U.S. markets close in 11 minutes

Edited Transcript of GRANULES.NSE earnings conference call or presentation 2-Jun-20 12:30pm GMT

Q4 2020 Granules India Ltd Earnings Call

Hyderabad Jul 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Granules India Ltd earnings conference call or presentation Tuesday, June 2, 2020 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Krishna Prasad Chigurupati

Granules India Limited - Chairman & MD

* Priyanka Chigurupati

Granules India Limited - Executive Director of Granules Pharmaceuticals Inc.

* Sandip Neogi

Granules India Limited - CFO

================================================================================

Conference Call Participants

================================================================================

* Aditya Khemka

DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare

* Ankit Hatalkar

Edelweiss Securities Ltd., Research Division - Research Analyst

* Ashwini Agarwal

Ashmore Equities Investment Management (US) LLC - Non-Discretionary Strategic Advisor

* Cyndrella Carvalho

Centrum Broking Limited, Research Division - Analyst of Pharmaceuticals

* Darshit Shah

* Ranvir Singh

* Richa Singh

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, good day, and welcome to the Granules India Limited Q4 FY '20 Earnings Conference Call hosted by Edelweiss Securities Limited. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Ankit Hatalkar from Edelweiss Securities Limited. Thank you, and over to you, sir.

--------------------------------------------------------------------------------

Ankit Hatalkar, Edelweiss Securities Ltd., Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

Okay. Thank you, Stephen. Good evening, everyone. On behalf of Edelweiss Securities Limited, I, Ankit Hatalkar, welcome you all to the Q4 FY '20 earnings con call for Granules India Limited. From the management, we have Mr. Krishna Prasad Chigurupati, Chairman and MD; Ms. Priyanka Chigurupati, Executive Director, GPI; and Mr. Sandip Neogi, Chief Financial Officer. Over to you, Richa.

--------------------------------------------------------------------------------

Richa Singh, [3]

--------------------------------------------------------------------------------

Thank you, Ankit. Good evening, everyone. I welcome you all to Granules India Limited Q4 FY '20 and Full Year '20 Earnings Conference Call. I would like to mention that some of the statements made in today's discussion may be forward-looking in nature. The nature involves several risks and uncertainties that may lead to different results. So with this, I would like to hand over the call to the management for their opening remarks, which would be followed by the question-and-answer session. Over to you, sir.

--------------------------------------------------------------------------------

Krishna Prasad Chigurupati, Granules India Limited - Chairman & MD [4]

--------------------------------------------------------------------------------

Thank you, Richa. Ladies and gentlemen, thank you very much for joining our Q4 end of the year results con call. In these challenging times, I hope each and every one of you and your families are safe and doing well. We, as a global population, are today facing an unprecedented crisis through all the suffering, which is unimaginable. The world has united to find a vaccine and remedies to deal with the invisible enemy, the coronavirus. I am hopeful that we, as a human race, are capable, and we'll learn to live with this situation for some time and finally get through this successfully. At Granules, we had faced innumerable challenges on various fronts. But we're able to put our best foot forward and slowly get over most of these challenges. Each of my colleagues at Granules and our various partners across our supply chain had gone through immense suffering during the initial weeks to get back our operations to near normalcy. They could not have done this without the support of their families. And I am reminded that it takes a crisis to bring people together and bring out the best in them.

I would like to thank each and every employee and the families behind these employees for understanding the importance of working in an essential service industry like ours. While as a company, we did everything possible to safeguard our staff and the community around us and also spent more than INR 20 crores towards this, I salute our frontline warriors and their families for the sacrifices they made and stood together as 1 team with 1 objective. Over the next few months, we will ensure to put the safety of our employees first, but we'll strive our best to ensure we meet the needs of patients across the globe.

I would like to address another key point before moving on to the financials. Recently, there has been a lot of correspondence regarding the presence of NDMA in metformin. Earlier in March, we had released a statement stating that the U.S. FDA has tested our samples of metformin from the market for generic glucophage IR and has concluded that NDMA had not been detected. This was done in response to a citizen petition filed by a company. Post this, we received another IR from the U.S. FDA and were requested to send samples of API and FD of metformin IR and ER from certain batches. Recently, we received communication from the U.S. FDA stating that the tested samples from a few lots of the company's API and finished dosage tablets "did not detect NDMA." That said, there is still some ongoing activity between the company and the FDA and the company will notify the stock exchange as the communication progresses.

Now coming back to the financials. Let me talk of revenue. Let me first give you the financial and business perspective of Q4. The fourth quarter revenue stood at INR 400 crores compared to -- INR 600 crores, sorry, compared to INR 613 crores in Q4 FY '19, which is a decrease of 2% year-on-year. Sequentially, we saw a decrease in revenue from INR 700 crores in Q3 '19 to INR 600 crores in Q4 '20, which is a decrease of 15%. The main cause for the reduction was the export restriction placed on paracetamol in March and also the supply disruptions of certain key raw materials due to shutdowns and logistics issues due to the pandemic.

For the year ended FY '20, revenue grew by 14% from INR 2,279 crores in FY '19 to INR 2,598 crores in FY '20. The API sales were flat over the previous year, while that of PFI and FD grew by 9% and 27%, respectively. The increases were mainly from the U.S. and Europe riding on the higher volume sales of FD. The 5 core molecules-driven business has witnessed decrease in sale of 5% in absolute terms compared to the same quarter of last year and has contributed 80 -- 85% of our total revenues during the quarter. The reasons for this reduction are: restriction on paracetamol; lockdown in the last week of March; and also increased contribution from other molecules. The sales breakup as per business verticals and regions are presented in our investor presentation, which is available on the website.

Regards gross margin, for the quarter, the gross margins moved from 45.9% to 53.5% year-on-year, which is due to the launch of new products at our U.S. facility GPI and also increased FD sales from 52% to 57% of the total sales in the respective quarters. For the year ended FY '20, the gross profit improved by 5.8% over the previous year from INR 1,024 crores to INR 1,318 crores, which was mainly due to higher FD sales and increased contribution from GPI business over the previous year.

EBITDA for the quarter without impairments stood at 20.3%, whereas it was 15.9% in the corresponding quarter of the previous year, which is a growth of 4.37%. EBITDA with impairment of USpharma, I'm sure all of you know that we had invested in this company quite some time ago, the impairment -- EBITDA with impairment stood at 16.7%, a growth of 80 basis points from Q4 of FY '19. EBITDA for the year stood at INR 525 crores, including the INR 22 crores impairment, of -- which is a 35% increase over the EBITDA of the previous year which was INR 384 crores. The primary reasons are increased capacities of metformin which we had commissioned in the past and are now being used for most of our internal as well as external customers. Better FD margins and new product launches from GPI have also contributed to increase in EBITDA over the previous year. Our API unit, Unit #4 in Vizag, had also started contributing to EBITDA growth with higher-margin products.

