Ladies and gentlemen, good day and welcome to the Granules India Limited Q3 and 9M FY 2023 earnings conference call. As a reminder, all participant lines will be in the listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Irfan Raeen from Orient Capital. Thank you, and over to you, sir.
Thank you, moderator. Good evening, everyone. Myself Irfan Raeen from Orient Capital. We are an investor relation advisor to the company. I hope that all of you and your families are safe and healthy. On behalf of Granules India Limited, I extend a very warm welcome to all participants on Q3 and nine-month FY 2023 financial result discussion call. Today on our call we have Dr. Krishna Prasad sir, Chairman and Managing Director, Dr. K.V.S. Rama Rao sir, Joint Managing Director and Chief Executive Officer, Ms. Priyanka Chigurupati, Executive Director, GPI and GUSA, Mr. Mukesh Surana, Chief Financial Officer, Mr. Puneet, GM, Business Finance and Investor Relations. I hope everyone has had an opportunity to go through our investor deck and press list that we have uploaded on exchanges and on company's website. I would like to give a short disclaimer before we start the call.
This call may contain some of the forward-looking statements which are completely based upon our beliefs, opinion, and expectation as of today. These statements are not a guarantee of our future performance and involve unforeseen risks and uncertainties. With this, I hand over the call to MD sir. Over to you, sir. Thank you.
Thank you, Irfan. A very good evening to all of you, ladies and gentlemen, and thank you very much for attending our Q3 earnings call today. As you are all aware, Mr. Mukesh Surana has joined us as our new CFO, and this will be his first call and I'm glad to introduce him to you. A detailed presentation of our Q3 performance has been uploaded on our website, and I am sure all of you would have gone through it by now. However, I will dwell on a few important aspects and later Mukesh will go into a little more detail. Our current quarter performance has improved year-on-year. It has declined slightly compared to the sequential quarter.
As I mentioned in the earlier calls, we were in the process of changing our 3PL service provider in the U.S., and though this process is now complete, the new company continues to have teething issues and missed out on quite a few deliveries to our customers. This has not only resulted in lesser revenue, but also certain failure to supply penalties, both of which have impacted our bottom line. Overall, I'm personally satisfied with our performance in Q3. We expect the 3PL performance to improve before the end of Q4. Our operational cash flow, though healthy year-on-year, there has been a decline compared to the sequential quarter. The price erosion in the U.S. continues, and we keep on mitigating this by geographic expansion and product mix rationalization.
The most important piece of information I want to share with you today is that we recently set the groundwork for our vision of going green, healing the planet and its people, and at the same time generating positive returns for all our stakeholders. I want to briefly discuss the dilemma facing our world before going into further detail. According to the most recent World Economic Forum study on global risks, six of the 10 biggest dangers of the future are all considered or connected to our inability to reduce or mitigate climate change, all of which will result in disasters which are unthinkable. These risks rank even ahead of global confrontation. The greatest service that any individual or corporation can provide is to at least reduce this risk in their line of business.
It is surprising to learn that the pharmaceutical industry is not as environmentally friendly as we may think. The CO2 equivalent emissions in 2015 were 55% higher than those from the automotive industry. I'm not sure if the pharmaceutical industry is working as quickly to reduce emissions as the automotive industry is. It is highly unexpected to learn that the emissions from the pharmaceutical businesses increased by 13% between 2020 and 2021, reaching 260 million tons of greenhouse gases equivalent to a carbon dioxide equivalent. Several nations set goals to achieve carbon neutrality by the year 2050 to 2070, big pharma too set goals between 2025 and 2030, with AstraZeneca being the most ambitious with a target date of 2025.
Though this is a very positive step, these dates only apply to Scope 1 and Scope 2 emissions, which account percent of all the emissions in pharmaceutical manufacturing. Scope 3 generates about 80% of the emissions. It is here that we must focus on supply chain and vendor management, neither of which are simple tasks until each vendor is incentivized and motivated to work towards aggressive targets. Carbon border tax, which has already started rolling out in Europe for certain products, will come into effect in many countries and also for pharmaceuticals over a period of time. Buyers will have to pay for emissions caused by their vendors, which will motivate them to incentivize products with the least carbon footprint.
While this is most common knowledge to most of you, I wanted to set the context for work towards reduction or elimination of greenhouse gases, gas emissions. Many countries are working on round-the-clock carbon-free electricity, hydrogen, and ammonia. India is most likely to be a leader on this front. Automobiles, shipping, fertilizer, and even steel companies are working towards making them net zero by using this initiative. I was actually surprised to learn that Volvo even made a truck with green steel and run by green energy. At Granules, we always believed in reimagining existing processes, systems, conventions, and beliefs. We always took the least trodden path. Now we are reimagining chemistry.
We recently entered into a MOU with Greenko, one of the largest suppliers of carbon-free energy, and will be partnering with them for supply of power, hydrogen, ammonia, nitric acid, and a few other chemicals, which will all be carbon-free, made with carbon-free electricity as the base. On our part, we'll convert some of these chemicals from Greenko to raw materials required for our intermediates and APIs. We have developed processes for this over the years, and we will not use any form of energy or any derivatives of fossil fuels in our processes. We will be located adjacent to the Greenko site and also close to a port. We will be starting with two products, paracetamol and metformin, and slowly expand into other products which we are working on. Our target is to have product with the lowest carbon footprint from cradle to port.
