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Granules India Ltd
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Ladies and gentlemen, good day, and welcome to the Q4 FY '22 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 Link Intime. Thank you, and over to you.
Thank you, Mike. Good morning, everyone. Myself Irfan Raeen from Orient Capital. We are the Investor Relations advisor with the company. I hope that all of you and your families are safe and healthy. On behalf of Granules India, I extend a warm welcome to all participants on Q4 and FY '22 financial results discussion call. Today on the call, I'm joined by Dr. Krishna Prasad sir, Chairman and Managing Director; Dr. KVS Ram Rao, Joint Managing Director and Chief Executive Officer; Ms. Priyanka ma'am, Executive Director, GPI; and Mr. Sandip Neogi sir, Chief Financial Officer. I hope everyone had an opportunity to go through our investor deck and press release that we have uploaded today on exchanges and on company's website.
Before starting this call, I would like to give a short disclaimer. This call will contain some of the forward-looking statements, which are completely based upon our beliefs, opinions and expectation as of today. These statements are not a guarantee of our future performance and involve unforeseen risks and uncertainties.
With this, I hand over the call to Dr. Krishna Prasad sir. Over to you, sir. Thank you.
Thank you, Irfan. Ladies and gentlemen, a very good morning to all of you, and thank you very much for joining us today for our Q4 FY '22 earnings call. I'm happy to inform you, that our Q4 performance had improved when compared to the last quarter. For the past 3 quarters for Q2, Q3 and Q4, we had a sequential growth in revenue, absolute gross margin, EBITDA and PAT. This performance came in the face of a challenging year for the industry. During this period, there were headwinds around both the availability and price of raw materials, solvents, catalysts, uncertainties arising out of Ukraine-Russia conflict, as well as reemergence of COVID crisis in China.
The global supply chain on the logistics continue to remain under duress. The logistics costs have remained at elevated levels. We also continue to face the pricing challenges in the U.S. market. This has resulted in low EBITDA and gross margins, where we had a good revenue growth.
Granules have demonstrated great resilience in the face of an adverse external environment facing the industry. We continue to remain agile to the changing business environment and doing our best to fulfill customer commitments and maintain service levels. Compared to Q4 '21, we ended up with a lower gross and EBITDA margins. When the trend was started in the last couple of quarters on the input costs continue, there may be a positive trend in terms of PAP supplies, as one of the biggest manufacturers in China will be starting and stabilizing its production in the next couple of weeks.
While we strive to strive for continued improvement in our financial performance in the short term, we are working on a long-term strategy, through making ourselves self-sustainable and overcome most of the challenges that we are facing now.
Looking back at our journey over the years, we have progressively moved from being an API to a totally integrated player, with dominant Finished Dosage sales. We have had a U.S.-driven growth trajectory built on scale, manufacturing excellence, focused execution and cost leadership. We are also making good inroads into Europe and contribution from regions other than U.S. have been on an upward trend. In fact, between E.U. and LATAM, we had a growth of 27% to 31% in the last 1 year. While our current business model continues, the time has come for us to take Granules to the next level in the journey. We are going through a major business transformation, to move the organization towards excellence in science, technology and innovation.
Our strategy going forward focuses on 3 elements. The first one is strengthening the core, through exploiting the current business. Second, building technology platforms for strengthening of existing businesses, and creation of new businesses. The third part is to create a strategic lever through ESG, when combining the strength of science and technology and reimagining manufacturing.
Ladies and gentlemen, I'm sure that all of you are aware that Dr. KVS Ram Rao has taken charge as CEO and Joint Managing Director at Granules. And today with him, we're in the process of a transformation with regards to human capital, manufacturing technology and finally, reimagining chemistry.
I would like to invite Dr. Ram Rao, to briefly explain to you about some of the initiatives we are acting on and creating a blueprint for Granules 2.0. Over to you, Dr. Ram Rao.
Thank you, Mr. Chairman, and very good morning to everyone. I'm happy to walk you through the strategy of the company going forward. Our strategy aims at creating technology platforms and chemistry and biotransformation, to bring the innovation engine to full throttle and looks at creating the synergies for existing and new businesses. Our efforts are geared towards reimagining manufacturing through innovative process technology and become an industry leader in segment over long term through partnerships and internal innovations.
We are dedicating our efforts, towards executing on our strategy through the following; creating a very strong R&D engine for both API finished formulations and chemical intermediates, bringing excellence in technical intellectual property and regulatory engines. A very important initiative will be to relook at the commercial engines to propel growth, not only in U.S. but also in chosen geographies like Europe and LATAM, where we have already started the nasal [ moving ]. The B2B businesses will be focused with the value-added APIs, a strong focus on cost management, review and governance, a lot of creation on systems and processes for sustainability, and the last one is technology development and partnerships.
