Granules India Ltd

Dear Friends,

Here are some quick notes taken by me from the Granules Q4 earnings call

  • Consolidated topline excluding other income increased from 1692 crores in 2017-18 to 2279 crores in 2018-19 registering growth of 34%. PAT grew to 236 from 133 crores in the previous year.

  • Top 5 molecules contributed to 85% of revenue in the Q4. Most of the topline growth has come on the back of enhanced API capacity.

  • EBITDA margin for the year 2018-19 stood at 17.8% helped by increased share from Finished Dosage and contribution from US unit.

  • Metformin new unit would have a FDA inspection in July-2019. Post that company would enhance utilization and start selling in regulated market.

  • Guidance of 20% plus topline and 25% plus bottomline for 2019-20, and over the next three years. Later in the call Mr. Krishna Prasad said that he would like to give conservative estimates and beat it.

  • Total debt as on 31st March 2019 was 908 crores, almost 100 crores lesser than as on 31st Mar 2018. Guidance for this year is to bring it down to 850 crores. Please note that it includes working capital and long term debt.

  • Company had a FCF positive year. The free cash left on the table was only 1 crore, but it is a big milestone. Company would put effort to remain free cash positive now onwards and would improve the value of it by good starting this year.

  • Promoter Pledging was brought down from 60% to 43% in the last few months. In the next two months it would be further brought down 43% to 32%. By 31st March 2021 it would be brought to zero.

  • Capital Expenditure for 2019-2020 would be 150 crores including cost for capacity expansion in US. No new debt would be taken to fund it.

  • 3 to 5 more products would be launched this year. Some may have the penetration similar to Metherzine (which was launched by Granules this year and had a good run/acceptance).

  • Between US and India more than 20 ANDAs would be filed this year.

  • Onco plant is about a year away from commercial production. Things are on time and as per plan.

  • CRAMS business – Omnichem, the dependency on one customer was a mistake. Company has diversified the customer base to 3 to 4 customers.

  • Raw material prices first stabilized and then started trending a bit down from last quarter. Expected to remain soft in near future.

Few other observations from my side

  • I have found that management walks the talk but with a lag. In excitement they pull forward the timelines for themselves, but actually doing things takes a bit longer. Pledge reduction, debt reduction, new API capacity and Onco – I have seen this pattern in almost all of them.

  • Quick calculation by me - with 25% plus profit growth next year’s profit is projected to be 300 crores plus. Taking out 150 crores for CAPEX and 30 odd crores for dividend, the company would be left with enough money in hand for debt reduction. A lot of assumptions are in play here and please take it just a guess.

  • Regarding Mr. Ganesh resignation from CFO. He attended the earnings call and answered some questions. Sometimes understanding his could be a challenge but he spoke on how/why Granules capitalizes the R&D expenses. Mr. Krishna Prasad thanked him in the call for his contributions in the past two years. It did not feel like there was any bad blood and to that point I would not speculate anything bad from his departure.

I am not an analyst. There is fair possibility that I would have heard or interpreted points made in the call incorrectly. This is not buy or sell recommendation. I own Granules shares.

Cheers,

Krishna

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Thanks Krishna for sharing with us the call notes. Here Granules MD reiterating some of the points in the inteview. https://twitter.com/CNBCTV18News/status/1126710751815536640

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Dear Mr. Krishna, thank you for your efforts.

Some additional points:

  1. Total debt is not 900 crores. Net debt is 908 crores. Please stand corrected.
  2. Cost of capital wasn’t answered. Has anyone worked it out already?
  3. Some guys are speculating on the CFO departure. For any doubts, why not write to the company instead of speculating.
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No wonder FIIs loading up Granules

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just taking 20% topline & 25% bottomline growth… numbers look attractive

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Few research houses have started sharing positive expectations… let us see how it pans out in next 2-3 years

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FDA Approval For Methylphenidate Hydrochloride Extended-Release Capsules

gran_us_anda.pdf (252.5 KB)

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Due to corporate governance like high salary/preferential warrants/pledge and low roe coupled with never ending capex! all for a commodity pharma.

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A good study of various parameters for a long term investor

https://news.yahoo.com/granules-india-limited-nse-granules-011549910.html

  • FII Holding has moved to 13.88%
  • Promoter Pledge remains at 43.40% (They committed to bring it down to 32% in last concall)

As promoters have been walking the talk, let us see if they act on this before release of Q1 results

Considering the current share price promoters may not sell their shares further to reduce the pledge percentage. I believe their main focus Should be to reduce the debt and strengthen the balance sheet.

