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Granules India Ltd
Earnings Call Analysis
Q2-2024 Analysis
Granules India Ltd
The company reported second-quarter revenue of INR 11,895 million, marking a modest 3% increase compared to the same quarter in the previous fiscal year. However, volume growth has been notably strong, outpacing value growth, with a particularly robust uptick of 21% compared to the first quarter of this fiscal year.
Value-added sales, which indicate the proportion of sales derived from higher-margin products, rose to 51.7% of total sales for the quarter, from 49.7% in the same period last year. This improvement has been attributed to a superior product mix and increased sales of formulations, which helped to counterbalance price erosions due to reductions in key raw material rates.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) came in at INR 2,130 million, or 17.9% of sales. This represents a 12% dip in value terms over the previous fiscal year, with increased operating expenses and a doubled R&D spend reflecting the company's commitment to future growth through capability and capacity building.
The company's net debt has increased by INR 2,224 million since the start of the year, reaching INR 9,895 million. This upsurge is primarily attributed to a decrease in operating cash, influenced by a decline in revenues in the first quarter. Nevertheless, operational cash flow improved notably in the second quarter to INR 329 million from INR 35 million in the previous quarter.
Return on capital (ROC) has improved to 12.8% for the second quarter, up from 9.3% in the first quarter, thanks to the increase in EBITDA. The company maintains a standard dividend policy, indicating a sustainability in rewarding shareholders while also managing expansion costs and investments.
The management team displayed confidence in the company's growth prospects, citing a balanced approach between liberal reward policies for shareholders and prudent expansion investments. They stressed the importance of a long-term strategy over short-term results, pointing to an exciting pipeline of product launches and geographic expansion, despite investor criticisms around financial performance and balance sheet health.
The company has seen significant growth in the U.S. market, driven primarily by increased sales of existing products. Additionally, executive management highlighted their long-term vision focused on sustainability and the impact of their business on the planet, which holds more importance than short-term financial gains.
With regard to future operations, the company's Genome Valley formulation facility is on track, with an investment guidance of INR 700 crores for the fiscal year. Investments are planned accordingly to ensure that no major inventory write-offs will impact the financials, supporting upcoming launches and overall growth.
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Ladies and gentlemen, good day, and welcome to the Granules India Limited Q2 and H1 FY '23 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Irfan Raeen from Orient Capital. Thank you, and over to you, sir.
Thank you, Sagar. Good afternoon, everyone. On behalf of Granules India Limited, I extend a very warm welcome to all participants on Q2 and H1 FY '24 financial results discussion call. Today on the call, we have Dr. Krishna Prasad, Chairman and Managing Director; Mr. KVS Ramrao, Joint Managing Director and Chief Executive Officer; Ms. Priyanka, Executive Director, GP, GPII and GUSA; Mr. Mukesh Surana, Chief Financial Officer; and Mr. Puneet, Head, Investor Relation and GM Business Finance. .
I hope everyone had an opportunity to go through our investor deck and press release that we have uploaded on exchanges and on the company's website. A short disclaimer, I would like to say before we begin the call. This call will contain some of the forward-looking statements, which are completely based upon our beliefs, opinion, expectation as of today. This statement are not guarantees of our future performance and involve unforeseen risks and uncertainties. With this, I hand over the call to Krishna Prasad sir for his opening remarks. Over to you, sir. Thank you.
Thank you, Irfan. A very good evening to all of you, ladies and gentlemen, and thank you very much for attending our Q2 earnings call today. A detailed presentation of our Q2 performance has been uploaded to our website, and I'm sure all of you would have gone through it by now. .
Our EBITDA, PAT and other ratios have improved and will further improve in the coming quarters. Some of the launches of the approved products, both in the U.S. and other geographies were delayed, and will be launched in this and the coming quarters, which will contribute to higher revenue and resulting profitability.
On the IT incident update, production and sales have almost rebounded to their pre-incident base. We have fortified our cybersecurity measures, establishing a more robust security environment to safeguard our operations, and we have instituted a comprehensive upgrade to our systems and security protocol. While we are trying to recover the business loss, we anticipate a revenue shortfall versus the planned production and sales as part of the lost sales is irrecoverable. During the quarter, audit at our Bagulapur formulations plant was successfully completed with 0 critical observations. We also received approval from Anvisa for compliance with the guidance of CGMP as per our Bonthapalli factory. Health Canada audit was completed with 0 observations for the Jeedimetla API plant. We also received the accreditation certificate of foreign drug manufacturers from PMDA Japan for the Jeedimetla facility. The construction of our new formulation facility at Genome Valley is progressing at a good pace, and we have completed the first phase during October '23, as communicated in the last con call. We are targeting to complete the next phase by May '24, with 2.5 billion dosages per annum capacity. Upon completion across all the phases, by December '24, this new plant will add 8 billion doses to our finished dosage capacity. As shared earlier, with this facility, along with the recently launched new greenfield packaging facility in Virginia, U.S.A., we now have capacity in place for us to cater to emerging new opportunities and demand in the near term.
