Granules India Ltd
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Earnings Call Transcript

Earnings Call Transcript
2025-Q2

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Operator

Ladies and gentlemen, good day, and welcome to the Q2 FY '25 Earnings Conference Call of Granules India Limited. [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.

I
Irfan Raeen

Thank you, [ Ashok ]. On behalf of Granules India Limited, I extend a warm welcome to all participants on Q2 and H1 FY '25 financial results discussion call.

Today on the call, we have Dr. Krishna Prasad, Chairman and Managing Director; Dr. . KVS Ram Rao, Joint Managing Director and Chief Executive Officer; Ms. Priyanka Chigurupati, Executive Director; Mr. Mukesh Surana, Chief Financial Officer.

Before we begin the call, I would like to give a short disclaimer. This call may contain some of the forward-looking statements, which are completely based upon our belief, opinion, expectation as of today. These statements are not a guarantee of our future performance and involve unfortunate risks and uncertainties.

With this, I would like to hand over the call to Dr. Prasad. Over to you, sir. Thank you.

Operator

Management may proceed with the presentation. The line for the management seems to have dropped. I will reconnect with the management.

K
Krishna Prasad Chigurupati
executive

Thank you very much. Good evening, ladies and gentlemen, and thank you for joining us on our Q2 FY '25 earnings call. We appreciate your continued interest in Granules. We have uploaded a detailed presentation of our quarterly performance on our website, and I trust you have had a chance to review it.

During Q2, our sales were impacted by a voluntary pause in manufacturing and distribution activities at our Gagillapur facility. Today, let me begin with an update on the recent U.S. FDA inspection at this site. As many of you are aware, the U.S. FDA conducted an inspection of our Gagillapur finished dosage facility from August 26 to September 6, '24. This resulted in 6 Form 483 observations. We submitted a comprehensive response to the FDA on September 27, outlining the corrective actions and initiatives we are implementing to address these observations.

Granules has a long-standing history of regulatory compliance, reflecting our commitment to responsibly advancing health care. We take our regulatory obligations with the utmost seriousness, ensuring that every product meets the highest standards of quality and safety. Following the inspection, we took a voluntary pause in manufacturing and distribution to assess any possible risk to the already manufactured products and also future production.

Throughout the process, we maintained full transparency with the U.S. FDA. To diligently investigate and address the FDA observations and to develop systems-based corrective and preventive actions that are supported by science and reflect a strong quality mindset, we engaged third-party independent consultants for a detailed review of our site's cleaning protocols and cross-contamination controls. We have also started working closely with additional independent experts to develop and implement protocols that reinforce best practices around personnel performance, data management, and investigation processes.

Based on our risk assessment studies and with the FDA's concurrence, we resumed dispatches in late September and began a phased restart of manufacturing operations in October. To further strengthen our quality culture, we are enhancing our organizational structure, too. We have appointed new leadership in operations and manufacturing and are bolstering our quality function to embed a culture of excellence and continuous improvement. Now looking at Q2 performance, while the voluntary pause impacted sales, we delivered healthy margins driven by strong sales of formulations and a favorable formulation product mix.

The API and PFI segment saw reduced contributions due to price erosion and softer demand in light of the still continuing high customer inventory levels, especially for paracetamol. Despite these challenges, our operations generated a healthy cash flow of INR 1,997 million. As we look ahead, our growth in the near future will be driven by new product launches from our GPI site in the U.S. market, especially the CNS and ADHD segment, and finished dosage sales in Europe.

We are preparing for new launches from the GPI site, which we expect will help lower the impact of the Gagillapur slowdown in Q2, which also has a small spillover effect into Q3. Our new formulation facility at Genome Valley under Granules Life Sciences is progressing well. Phase 1 with a capacity of 2.5 billion doses has been commissioned and commercial dispatches of monograph products have commenced. We are targeting prescription products commercialization for Europe in Q1 -- Q4 '25 and Q1 of '26. Phase 2 with an additional 7.5 billion dose capacity is expected to be completed by Q4 FY '25, with validation and commercialization activities slated to begin in Q1 FY '26.

