Ladies and gentlemen, good day and welcome to the Granules India Q1 and FY21 earnings conference call hosted by Motilal Oswal Financial Services Limited. As a reminder, all participant lines will be in the listen-only mode, 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. Tushar Manudhane from Motilal Oswal Financial Services Limited. Thank you, and over to you, sir.
Thank you, Sajan. On behalf of Motilal Oswal Financial Services, I welcome you all for the Q1 FY21 conference call for Granules India. From the management side, we have Mr. Krishna Prasad Chigurupati, Chairman and MD, Ms. Priyanka Chigurupati, Executive Director, GPI, and Mr. Sandip Neogi, Chief Financial Officer. We have opening remarks from the management, followed by Q&A. Over to you, Richa.
Thank you, Tushar. Good evening, everyone. I welcome you all to the Granules India Limited Q1 FY21 earnings conference call. I would like to mention that some of the statements made in today's discussion may be forward-looking in nature. The nature involves a number of risks and uncertainties that may lead to different results. So with this, I would like to hand over the call to management for their opening remarks, which will be then followed by the question and answer session. Over to you, sir. Thank you.
Thank you, Richa. A very good evening, ladies and gentlemen, and thank you very much for attending our Q1 investor call. We seem to be having a few problems with the phone lines, if at all we get disconnected, please be assured that we'll reconnect immediately. I'm sure that all of you and your families continue to do well and stay safe. At Granules, we continue to face various challenges every day, we are overcoming these continuously and are able to work beyond our normal capacities. We continue to do our best for the well-being of our employees, most of the measures we had initiated in March continue to be in place and have further strengthened these. During Q1, the quarter under discussion, we had spent INR 13 crores towards their well-being.
From the bottom of my heart, I thank everyone of the Granules team for making this happen while facing innumerable risks. Let us get on with the main agenda for the meeting. The company is seeing a much stronger demand growth than originally anticipated. Production today is running at 130%-140% of year ago levels, and a large part of the current capacity is likely to get utilized fully this year itself, which is much ahead of the originally anticipated timeline. It stands to reason that a strong revenue growth and high capacity utilization level will result in better EBITDA margins. A marginal setback for us during the previous quarter was the recall of Metformin ER 750 mg dosage form in the U.S. market due to a slightly higher than FDA-announced NDMA levels in one of the 12 batches produced.
Given a much stronger and sustainable demand growth in our current high volume products portfolio and an expectation of getting approvals for four to five high volume and high-value complex molecules in the next one or two years, we have already started construction of a new facility at our existing formulation site at Gagillapur. We will end up spending about INR 250 crores on this facility over the next 15 to 18 months. This facility will be one of the largest and most integrated multi-particulate system tableting facilities in the world and will be ready by Q3 of the next fiscal with a capacity of 4 to 5 billion tablets a year. This facility, when fully constructed, will also provide additional PFI capacity and an additional compression capacity of 2.5 billion units per year.
We expect this facility to pay back within 24 to 36 months from the date of commissioning. This would need some additional CapEx during the current and next year to keep our growth momentum, but this would all be funded through internal accruals only and not through debt. During the previous quarter, we successfully completed the previously announced tender-based share buyback program, buying back stock worth INR 142 crores at INR 200 per share. Despite higher CapEx and the buyback, we expect to maintain similar levels of net debt as last year, if not better. Key focus on free cash flow generation continues to be our focus. Lastly, on the guidance front, we are confident that we'll be able to cross 30% on the bottom line this year as compared to last year.
I request Priyanka to take you through some detailed numbers before we start our Q&A.
Thank you, sir. Before we move on to the financials, I'd like to provide a few updates. metformin. As stated in the call last month, we continue to have an ongoing conversation with the FDA regarding NDMA in metformin.
We believe this to be an ongoing discussion for the industry in general, we at Granules ensure to focus entirely on regulatory and patient compliance. As reported the previous quarter, the FDA had requested us to test random samples from the market of metformin IR and ER tablets. From the samples tested, there were no issues with the IR tablets and the 500 mg of the metformin ER. We were in correspondence with the FDA in response to an information request pertaining to the 750 mg, in the process, we had found one batch to have crossed the specifications. While only one out of the 12 batches that were tested crossed the specifications, out of abundance of caution, we had recalled the product distributed to the market since we are yet to finalize the recall.
The 750 mg contributed to 0.3% of our FY 2020 revenue, we do not see a significant impact on the long-term revenues since 750 mg, as a strength, contributes to less than 8% of the overall volume of Glucophage XR. We do plan to relaunch the product at the earliest. This is a Class II level recall, we are yet to assess the entire financial impact. At this time, we assess an impact of $2 million, out of the INR 15 crores we provided for, INR 5.38 crores were accounted for in the CO&C, reflecting the material consumption, INR 9.68 crores were recorded in other expenses. Moving on to the financials of Q1 FY 2021. I'm very happy to say that in spite of extremely challenging situations, we had a record-breaking revenue, EBITDA margin, and PAT margin, the best and highest in the history of Granules. Revenue.
The first quarter revenue stood at INR 736 crores compared to INR 595 crores in Q1 FY 2020, an increase of 24% year-on-year. Sequentially, we saw an increase in revenue from INR 600 crores in QY FY 2020 to INR 736 crores in Q1 FY 2021, an increase of 23%. The primary reason for the increase was due to the agility demonstrated on an operational front to cater to a surge in demand pre-COVID and due to COVID across all the markets. We increased our capacity with compression by about 50% since Q1 FY 2020 proactively with a minimal CapEx spend, which has resulted in us being able to cater to the increased demand of our products. There was also an element of freight through air shipments that were charged to the customers that added to the revenue has eventually been netted out in the G&A expenses.