Our focus on R&D over the past 6 quarters with enhanced outlay is geared towards fast-tracking integrated product development, building expertise in the areas of controlled substances, complex products and biocatalysis and enzymes. As of today, we have 59 approved and 2 tentatively approved U.S. ANDA, 5 European dossiers, 2 in the U.K., 6 in Canada and 3 in other regions. A total of 75 dossiers approved and 21 global dossiers to be approved. We have a total of 33 US DMS, 24 CDPs, 5 EDMS, 8 KDMS, 4 Canadian DMS, 4 China DMS, 2 Japanese DMS and 55 across several regions.
We have launched 4 products in the U.S. and 1 product in the U.K. in H1 '23, and we expect to launch -- we expect to launch about 7 products in the U.S., 2 products in South Africa, 2 products in the U.K. and 2 products in Europe in H2. The complete effect of which will be seen in quarters going forward.
Climate change and sustainability opportunity. Our newly adopted purpose is healing lives responsibly through pioneering green side. This is guiding us towards transforming health care through innovation and sustainability. We are resolute in driving the positive transformation within health care. Our commitment is further solidified by our pledge to achieve net zero emissions by the year 2050.
Ladies and gentlemen, I would like to once again emphasize we pledged to achieve net zero emission 2050, a very ambitious target, and every person in the company is striving towards this. Earlier this year, we completed the measurement of our Scope 1 and Scope 2 emission. Now we are in the process of inventorizing our complete Scope 3 emissions as of the GHG protocol. Making a significant stride in our journey, we have received a BB rating in our first MSCI ESG evaluation, acknowledging our initial efforts in environmental, social and corporate governance criteria. We aim to improve our ratings in the subsequent years through sustained efforts and excellence in our sustainable practices.
In tandem with our strategic vision, we have placed allegiance to the science-based targets initiative, ensuring that our climate goals are aligned with the latest -- sorry. Our dedication to sustainable practices resonate to the ethos of United Nations Global Compact, UNGC, to which we are committed, signifying our support for responsible business practices globally. A landmark in our sustainable journey is an MOU with Mohali, heralding the inception of the center of excellence, and sustainable pharmaceutical development. The envisaged outcome is a suit of innovative pharmaceutical products and processes that are resource efficient as well as optimize for energy conversion.
[indiscernible] As shared during the last call, we are focused on strengthening our core business for backward integration of paracetamol and metformin in the first phase as we are putting up a pilot plant for BCGA and a small commercial plan for PAP at the Vizag plant. We have received the technical feasibility report, and we are under final review and discussions with AM Green, which is part of GreenCo on the project planning for the Kakinada site, which will be our main facility for We are targeting to start the project work at Kakinada during FY '25.
With this, ladies and gentlemen, I hand over the call to Dr. KVS Ramrao.
Thank you, Chairman. Good afternoon, everyone. I wish to update you on the progress of the transformation journey as based in my last couple of conversations, there's a paradigm shift in the management of portfolio of our new products, from a traditional Para 2 filing the company has shifted its focus to Para 3 and Para 4 filings. The shift in focus is followed by strengthening of portfolio teams, R&D teams, technology transfer teams to enable smooth integration and filing of the products. The new portfolio of the organization is aimed at not only [indiscernible], but also other dosage forms, the capability of Granules technological capabilities in API and formulations.
Significant progress has happened on these dosage forms, and we expect to file new dosage forms in the near future. At present there are about 41 products which are under various stages of development. In Granules integrated product development center, all these products are scheduled to be filed in FY '24 and FY '25. Out of which 41 products, launch and approval of 16 products, launches are around 13 products. The first year launches are around 9 products, and 1 is an LCE minus 1.
To add to the numbers stated by the Chairman in his opening remarks, we are geared up to double-digit filing of BMS and ANDAs that are of strategic importance to us. The progress -- our commitment in execution of our strategy. Yet the significant aspect of strategy is to focus on sustainable new technologies. The technology development team has made significant progress on application of biocatalysis on 3 products, 2 products have completed the pilot scale and commercial production plants are
And third molecule has completed optimization in the lab. These 3 products can give significant and sustainable advantage for Granules when they are commercialized. Global cost reduction has been one of the strategic levers identified by the organization. While the backward integration of C Zero will give us the leadership for paracetamol and metformin. We have started our work on additional 10 products, which are critical for the organization in terms of both profit optimization and protecting market share in geographies of interest. The program is expected to bring in the desired results in the years from now. With this, I hand over to Mukesh.