We are working on an effective organization design, which focuses on these growth drivers and continue to build management capabilities, both organically and inorganically, and transform ourselves into enlarging the organization. Some of the important initiatives that we have already started are; the first one is a backward integration. We are leveraging our technology partnerships to achieve backward integration for some of the key raw materials for the chosen products, using innovative routes, innovative process technologies and looking at manufacturing excellence with sustainability as a backdrop. We continue to watch the availability and the price trend for some of these raw materials, while working in parallel on our initiatives for backward integration.
Portfolio filing and launches; we continue to work on our product pipeline and our portfolio with a new vigor. We are strengthening our R&D capabilities to focus on enhancing both the scale and quality of our pipeline. We have several launches planned in the next couple of -- in the next 18 months. We'll be focusing on enhancing the quality of our pipeline, as we strengthen our R&D capabilities. Our pipeline -- will be moving from ME-II product and other generics to products which focus on innovation, science, technology and going forward, we'll target more first-wave launch products, niche products and also balance the portfolio with high volume products, which is a strength of Granules.
One of the important initiatives that will kick in and already kicked in apart in this quarter, are the oncology block, how do -- we are currently working with several customers, to provide CMO services. In the last financial year, we completed submission by validation batches and technology transfer is in progress for several products. The commercial supply from this oncology block are expected, as soon as the regulatory approvals we get at different stages in this year. We are evaluating opportunities for offering product process and related services to customers in this area of oncology.
The Europe partnership business; the growth for Europe in the upcoming years will be driven, majorly by partnership business model, as this offers value add to our partners and strengthens Granules footprint across Europe. Europe business model in terms of partnering with customers has been promising as we have already seen growth, and as we enter into new business agreements with some of the strong players in Europe generics, with signed contracts, we are in process of signing also some contracts with the country players, which should help us to refocus commercial excellence and geography of Europe, and the same strategy can be extended and will be extended to LATAM.
Coming to MUPS block, the block has been commissioned and a couple of products have been validated, and we also received a few approvals to the commercialized products from this block. We are confident of earning revenues in MUPS block from quarter 2 onwards.
With this, I hand over to Sandip, for taking us through the detailed financial performance.
Thank you, Dr. Let me now take you through the performance for the year.
Revenue; the fourth quarter revenue was INR 1,030 crores as compared to INR 799 crores in FY '21. The full year revenue was INR 3,765 crores as compared to INR 3,237 crores in the previous year, showing a growth of 16.3% over the previous year. With supply constraints in API, we have maximized our profitability by optimization of portfolio. Share of revenue from Europe has gone up from 18% to 21% for the full year. Revenue share for other molecules, stood at 19% on a full year basis versus 16% in the previous year, in line with our strategy. Short supply of para-aminophenol, PAP, resulted in loss of paracetamol API business. The gross margin loss was at least INR 65 crores in FY '22. The sales breakup as per business verticals and regions are presented in our investors presentation, which is available on the website.
Gross margin; our gross margins for Q4 contracted by 8.3% on a Y-o-Y basis, but improved by 2.3% sequentially, when compared with Q3 of FY '22. For a full year basis, the gross margins contracted by 7% over the previous year, increase in key raw materials, solvents and other input materials and unrecovered freight costs have contributed to this contraction. You may like to note, that raw material increase was in the range of 60%, whereas solvent was in the range of 40% to 70%, and freight was in the range of 7% in terms of hike.
While we are able to recover the added cost from our B2B business, the same was not recovered from the B2C business due to fixed nature of the contracts. Unrecovered freight and container costs, unrecovered increase in the material cost across all molecules and U.S. price erosion, has resulted in bottom line decline in this year.
EBITDA and EBITDA margin; EBITDA for the quarter was INR 193 crores when compared to INR 202 crores in the previous year same quarter. On a full year basis, EBITDA was INR 722 crores in the previous year, the same was INR 855 crores, thereby contracting 723 basis points in terms of EBITDA percentage, on account of reasons explained above.
R&D; Our R&D spend for the quarter was INR 33.9 crores when compared to INR 36 crores in the same quarter previous year. On a full year basis, R&D spend was INR 146 crores when compared to INR 100 crores in the previous year. The R&D spend would be maintained -- would be monitored very closely throughout the next year, and prioritization will be made as per the strategic priorities across various technologies as alluded earlier by our GMD and CEO.
Net debt; our net debt was INR 697 crores as compared to INR 575 crores a year ago, mainly on the increased inventory and receivables due to our increased sales. Our inventories were maintained at higher levels, due to COVID and freight delays, and this was a strategic decision. We are constantly monitoring our working capital and efforts are underway to reduce the same, while keeping business interest and customer service level in mind.
Cash-to-cash cycle; Our cash-to-cash cycle was 138 days in the current year compared to 117 days in the previous year. The increase of 21 days was mainly attributed to inventory increase, due to reasons stated above. Receivables increased due to increased business. We hope that the raw material situation stabilizes soon, and then we could expect CCC to improve further.
