Ladies and gentlemen, good day and welcome to the Granules India Limited Q2 H1 FY 2027 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 this conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Prachi Ambre from MUFG Investor Relations. Thank you, and over to you, ma'am.
Thank you, Swapnali. On behalf of Granules India Limited, I extend a very warm welcome to all the participants on the Q2 and H1 FY 2027 financial results discussion call. Today on the call, we have Dr. Krishna Prasad Chigurupati, Chairman and Managing Director, Ms. Priyanka Chigurupati, Executive Director, Mr. Mukesh Surana, Chief Financial Officer, Dr. P.V. Srinivas, Chief Technology Officer, and Mr. Sanjay Kumar, CEO, Senn Tides India Private Limited. Before we begin the call, I would like to give a short disclaimer. This call contains some of the forward-looking statements which are completely based on our expectations, beliefs, and opinions as of today. These statements are not a guarantee of our future performance and involve unforeseen risks and uncertainties. With this, I would like to hand over the call to Krishna Prasad sir for his opening remarks. Over to you, sir. Thank you.
Thank you, Prachi. And a very good evening, ladies and gentlemen. Thank you for joining us today and for your continued interest in Granules. We have uploaded our detailed quarterly presentation, and I trust you have had a chance to go through it. Let me first provide an update on our Gagillapur facility.
The US FDA conducted a cGMP inspection of the facility from October 19 to October 30. This was the first FDA inspection since the Warning Letter issued in February 2025, following the 2024 inspection. The inspection concluded with a Form FDA 483 containing 11 observations. Based on our assessment, none of the observations relate to data integrity, cross-contamination, or facility upkeep. They concern investigations, change control, process and equipment qualification, visual inspection controls, and documentation practices. There is no impact on manufacturing or distribution of products from this site.
We will submit a comprehensive response within the stipulated 15 business days, detailing our corrective and preventive actions. We believe these observations are addressable and remain focused on demonstrating the effectiveness and sustainability of our quality systems. Coming to our performance, Q2 was another strong quarter for Granules. Revenue grew 20% year-on-year to INR 15,600 million, crossing INR 15,000 million in quarterly revenue for the first time in our history. EBITDA grew 21%, while PAT increased 39% to INR 1,818 million. This also marks our eighth consecutive quarter of sequential revenue growth. These results were delivered despite a challenging operating environment.
Geopolitical developments continue to put pressure on input and logistics costs across the industry. We expect some of these pressures to persist, with customer price adjustments following with a lag. Against this backdrop, the consistency of our performance gives us confidence in the underlying strength and momentum of the business.
In our September investor presentation, I spoke about our return to growth as the beginning and beginning to a new journey. Our growth strategy has multiple pillars: controlled substances under our Make in America platform, complex generics and early market opportunities, geographical expansion, oncology, and peptide CDMO.
The progress across our business is beginning to validate this direction. North America, our largest market, continued to grow, led by controlled substances. Europe sustained its growth momentum, while our efforts to develop the rest of the world markets are beginning to contribute. Our peptide CDMO business through Senn's also grew year-on-year. This platform remains in its build-out phase, with the near-term focus on strengthening execution, customer delivery, and profitability. One of the most significant changes within Granules is the evolution of our R&D and product development strategy.
We are pursuing differentiated opportunities, addressing greater technical complexity, and building the potential for early market entry. Our first-to-file strategy is a visible outcome of this transformation. Over the last three quarters, we have announced filings for three potential sole first-to-file ANDAs: generic DYANAVEL XR, or amphetamine-based extended-release ODT, sodium oxybate ER, and ruxolitinib ER. Several more such products are under development, with filings targeted over the next six to seven quarters. These opportunities have a different commercial profile from conventional generics. Successful early entry, particularly into products with significant technical or regulatory barriers, can create substantial value. The timing and extent of this contribution will depend on regulatory and litigation outcomes, and the upside may be uneven across quarters. Alongside these opportunities, we have 26 ANDAs awaiting approval, providing a strong pipeline for the next wave of launches.
On sustainability, we continue to make steady progress through our Sedex assessments and CRISIL scores. Four of our facilities have also achieved zero waste to landfill certification. We remain focused on making these improvements an integral part of how we operate. Granules today is fundamentally different from the company we were a few years ago. We have a broad portfolio, deeper development capabilities, and multiple avenues for growth. Our focus remains on disciplined execution, strengthening quality, delivering reliability to customers, and translating our investments into sustained growth and earnings. With this, I hand over to Sanjay to provide a more detailed update on the progress of the peptide vertical. Over to you, Sanjay.
