Although Q2 results were positive, the disappointment was the lack of sequential gross margin improvement.
The reasons for this dismal show include:
The mix during the quarter in the API business for new capacity coming on stream being more skewed toward developing markets where the margins tend to be lower. In addition, our company trimmed down some volumes in India for Metformin due to competitive pricing. Overall this resulted in the gross margin benefit from expanding US revenues being offset by unfavorable geographic mix within the APIs.
Raw material cost inflation continues to be an issue. Given the lag with which price increases are coming through, the pass-through is still not reflecting in gross margins. crude cooling down is a major positive on this aspect.
Our management is confident that after the completion of the last round of major expansions (Oncology API and FDF), steady deleveraging can be expected from the next year. The current gross debt of Rs 1120 Cr should decline to Rs 900 Cr over next two years.
2HFY19 is expected to be stronger as the impact of additional asset utilization plays out. The margin impact, however, would be fully captured only in FY20.
In the next 2-3 years, the focus will be on higher capacity utilization. During FY18-21, the company expects a ramp-up in capacity utilization across its key molecules, including Paracetamol with expanded capacities of 6000tpa with validations for higher-margin developed markets, and Metformin, for which demand growth is expected to remain strong in the developed markets.