Granules India Ltd

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Granules Q4 conference call 29th April

http://www.granulesindia.com/img/pressrelease/160.pdf

Bottom line and EBIDTA numbers are very good. However, top line growth could’ve been better.

Let’s see what management says on conference call.

Disc: Invested.

Management guidance of 10-15% topline growth for FY17 and 20%+ bottomline growth

They feel they can beat these numbers in next 2-3 years given the increased pace of filings and entry into complex molecules…

Debt they plan to reduce by 60 cr every year

Next year capex of 300 cr

FD and PFI share they plan to increase further…

EBITDA margins they plan to keep above 20%…

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This is due to Auctus portfolio rationalization . Low margin product has been discontinued , High margin products are generaaitng higher EBTIDA . This is also of the reason also for the steep margin growth

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[quote=“amitayu, post:353, topic:940, full:true”]
This is due to Auctus portfolio rationalization . Low margin product has been discontinued , High margin products are generaaitng higher EBTIDA . This is also of the reason also for the steep margin growth
[/quote]Agreed. Management guidance of 10 to 15% top line in FY17 and more than that from FY18 on wards is positive.

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Granules Q4 FY16 Investor Presentation …
http://www.granulesindia.com/img/investorpresentation/10.pdf

Keynotes from the presentation and con call

  1. High Margin FD Segment grow 38% driven by scaling up of the Rx business (Ibuprofen in the US),PFI segment grow 6% compared to API segment which was down 17%.Increasing emphasis on finished dosages will increase revenue and profitability now onwards
    2.Acquired Formulation facility in Virginia in the USA to introduce value added form of existing products and to concentrate into formulation R&D of complex molecules.Primary focus on formulation research and development with a list of 12-14 products the ANDAs for which,will be filed for within the next 2-5 years.
  2. Future Growth from existing portfolio
    • Increasing emphasis on finished dosages will increase revenue and profitability
    • Enhancing the product basket with new ANDA filling
    • More Auctus portfolio Rationalization
    • realization from Omnichm JV
    • OTC
  3. Current D/E is 0.7 reduced from 1.1 earlier year
    5.Validating few products in Auctus Pharma every quarter.Auctus was a loss-making yet high-potential API business.Significant saving in time for Granules on growth strategy.
  4. Marketing of store brand OTC products with direct relationship with retail outlets in the US . It will be real game changer from FY19 onwards. After 3-4 years it will be most important part of granules business.
    7.Regarding filing , expected 2 filing from india this year but missed one for few days which is included in current financial year. In this financial year they are expecting 5-6 filing from India and minimum 2 ANDAs from USA . Going forward they expect more filing from India and US
  5. Metformin Capacity expansion Phase 1 will contribute in revenue after 6 months from non regulated market. It will take 1.5 to 2 years (time require to get approval, validation batches etc) to contribute from regulated market.
  6. Regarding Minor Observation on Jeedimetla, Granules already taken the corrective action within March 31 and responded the same . They are pretty confident they have done their job and nothing to be done.
    10.RnD budget will be 100-110 crore in FY 17 for formulation development which will be capitalized
  7. Maintain guidance of Rs 200 crore sales (might be higher) in Omnichem JV for FY 17. Some of the shipment was delayed in current quarter from client which will increase the sales in next quarter and also this is the reason they ended up little loss in current quarter.

Disc: Invested

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Granules seems to be on the right track and management sounded quite confident to grow at above average rate starting from FY18 on wards.

MOSL 4QFY16 Results Update:

http://institution.motilaloswal.com/emailer/Research/GRAN-20160429-MOSL-RU-PG008.pdf

7255000 equity shares of Re.1/- each issued at premium of Rs. 94.30/- to Promoters on a preferential basis pursuant to conversion of warrants.

http://www.bseindia.com/markets/MarketInfo/DispNewNoticesCirculars.aspx?page=20160502-17

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@pikrohit @amitayu , I read somewhere in the thread that filing a single ANDA costs about 4 crores. That’s a significant amount for company like granules. Very recent post in Alembic thread shows that R&D equipment are capitalized by granules. However, I suspect that Granules puts ANDA based R&D expense under P&L. I would be glad we could figure this out for sure. I am a bit weak in thoroughly looking at the balance sheet. Would need your help :slight_smile:

look at my reply in Hitesh Patel’s post, as to when can R&D expense be capitalised and when it has to be expensed

Hi @nishantkandoi,

In q4Fy15 con call Management provided below statements

  1. For development and filing Rs 4 to 4.5 cr cost incurred per ANDA.

2.They was asked how much of R&D would actually get expensed off?
Management : They will write-off 100% The normal R&D expenditure and the routine R&D expenditure, For
new product development it will be capitalized and when revenue will start generating from that particular ANDA,then they will start write-off .