Thank you, Sir. Coming to Senn Tides, we continue to make progress across regulatory compliance, commercial development, and the expansion of our capabilities in Switzerland and India. During the quarter, Senn Chemicals site in Zurich successfully completed its Swissmedic GMP inspection with no critical findings and acceptable GMP compliance status. This reflects a meaningful progress in strengthening our quality system and regulatory capabilities compared with previous inspection two years ago. On the commercial front, we are seeing strong momentum. A theranostic-related pharmaceutical project has been revived after nearly two years, driven by progress in its clinical development. We have also renewed engagement on supply partnership with two major peptide CDMO players and initiated discussion for a second-year manufacturing campaign with another CDMO partner following successful delivery last year.
Importantly, our increased business development efforts, industry outreach, and re-engagement with longstanding customer relationship have resulted in a strong inflow of RFPs and RFQs during the recent months. Our focus now is on converting this expanding opportunity funnel, leveraging Senn's expertise and our extended development capabilities. In parallel, we are advancing our CRDMO platform. Our oligonucleotide scientific leadership is now on board, with additional team members expected to join over the next quarter. The R&D teams in Zurich and Hyderabad are already collaborating closely as we prepare to expand our footprint across both peptides and oligonucleotides. On the manufacturing side, our India project team is in place and progressing the planning and design of our proposed integrated peptide manufacturing facility at Vizag. At Zurich, our immediate priority remains operational execution and delivery readiness as we prepare for a more active fourth quarter of this financial year.
We are aligning our manufacturing plans and resources with scheduled customer offtakes while accommodating customary December holidays and the plant maintenance break during December. Overall, our priorities are focused towards strengthening customer engagement, converting our growing pipeline into the business, and building an integrated CRDMO platform capable of supporting the next phase of growth for Senn Tides. With this, I hand it over to Mukesh, our CFO, for taking us through financials.
Thank you, CMD and Sanjay. Good evening, everyone. I will now walk you through the financial performance for Q2 FY 2027. Revenue for the quarter was INR 15,600 million, up 20% year-on-year and 6% quarter-on-quarter. Growth was broad-based across our businesses and key markets, supported by steady demand for our product portfolio and higher growth of complex generics. Gross margins. Gross margin was INR 10,039 million, up 18% year-on-year and 4% quarter-on-quarter. As the business continued to scale, gross margins stood at 64.4%, down 134 basis points year-on-year and 126 basis points quarter-on-quarter. The moderation primarily reflected higher input costs arising from the ongoing conflicts in West Asia, partly offset by lower cost safety inventory carried into the quarter in USA.
We continue to monitor input cost and freight cost closely and are engaging with the customers to pass on increases wherever possible, although with a time lag. EBITDA and profitability. EBITDA was INR 3,376 million, up 21% year-on-year and stable quarter-on-quarter. EBITDA margin stood at 21.6%, up 19 basis points year-on-year and down 131 basis points quarter-on-quarter. The quarter-on-quarter movement in margin was driven by higher input costs and logistic costs due to the ongoing conflicts in West Asia. R&D. R&D expenses were INR 885 million or 5.7% of sales, up 26% year-on-year and 1% quarter-on-quarter. R&D is the engine of our transformation from a volume-led to a value-led, innovation-driven company.
We have intentionally focused our efforts on high-barrier areas such as CII, ADHD, oncology, MUPS, and complex formulations, where limited competition allow us to build a differentiated and lasting position. PBT. PBT was INR 2,434 million, up 38% year-on-year and 1% quarter-on-quarter. PBT margin improved to 15.6% from 13.6% in Q2 FY 2026, an improvement of around 200 basis points. Net debt. We closed the quarter with a net cash position of INR 8,280 million compared with net debt of INR 1,012 million in Q1 FY 2027. Receipt of balance proceeds of warrants moved us into a net cash position, strengthening our balance sheet and supporting growth, capacity expansion, and R&D. Working capital. Net working capital to sales was 30% compared with 29% in Q1 FY 2027 and 29% in Q2 FY 2026, and remained stable in this range.
Cash conversion cycle was 231 days compared with 229 days in Q1 FY 2027. This movement was the result of a deliberate inventory buildup, mainly in the U.S., to ensure some supply continuity in line with the demand. Cash flow from operations. Cash flow from operation was INR 650 million compared with INR 3,874 million in Q1 FY 2027 and INR 1,937 million in Q2 FY 2026.