In summary, we are prioritizing the enhancement of quality and compliance across the organization while actively pursuing our growth objectives. These include new launches from our GPI facility, expanding our formulation capacity at GLS and investing in R&D to support our portfolio expansion in the long term. Dr. Ram Rao will provide further insights on some of these initiatives.

So I hand over the call to Dr. Ram Rao.

K
Kandiraju Venkata Sita Rao
executive

Thank you, sir. Good evening, ladies and gentlemen. Innovation has been a core priority for Granules serving as the foundation of the company's strategy over the last couple of years. In an industry where scientific advancements are constant, our approach to innovation has helped us to foster growth, accelerate market entry and ensure that we are able to adapt to evolving healthcare challenges and regulatory requirements.

With R&D spend of INR 524 million in Q2 FY '25, this continues to be a consistent focus for Granules. R&D spend in H1 FY '25 of INR 1,144 million is significantly higher, 26% more than that of the same period last year, demonstrating the organization's growing commitment to research and innovation. We are making consistent progress in achieving our R&D goals. In addition to our growing list of product approvals globally, Granules at present has 17 ANDS in the U.S. and 4 applications in Europe and 8 applications in rest of the world under review for approval. We continue to grow our current therapeutic portfolio with new filings in CNS, antidiabetic category, et cetera, in Q2 FY '25. Globally, our R&D efforts have been centered around achieving the following objectives. At our Chantilly facility, we are developing the CNS products with a focus on ADHD therapies. The process of -- the progress of our portfolio is on track, having filed 1 product in Q2, and we expect to file several promising products in the next few quarters.

Oncology is another focus area for granules. We are making significant progress on our oncology platform with several new products in development that are expected to be filed globally in the coming quarters. Our world-class infrastructure in both API and finished dosage forms for oncology, coupled with a strategically selected portfolio of near-term launch products with market entry barriers, we aim to become a key player in this segment. Another focus area for our R&D is on the fermentation and biocatalysis. Biocatalysis is observed to be an effective green substitute. In line with our -- developing environmentally benign processes, we have embarked upon development of enzymes using the latest protein engineering concepts and enzymes are designed to develop for affecting the specific chemical transformations. Process validation of the first API with this technology is set to be completed in quarter 3 of the current financial year, followed by 2 more products in the subsequent quarters.

This platform helps us build sustainability and global cost leadership. We are making continued progress in the development of our fermentation technology products with 4 products currently under feasibility and development. I'm pleased to share that we have remained consistently focused on executing our R&D strategies and developing a robust portfolio for the future. Thank you all.

U
Unknown Executive

Thank you, CMD and GMD. Let me take you all through the top financial parameters now. Revenue. The second quarter revenue were INR 9,666 million as compared to INR 11,895 million in Q2 FY '24 with a decline of 19% and revenue declined by 18% as compared to Q1 FY '25. The sales breakup as per business division, geographic regions are presented in our investor presentation, which is available on the website. Gross margin. Our gross margin as a percentage of sales for Q2 FY '25 was 62% as compared to 51.7% in Q2 FY '24. Gross margin as compared to Q2 FY '24 is up by 1,036 basis points, achieved by higher favorable mix of FD sales. Further, raw material costs were also lower as compared to Q2 FY '24.

Gross margin as a percentage of sales for Q2 FY '25 is up by 307 basis points from Q1 FY '25, primarily achieved by higher favorable mix of FD sales. EBITDA and EBITDA margin. EBITDA for the quarter was INR 2,033 million, that is 21% of sales as compared to INR 2,130 million, that is 17.9% of sales in Q2 FY '24, an increase of 313 basis points from Q2 FY '24, mainly on account of improved gross margins. EBITDA as a percentage of sales for Q2 FY '25 is down by 94 basis points from Q1 FY '25. R&D. Our R&D spend for the quarter was INR 5,524 million, that is 5.4% to sales as compared to INR 496 million in Q2 FY '24, that is 4.2% to sales and INR 620 million in Q1 FY '25 that is 5.3% of sales.