PAT for the quarter stood at INR 92 crores, while in the same quarter last year it was INR 64 crores, which is a growth of 44%. PAT for FY '20 stood at INR 335 crores as compared to INR 236 crores for FY '19, which is a growth of 42% year-on-year. PAT for FY '20 without onetime write-offs, such as gains or losses from the sale of JVs, impairment and tax reversals, stood at INR 338 crores, which is still a growth of 43% from that of FY '19. We have made a clear shift in our strategy to concentrate more on profitability with high-margin products rather than chasing the top line.

Research and development. We stand committed to continue to invest in our R&D and the overall R&D expenditure for the year stood at INR 108 crores, out of which INR 79 crores have been charged to the P&L in the current year. From Q3 of the current year, the R&D expenses have been charged off in the profit and loss account on a more conservative basis and thereby increasing the R&D spend. This conservative approach is also making our balance sheet stronger, with lesser accumulation of intangible assets in both India and the U.S.

JV stake sale. During the current year, the company had divested its stake from both the noncore joint ventures, Granules Biocause Pharmaceuticals and Granules OmniChem Private Limited and has recorded a profit of INR 28 crores, which is recorded as an exceptional item in the financials. The long-term capital gain tax on the above was INR 28 crores, thereby nullifying the total exceptional benefit in the current year. The cash proceeds from OmniChem deal was received during May 2020.

USpharma. This year, we took an impairment of INR 22 crores in USpharma against our investment. We took a conservative approach by writing off this amount due to the delays in product filings and approvals. We also took a hit of INR 11.2 crores this year against milestone payments made for certain products, which we licensed from the company.

Gross debt. This year, we have reduced our gross debt from INR 991 crores from the previous year to INR 884 crores in the current year. Current depreciation of the Indian rupee in March 2020 has increased the year-end gross debt number by INR 36 crores. On a foreign currency basis, the gross debt reduction is 17%, whereas at a rupee basis, this is 11%. We would like to emphasize that we were able to reduce our short-term working capital debt despite an increase in our working capital requirement by improved cash management.

Cash-to-cash cycle. I'm happy to share the progress we have made towards reducing the cash-to-cash cycle of the company. We have started the year with INR 110 crores (sic) [110 days] of working capital cycle, which we managed to reduce to 104 days by the end of the year, which had helped in maintaining the downward trend in short-term debt. We are in touch with our key customers and selective set of suppliers to see what best possible payment terms can be achieved, which will help us maintain the working capital cycle.

Free cash flow. Free cash generated from stand-alone business in FY '20 was INR 265 crores. In addition, we have received the funds from the sale of Hubei Biocause to the tune of INR 112 crores, a total of -- which is a total of INR 377 crores. This is an increase from the free cash position of negative INR 38 crores for the year FY '19.

Status of buyback. As most of you know, the buyback was launched yesterday and a letter was sent out -- a letter of offer was sent out to our shareholders. The buyback activities continue to be on track, and we expect to complete the process by the first week of July.

With this, ladies and gentlemen, I would like to open the floor for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question is from the line of Ashwini Agarwal from Ashmore Investment Management.

--------------------------------------------------------------------------------

Ashwini Agarwal, Ashmore Equities Investment Management (US) LLC - Non-Discretionary Strategic Advisor [2]

--------------------------------------------------------------------------------

Greetings. Wonderful numbers in spite of very, very difficult circumstances. I mean, in light of the circumstances, I think these are very good numbers, congratulations. A few questions. One is, how do you see the environment in the coming year? I mean, you had one off issue last quarter, which included supply of some raw materials, some transportation bottlenecks and, of course, the restriction placed by the government on export of paracetamol. How do you see things in the current quarter? And what would you like us to think about when we look at the current financial year?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [3]

--------------------------------------------------------------------------------

Ashwini, this is Priyanka. First of all, thank you. So like you said, yes, there was a gap in revenue in Q4, that kind of moved into Q1 as well. As you know, there has been an upliftment of the restriction of paracetamol in the recent past. And now we are free to dispatch any quantities of product as needed. And that said, we do have a significant increase in demand for paracetamol itself. So we -- and we have a very strong order book as we speak. So we have started producing product and that is going seamlessly. There's also increased demand for other products. The primary increase will be seen in the U.S. products in terms of dispatches. So while we do manufacture and supply product in Q1, on a consolidated basis, the numbers might be a little bit lesser because of the sales cutoff. So that's how we're looking at Q1. But going forward, we're hoping that the COVID situation eases out a little bit. And we're hoping to continue manufacturing as we are today. And just to give you an indication, today our manufacturing is going on up to 90%, 95%, if not more levels depending on the facilities. And during the last couple of months, we did not have any supply disruption except for March. A little bit of February and March, we've had some issues with receiving raw materials that has affected our revenues quite a bit. But going forward, we see that to ease out a little bit.

--------------------------------------------------------------------------------

Ashwini Agarwal, Ashmore Equities Investment Management (US) LLC - Non-Discretionary Strategic Advisor [4]

--------------------------------------------------------------------------------

Okay. So you had a couple of years ago made...

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [5]

--------------------------------------------------------------------------------

Ashwini, I am sorry to interrupt you. Could you be a little bit louder, please?

--------------------------------------------------------------------------------

Ashwini Agarwal, Ashmore Equities Investment Management (US) LLC - Non-Discretionary Strategic Advisor [6]

--------------------------------------------------------------------------------

Yes, yes. No. In terms of guidance, I mean, you had said that revenue should grow at 20% on a compounded annual growth rate basis a couple of years ago, and so it should -- that should continue to be in place. Would that be correct?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [7]

--------------------------------------------------------------------------------

Yes, Ashwini, that, we're still guiding for the same 20% top line, 25% bottom line growth. That said, I do want to mention 2 points: One is that our focus as a company has moved more towards profitability. So even if you see a slight dip in revenue, it will be made up in profitability; now the second point is that as of now, we've spent about INR 17 crores, INR 18 crores on employee expenses for COVID-related activities. If this eases out, then we will not see any significant impact on profitability, and we should be able to maintain the guidance. If this does go on for a few more months or quarters, then we will see an impact on the profitability.

--------------------------------------------------------------------------------

Ashwini Agarwal, Ashmore Equities Investment Management (US) LLC - Non-Discretionary Strategic Advisor [8]

--------------------------------------------------------------------------------

Okay. And in line with the strong demand that you're seeing for your core products, is there a change to your investment plans? How are you looking at CapEx? Could you give me the CapEx number for the financial year just completed? And what would be the plan for the current financial year?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [9]

--------------------------------------------------------------------------------

The CapEx numbers they are talking.