Operational cash flow; operational cash flow for the quarter was INR 75 crores when compared to INR 145 crores in the previous year same quarter. The full year operational cash flow was INR 332 crores, when compared to INR 432 crores. Increased working capital, reduced profit has contributed to the reduction in the operational cash flow. We have started seeing improvement in the operational cash flow and free cash from Q3 onwards.
CapEx; CapEx spend during the year was INR 397 crores compared to INR 271 crores in the earlier year, mainly on account of increased spend in the MUPS block and the PP-II block in Vizag. Our CapEx spend will be in the range of INR 600 crores for the next 2 years. Overall, the U.S. performance was quite good, considering the challenges that we have faced throughout the year.
With this, I open the floor for questions.
[Operator Instructions] We have the first question from the line of Tushar Manudhane from Motilal Oswal Financial Services.
Sir, firstly, on the raw material side, other than PAP for the other core molecules, has there been any disruption on the prices or the supply side, or that is pretty smooth?
I think all the raw material supplies other than the PAP are smooth, to the extent where we are able to get the product supplies to the market. But PAP continues to be an issue for us, and the prices of other raw materials either have gone up or maintained the same as in the previous quarters.
So will that have some repercussions on the gross margins in the near term, or will we be able to pass it on in terms of higher finished goods prices?
I think while our effort has been and as mentioned by the CFO, that our B2B business, we are able to pass on the prices to certain customers in the last couple of quarters. But the increased prices to be passed on to customers in the B2C will happen only -- if that is in the formulation business in the U.S., is likely to happen only towards the end of the first quarter or it could be in the beginning of the second quarter.
Understood. Secondly, I just would like to understand now that MUPS and oncology blocks will have how much of operational costs on an annual basis?
So we are -- that's a work in progress, and we should be able to come out with some kind of answers towards the end of Q2, because we are looking at various capacities of occupancy of these 2 blocks as we move forward. So a stabilized expenditure for these 2 is expected only after some time.
Okay. Because that will be additional expense compared to, let's say, the fourth quarter operational cost?
But that is also linked to, in my opinion, the revenue that gets generated from these blocks.
Understood. And lastly, where do you think net debt to be at the end of FY '23?
Yes, we will be continuously trying to maintain it at the same level. But since there will be -- if there is an increase in the inventory due to strategic route, and if we continue to grow the business that we are expecting, there could be a little bit of increase in the debt position.
We have the next question from the line of Ranvir Singh from Sunidhi Securities.
Just one clarity that in footnote you had mentioned the INR 17.25 crore duty drawback claim has been recognized. So which line item is this appearing?
It will be in the line of raw material cost reduction, when it comes to the current year. When it comes to the previous year, it is gross margin.
So it is in form of [indiscernible]?
INR 17 crores is in the other operating income line, which is affecting the gross margin.
Okay. Fine. And secondly, and the CapEx we mentioned for FY '22 for this year, how much is attributable to MUPS block and how much is related to the remaining Vizag block?
Current year, MUPS block will be in the range of INR 220 crores.
Okay. So remaining INR 180 crores is related to...
Yes, relating to all other spreads, including the routine CapEx that we spend.
And currently, because how many products we have filed for MUPS and how much approvals we have, so far?
We currently have 2 approvals from the MUPS block and we filed about 6 products so far.
And these 2 products would be launched in next quarter?
We've already launched these 2 products at a small scale from one of our other module, but we will be scaling up and increasing market share over the next couple of quarters.
Okay. So we -- earlier also, we had MUPS product, but from different facility. So this is -- this 2 products we approved from this new facility, right?
You're right. We have MUPS capability in our U.S. facility and also in our existing Gagillapur site, we have another module that is capable of making these products. But because this is going to be a technology that we focus on. We dedicated a full-scale large-scale facility for just MUPS, where we have a much larger capacity that we can take advantage of with more products that we'll be launching soon.
Okay, fine. And we see in the revenue side, formulation business has gone up by [ $10 million ] Q-on-Q. So that increment is from North America only or we see across the geography?
I think this improvement is across the range.
Okay. Okay. Because the similar kind of delta is for North America also -- North America...
Sorry, just to add to what Dr. Ram Rao said, a majority of that does come from North America due to the increased number of launches that we have had over the last year. But there has been a significant growth outside of Finished Dosage coming from Europe and Latin America.
Okay. So how much products currently we have on shelf in North America?
We have a total of about 24 products in the U.S. That's on the RX side, and on the OTC side, we have about 10 products. So that's a total of about 34 products in the U.S.
We now have the next question from the line of Tarang Agarwal from Old Bridge Capital.