We will continue to see a strong growth due to the orders available currently. The sales breakup as per business verticals and regions are presented in our investor presentation, which is available on the website. Gross margins. For the quarter, the gross margins moved from 50.4% to 59.5% year-on-year due to higher realization from new launches, increased market share of existing products, and product rationalization, primarily in CSI and finished dosage segments. While we will continue to focus on maintaining our gross margins, we might see an impact due to raw material cost increases from our vendors due to COVID and geopolitical situations. In addition to the freight we mentioned above, there was also an overhead reversal in the cost of material percentage on account of increase in inventory to the tune of 2.4%.
That said, we have begun to pass on some of these costs mentioned above to our customers, we'd not see a major impact in the percentage of gross margins. EBITDA and EBITDA margin. EBITDA for the quarter was 25.65% relative to 19.9% in the corresponding quarter of the previous year, a growth of 5.03%. As mentioned above, an increase in capacity through operational efficiencies paved the way to increase production with a non-linear increase in cost. We also started to utilize most of our internal API for metformin products, which in turn enabled us to see a further decrease in cost. In addition to this, our focus on product rationalization based on profitability enabled us to achieve this growth. PAT for the quarter stood at INR 111.4 crores compared to INR 83 crores, a growth of 34% year-on-year.
The PAT of INR 1,100.4 crores includes INR 15.4 crores of a provision on the account of metformin recall. I would also like to mention that the INR 83 crores last year included INR 25.5 crores of profit from our JVs that we divested. Excluding that amount, the growth today is at 93% year-on-year. As mentioned over the last call, we continue to focus on a strategic shift from top line to bottom line, we will continue to remain focused on profitability to drive shareholder value. U.S. business, GPI. GPI numbers this quarter were lower than anticipated, primarily due to the stabilization of stock levels, which were pulled by customers into the Q4 quarter last year. Also, we did not see the full effect of the two launches we had made this quarter in the second half.
We aim to launch at least about seven more products from GPI this fiscal year, two of which will be high volume products from GIL. We also have another two products we're looking to launch in the OTC market in the U.S., Tribusa and GCH. Research and development. This quarter, we did three filings for finished dosages. One was for the U.S., one dossier for Europe, and one in Canada. We also filed one DMF. As mentioned during the last investor call, our R&D spend will be focused on a limited number of medium to large volume integrated molecules, along with a few strategic differentiated products. Our goal is to protect and strengthen our existing products through process efficiencies and innovative technologies within the API and finished doses spaces to respond to the ever-changing market dynamics. Gross debt.
This quarter, we have reduced our gross debt from INR 884 crores from the previous quarter to INR 870 crores in the current quarter. Out of this, our long-term debt is INR 522 crores and debt is INR 348 crores, down from INR 372 crores, which was purely due to judicious management of our working capital. We are committed to decreasing our long-term debt further in the upcoming quarters and aim to land at about INR 430 crores at the end of this fiscal. Cash to cash cycle. Our cash to cash cycle has reduced from 109 days in QY FY 2020 to 103 days this quarter. We constantly endeavor to improve our working capital cycle and continue to negotiate with our key customers and vendors to further improve the cycle. Free cash generated from our business stood at INR 37.3 crores in this current quarter.
We witnessed a drop in free cash flow this quarter due to an increase in receivables, resulting from higher sales and increase in inventory. During the year, we'll be generating sufficient cash to fund our CapEx requirements of around INR 350 crores-INR 400 crores this year. The status of pledge. This quarter, the promoters have reduced their pledged shareholding by 12.95% and have about 3.65% remaining as of date. As committed a few years ago, the remaining pledged amount will be extinguished in entirety by the end of FY 2021. With that, I would like to, again, thank each and everybody who worked tirelessly towards achieving our targets, and I'm very optimistic about the year to come. With this, I'd like to open the floor for questions.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and 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. Reminder to the participants, anyone who wishes to ask a question may press star and one at this time. The first question is from the line of Ashwini Agarwal from Ashmore Investment Management. Please go ahead.
Hi. Good afternoon, Mr. Krishna Prasad, Priyanka, and the rest of the team. Congratulations on a wonderful set of numbers and the cash flow generation, working capital management. All are picture perfect. Very good job and congratulations. Two questions. One is, in your results and accompanying notes and presentation, you called out two numbers. One is, of course, the INR 15 crore provision towards metformin ER, and another is a INR 13 crore COVID-related expense. Should we consider the full INR 28 crores as one-off, or the COVID-related expenses will continue for a while?
First of all, thank you very much, Ashwini.
Yeah.
The INR 13 crore COVID-related, we don't know how much would recur this quarter, but some of this will continue. It all depends on what is happening with all of us in the world. At least this quarter it will continue, and next quarter we'll have to see what will happen. Recall, you want to answer, Priyanka?
Hi, Ashwini. Thank you so much. With respect to the recall, because of the volume of product that we had in the market, we are unable to assess the entire impact. That said, we did recall all the 12 batches, and we do estimate a portion of the recall cost to fall into next quarter and possibly the quarter after as well. I don't think this will be a big amount that will impact our numbers significantly.