Thank you, Let me take you all through the top financial parameters. Revenue. The second quarter revenue were INR 11,895 million as compared to INR 11,507 million in quarter 2 FY '23, a growth of 3% in value terms. Volume growth year-on-year was higher as compared to the value growth. Sales in the U.S. region grew well, primarily -- partially offset by the decline in the LatAm and regions. Revenue grew by 21% as compared to Q1 FY '24. The sales breakup as per the business division geographic regions is presented in our investor presentation, which is available on the website.
Value-added. Our value added as a percentage of sales for Q2 FY '24 was 51.7% as compared to 49.7% in Q2 FY '23. Value-added percentage as compared to Q2 FY '23 has increased by 2% points, primarily on account of better product mix, increase in sale of formulations. Price erosions were offset by the reduction in rates of key raw materials. Value added as a percentage of sales for Q2 FY '24 is up by 0.3 points from Q1 FY '24, primarily on account of better product mix, increase in sales of formulation. Price erosions were offset by the reduction in rates of key raw materials and an increased focus on product level cost reductions.
EBITDA and EBITDA margin. EBITDA for the quarter was INR 2,130 million, 17.9% of sales as compared to INR 2,429 million, 21.1% of sales in Q2 FY '23, a decrease of 12% in value terms over the previous year, primarily on account of increase in operating expenses such as and R&D increased as part of capability and capacity building which will drive future growth in short to medium-term R&D. Our R&D spend for the quarter was 496 million as compared to 246 million in Q2 FY '23 and 413 million in Q1 FY '24. We are going to continue to spend on R&D in the coming quarters as well.
Net debt. Our net debt was INR 9,895 million as compared to INR 7,671 million at the beginning of the year. The net debt has increased by 2,224 million primary on account of reduction in operating cash due to a reduction in revenues in Q1.
Cash-to-cash cycle. Our cash-to-cash cycle was 162 days in the current quarter as compared to 132 days at the beginning of the year and 170 days in the previous quarter. The decrease as compared to Q1 happened because of a decrease in inventory days as sales picked up this quarter post IT incident in the last quarter.
Operational cash flow. Operational cash flow for the quarter was 329 million as compared to 35 million in Q1 FY '24. Increase is primarily on account of increase in EBITDA and better cash-to-cash cycle compared to Q1.
CapEx. CapE stand during the year -- during the quarter was 1,029 million.
ROC. ROC for Q2 FY '24 is 12.8% as compared to 9.3% in Q1 FY '24, primarily on account of increase in EBITDA due to the reasons stated ago.
With this, I open the floor for questions.
[Operator Instructions] The first question is from the line of Shah from Prosperotree.
I just have one simple question. Time and again, there have been many media sources and articles telling us about the sale of the company. Many times, Priyanka and the promoter team both have denied such a possibility and have clarified over the same. But again, in the last 1 week, we have again begun to hear that you are close to finalization of a sale with some private equity players. And usually, media sources won't keep sharing such things again and again for no reason at all. So can you please comment on the same?
Okay. Mr. Shah. I think I understand your concern. Let me tell you, denying is over and over again and the rumors erupting over and over again is really disgusting. But in my opinion, just to put this at rest, rather than just denying, I would like to mention the initiatives which we have taken now towards sustainability, the green chemical, reaction, flow chemistry, so many things, formulation development, green development and the incidents we are making today are like a dream for us. Everyone in the company are excited and are working towards this. They're putting in their best efforts. And if at all, there is any intention of doing what you suggested, this is not the way we would be going. And we would not be spending our time and efforts and our blood and heart into this what we are doing. It's something what we are trying to achieve is something nobody has done so far. I can even probably say somebody who has something which has not been attempted so far in the world. We expect to be one of the first few companies to achieve this. And do you think we'll just give up of this grand dream just for a little bit of money. Money doesn't mean much what we have planning to do, trying to be responsible, trying to save the planet is much more important than a few thousand crores. I don't think I can add more than this. And I wish people are convinced and the media stops these type of rumors.
We completely understand it, just that the media reports keep on coming again and again. So as investors, we are just a little bit concerned, that's all.
Yes, I understand it. But I'm sure I don't know if you are convinced, but I don't know what more convincing I can say this best answer I can put forward.
[Operator Instructions] The next question is from the line of Suresh Agarwal, who's an individual investor.
Sir, we are on expansion speed from last few years, but it's not generating any foreseeable. We are in the range of INR 100 crores to INR 140 crores profit range. Our expenses on all fronts, increasing but not fruitful. Please throw light on this.