In the Q4 FY16 concall , Management clarified followings…

  1. Regrading RnD budget on FY17
    Managemnt : FY17 Rnd cost can split it up into two parts, one is APIs and the
    other is the formulation development. Formulation development is going to be really high
    because they are doing formulation development both in India and in the U.S. and they expect
    anything upwards of Rs. 100 crores to Rs. 112 crores for formulation development.

  2. Why they have capitalized entire Rnd Expense ,
    Management : Because theyhave not started production, so entire thing will be capitalized. Commercial
    production start only after getting approval of ANDA. So all theyspend on formulation
    development will be capitalized, what is spent on API R&D will be written off. That is the
    accounting policy they have been following.

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Yes, in the last confcall (Q4 FY2016) it was mentioned that R&D cost for API 's are expensed and the R&D cost for new formulations whose commercial production for regulated markets will start only after regulatory approvals are capitalized.

Question to Pharma experts:
In the conf call it was mentioned that they will focus henceforth on molecules which are complex either on the IP side or the chemistry side. Their Auctus portfolio also will be oriented in this direction . Also it was mentioned that the Vizag and US R&D offices are actively working on it. It was emphasized in the call that these will be game changer for the company. However it was not revealed what these new molecules are.
My questions to the experts are:

  1. Is there are a way to figure out what are these new molecules the company is working on? Or we need to wait till ANDA’s are filed to get this information?
  2. I understand complexity of molecule in terms of IP. But what does complexity in terms of chemistry mean?
    Thanks in advance.

Disc: Invested @80-85 levels. Views could be positively biased. Please do your own research before investing.

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  1. There is no way to find out what new molecule Granules is working on. These are very closely held trade secrets and for good reason. You do not want to give competition a heads up on what you’re working on given the ANDA / FTF race.

  2. Complex chemistry means what it says. These are usually larger molecules with a lot more elements comprising the compound. For example - below is the chemical structure of Ibuprofen, a very simple molecule to reproduce. The second image are those of complex molecules. These are not only complicated in molecular structure, but also require additional processing / manufacturing steps & expertise. Unlike Ibuprofen that can most likely be manufactured in an extremely simplistic lab, the equipment & expertise required to manuf complex molecules are significantly more specialized & expensive.

Ibuprofen

Complex molecules

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Q4 earnings call transcript. http://www.granulesindia.com/img/pressrelease/165.pdf

The best part of transcript coming directly from the Horse’s mouth :slight_smile:

Rajesh Reddy: I just have one question, what is the guidance for FY17 especially top-line as well as the bottom-line?

Krishna Prasad C.: Very conservatively 10% to 15% on the top-line and 20% on the bottom-line growth over last year.

Rajesh Reddy: Okay. And also like just roughly what can the you know the individual investors what we can look for in next two years - three year what kind of growth we can estimate?

Krishna Prasad C.: The current year I am saying this will be but based on product approvals and today going by way the FDA is working the approvals are coming in pretty fast. Normally, I would have said 18 months to 30 months to get approvals but now-a-days the case is where nine months’ approvals are coming through. So assuming there is a nine-month possibility, I think the year 2017-2018 onwards will be really exiting. It will not be the 10% to 15% growth it will be much higher and from then on for a few years there will be real good growth.

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Granules technical picture is a delight for any guy wanting to look into a perfectly uptrending stock. Note some features marked in the chart along with comments.

disc: Invested as a techno funda bet a couple of months back around 120.

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hi hiteshbhai,

I have a question may be dumb :slight_smile: once in page thread you mentioned earlier that “when any stock is in f&o and there could be a lot more volatility and huge price swings due to that.”. my question is, FnO is nothing but the derivatives of the original price of the stock in cash market , so inclusion in FnO of a stock , how it increase the volatility of original stock price?

Amitayu, there is leverage in the F&O trades. Also there is expiry to the F&O contracts. So it is likely to have more volatility.

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