90% of raw materials will be made in-house at one site, and there will be very negligible dependency on any other company unless they are also green. During the process, while we maintain our current plant, current and future products which we are working on, we propose to set up additional capacities for these two products to meet more than 50% of the global requirement. Negligible emissions may happen from our small supply chain, and we try to offset this by carbon sequestering. We are also working on developing carbon sinks by afforestation with select high carbon absorbing plants while still maintaining the biodiversity of the ecosystem. I'm highly excited and could not avoid sharing a few of my thoughts and plans with all of you today.
Research has shown that sustainability-driven companies had always outperformed others, and it's my fond hope that more companies or organizations will make sustainability the heart of their operations and create value for themselves, stakeholders, while also heal the planet. With this, ladies and gentlemen, I pass this on to Dr. K.V.S. Rama Rao, our Joint Managing Director.
Thank you, Chairman. Over the last few quarters, I spoke about Granules' long-term strategy of science, technology and innovation. Strengthening the R&D and product pipeline is key to our strategy. We have revisited our product portfolio, which will focus on reasonably short-term and medium-term commercialization. The portfolio focuses on development of controlled substances, both API and formulation, and backward integration of these products. The emphasis has been on the product leveraging on the current strength of Granules in India and U.S. and also bringing in approach of global cost leadership and sustainability. Enzyme fermentation technology is an area of focus, and we have made very good progress on the select set of molecules. For these set of products, we have done work on the genetic engineering of the enzymes. Interface work of enzymes and chemistry is under progress.
We expect to see the first validation of our enzyme-based APIs by quarter three of next year. On our key product, paracetamol, the supply challenges of PAP are behind us, and we are running at full capacity. Our focus is now geared towards significantly improving our paracetamol API capacity, along with increasing the yields through continuous process improvements. Our backward integration program on DCBA and PAP are also progressing well. During the quarter, we have initiated profitability improvement programs across direct and indirect procurement, API manufacturing, Finished Dosages manufacturing, and commercial excellence through consumption and technical levers. We have partnered with a leading global consulting firm, and several projects have been initiated and are being implemented, which will make material impact on our profitability in short to medium term. As we have communicated, U.S. FDA conducted a pre-approval inspection of our Gagillapur facility from January 9 to 13.
We have received pre-form for the three observations. The company will respond to these observations within the stipulated time period. With this, I hand it over to Mukesh who will take us through the financial section.
Good evening, everyone, thank you, CMG and GMG. Let me take you all through the top financial parameters now. On the revenue side, the third quarter revenue was INR 1,146 crores as compared to INR 997 crore in Q3 of 2022, at a growth of 15%. This growth is primarily attributed to increased efforts in all major geographies, including USA. Revenue was flat as compared to Q3 of 2022, primarily on account of change of the three-tier partner, which has impacted our FD sales from GPI in the U.S., despite having orders in hand. The sales breakup, as per business verticals and regions, are presented in our investor presentation, which is available on the website.
On the value add side, as a percentage to sales for Q3 of 2023, it was 48.4% as compared to 46.6% Q3 of 2022. Value added as of compared to Q3 of 2022 is down by 1.3 %, points primarily on account of higher sales of API and lower FD sales in the USA, impacted by the three-tier partner transition, which I just mentioned earlier. Along with that, we have also seen some price erosion challenges in the markets, including USA. On the EBITDA and EBITDA margin front, for the quarter, we were at INR 231 crore as compared to INR 174 crore in Q3 of 2022, an increase of 30% over the previous year, mainly on account of increased business across all major geographies.
R&D spend for the quarter was at INR 23 crores as compared to INR 35 crores in Q3 of 2022. It is expected that R&D spending will be in the range of INR 35 crores-INR 40 crores in each quarter going forward. Net debt our debt was INR 894 crores as compared to INR 697 crores at the beginning of the year, mainly on account of reduction in cash position. We did a buyback of shares, including, you know, transaction and cost. It was INR 311 crores, and there is a deployment of CapEx funds of about INR 50 crores in our new expansion plan with green initiatives in Kakinada and INR 42.5 crore for land acquisition in Visakhapatnam for expansion.
Cash to cash cycle was at 137 days in the quarter, in the current quarter, as compared to 138 days at the beginning of the year and 141 days in Q2 F 2022, F 2023. Operational cash flow for the quarter was INR 161 crores as compared to INR 23 crores in the previous year same quarter. Higher operating profits and a focus on working capital management contributed to the higher operating cash flow as compared to the previous year. CapEx spend during the year was INR 194 crores, including the advance paid, which I explained earlier, INR 50 crores for latest purchase of land in Kakinada for initiatives, green initiatives, and INR 42.5 crores in Visakhapatnam.