Suresh, if you see -- I mean your statement saying they are not grown may not be right. If you see our last 5 years of CAGR on both top line and bottom line, are about around 25%. So both bottom line and top line are growing at 25%. And I think it's the decent growth in my opinion. Some companies may have extra growth, but Granules has been growing sustainably, and this growth is just not over the last 5 years, even if you see the last 15 years, the CAGR is almost like that. And it's a proportion to our investments, too. And without investments, you can never get growth. Some investments may take a little time to pay off, some payoffs immediately. So this is what is happening, and we have been investing very responsibly prudently, and even in C Zero, it could be a dream, but we are also responsible. We are not investing blindly. We're putting pilot plants, demonstrating our ability to make green products. And only after that, we're going to the next stage. So I think I have to say that we are growing and our investments are paying off and will continue to pay off.
Sir, do we have any dividend policy in the company?
We have a dividend policy, which Mukesh will explain.
Yes. So we do have a dividend policy, and it is also put out you can take it, and it's a pretty standard dividend policy.
So can you give some light on that?
So you can take it offline, but it's there in the stock exchange in our website. But the policy, we are not paying specifically to payout and all. It depends on all profit and reserves and also availability of cash flow and depending on the future expansion.
Sorry, Mr. Agrawal Ara, let me also add I think we have been one of the -- okay, I don't want to say it. But I personally feel they have been very liberal and we want -- we have rewarded our shareholders liberally. In the last 3 years, 4 years, if you see, we had 2 buybacks which are more interesting than even a dividend. We also had a dividend last year of close to about 80% or 90% in addition to the buyback. So buyback was about INR 270 crores, I think, around INR 270 crores. And that's been very liberal and 2 years before that, we had another buyback. So we've been quite liberal in our rewards to the shareholders. In fact, we have been criticized by many investors for wasting money to some extent. It feels captive for our expansion.
We hope that the company actually in the first few years actually, actually I have invested since 2011. It has rewarded us big -- good in the last -- 2017/'18. But after that, the company has become lethargic like we are expanding in the Americas and all this, we have put up Priyanka is looking after that, but revenue is there's no profit from their. So I think we are in a vicious circle of expansion and expansion and growth and growth but not reflecting truly in the balance sheet, which my suggestion, please do something like our unit better molecules also, but that has not been materialized, like this new CMD has come. He is also going for expansion in some other fields. So please consolidate -- we are long-term investor, we are with you.
We understand. But I think, Mukesh, maybe you can wrap up.
So since 2011, which you are mentioning, our return on capital employed, return on equity, net debt to EBITDA, all the parameters, we have done extremely well. So we are ensuring that we are also growing and also we are ensuring that our balance sheets and financials are healthy. So -- that's what I could say.
The next question is from the line of Harith Ahamed from Avendus.
I'm looking at the segmental breakup of our revenues and the FD sales has increased sharply on a quarter-on-quarter basis. So -- and I'm looking at the geographic mix as well. It's the U.S. market, which is also seeing a sharp increase on a quarterly basis. So it appears that we've done quite well in that market on the formulation side. So what exactly is driving this? Are there some specific launches or it's the general pricing and demand environment that you're seeing in that market?
Okay. I think Priyanka will take that.
I think the U.S. market grew quite significantly this quarter based on our formulation growth. The only thing I'd like to add to that is while launches -- new launches certainly are responsible for some of the growth, I think most of the growth for this quarter came from existing products. And the one stance that we've always taken is that once we enter a molecule, we don't really exit because we work on constant cost improvement activities. We work on sustainability, which also mentioned earlier in this call about availability cornerstone for our growth. considering all that, I do want to point out that most of this growth came from our existing molecules where other companies could not sustain or supply some product. So that's where the major formulation growth came from.
End of the at least if you see most or PFIs have come down a bit. Most of our PFI customers are converting to finished dosages. That's the reason that these are also growing a bit.
Okay. And then so we didn't look at a similar run rate in the quarters and maybe growth on top of this level going forward?
There would be changes here and there, but definitely, this is the ratio. And like I always mentioned, FDs will be going up, MPFS and API to be coming down as we go up -- as we go up the value chain. And it is -- this can be seen quarter-on-quarter. .
Okay. So I'm looking at the employee cost for the quarter and for the first half. There's a significant increase on a Y-o-Y basis. And this is largely responsible for our EBITDA margin be bit muted beside the expansion that we've seen on the gross margin front. So what is leading to this Y-o-Y increase in employee costs? Have we commissioned some new facilities or I understand there's an element of higher spend, but it looks quite high even after factoring that.