--------------------------------------------------------------------------------

Krishna Prasad Chigurupati, Granules India Limited - Chairman & MD [10]

--------------------------------------------------------------------------------

Let me take that, Ashwini. We do see that this year, we will be producing much more than what we anticipated. And we see that we will be doing about 1.8 to 1.9x asset turns. And the time will be coming where we'll have to invest a little bit more in CapEx for extra capacity. We are very carefully evaluating the situation. And like we always said, we will try to control our CapEx, but when needed, and when we see opportunities, we also said that we will invest. However, that said, we will never think of debt. We will have enough cash flows, comfortable cash flows to invest into whatever CapEx is needed in the next few years.

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [11]

--------------------------------------------------------------------------------

Ashwini, to answer the second part of your question, the CapEx that we spent this year was INR 156.6 crores. And in terms of our strategy going forward in terms of how we're thinking, all the products that we know are going to be an extension of our core molecules are going to be backward integrated to the level we can. So even if you look at the presentation, this year, we've started to mention that 70% of our R&D spend will be focused on building our core molecules and further strengthening our core molecules. And the remaining will be spent on some other -- some opportunity products that we see going forward. So that's how we're looking at the growth for our core business. I hope that answers your question.

--------------------------------------------------------------------------------

Ashwini Agarwal, Ashmore Equities Investment Management (US) LLC - Non-Discretionary Strategic Advisor [12]

--------------------------------------------------------------------------------

Yes, yes, it does. A couple of housekeeping questions. One relates to the other income number for the fourth quarter of INR 22.5 crores, if I could get the breakup of that? That's 1 question. And the second one is, with capital gains tax of INR 27 crores in light of -- if I put the 2 transactions together, Biocause and OmniChem, I mean it appears to a little high. So if you could help me understand those 2 numbers, please?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [13]

--------------------------------------------------------------------------------

Sure. So the capital gains for OmniChem as pre-tax was INR 52 crores and for Biocause was INR 69.25 crores standalone. This was a total of INR 121 crores. The capital gain tax was 22.8%, which was INR 27.8 crores in actual numbers. With respect to the other income, I will let Sandip answer the question.

--------------------------------------------------------------------------------

Sandip Neogi, Granules India Limited - CFO [14]

--------------------------------------------------------------------------------

So other income is INR 10.05 crores, which is basically the Hubei money, and ForEx gain is INR 8.81 crores. Yes. So basically, these are Hubei-related transaction ForEx and other transaction-related ForEx coming to INR 18 crores.

--------------------------------------------------------------------------------

Ashwini Agarwal, Ashmore Equities Investment Management (US) LLC - Non-Discretionary Strategic Advisor [15]

--------------------------------------------------------------------------------

So should that be treated as a one-off or operational income? I should take it as one-off, right?

--------------------------------------------------------------------------------

Sandip Neogi, Granules India Limited - CFO [16]

--------------------------------------------------------------------------------

Yes. We feel that it should be treated as a one-off because these are all kind of ForEx gain and losses. Hubei, definitely, yes.

--------------------------------------------------------------------------------

Ashwini Agarwal, Ashmore Equities Investment Management (US) LLC - Non-Discretionary Strategic Advisor [17]

--------------------------------------------------------------------------------

Yes. And so -- Priyanka, just coming back to the capital gains tax, I thought that there was a loss on the Hubei transaction. So I mean, how did -- how does that show up as a capital gain from a capital gain tax perspective?

--------------------------------------------------------------------------------

Sandip Neogi, Granules India Limited - CFO [18]

--------------------------------------------------------------------------------

Yes. So actually, at a standalone level, in both the cases, there was profit. But as you -- as it's a JV consolidation, in a consolidation scenario, all your [years] profit gets accumulated to your investment. And therefore, at a consol level, there was a less profit situation. So when you calculate the taxes, it's based on the standalone we mentioned, which, based on the numbers, both had capital gain taxes to be paid.

--------------------------------------------------------------------------------

Ashwini Agarwal, Ashmore Equities Investment Management (US) LLC - Non-Discretionary Strategic Advisor [19]

--------------------------------------------------------------------------------

Okay. So it's a net cash at the subsidiary level, which gets netted out in this consolidation calculation, which is why you have a tax to accommodate that.

--------------------------------------------------------------------------------

Sandip Neogi, Granules India Limited - CFO [20]

--------------------------------------------------------------------------------

Right, right, right. So while the standalone was profitable, at a consol level, it was breakeven.

--------------------------------------------------------------------------------

Ashwini Agarwal, Ashmore Equities Investment Management (US) LLC - Non-Discretionary Strategic Advisor [21]

--------------------------------------------------------------------------------

Yes, because you left value behind. That's fine. Okay.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

The next question is from the line of [Vishal Bohra from Emkay Ventures].

--------------------------------------------------------------------------------

Unidentified Analyst, [23]

--------------------------------------------------------------------------------

Congratulations to the management for an excellent set of numbers in light of the situation and the guidance given earlier. Sir, a few points. So firstly, we have, over the last couple of years, systematically, I would say, undone some of the investments that we had made over the preceding 5 to 7 years, right? When I look at OmniChem, we have now sold off. We have also now taken an impairment in USpharma. So if you can just help understand as to -- while you have given some commentary around it, but if you could just, again, help us understand where did things go wrong in these initiatives? And because we have another initiative coming up in terms of the onco block, how comfortable should investors be towards the new investment in light of these write-offs or sale?

--------------------------------------------------------------------------------

Krishna Prasad Chigurupati, Granules India Limited - Chairman & MD [24]

--------------------------------------------------------------------------------

Vishal, let me tell you, nothing has gone wrong or nothing is negative, it's only a timing. And also Biocause, as you know, has been highly profitable. But then the continued expenses on effluent control in China didn't make sense for us to keep on. You know we are not getting cash from there. It's only profits in the books. So with that -- that, we felt is a wise decision to get rid of it. And whatever cash we get, we thought we can reward the shareholders. And coming to OmniChem, it's still a great business, but it's long term. It's going to take a long time for us to start getting returns. And again, it doesn't fit into our core strategy. So we thought that there is so much to do in core areas. And so we thought it's better that, again, we exit that.

Now coming back to USpharma, USpharma, again, there's a lot of potential. The USpharma makes dermal patches and lidocaine patches and other things, Nitro-Dur, that's a brand that they sell. And also, they are also making gummies of CBD. CBD, as you know, is the hottest thing now today. And there's potential, again. But then again, that's going to be delayed. So we thought -- and again, that's not our area. We don't have direct control. Just having -- we are not an investment company. We are a manufacturing company. So we thought it's better that slowly we even get out of that. And also since the incomes are going to be delayed, we thought it's very prudent and conservative to sort of impair a little bit of that investment. And if the returns are going to be much more delayed, we may impair more; but if the returns come in quicker, we may not impair. So basically right from charging R&D to our P&L -- and also if you have realized last quarter, 2 ANDAs that were approved, which are in the opioid space, which still have a great potential; but right now, there's a little uncertainty on it. Now we see a lot of pickup of sales from other manufacturers. Still, we took a very conservative approach and did an impairment of almost close to $3 million...