Free cash flow this quarter has been negative at INR 32.5 crore as compared to negative of INR 72 crore in the previous year same quarter. It was down from Q2 F 2023, where it was positive INR 124 crore. This quarter, primarily on account of little lower operating cash flow and higher CapEx spend, which we have just explained earlier, has resulted in negative INR 32.5 crore. ROC for Q3 F 2023 increased to 25.6% as compared to 21.2% in Q3 F 2022. We expect improvement in ROC year-on-year basis to continue in Q4 F 2023, despite higher spends on CapEx for green initiatives. With this, I open the floor for questions.
Thank you. Ladies and gentlemen, we will now begin with the question and answer session. Anyone wishing to ask a question may please press star one on your touchtone telephone. If you wish to remove yourself from the question queue, you may press star two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Apurva Bahadur from Goldman Sachs. Please go ahead.
Hi, sir. Thank you so much for the opportunity. Sir, wanted some clarity on the arrangement with Greenko. If you could, sir, just throw some light on the financial viability of these projects, even without CBAM, right, what will be the type of the structure of this agreement?
Okay, Apurva. The arrangement with Greenko is they supply us, carbon-free electricity around the clock, along with certain other chemicals, like I said, ammonia, hydrogen, nitric acid, which they've been producing in large quantities for export across the world. The economies of scale are going to give us a great advantage, and there will be fixed price contracts for these products. From these products, like I said, we will be making some other products, other raw materials, and finally converting them to our APIs. The advantage is there is no transportation of chemicals. It's all in one site, and green power at a reasonable price is available around the clock, and we are also next to the port.
Okay, sir. How do the pricing at which probably Greenko will supply the chemical, does it hold against the current, say, gray chemical pricing?
Yeah, it'll definitely hold against the gray chemical pricing. The cost of raw material chemicals which they produce also, overall cost when you take the total cost, will definitely not be more than the gray chemicals.
Oh, including freight and all, sir?
When they can account the transportation and other costs, they'll be the same price or possibly little lesser.
Good to hear that, sir. sir, where is the site exactly? Sorry. you said that you'll be co-located with them.
It's in Kakinada.
Oh, okay. Okay.
In Andhra Pradesh.
Got it, sir. You said, sir, it's, it'll be a fixed price contract. What will be the tenure over here?
I think about, 10 years to start with.
Okay. Understood. The structure, as in by structure I meant that will you be incurring the CapEx for the renewable capacity or the electrolyzers, or it'll be like a fixed take or pay type of a contract straight for the chemicals and the electricity?
Definitely we are not involved in any of the CapEx, either for storage of energy or for the electrolyzers. It's all their effort, and the percentage we are going to draw from them is a small fraction of what they propose to manufacture. They're going to plan supply to the whole world, and what we are going to take is a very small quantity.
Right. Right. Right. very useful, sir. Just one last question, if I may.
Yeah.
This is on the costing of the green chemicals. As we understand that, there's an expectation that this entire the hydrogen pricing, green hydrogen pricing will sort of see a very sharp correction over time. Is there any risk of getting tied to a high cost source, say, in future maybe it might decline quite significantly?
10 years is not a very long time, Apurva, number one. Number two, when we agree at the pricing with our partners, we have taken into account all the developments that are going to happen in the world for solar panels, number 1, wind turbines. Most importantly, we also have calculated the efficiencies that are expected in electrolyzers. Electrolyzer technology is going through a great change, so we are very well aware of that, what the future cost will be, what the current cost will be, and we are very cautious in not over-committing ourself where we may get ourself stuck with a higher cost.
Understood, sir. Thank you so much. All the very best.
Thank you.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in this conference call, we request you to limit your questions to two per participant. The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.
Yeah, thanks for the opportunity. Just continuing with this green initiative, which other entities have also sort of tied up at this site, other than Granules?
There's no other company tied up at this site as of today. They only have contracts to supply green chemicals to countries across the world and even with, within India. At this site, there's no other company tied up with them, and we will also be an exclusive pharma company with them. There's been no other pharmaceutical company there.
Understood. Sir, this sales getting pushed because of the logistics issue, any guideline you would like to give that how much of the sales has got deferred for the fourth quarter?
I think Priyanka is on the line, Tushar. I think it's best she answers that. Priyanka, are you there?
Yes, I'm here. I couldn't really hear Tushar's question. Could you please repeat it?
Yeah. I'm referring to these logistical issues could have deferred certain sales in the U.S. market. If you could just quantify how much of that would come up in Q4?
How much of that will come into Q4? Did I hear you right?
Yes. Yes.
Right now it is $2 million of sales that we couldn't hit in Q3, at the end of Q3, because of the logistical issues. How much of that will come into Q4 is a question that we need to figure it out because we're still having some of those issues in January. We are trying to resolve it in a few more weeks. How much of that will come into Q4 is something that's still subjected depending on the customers replacing the orders.
Understood, understood. Outlook on Paracetamols, are you seeing the demand still strong and for how long? Maybe couple of quarters or whatever we could gain now the incremental business is going to be a normal Paracetamol business?