Net debt. Our net debt was at INR 7,973 million as compared to INR 7,941 million in Q1 FY '25. Our net debt was INR 8,421 million at the end of March '24. Cash to cash cycle. Our cash-to-cash cycle was 213 days in the current quarter as compared to 183 days in Q1 FY '25. New launches, Red Sea issues and the voluntary pause in operations of Gagillapur facility impacted both inventory days and overall CCC days. Cash flow from operations. Cash flow from operations for the quarter was INR 2,007 million as compared to INR 329 million in Q2 FY '24 and INR 2,161 million in Q1 FY '25.

CapEx. CapEx spend during the quarter was INR 1,324 million, primarily invested in Granules Life Science amounting to INR 794 million. In H1, we spent INR 2,768 million, primarily invested in Granules Life Science INR 1,485 million ROC. ROC for Q2 FY '25 is 16.9% as compared to 19.6% in Q1 FY '25 and 12.9% in Q2 FY '24.

With this, I open the floor for questions.

Operator

[Operator Instructions] The first question is from the line of Rashmi Shetty from Dolat Capital.

R
Rashmi Sancheti
analyst

First question is on the remediation cost. You mentioned in the call that you all have hired a third consultant. So for that, any big expenses is supposed to be spent, I mean, in this year, in FY '25, basically in the second half of the year or it is already spent in the second quarter?

K
Krishna Prasad Chigurupati
executive

Rashmi, a little bit was already spent, and we expect that this could be anywhere up to $2 million for this year.

R
Rashmi Sancheti
analyst

$2 million, and that will be sitting all in the other expenses, right?

K
Krishna Prasad Chigurupati
executive

Yes.

R
Rashmi Sancheti
analyst

Okay. And -- so related to the facility observations, what are you gauging with the response, which is coming from the U.S. FDA? Is it something you feel that it will get resolved in near term or you feel that it might take some time?

K
Krishna Prasad Chigurupati
executive

We are pretty confident that this will get resolved and it all depends on the EIR, which we expect will be coming in December, and we expect a positive outcome of that.

R
Rashmi Sancheti
analyst

Okay. And the spillover, which you mentioned that third quarter will also have some sort of impact because of the shutting down of the lines at Gagillapur. So third quarter, can we expect that there would be -- it would be still better than quarter 2, I mean in terms of sales that got impacted in quarter 2? Or you feel that it would be more or less similar.

K
Krishna Prasad Chigurupati
executive

Sales impact of lost sales will be less than quarter 2.

R
Rashmi Sancheti
analyst

Lesser then the quarter 2?

K
Krishna Prasad Chigurupati
executive

Yes, the lost sales, yes.

R
Rashmi Sancheti
analyst

Okay. And just to understand that you said that you will be doing more filings from the other facility to derisk basically. So I just want to understand this thing that from the Gagillapur plant, we are just supplying the core products or we are supplying some other products, which are your noncore products where the contribution in the U.S. is now going up. If you can explain that?

Also, if you can explain that like the breakup sort of, like you mentioned that the upcoming 7.5 billion dosage in Genome Valley will be consisting more of CNS and ADHD products? But what about the older phase, the Phase I, where we have already 2.5 billion dosage, what exactly we are producing and supplying from that plant and from the Vizag plant? I just want to understand that the MUPS products, controlled substances, these are the products basically supplied from which plants. If you can just explain us.

K
Krishna Prasad Chigurupati
executive

Rashmi, first of all, from Gagillapur, we have quite a few products. It's just not the core products. There are a lot of MUPS products and many other products which have been supplying, and this will continue to be supplied from there. We -- all the new filings, we are doing from GLS because there is a problem of capacity in Gagillapur. And also as a possible derisking strategy, some of the important existing products also, we have filed some and we'll be filing some more from our GLS facility.

And regarding our GPI facility, we have a lot of products. It's just not ADHD and CNS, we have a lot of other products, which also are good products and which have been contributing fairly well in the past. And on the Vizag, we have the onco facility in the [indiscernible]. And these -- we have done some very interesting filings of onco products, which will be launched in the near future on approval and expiry of patents. But we also do a lot of third-party manufacture in Vizag, and that's picking up right now. We manufacture for other companies.

R
Rashmi Sancheti
analyst

Understood. So currently, just to have a little clarity, the product supplies are mainly from -- the fixed dosage supplies are mainly from Gagillapur, your Genome Valley, which is the older phase, and your Vizag -- sorry, Vizag is something which is -- something expected in the future from the Virginia. Is this correct?

