Granules India (NSE:GRANULES) Q2 2027 Earnings Call

0:00 Ladies and gentlemen, good day, and welcome to the Granules India Limited Q2 H1 FY 'twenty seven Earnings Conference Call. As a reminder, all participant lines will be in the listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Please note that this conference is being recorded. I now hand the conference over to Ms. Pachi Hamdi from MEFG Investor Relations. Thank you, and over to you, ma'am. Thank you,. On behalf of Granules India Limited, I extend a very warm welcome to all the participants on the q two and h one FY twenty seven financial results discussion call. Today, on the call, we have doctor Krishna Prasad Chigurupati, chairman and managing director, miss Priyanka Chigurupati, executive director, mister Mukesh Surana, chief financial officer, doctor P.

1:06 V. Srinivas, chief technology officer and mister Sanjay Kumar, CEO of Sendtites India Private Limited. Before we begin the call, I would like to give a short disclaimer. This call contains some of the forward looking statements, which are completely based on our expectations, beliefs, and opinions as of today. The statements are not a guarantee of our future performance and involve unforeseen risks and uncertainties. With this, I would like to hand over the call to Krishna Prasad, sir, for his opening remarks. Over to you, sir. Thank you. Thank you, Prachi, and a very good evening, ladies and gentlemen. Thank you for joining us today and for your continued interest in Granules.

1:53 We have uploaded our detailed quarterly presentation, and I trust you have had a chance to go through it. Let me first provide an update on our Vagilapur facility. The U. S. FDA conducted a CGMP inspection of the facility from October 19 to October 30. This was the first FDA inspection since the warning letter issued in February 25, following the 2024 inspection. The inspection concluded with a Form four eighty three containing level observations. Based on our assessment, none of the observations relate to data integrity, cross contamination or facility upkeep.

2:49 They concern investigations, change control, process and equipment qualification, visual inspection controls and documentation practices. There is no impact on manufacturing or distribution of products from this site. We will submit a comprehensive response within the stipulated fifteen business days with detailing our collective and preventive actions. We believe these observations are addressable and remain focused on demonstrating the effectiveness and sustainability of our quality systems. Coming to our performance. Q2 was another strong quarter for Granules.

3:35 Revenue grew 20% year on year to INR 15,600 million, crossing INR 15,000 million in quarterly revenue for the first time in our history. EBITDA grew 21%, while PAT increased 39% to INR $18,000,000 This also marks our eighth consecutive quarter of sequential revenue growth. These results were delivered despite a challenging operating environment. Geopolitical developments continue to put pressure on input and logistics costs across the industry.

4:24 We expect some of these pressures to persist with customer price adjustments following with the lag. Against this backdrop, the consistency of our performance gives us confidence in the underlying strength and momentum of the business. In our September investor presentation, I spoke about our return to growth as the beginning and beginning to a new journey. Our growth strategy has multiple pillars: controlled substances under our Make in America platform complex generics and early market opportunities, geographical expansion, oncology and peptide CDMO.

5:18 The progress across our business is beginning to validate this direction. North America, our largest market, continued to grow, led by controlled substances. Europe sustained its growth momentum, while our efforts to develop the rest of the world markets are beginning to contribute. Our peptide CDMO business through SEN also grew year on year. This platform remains in its build out phase with the near term focus on strengthening execution, customer delivery and profitability. One of the most significant changes within Granules is the evolution of our R and D and product development strategy.

6:11 We are pursuing differentiated opportunities, addressing greater technical complexity and building the potential for early market entry. Our first to file strategy is a visible outcome of this transformation. Over the last three quarters, we have announced filings for three potential sole first to file ANDAs. Generic Dynavil XR or amphetamine based extended release OGT, sodium oxybate and ruxolitinib ER. Several more such products are under development, with filings targeted over the next six to seven quarters.

7:05 These opportunities have a different commercial profile from conventional generics. Successful early entry, particularly into products with significant technical or regulatory barriers can create substantial value. The timing and extent of this contribution will depend on regulatory and litigation outcomes, and the upside may be uneven across quarters. Alongside these opportunities, we have 26 ANDAs awaiting approval, providing a strong pipeline for the next wave of launches. On sustainability, we continue to make steady progress through our assessments and CRISIL scores.

7:57 Four of our facilities have also achieved zero waste to landfill certification. We remain focused on making these improvements an integral part of how we operate. Granules today is fundamentally different from the company they were a few years ago. We have a broad portfolio, deeper development capabilities and multiple avenues for growth. Our focus remains on disciplined execution, strengthening quality, delivering reliable reliability to customers and translating our investments into sustained growth and earnings.