--------------------------------------------------------------------------------

Sandip Neogi, Granules India Limited - CFO [25]

--------------------------------------------------------------------------------

$2.2 million.

--------------------------------------------------------------------------------

Krishna Prasad Chigurupati, Granules India Limited - Chairman & MD [26]

--------------------------------------------------------------------------------

Yes, $2.2 million. So we are acting as a very conservative company. And definitely, nothing has gone wrong. If we just have the patience and if we decide to act just like an investment company, not like a manufacturing company focusing on our strengths, things would have -- things would go well. But we just want to focus on our core capabilities today.

And with regard to onco unit, onco is a new area for us. Again, that's also going to be a very long-term return. So -- and like I always said, it's just not onco. It's onco cum other APIs. We have a huge block where we spent more than the onco block. And that -- in that block, we have validated about 5 APIs, which we are going to use for our own internal development. We have already started using them for our FDs. There are a lot of products. And as we file these products and before we get approvals, we are going to invest a little bit more money and increase the capacity of these products. So we will see -- we expect to see more revenues and profitability coming out of the API block as compared to the onco block. But onco in the long run is definitely going to be good. But now we are trying to make sure that we get in returns earlier than just sticking to onco. And this is the growth engine. As you know, we are an integrated company. And our entire -- the secret of our growth is being integrated right from APIs all the way to finished dosages. And all the new products which we are filing in the FD space, we need to integrate backwards. So this Unit 5 in Vizag is going to be the next growth engine for our future growth. And definitely, I think this is going to pay off.

--------------------------------------------------------------------------------

Unidentified Analyst, [27]

--------------------------------------------------------------------------------

Great, sir. Just related to this one, we took a INR 11.2 crore milestone impairment also, right? Or whatever we paid off, it -- booked that as a loss. Has it come above EBITDA? Or where is that sitting in expenses?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [28]

--------------------------------------------------------------------------------

That has come in other expenses, which is pre-EBITDA.

--------------------------------------------------------------------------------

Unidentified Analyst, [29]

--------------------------------------------------------------------------------

So that's over and above INR 22 crores, right?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [30]

--------------------------------------------------------------------------------

Yes, that's over and above INR 22 crores.

--------------------------------------------------------------------------------

Unidentified Analyst, [31]

--------------------------------------------------------------------------------

So my EBITDA should, therefore, be higher by another INR 11 crores?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [32]

--------------------------------------------------------------------------------

Yes, at a YTD level.

--------------------------------------------------------------------------------

Unidentified Analyst, [33]

--------------------------------------------------------------------------------

Yes. Okay. So the INR 121 crores should actually be INR 132 crores then, is that how I read it?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [34]

--------------------------------------------------------------------------------

Sorry, our EBITDA is actually INR 525 crores for the year.

--------------------------------------------------------------------------------

Unidentified Analyst, [35]

--------------------------------------------------------------------------------

No, no. I said, from a Q4 perspective, I -- have you taken the number in Q4, right?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [36]

--------------------------------------------------------------------------------

Yes. The INR 11.7 crores that you're talking about is done throughout the year. This quarter, we only took an impairment -- I mean, we took the impairment of INR 22 crores, and the rest of it was done prior to it. So as a total, the FY '20 number will go up by INR 22 crores plus INR 11.7 crores.

--------------------------------------------------------------------------------

Unidentified Analyst, [37]

--------------------------------------------------------------------------------

Okay, sure. My next question is related to the R&D expense. Just taking from your presentation, the R&D has been continuously trending down over the last 5 quarters. And also you also mentioned that 70% of the incremental R&D would go towards your core business. So my concern or my sort of question on that would be: A, given that the company is now looking at increasing both scale and complexity, and we've been fairly successful for that matter over the last 2 years, given that we are increasing scale and complexity, why should our R&D investments actually be trending down? And my second question is that what is the nature of this investment in core products? And why are we focusing on products, which are already successful. What is the need for incremental R&D there as compared to a whole host of products that you were looking at in Onco and Hi-Po APIs, et cetera?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [38]

--------------------------------------------------------------------------------

Okay. So I'll take a part of the question. The R&D expense, if you look at it in absolute terms, hasn't been growing up that much, maybe INR 10 crores, INR 12 crores year-on-year. But as a percentage of sales, it has gone down because our sales increased. So I wouldn't necessarily say that R&D -- the focus on R&D has gone down by any means. And from this year onwards, it will grow up because we'll start to see even more realizations coming up that we can spend on R&D.

Now the second question is why core products and why not -- basically, why you're investing in core products is that, see, Granules has always said that we are a manufacturing company that focuses on operational efficiencies. We have never said that we are on -- the forerunners in terms of being first-to-file, that's what you need to be in the complexity game. Yes, we are focusing on products that are at various levels of complexities in the U.S. If you've seen our history and going forward, GPI has and will come up with products that are extended release, control substances, control release products. And -- but the number of ANDAs that will be made at GPI will be limited.

Now going forward -- going through the core products, like I said, we are always a manufacturing company that focuses on operational efficiencies. Now we all -- we need a bunch of core products going forward to launch across the world globally to make sure we have a strong base to build up on. So when we say R&D, we don't have those products now. R&D is not just going to be focused on finished dosages. R&D will be focused on APIs and also making those APIs more process efficient, and that will take a few years. Only when you have that cost position and are integrated, will you be able to compete in -- at a finished dosage level. And if you look at every company today, the products that are non-first-line of defense products or products that we're working on to add to our core businesses, they don't have very stable growth. Since our growth is primarily focused on sustainability with -- while meeting our margins, we did realize the importance of increasing our R&D spend on core products was more, and that's how we're moving as a company.

--------------------------------------------------------------------------------

Krishna Prasad Chigurupati, Granules India Limited - Chairman & MD [39]

--------------------------------------------------------------------------------

Let me just add something to this. When -- I think there seems to be a different feeling that core product means only metformin, ibuprofen and paracetamol. In our definition, core products are high-volume products where manufacturing efficiencies make a big difference and where integration makes a big difference. So while we still will expand our metformins and ibuprofens into other markets like Europe and Latin America and other places, we are concentrating on higher value-add products; products, which are 3x, 4x more expensive than the current products, but again, high in volume. So and we -- one of the focus now is on ER products, especially MUPS technology, which is not that easy. There are a lot of people making MUPS, but making them efficiently is a challenge. And Granules has always been good at making anything we do efficiently. So we will be making more and more MUPS products. We have already started filing and a lot of R&D is going to go into these products. So for the same capacity, the revenues from these products will be much higher going forward. So am I clear on that?