Okay. The second question is, you were very clear in your opening remarks and that your gross margin is probably going to remain stable despite some tailwinds and some headwinds that you saw during the quarter. What was the revenue number which was carried over from the March quarter into the June quarter? Is that sort of one-off lumpiness of any nature or not really?
Ashwini, let me take this question. The revenue number carried forward was about INR 35 crores. However, this does not have any positive impact on Q1 revenue because by the end of Q1, we had a higher inventory due to logistics issues. We could not ship enough product, and compared to end of Q4, end of Q1, we had inventory which was INR 60 crores higher. Q4, we had INR 200 crores closing inventory of finished goods, and Q1 we had INR 260 crores. Definitely there is no positive impact of the carried forward sales from Q4. In addition, there has been a negative impact because of inventory buildup, which we will see in Q2. If some of the logistic issues continue, Q2 and Q3 also.
Okay. No, that's very clear. Thank you so much for providing that clarity. In sum, revenue line is pretty much normalized. On the cost side, we have had a few one-off elements. That's quite encouraging. Is there a potential that the R&D costs go up from here as you look for growth opportunities couple of years down the line? Or would that remain stable at the current run rate?
Ashwini, I'll take that question. We do plan on increasing our R&D expenses. This quarter, we didn't hit our target in entirety. We missed a filing or two only because of COVID-related disruption. But that said, like I said in the previous call, we are very judiciously watching the quality of ANDA, and our portfolio is being rationalized currently. As a percentage of sales, the R&D expenses will go down, but in absolute terms, we have a budgeted amount that we will hit this year. Going forward, it will remain at the same amount. That will give us our target number of ANDAs, dossiers, and DMFs.
Okay. Thank you so much. All the best once again, and many, many congratulations.
Thank you so much, Ashwini.
Thank you.
Thank you. The next question is from the line of Chirag Dagli from HDFC AMC. Please go ahead.
Sir, thank you for the opportunity. Sir, for metformin ER, at what level is the issue in your assessment? Is it at the formulation level? Is it at the API level? If you can just throw some light on your?
Ladies and gentlemen, the line for the management is disconnected. Please hold while we reconnect them. Thank you. Ladies and gentlemen, thank you for patiently waiting. The line for the management is reconnected. Thank you, and over to you.
We are waiting for the question.
Mr. Chirag, please go ahead with your question.
Yeah. Sir, am I audible?
Yes, you're audible.
Yes. Sir, I don't know if you caught the question. This was about metformin ER. At what level is the issue, sir, for the NDMA impurities? Is it at the API level? Is it at the formulation level? When there is no product in the market, do you think the market will shift to some other product?
I'll take this question, Chirag. The product is at a formulation level. At a formulation level, it's only at the ER level. At the ER level, it's only at the 750 mg level. Let me please clarify that the RLD of this ER is Glucophage XR and not any other product. What was the second half of the question? Sorry, what was the second half of your question?
Will the market shift to any other product now that everyone's recalling products?
There is no substitute for metformin, Chirag. We only see the demand moving from maybe 750 mg to 500 mg, and we definitely see an increase in the IR. Because we're present in both, I don't think this will impact us in any way.
Understood.
In fact, it will have a positive impact because our product has been cleared with IR and 500 mg as well. If anything, we'll see a positive impact.
Understood. In your opening comments, you mentioned, Priyanka about some reversal of inventory, which was about 2.4%. I was not actually clear what exactly this was.
Chirag, because of the increase in inventory at our subsidiary, we had to consider the overhead cost as a part of our material cost. That reduced the cost of materials, that increased our gross profit level. This is an accounting practice.
Understood. On an absolute gross profit in INR crores level, there is no impact in what you're saying.
INR crores
No, there was an impact. I'll let our CFO answer this question. One second.
When our inventory gets built up between the opening and closing inventory, as our closing inventory is higher, there will be a reversal of profit, and therefore, there will be a favorable impact in the material consumption line. That has exactly happened. We have got benefit in both, meaning that in the gross profit in value, and also in percentages.
That is 2.4% of sales.
Yeah. That's right, Chirag. However, assuming the inventory was not there, and if we had sold the product, then the profit would have been much higher than this. In absolute numbers, the profit would have been higher though on percentage-wise, the percentage would have gone up.
Understood. The last question, sir, if I can. In terms of ANDAs filings, how should we think about the number of filings every year? Maybe slightly longer term, not the next couple of years, but beyond that, how should we think about the R&D pipeline?
Chirag, like I mentioned last time in our investor presentation and the call, we will be focusing on a limited number of ANDAs, we'll be focusing on strengthening every single asset that we have currently and going forward. In terms of ANDAs and dossiers, our targets will be between seven to maybe nine ANDAs dossier s per year. We'll be spending significantly on backward integrating the products, because that's the name of the game today in terms of protecting the assets you have, and that's the only way we know we will have sustainable growth going forward. That said, in terms of R&D, even the ANDAs and dossiers that we develop will be more value creative than the products that we have now.
A lot of the expenses will be focused on the GIL products, which is basically high to medium volume integrated products versus our more differentiated products. Because at the core of our company, we are a manufacturing company, and we'll continue to remain that way.
Seven to nine is not the next two years, but thereafter, is it?
No, even this year, next year, we'll have between seven, eight to nine filings per year. This could be ANDAs and DOTRs, because like I said last time, we are utilizing the advantage that we have on being integrated on our current core molecules and the other molecules that we've added by expanding globally. We are extending our U.S. ANDAs to Europe, to Australia, to Canada, and South Africa, based on the business cases that we see. Including that, we'll have between seven to eight, to nine filings per year.