8:43 With this, I hand over to Sanjay to provide a more detailed update on the progress of the peptide vertical. Over to you Sanjay. Thank you, sir. Coming to SANKIND, we continue to make progress across the regulatory compliance, commercial development and the expansion of our capabilities in Switzerland and India. During the quarter, Send Chemical site in Xerox successfully completed its Swissmedic GMP inspection with no critical findings and acceptable GMP compliance status. This reflects a meaningful progress in strengthening our quality system and regulatory capabilities compared with previous inspection two years ago. On the commercial front, we are seeing strong momentum. A Theragunovsky related pharmaceutical project has been revived after nearly two years driven by progress in its clinical development.

9:37 We have also renewed engagement on supply partnership with two major peptide CDMO players and initiated discussions for a second year manufacturing campaign with another CDMO partner following successful delivery last year. Importantly, our increased business development efforts, industry outreach, and reengagement with long standing customer relationship have resulted in a strong inflow of RFPs and RSQs during the recent months. Our focus now is on converting these expanding opportunity funnel, leveraging sales expertise and our extended development capabilities. In parallel, we are advancing our CRDMO platform. Our oligonucleotide scientific leadership is now on board with additional team members expected to join over the next quarter.

10:29 The r and d teams in Zurich and Hyderabad are already collaborating closely as we prepare to expand our footprint across both peptides and oligonucleotides. On the manufacturing side, our India project team is in place and progressing the planning and design of our proposed integrated peptide manufacturing facility adviser. At Zurich, our immediate priority remains operational execution and delivery readiness as we prepare for a more active fourth quarter of this financial year. We are aligning our manufacturing plans and resources with scheduled customer offtakes while accommodating customary December holidays and the planned maintenance break during December. Overall, our priorities are focused towards strengthening customer engagement, converting our growing pipeline into the business and building an integrated CDMO platform capable of supporting the next phase of growth for Centaurus.

11:27 With this, I hand it over to Mukesh, our CFO, for taking us through financials. Thank you, CMD and Sanjay. Good evening, everyone. I will now walk you through the financial performance for Q2 FY 'twenty seven. Revenue for the quarter was 15,600 million, up 20% year on year and 6% quarter on quarter. Growth was broad based across our businesses and key markets, supported by steady demand for our product portfolio and higher growth of complex generics. Gross margins. Gross margin was 10,039 million, up 18% year on year and 4% quarter on quarter. As the business continued to scale, gross margin stood at 64.4%, down 134 basis points year on year and 126 basis points quarter on quarter.

12:19 The moderation primarily reflected higher input costs arising from the ongoing conflicts in West Asia, partly offset by lower cost safety inventory carried into the quarter in USA. We continue to monitor input costs and freight costs closely and are engaging with the customers to pass on increases wherever possible, also with the time lag. EBITDA and profitability. EBITDA was INR 3,376 million, up 21% year on year and stable quarter on quarter. EBITDA margin stood at 21.6, up 19 basis points year on year and down 131 basis points quarter on quarter. The quarter on quarter movement in margin was driven by higher input costs and logistic costs due to the ongoing conflicts in West Asia.

13:09 R and D. R and D expenses were 8,885 million or 5.7% of sales, up 26% year on year and 1% quarter on quarter. R and D is the engine of our transformation from volume led to a value led innovation driven company. We have intentionally focused our efforts on high barrier areas such as C2, ADHD, oncology mux and complex formulations, where limited competition allow us to build a differentiated and lasting position. PBT. PBT was INR2434 million, up 38% year on year and 1% quarter on quarter. PBT margin improved to 15.6% from 13.6% in Q2 FY 'twenty six, an improvement of around 200 basis points.

14:01 Net debt. We closed the quarter with a net cash position of INR 8,280 million compared with net debt of $1,012,000,000 in Q1 FY 'twenty seven. Basic of balance proceeds of warrants moved up moved as a cash position, strengthening our balance sheet and supporting growth, capacity expansion and R and D. Working capital. Net working capital to sales was 30% compared with 29 in Q1 FY 'twenty seven and twenty nine percent in Q2 FY 'twenty six and remained stable in this range. Cash conversion cycle was two thirty one days compared with two twenty nine days in Q1 FY 'twenty seven. This movement was a result of a deliberate inventory buildup, mainly in The U. S. To ensure some supply continuity in line with the demand.