--------------------------------------------------------------------------------

Unidentified Analyst, [40]

--------------------------------------------------------------------------------

Yes, sir. That's very helpful. Just one on gross margins. And congratulations, the margins are probably the highest we've seen so far. Should we take this as the new normal -- as a new baseline for '21? This still...

--------------------------------------------------------------------------------

Krishna Prasad Chigurupati, Granules India Limited - Chairman & MD [41]

--------------------------------------------------------------------------------

Yes. We can think that as the new normal, definitely. And like I always said, like 20% is where -- 20%, 21% is where we will be. And gross -- if you are talking about gross -- I was talking of EBITDA. But if you're talking of gross margins, I mean, I can definitely say we'll be a little above or around 50% at any point in time, and we may do better.

--------------------------------------------------------------------------------

Unidentified Analyst, [42]

--------------------------------------------------------------------------------

All right. And what was the impact, sir, of COVID-19? You mentioned in the call in April, early April, that there would be some revenue loss due to logistical reasons and otherwise. Can you just help us quantify the, say, revenue loss that would have happened because of non-booking and corresponding EBITDA level impact for us?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [43]

--------------------------------------------------------------------------------

So I will address the revenue figure right now. So we are looking at anywhere between INR 60 crores and INR 70 crores as a loss from revenue in March alone.

--------------------------------------------------------------------------------

Unidentified Analyst, [44]

--------------------------------------------------------------------------------

INR 60 crores to INR 70 crores?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [45]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Unidentified Analyst, [46]

--------------------------------------------------------------------------------

And at an EBITDA level?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [47]

--------------------------------------------------------------------------------

About 30% EBITDA margin.

--------------------------------------------------------------------------------

Unidentified Analyst, [48]

--------------------------------------------------------------------------------

30% is it or 40%?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [49]

--------------------------------------------------------------------------------

30% of that would be EBITDA margin.

--------------------------------------------------------------------------------

Unidentified Analyst, [50]

--------------------------------------------------------------------------------

So the cost for this has not been booked, the operational cost?

--------------------------------------------------------------------------------

Krishna Prasad Chigurupati, Granules India Limited - Chairman & MD [51]

--------------------------------------------------------------------------------

No, no.

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [52]

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

Unidentified Analyst, [53]

--------------------------------------------------------------------------------

I mean these -- if I take the same gross margin for these products as the baseline for Q4, that works out to about 53% gross margin for the INR 60 crores, INR 70 crores. So the -- is this the gross margin that we should add to the EBITDA overall? Or should we add only 30% of the lost revenue?

--------------------------------------------------------------------------------

Sandip Neogi, Granules India Limited - CFO [54]

--------------------------------------------------------------------------------

Yes. So I think the cross margin that we are looking at for Q4 will be kind of -- as we calculate it, it will be in and around that level.

--------------------------------------------------------------------------------

Unidentified Analyst, [55]

--------------------------------------------------------------------------------

No, no. So what I'm saying is that, let's say, you have INR 600 crores is revenue and 53.5% gross margin is the reported number for Q4. Now you had a INR 60 crore, INR 70 crore lost revenue, I will say, because of deferment or whatever reason, right? If this revenue had been booked, it would have had a gross margin similar at 53.5% maybe?

--------------------------------------------------------------------------------

Sandip Neogi, Granules India Limited - CFO [56]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Unidentified Analyst, [57]

--------------------------------------------------------------------------------

So should I take 53.5% of the lost revenue and add it to my EBITDA? Have you booked the operational cost for this lost revenue in Q4 or have you not booked it?

--------------------------------------------------------------------------------

Sandip Neogi, Granules India Limited - CFO [58]

--------------------------------------------------------------------------------

No, no. So our -- most of our expenses are fixed in nature. So obviously, the manufacturing overhead has not been booked to the products and the [AMC]. All other things, which are more or less fixed in nature has to be spent, so that has been spent.

--------------------------------------------------------------------------------

Unidentified Analyst, [59]

--------------------------------------------------------------------------------

So therefore, possibly a higher number, say, maybe 40%, 45% of this, I should take as EBITDA, right? So maybe your EBITDA would have gone up by, say, about INR 25 crores to INR 30 crores had this...

--------------------------------------------------------------------------------

Sandip Neogi, Granules India Limited - CFO [60]

--------------------------------------------------------------------------------

That's what I said. That 30% of INR 60 crores or the -- INR 70 crores, so INR 20 crores would have been [higher].

--------------------------------------------------------------------------------

Operator [61]

--------------------------------------------------------------------------------

The next question is from the line of Aditya Khemka from DSP Mutual Funds.

--------------------------------------------------------------------------------

Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [62]

--------------------------------------------------------------------------------

Sir, a few questions. Firstly, on the North American sales that we booked...

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [63]

--------------------------------------------------------------------------------

Sorry, can you be a little bit louder? I am not able to hear you at all. And could you please repeat your name?

--------------------------------------------------------------------------------

Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [64]

--------------------------------------------------------------------------------

Sure. This is Aditya Khemka from DSP Mutual Fund. So my question was on your North American sales. So your North American sales, do you sell through your own front-end partner only? Or do you have like a co-distribution agreement with other entities in the United States?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [65]

--------------------------------------------------------------------------------

So the North American business is divided broadly into 2 segments -- 3 segments: one is our Granules USA, that's a fully owned subsidiary; Granules Pharma is a fully owned subsidiary. Granules USA sells products through our partners. So that's primarily a B2B business. But Granules USA also has another small subsidiary called Granules Consumer Health, which is our OTC front-end division. So the OTC front end that goes directly to the wholesalers and retailers is Granules Consumer. And Granules Pharmaceuticals is our front-end for the U.S. prescription products in addition to being in R&D and manufacturing side as well. So -- and then the Canadian business is primarily B2B as well. We also have 2 partners that we work with on 2 of our core molecules. The sales go through India, but they supply the products to the U.S. division.

--------------------------------------------------------------------------------

Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [66]

--------------------------------------------------------------------------------

Understood. So in your revenue split, when you give North America as INR 1,400 odd crores for 2020, that is completely your sales to either the distribution in the U.S. as in the 3 large distributors or the retailers there for the OTC business. This does not involve a B2B element? Or does it involve a B2B element?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [67]

--------------------------------------------------------------------------------

It's all inclusive, Aditya.

--------------------------------------------------------------------------------

Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [68]

--------------------------------------------------------------------------------

Okay. And do we know how much is B2B? I mean are you calling that number out, out of this?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [69]

--------------------------------------------------------------------------------

I don't have the details, but I can have them send to you. And if you could please contact Richa, I can give you the exact details post the call.

--------------------------------------------------------------------------------

Krishna Prasad Chigurupati, Granules India Limited - Chairman & MD [70]

--------------------------------------------------------------------------------

Aditya, let me clarify here. When we started our business in the U.S. for Rx, we had these 2 partners; 1 for metformin, 1 for ibuprofen. But as we progressed with our GPI, our own manufacturing facility, all the products that we were launching are being done by ourselves, our own front end. Since we have a good relationship with the partners for such a long time, we deliberately took a call not to disturb any of that business, but all new businesses going forward will be done by ourselves.