Specifically for the U.S., Priyanka?
I can't say, but we're at least targeting five products at the least per year.
Understood. Thank you.
Yeah.
Thank you. The next question is from the line of Madhusudan Kela from MK Ventures. Please go ahead.
Congratulations, Mr. Krishna Prasad, Priyanka, and the entire team. What a splendid show in these challenging times. Heartiest congratulations from all of us to the entire team. Sir, my question is little longer term. We've seen company generate free cash flow this year and even last year. Should we assume that over the next three years, even after completing your CapEx plan, we will still continue to see free cash flow from the company? Also, we saw a fantastic gesture in terms of buybacks last year. Will that practice continue at least in the foreseeable future for the next two, three years, as and when you have free cash flow?
First of all, thank you very much, Madhu. Regarding the free cash and the CapEx, I think I made it very clear that all our CapEx will be funded only by internal accruals, and I'm pretty confident that after funding our CapEx, there will be some cash left. For sustaining our growth rate, we need to invest in CapEx, however we may not have a lot of cash left, but some cash will definitely be positive. Regarding buyback, yes, we had deliberations in the board about increasing the dividends. We felt that we need to conserve cash to fund our CapEx growth, and also COVID, if there's some uncertainty, it's better that we keep cash in the books rather than distribute it today. As and when we have surplus cash, our intention is to keep doing buybacks.
It all depends on how much goes for CapEx and how much free cash is left. Based on the then situation, we'll take a call, the intention of doing buybacks is still there.
That's fantastic, sir. Sir, one last question I had was, right now going is all good and the team is doing fantastic work. What are the key risks which you see over the next two, three years, if there is any which you would like to share with all of us?
One of the biggest risks we all see and everybody is debating about is the geopolitical circumstances. Anything that happens with China is not only going to affect us, but it's going to affect the whole world. Pharmaceuticals would be in short supply across the world. I see the possibility of this happening as very remote. The whole world and countries are interdependent today. No country can do without the other country, not only in pharmaceuticals, across all trades.
[Hemant, I'll just take a part of that question. That said, as a company, we are trying to reduce our dependence on China. Today, 3 products come from China, major KSMs, 2 of which we have taken care of by having multiple sources. There is one KSM that we do import quite a bit from China. We are working in the background to backward integrate into that product, and I think that will be a strategic product that Granules will get into over the next couple of years. That way, we will also be lowering our dependency on China. That said, in the near term, any boycotts or bans will be very counterproductive for the Indian industry that imports about 70% of its products from China, because it will be hindering access to medicine all over the world.
I don't think any boycott or ban will happen anytime in the near future.
Thank you so much, Priyanka. All the very best. God bless.
Thank you.
Thank you.
Thank you so much.
Thank you. The next question is from the line of Ravi Sundaram from Sundaram Family Investment. Please go ahead.
Thank you. Hello, team. Thanks for the opportunity. Congratulations for the excellent set of numbers. I just have two questions. The first question, I think, though the previous participants covered it, I probably need some little more details. First, R&D, we see it is coming both as a percentage and as an absolute value, in terms of R&D percentage. Why is it happening? Is it any reason? I think I'm even looking at it sequentially from Q1 FY 2020, from about INR 340 it has come to INR 200 crores.
I'll take that question. R&D, like I said, as a percentage of sales, it has come down because the sales have gone up. That said, the first couple of years when we especially launched into the U.S. market, one of our learnings when we launched into the OTC market was that we didn't have a basket of products. We were very clear that we wanted to have a basket of products before we entered the RX market. We had up to 13, 14 filings coming from one site. Overall, about 14 to 15 filings coming from just one site for the U.S. market for years. Launching those products, where you have little to no value advantage was, and will continue to be an issue.
We changed our strategic approach to R&D a little bit, where we invest more and only in products that we have a strong value proposition on. That kind of limits us in terms of number of ANDA filings. What we're working on, like I said, is to increase our DMF filings, et cetera, to strengthen these products. Sometimes it's more about the process efficiencies rather than the R&D process in itself. While you see the R&D expenses possibly going down, that amount will be spent on possibly on CapEx. We need to make sure that these kind of products that primarily work due to process efficiencies are commercialized in the best possible way. I hope I answered your question.
Yes, madam. Any guidance on R&D for the current year?
We've always said that the guidance would be about INR 150 crores per year.
Okay. My second question is on the buyback. I think buyback was at INR 200. Any reason why the management I know it was to reduce the pledge, but we tendered a little extra also, compared to the entitlement. Considering that the business has been doing phenomenally well, was there any reason? Did we deliberate about this?
Ravi, was it that you said we could have tendered more, or what was the exact question?
My question was, the buyback was at INR 200. I think considering that the business has been doing phenomenally well, I think the valuation could be even much better than current market price is my personal understanding. Why did the management tender at 200? Could we have waited or any color on that?
Ravi, the important thing here is not to get some extra money or extra cash. We wanted to reduce the pledge. That was the key objective. I didn't think it was right to wait and try to sell it in the market. We thought it is safe to tender. We had a plan to tender, so we didn't want to change our plans. We went ahead and tendered.
Unfortunately, others did not, because they had no reason to do that. We didn't see any reason to change our plans. We are happy we went ahead and we reduced our pledge. We paid back INR 100 crores and now there's very little pledge, and I think that'll also be extinguished pretty soon.