Paracetamol is growing, Tushar. There's a lot of huge growth in Paracetamol business at the expense of a few other molecules. We see a double-digit growth for the next few years. More than the growth of the market, as you have seen, our model is always to, I need to use this word, but we cannibalize on other businesses. We are effective. Our service levels are great. All the biggest brands in the world trust us. They like to work with us on long-term contracts. There's For, especially for us, there's a lot of demand. When I said that we're not taking into account existing capacity, which we are also expanding, we are planning to set up new capacities of more than 50% of the world requirement.
Again, for this, many of... as long as we are green, there are enough companies in the world who want to tie up long-term contracts with us.
Sure, sir. Just last...
Like I said, Tushar, the carbon tax and other benefits which people get and the commitments are made, there is no option but for companies to go for products with the lowest carbon footprint.
Sure, sure. Just lastly on the, considering this green initiative and the existing capital expenditure, if you could just refresh the CapEx requirements for 2023, 2024?
2023, 2024, we are aware all along planning will be around INR 300 crores, Tushar. That will take into existence, into account DCBA. Our formulation capacity increases and some initiatives which Dr. Ram Rao was mentioning about, enzymatic reactions and some flow chemistry initiatives. What we are doing right now is a big initiative. We feel that in the next four-five years, we should be spending at least INR 200 crores just on this, INR 2,000 crores just on this green initiative. When we do this green initiative, it's not only paracetamol and metformin that will come out, but there will be a few other by-products and a few other chemicals that can also add revenue to us.
In addition to whatever we have planned, this will be INR 2,000 crores extra in about four-five years.
Got it. Thank you. That's it from me.
Thank you. The next question is on the line of Yogesh Tiwari from Arihant Capital Markets Limited. Please go ahead.
Thank you. My first question basically is regarding, there has been some drop in gross margins on a quarter-on-quarter basis. Is this related to higher sales of Paracetamol?
Yes, Yogesh, you're perfectly right. As you're all aware, API themselves have a lesser margin than the finished dosages. Paracetamol API sales have increased and finished dosage sales in the U.S. have decreased. That's the reason for the drop in margin for last quarter.
Yeah. Thank you, sir. The second is like on the interest and depreciation also, there has been an increase both on quarter-over-quarter and year-over-year. What would be the driver for that?
I think, it's best Mukesh answers that, Yogesh. Mukesh, go ahead.
Yeah. The finance costs have gone up, primarily the SOFR, you know, the index rates have gone up. The working capital, you know, we are continuously moving on to now bring more free cash flow. You would see that, you know, the debts are under control. It's just that, you know, SOFR rates are going up. In the Q4 also we are expecting SOFR will have a little rise, so interest cost in Q4 also will be slightly higher side. On the depreciation, you know, this because of some capitalization we have done timely, there are depreciation which has come in Q3, and this will be quite normal.
There will be increase in cost, Yogesh, but like you know, we are expecting some new launches and the Moxifloxacin is going to go full commercial with some of the new approvals coming through in the next one or two months. Increased revenues and increased product, a variated product mix can make up for some of these extra costs.
I'm sure. Sir, sir, last question on Europe. Basically,
Yogesh Tiwari.
Yeah.
Mr. Tiwari, may we request that you return to the question queue? There are participants waiting for their turn.
Sure, madam. Yeah, thanks.
Thank you so much. We'll move on to the next question that is on the line of Sajal Kapoor, an independent investor. Please go ahead.
Yeah. Hi. Thanks for the opportunity. to begin with, I have a small appreciation for the management team at Granules. I've been tracking this business for over two decades now. when our sales used to be in the INR 20-25 crore range, management has clearly executed very well to grow sales by a factor of a 200 in less than 24 years. Congratulations for that. I've got two questions, and both are long-term in nature. Coming to my first question, the DNA of Granules has been in large volume, compliance-led manufacturing, of molecules like paracetamol. so economies of scale has been our competitive advantage, right?
While these new, recent announcements around, you know, biomanufacturing and clean science is clearly a bold new thinking, and a new direction, it also means a new set of execution risks and challenges that we have never faced before, right? What could go wrong in this new approach, and what are those potential pitfalls?
First of all, thank you very much, Mr. Kapoor. You have been with us and tracking us for so many years. My sincere thanks for that. I think you answered part of your question, our DNA. Our DNA is different. Like I always said, we travel the least trodden path. We don't think like others. One of the things we did was large volume products with economies of scale. Even large volume products, we never did it in the typical way other people manufacture. There was a differentiated way. Then we went into tablets and into high volume tablets. Everything was different. What differentiates us is our thinking, and this applies to other products, large volume or small volumes.
On this particular front of the new molecules and small molecules, enzymatic reactions, I think it's best where Dr. Ram Rao, who's been working on this for such a long time, answers this.
Yeah. Thank you, Sajal. Just the first question on the way we are really looking at the new, or the shift rather I call it. First is the innovation mindset that need to set into the people. We have already have the leadership in place who have enough experience of looking at these kind of molecules with such technological options available. I think that will help us to really make sure that, you know, the pitfalls you have rightly pointed out in terms of how do you look at the product development, how do you integrate the technologies together, and then actually view out the final product, which will be a combination of everything. We looked at it.