14:51 Cash flow from operations. Cash flow from operation was INR $650,000,000 compared with INR 3,874 million in Q1 FY twenty twenty seven and INR1937 million in Q2 FY 'twenty six. This was mainly due to a planned increase in working capital to support the business growth. CapEx. CapEx was INR1304 million compared with INR $890,000,000 in Q1 FY 'twenty seven and INR 2,112 million in Q2 FY 'twenty six. We continue to strengthen our manufacturing and packaging capabilities. ROCE. ROCE was 17.6%, up 138 basis points year on year and broadly stable quarter on quarter compared with 18%.

15:37 This improvement was achieved even as we continue to invest in working capital and CapEx to support our next phase of growth. With this, I open the floor for questions. Thank you. Thank you, sir. We will now begin with the question and answer session. Anyone who wishes to ask a question may press star and then one on the touch tone telephone. If you wish to remove yourself from the question queue, you may press star and then 2. We have the first question from the line of Praful Kapoor from Antifragile Thinking. I've got two sets of questions, one for the Gadilapur and one set of questions for CDMO. So maybe I can start with CDMO.

16:57 So Sanjay, on the operating performance, first half peptide revenue is coming out at 109 crores with the cumulative EBITDA loss of about 28 crores. Right? And to reach the target of $2.40 crores, which was the minimum target, we need 21 percent bigger h two and about... Or about 131 crores. And you also kind of committed to bad profitability for FY twenty seven end. Are both targets still on track? So so thank you, sir, for the question. So, typically, as you would have seen in the last year, our h two is heavier than the h one. With with the revenue that you projected will be somewhere between a bit neutrality to the fact neutrality depending...

17:49 It largely depends on the kind of product slash project mix that we do. We are hopeful to close near our stated ambition and all the key to that lies in our smooth Q4 executions where the off takes are the maximum from the customers. So we are absolutely hopeful of meeting our target that we have set ourselves at the beginning of the year. That's helpful. And Sanjay, regarding the customer wins and capital allocation, so there was a target of three customer wins worth about $200,000,000 plus annually. How many have been signed so far? And is the INR 300 crore India CapEx investment contingent on securing these relationships or that's gonna proceed regardless?

18:44 Thank you. So, Sajal, I cannot comment on the first part where you spoke about few customers and few 100,000,000. We have never gave that number and we never projected that. So I'll let it pass. The the second one is the investment in India facility being contingent upon any any particular tie up with the customers. No. We we are absolutely going ahead investment in in India facility at Wisek operations. That's the minimum that we need to build because now the next set of growth has to come from the supporting capacity that we'll be building both in India and expansion of our capacity in Zurich as well.

19:32 So they're not contingent and we are going ahead with our YZ client. The planning is already underway with our project team on board with us. So Sanjay, that 10,000,000 thing is coming out of the q one call. So you said account customer wins only if they get into a potential annual size of 10,000,000 plus, and I think I know. Something along those sides. So, Sajal, in your commentary, I heard couple of 100,000,000 references and that's all. Okay. Okay. No. Fair enough. Yeah. Yeah. Okay. But any... Anything anything signed there or still under discussion? And So so they are under discussions. We are we are absolutely seeing traction as as I announced in my opening remarks.

20:20 There's a diagnostic project revival post customer progressing its assets in the clinical pipeline, and that that has can be supported from Zurich itself. The couple of partnering with the other large CDMO players requires investment in capacity. We have seen a very positive uptick on multiple fronts with those two large CDMO players that require support of capacity from India as well. No. That's that's helpful. Thank you. And on the Gagilapur, so the existing products can continue, but it kind of hampers our CMO, CDMO relationship because new products, I believe, and and couple of them were on patent manufacturing assignments that cannot now start because the observation, the warning letter has not been lifted.

21:15 So the question is, what did the US FDA inspection reveal about Kappa effectiveness that our internal reviews and three thirty audits kind of missed? I'll take that question, Sachin. The FDA the remediation plan was completed except for two kappas. And like CMD mentioned, I think even in the press release, we did not get any observations on the points that were stated in the warning letter. Alright. So Priyanka, so these these are all fresh observations that were not part of the original? Yes. Okay.

22:01 And so on that basis, are we getting a sense that because we had the warning letter, is US FDA making it kind of harder? I mean, quote, unquote, teach us a lesson because I've seen this pattern with every company. Almost every company who gets a warning letter or an import alert never gets to clear the reinspection in the first attempt. Azil, all I can tell you is, I cannot comment on what you said, but this was a two week audit with three inspectors. Was pretty stringent. It was stringent. That's all I can say. Thank you so much. That is all for today. Thank you so much.