Yeah. Actually, thanks for the clarity, because that's something that was a question in the investor community. My last question is on the onco block. Sir, has the commercialization of it started? If not, any timeline on that?
Ravi, we have started commercializing the oncology block. We started seeing some revenues from the API facility. For us to see significant material revenues coming from this side will take us a couple more quarters.
Okay. Thank you very much, and all the very best for your subsequent quarters. Thank you.
Thank you. The next question is from the line of Kaustav Bubna from Rare Enterprises. Please go ahead.
Yes, hello.
Yeah.
Hi. Just wanted to know what type of CapEx would be needed for the next foreseeable future, three, four years, to maintain this type of growth. In what field, what type of CapEx?
CapEx, we are looking at about INR 350-400 crores this year, and possibly another INR 300 crores or so next year. We cannot foresee beyond that.
Yeah.
We are sure that we are going to match our CapEx to try and maintain the current growth which we have. We are pretty confident that going forward with the new product launches and all.
We are pretty sure that we can maintain this growth. Like I said in my opening remarks, we are investing in a MPS block, which is multi-particle sustained release products. This is going to be one of the largest in the world and fully integrated. That is going to make a big change for us. Like the value per thousand tablets or per tablet, there is many times more than our current products. Since it's a little more complex in manufacturing, the margins are also good. With our efficiencies which we developed in high volume manufacturing and low cost manufacturing, we have made some changes and tweaked the process, and we believe we will be very cost efficient, and this is going to maintain our growth.
Okay, just one more.
Also we are looking at API production in different APIs, which will also add to our margins.
Great. One more question on your U.S. FDA approved plants. Currently, how many U.S. FDA approved plants do you have, and how much revenue does that contribute to your total revenue? In three, four years from now, what would you expect that number to be, both on the amount of plants and the amount of revenue it contributes in total?
I take that question. You mean, GPI, correct?
Yeah.
Okay. As of now, in terms of revenue this quarter, about 11% of our top line came from our GPI. Going forward, we expect this business to go fourfold in the next three years. We are expecting this business to at least
Ladies and gentlemen, the line for the management is disconnected. Please hold while we reconnect them. Thank you. Ladies and gentlemen, thank you for patiently waiting. The line for the management is reconnected. Thank you, and over to you.
Apologies for the disconnection.
No worries.
Hi, can you hear me?
Yes, I can.
Sorry. Apologies for that, Sir. I was saying that within the next three to four years, we see the GPI revenues to at least go fourfold.
Okay. What's that? Yeah, go ahead.
As a percentage of our revenue, we don't look at GPI in particular. We look at the U.S. market in totality, we expect it to get to between 68% and 70% of our overall revenues.
What is the margin profile be for U.S. versus the rest of your business for formulation?
I can't really put a number on the margin.
Steady state?
I'm sorry.
Steady state.
Okay. Steady state revenues for
No, just wanted to get a sense. Your growth, which let's say is formulation based, I just wanted to get a sense, what is the incremental growth margin supposed to be versus your normal portfolio?
On an EBITDA level?
On an EBITDA level, yes.
On EBITDA level, we've always committed to an increase in 1% year-on-year. Just on formulation. If it's just on the formulations, we haven't necessarily.
Yes
calculated it. A majority of this business will come from formulations. Formulations is the highest margin products we have, and new products that are coming in in formulations are going to have increased margins. PFIs, and then APIs, that's the order of margins we make. Definitely going forward as formulations sales increase as a percentage, the margins also will increase. That's what we have factored into our entire growth plan and also our guidance of 30% this year and possibly 25% after that.
For this full oncology CapEx that you've done, what is the maximum amount of revenue this can generate, assuming that everything goes on successfully?
First of all, let me clarify. We called it an oncology facility in the past, but the fact is, it's a multi-API facility and infrastructure which we have built. Oncology block is just a small part of it. We spent about close to INR 80 crores out of the INR 280-290 crores on that facility. Oncology, I would not be able to put an exact number. We've seen some potential, but more than that, we had a block with lot of infrastructure and a pilot plant built in there. Today we have lot of APIs which we have filed DMFs and which we have also qualified in our new filings for ANDA. We are planning to scale up those products. We are putting extra reactors, and we will be scaling the products there.
Going forward, the growth is going to come mainly from other APIs as compared to onco. APIs, there's a lot of potential there. We created the infrastructure, and that site is good enough to take us forward for another four to five years of growth on APIs.
All we have to do is keep on putting equipment or a new block, which will not cost as much as a greenfield venture. That will be brownfield, and all brownfields will yield a quicker return.
This is the operator. Sorry to interrupt you. Mr. Bubna, may we request that you return to the question queue for follow-up questions?
Yeah, okay. No problem.
Thank you. The next question is from the line of Deepak Khatwani from Girik Capital. Please go ahead.
Hi, sir. Congrats on the set of numbers. I had a couple of questions. First is, if you can put a qualitative as well as quantitative color on the growth potential of your core molecules, and how much did they contribute to the revenue in this quarter?
This quarter, the core molecules contributed to about 85% of our revenues.
Okay.
Going forward, these five molecules will remain to contribute a significant amount to our top line because of global expansions of our molecules. We see it at around 70%-75% level, even three to four years from now, primarily coming from revenues that we get from various regions. One rationale is to be able to have a market share and maintain that market share in these kind of molecules takes years, and we're never going to let go of that capability. Like we've said in the past, we've said that we are adding more core molecules to our business. While we get to this level for those molecules, it will take us some time. Also, if you look at the overall global scenario, there's only a few molecules that have the volume and the value that we produce.