A couple of questions. One, the CFO attributed the gross margin compression to price erosion amongst other things. And it's been fairly visible over the last year for sure. Now if you look back, were you to attribute this more to channel filling and consequent destocking of channel, or did you see heightened competition in terms of more supplies coming in for your products? And going forward, for the year to come by, how do you see this evolving on the pricing front? Because I did you had a comment, whereby you mentioned that in Q1, at the end of Q1, you should hopefully be able to pass on the cost increases to your B2C customers.
Sorry, could you please repeat the first half of your question?
Right. So if I look back, I mean, price erosion has been a pervasive trend across this FY '22 as a whole. Just wanted to get a sense, in your opinion, was it on account of more channel stocking in FY '21 and consequent destocking, or was it on account of more supply kicking in, and in terms of more competition for your products? And how should we see this going forward from Q1 FY '23 onwards?
So I would like to look at this price erosion from 3 perspectives, okay? What you are asking is only from the U.S. perspective on the formulation. But when you really look at the price erosion coming to API on account of raw materials, solvents and all, that is very clear. And as stated very clearly by the CFO, that there has been a north of 60% increase in the raw materials and between 40% to 120% of the solvents, that is part 1.
Part 2 is mainly on account of the price, which has been a significant increase component, almost north of 70%. And the third one is on the formulation and -- Priyanka, would you like to take that?
On the formulation front, primarily in the U.S., you are right. A lot of our competitors have stocked up on a significant amount of inventory over the last couple of quarters, only because the logistics issues have been increasing. We all estimated that they would decrease, but they've been increasing. So everybody has been overstocking on inventory, and that's why we've seen a significant amount of deflation, which is from what we hear, the largest in over the past decade.
Now going forward, inventory levels, we do see them to be going down a little bit because the prices have reached a point that no other -- most companies that do not have the wherewithal, cannot handle any more price reduction. So we do see a lot of product level rationalization going forward, and with product level rationalization, comes a decrease in inventories, and we will see a change, a small change in the scenario over the next couple of quarters.
Now why we said that the price increases will be visible from Q1, Q2, is because for some of our major molecules, we have already passed them on, like we have committed over the last -- that we have stated over the last couple of con calls. But the term of our agreements, gives the customers a certain time period of protection. Now that we have passed that timeframe, we'll start seeing that in our actual invoices. I hope that clears your question?
Yes, just a follow-up on this. I mean, these competitors who have been stocking inventory owing to freight, are they of Indian origin, are they of Chinese origin? Because one would presume that their cost structure would be similar or slightly higher than ours, for them to be able to sustain the pricing at current levels?
See, everything is very product specific. I would say it's a mix between all regions. But I will say that the strongest players will come out stronger, because there could be 1 or 2 players that say we're going to slash the prices in half, but how long are they going to sustain? It's quite like you rightfully said. So that's why we've actually seen multiple scenarios, where we said, fine, take the business, we will be prepared to give up the business, but a month later, we got a query saying we need this product again. So if you look at the market share for some of our largest products, we've grown in terms of market share over the last couple of months, which will be visible over the next couple of months.
We have the next question from the line of Rashmi Sancheti from Dolat Capital.
So you have mentioned in your initial comments that PAP manufacturing, the supplies will be starting in China. So of your total raw material requirement from now on, how much we will be dependent on Indian supplier and how much we will be sourcing it from China?
I think the way to answer this question will be twofold. One is China and one is non-China, rather than Indian suppliers. So the way we see the entire thing that will be coming up, if things go well, should be to the tune of 15% to 20% from China. And beyond that, will be from suppliers outside China.
Suppliers outside China, you mean India as well as Europe?
Yes. I don't want to be very specific there. But just to say that, this is the one part which we are looking at in terms of derisking the supplies. Having said that, being the largest manufacturer of Paracetamol, we also intend to look at backward integration of PAP and some of the important products like metformin, and we have started a program already in terms of looking at backward integration. And once that happens, I think our dependency on the China or other external uncertainties is expected to come down significantly.
And by what period are we expecting that, we will be completely backward integrated for this molecule as well as metformin?
We are in the process of development of the product, and we will let you know as we go forward on our plans of backward integration. But definitely, the programs have started in the organization.
Okay. And then how do you see your gross margin moving from the current levels? Do you still see -- because you have already mentioned that there is a lot of pressure on the KSM and solvents. Do you see that it would be improving from here on, whatever we have done in FY '22? Or we think that it will be at the similar levels in FY '23?
So as an organization, Granules was always focused on customer satisfaction and customer delight, and also the quality of the service to the customers. I think that has been our biggest focus so far, in terms of supply issues, and that's how we are able to retain the market share. Looking at the price trends and the right -- the way it is, we don't expect any dramatic improvements in any of these areas. But the organization is reasonably positive in terms of the actions that we have already taken. And probably, we should be able to see the positiveness in Q1 or post Q1, in the direction what you are talking about.