The first thing on the people front, I think we have done enough homework, and we have a new R&D center which has got opened up about six, seven months ago. The team is in place to take care of these challenges. The second one we are looking at is how do we really get to the world-class approach onto this? We have certain tie-ups, and we have certain partnerships with those people who have built the expertise in these particular areas. The, and with the collaboration between the internal Granules team and the external collaboration, we are pretty confident that the execution engine will actually run. This is our DNA. We really don't think the way others think. I think that's what Chairman alluded to.
Giving examples of green chemistry, the green initiative, coupled with the kind of initiative that we are bringing on the portfolio, the shift in the portfolio and the application of the science, technology and the innovation into the portfolio through a human capital and also the infrastructure will enable us to lead in this, is my firm belief.
That's very reassuring. Thank you, Dr. Rao. My second question is on the 4Q FY 2022 call, you were elaborating on the new oncology block and the services-based partnership model going ahead, where you, where you quote, and I'm now quoting yourself. You said that "Once our technology strategies kick in, CRAMS will become an important business element in our journey." Please, can you elaborate the medium-term plans for CRAMS in terms of, you know, how many scientists can we integrate and what kind of additional or incremental infrastructure we would require to put, you know, a credible CRAMS strategy in place?
I think, it is, just to let you know that we made certain initiatives towards the technology and green. Unless these two mature, I think we will not be able to offer a differentiated approach into the area of CRAMS in the pharmaceutical industry. Our first step towards the entire journey of considering ourselves as a science, technology and innovation-led organization, we made three, four different moves. The first move, Chairman explained, how do you go green, which is the most important requirement. The second, by going green on the energy and also based on certain fundamental chemicals, how do you really build your platform of chemical intermediates for pharma, which is both for the current product and also for looking at the future pipeline of the products.
I think we need to establish this platform, and then we should be able to really think about a much larger picture of how do we contribute towards the global platform of pharmaceutical industry on a CRAMS mode and otherwise. I think so the stage is set, but it is difficult to put a quick timeline to this. Our endeavor, first endeavor is to make sure that whatever we are thinking, we will get to a degree of maturity.
That's very thoughtful, Dr. Rao. Thank you very much for all those responses and all the very best.
Thank you.
Thank you. The next question is from the line of Varun Basrur from Julius Baer Wealth Advisors Private Limited. Please go ahead.
Good evening to the management. Thanks for taking my question. First is, you know, post the INR 1,000 crore CapEx, which was announced in FY 2022 for over three years. I think the exit gross block would be somewhere around INR 3,100 crores. I understand some of this CapEx is towards backward integration. Just want to understand what sort of revenue potential this INR 3,100 crores of gross block can achieve at current prices, and over what period of time, you know, the management wants to scale up the revenue to this level.
While Mukesh answers this question, Varun, just let me explain. You know, this is all for backward and forward integration. Revenue will not be the main key here because it's all intercompany supplies. Revenue will be eliminated at every stage. However, the profitability will improve. All future investments, whatever we are doing, we are looking at least 2.5x to 3 x of asset turns with this particular model. I would like Mukesh to add to this.
You know, some of the gross block which we have are, you know, some CapEx initiatives which we have taken up and also, you know, some initiatives which we are planning to take in next couple of years. It's a, you know, long-term project. Some of the differentiation and maturity which Dr. Dr. K.V.S. also was talking about all are, you know, will get into, you know, payback mode in starting from next few years. Currently the gross block looks high, but, you know, the revenue generation is going to start, you know.
I'd just like to add here, Varun, the max block, like I said, is going to go fully commercial, shortly with the new flows coming through. That is going to make a large difference to our returns on CapEx on gross block.
Sure. Thanks for that. The second question is, you know, just building on what a previous participant had asked, if you can split the finance cost into what the debt service cost is, and there's a factoring element also there. What is that? Factoring of receivables. What is the cost of funds today as in at the end of this quarter? Yeah. Thank you.
Yeah. So, you know, the finance cost, we see it holistically. The factoring cost also it's indirectly it's a financing of, you know, cost only. You know, there is a significant cost for factoring also, but, you know, the difference between the factoring cost versus borrowing costs are not significantly different. You know, the factoring definitely helps us to bring the free cash flow timely. So, the overall finance cost is primarily because of SOFR movement, which has been, you know, ramping up, you know, quarter on quarter. Every time when, you know, Fed rate increases, RBI rate increases, SOFR also has the impact. That is what is impacting.
What is the cost of funds? What was the average cost of funds this quarter?
Average cost of fund this quarter is closer to 5%.
All right. All right.
Okay. Thank you.
Thank you. The next question is on the line of Pujan Shah from Congruence Advisers. Please go ahead.
Hi, sir. First of all, I just wanted to ask a question on the raw material easing or the price erosion in U.S. Could you just get a sense of how much price erosion has been in quarter on a blended side and on a year-on-year basis, how, like from the top, how much it has been eroded?