Right.
These products will continue to be a focus for us going forward, and will continue to be our cash cows.
This is the operator. Sorry to interrupt you. Mr. Khatwani, may we request that you return to the question queue for follow-up questions, as there are several participants waiting for their turn?
I just have a follow-up on the answer. Hello?
Please go on, Mr. Khatwani.
Yeah, I was asking just to add to that question as to when you talk about core competencies or what adds to your core competency in these molecules, because these are pretty generic molecules, right? What does Granules do differently than other people in terms of getting more market share?
First of all, Mr. Khatwani, the very fact that we have such huge market share in the U.S. as compared to people who have been there for ages-
Right
shows that they did something different. We are cost-effective. We are not definitely the cheapest, but people have a lot of faith and trust in our delivery. One reason is integration. We make all the APIs, we are integrated across the value chain. The second reason is our manufacturing, I would say, philosophy itself is totally different. We don't manufacture products the way that typical pharma industry works. We have a different way of producing, and it creates a lot of cost efficiencies, and that has proven itself for the market share which we have. Another main and key factor is our regulatory compliance.
Right.
In the entire history of Granules, we never had any regulatory compliance issue, which is very rare in today's world. This gives the confidence to all our customers that we will deliver and deliver on time. Integration, unique way of manufacturing, and finally, regulatory compliance, and also our history of supplies, which were built over a period of time, gives confidence to the market and they buy from us.
In addition to that, I think I'd just like to add that our batch sizes are rather large. To understand the philosophy of that, please just look at our website. There's a clear understanding of how the large batch sizes result in cost efficiencies and operational efficiencies. I'm happy to take a call offline to explain that in detail with you.
Thank you so much. That will be helpful. Great. I'm happy with the integration. Congrats again for the numbers.
Thank you.
Thank you.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in the conference, please limit your questions to one per participant. Should you have a follow-up question, we would request you to rejoin the question queue. The next question is from the line of Kunal Mehta from Vallum Capital. Please go ahead.
Thank you very much for your question. The question I have is, can you give us an understanding of this new CapEx, which you intend to do for the next two years? I'm sure you mentioned that the new CapEx will be focused on the existing core molecules. Could you just give us an understanding of the new CapEx in a bit more detail?
Sorry, can you repeat the second part of the question?
Yeah. Could you please give us an understanding of in which areas do you want to do the new CapEx, which you're planning through the next two years? You mentioned that you plan to do it in the core molecules, your top five core molecules. Could you just give us some more understanding on this front?
Core molecules will continue to grow as we go to new geographies, that will need some additional capacities. The key thing is, as we go forward, I mentioned a little while ago that we are investing in a MUPS block, which can make sustained release tablets, multi-particulate technology. This is a little complex technology compared to normal manufacturing, the scale at which we are going to manufacture is different. Our main investment for this year and the next half of year, INR 250 crore, would go into this block. Also there's some investment which go into API and backward integration into some of the, I would say, basic raw materials.
The API investment mainly will be in Vizag unit 5, where we said we are going to add on more reactors and more blocks, that site is created for the next four to five years.
Understood, sir. This specific block which you are creating for the different sites. The products which you are going to manufacture in this block, are they going to be the same ones, metformin, acetaminophen, paracetamol, or they are going to be the different products which you are going to manufacture?
metformin and ibuprofen are not made with multi-particulate technology. It's a rather straightforward technology. This block is going to do multi-particulate where you can do products like omeprazole and metoprolol and so many other products. They add a lot of value, it's not easy to manufacture these products. Like I said, they come to us because of manufacturing base.
Even in terms of the other block that CMD just mentioned, with respect to APIs, these APIs are not going to be any of the core molecules. These APIs are basically going to be for products that we've already filed for or are going to file for, which we think have a strategic importance going forward in terms of finished dosages. We're going to be backward integrating into these APIs. Like I said, we will be strengthening these to strengthen the finished dosages. Unit 5 will be a multi-API facility.
Understood, ma'am. Understood. All the best for the future. Thank you.
Thank you. The next question is from the line of Tushar Bohra from MK Ventures. Please go ahead.
Thank you so much for the opportunity, and congratulations to the management on excellent set of numbers. A couple of points on the way forward. You mentioned CDMO/CMO for oncology and multi-API block in the presentation. If you could help us understand what is the strategy on CDMO and how advanced is our strategy on this? Do we already have discussions in place? If you can just give a roadmap for this particular segment for next two years.
Sure, Tushar. I'll take your question. I think we should have made it a little bit more clear in the presentation. We said that unit 5 there is an oncology block, then there's a non-oncology block, then there's just space available for any new growth that we wish to have. Only the oncology block will be focused on CDMO and CMO projects. Oncology, we are working with strategic partners. We have developed some APIs. We filed some of our APIs, and we do plan on selling them to customers once they're approved, and we already started receiving samples, et cetera. The oncology business in particular, we are tying up with strategic players who already have a front-end presence to work with them to do our business.
We're not going to be front-end in the oncology business because as a company, we are going back to focusing on what we know best, which is manufacturing efficiency. That said, we do have a strong R&D with our oncology capabilities, and that's where we're going to be utilizing the R&D for CDMO business and the manufacturing side for CMO business. The rest of the 70% of the spend or the area will be used for multi APIs that will primarily be used for integration for our own products and a part of it will also go to third party sales.
Great. Thanks. That helps.