This was mainly due to a planned increase in working capital to support the business growth. CapEx. CapEx was INR 1,304 million compared with INR 890 million in Q1 FY 2027 and INR 2,112 million in Q2 FY 2026. We continue to strengthen our manufacturing and packaging capabilities. ROCE. ROCE was 17.6%, up 138 basis points year-on-year and broadly stable quarter-on-quarter, compared with 18%. This improvement was achieved even as we continue to invest in working capital and CapEx to support our next phase of growth.
With this, I open the floor for questions. Thank you.
Thank you, sir. We will now begin with the question- and- answer session. Anyone who wishes to ask a question may press star and then one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and then 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. A reminder to all the participants, you may press star and one to ask a question. We have the first question from the line of Sajal Kapoor from Antifragile Thinking. Please go ahead.
Yeah, thank you for the opportunity and good afternoon, good evening, team. I have got two sets of questions, one for the Gagillapur and one set of questions for CDMO. I can start with CDMO. Sanjay, on the operating performance, first half peptide revenue is coming out at INR 109 crores with cumulative EBITDA loss of about INR 28 crores, right? To reach the target of INR 240 crores, which was the minimum target, we need 21% bigger H2 or about INR 131 crores, and you also kind of committed to PAT profitability for FY 2027 end. Are both targets still on track?
Thank you, Sajal, for the question. Typically, as you would have seen in the last year, our H2 is heavier than the H1. With the revenue that you projected will be somewhere between an EBITDA neutrality to the PAT neutrality. It largely depends on the kind of product/project mix that we do. We are hopeful to close near our stated ambition, and the key to that lies in our smooth Q4 executions, where the offtakes are the maximum from the customers. We are absolutely hopeful of meeting our target that we have set ourself at the beginning of the year.
That is helpful. Sanjay, regarding the customer wins and capital allocation, there was a target of three customer wins worth about $200 million plus annually. How many have been signed so far, and is the INR 300 crore India CapEx investment contingent on securing these relationships, or that is going to proceed regardless? Thank you.
Sajal, I cannot comment on the first part where you spoke about few customers and few hundred million. We have never gave that number. We never projected that. I will let it pass. The second one is the investment in India facility being contingent upon any particular tie-up with the customers? No. We are absolutely going ahead with our investment in India facility at Vizag operations. That is the minimum that we need to build, because now the next set of growth has to come from the supporting capacity that we will be building, both in India and expansion of our capacity in Zurich as well. They are not contingent, and we are going ahead with our Vizag plan. The planning is already underway with our project team on board with us.
Sanjay, that 10 million thing is coming out of the Q1 call. You said, "I count customer wins only if they get into a potential annual size of 10 million plus," and I think 300-
I know.
Something along those lines.
Sajal, in your commentary, I heard couple of hundred million references and-
Oh, okay. No, fair enough. Yeah. Okay. But anything signed there or still under discussion?
So, they are under discussions. We are absolutely seeing traction, as I announced in my opening remarks, that the theranostic project revival post the customer progressing its assets in the clinical pipeline, and that can be supported from Zurich itself. The couple of partnering with the other large CDMO players requires investment in capacity. We have seen a very positive uptake on multiple fronts with those two large CDMO players. That requires support of capacity from India as well.
No, that's helpful. Thank you. And on the Gagillapur, so the existing products can continue, but it kind of hampers our CMO, CDMO relationship because new products, I believe, and couple of them were on patent manufacturing assignments that cannot now start because the observation, the Warning Letter has not been lifted. So the question is, what did the US FDA inspection reveal about CAPA effectiveness that our internal reviews and third-party audits kind of missed?
I'll take that question, Sajal. The remediation plan was completed except for two CAPAs. And like CMD mentioned, I think even in the press release, we did not get any observations on the points that were stated in the Warning Letter.
All right. Priya, these are all fresh observations that were not part of the original?
Yes.
Okay. On that basis, are we getting a sense that because we had the Warning Letter, is US FDA making it kind of harder, I mean, quote unquote, "teach us a lesson"? Because I have seen this pattern with every company. Almost every company who gets a Warning Letter or an import alert never gets to clear the reinspection in the first attempt.
Sajal, all I can tell you is I cannot comment on what you said, but this was a two-week audit with three inspectors.
And-
Stringent.
It was stringent. That is all I can say.
Okay. Thank you so much. That's all for today. Thank you so much.
Thank you. We will take the next question from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.