I think once Priyanka answers, what is the erosion that could be happening in the U.S., maybe if required, I will answer our mitigation measures, but let Priyanka go ahead and answer that.
If I understood your question correctly, you're asking about the erosion expected for the next year. Am I right?
Yeah, yeah. I'm just like, first of all, I'm expecting the erosion for this specific quarter and the price erosion from the top. The 50, the high which made, it has made, and that from that how much percentage?
Could you please, you know, put the phone a little bit away from you?
Yeah, yeah. Sure, sure.
You're very muffled.
Yeah. Hello. Am I clear? Am I clear?
Yes.
Yeah. First of all, I just wanted to ask that for this specific quarter, how much your percentage of price been eroded? The second question would be, like the for the continuous question would be how much the price has been eroded from the high it has made in the year-on-year basis. Like, let's say it has made a high, currently the price of 60, the erosion price is 40. What is the actual, from the high it has been eroded in percentage terms?
It's very different, I mean different sets of products, different categories of products have a different-
Yeah, yeah. I wanted to talk on a blended basis. You can get a sensible on a range basis. It's okay for me.
On a blended basis, we can't define it by quarter, YTD we expect we had a total erosion of roughly around 12%-15%.
12%-15%. Hello?
Yes, 12%-15%.
Okay. Okay. Are we seeing this price like erosion is bottoming out due to destocking? It's been like lesser than the previous quarter and now it's becoming U.S. stable and predictable in all means or it's still U.S. being a concerning state for us?
The U.S. market has been concerning and will continue to be a little bit concerning for the next couple of quarters. That said, prices have bottomed out to a large level, to a point that customers who have quoted very without thinking big picture have gotten out of products. Now most of our customers, especially on the controlled and large volume products, which are essentially our bread and butter, are really looking backwards to understand the integration strategy and or any other strategy that we might have and are paying more attention to the supply chain versus erosion. While there will be erosion year-on-year, the rate at which the market erodes will certainly get better. I think this upcoming year will not be bad for us in the U.S. market.
Okay. Okay. 1 last question from my side is from Greenko, which we have made a tie-up. How many percentage of our raw material is being supplied by Greenko?
Basic chemicals, like I said, ammonia and hydrogen, nitric acid, and one or two other chemicals will be supplied by them. We will use these chemicals to further transform them into other chemicals, which will be used by our products and possibly we'll have some surplus material to sell outside too. As of now, I see about four chemicals which they'll be supplying in addition to carbon-free energy.
Let's say in four, five years, how many chemicals could they supply to us or something like any blueprint plan we have made or something like that?
We have not made any blueprint plan. We are working together in the true spirit of partnership. It's a constant innovation that's going on. We will as we go by, we'll get to have new ideas and new ways of working.
Okay. Okay, sir. Okay, thank you so much.
Thank you. A reminder to the participants, anyone wishing to ask a question, may please press star and one. The next question is on the line with Darshil Jhaveri from Crown Capital. Please go ahead.
Yeah. Hi, am I audible?
Yes, you are, Mr. J haver i.
Hi. Good evening, sir. Thank you so much for taking my call. I just want to congratulate on great set of results and your new green initiative. That sounds very promising. I would just like to ask about, whether our, performance currently in the December quarter, could that be taken as a base for our future performance, maybe, you know, next year or something, you know? For FY 2024, could we, do we have some target of, you know, our revenue and margins, you know, that could help me out a lot?
Yeah, Mr. Jhaveri, basically, let me not talk on quarter-to-quarter, but year-on-year definitely there's going to be an improvement. Like I said, in the last few calls, there will be creeping up of EBITDA margins and revenues. We see that path very clearly. Year-on-year, definitely there's going to be a good growth, and especially with all the new initiatives we are taking. While we can't put a number on it today, I think it will be an exciting journey going forward.
Okay. What could be our, you know, you know, all the backward integration and so at, you know, at peak utilization, could you help out with some numbers that would be, you know, very helpful, like maybe, you know, INR 5,000 crores at a 20%-22% margin? Something or the other, you know, not a specific number, some range would help out a lot.
It's too early to talk about this, Mr. Jhaveri. One thing, like I mentioned a little while ago, on some of our new investments, we are looking at least 2.5-3x risk returns. We still need to validate this, but they look very promising. The biggest part here, Mr. Jhaveri, is I don't know if you heard in my speech, if not today, in a few years, the carbon border tax will be implemented. People who are buying products from other countries, for all the Scope 3 emissions they're importing, they're bringing into their country, they have to pay a tax, or they have to incentivize people like us to make sure that there is no carbon footprint. Definitely the margins could be a lot different than what we are expecting today.
The world is going through a great change and, I think there's a great sense of urgency and the way we work year on year is going to change.
Okay. Thank you so much for your answers. That helps me a lot. Thank you so much, sir. All the best.
Thank you.
Thank you. The next question is on the line of Tushar Bohra from MK Ventures. Please go ahead.