Okay. We -- specifically, our is fully operational now, and we have built for manpower for extra revenue because there were still some delay in launches resulting from offshoots IT incident. The launches were delayed. And I mentioned in my last call, Q2 also will be hit to some extent that has happened. So the whole -- this manpower is built for higher revenue, and we are working towards higher revenue. And also another reason for extra manpower is -- in addition to R&D, is packaging site in the U.S. -- new packaging sites which we have built builder Virginia. That is fully operational now. People are there, but is yet to stabilize. We expect that end of Q4 the plant will be generating cash. And then the whole manpower is going to be justified. But we had to put in people ahead of the actual return coming in.
And again, as the may talk about R&D. R&D manpower has also gone up quite a bit. You want to talk about how many people they have there.
Yes. So we have both API and formulation put together, we have ramped up the manpower by almost 50% compared to last year. And clearly reflecting in our productivity authority. So I think we have -- we are geared for the future growth, both in operations as well as in our R&D filings.
The next question is from the line of Nikhil Yadav from Motilal Oswal Services Limited.
Am I audible?
Yes, you are.
Tushar, here, sir. Sir, just extending the earlier comment. So with new launches like metoprolol -- sir, metformin is launched in the first question.
No. That's what I was referring towards delayed. Metoprolol is not launched. There are a few other products where validations are just getting completed and will be launched by the end of this quarter or early next quarter.
And so that should then ideally further drive the U.S. sales going forward?
Yes, that's the whole expectation, it should.
Tushar, just to add to that, we have about 7 launches planned in the U.S. and the U.K., and some 1 in Europe over the next -- over H2. So the next 2 quarters, you'll see quite a bit of an increase in formulation growth.
Understood. And just on the raw materials -- or let's say, the gross margin side, if you bifurcate the benefit in terms of -- due to the segmental mix change and due to the lower raw material costs?
Yes. I will clarify Yadav. The raw material cost benefit and cost improvement benefit is largely offset by price erosion also and product mix also. The major improvement has happened because of increase in the ratio of formulation sales.
Okay. And secondly, even on the other expenses side, it has now moved almost up to INR 250 crores. So now that the facility is operational and even the packaging side is operational. So should this be considered as a base going forward?
Yes, this is to be considered as these and some of these results will start coming from Q4, Q1 onwards.
And I missed the net debt number, if you could just share at the end of FY '24?
Net debt of INR 990 crores.
The next question is from the line of Rahul Veera from Abakkus.
Just a quick question on the Genome Valley formulation facility. Has it -- is the CapEx is on track, sir to start in the quarter?
Yes, Rahul, it is on track. But the first thing that we actually -- we did a puja a few days ago. That was for the pilot plant. Now there is a manufacturing section, which will come up in another 6 months with 2.5 billion capacity and maybe end of -- I mean by December of calendar year '24, the entire capacity of 8 billion would be online. If everything is on track, we will be making some filings from the pilot plant in the next month and which will trigger off an inspection from the FDA. And by the time the site is approved, we would have had the capacity running a few months here and there.
So over the next 6 months, other than metoprolol, which would be the large key molecule where our expectations are very high?
I don't think we can share the products, but we do have quite interesting molecules. And as and when we launch, maybe you will be understanding or as you keep tracking our approvals also you would understand, but I don't think we should be naming these products ourselves.
Correct , which are the ones where our expectations are very high, which are in the public domain, but our expectations are very high, [indiscernible] molecules, we've done H1 we have done INR 2,000 crores of top line. And our ideal guidance in the last quarter was 20% on last year's base of -- INR 4,500 crores was the top line FY '23. So to move to INR 5,400 crore of top line, we have to do like INR 1,700 crores over the next 2 quarters each.
This quarter, there is some. This year, there is a loss sale which cannot be recovered. So -- but still, all I can tell you is there are good launches, which we are sure we can pick up. We have already been talking to customers. There's good traction happening. We cannot name what it will be, but definitely, it's interesting and exciting. But again, I have to remind you, we cannot keep looking on quarter-on-quarter. It's a long-term strategy we're playing, even though we are confident of the next few quarters. And we will be seeing good improvement.
Sure. Sure, sir. And our CapEx is INR 700 crores for this full year, FY '24?
So CapEx, the INR 700 crores is the guidance we have given. We have spent so far about INR 280 crores. And we probably would spend another INR 400 crores or so in H2.
[Operator Instructions] The next question is from the line of Madhav Marda from FIL.
Just wanted to understand on -- I think in the beginning of the call, I think, mentioned about the is for us to improve in the coming quarters. Just if you could remind us what are the key drivers? Is it basically newer launches which are the margin and the operating leverage from the fixed cost that you've added. Is that the right way to look at the drivers for the margin
as I mentioned a little while ago, the entire infrastructure is now built for higher capacity. Now we need to produce high, which we will and sell them, and this is also be partially driven by existing molecules in new geographies, like we said, we have some approvals in Europe, South Africa and all, and also new products in the U.S. So these are the new launches plus an increase in existing products, which will drive growth.