22:53 Thank you. We will take the next question from the line of Tushar Manudhani from Mojilal Oswal Financial Services. Sir, just personal question on Gagila Pool. Like what is the current capacity utilization given that we have the inspection going on or the remediation measures which we are going to implement? So what is the current capacity utilization? Tushar, the current capacity utilization are similar what it was earlier, which we said around 75% is what we are using DGP. Got it, sir. And what while we would respond to you as a day within fifteen working days, but if you could share what kind of timeline we'll require to address the issue.

23:44 To share, typically, takes about... I mean, it should be about ninety to one hundred days from data for response, But it all depends how things go. Got it. And lastly, the complex products events of upcoming products, if you could share what are the interesting products that would come in next twelve months? And subsequently, if you could also share what would be the FY 'twenty seven guidance for revenue growth and EBITDA margin? That's it. I'll take the first question. I'll speak about the next six months because when you consider regulatory landscape, twelve months is a little bit farther away. But overall, we have about 26 pending approvals with the FDA.

24:36 In the next six months and to clear this out also, we have about eight pending launches from GGP at this point. We've tech transferred a few of those products to various sites and we will be launching them, a few of the products in Q3 and Q4. You asked us about the interesting products. We have three products being launched from GPI, two of which are controlled products. Those are very exciting, very limited competition and the markets are big. So we're very excited to launch those two products in Q3 and Q4 respectively. And on the revenue guidance, Mukesh will Let me address that on the revenue guidance, Nishat.

25:27 As you know, we don't give guidance, but all I can tell you our current rate of growth and the current progress we are making will continue. There will be no change in that. All right, sir. Thank you, Ashish. Thank you. We have the next question from the line of Shashank Krishnakumar from MK Global. Please go ahead. Hi. Thanks for taking my question. Just the first one on other expenses this quarter, which went up Q o Q. I think R and D was broadly flat. So what is it that drove this increase in other expenses? Continue, sir. No, continue. Also, just wanted to check. So broadly, the assumption we are working with is probably certain onetime expenses like remediation, etcetera, might start moderating going forward. So in the current scenario, is that still a reasonable assumption to sort of work with?

26:33 Yes, Shashank. I will address both of your questions. In other expenses, the significant increase in the current quarter is tight cost, which has gone up because of the West Asia conflict. The rates of the shipments have gone up. Second question with respect to remediation expenses, Q4 onwards, it will moderate significantly. Q3 also will be similar to Got it. And just the second one on the share of complex generics. I think there's a marginal decline Q o Q. Now is this got to do with any quarter to quarter variation in complex generics? Or and given that Q3, Q4 will see some newer Control Substantial launches, should we expect this to sort of again increase going forward?

27:22 Absolutely. This will be on an upward trajectory. Quarter on quarter, some there's a lot of compliance related ups and downs that you can see, like for any other products. And when I say compliance, sometimes the pickup is a little low, sometimes it goes much higher than historical numbers, etcetera. So this is quarter on quarter. The short term, medium term, long term projection for The U. S. Products is just on an upward trajectory. Okay. Thank you. That's it. Thank you. We have the next question from the line of Prashmi Shetty, Cryptolix Capital. Please go ahead. Yeah. Thanks for the opportunity. Just on the API and the PSI segment, you know, the growth is pretty strong during the quarter and also in the first half.

28:14 Earlier, this API and PSI segment were used mainly for the captive consumption. But is it fair to assume that this time we are getting better pricing and therefore the sales are higher? Yes, Kashmir. Predominantly, it was still a captive. And some of the opportunities in terms of geographic expansion, looking at particularly in EMEA and LatAm region, we are growing better in FY. Okay. And your are we seeing a higher volume growth also or the entire growth is mainly coming from the better pricing? It is primarily volume and pricing is also better. With the cost increase, the price is also has been recovered.

29:04 Okay. So should we assume that similar kind of growth momentum to continue even in second half in terms of API and PFI segment? Yes, similar trajectory, but we are not giving guidance. Okay. Understood. And on The U. S. Front, Priyanka, you mentioned that eight launches are expected, right, in Q3 and Q4 total? No. I said eight products pending from GGP. And those approvals, once they are approved, we launch. Out of this, we filed two to three products from GPI. Those will be launched in Q Q4, Q5 depending on when we receive the approvals.