Okay. Okay. And in terms of North America sales, from last 2, 3 years, we were doing a strong growth of more than 25%. In FY '22, we have done mostly in the range of 12%. So is it that the lower growth is because we have seen a huge pricing pressure in the -- in our base product, and what kind of launches have we done in FY '22, and what is the outlook for FY '23 in terms of number of launches, then what do you think the price erosion would be for next year?
I will take question. If you look at absolute terms, we have grown about 13%, 14% over the last year in the U.S. itself, and we will continue to grow in a much -- as a percentage, we will continue to grow much better even in terms of absolute numbers, we'll be at a much higher level next year as well. You did answer the question yourself, because of price erosion, we have had a significant decline versus what we projected for the year.
In terms of the number of launches, we did 5 launches this past year. But like we said earlier, we wanted to launch at a scale that we are comfortable in, only because we want to ensure that the supply security is there. So the products that we've launched, we've launched in a soft scale, the full effect of which we'll see this year. In FY '23, we have about 12 launches in the U.S. market, a total value of about 3.6 billion units in terms of addressable value. And then in terms of growth, you will see a much higher growth percentage than we have seen this year.
And currently, the price erosion in the U.S. is in double digit. Should I assume that?
Yes. The price erosion in the U.S. is in the double digits, I would say high double digits. And this is like I said, this has been the highest amount of deflation in the past 10 years in the U.S., this past year.
Okay. And what I see is that your total FD sales is also just in the range of around 13% to 14% growth this year and your North America sales is also almost around 12%. So whatever sales which we have done higher sales in Europe and LATAM, is it that the contribution in these 2 markets are majorly coming from the APIs and the PFIs?
Yes. As you see and also in the speech, we have already told that Europe and LATAM will be the future good geographies over the different product mix of API, PFI and formulation. But the current growth what you see, dominantly comes from PFI, and PFI is a more value-added product, as you know. And the commercial excellence engagement that we are doing right now in the organization, is focused to make sure that, while the formulation sales continue to grow in the U.S. through new launches, and also through our focus on the core molecules. But the Europe and the LATAM are the 2 growth geographies for us in terms of API, PFI and also the finished [ module ].
Okay. Sir, my last...
Just to add on that, I think it's very important to also note that in addition to the 12 launches in Finished Dosages that we had this year in the U.S., we're also going to be launching 5 Finished Dosages in Europe this year. Okay. And my last question, again, on PFI. If you can throw more light like, how are we adding new customers in Europe or we are getting our repeat orders in Europe? Which are the major dominant molecules, for which you're able to get higher number of contracts? If you can throw some light on PFIs and APIs, especially in Europe and LATAM markets, that is going to drive growth in the future?
So it's a 3-pronged approach. The first one is, to increase the market share with our existing customers. Second one is to add more new customers into the basket and [ execute ]. And the third one is to expand the geography of Europe from where we are to the other parts of the geography. That is on the geography end of the customer side, and on the product portfolio side, on the PFI, it is not just the existing molecules, but we also started adding the new molecules and the new approvals are likely to come, and we are launching also some new products as what Priyanka has just pointed out. It's a combination of all these factors together, is what we see as a growth in Europe and LATAM.
[Operator Instructions] We have the next question from the line of Mohit Mandhana from Fidelity Investments.
So I have 2 questions, actually, one short term and second long term. In terms of short-term question, is there any guidance we are giving in terms of revenue growth and EBITDA margins for FY '23? If you can, that will be great. The long-term question is really what sort of contributions are we looking from MUPS block, as well as the new onco/complex API block over the next 5 years, and what does it mean in terms of our revenue growth trajectory over the next 5 years and our EBITDA margin trajectory over the next 5 years?
Yes. So on the guidance, I think looking at the kind of uncertainties that we have both on the prices of raw materials, freight and others. I don't think we can give a guidance on both revenue and EBITDA directly. But organizations can qualitatively say that, we are positive in the direction of looking at both revenue and EBITDA in the next coming couple of quarters. And we are working towards making sure that, how do we really look positive all along in the next 4 quarters. I think that is on the first one.
And on the long term, I think as Priyanka just pointed out, that MUPS has become one of the specialized manufacturing facility and an excellence in manufacturing for Granules. And we have already got approval for a certain number of products, and we are already getting approval for the remaining number of products. And our target, as I also told, that we will be able to start commercialization of this, and we will be able to become one of the largest suppliers of MUPS capacity across the world on the chosen set of approved molecules, which are going to get launched both in the U.S. and Europe.
So I think that's the journey we have. And since it is 5 years, you have asked, I think our endeavor is to see that, the kind of products and approvals will happen in the next couple of quarters, and we should be seeing the filling of capacity very soon, towards the end of the year, and that's our endeavor on the MUPS block.