--------------------------------------------------------------------------------

Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [71]

--------------------------------------------------------------------------------

Understood. Got that question, sir. Very helpful. Secondly, if I just look at your revenue trajectory over the last 4, 5 years, the rate has been put in the presentation, you -- obviously, your North America piece has grown disproportionately, whereas some of that growth may have come on the cost of your domestic business, your Indian business, and also maybe to some extent over your Latin American business. So could you help us understand the difference in economics in this business, the reason for the preference to the U.S. or the North American business versus, let's say, Latin American or an Indian business?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [72]

--------------------------------------------------------------------------------

Aditya, sorry, sorry. I am really sorry, but could you please slow down and just speak a little bit louder?

--------------------------------------------------------------------------------

Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [73]

--------------------------------------------------------------------------------

Sure. Is this any better, Priyanka?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [74]

--------------------------------------------------------------------------------

Not really.

--------------------------------------------------------------------------------

Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [75]

--------------------------------------------------------------------------------

I'm not sure what's wrong. Okay, okay. I'm trying my best here. So let's see. So the question -- I'll repeat my question. If I just look at the revenue trajectory for your different segments, your North American business growth seems to be coming on the cost of growth of your Latin American and your Indian business. Any particular reasons you would like to call out for the preference of the North American business over your Latin American or Indian business?

--------------------------------------------------------------------------------

Krishna Prasad Chigurupati, Granules India Limited - Chairman & MD [76]

--------------------------------------------------------------------------------

Okay. Aditya, let me take that. Right from inception, maybe 35 years ago, we were always a U.S.-centric company. Even when we made simple paracetamol API, we were selling in the U.S. the API. In fact, we were the second company from India to sell API into U.S., first being Dr. Reddy's with ibuprofen. And also U.S., we have excellent contacts with all the 3 big distributors, many other companies. And U.S. also is quite a profitable business in spite of what people say. Yes, there have been price erosions, but still it's more profitable than other markets. So we are not really growing business at the cost of other markets. Other markets are not -- are growing, but not at the same level like U.S. So we being a U.S.-centric company, we have been focusing on that. But of late, like I mentioned a little while ago, we have also started filing of our own dossiers in Europe and also LatAm. We are also trying to grow our business there. And what we have leadership in the U.S. today for certain products, we want to extend it into a leadership in the world. So we are working towards it. But even going forward, U.S. will still be a major part of our business.

--------------------------------------------------------------------------------

Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [77]

--------------------------------------------------------------------------------

Understood, sir.

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [78]

--------------------------------------------------------------------------------

I would like to add that U.S. and Europe put together, regulated markets have always been a focus of the company and will continue to remain so.

--------------------------------------------------------------------------------

Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [79]

--------------------------------------------------------------------------------

Perfect. Just 1 last question from my side. I understand the focus on fixed dosage formulations. Conventionally, they have been the higher margin business for many companies. But given the recent turmoil in China, given the recent turmoil in the entire supply chain for the global pharma majors, have you seen any noticeable difference in the profitability of your intermediate and API business? Or it largely has improved across the 3 segments?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [80]

--------------------------------------------------------------------------------

Has there been any increase in profitability in what business? Could you please repeat that?

--------------------------------------------------------------------------------

Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [81]

--------------------------------------------------------------------------------

The intermediate -- the PFI and the API business, has there been a meaningful improvement in realization? When I say profitability, I mean to imply realization. So has the pricing, for instance, gone up in the API and the PFI business compared to what it used to be, let's say, a year back or 2 years back?

--------------------------------------------------------------------------------

Krishna Prasad Chigurupati, Granules India Limited - Chairman & MD [82]

--------------------------------------------------------------------------------

Basically, Aditya, we as a company focus on maintaining our profitability. We don't take undue advantages when the market opportunities arise. We also have arrangements with most of our customers that when our raw material prices increase or decrease, we pass on the benefits or -- these benefits to them. So yes, here and there, we see some -- we have some opportunistic businesses, but most of our business is long term. So we have seen some increases. But most of these increases are in proportion to the raw material increases sometimes. And -- but as more FDs grow, FDs are a little more profitable. And again, FDs are profitable as long as you're integrated backwards. If you are buying the APIs from somebody else, the profitability will not be the same. So as our FD percentage increases, you have seen the percentages have been increasing, the overall profitability for the company is increasing.

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [83]

--------------------------------------------------------------------------------

And just to add to that, while there was no direct increase in API and PFI margins, the -- like CMD just mentioned, the ability to be able to supply finished dosages through these APIs and being integrated has been -- has enabled us to grow our gross margins and EBITDA levels.

--------------------------------------------------------------------------------

Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [84]

--------------------------------------------------------------------------------

Got you. I understand that. Much appreciate it. Just -- sorry, 1 last question I had. When it came to the Indian government talking about Make in America -- Make in India, and then they're giving incentives to the domestic API manufacturing and intermediate manufacturing, most of the industry is telling me the incentive, although called out too much in the media, is not that meaningful for the industry in terms of size and the way it has been designed. Would you care to comment on that?

--------------------------------------------------------------------------------

Krishna Prasad Chigurupati, Granules India Limited - Chairman & MD [85]

--------------------------------------------------------------------------------

I agree with you, Aditya. I think there seems to be a little more hype than reality here. Yes, the government is very keen on making products in India, reduce dependencies on imports. And this is not just today, this started actually about 8 years ago, but not much progress has been made. Now because of the current situation, there's a lot of talk going on and government has clearly earmarked lots of funds, but what it will translate into, we are not sure. But as Granules, we are very keen now on investing. If the government is going to help us, fine; even otherwise, we are very keen on investing some funds as we go by into some of the key intermediates that we depend on from China. So again, the timing is the key. We don't want to invest indiscriminately. We will monitor our cash flows, free cash, and then we'll take calls. However, the good news is we have been investing on R&D for most of these key raw materials, key starting materials, to make them more efficiently, not only in terms of cost, also in terms of carbon footprint. We have developed the least polluting processes and also cost-efficient processes. And the minute we have very good cash flows, which we now have very clear visibility, we will be taking up some of these projects. We are evaluating everything very carefully as of today.

--------------------------------------------------------------------------------

Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [86]

--------------------------------------------------------------------------------

Right. Sorry, I had 1 more follow-up, if I may. Just in terms of our exposure to the U.S. dollar, given that our North American revenues have now grown extremely disproportionately versus rest of our business and our debt profile is also coming down, are you guys planning to hedge your debt -- sorry, hedge your receivables or your exposure to the U.S. dollar? Or how do you plan to do this with -- to do...