And also if you could just remind us of our basically paracetamol, which we wanted to sell more in outside of the U.S. market, just how is that scale up happening for us, like Europe, et cetera, or South Africa?
There has been quite quite a bit of approvals, more than 50% of those are paracetamol in Europe and South Africa, U.K. So these -- paracetamol in these geographies is growing in the form of formulation. And in the same market, the API sale of paracetamol we expect will be coming down as formulations increase.
And obviously, formulation should be better margin than selling API, right, in sales
That's right. The product mix is what will drive the margins as we graduate more towards the margins also should keep changing. That's the expectation we had all these years and we keep harping on that. But without the support of APIs and PFIs, the whole equation did not work.
And sir, the IT incident, I think there was some impact in the early part of the Q2 as well. If you -- like you all did quantify in Q1, there was about INR 150 crores of sales impact. Anything that you could share for Q2, how much was that impact for us in the earlier part of the quarter?
It's a little difficult to quantify that, Madhav, because some of the launches got delayed too. It's not only the production. But I'm happy to say that the last month of the quarter was normal. They have returned to normalcy. That's why we said in my opening statement, we are back to near normalcy. We are in a normal state of running right now.
So basically, the Q3, we should see full normalized operations now. There's more like issue.
Q3 should be a normal operation as anticipated in the past.
The next question is from the line of Varun Basrur from Julius
So just a couple of questions. Number one is that there has been some inventory buildup. I'm assuming this is in line. This is to support whatever launches are happening in H2. Has there been an element of -- will there be some sort of write-offs in line with whatever lost sales have been done in the first half? That's my first question. The second question is, there have been issues in the last couple -- last 3 quarters also first with the 3PL changeover and then with the cyber attack. Is there any element of this which is going to come into H2? Or just if you could reiterate over that. And yes. That's all from my side.
Mukesh, are you planning to take that.
Varun, valid observation, the inventory buildup has happened and also largely for the new launches and also to serve the U.S.A region because we need to carry some inventory in the U.S.A. to serve there. And there are no such issues in terms of inventory write-off or anything or loss of sale or anything in H2. So these are inventory built up to serve launches in the expected sales. And there is an increase in -- yes, sorry. Go ahead.
Yes, sure. And OpEx that there was some issue with third-party logistics, which that entire thing is behind us at this point, right? Or is there some spillover that's going to happen.
Yes, the expenditure has substantially come down, almost negligible. I would request Priyanka to add on to it.
I just want to add 1 point to and if the transition to our new 3PL has completed and we've seen a very significant improvement in our rates. So there might -- this past quarter, we might have had a very small spillover and possibly a very small spillover the next quarter, but there's nothing that is substantial enough to discuss right now.
The next question is from the line of Vikas Sharda from Management.
A couple of questions. One is on the product mix. You talked about increasing share of formulations. And this quarter, it is over 60%. Any guidance you can give on where do you think the share can go up to, say, next 2 to 3 years?
So 2 to 3 years should be in that range. But quarter-on-quarter, we should not be tracking. So this quarter, let's say, whatever the issue, whether it will be same in Q3, Q4, a difficult answer, but year-on-year, it should in that range. And going forward, it will go beyond 60%.
Understood. And secondly that sales by [indiscernible]
Sorry to interrupt, there is a lot of disturbance from your line.
Still, sir, we are not able to hear you. Could you please come in the better reception area.
Why don't we take the next question and come back to Vikas.
Yes. So we'll take the next question from the line of Mr. Yash Malhotra from JM Mutual Fund.
I just would like to know your current optimization levels? And where do you plan to take it further?
So the optimization levels are to keep in Q2 onwards. So as Chairman has explained, we have taken a higher expenditure in quarter 2. The optimization and automation effectiveness will start from Q3 onwards. Is that the question? I will answer what the question -- what you're right?
Okay. No level in percentage?
Sorry?
Do you expect your -- Sorry? .
Yes. Yes. Go ahead.
Okay. I understand you expect it to kick in Q3 onwards.
That's right.
[Operator Instructions] The next question is from the line of Nirali Shah from Ashika Group.
Yes. So in the last call, you had actually mentioned that the legacy that I top legacy products were no longer the metformin, and that is second order will change and probably these products will be replaced by more complex products that are upcoming. So if you could just update us on this complex products?