Coming to oncology block, I think the whole business model, what we are looking at, I think we have very -- we have good positive strokes from some of our customers, in terms of doing the oncology oral solid formulations. And then we are also working with several other partners. And as soon as we have the regulatory approvals in place, I think we will be able to throw more light on the oncology capacity utilization. But this should happen, in my opinion, in the next couple of quarters.
We have the next question from the line of Rahul Veera from Abakkus.
Just wanted to understand between the revenue impact, because of the deflation versus the logistics and current impact on the margins, how do you see the trajectory from here on? I understand you don't want to give any guidance for FY '23, but just wanted to understand whether it's going to be product launches, and how will the trajectory shape up over the next 4 quarters?
Shall I take this? I think [indiscernible]. So as Dr. said that, it will be difficult for us to give any sort of guidance on the gross margin trajectory, unless and until we come back to normal, in terms of supply certainty and also in terms of stabilization of the cost, which is highly dependent on crude and other things. So what we can think is that, there will be -- yes, there will be all the -- our endeavor will be always to maximize top line and bottom line. And obviously, when I talk about top line and bottom line the gross margin, through various portfolio optimization and other things. Beyond that, I don't want to comment further.
Just to add to what Sandip has told, there are -- there is a program which we have started with a high degree of focus and orientation. This is on the cost optimization. We are looking at various aspects of cost optimization, and that should be able to give us some positive strokes, as we go forward into the last couple of quarters. Along with that, we are also expecting some new product launches to kick in, and these are supposed to be a little high volume, new product launches. And as we get to the approvals, we see more positivity coming out in both top line and bottom line, and we keep you posted on the progress of these 2, as we move forward.
Sure. Sure, sir. Now when it comes to MUPS technology, the product and just 2 launches that we've done. So in terms of broader margin profile, is it better than the company profile, company [indiscernible]?
I don't think we want to necessarily comment on specific category-wise gross margin. The overall margin will definitely improve over the next couple of quarters.
Okay. So the confidence on the margin is coming from the new contracts that we signed recently?
I think it comes from...
FOB and we could not take the price rise at that particular point of time, back in December in the Q2 con call, you mentioned. I do [indiscernible] that we had done like revamped a lot of contracts after that?
Rahul, can you repeat the second part of your question, please?
Yes. So I believe our contracts were earlier used to be FOB, where a lot of cost was incurred from our end, and we could not take the price rise, because they were fixed price contracts. I believe we have revamped a lot of contracts. So are we confident that margins are going to improve largely because of this contract now?
I think the margins we said, we are positive on that, and it is not just because of only one, it is because of the optimization of the product portfolio across various geographies. It is on account of some cost optimization programs that we want to build in, which are supposed to help us to either maintain a better positive side of the margin. And the third one we are looking at is the new product launches. So all these put together, we'll be able to get to the positivity on that. Although it's difficult to say, and I am not sure anybody will be able to predict what will be the raw material prices in 3 months' time down the line or supply prices. But whatever the best that we can do, which is internally controllable, I think we are fully on top of it.
Rahul, just to add to what Doctor said, our endeavor is always to get into kind of an effort to get the increased prices recovered. So that process is always on. We don't want to kind of get into any discussion, that how many we have been able to pass on or not. But it's always there.
Sure, sure. And how many launches we will be doing from the onco block this year, sir?
Oncology block, we're not focusing on Finished Dosages. That block is primarily for CDMO and CMO businesses.
So will we see any launches on the contracts, say CDM contracts, like will be utilizing in the blocks this year?
From the visibility that we have, at least, we should be able to see 2 launches coming out from oncology block.
We have the next question from the line of Ranvir Singh from Sunidhi Securities.
Sir, just one thing on the R&D side, can you guide what level of expenses you can expect in FY '23?
So we are looking at an R&D expenditure, at least between INR 160 crores to around INR 165 crores is what we are anticipating as a next year R&D, as compared to INR 143 crores this year.
Okay. So -- and how many new ANDA we are planning to file or launch [ standalone ]?
Currently, we have 25 dossiers that we're working on. And like I mentioned earlier, this year, we are looking to launch about -- not this year, but within the next 16 to 18 months, we're looking to launch about 17 different dossiers in the U.S. and Europe and Canada, of course.
This is 17 finished products you are talking about, right?
Finished Dosages. Correct.
Okay. And this 17 will not all be in U.S. So partly that will be in...
Yes. It's a mix between U.S. and Europe and LATAM.
Okay, fine. And on the PAP side, I can understand that the challenges continues, but what we have strategy and planning for -- to get PAP supplies on a regular basis?
So as we all know that, while we have developed several PAP alternate suppliers apart from China, and China's biggest supplier is starting and they've just started production and stabilizing it in the next couple of quarters. Next couple of months, we should be in a position to start assuming that all the things in China are going to be under control. However, as I clearly mentioned to an earlier question, we are now in the process of going self-reliant through backward integration on PAP, and that work is already going on. And that will help us to become a completely backward-integrated self-sufficient organization over a period of time.