Yeah. Thanks for the opportunity. Couple of questions. First, on the operations side, or rather first I'll ask on the CapEx side. Sir, you know, just want to understand how much of the current cross blocks is not optimally utilized, or will go, get optimally utilized, say, over the next few quarters. You know, especially want to look at some color on MABS waste facility as well as on the Onco blocks. Since you're planning such a large new CapEx, it'd be good to understand the, you know, the status of the existing large CapEx already executed.
Let me answer this about the current cross block for Mukesh gets in. The MABS block, which was underutilized, maybe we spent about INR 280 crores, INR 290 crores on that. Definitely we're going to see at least 2.5x as a turn on that very shortly. With possibly very decent margins too. That's with the MUPS block. The Onco block, there's so many things happening there, and that's one of the things that will take a little more time to start yielding. Some of our expansions, which we are doing using enzymatic reactions and all, are going to be made in the Vizag site, though not on the Onco block, on the other blocks which we have commercialized. That also should turn around soon.
The only asset that may not be paying, optimum today could only be the Vizag site. All other sites are being optimally utilized. Going forward, we are very, very confident about our CapEx. Also to let you know, we are not going to take huge debt to put up the CapEx. We're very confident of our cash generation and cash flows, I don't see it as a great risk, Tushar.
It would be fair to assume that the new CapEx obviously would be put up in phases, and we would continue to monitor the progress of, say, a given phase before we commit to greater CapEx. What would be the kind of payback period, intended payback period? I know it's too early, but you would have a target in mind for all new CapEx as to the payback period, right?
Yeah. Tushar, you know, currently, as we, you know, our Chairman has clearly explained, we don't see any issues in terms of the sufficient cash generation from operations, which will take care of the loan for the new CapEx. CapEx, we generally have, you know, payback period anywhere from three to six to seven years. Depending on some of the small CapExes and small debottlenecking can give paybacks period quicker. Some of the large initiatives can be six years kind of payback also.
Okay, sure. My second question is on the operations side. Just an observation from the numbers. you know, this quarter, our other molecule contribution is about 13.5%. It was about close to 19% last time around. Quick back-of-the-envelope calculation shows me about INR 40-50 crore drop in revenue on the other molecules. Second, U.S. business contribution to overall has increased sharply from 43%-49%, this is despite the lost sales in U.S. Third observation is that my standalone gross margin is over 300 basis points up quarter-on-quarter, whereas the consol margin is down by close to 100 basis points.
Just help us understand, you know, what's leading to these kind of, you know, readings on the numbers, right?
Yeah. Sure, Tushar. you know, some of the breakup, we have already shared it in the investor presentation. It is difficult to tell you know, what happened in standalone to consol, because in the standalone, many a times in, you know, Q3, when we add the performance, there are inventory which is dispatched to USA for Q4, you know, dispatches there. Particularly coming to quarter three, you are right. you know, there is a mix change, and there is a lower sale in FD and PFI. That FD lower sale is primarily also because of the 3PL smoothening issue, which, you know, has been taking some time. It is, of course, for betterment. The capability of the new 3PL is good in terms of automation and digitization.
It's just that, you know, stabilization is taking time. We are expecting in Q4 it would improve. Q4 we are seeing, you know, the mix should be changing. Overall still the value addition percentage also we would be improving.
Tushar, you can let me just add, there was an increase in paracetamol sale to the U.S., which the margins are not similar to FDs. Now going forward again, some of these paracetamol sales are going to get converted to FDs to the U.S. market itself. That itself is going to correct. Through the 3PL dispatches that are going to improve, there will be better margins on the regular FDs also.
Just a qualitative follow-up on this, please. Just to understand, as we have in the past guided, that, you know, our other molecules would start to contribute meaningfully, and I understand it's a gradual process over a few years, but by when do we really start to see meaningful traction in the non-para metformin, in IV biz?
Tushar, as you have rightly seen there, the first, the drop in the other molecules is not on account of not new products, but the products where we are making the low throughputs or low value additions. That is the products where we have taken a conscious call not to promote the products in the markets where there is no profitability or less profitability. The second part, where we have shifted our portfolio, I already told in my opening statement that in the short to medium term, we should be able to start seeing both the API and the finished product commercialization into markets in U.S. and other geographies.
That shift is going to really take place probably from two years from now, you start seeing a shift where you will start getting into products which are of different nature as compared to the standard five products, which we normally have as a part of a commercial basket, which occupy a higher percentage. However, for the shift to go into the direction in a much s tronger way. I think our focus will be that four to five years down the line, we will have a dominant segment of new product portfolio coming to launches in various regulated market geographies.
To add to that, Tushar, if you have seen, we have been getting some approvals lately. Today also we got an approval for one controlled substances, and one that's already approved will be launching shortly. The next, two months we are expecting some more approvals. All these things also will definitely add to our, increase in new products, market share. Let's see how things go. What Dr. Ram Rao was mentioning is some of those, real attractive products with the differentiated chemistries and all, that should take about two years.
Sure, sir. Thank you, and wish you all the best. I'll join back in queue.
Yep. Thank you.
Thank you. The next question is on the line of Anirudh Gangahar from Avendus Wealth Management. Please go ahead.