Mr. Bohra, this is the operator. May we request that you return to the question queue for follow up.
I just asked one question. I'm sure you can allow me one more.
Please go ahead.
Yeah. Thank you. Thank you so much. Regards to the overall volume-based business, you mentioned that two launches in this financial year will be in the high volume products. It would be fair to assume that they would be from your emerging segment between losartan, cetirizine and one more that was mentioned in the presentation. When we say high volume products, you are referring to that one, right?
It would be products like losartan, cetirizine, dextroamphetamine. We will not be adding more value credit products. We already have some of the filings made. We're launching some products this year. Those are the kind of products that will be increasing our R&D spend in. Again, I'd like to say that we're not going to be spending more R&D on, say, a metformin at this point. The core molecules will remain the way they are, and any spend on the core molecules will be outside of this R&D spend. That will be a strategic project that we pick up in its own.
These molecules that you are launching, can any of them actually be-
Sorry to interrupt you. May we request that you return to the question queue for follow-up questions. We have several participants waiting in the question queue, sir.
I'm just trying to complete my question. I'm not asking a new one. You have to allow me to at least get my point clarified.
Yeah.
Yeah. Thank you.
Please go ahead.
Sorry about that. The only point was that these launches that they're considering, the new volume ones, do we expect that some of them could sort of be comparable to the top three molecules for us at some point in future? Are we looking at them as that kind of scale, say, over a three to five-year period? Is it fair to assume that?
Like I said earlier in my conversation, the products that we have already been present in over the last five years, especially Cyra, metformin, and Ibu, there may be one or two other products that are of that scale and that value. The products that we have pitched right now, in general, overall market, there's not that many products of that volume. No, I will not say that any of our products will reach up to that level, but there will be a significant contribution coming from these molecules. A very significant contribution, but they won't be at a level of neither [Trofin] nor metformin.
Very well. Thank you so much. Wish you all the best.
Thank you. The next question is from the line of Ritesh Bhagwati from Rockstreet Capital. Please go ahead.
Thanks for taking my question. Most of my questions actually have been answered. I just have one question actually in regards to the margins. In this quarter, I think we recorded EBITDA of 25%. Can we assume that this is going to be a start of our further improvement in our margins? Or are we at the top of this level going ahead? Can you just guide us on that?
EBITDA, we've always been saying that 22% is what we aim for. Looking at the current trend, we think that we will be able to maintain about 23% EBITDA going forward. However, like I said, that even this 23% EBITDA, we are very confident of reaching our guidance of 30% growth in bottom line this year, and possibly after that, on this year's profit, maybe 25% next year. 23 is what we can take into account.
Okay. I just needed some clarity in regards to-
This is the operator. Sorry to interrupt you, Mr. Bhagwati. May we request that you return to the question queue for follow-up questions. We have several participants waiting in the question queue.
Okay, no problem.
Thank you. The next question is from the line of Nitin Agarwal from IDFC Securities. Please go ahead.
Hi. Thank you very much. {audio distortion} we have a sharp improvement when I can define your gross margins on a YOY basis. Will it be possible for us to give some color on the various constituents to drove up the gross margin on a YOY basis? I mean.
Sorry to interrupt you, Mr. Agarwal. Please use the handset mode. There is some echo from your line.
Hello, sorry. Is it better now?
Yes.
It's better now.
Yeah. I was saying, will it be possible for us to share the gross margin? We have a dramatic improvement in this quarter as we are on a gross margin front. We've almost delivered 900 basis points on a QOQ on a YOY basis. Will it be possible for us to understand a little better in terms of various constituents which drove up the gross margin to this level?
Sure. I'll take that question. Like I mentioned in my call, I mean, in my opening remarks, we've had some freight costs that the customers paid for that were added to the gross margin. In addition to that, there was an overhead reversal in the cost of materials on account of increasing inventory, and that added up to about 2.4%.
However, let me also clarify. Gross margin percentage is a factor of product mix and also build-up of finished product inventory. Different product mixes have different margin percentages. However, some of those high-margin products are slow to manufacture. If we have to make 100 tablets of high-margin products, in the same time, we can make 300 tablets of a low-margin product. If you see in the same time, the overall profit number in absolute terms will go up, but percentage may not. Percentage will keep varying either way. It could go positive or negative based on product mix and also the inventory levels. However, we're very confident that as absolute numbers will keep it growing.
Okay. Thank you.
Best luck. Thank you.
Thank you. The next question is from the line of Bharat Selhi from Equitas Securities. Please go ahead.
Yeah. Thanks for the opportunity, Congrats for the good set of numbers. Sir, just wanted to get a clarity that how API prices, you mentioned that couple of APIs have seen an increase in prices. Sir, just wanted to get a clarity, which APIs were those and how the price has moved for those APIs?
Are you talking about API price increases?
Yeah.
Okay. APIs, as such, the APIs we buy have not increased much, but for some of the APIs which we make, the key starting material, some of those have gone up, especially one out of China. It has stabilized. We don't think it will go up further. However, we were able to pass on some of these increases to our customers and get better realizations. We don't anticipate any major issue going forward on API price or these increases.
Okay, thanks.
Thank you.
Thank you. The next question is from the line of Charulata Gaidhani from Dalal & Broacha. Please go ahead.
Yeah. Hi. My question is, of the total revenue growth, could you split it up between volume and prices and new products?
We unfortunately don't have the breakup. If you reach out to our investor relations, we'll be able to give you some split up. We don't have the numbers ready with us right now.