Thanks for the opportunity. Sir, just two questions on Gagillapur. What is the current capacity utilization given that we have the inspection going on or the remediation measures which we are going to implement? So what is the current capacity utilization?
Tushar, the current capacity utilization are similar what it was earlier, which we said around 75% is what we are using GGP.
Got it, sir. While we would respond to US FDA within 15 working days, if you could share what kind of timeline we will require to address the issues?
Tushar, typically it takes about, I mean, it should be about 90- 100 days from date of our response. It all depends, you know, how things go.
Got it, sir. Lastly, on the complex products, in terms of the upcoming products, if you could share what are the interesting products that would come in next 12 months? Subsequently, if you could also share what would be the FY 2027 guidance for revenue growth and EBITDA margin? That is it from me, sir.
I will take the first question. I will speak about the next six months because when you consider regulatory landscapes, 12 months is a little bit farther away. Overall, we have about 26 pending approvals with the FDA. In the next six months, and to clear this out also, we have about eight pending launches from Gagillapur at this point. We have tech transferred a few of those products to various sites, and we will be launching them, a few of the products in Q3 and Q4. You asked us about the interesting products. We have three products being launched from GPI, two of which are controlled products. Those are very exciting, very limited competition, and the markets are big. So, we are very excited to launch those two products in Q3 and Q4 respectively. On the revenue guidance, Mukesh will answer.
Let me address that on the revenue guidance, Tushar. As you know, we do not give guidance, but all I can tell you is, our current rate of growth and the current progress we are making will continue. There will be no change in that.
All right, sir. Thank you. That is it.
Thank you. We have the next question from the line of Shashank Krishnakumar from Emkay Global. Please go ahead.
Hi, thanks for taking my question. Just the first one on other expenses this quarter, which went up quarter-over-quarter. I think R&D was broadly flat. So what is it that drove this increase in other expenses? And also-
Yeah, continue, Shashank.
Yeah.
No, no, continue, Shashank.
Yeah. Also, just wanted to check, so broadly, the assumption we are working with is probably certain one-time expenses like remediation, et cetera, might start moderating going forward. So, in the current scenario, is that still a reasonable assumption to sort of work with?
Yes, Shashank, I will address both of your questions. In other expenses, the significant increase in the current quarter is freight cost, which has gone up because of the West Asia conflict. The rates of the shipments have gone up. Second question with respect to remediation expenses, Q4 onwards, it will moderate significantly. Q3 also will be similar to Q2.
Okay, thank you. Just the second one on the share of complex generics. I think there was a marginal decline QoQ. Is this got to do with any quarter-to-quarter variation in complex generics? Given that Q3, Q4 will see some newer controlled substance launches, should we expect this to sort of again increase going forward?
Absolutely. This will be on an upward trajectory. Quarter on quarter, there is a lot of compliance-related ups and downs that you can see, like for any other product. When I say compliance, sometimes the pickup is a little low, sometimes it goes much higher than historical numbers, et cetera. So this is quarter- on- quarter. The short-term, medium-term, long-term projection for the U.S. products is just on an upward trajectory.
Okay, thank you. That is it.
Thank you. We have the next question from the line of Rashmi Shetty from Dolat Capital. Please go ahead.
Yeah, thanks for the opportunity. Just on the API and the PFI segment, the growth is pretty strong during the quarter and also in the first half. Earlier, this API and PFI segment were used mainly for the captive consumption. But is it fair to assume that this time we are getting better pricing and therefore the sales are higher?
Rashmi, yeah, predominantly it is still a captive, and some of the opportunities in terms of geographic expansion we're looking at, particularly in LATAM region, we are growing better in PFI.
Okay. Here, are we seeing a higher volume growth also, or the entire growth is mainly coming from the better pricing?
It is primarily volume, and pricing is also better. With the cost increase, the price has also been recovered.
Okay. Should we assume that similar kind of growth momentum to continue even in second half in terms of API and PFI segment?
Yes, similar trajectory, but we are not giving guidance.
Okay, understood. On the U.S. front, Priyanka, you mentioned that eight launches are expected, right, in Q3 and Q4 total?
No, I said eight products pending from GGP, and those approvals, once they are approved, we launch. Out of this, we filed two to three products from GPI. Those will be launched in Q3, Q4, Q5, depending on when we receive the approvals. But in total, we have about five launches within the next two quarters. three launches, well, all of them are in the U.S. market. Two products are controlled, and the other products are uncontrolled. But we have non-controls. We have five products coming up.
Understood. So, out of five launches, three are planned in U.S., and out of that three launches, two are controlled substances.