29:53 But in total, we have about five launches within the next two quarters. Three launches are well, all of them are in The U. S. Market. Two products are controlled and the other products are uncontrolled, but we have noncontrols. We have five products coming up. Understood. So five... Out of five launches, we are planned in US, and out of that three launches, two are controlled systems. Sorry. All of them are planned in The US, not three. All of them are planned in The US. Okay. Two controlled. Okay. And in the first half, how many launches have we done? First half, we haven't done any launches. No launches. Okay. Okay. But one thing I do want to just state is that even through the warning letter, even now, there is no disruption to the existing the growth in the existing products, existing business.

30:51 So even H1, we have seen an increase in demand for the Gagilapur sites. That is still on the ramp up, which means we have received certain awards this past H1, which we are going to start servicing, say, December, January. So there will be an increase in GDP as planned. And of course, growth from The U. S. Will be ongoing from the GPS side. Got it. And on the gross margin front, for this quarter, obviously, quarter on quarter, it is down because of higher cost increases, inflationary pressure. Is it fair to assume that in the subsequent quarters also, the gross margin would be similar in range? Or do you feel the pressure could increase and probably we might see decline in gross margins compared to quarter two?

31:48 Currently, the cost pressures are continuing, and we are continuously working with customers to pass on the prices. But even if I pass on 100 out of 100, the percentage arithmetically will come down. But what we are working on is making sure that we are able to grow the profit as expected, whatever internal plans are. And Rashmi, let me add, some of these projects are being made up as of today and in future too by the ratio of complex products to the legacy products. So that's also going to help us. And like Mubesh said, nothing changes in our growth trajectory. Understood. So you mean that the better business mix can offset some of the cost pressure.

32:35 So at least this kind of gross margin is expected to sustain? May be a little bit here and there. But yes, overall, the profits will be as expected. Understood, sir. Thank you so much, sir. Thank you. We have the next question from the line of Satish Parekh from Unified Mutual Fund. Yeah. My question is from controlled substance business. Your ADHD portfolio is mostly extended release product, and you have gained a good market share there. I want to understand your plan for immediate release. Are you planning upcoming filing from immediate release or what?

33:29 We primarily have extended release products. And by nature of what you said, it falls within a complex category. We do have a few immediate release products also, but we'll launch them as needed. It all depends on the quota allocation. We just want to maximize the utilization of the quota and maximize earnings per kg of quota received. Okay. The upcoming two launches are immediate release or extended release? Extended release. Okay. That's from my side. Thank you. Thank you. We have the next question from the line of Yash Mehta from Credit Securities.

34:18 Please go ahead. So hello. I have a few set of questions. So firstly, so with complex generics now contributing around 47% of the formulation's revenue and also the three potential SOL first to file ANDAs already filed. So how should we assess the earning potentials of this pipeline over the next two to three years? And more importantly, like, do you see this opportunity structurally resetting the company's margin profile, or will profitability remain dependent on episodic high value launches? This is just the beginning. That's all I'll say. The margin is going to our margins are going to be on an upward trajectory going forward. I think we'll start seeing first to file within the next two point five years, two point five to three years max and after that it will be on an upward trajectory. You'll see a big change going forward even on the quality of the R and D filing. We already have a few complex filings that we've done that we're expected to launch.

35:22 So yes, it will all keep going upwards going forward. Understood. Understood. And also, while the underlying business is generating like nearly around 25% of ROCE, So the consolidated ROCE remains at around 17.6% with Gnomelli operating at just 25% utilization. And also, like, the peptide CDMO business is still loss making. So given the planned INR 2,000 crore organic CapEx, what gives you guys confidence that incremental investments will generate superior returns? And when should investors expect the gap between core and consolidated ROCE to meaningfully narrow? See, our hurdle rate for investment is not to drag down the ROCE. So as the investment matures, we'll get better ROCE and ROCE will keep inching up.

36:17 Currently, GLS is only 25% utilization. And once it goes to optimal utilization, that will generate additional double digit ROCE, similarly, all other assets as well. And we will expect the same trend for the next INR 2,000 crore also. That all will give a strong double digit ROCE. It. Got it. Yes. Thank you so much. Thank you. We have the next question from the line of Shreya Chatterjee from HLS Capital. Please go ahead. Hi. Thank you for taking my question. I have a couple of questions. Amongst that, the first one is, just wanted to confirm out of the five launches that's happening in the next two quarters, are those of generic lumirase and sodium oxybate, those include those two, or are they going going to be launched in 2028? And when is ruxolitinib going to be launched?

37:15 What was the last product? I'm sorry. What was the last product you said? Ruxolitinib. Ruxolitinib. Ruxolitinib. See, all these all these are litigation based products. I cannot guide on any of them. So to answer your question, no. But that's all I can say. So among these products that are going to be launched or the products that you're filing, are these majorly FTF products? Like, how many FTF products are there and how many complex generics, if I may ask in that way? They're all complex generics. These are not first to file. Okay. And what is your current market share right now in The US in CNS? Well, market share depends product to product, but we are number three in The US with respect to control substances.

