Why is this paracetamol maker bleeding?

The trusty paracetamol has remained the first line of defence against fever for over seven decades now. But it seems like Granules India , the leading paracetamol API manufacturer, is hit with a fever with no quick cure.

In the last 12 months, its net profit has tanked 22 per cent YoY. Notably, its operating margin shrank to its lowest levels since FY18. Also, in the six months ending September 2023, its cash flow from operations contracted 91 per cent YoY!

However, its historical numbers tell a different tale. Between FY13 and FY23, Granules India recorded an annual revenue and profit after tax growth of about 19 and 32 per cent, respectively.

This sudden shift in fortunes had us intrigued. So we decided to dig deeper and uncover what is ailing this pharma giant. However, before we dive into the details, let's quickly recap what Granules India does best.

About the company

Granules specialises in manufacturing APIs, key components that give medicines their efficacy. Apart from the API, it makes pharmaceutical formulation ingredients (PFIs), which are used with APIs to produce medicines, and finished dosages of generic medicines.

It primarily focuses on five commonly used generic molecules, collectively contributing 84 per cent of its total revenue in FY23, with paracetamol alone accounting for 45 per cent.

Now that you know what it does, let's look into what halted its growth in the last 12 months.

Challenging business environment

The declining cost of critical raw materials used in producing APIs has reduced market prices, directly affecting revenues. Additionally, price erosion in the generic medicine segment across the US and European markets has shrunk profit margins, as the segment contributed nearly 80 per cent of the company's total revenue on a TTM basis.

Operational challenges

Granules India faced cyber security issues in the first quarter of FY24, which disrupted the company's production in a few manufacturing lines for almost an entire month. This issue resulted in a YoY revenue and PAT decline of 3 and 63 per cent, respectively. The PFI segment took the worst hit as revenue generated from the segment declined by 37 per cent on a YoY basis.

Production delays affected the Q2 financials as the company faced multiple order delays and even a few cancellations. It even had to pay a penalty of Rs 21 crore. Operational inefficiencies also increased inventory and debtors, which shrank its CFO (cash flow from operations) YoY by nearly 91 per cent as of September 2023.

However, Q3 witnessed a marginal growth in revenue and profitability of Granules India.

The road ahead

Granules has faced multiple obstacles in the current financial year. The API and PFI business has declined in the nine months ending December 2023. However, despite all the challenges, the company has managed a few positives; it has recorded a double-digit volume growth in the nine months ending December 2023. Moreover, its finished dosage segment grew by 23 per cent in the same period.

From a long-term perspective, the company is looking to expand its product portfolio and finished dosages capacity while also improving its raw materials sourcing to reduce dependence on suppliers and achieve backward integration. Hence, it has incurred a capex of nearly Rs 800 crore in the last two financial years and planned another Rs 1,000 crore capex in FY24 and FY25.

On the finished dosages front, the company has received multiple new approvals for its applications in the US, European and Canadian markets, and it will start commercialising these products in FY25. Moreover, Granules is developing a new plant for capacity expansion of finished dosages by 30 per cent, which will commence commercial production in the second half of FY25.

Simultaneously, the company is developing two plants for producing PAP and DCDA, which are key API ingredients for paracetamol and anti-diabetic medicines. The move will help it penetrate deeper into the supply chain to achieve backward integration and expand its profit margins. The company expects to commercialise both plants by the end of FY25.

The market has also continued to reward the company despite the disappointing financial performance as the stock price is up 66 per cent in the last year, and it trades at a P/E of 28.5, which is way beyond its five-year median of 15.7, as of March 1, 2024. However, whether or not the company can execute its capex plans successfully remains to be seen.

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