Sorry, all of them are planned in the U.S., not three. All of them are planned in the U.S.
Okay.
Two controlled.
Okay. And in the first half, how many launches have we done?
First half, we haven't done any launches.
No launches. Okay.
But one thing I do want to just state is that even through the Warning Letter, even now, there is no disruption to the growth in the existing products, existing business. So even H1, et cetera, we have seen an increase in demand for the Gagillapur site. That is still on the ramp-up, which means we have received certain awards this past H1, which we are going to start servicing, say, December, January. So there will be an increase in GGP as planned. And of course, growth from the U.S. will be ongoing for the GPI side too.
Got it. And on the gross margin front, for this quarter, obviously quarter-on-quarter, it is down because of higher cost increases, the inflationary pressure. Is it fair to assume that in the subsequent quarters also, the gross margin would be similar in range, or you feel the pressure could increase and probably we might see decline in gross margins compared to quarter two?
Currently, the cost pressures are continuing, and we are continuously working with customers to pass on the prices. Even if I pass on 100 out of 100, the percentage arithmetically will come down. What we are working on is making sure that we are able to grow the profit as expected, whatever internal plans are.
Rashmi, let me add, some of these pressures are being made up as of today and in future too, by the ratio of complex products to the legacy products. That is also going to help us. Like Mukesh said, nothing changes in our growth trajectory.
Understood. You mean that the better business mix can offset some of the cost pressure. At least this kind of gross margin is expected to sustain.
It vary a little bit here and there, but yes.
Yeah.
Overall-
Yeah
the profits will be as expected.
Understood. Thank you so much, sir.
Thank you. A reminder to all the participants, you may press star and one to ask a question. We have the next question from the line of Siddhesh Parekh from Unifi Mutual Fund. Please go ahead.
Yeah. Hi, team. Am I audible?
Yes.
Yes, sir.
My question is from controlled substance business. Your ADHD portfolio is mostly extended-release product, and you have gained a good market share there. I want to understand your plan for the immediate release. Are you planning upcoming or filing for immediate release or what?
We primarily have extended-release products, and by nature of what you said, it falls within our complex category. We do have a few immediate-release products also, but we will launch them as needed. It all depends on the quota allocation. We just want to maximize the utilization of the quota and maximize the earnings per kg of quota received.
Okay. The upcoming two launches are immediate release or extended release?
Extended release.
Okay. That's all from my side.
Thank you.
Thank you. We have the next question from the line of Yash Mehta from Grit Securities. Please go ahead.
Hello. I have a few set of questions. Firstly, with complex generics now contributing around 47% of the formulations revenue, and also the three potential sole first-to-file ANDAs already filed, how should we assess the earning potentials of this pipeline over the next two to three years? More importantly, do you see this opportunity structurally resetting the company's margin profile, or will profitability remain dependent on episodic high-value launches?
This is just the beginning. That's all I'll say. Our margins are going to be on an upward trajectory going forward. I think we'll start seeing our first-to-file within the next 2.5 years, 2.5-3 years max, and after that, it will be on an upward trajectory. You'll see a big change going forward, even on the quality of the R&D filings. We already have a few complex filings that we've done that we're expected to launch. Yeah, it will all keep going upwards going forward.
Understood. Also, while the underlying business is generating nearly around 25% of ROCE, the consolidated ROCE remains at around 17.6%, with Genome Valley operating at just 25% utilization. Also, the peptide CDMO business is still loss-making. Given the planned INR 2,000 crore organic CapEx, what gives you guys confidence that incremental investments will generate superior returns, and when should investors expect the gap between core and consolidated ROCE to meaningfully narrow?
See, our hurdle rate for investment is not to drag down the ROCE. As the investment matures, we'll get better ROCE, and ROCE will keep inching up. Currently, GLS is only 25% utilization, and once it goes to optimal utilization, that will generate additional double-digit ROCE. Similarly, all other assets as well. We will expect the same trend for the next INR 2,000 crore also. That all will give a strong double-digit ROCE.
Got it. Yeah. Thank you so much.
Thank you. We have the next question from the line of Shreya Chatterjee from Ageless Capital. Please go ahead.
Hi. Thank you for taking my question. I have a couple of questions. Among that, the first one is, just wanted to confirm, out of the five launches that is happening in the next two quarters, are those of generic LUMRYZ and sodium oxybate, those include those two? Or are they going to be launched in 2028? And when is ruxolitinib going to be launched?
What was the last product? I am sorry. What was the last product?
Ruxolitinib.