K
Krishna Prasad Chigurupati
executive

From Virginia, a little bit from GLS, Gagillapur and onco also, there is products that are going on, on CMO basis.

R
Rashmi Sancheti
analyst

On the CMO basis. Understood. Got it. And one more question, if I may. Just on the API and the PFI side, like you mentioned that still the demand has not revived, inventory is still there in the market. When can we expect this to turn around? And is this thing which is happening only on the paracetamol side or on the other API products also which you are supplying, your other core API and PFI products?

K
Krishna Prasad Chigurupati
executive

It's mainly on the paracetamol. And there also, we see a little bit of easing. We saw some positivity in Q2, and we think that it will improve in Q3, but definitely not come back to normalcy.

R
Rashmi Sancheti
analyst

Okay. It will not come back only.

K
Krishna Prasad Chigurupati
executive

In Q3. Q4 could be abnormal quarter. We have to see...

Operator

The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.

T
Tushar Manudhane
analyst

Sir, given the kind of measures we are doing at Gagillapur, at the same time, do we have any product would come up for approval over, say, next 3 to 5 months, which could be from this side? Any target action date?

K
Krishna Prasad Chigurupati
executive

Yes, Tushar in Q3 Q4. Priyanka, you want to take that call?

P
Priyanka Chigurupati
executive

Yes, I will take that question. We have about 3 approvals pending from Gagillapur in Q4.

T
Tushar Manudhane
analyst

Okay. And would you also share some thoughts on this generic Toprol or Metoprolol Succinate, how has been the traction or sort of the business from that product?

K
Krishna Prasad Chigurupati
executive

Tushar, can you come again? Yes, go ahead Priyanka.

P
Priyanka Chigurupati
executive

We're doing well, much better than we expected on the product. We are continuing to supply. I mean you can look at the IMS data. It shows -- it just reflects our launch quantities. But I would say that we did really well on that product right now in terms of market share.

T
Tushar Manudhane
analyst

So any -- what kind of like price discount has product taken to get the business?

P
Priyanka Chigurupati
executive

Let's not get into those details, Tushar. That's too much information.

Operator

And the next question comes from the line of [indiscernible].

U
Unknown Analyst

My main question is on Gagillapur, sorry, given the same inspector who did inspection of Intas and ultimately the plant got ended an import alert. So what is the thing that giving confidence to the management for resolving this matter?

K
Krishna Prasad Chigurupati
executive

Harshith, I think I only heard the last part of your question. Can you repeat it once again?

U
Unknown Analyst

Yes, sure, sir. So given the same inspector who did the inspection for the Intas and ultimately, they gave the import alert to the plant. So what are the things that giving confidence to the management for resolving the matter and getting the plants here from FDA?

K
Krishna Prasad Chigurupati
executive

Okay. Now still the question was not clear, but I think I broadly understood the tone of the question, and let me attempt answering it.

Yes. I thought the question was what gives us confidence on being able to resolve the FDA issue and what measures we are taking...

U
Unknown Analyst

Am I audible?

K
Krishna Prasad Chigurupati
executive

But it's getting a little -- maybe if you speak slowly, we should be able to hear you better.

U
Unknown Analyst

Can you hear me now, sir?

K
Krishna Prasad Chigurupati
executive

Is my assumption correct? What I said your question was about how...

U
Unknown Analyst

My question was that given the same inspector who did inspection of Intas and ultimately, the inspector gave the import alert to the Intas plant. So what are the things that are giving confidence to the management that this plant will get clear or matter will get resolved considering the critical nature of the inspections, which were mentioned in the 483?

K
Krishna Prasad Chigurupati
executive

Okay. Got it, Harshith. Okay. The same inspector in some other company would have resulted in a warning letter, but with the same inspector in some other company has resulted in a [ PAR. ] So it doesn't -- it all depends on how the company is responding, what are the actions the company is taking and how we communicate it to the FDA.