38:02 Got it. Got it. And with the launch of steady state of launch of this complex generics and integrated generics, how do you see your margins evolving, like the EBITDA margins evolving? And with the remediation costs also hopefully going away with the Gagalapur, like remediation going away. So how do you see the EBITDA margins evolving in the shorter term this year and also in the medium term? Yes. So the EBITDA margin, currently, we are at 21.6%, which was much higher in Q1. So we dipped by 130 plus basis points. That is primarily because of West Asia conflict. Once this situation settles down, the margin percentage will continue to improve. More importantly, this year, we will try to work hard to ensure that our profit trajectory moves on. So absolute profit will grow.

38:53 Got it. Any sort of quantification you want to give, like for the medium term, how much business points should we expect for It's this very dynamic. So what price of crude today may not be the same crude price one week down the line. So it's very dynamic. It is difficult for me to give some number. Second is we are having a continuous efforts to discuss with customer to get a price pass on. That is also very dynamic. In the longer term, how much should it improve over the course of three years? Shreya, let me summarize. Our growth will continue to be there. Whatever we have been growing it and whatever we have planned will happen, and there's not going to be any big impact in spite of whatever it has.

39:40 Got it. And you are not like you don't want to comment right now on the longer term growth of EBITDA margin? Or did it? No. And lastly, how should we look at the capacity utilization ramp up for your Gagalapur plant going from here and your like the Genome Valley plant going from here? So Genome Valley is under 25% or roughly 25% as of now, which we are expecting by Q4, it will cross 50%. And with respect to Garilapur, currently, is around 75%, but there is a good room for maximizing the product mix as well as utilization. So that also will have additional potential revenue from both sides. Got it. Got it. Thank you. Thank you so much. Thank you.

40:30 Ladies and gentlemen, in order to ensure that the management is able to address all the questions from the participants in the question queue, we request that you kindly limit your questions to two per participant. If you have a follow-up question, please rejoin the queue again. We have the next question from the line of Suhani Singh from ROS Capital. Sir, I had a few questions. So following the recent U. S. FDA inspection at Gadilapur, how could investors assess the potential implications of the observations and upcoming product approvals and commercial operations? Sunny, we are very happy. We are very I mean, we are very glad that there are no observations regarding data integrity, cross contamination or facilities.

41:31 So all the observations we believe are addressable and we have we are going to have a good dialogue with the FDA and we are quite positive about the outcome. So are there any dependencies that could affect the near term launch pipeline? No. The business in Gagilapur will continue as it is and growing with existing products. And but the overall growth will not change. There are a lot of Gagilapur is just one side. The growth is driven mostly the future growth is driven by The U. S, Onco in India and also GLS. So there will be no impact. It will actually be positive. Okay. That's helpful. So while the revenue and EBITDA have grown strongly, the operation operating cash flow declined sharply to INR 65 crores this quarter from INR 87 crores in Q1.

42:24 So how much of this working capital absorption is temporary versus structural? And when could we expect the operating cash conversion to realign with earnings growth? We have received Q1 and Q2 together as H1 because some of the expenditure or cash outflow, which we have incurred in Q2 are have to be seen as H1 outflow. Secondly, the investment in working capital, we have consciously increased from 29% to 30%, but it will be in this range largely plusminus 100 basis points here and there. We have built some inventory in USA for safety stock, both for controlled substances as well as other complex generics. Okay, sir. That's right. Thank you so much.

43:14 Thank you. We have the next question from the line of Geovan, an individual investor. Please go ahead. Hi. I have a question regarding the recent FDA inspection of Galeel, Gareelapur. Do you expect a nine or by classification following your copper response? Or will any observation require another on-site inspection? And could you provide an estimate time line for resolving the warning letter and unblocking the nine pending applications? Thank you very much. I'll answer your question in two bits. Like CMD said multiple times earlier in this... On this call, we think the inspection progressed constructively, and we believe that we can the observations can be fully addressed through our responses and the CAPAs that we put in place.

44:06 With respect to the launches, assuming the observations sorry, the observations can be addressed through the responses, we should start receiving them immediately after. Okay. Thank you. Thank you. We have the next follow-up question from the line of Sachil Kapoor from Antifragile Please go ahead. Yes. Hi. Thank you for the follow-up. Just two quick questions, team. One is on the net cash and the other one is on the gross margin. So I've been looking at the historic trend that Granules has reported on the gross margins. So we... March 2016, we were around 46, 47% gross margin.