Nirali, the legacy products will always keep growing. I always maintain there's a lot of market for those products in new geographies, and they continue to grow. While in the new market -- new products when we launch, which will be better profitable and volumes may not be at the same level. But going forward in the next 1 or 2 years, we still see that our legacy products will at least be more than 65%, and the rest will be from new products even though the margins may vary, but the sales mix will be somewhat like that.
Okay. And my second question is, can you also update us on the backward integration projects, mainly DCT and SAP?
Yes, DCT, we have put up a small pilot plant because this is a technology being implemented by us first time in the world and patented technology. So we just wanted to start with the to pilot plant and then go on to the main plant. The pilot plant will start in February. And meanwhile, the planning for the main plant is on. The equipment also has been ordered. And that should start sometime in FY '25 of DCDA. And we are planning to start many commercial plant in Vizag, along with the DCDA, which should happen next year. The reason of starting in Vizag, Kakinada site where we plan to do C Zero and all the green chemicals and intermediates, is still not ready. The power has to come in. Rather than waiting, we just wanted to start something run it and master the whole And then by the time the site is ready, we'll be ready to go there.
The next question is from the line of Mr. Varun Mishra, who is an investor.
Actually, I just had one question. Like we have seen the raw material prices have come down in this current quarter. So like do we see this similar trend to continue for the rest of the year? Or is like the prices have a bit like it has stabilized?
I think we see that the raw material prices have come down. We believe that it has touched its bottom plateau. And we will continue to monitor it as the signals from the external world keep coming in. But as of now, I think it is at a reasonably low level.
The next question is from the line of Nagesh who is an individual investor.
I congratulate the team for the good results of the quarter. And I would like to know about the debt component. Is it in Indian rupees or foreign currency debt? And what is the cost of the debt?
Before our CFO take that question. I just want to tell you, Nagesh, thank you very much for the congratulatory message, but we all realize we have a long way to go. We are working towards it. And...
It's a continuous process. It's not a
Yes, it's an continuous process and we are trying to make up for lost ground. And so Mukesh, you can go ahead and answer that.
So our borrowings are in foreign currency, and it's a mix of long-term loan as well as short-term working capital. And we are borrowing in so far less effective spread. So which is a very competitive rate.
Okay. What's the component of working capital and the term loans?
Sorry, what is that?
The breakup of the total debt. .
Yes. So out of that -- yes, out of INR 990 crores, INR 150 crores is long term.
Okay. The balance is the working capital. .
Yes.
And by any chance you are in the PLI scheme?
So currently, we have applied for PLI scheme for our new project. Presently, there are no other PLI scheme.
Okay. That's all. . And the no dividend has been declared for this quarter, right?
No.
What we have been getting some interim dividend.
Interim itself, we'll go for a final dividend at least, let there be a sizable number.
The next question is from the line of Rahul Veera from Abakkus. .
By any chance, any update is there for the DCDA getting the PLI approval for us?
It's improved actually. We have approval for DCDA for 8,000 tonnes, maybe you want to go beyond that. Now even though our plan for manufacturing is 30,000 tonnes, when we apply, we apply only for 8,000 because there's a liability, we don't get to that number first.
[Operator Instructions] The next question is from the line of Shivanendra who is an investor.
Congratulations to team Granules in on a very set of numbers. I just have one clarification who's already covered in the call. What is your take on IT issue? And how do you see that -- I mean, do you see that impacting margins going forward? Or is this done? And has the resolved as in the past.
So I think the IT issue, whatever we have faced in the quarter 1, it had a spillover effect until middle of the next quarter. And we have currently resolved all the issues. And as out by Chairman in his speech and later that the last month has been normal, and we are absolutely back on track for the regular production and dispatches, and all operations have become normal. And although it has got its own regularization happened last month, but it had its impact in terms of the revenue, which was also stated in the speech of the Chairman.
And going forward, I just -- I think the last part of your question was we have taken enough security measures. They've done a lot. And I think we are at a much, much, much better set of preparedness to face this attack. They win, people keep getting attacked every day, and we keep monitoring what's happening.
The next question is from the line of Tushar Bohra from MK Ventures.
Congratulations to the management for a strong bounce back from the issues of the previous quarter. Quickly, a couple of questions. First, in the last couple of years, something or the other has continued to on in terms of execution. I think we hit a quarterly high somewhere in mid-2020, about INR 164 crores of PAT. And then obviously, a lot of things have happened since then. But would it be safe to assume that with the IT incidents and the third-party logistics issue behind us, we can look at next few quarters, a strong set of execution and on a much higher revenue base. Can we expect that we can have much better profitability? Like should we look at most of these execution challenges or sporadic issues are now behind us, and we can look for a few quarters of very strong execution rate growth for the company?