So we are pretty confident about the actions we have taken and also the very fact that with no compulsion or no instructions, we ourselves took a voluntary pause and then did a thorough risk assessment, not only by ourselves, even by using third-party consultants and only after satisfying ourselves that things are good to go.

With concurrence from the U.S. FDA, with their consent, we restarted sales and production. That itself is a good sign that we are very proactive and not reactive. And this goes very well with our quality culture and the nature of our response and the actions we have taken, the actions we are continuing to take gives us a lot of confidence that things should be in control.

U
Unknown Analyst

Okay, sir. But the 483 observations are largely similar in terms of the GMP document and OS, OD things. So that was the key thing because that observations were very critical.

K
Krishna Prasad Chigurupati
executive

They are critical, but we have good responses to that. I would like to explain, but unfortunately, I cannot go into detail.

Operator

Does that answer your question, Mr. Harshith?

U
Unknown Analyst

Yes, yes sir.

Operator

[Operator Instructions] Next question comes from the line of Tara Agrawal from Old Bridge.

T
Tarang Agrawal
analyst

Yes. Sir, a couple of questions. One, on the gross margin for Q2 FY '25. Fantastic gross margin delivery. Is it a function of any one-off development? I mean, pricing advantage in some of our products? Or it's really just a function of the mix change in terms of the marketplace and in terms of skewing more towards formulations?

K
Krishna Prasad Chigurupati
executive

It is a mix towards -- skewing towards formulations, which is a very high percentage this quarter. And also within the formulations, it's the product mix. If we did our entire sales possibly, the margins would have come down a bit because they are profitable products, less profitable products. So it's more that the more profitable products were sold that we made a better margin. However, the increase in margins is on the upward trend. While I say that it was profitable products that contributed, it doesn't mean our gross margins will fall drastically.

T
Tarang Agrawal
analyst

Sure. If I recall correctly from our last conversation in the previous earnings call, 5 products were launched in H2 of FY '24 that was supposed to drive growth for FY '25. Has that at all been impacted because of developments in Gagillapur?

K
Krishna Prasad Chigurupati
executive

Some of these products went out on time, and they will continue to go, and they will definitely drive the growth in '25. And some of these products are the growth drivers in margins.

T
Tarang Agrawal
analyst

So there has been a partial impact. Would that be the right way to look at it?

K
Krishna Prasad Chigurupati
executive

Sorry?

T
Tarang Agrawal
analyst

So I mean, the conclusion would be there has been some partial impact, maybe not a significant impact, but a partial impact, correct?

K
Kandiraju Venkata Sita Rao
executive

Yes, you're right.

T
Tarang Agrawal
analyst

Okay. Sir, between the sales that have been lost owing to the voluntary shutdown, additional spends on remediation, would it be fair to presume that on the bottom line, the hit would be close to about $25 million?

K
Kandiraju Venkata Sita Rao
executive

I've not understood how you are computing it. If it is only remediation expenses, Chairman has clarified, it could be close to $2 million. Are you also computing loss of sales?

T
Tarang Agrawal
analyst

*Yes, loss of sale and because of which -- because of the voluntary shutdown and owing to that, the negative operating leverage or the loss of profits that we would have made on the sales.

K
Krishna Prasad Chigurupati
executive

You're referring to Q2, right, Tarang? Or is it going to be for the year?

T
Tarang Agrawal
analyst

I mean, overall for the year, between Q2 and Q3.

K
Kandiraju Venkata Sita Rao
executive

It's probably I will give a little judgmental number over here, let's say, close to INR 200 crores of sales and close to INR 50 crores, INR 60 crores of profit.

T
Tarang Agrawal
analyst

Sure. And the last question, I mean, what utilization was Gagillapur running prior to the inspection and my sense is a large part of September and some part of October has been lost. So what utilization was it running prior to the audit, what utilization is it running at today? And would it be safe to presume that we've lost about 1.5 months of revenues?

K
Krishna Prasad Chigurupati
executive

It was running at around 90% of the capacity. And we are close to that way back and close to that as of today. It's only the 45 days or 40 days that we have an impact. We're back to the original number.

Operator

[Operator Instructions] And the next question comes from the line of Bino Pathiparampil from Elara Capital.