--------------------------------------------------------------------------------

Krishna Prasad Chigurupati, Granules India Limited - Chairman & MD [87]

--------------------------------------------------------------------------------

We always -- since we are a net ForEx earner all along, not now, last 30 years, we never believed in hedging any of our debt or any hedging at all because personally, I always felt hedging when you have a natural hedge is more a gamble than safeguarding ourselves. So we do not plan to hedge anything going forward, too.

--------------------------------------------------------------------------------

Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [88]

--------------------------------------------------------------------------------

Yes. Sir, just a clear -- and I'll be done. Because earlier you had enough debt and you had lower sales, so you had almost a perfect natural hedge, but now your sales have disproportionately gone up and your debt has actually come down. So that maybe leaves you a little more vulnerable to the fluctuation of U.S. dollar than it did maybe 4, 5 years back. So just something to think about. I think I'm done with my questions, sir.

--------------------------------------------------------------------------------

Krishna Prasad Chigurupati, Granules India Limited - Chairman & MD [89]

--------------------------------------------------------------------------------

You know this is something that -- anyway, we'll take this into account, and we'll have a good discussion with some experts, Aditya. I'm sure you are all great experts on this. And when you say something, we're going to take this seriously and study this in detail.

--------------------------------------------------------------------------------

Operator [90]

--------------------------------------------------------------------------------

(Operator Instructions) The next question is from the line of Darshit Shah from Nirvana Capital.

--------------------------------------------------------------------------------

Darshit Shah, [91]

--------------------------------------------------------------------------------

Congratulations on a great set of numbers. Sir, my question pertains to the recent NDMA issue in metformin extended release tablets. And I understand FDA has recalled some of other competitors tablets from the U.S. market. So sir, just want to understand, how serious this issue could be? Do you think there could be more recalls? Or like -- or there could be even national recalls, like such happened in ranitidine or so? Or do you think this could be just a normal recall issue, could not be a serious issue that much? Can you please comment on that?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [92]

--------------------------------------------------------------------------------

Yes. I'll take your questions. From our understanding, in our correspondence with the FDA, everything that we've been reading, this is not going to be a ranitidine level of a recall. Right now, the FDA has been -- has cleared most metformin IR products. And metformin IR, if I am not mistaken, is back on track, and everything seems to be fine. Yes, there are some -- recently, the FDA has recalled some metformin ER products from 5 companies, out of which, 1 company has an active share in the U.S. and they have initiated a recall. Some other companies do not have that much market share. So in terms of obstruction, it's not going to be very significant. Now I'm not very sure about how much market share these companies have in other markets and what the impact is on the other markets, but I'll comment on the U.S. The risk associated for us is, at the moment, minimum. Like CMD addressed in his opening remarks, we have been in constant correspondence with the FDA. That said -- and they have cleared our product as per the last communication. They have cleared our API, our metformin IR and metformin ER. These are samples that have been tested from the market. So actually -- let me take that back. These are samples that have been sent by us in response to their request. So samples from specific retained batches that we've had. Now going forward, there is still some ongoing correspondence with the FDA. And as of now, we -- everything looks positive, but that said, unless we have official correspondence from the FDA, we wouldn't like to make an official comment on that.

--------------------------------------------------------------------------------

Darshit Shah, [93]

--------------------------------------------------------------------------------

Okay. So there's just a follow-up on it. So in terms of...

--------------------------------------------------------------------------------

Operator [94]

--------------------------------------------------------------------------------

Mr. Shah, sorry to interrupt, sir. But for any follow-up, request you to rejoin the queue, please. The next question is from the line of Ravi Sundaram from Sundaram Family Investment.

--------------------------------------------------------------------------------

Unidentified Analyst, [95]

--------------------------------------------------------------------------------

Sorry, I was on mute. Let me just quickly put forward the question. Sir, during March con call, you had mentioned there is some impact in the current quarter as well due to COVID and in the previous -- in the response to the previous caller, you mentioned the impact of around about INR 60 crore for the March quarter. And even if we don't have an exact number for the current quarter, would it be a number greater than this? Or would the impact be lesser than this? And a quick follow-up. At what revenue level would you think at a firm level, would you need to start with incremental CapEx? Right now, you're running at, I think, about INR 2,300 crore, INR 2,400 crore revenue run rate. Let's say, would you look at incremental CapEx when you hit INR 3,000 crores or something? So that's my second question.

--------------------------------------------------------------------------------

Krishna Prasad Chigurupati, Granules India Limited - Chairman & MD [96]

--------------------------------------------------------------------------------

Okay. Just to recap a bit from the March con call, we mentioned that if the situation stays as it is with the lockdown that's happening, we will still meet our guidance numbers. But if it continues for a longer time, we could get hit. Now having lost some revenues in March, definitely, we can make up for those in this current quarter to some extent and to a fairly decent extent. That would, of course, also increase our EBITDA numbers and profitability a bit. But still, like I said, for the whole year, I would still like to keep to my guidance, whatever we have given. And if we get more, that's always welcome.

So now coming to capacity, like I said, in one of the first questions, we are touching like 1.8x asset turns, and we are likely to go up a little higher. So a stage will come in the next 1 or 2 years where we will need capacity. We are judging this very carefully, analyzing the whole situation. And definitely, we will have to invest. But like I again said and I keep on reiterating, we will do this out of our own free cash flows. Our free cash flows, also our EBITDA to -- operational cash conversion also has been pretty recent. Free cash flows also will keep increasing.

--------------------------------------------------------------------------------

Operator [97]

--------------------------------------------------------------------------------

The next question is from the line of Ranvir Singh from Sunidhi Securities.

--------------------------------------------------------------------------------

Ranvir Singh, [98]

--------------------------------------------------------------------------------

Sir, just a clarity on -- you said the loss of revenue in fourth quarter was INR 60 crore, INR 70 crore, was that all related to paracetamol? And secondly, because the situation has started improving from May, so from perspective of Q1 FY '21, can we see similar kind of revenue loss, especially in the API segment, which has now restriction is over by end of May? So from perspective of that, Q1 '21, if you could guide us on this front?

--------------------------------------------------------------------------------

Krishna Prasad Chigurupati, Granules India Limited - Chairman & MD [99]

--------------------------------------------------------------------------------

Okay. To answer your question, the revenue loss in the last quarter was just not on paracetamol, it's paracetamol and few other products, which were due to logistics issues. And definitely, there will be an added revenue and profitability in this year. However, like I said, while we are very positive, I would still like to stick to my guidance of 25% growth impact.

--------------------------------------------------------------------------------

Operator [100]

--------------------------------------------------------------------------------

The next question is from the line of Cyndrella Carvalho from Centrum Broking.

--------------------------------------------------------------------------------

Cyndrella Carvalho, Centrum Broking Limited, Research Division - Analyst of Pharmaceuticals [101]

--------------------------------------------------------------------------------

Just a clarification...