45:04 Gross as in end product minus the raw material cost. So material gross margin. Today, we are 65% plus. So broadly, we have gained 1,900 bps, give or take, on the gross margin side. When we were at 46, 47%, because our capacities were fully utilized and our cost base perhaps was leaner, we were reporting 212021% EBITDA. Today, it has significantly higher gross. We are still reporting very close to that 21, 22 number on the EBITDA side. So what I'm trying to understand is how significantly our cost base has gone up. That's one.

45:49 And there is definitely significant deleverage in the system. So both points, if... Mukesh, you can clarify. One is on the cost base. How different is our cost base today relative to where we were in two thousand sixteen, seventeen? And how significant is the deleverage in the system? Thank you. Thank you for this question. And some of the answers you have given yourselves, the cost base has changed, business model has changed. So our gross margin has expanded significantly and that also would mean I have started investing in R and D to continuously have the sustainable gross margin for future pipeline.

46:35 And also my business model has changed from APA to formulation, and now I'm focusing more on complex generics. And also, if you see, we never had U. S. Operations manufacturing site fully run what the current size levels are. The employee cost in USA geography, employee cost in the newly acquired entity same type, all are significantly higher, these cost of employees, right? And you have already answered, there is a significant room for deleverage Once we start increasing our capacity utilization, some of the opportunities and cost leverage will move into EBITDA margin improvements. That's helpful. Mukesh, and then given that we are sitting on INR800 crore plus of net cash on the balance sheet, and of course, we are operating cash flow positive. So every year, we will be adding to that QT minus the CapEx that we do.

47:36 I think net net, is it fair to say that if a customer comes to you for CDMO or otherwise, cash will not be a constraint on the system in terms of, you know, deploying growth CapEx because as far as I remember, Granules balance sheet has never been so healthy on the net cash. Even if we go back twenty years, thirty years since the IPO, we have always carried debt, sometimes excess debt on the books, but this... You know, where we are today on the net cash, that should give us, you know, a lot of flexibility to undertake gross CapEx without diluting equity or taking leverage. You are absolutely right.

48:22 That is also the intent when we have raised this money. So currently, we have a good amount of cash, which will be used for both organic growth as well as inorganic growth. Organic growth, you can see the way we are adding the pipeline would mean additional revenue and also additional working capital for the additional revenue and also the continuous growth CapEx. And in addition to that, we are open and continuously exploring inorganic opportunities. Got it. That's helpful. Thank you so much. That's all from my side. Thank you. Thank you. We have the next question from the line of Sameer Desiwala from Sattman Capital. Please go ahead.

49:10 Hi. Thank you. Good evening, everyone. Dream, I just wanted to make sure that I heard it correctly that the first FTS launch is two and a half years or so of it. Is that correct? Roughly around two and a half years away, two and half to three years away, subject to litigation. But there's also another product that we're going to be filing shortly, which has been an open FTS for a while. That is the product that I'm seeing it will be roughly two point five, three years away. Okay. And in that case, I'm just wondering how do we think about fiscal 'twenty eight and 'twenty nine, the gap years, if I can say that.

49:58 What's going to drive growth in those two years because FDA is quite back ended in that sense? So as soon as we get approvals for the launches that are still pending, we will start launching them in The U. S. In the prior calls, we've mentioned that we are focusing on global expansions of all our products. We've started filing a few products around the world. We've done about six filings in the last no, about eight filings in the last six months. These are the products that will give us mid term revenues well, short to mid term revenues. There's a lot of potential there. And going forward, that will contribute to a large percentage of the overall sales as well. And again, Sameer, just like Priyanka mentioned a little while ago, we have five new launches coming in the second half, out of which two are controlled substances and all complex products, and there's a lot of potential in these products.

51:01 Sorry, just to add to what CMD said, outside of the first two files that we have done, we are also doing other products that are still in the works. And those products and we're licensing a few products as well. So all these products put together will give us short to medium term revenues. I think there's some disturbance. So when you first said six to eight products will drive growth using non U. S. Filings that you have done. Is that was that correct? These are a few products that we've done only in H1. But depending on the country that we're expanding to strategically and the regulations in those countries, there are some products that are subject to approvals within six months, within twelve months, etcetera. So we're very carefully filing key products across geographies and those are the products that will start yielding revenues in the short to mid term as well. And that will also go on.