B
Bino Pathiparampil
analyst

Just a follow-up question. I have -- in your financial statements, I see that your revenue across geographies are impacted, not just the U.S. So when you say there was a shutdown of lines, are the lines really common across U.S., emerging markets, semi-regulated markets, India, et cetera?

K
Krishna Prasad Chigurupati
executive

We have only one facility for all these markets. And when we said that we took a voluntary pause, we have a different perception of quality, it's quality for everybody that has to be the same. It's not for different markets. So we took a pause for all markets and having satisfied ourselves that there is no possibility of risk to product and contamination, we released it across. To answer your question, the pause has affected sales to all products from this plant.

B
Bino Pathiparampil
analyst

Got it. And sir, when you say starting in a phased manner from October, is that same for all markets again? Or is it that other markets can ramp up faster than U.S. supply?

K
Krishna Prasad Chigurupati
executive

Yes. As of today, we -- because U.S. continues to be a very big market for us, the priority goes to U.S. and other -- we have ramped that up quickly and other markets are ramping up now. There is a backlog which also has to be cleared. So the ramp-up in other markets will be a little slow.

Operator

The next question is from the line of Harith Ahamed from Avendus Spark.

H
Harith Mohammed
analyst

So my first question is on Granules Life Sciences, the new facility. You mentioned that you are undertaking validation activities there. So how should we think in terms of the timelines for starting commercial supplies from the tubulin tablet block that we have there? Can that be expedited given some of the issues that we have at Gagillapur? That's what I'm trying to understand.

K
Krishna Prasad Chigurupati
executive

Let me answer this first, Harith. The commercial supplies from GLS have already started. And in fact, last month also, we did ship product out, and that will keep continuing. It is especially to the U.S. with monograph products, which don't need a facility inspection and approval. So this is going on. The 2.5 billion capacity, we expect to hit a run rate of about 1 billion in possibly 2 months' time and then ramp it up.

We could have hit a bigger number, but we don't have packaging capacity till the main plant comes up. Main plant is expected to go commercial possibly in Q1 of next fiscal and we are doing everything possible to speed it up. And also a lot of new filings are going to happen from here and some site transfer products are also happening.

H
Harith Mohammed
analyst

Okay. Got it, sir. And on Gagillapur, you mentioned that we've reached utilization levels which we had before the inspection currently. But the 45 days when we were impacted, was it a complete shutdown or were we operating at a lower utilization level?

K
Krishna Prasad Chigurupati
executive

We were just finishing products which are WIP, but granulation has stopped.

H
Harith Mohammed
analyst

Okay. Okay. And then in terms of next steps on the -- from the U.S. FDA side, the final classification, and if there are any further steps, how should we think about the timelines for those?

K
Krishna Prasad Chigurupati
executive

Typically, it takes about it's 90 days normal limit from completion of inspection. EIR is expected, and that's what the FDA is supposed to give, but it could be delayed a bit. We have to see how it goes. And meanwhile, it's not only our response, but we are in constant communication and updating the FDA on various development programs we are doing, various initiatives and the results that are happening here. And like I said, we are doing everything we think is the right way to go ahead, and we are confident that this could result in a lot of positive results.

H
Harith Mohammed
analyst

Okay. And last one, on the Pantoprazole launch that you mentioned during the quarter, can you share some color on the market opportunity here and the competitive intensity and what market shares we've been able to achieved as of currently?

K
Krishna Prasad Chigurupati
executive

Priyanka, do you want to take that?

P
Priyanka Chigurupati
executive

Sure. Give me a second. In terms of Pantoprazole, the overall market size is about $100 million genericized -- well, sorry, gross value. But if you talk about the market share, we've already taken some market share. We've launched the product, but we haven't completely reached our target market share yet. So we want to grow slowly because this is a high-volume product. So we want to make sure that we don't crash prices in the market and grow slowly on this product.

K
Krishna Prasad Chigurupati
executive

And Harith, just to mention that we are fully integrated on this product, even though we have launched the product with bought out API, third-party API. Now we have approval received last week, accepting our in-house API. So that should add to some strength in the product.

Operator

The next question is from the line of Foram Parekh from BOB Capital.