I think IT issues are almost behind us. And the raw material prices have started stabilizing much lower at a lower level. So I think it will -- the residual impact of some of these issues on the execution will be there for a quarter or so. But as we expect the operations coming back to normalcy, and then the execution going to a higher level, our capacity is coming up in quarter 4 and quarter 1. You can see progressively there will be a good improvement, and we are all striving to achieve that.
Got it, sir. And the sharp formula growth in U.S. Is it more to do with your core molecules like something to do with the core molecules? Or is it the newer molecules have now started to contribute at a higher run rate?
I'll take that question. It's a mix of major products, some of which are some dosage forms of the core molecules, but also a lot of them are from previously launched noncore model. And this primarily came from GPI.
So like since the new products, typically, they have given the Granules strategy of gradually looking at market share increases and you're sustainably building the products over several years. Can we say that we are finally starting to get meaningful traction from some of our launches over, say, FY '21 to '23?
If you look at the IMS numbers, market shares, we picked up market share quite fast for most of our major products. And -- there are some changes that I mentioned earlier in my discussion that have happened in the market which has enabled us to pick up more market share and/or potentially change some level of pricing with customers because our competitors in the market, the competitive landscape in the market changed a little bit. That's -- so to answer your question, yes, we have increased market share quite a bit, but it's not something that has grown gradually. This has -- we are seeing the market Granules exchange and because of Granules' backward integration and all the other pillars that we have to support our front end, we've been able to increase prices to a certain extent, by certain extent, and then sustainably grow market share.
Just to complete that, to fully answer your question, some of the new launches, we were able to get a very good market share.
So therefore sir, just to follow up on this. So therefore, we should be able to see a more consistent increase further from here or the overall traction in U.S. And assuming that the incremental sales also pick on Europe once you have solely normalized from Q3 and beyond, can we expect that the overall contribution from formulations will continue to trend up or remains strong in percentage terms?
Absolutely. You see an increasing trend of formulation in absolute terms. Like I mentioned earlier in this call, we have several approvals -- sorry, several launches over the second half, most of which the market shares, which will be seen through the next couple of quarters. So outside of that, we also have new products being approved in the next fiscal year. Dr. Ramarao mentioned, we have a double-digit that we are aiming to achieve this year. All those products -- some of those products might be approved in FY '25, and there will be a continuity of it in FY '26. So at least it would be a strong pillar of our growth globally, supported very strongly by our growth and investments into PFIs and API.
Just one last on the overall strategic initiative going forward. So we see a lot of emphasis in the last few quarters on R&D and innovation and also the work that has been done in controlled substances and new technologies, which was also mentioned earlier in this call. Maybe if you can highlight few on qualitative details as well as highlight the path to commercialization of these new molecules or these new initiatives across enzymes and biocatalysis as well as some of the work that has been done on the Pune laboratory?
Yes. It's -- I think highlighting on the quality definitely on the enzymes, we have gone ahead with a 3 molecules as I mentioned in my speech. And then we will be looking forward to commercialization of at least 2 molecules in the coming 12 to 14 months commercialization plan. And then when you really look at the entire portfolio, it is very, very clearly mentioned that we have different type of products. And we are also looking at something slightly outside the oral solid forms, first wave launches. And also, we are looking at and [indiscernible] filings. So all this endeavor from the strategic side is to ensure that we have a very healthy pipeline and focused on day 1 launches. So with our propensity to pick up market shares through the global cost leadership, backward integration, I think we will be able to clearly see that as the pipeline keeps filling up year-on-year, and these are all the launches which are likely to happen if things go well between '26 to '30. So with that type of a midterm and a short-term plan together in the portfolio, I think as what Priyanka has very clearly stated is that we will be seeing the launches, and we will be seeing the actually, the market share picking up for these new products. And I have also stated it in my speech that we are also looking at global cost leadership. And this is very important from the perspective that always the generic pricing in the markets both U.S. and Europe is going to go down. So should we need to compete, then I think cost leadership is an important element, and therefore as an overall strategy, we have a portfolio. We have launches from approval products to the and then cost leadership. Something put together should give a lot of value to our organization in the next couple of years.
Just one last if I I may please, very quickly. You mentioned on the formulation side, any of the new products already surpassed methocarbamol and for us in terms of sort of contribution to revenues on an annualized basis?
Yes. A few products have been far better than them.
In the interest of time, that was our last question. I now would like to hand the conference to the management for closing comments.
Once again, thank you very much, ladies and gentlemen, for attending this call. I would like to end this on a very positive note saying that we do expect to do better quarter-on-quarter, and we will all be seeing better business going forward. So with this, I wish you all a very happy upcoming Diwali. Thank you very much.
Thank you. On behalf of Granules India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.