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [102]

--------------------------------------------------------------------------------

I'm sorry, but we can't hear anything you're saying.

--------------------------------------------------------------------------------

Operator [103]

--------------------------------------------------------------------------------

Ma'am, can you move to a better reception area, please?

--------------------------------------------------------------------------------

Cyndrella Carvalho, Centrum Broking Limited, Research Division - Analyst of Pharmaceuticals [104]

--------------------------------------------------------------------------------

Is this any better?

--------------------------------------------------------------------------------

Operator [105]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Cyndrella Carvalho, Centrum Broking Limited, Research Division - Analyst of Pharmaceuticals [106]

--------------------------------------------------------------------------------

Yes. So on the debt reduction plan, if you could help us with?

--------------------------------------------------------------------------------

Krishna Prasad Chigurupati, Granules India Limited - Chairman & MD [107]

--------------------------------------------------------------------------------

Okay. On the debt reduction, okay. I think CFO, Sandip is going to answer this, and he is the most competent person.

--------------------------------------------------------------------------------

Sandip Neogi, Granules India Limited - CFO [108]

--------------------------------------------------------------------------------

Debt reduction will be in two ways. One is that the long-term loans that we have, that will get paid off on a yearly basis. Then we will also -- as we continue to generate free cash, we will be taking less amount of PCFC than -- and short-term loans. And therefore, our debt position will continue to improve.

--------------------------------------------------------------------------------

Cyndrella Carvalho, Centrum Broking Limited, Research Division - Analyst of Pharmaceuticals [109]

--------------------------------------------------------------------------------

And any benefits of lower oil prices into our P&L?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [110]

--------------------------------------------------------------------------------

Any benefits of lower oil prices?

--------------------------------------------------------------------------------

Cyndrella Carvalho, Centrum Broking Limited, Research Division - Analyst of Pharmaceuticals [111]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Krishna Prasad Chigurupati, Granules India Limited - Chairman & MD [112]

--------------------------------------------------------------------------------

No, we don't see anything due to lower oil prices. It's more today, some of the key materials that come out of China are more related -- the costs are more related to environmental compliances. Oil definitely has not shown any positive trend towards reduction so far. However, if we decide to go all the way backwards into the key materials, like benzene and other things, and start making the key starting materials, yes, oil prices will definitely have an impact, but that's still some time away. So it doesn't make a sense talking about it today.

--------------------------------------------------------------------------------

Operator [113]

--------------------------------------------------------------------------------

The next question is from the line of Charulata from Dalal & Broacha. As there is no reply from the current participant, we move to the next question from the line of Vishal Bohra from Emkay Ventures.

--------------------------------------------------------------------------------

Unidentified Analyst, [114]

--------------------------------------------------------------------------------

Sir, just on a positive note, if the metformin issue persists for our competitors, could this be sort of an opportunity for us to meaningfully consolidate our leadership in metformin in U.S. and regulated markets? Like just giving as an example what Strides had mentioned in ranitidine that they were able to gather as much as 80% market share because of disruption with their competitors. So something -- a similar trend for us is possible?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [115]

--------------------------------------------------------------------------------

See, yes and no. Yes, because there is definitely a disruption in the market. And no, because we -- like you said, the 80% market share levels for -- yes, it's something that we wouldn't be able to touch because there hasn't been a disruption at that level. Now, will we grow our market share? Definitely. And I am assuming to the level of 10%, 15% this year, but I don't think it would be more than that at this point. But I would be able to comment better on this next quarter.

--------------------------------------------------------------------------------

Unidentified Analyst, [116]

--------------------------------------------------------------------------------

And are we supplying API to any of these competitors who got disrupted?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [117]

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

Krishna Prasad Chigurupati, Granules India Limited - Chairman & MD [118]

--------------------------------------------------------------------------------

We use it all ourselves.

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [119]

--------------------------------------------------------------------------------

We use our API ourselves and for some PFIs to some other customers, none of who have been issued a recall.

--------------------------------------------------------------------------------

Unidentified Analyst, [120]

--------------------------------------------------------------------------------

Sure. If we look at the guidance and we look at our performance vis-à-vis guidance last 2 years, so we've -- I think from a INR 136 crore base in FY '18, we are now at INR 335 crores, so INR 200 crores added. Should we consider that as our gross margins trend up this year and with the new launches that we are planning in U.S., I think 9 launches is what mentioned in the presentation, should we expect that the 25% guidance if -- because that business is not anymore being disrupted due to COVID from a manufacturing perspective, should we assume that we can actually do much higher than 25%? Just a qualitative response.

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [121]

--------------------------------------------------------------------------------

See, internally, we are looking at much higher numbers, but 25% is the guidance that we're providing. So to answer your question, yes. But again, there's a lot of things that we have to be wary of, especially with the COVID situation. But to answer your question in a word, yes.

--------------------------------------------------------------------------------

Unidentified Analyst, [122]

--------------------------------------------------------------------------------

And when do these new molecules...

--------------------------------------------------------------------------------

Operator [123]

--------------------------------------------------------------------------------

Mr. Bohra, sir, sorry to interrupt. But for any follow-up, request you to rejoin the queue, please? The next question is from the line of Ranvir Singh from Sunidhi Securities.

--------------------------------------------------------------------------------

Ranvir Singh, [124]

--------------------------------------------------------------------------------

Can you give some indication about the profit of GPI for this year?

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [125]

--------------------------------------------------------------------------------

You're talking about the profit of GPI?

--------------------------------------------------------------------------------

Ranvir Singh, [126]

--------------------------------------------------------------------------------

Yes, yes.

--------------------------------------------------------------------------------

Priyanka Chigurupati, Granules India Limited - Executive Director of Granules Pharmaceuticals Inc. [127]

--------------------------------------------------------------------------------

So at an EBITDA level without impairment, we were at INR 57 crores for the year. But with impairment of the USpharma that we mentioned earlier, it was at [INR 35.9 crores]. At a PAT level, we were negative 8% -- or negative 3%.

--------------------------------------------------------------------------------

Operator [128]

--------------------------------------------------------------------------------

Thank you. Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference over to Mr. Ankit Hatalkar for closing comments.

--------------------------------------------------------------------------------

Ankit Hatalkar, Edelweiss Securities Ltd., Research Division - Research Analyst [129]

--------------------------------------------------------------------------------

Thank you, everyone, for attending this call. Stay home. Stay safe. Thank you.

--------------------------------------------------------------------------------

Krishna Prasad Chigurupati, Granules India Limited - Chairman & MD [130]

--------------------------------------------------------------------------------

Thanks again, Ankit. And I would really like to thank Ankit and Edelweiss for hosting this call. Thanks, once again.

--------------------------------------------------------------------------------

Operator [131]

--------------------------------------------------------------------------------

Thank you. Ladies and gentlemen, on behalf of Edelweiss Securities Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.