So when -- you spoke in our commentary, that backward integration is one of strategies, so that is related to PAP only or through other products also, we are looking at backward integration?
Related to PAP and all other identified key raw materials in our portfolio.
Okay. Fine. And though you are not giving guidance, one thing I wanted to understand actually, what are challenges for not giving guidance? Because I can understand the raw material prices are volatile. But at least on the revenue side, whether the run rate we have achieved in this quarter, whether this -- any part of this revenue is one-off, or this is sustainable, at least that kind of indication you can give us?
I think we spoke about it on the guidance on the -- there are 3, 4 factors, which lead to -- lead us to believe, that instead of giving the guidance, we work towards a positive quarter. And right now, we don't want to give any numbers of this. However, the management is that we will be positive in all the quarters -- coming quarters on both top and bottom line. I think that's what we would like to put it, as our approach for [indiscernible].
Okay. So like for PFI side, we see that suddenly, we have seen a very strong growth. And I believe that mostly this is in Latin American region. So whether we have that new contract or new products have been launched, as the number of portfolio have been increased or number of clients, or it's the similar same clients giving us higher orders. So what is actually driving -- or it's a pricing related thing?
Yes. Just to repeat once again, that in the geographies where we are growing on the PFI, it is not only the increase in the market share with our existing customers, but it is also acquisition of new customers, who are helping us to increase the overall market share in those geographies.
Okay. So it's the customer base actually has helped us to...
Yes, both. It's a combination of both. We are doing very well with our existing customers. At the same time, we are also increasing our customer base.
But your unit, legalization-wise, we have in FDD, right?
It's a mix of both. Well, while we have increased our customer base, we were also able to pass on our cost increases, price increases to our customers.
Understood. Understood. So obviously, the new customer would be at new pricing, thus?
Correct.
Okay. Okay. That clarifies.
We have the next question from the line of Tushar Bohra from MK Ventures.
It's good to see numbers starting to trend up again. Congratulations to the management for that. Sir, last few quarters and especially with Mr. Rao coming in, there's been a lot of focus on the science and innovation part, and strategic thinking going forward. But if you could maybe detail it out a little bit more, say, for example, CNS, which is our second largest in terms of number of products, what kind of strategies you could adopt for specific segments or what new therapies or areas we are looking at? Maybe a bit more detail if it could be shared, to understand better the way forward?
I think, Tushar, first of all, we are therapy agnostic. So what we will be looking for is, innovative opportunities, where we will be able to A, contribute through our innovation in the [ entire ] science technology space. B, we will be looking at the first wave of launches of some of those important products. And C, we will be -- it will be fitting into our strategy of backward integration through all these what I have spoken as a strategy, so that we will be a player who will start with the chemical intermediates, and all the way we will go towards the finished product.
I think that is how we approach the new portfolio, and while doing that, we are not going to ignore any of our current commercial products. And as clearly stated and in several questions, we will be strengthening our current products in such a way that, we will be able to become the same, right from chemical intermediate to the finished product supplies on all the chosen products even in the current commercial segment. I think this is a slightly different approach to what we used to do earlier. And this will enable us to actually benefit from 3 assets: A, supply reliability, where you don't have to depend too much on some of the external elements. B, the sustainability where you will be able to improve on all other factors. And C, you should be able to be cost competitive all the time on molecules. I think this has been an approach which we have started and which we are beginning to execute, and we should be able to see fruits as we move forward.
Great, sir. Second, from an overall, from a number -- so from an overall numbers perspective, and I don't really need guidance, but just to try and understand this, last couple of years -- last 5-6 quarters, to be precise, while we've continued to have a challenge on a gross margin and EBITDA margin, and maybe this could be a new normal or maybe there would be a reversion to mean on raw material and logistics costs, but we've managed to grow our revenues quite smartly. It would be fair to assume that, the increase in margins, both gross and EBITDA going forward, would be accompanied by a reasonably good growth on revenue overall. I'm not saying next one quarter, 2 quarter, but directionally, we should be able to maintain our revenue growth as well as hopefully, improve margins, gross and EBITDA, in the next 2, 3 years?
Yes. So there are 2 elements in which I would like to explain this. The first element is that, we would like to grow in U.S. geography through our pipeline launches, that are likely to happen, as Priyanka explained, and those launches. And some of them, we believe, are high-volume products. And therefore, the revenue growth will come from the new product launches, while protecting and increasing the market share on all our core molecules, both in -- from India-based as well as the U.S. based molecule. That is our first approach.
