year; also planning to take to LatAm and other countries; outlook looks quite good. On price erosion - not great, whenever a newcomer comes there is a fight and prices go down a bit, but nothing drastic.

    Follow-up. Any other interesting products in the portfolio that could come up for approval in FY25? How many launches overall?

    Answer. Priyanka Chigurupati: About 16-18 launches coming up in FY25, of which 14 are new and the rest are ramp-ups of Q4 launches. Coverage is US and Europe simultaneously, with ROW in next phase. Krishna called it the first time Granules will launch so many products in one year.

15. 15. Net debt trajectory

    Tushar, Motilal Oswal

    Question. If we connect 22-23% EBITDA margin and capex, where would net debt land by end of FY25?

    Answer, Dr. Krishna Chigurupati, Chairman and Managing Director. Net debt may not come down; maintaining net debt-to-EBITDA at less than 1; if great opportunities arise may not want to grow past that band; not trying to bring to zero. Mukesh Surana added net debt at INR842 cr year-end, 1x net debt/EBITDA is the target. Working capital investments and Life Sciences expansion will keep net debt range-bound.

    Follow-up. On paracetamol - what has happened exactly that has led to significant price reduction?

    Answer. Dr. KVS Ram Rao: Three components - (1) end customers have inventory stored, will take a couple of quarters to liquidate, situation expected to improve by Q3/Q4 of this year but not back to original levels; (2) low offtake and high post-COVID capacities creating excess supply, some organisations lowering prices to survive utilisation; (3) Granules moving to finished dose on paracetamol to balance overall. Situation to continue for next 2-3 quarters. Krishna added that other manufacturers are single-product companies fighting tooth and nail and desperate - Granules will stick to regular customers and re-enter once inventories rationalise. Tushar confirmed this is paracetamol-specific, not Metformin, Ibuprofen or Methocarbamol.

16. 16. GPI revenue disclosure

    Harith Ahamed, Avendus Spark

    Question. Can you disclose GPI subsidiary (Granules Pharmaceuticals Inc) FY24 sales? Can we extrapolate FD growth of 25%+ to FY25 and share number of US launches targeted?

    Answer, Mukesh Surana, Chief Financial Officer. GPI full year turnover INR1,619 cr; Q4 turnover INR477 cr. Krishna added that all growth going forward is mainly from FD; overall growth needs FD growth to be decent and healthy; definitely healthy and possibly slightly better than last year.

    Follow-up. 13 ANDAs pending approval seems low for size of US FD business - should we expect a step-up in R&D spend in FY25?

    Answer. Dr. KVS Ram Rao: R&D spend has gone up and continues to remain around that level, likely to go up further given pipeline in CNS, Oncology, first-to-file 181-day launches. Krishna added that onco and other areas have a lot of work; slight increase possible but not a great increase - already provided for growth.

    Partly answered.

17. 17. Other expenses QoQ

    Harith Ahamed, Avendus Spark

    Question. Other expenses up INR50 cr QoQ in Q4 - any one-offs in the number? Should we expect normalisation next quarter?

    Answer, Mukesh Surana, Chief Financial Officer. R&D up, freight cost up on Red Sea, plus one-off consultancy and quality audit costs specific to the quarter. R&D similar QoQ going forward; other expenditure should come down.

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