See, all these are litigation-based products. I cannot guide on any of them. To answer your question, no, but that is all I can say.
Among these products that are going to be launched or the products that you are filing, are these majorly FTF products? How many FTF products are there, and how many complex generics, if I may ask in that way?
They are all complex generics. These are not first to files.
Okay. What is your current market share right now in the U.S., in CNS?
Well, market share depends product to product, but we are number three in the U.S. with respect to controlled substances.
Got it. With the launch of steady state of launch of this complex generics and integrated generics, how do you see your margins evolving, like the EBITDA margins evolving, and with the remediation costs also hopefully going away with the Gagillapur, like remediation going away? How do you see the EBITDA margins evolving in the shorter term this year and also in the medium term?
Yeah, the EBITDA margin, currently we are at 21.6%. It was much higher in Q1. We dipped by 130 plus basis points. That is primarily because of West Asia conflict. Once this situation settles down, the margin percentage will continue to improve. More importantly, this year, we will try to work hard to ensure that our profit trajectory moves on. So, absolute profit will grow.
Got it. Any sort of quantification you want to give, like for the medium term, how much basis points should we expect for the year?
It's very dynamic. What price of crude today may not be the same crude price one week down the line. It is very dynamic. It is difficult for me to give some number. Second is, we are having continuous efforts to discuss with customer to get a price pass-on. That is also very dynamic.
But in the longer term, how much should it improve, or like, over the course of three years?
Shreya, let me summarize. Our growth will continue to be there. Whatever we have been growing at and whatever we have planned will happen, and that's not going to be any big impact in spite of whatever is happening.
Got it. You don't want to comment right now on the longer term growth of EBITDA margin or the-
No.
Okay. And lastly, how should we look at the capacity utilization ramp up for your Gagillapur plant going from here and your Genome Valley plant going from here this year?
Genome Valley is under 25% or roughly 25% as of now, which we are expecting by Q4 it will cross 50%. With respect to Gagillapur, currently it is around 75%, but there is a good room for maximizing the product mix as well as utilization. That also will have an additional potential revenue from both sides.
Got it. Thank you. Thank you so much.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address all the questions from the participants in the question queue, we request you to kindly limit your questions to two per participant. If you have a follow-up question, please rejoin the queue again. We have the next question from the line of Suhani Singh from ROS Capital. Please go ahead.
Hello, sir. Good evening. I had a few questions. Following the recent US FDA inspection at Gagillapur, how could investors assess the potential implications of the observations on upcoming product approvals and commercial operations?
Suhani, we are very happy, we are very glad that there are no observations regarding data integrity, cross-contamination, or facilities. All the observations, we believe, are addressable, and we are going to have a good dialogue with the FDA, and we are quite positive about the outcome.
Are there any dependencies that could affect the near-term launch pipeline?
No, the business in Gagillapur will continue as it is and growing with existing products, but the overall growth will not change. Gagillapur is just one site. The growth is driven mostly, the future growth is driven by the U.S., Onco in India, and also GLS. There will be no impact. It will actually be positive.
Okay, that is nice. While the revenue and EBITDA have grown strongly, the operating cash flow declined sharply to INR 65 crores this quarter from INR 387 crores in Q1. How much of this working capital absorption is temporary versus structural? When could we expect the operating cash conversion to realign with earnings growth?
We have to see Q1 and Q2 together as H1, because some of the expenditure or cash outflow which we have incurred in Q2 have to be seen as H1 outflow. Secondly, the investment in working capital we have consciously increased from 29% to 30%, but it will be in this range, slightly plus-minus 100 basis points here and there. We have built some inventory in USA for safety stock, both for control substances as well as other complex generics.
Okay, sir. That helps. Thank you so much.
Thank you. We have the next question from the line of Gio Wayne, an individual investor. Please go ahead.
Hi. I have a question regarding the recent US FDA inspection of Gagillapur. Do you expect a NAI or VAI classification following their CAPA response, or will any observation require another on-site inspection? Could you provide an estimate timeline for resolving the Warning Letter and unblocking the nine pending applications? Thank you very much.
I will answer your question in two bits. Like CMD said multiple times earlier on this call, we think the inspection progressed constructively, and we believe that the observations can be fully addressed through our responses and the CAPAs that we put in place. With respect to the launches, assuming the observations can be addressed through the responses, we should start receiving them immediately after.
Okay. Thank you.
Thank you. A reminder to all the participants, you may press star and one to ask a question. We have the next follow-up question from the line of Sajal Kapoor from Antifragile Thinking. Please go ahead.