Granules India’s Bonthapally facility completed US FDA inspection

Company’s Bonthapally facility located at Hyderabad, Telangana, India has completed the US FDA inspection from 22nd July 2019 to 26th July 2019 with one(1) 483 observation which is procedural in nature. The Company will respond to this observation within the stipulated time period.

Bonthapally facility is one of the world’s largest single site Paracetamol API manufacturing
plant by volume. Along with Paracetamol APIs, the Company has established Metformin and
Guaifenesin API manufacturing plants in the same facility. The Company has already received approval from US FDA for Metformin API from this facility.

Another good set of numbers

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Granules continues growth momentum with the first quarter of FY20 showing encouraging results. Total Revenue from operations increased by 31% and net profit by 61% compared to the same period of previous year. The sustained growth in high volume based molecules business and unwavering focus on US market enabled to achieve the growth. One of the key pillars of business model has been driving operational efficiencies and along with it a better product mix helped granules improve the Operating and Net profit margins in this quarter. During the quarter company filed 3 ANDAs and received approval for 2 ANDAs from US FDA flied earlier. In continuation to commitment to improve the leverage position of the Company, this quarter has also witnessed improvement in net debt position (Reduced by 45 Cr)

image

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Granules Pharmaceuticals, Inc. received US FDA approval for Amphetamine Sulfate Tablets

c3159c1f-46e2-46a5-b957-2c7284db0025.pdf (220.1 KB)

Interesting point to note is that last fortnight … Cadila Healthcare (Zydus’ Nesher Pharmaceuticals) has received final nod from the US health regulator to market Amphetamine Sulfate extended-release capsules in the strengths of 5 mg, 10 mg, 15 mg, 20 mg, 25 mg and 30 mg

Does USFDA grant approvals in bulk?

Anybody can apply and get approvals provided documents meets the guidelines.
That’s why now there are cases where approvals are there but not launch. Market is crowded and competition cut throat.

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As committed Management further reduced its pledge position.

Looking very interesting.
It seems promoter now Walking the talk

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110904D2_0561_4F75_8190_31628CB46B7C_104200.pdf (936.9 KB)

With release of 70L shares, now the pledge has come down to 36.06%.

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Granules India Limited to divest its stake in its Joint Venture located in India

The proposed divestment of Granules’ 50% stake in the joint venture aligns with their focus on strengthening core area of business. With this transaction, S.A. Ajinomoto Omnichem N.V. will take over full control of the CRAMS business. Through this deal Granules would like to extend support to joint venture partner for their business plan to integrate their small and large molecule businesses which in turn strengthens their business operation and client relations. Management believe this is a win~win situation for both the companies as Granules will continue to build upon their business model based on area of concentration.” said Mr. Krishna Prasad Chigurupati, Chairman and Managing Director, Granules lndia Limited.

f814fba2-b6b8-466f-a1b0-88d668c736df.pdf (218.5 KB)

The Share Capital of the Granules OmniChem Private Limited (JV) as on 31st March 2019 was INR 8,576.19 lakhs. The Company achieved a turnover of INR 21,820.82 lakhs during the FY 2018-19 as against INR 14,697.97 lakhs during the FY 2017-18. Profit after tax for the year under review is INR 864.76 lakhs as against INR 362.57 lakhs in the previous year of which Granules India Limited reports 50% share in profit from Joint Ventures/Associates.

image

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This is a positive development in my opinion. This JV was not going anywhere. It will be better to use the proceeds to reduce debt and focus on core. Quite a few positive steps over last few months, along with decent results. Granules looks interesting at these levels, however they have very high receivables. Lets see how this pans out

Looks like a good move, however, how much they are getting is not mentioned in the release.

Considering 8 PAT, they should realistically get more than 75/80 cr (with 10 PE on a back of envelope). Granules have invested lot of money and resource over many year on this JV, so I hope they get reasonable compensation for this sale.

The management has indicated that this JV will not contribute much this year, so not much impact on PAT projection of for Fy20.

I can see the JV has have debt of 60 cr as of March 2019. Will divesting from this reduce Granules India debt by 60cr or 30 cr? Any idea?

In recent Con call, CEO said that they are planning to apply ANDA (or patent) application what Granules India has already applied in the US.

I have observed the Shilpa Medicare is also planning to do that same.

I understand US market is huge and profitable as compared to European market.

Do we have a precedent from the Indian Pharma companies launching their product in the European market after successfully doing it in the US market?

Any idea about how big is the market?( I know this is very open ended questions, but I am looking for some high level indicator)