Our second approach as already told, that we are expanding our geography footprint, especially into Europe and some parts of LATAM, and that is going through, again, new product launches acquisition of new customers and also increasing the market share of the current customers and current products. So when you really look at it and directionally, obviously, we should be looking at positive growth in both revenue, and we are also not just focused on the top line, our endeavor is also to really focus on the bottom line. And also, we should look at the cash. I think all the 3 elements will be focused in totality. And directionally, yes, what you are asking is what organization is actually looking at.
Got it, sir. And specifically on the technology side or in terms of new initiatives, are we also looking at going beyond oral solids? Say, for example, injectables, are we looking at evaluating it in any way or new initiatives and these can...
Yes. I got your question. I think currently, we would like to strengthen our competitive strength in the overall solids, before we can think of going -- we are not averse, but I think focus is very important for the organization. And currently, we are focused on oral solids, current portfolio and future portfolio and geography expansion. I think that's how I will look at it, right now.
Got it, sir. One quickly on CRAMs. You had in the media interaction just before this call, mentioned that there is at least a thinking or a plan around CRAMs. If maybe you could just help us understand a bit more detail, what exactly is the organization thinking, and maybe over what horizon we should start to see some execution efforts around that?
So our first effort is on the oncology block. I think that is where we already started looking at CRAMs and the contract manufacturing as a combination. So it's both development as well as manufacturing in some cases, and it is manufacturing and [ technology ] in some cases. So which we have already started, but we started in a smaller way, and that will be the focus going forward in the next couple of quarters. And then we look at this as a business model going forward. And once our technology strategies kick in. And that's, in my opinion, will be some time away from now to get to that execution piece. I think CRAMs will become an important business element in our [indiscernible].
If I may squeeze one last on numbers side quickly. We see in this quarter, your cost -- other expenses have gone up meaningfully. Just to understand whether there's any one-off element here, or why has this gone up substantially? And on a related note, how much costs would be attributable this quarter to say, MUPS and onco blocks, where I'm assuming there's no revenue contribution as yet?
[ Kartik ]?
So sir, MUPS and onco for this current quarter is not significant at all, because the capitalization has happened very, very late in the year. And regarding the increase in the cost, mainly it is freight, which is attributed to that. Freight is...
Tushar, if you see the price costs have gone up north of 70% to the U.S. port, and you all know, that we have low value, high-volume products. And therefore, price becomes a very, very important component and that, I think, is a very significant contributor. And it has been there for the last couple of quarters, because of a continuous increase in the price cost and new contracts being sought by the shipping lines.
We will now take the last question from the line of Tarang Agrawal from Old Bridge Capital.
Just a slightly longer question and correct me if I'm reading it wrong. I mean, you guys have been in the North America space for quite some time as API suppliers and now as formulators. Yet, the oncology piece that's coming up, you're looking at building a contract manufacturing business out of it, instead of building a North America facing formulation space. Similarly, if I were to look back at the manner in which the commentary was feeding, it did seem like a lot of thrust was going towards building a formulations business, because you move from API to PFIs to formulations. But now the sense that I get at least, and I might be ahead of myself in reading this, but the sense that I get is, there's a lot more focus in -- while the formulation business grows for the investments that are done and incrementally, there'll be investments, but there's more trust in sort of trying to grow the LATAM and the Europe business, which is, again, a API and PFI-driven business. So if you could just explain -- am I reading it correctly? And if so, why not the continued thrust on formulations.
So first, let me take your oncology question. Okay. So while we are doing the contract manufacturing business because we have a good infrastructural capability and we have the capacity available, and there's an opportunity, I don't think the management has ever said that we are not focused on oncology formulations and the development of oncologic formulations, which is already happening. And we will be developing the products, but we won't launch the old products of P2 or generic products, but we will be definitely looking at launching oncology products in U.S. and other geographies, either by us through partnership, and that's the highest level of focus in terms of Wave 1 launches of oncology products. That's the first one, okay?
And the second one is in LATAM, Europe, there's a more focus to derisk the U.S. business pressure, and also to make sure that you increase your growth opportunities from existing portfolio. And the commentary of the management has always been that, while API is always an important element in our business model, but you will get more value add when you are able to leverage your capabilities of the formulation dossier, and your PFI capabilities, so that you have a sense of permanency with the customer, as well as a better margin to your product. And therefore, the strategy will be to actually look at higher-end opportunities through regulatory innovation, as well as the kind of product leverage that we can get. That is the second part of it.
And the third part of it is very importantly, is that in the North America business, our focus continues to be on the formulations and increase in the product portfolio through new launches and oncology included in that. I think that answers all the 3 questions.
Thank you. I would now like to hand the conference over to the management for closing comments.
So thank you, everyone, for an interesting line of questions on this call, and thank you very much and look forward to an exciting next quarters despite all the challenges that we face. Thank you very much, and have a good day. Bye-bye.
Thank you. In case of any queries, please write to irfan.raeen@linkintime.co.in. On behalf of Granules India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.