Yeah. Hi. Thank you for the follow-up. Just two quick questions, team. One is on the net cash and one is on the gross margin. I have been looking at the historic trend that Granules has reported on the gross margins. So, March of 2016, we were around 46%-47% gross margin. Gross as in end product minus the raw material cost. So, material gross margin. Today, we are 65%+. Broadly, we have gained 1,900 basis points, give or take, on the gross margin side. When we were at 46%-47%, because our capacities were fully utilized and our cost base perhaps was leaner, we were reporting 20%-21% EBITDA. Today, at a significantly higher gross, we are still reporting very close to that 21%-22% number on the EBITDA side. What I am trying to understand is how significantly our cost base has gone up. That is one.
And there is definitely significant deleverage in the system. Both points, if, Mukesh, you can clarify. One is on the cost base. How different is our cost base today relative to where we were in 2016, 2017? And how significant is the deleverage in the system? Thank you.
Thank you for this question, and some of the answers you have given yourself. The cost base has changed, business model has changed. Our gross margin has expanded significantly, and that also would mean I have started investing in R&D to continuously have the sustainable gross margin for future pipeline. And also, my business model has changed from API to formulation, and now I am focusing more on complex generics. And also, if you see, we never had U.S. operations manufacturing site fully run what the current size levels are. The employee cost in USA geography, employee cost in the newly acquired entities, Senn Tides, all are significantly higher, these cost of employees, right? And you have already answered, there is a significant room for deleverage. Once we start increasing our capacity utilization, some of the opportunities and cost leverage will move into EBITDA margin improvements.
That is helpful, Mukesh. And then, given that we are sitting on INR 800 crore+ of net cash on the balance sheet, and of course, we are operating cash flow positive, so every year, we will be adding to that kitty minus the CapEx that we do. I think, net-net, is it fair to say that if a customer comes to you for CDMO or otherwise, cash will not be a constraint on the system in terms of deploying growth CapEx? Because as far as I remember, Granules' balance sheet has never been so healthy on the net cash. Even if we go back 20 years, 30 years since the IPO, we have always carried debt, sometimes excess debt on the books. But where we are today on the net cash, that should give us a lot of flexibility to undertake growth CapEx without diluting equity or taking leverage.
You are absolutely right. That is also the intent when we have raised this money. Currently, we have a good amount of cash, which will be used for both organic growth as well as inorganic growth. Organic growth, you can see the way we are adding the pipeline would mean additional revenue and also additional working capital for the additional revenue and also the continuous growth CapEx. In addition to that, we are open and continuously exploring inorganic opportunities.
Right. That's helpful. Thank you so much. That's all from my side. Thank you.
Thank you. We have the next question from the line of Sameer Baisiwala from Sakman Capital. Please go ahead.
Hi, thank you. Good evening, everyone. Priyanka, I just wanted to make sure that I heard it correctly, that the first FTF launch is two and a half years or so away. Is that correct?
Roughly around two and a half years away, two and a half to three years away, subject to litigation. There is also another product that we are going to be filing shortly, which has been an open FTF for a while. That is a product that I am saying it will be roughly two and a half, three years away.
Okay. In that case, Priyanka, I am just wondering, how do we think about FY 2028 and FY 2029, the gap years, if I can say that? What is going to drive growth in those two years? Because FTF is quite back-ended in that sense.
As soon as we get approvals for the launches that are still pending, we will start launching them in the U.S. In the prior calls, we have mentioned that we are focusing on global expansions of all our products. We have started filing a few products around the world. We have done about eight filings in the last six months. These are the products that will give us midterm revenues, short to midterm revenues. There is a lot of potential there. Going forward, that will contribute to a large percentage of the overall sales as well.
Again, Sameer, just like Priyanka mentioned a little while ago, we have five new launches coming in the second half, out of which two are controlled substances and all complex products, and there is a lot of potential in these products.
Sorry, just to add to what CMD said, outside of the first two files that we have done, we are also doing other products that are still in the works, and we are licensing a few products as well. All these products put together will give us short to medium-term revenues.
Okay. Priyanka, I think there is some disturbance. When you first said six to eight products will drive growth, you are saying non-U.S. filings that you have done. Was that correct?
These are a few products that we have done only in H1, but depending on the country that we are expanding to strategically and the regulations in those countries, there are some products that are subject to approvals within six months, within 12 months, et cetera. We are very carefully filing key products across geographies, and those are the products that will start yielding revenues in the short to midterm as well. That will also go on. While the U.S. continues to be the biggest market for the foreseeable future, these markets will contribute quite significantly as well. These are pure global expansions of existing products. There is a huge market out there that is still untapped, and that is what we are looking at doing strategically.