Yeah, thank you for the opportunity. I've got two questions. First is, just on the U.S. sales that we have not materialized during the last quarter. If they had, what would be the delta in the revenue and probably even at the EBITDA level? I hadn't, I mean, whether it materializes in this quarter or next quarter, this is something which should come through, hopefully. The second thing is, second query is on the press release that has been given. There's a comment said that we are also seeing a price and margin erosion in Q3 and expect a similar trend in Q4. Are we referring to the U.S. market only, or are we referring to the overall consolidated picture that we are going to see some more margin erosion in the current quarter as well?
Those are my two questions.
I will do the second question first. We were only referring to the U.S. market, Priyanka has said we are already almost bottoming out. Erosion will subside. Also, my personal view is that people were competing to get market share all along because there were no new approvals coming for people because FDA was not inspecting many customers, many of companies here. Now that FDA has started inspections, more approvals are coming through, I don't think people will be fighting for the same market and prices may, if not go up, definitely may stop eroding, but we will see as we go by. The other thing, what the numbers would be.
In addition to that, sorry.
Priyanka?
Sorry. I was just saying that in addition to that, our view on erosion is pretty optimistic because like Dr. Krishna Prasad Chigurupati said, outside of the approvals are coming in, if you looked at the FDA, the trajectory over the last couple of weeks and months, actually weeks, for many of the big pharma companies who are essentially our competitors, you will see a weakness. We just had our FDA audit, we don't have that weakness right now. There are many opportunities that are coming up, which we are taking while placing a lot of onus on the longevity of it. Considering that, I do think that customers are looking very closely at the supply chain versus just pricing in the market. I do see next year being much better in terms of erosion than we had this past year.
I think Mukesh can answer the first question.
Yeah. The USA sales, you know what, we might have lost, Priyanka also had clarified earlier to one of the questioners, $2 million is what we would have lost. Adding to that, you know, there is this sale is on FD. That also has impacted the VA percentage and EBITDA percentage.
Okay. That loss of sales would largely be directly flowing to the EBITDA numbers?
Yeah, the substantial margin on that is because FD has the highest value addition percentage, directly to EBITDA.
There was also a failure to several penalties which we had to pay. That also has contributed. Once the supplies are streamlined, the margins definitely are going to improve. We cannot put a number right now, but definitely there's going to be a positivity.
I understand that part. Thank you very much for the answer, sir.
Thank you. The next question is on the line of Harith Ahamed from Avendus Spark. Please go ahead.
Good evening. Thanks for the opportunity. There's a land acquisition in Vizag that you talked about, a spend of around INR 43 crores. This is for which business of ours?
Yeah. We have acquired the land to look at the continuous flow of intermediates and some of the APIs that we want to put it as a part of our strategic journey. We were looking at the site which will have the advantages of looking at it. The Vizag site is going to focus on these technology-based platforms on flow and engineering excellence.
Okay. On the operating cash flows, there's a roughly INR 50 crore reduction versus last quarter, and this is despite the cash conversion cycle improving. Any reasons that you can call out here?
Yeah. The current year operating cash flow has been healthy, INR 161 crores. You know, the primary reason why the free cash flow is negative is because of the CapEx. Operating cash flow has been slightly lower than sequential quarter is on account of, you know, some delay in sales and, you know, that has resulted in a little higher side on the debtors.
Okay. Lastly, on the paracetamol demand, you commented that it's been strong. Trying to understand and when I look at the numbers also the last couple of quarters, we've seen a step-up in our paracetamol trades. Any particular factors that's driving this demand, any disruptions with competitors, that's turning out to be positive for us? Is it just more customer or contract wins from our side?
Harith, one of the smaller reasons is, growth and, usage of paracetamol. The main reason is supply security. We supply to a lot of, the biggest brands in the world, and, their current suppliers, they don't feel very comfortable with, and they want to make a big change to us. That's one of the reasons we see that there is a good potential as we go by.
Okay. Last one with your permission, just on the R&D spend. We've been guiding for a step-up there, to around INR 14-45 crores a quarter. We've been tracking, roughly half of that. By when should we factor this step-up?
Actually, some of the filings got delayed, Harith, that's the reason the cost has come down. There's been some efficiencies built into the R&D organization. The main reason is the delay in filings. The filing fees and the file developments and the bio studies, some of them got delayed. Next quarter we should come back to normalcy. After that, a little more shift in our R&D strategy towards high technology products. I think there could be a little extra increase on R&D spend.
Okay. Got it. Thank you very much, sir.
Thank you.
Thank you. Ladies and gentlemen, due to time constraint, that was our last question. I now hand the conference over to Dr. Krishna Prasad for his closing comments.
Once again, ladies and gentlemen, thank you very much for spending the evening with us today. While I personally am very excited with the new journey and also very proud about what we are doing, in fact, I feel that we could be the first pharmaceutical company in the world to make a pharmaceutical API. I was so happy to share all this with you. Once again, thank you very much for spending your time with us today. In case of any further questions on green initiatives, please feel free to write to us. Thank you.
Thank you. Ladies and gentlemen, on behalf of Granules India Limited, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.