F
Foram Parekh
analyst

My first question is on margins. Since we expect a spillover effect of the facility shutdown even in the next Gagillapur facility shutdown even in the next quarter. And we see that the base -- the margin base is higher at 22%. So how much impact do you see of this facility spillover effect impact on the margins at an EBITDA level?

K
Kandiraju Venkata Sita Rao
executive

Foram, I will talk about the gross margin. Maybe then you can arrive at how you are looking at EBITDA. Gross margin, the next year -- next quarter, the spillover is there and there is a reduction in the formulations also of Gagillapur. So there can be some favorable margin from formulation, not to the extent of Q2, slightly better from Q1. But at the same time, [ API ] also will catch up a little bit. So overall, you can look at not as high as Q2. Probably [ would have to ] consider a moderate margin in Q3.

K
Krishna Prasad Chigurupati
executive

So revenue would increase, but margin may fall a little bit.

F
Foram Parekh
analyst

Okay. Got that. And my second question is on the API side. I see there is massive decline both on a Q-o-Q and Y-o-Y basis. So is it because of some price realization -- I mean, lower price realization? Or what has led to such a massive decline?

K
Krishna Prasad Chigurupati
executive

It is a price erosion on one side and lower sales also on the other side. The lower sales are due to customer inventory buildup. And just to give you a little bit of history, what we -- our analysis is and discussions with our customer -- based on our discussions with the customers, people were very worried, especially paracetamol during COVID time. They built up huge inventories.

They also expected their sales will continue at the same level. And their sales dropped of finished dosages. In fact, even consumers have stocked up. So they also were not buying. And that resulted not only in lost sales for us, it's also the pricing pressure because there were no sales, there was competition offering lesser prices. So it's a result of -- and then came the Red Sea. Once the Red Sea problem came up, again, there was panic buying and stocking up. So that led to this continued excess inventory. But like I mentioned earlier, we see a little softening. And Q4, I think things will be in very good shape, better shape, I would say, much better shape.

F
Foram Parekh
analyst

So can we expect growth from Q4 onwards in this API division? Or we can still expect some sort of decline?

K
Krishna Prasad Chigurupati
executive

Decline won't be there. It will definitely be a growth over the current quarters. But whether it will touch Q2 of last year, it may not, but at least in the next fiscal, it will definitely go to that level.

F
Foram Parekh
analyst

Sure. And my last question, if I may. So the formulation sales is showing muted growth. But overall, the geographies I see have declined massively. So could you just explain the reason why Europe, India continue to decline steeply?

K
Krishna Prasad Chigurupati
executive

Basically, like I said, we have prioritized U.S. sales during the slowdown also during the falls, and we give priority to U.S. Now there are a lot of European sales which are catching up so -- and other markets. That's why there's a big decline. The overall decline we mostly had it into Europe and other places.

P
Priyanka Chigurupati
executive

I just want to add one thing to this. U.S., as you can -- I'm sure you know that it's primarily B2C business, right? So we had -- we always maintain enough safety stock in the U.S., which we could immediately release post communication with the FDA and push out into the market versus having to manufacture the entire product and release to Europe and rest of the regions. So that's why we were able to increase the U.S. sales because of our safety stock.

Operator

Next question is from the line of Rashmi Shetty from Dolat Capital.

R
Rashmi Sancheti
analyst

Just want to understand on the PFI side of the business. When you temporarily stopped the production at the Gagillapur, was PFI block was also the part of it?

K
Krishna Prasad Chigurupati
executive

Yes. Granulation, we stopped PFI, we sell as a product, and we also use PFI for our tableting. So it's mainly granulation that has stopped. And WIP, we continue to compress and coat, but not really...

R
Rashmi Sancheti
analyst

Okay. Got it. And now those PFI lines have already started, I mean, from the October onwards.

K
Krishna Prasad Chigurupati
executive

Everything back to normal as of today.

R
Rashmi Sancheti
analyst

Got it. Okay. And earlier, we were saying that in the PFI segment, we will be adding -- we are seeing more customer increase in later markets and all. So what is the update over there? I understand that one quarter impact we have. But just on a general terms, what are you seeing demand from those geographies?