51:57 While The U. S. Continues to be the biggest market for the foreseeable future, these markets will contribute quite significantly as well. These are pure global expansions of existing products. So there's a huge market out there that is still untapped, and that's what we're looking at doing strategically. Okay. Excellent. Thank you. Very clear. And just finally, can you provide some color on this INR 2,000 crore upcoming CapEx? Yes. This INR 2,000 crore growth CapEx over the next three, four years will be largely into one, expansion of infrastructure and capacity for peptide CDMO, both in Zurich as well as India and other CapEx will be going towards U. S. Platform, enhancing the manufacturing capability and overall distribution.

52:52 Third is on oncology side, where we have certain plans of launches. So accordingly, we need some capacity expansions. And we are also working on multiple KPI expansions based on the capacity utilization levels. So there are multiple round based CapEx programs out there for next three, four years. Amit, it looks like most of them are downstream expansions. Is that the way we should think about it? Not necessarily. So complex and oncology are more of our formulations. And there will be also, as you rightly said, downstream in terms of APA or it can be downstream in terms of improving the barrels and distribution.

53:40 And there will also be a good amount of investment in IT digitalization to improve our quality management system, improve our manufacturing capabilities. Okay. I'll take it offline. Thank you so much. You. We have the next question from the line of Pehal Sharma from DD Capital. I have some set of questions with me. So my first question is that on the peptide CDMO opportunity, could management provide an update on customer engagement, the development programs and the effective timeline for commercial scale revenues? Seljie?

54:28 I'll take that question. See, we are bound by confidentiality agreement with most of our customers, and we cannot disclose that. And I hope you would understand that. In terms of commercial, I think what the journey from an RFP and RFQs to to commercial translation takes it while. We have already waited for some time, and we are seeing... I mean, the last four months has been one of the... In the period of our highest inquiry that we have seen, and that has been on the result of certain measures that we took on a BD outreach. We are seeing a validation of that, and it all comes to execution over next few quarters that we translate them to material...

55:17 Materially movement on on our revenue side. I'm afraid I cannot provide any additional details on this, and we'll take one at a time when when it it does start to transfer. Understood. Understood, sir. And my next question is, like, a while complex generics revenue grew by 28% Y o Y in q two of five twenty seven, and it's shared in the overall portfolio declined to 47% from 50%, right, in q one FY twenty seven. So, like, this integrated generics increasing to 48% from 46%. So, like, could management elaborate on the factors driving this shift in the portfolio mix? And, also, is this largely attributable to the growth trajectory of the, like, integrated generics, Or were there any specific factors impacting complex generics during the quarter?

56:18 And how should we expect the portfolio mix to evolve going forward? Yes. So our medium part we guided is 50% of our formulation portfolio will be around the complex generics. So quarter on quarter, a few basis points here and there is expected, but you will have to see year on year basis. And we I would say we are ahead of what we have stated. And probably, we will be doing more than 50% in the medium term. Panal, do you have any further questions? Thank you.

57:05 We have the next question from the line of Giovanni, an individual investor. I have a follow-up question. I clearly asked about the Rizdalilapur FDA inspection and the nine pending applications. You mentioned you mentioned it that they would be progressively unblocked. Did you mean that COPPA responses are submitted or only once the FDA accepts the corrective actions? And would another on-site inspection be required? Sorry. It's a bit confused for me for me. Thank you. Sorry. I didn't quite understand your... The second half of your question. Can you please repeat that? Yeah. That... If if if if another on-site inspection would be required for for for the gazillionaire pool. At at this point, I don't believe that's required, but it's the FDA. We leave it to the FDA to decide.

57:56 Okay. And the first part of my question, when do you guys expect to get those nine application unblocked? Do you have any timeline approximately? The general process is that after you receive an EIR with a VAI or an MAI, the FDA takes a few weeks, a few months to provide approval. It's usually between thirty and ninety days after receiving the Okay. Jebus, let me also add here, it's nine that are filed from there. But out of that, two are already transferred to our U. S. Facility out of eight. So meant actually, we don't need to get those approvals here. They'll be continued to make in U. S. Okay. Yes, yes, understood. Thank you.

58:48 Thank you very much. Ladies and gentlemen, that was the last question. And with that, we conclude the question and answer session. I now hand the conference back to the management for their closing remarks. Thank you, and over to you, sir. Thank you once again, ladies and gentlemen, for patiently listening to us. And let me conclude by saying we are on a continued growth path and you will keep hearing better and better things from us in future. Thank you once again. Thank you, members of the management. On behalf of MUSG Investor Relations, we conclude this conference. Thank you, everyone, for joining with us today, and you may now disconnect your lines.