Okay, excellent. Thank you. Very clear. Just finally, can you provide some color on this INR 2,000 crore upcoming CapEx?
Yes. This INR 2,000 crore growth CapEx over the next three, four years will be largely into, one, expansion of infrastructure and capacity for peptide CDMO, both in Zurich as well as India. Other CapEx will be going towards U.S. platform, enhancing the manufacturing capability and overall distribution. Third is on oncology side, where we have certain plans of launches. Accordingly, we need some capacity expansions. We are also working on multiple API expansions based on the capacity utilization levels. There are multiple round-based CapEx programs are there for next three, four years.
It looks like most of them are downstream expansions. Is that the way we should think about it?
Not necessarily. Complex and oncology are more of our formulations, and there will be also, as you rightly said, downstream in terms of API, or it can be downstream in terms of improving the warehouse and distribution. There will also be a good amount of investment in IT digitalization to improve our qualities management system, improve our manufacturing capabilities.
Okay. I will take it offline. Thank you so much.
Thank you. We have the next question from the line of Pahel Sharma from DD Capital. Please go ahead.
Good evening. I have some set of questions with me. My first question is that on the peptide CDMO opportunity, could management provide an update on customer engagement, development programs, and the timeline for commercial scale revenues?
Sanjay?
I will take that question. We are bound by confidentiality agreement with most of our customers, and we cannot disclose that, and I hope you would understand that. In terms of commercial, I think the journey from an RFP and RFQs to commercial translation takes it while. We have already waited for some time. The last four months has been one of the period of our highest inquiry that we have seen, and that has been on a result of certain measures that we took on a BD outreach. We are seeing a validation of that, and it all comes to execution over next few quarters that we translate them to materially movement on our revenue side. I am afraid I cannot provide any additional details on this, and we will take one at a time when it does start to translate.
Understood, sir. My next question is, why complex generics revenue grew by 38% year-over-year in Q2 FY 2027, and its share in the overall portfolio declined to 47% from 50% in Q1 FY 2027? With integrated generics increasing to 48% from 46%, could management elaborate on the factors driving this shift in the portfolio mix? Also, is this largely attributable to the growth trajectory of the integrated generics, or were there any specific factors impacting complex generics during the quarter? How should we expect the portfolio mix to evolve going forward?
Yeah, our medium path we guided is 50% of our formulation portfolio will be around the complex generics. Quarter- on- quarter, a few basis points here and there is expected, but you will have to see year-on-year basis. I would say we are ahead of what we have stated, and probably we will be doing more than 50% in the medium term.
Pahel, do you have any further questions?
[inaudible] .
Thank you. We have the next question from the line of Gio Wayne, an individual investor. Please go ahead.
Yeah. Hi. I have a follow-up question. I previously asked about the Gagillapur US FDA inspection and the nine pending applications. You mentioned that they could be progressively unblocked. Did you mean as CAPA responses are submitted, or only once the US FDA accepts the corrective actions? Would another on-site inspection be required? A little bit confused for me. Thank you.
Sorry, I didn't quite understand the second half of your question. Can you please repeat that?
Yeah. If another on-site inspection would be required for Gagillapur.
At this point, I don't believe that's required, but it's the US FDA. We leave it to the US FDA to decide.
Okay. When do you guys expect to get those nine applications unblocked? Do you have any timeline approximately?
The general process is that after you receive an EIR with a VAI or an NAI, the FDA takes a few weeks, a few months to provide approval. It's usually between 30 and 90 days after receiving the EIR.
Gio, may I also add here, it's nine that are filed from there, but out of that, two are already transferred to our U.S. facility, out of eight. So, actually, we don't need to get those approvals here. They'll be continued to made in U.S.
Okay. Yeah, yeah. Understood. Thank you.
Thank you very much. Ladies and gentlemen, that was the last question. With that, we conclude the question- and- answer session. I now hand the conference back to the management for their closing remarks. Thank you, and over to you, sir.
Thank you once again, ladies and gentlemen, for patiently listening to us. Let me conclude by saying we are on a continued growth path, and you will keep hearing better and better things from us in future. Thank you once again.
Thank you, members of the management. On behalf of MUFG Investor Relations, we conclude this conference. Thank you, everyone, for joining with us today, and you may now disconnect your lines.