P
Priyanka Chigurupati
executive

I'll take that question. There has been an increase in demand for our PFI. We've been retracting that business. And so you can see the absolute numbers of PFIs in LatAm go up gradually. In addition to that, we are also qualifying new customers. But as you know, registrations in Latin America takes some time. So we're building a strong BD pipeline for our existing PFIs and also some new PFIs.

R
Rashmi Sancheti
analyst

Okay. Another question for Priyanka. Just on the launches side, we were expecting that for the U.S. business this year, we will be doing around 8 to 9 launches. But because of this Gagillapur impact, do you think that the number of launches for this year would come down? Or you feel that at the end of the year, you will be able to launch around 8 to 9 products in the U.S. market?

P
Priyanka Chigurupati
executive

So we've already launched about, I would say, about 3 products in -- so far. And the remaining half of the year, we have another 5 launches -- 4 launches planned for the U.S., which are on track. Now if all goes well, by the end of March, we'll receive another 2 approvals. But either way, they won't come into this year's sales. They'll slope into next year's sales.

U
Unknown Executive

There will be some products that are getting approved from GPI, which will be launched.

Operator

[Operator Instructions] The next question is from the line of Tarang Agrawal from Old Bridge.

T
Tarang Agrawal
analyst

Priyanka, in a response to one of the participants, you suggested that 3 approvals are pending from Gagillapur in Q4. Is it Q4 FY '24 or Q4 -- sorry, Q4 FY '25 or Q4 CY '24?

P
Priyanka Chigurupati
executive

It's in fiscal '25.

Operator

Does that answer your question?

T
Tarang Agrawal
analyst

Yes.

Operator

The next question is from the line of Sahil Vora from M&S Associates.

S
Sahil Vora
analyst

Yes. I just had some questions. Yes. Sir, with the softer input costs this quarter contributing to gross margin expansion and the major molecules being backward integrated, how sustainable do you anticipate these margins to be going forward?

K
Kandiraju Venkata Sita Rao
executive

We already clarified Q2, the margins are a little higher because the U.S. FDA issue was there. So we have prioritized and sold favorable margin products in terms of priority. But at the same time, the margin will not fall significantly in Q3, Q4. So we will be able to have a good margin run rate.

S
Sahil Vora
analyst

Okay. Got it. And could you provide more insight into the new product launches during the first half of FY '25?

P
Priyanka Chigurupati
executive

What would you like to hear from us on that front?

S
Sahil Vora
analyst

In general, I wanted just an idea about the product launches.

P
Priyanka Chigurupati
executive

We launched 3 products in this fiscal year, both from GPI and GIL. And like I mentioned in my previous call, we launched about 3 products at the end of fiscal '24, which kind of extended into this year. So if you consider about 6 products, we've made decent inroads into every single product.

But again, all of them have room to grow. And if you look at IMS data, et cetera, whatever data sources that you look at, you'll just start seeing small numbers because we just launched them into the market. So going forward, as production ramps up, we'll be taking -- we'll be actually supplying in full and taking on more market share.

And also, I just want to clarify something to the participant from earlier. When I mentioned that we have about 4 launches coming up the rest of this year and also 3 to 4 launches that we -- sorry, approvals that we're expecting in Q4, these are not linked. The 2 out of the 4 launches or 3 out of the 4 launches that we are expecting to do are from products that have been approved a while ago that we're launching now because the markets opened up in a very good way for us. So they're not linked. I just wanted to clarify that.

S
Sahil Vora
analyst

Okay. Understood. Lastly, could you provide an unexpected -- sorry, expected timeline for the Gagillapur facility to resume operations?

U
Unknown Executive

Gagillapur facility, Sahil has already resumed operations and clarified a few times in this call that things as of today, we are producing at normal capacity.

Operator

[Operator Instructions] As there are no further questions from the participants, I would now like to hand the conference over to Dr. Krishna Prasad Chigurupati for closing comments. Over to you, sir.

K
Krishna Prasad Chigurupati
executive

Once again, ladies and gentlemen, my sincere thanks for your interest in Granules and for joining us in this earnings call today. I wish you all a great time ahead. Thank you.

Operator

Thank you, sir, and thank you, everyone. On behalf of Granules India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.

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