Okay. Going forward, what would be the contribution of core molecules over the next three to four years?
I mentioned this in my response about two questions ago. The contribution will be around 70%-75% over the next four years.
Okay. Existing is 85?
Existing is 85, and by core molecules, I specifically mean paracetamol, metformin, ibuprofen, methocarbamol, and guaifenesin.
Okay. Fine. Thank you. All the best.
Thank you.
Thank you. The next question is from the line of Cinderella Garwala from Centrum Broking. Please go ahead.
Thanks for taking my question, and congratulations on a great quarter, {audio distortion} . If you could help me understand the demand scenario. We have said in our interactions that we have seen some market expansion. We have seen-
Cinderella, there is an echo on your phone.
Okay. Sorry about that.
Ma'am, please use the handset mode.
I am already on the handset.
Okay. Go ahead.
Could you please repeat your question?
Yeah. I want to understand more from a demand sustainability. If you could help us understand the key parameters. You have explained that there is a market expansion and there is increased demand. If you could help us understand the key drivers of these segments.
It came from all the products, not necessarily a few products, all the core molecules. It was both pre and post-COVID. It could be because some of the products, like metformin has been seeing some NDMA issues. That is one of the primary reasons. Again, being first line of defense, we have some products like paracetamol, ibuprofen, et cetera, which are basically the first line of products that people take even during the COVID situation when they fall sick. That itself has led to an increase in our OTC products as well.
As we see the COVID scenario, maybe beyond that, should we see any changes to the existing demand?
The demand that we have, I think it's been given to us, it's been awarded to us. We are very confident of being able to supply. If we continue the momentum of supply, I think this will definitely turn out to be a permanent demand for us. Or an award.
One clarification. You said that.
Ma'am, may we request that you return to the question queue for follow-up question?
Yeah, sure.
Thank you. The next question is from the line of Praful Bora from MJ Global. Please go ahead.
Yeah, thanks. Sir, recently there was an article which said that there's some carcinogen which is found in paracetamol in certain European markets. What's your take on that and any opportunity that goes with that?
Yeah, Praful, I think you are referring to that Netherlands study-
Yes
of the Chinese material. Yes. They said they have found some traces of para-chloroaniline in paracetamol, which is carcinogenic. We had a lot of customer concerns. A lot of customers started reaching out to us and saying, "How are you sure it's not in your product?" Basically, as per the specifications laid down by US Pharmacopeia or any other pharmacopeia, there's no test for para-chloroaniline. This is an impurity that is formed in the manufacturing of PAP. If at all it's present in PAP, it gets converted into para-chloroacetaniline, and there's a test for chloroacetaniline. All our batches in the entire history have shown non-detectable limits of chloroacetaniline. We presume that chloroaniline is not present in our products because everything gets converted. The question comes up saying why Chinese product has this, and what is the difference?
There's a difference in manufacturing, where in our manufacturing process, we assume there could be a complete conversion of chloroaniline, whereas in Chinese may not be, we don't know. This got our customer concerns, and I don't see any risk to our product from this. If at all, there could be a small opportunity.
Praful, also, at Granules India, we also have a control of this impurity in our finished product release, I think, with a specification limit based on the FDA guidelines. As of now, based on the trending, we have seen a trending of not detectable. Whether by trend or design, this aniline is not detected in the API either.
Got it. Thank you.
Thank you. The next question is from the line of Abhishek Vishwajeet from Wallfort Financial Services Limited . Please go ahead.
Hi, it's Abhishek Vishwajeet. My question is regarding metformin. I just wanted a clarification if you are still selling, actively manufacturing and selling the metformin API, PFI, and the 500 mg IR.
Sorry, what was your question?
No, no. I'm just asking if you are still actively manufacturing and selling the metformin API and PFIs at least.
Yes, yes. We haven't stopped manufacturing of anything.
Okay.
In fact, demand is going up for all the other variations of products.
Okay.
The only product that we have voluntarily recalled is metformin 750 mg ER product.
Okay. Thank you.
Thank you. The next question is from the line of Shiven Saroya from GHP Securities Private Limited. Please go ahead.
Good evening, sir. My question is on the B2B business. You've alluded to the fact that you are entering into new geographies like Europe, Canada, and South Africa. Sir, my question is, if you could give some perspective on the margin profile for the same products that you would be having in these countries going forward?
These geographies, at least I can speak for Europe, because we have a little bit of experience there, is a little lesser than what we make in the U.S. The consistency and price will be more sustainable in Europe compared to the U.S. However, I would say it's not as high as the U.S. margins.
Okay, sir. South Africa and Canada, sir, if you could give some color there.
Canada is a little more profitable than U.S. South Africa, we are just exploring. We'll get a better idea. We are working on the dossiers, meaning that in these markets, we are going to out-license these products to other companies. We will not get into the market ourselves. Other existing companies which have been selling metformin or some of these products, they will stop making these products themselves and keep continuing to buy from us. That's how we get them.
Okay, sir. Okay. Thank you very much.
Thank you.
Thank you. Ladies and gentlemen, due to time constraint, we'll take this question as the last question. I would now like to hand the conference over to the management for closing comments.
Thank you everybody for joining the call today. I hope we were able to answer all your questions, but if not, please feel free to reach out to Richa. Her details are on the investor presentation, and we'll be happy to take one-on-one calls post this call. Again, thank you so much for joining. Hope all of you and all of your families are doing well.
Thank you. On behalf of Motilal Oswal Financial Services Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.