Granules India Ltd (GRANULES) Q2 FY23 Earnings Concall Transcript

Granules India Ltd (NSE:GRANULES) Q2 FY23 Earnings Concall dated Oct. 20, 2022

Corporate participants:

Irfan Raeen — Investor Relation

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Dr. K.V.S. Ram Rao — Joint Managing Director & Chief Executive Officer

Sandip Neogi — Chief Financial Officer

Analysts:

Rahul Veera — Abakkus — Analyst

Krish Mehta — Enam Holdings — Analyst

Ashwini Agarwal — Demeter Advisors Llp — Analyst

Rashmi Sancheti — Dolat Capital — Analyst

Priyanka Chigurupati — Executive Director

Varun Basrur — Julius Baer Wealth Advisors India Private Limited — Analyst

Maitri Parikh — Pi Square Investments — Analyst

Tushar Bohra — MK Mutual Fund — Analyst

Koushik Mohan — Ashika Group — Analyst

Maulik Varia — Anand Rathi — Analyst

Suresh Agarwal — Individual Investor — Analyst

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Presentation:

Operator

Ladies and gentleman, good day and welcome to the Q2 and H1 FY ’23 Earnings Conference Call of Granules India Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Irfan Raeen from Orient Capital. Thank you and over to you.

Irfan Raeen — Investor Relation

Thank you, Yashashree. Good evening, everyone. Myself, Irfan Raeen from Orient Capital. We are an Investor Relation Advisor to the company. I hope that all of you and your families are safe and healthy. On behalf of Granules India, I extend a warm welcome to all participants on Q2 and H1 FY ’23 financial discussion call. Today on the call I am joined by Dr. Krishna Prasad sir, Chairman and Managing Director; Dr. K.V.S. Ram Rao, Joint Managing Director and Chief Executive Officer; Ms. Priyanka ma’am, Executive Director, GPI; and Mr. Sandip Neogi sir, Chief Financial Officer.I hope everyone had an opportunity to go through our investor deck and press release that we have uploaded today on exchanges and on company’s website. Before beginning with the call, I would like to give a short disclaimer. This call may contain some of the forward statement which are completely based on our beliefs, opinions and expectation as of today. These statements are not guarantee of our future performance and involve unforeseen risk and uncertainties.

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

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Thank you, Irfan. A very good evening to all of you, ladies and gentlemen, and thank you very much for joining us today. I’m sure all our investors had received the proceeds from the buyback by now and are happy that the company has the interest of the investors as a priority. All of you would have gone through our numbers and Sandip will also take you through them. Let us only dwell on some key indicators. During the current quarter, we continued and improved on our performance on all fronts compared to Q2 of FY ’22 and Q1 of FY ’23. While net profit has grown, the most important and satisfying parameter is the cash position. We had generated operational cash of INR218 crores as compared to INR181 crores during Q1 ’23. After accounting for capex, we generated free cash of INR124 crores compared to INR98 crores in Q1.

As explained in our last call, our focus continues to be free cash and we will continue to focus on this. As of today, we had completed the buyback and had incurred an outflow of INR310 crores including taxes and other expenses. We are confident that after taking this amount and future capex into account, we will end up with a positive cash flow and reduce net debt by the end of the current fiscal year as compared to March ’22. On the business front while we continue to see price erosion in the U.S., we will continue to offset this through increased sales in other geographies and increased focus on operational efficiencies. This has been an ongoing issue for the past many years, but Granules had been able to successfully manage this. On the positive side, the slow downward trend in raw material prices is continuing, but the cost of energy had gone up adding to our cost. The international freight rates, especially for reefer containers, had not reduced much during the last quarter, but we see a downward trend in Q3 already.

The supply of PAP and DCDA, some of our important raw materials, have been stable and we expect it to continue and possibly improve. The political situation in Europe had caused disruptions in raw materials coming out of this region. But for us, we were impacted only on excipients. We are mitigating this by qualifying alternate sources from other geographies. Work on the DCDA project is proceeding smoothly and we expect to see results in less than two years. R&D is progressing smoothly and details of the ANDA filings, approvals and DMS filings are in the investor presentation. While we continue with our current business model and keep trying to grow it, I’m greatly excited that our journey towards Granules 2.4 is proceeding smoothly and we are all excitedly looking forward to the positive outcome from this. As usual, I request our JMD, Dr.

Ram Rao, to take you through this journey. Over to you, Dr. Ram Rao.

Dr. K.V.S. Ram Rao — Joint Managing Director & Chief Executive Officer

Thank you, Mr. Chairman. Good evening, everyone, on the call. I echo the views of the Chairman on a very satisfying second quarter performance of the company. In my last quarter remarks, I spoke about Granules’ long-term strategy on science, technology and innovation. I’m very happy to confirm that our strategy relating to this is on track. We made decent progress on the enzyme and the fermentation technology driven product development and completed proof of concept for a couple of projects. We are also making good progress on the continuous process development effort in DCDA and, as pointed out by the Chairman, we should see the commercialization of this product in the next couple of years.

The R&D and portfolio management strategies are much more robust now and are based on the initiatives of science and technology. And we have also made a very good progress in institutionalizing ESG as a way of doing business for us. All these science, technology related initiatives are going to increase the R&D spend in the subsequent quarters. As also communicated in the last quarter, we see huge untapped market potential for our core molecules in Europe, South Africa and AMEA countries. We have now started expanding in these markets. The first set of the European launch of some of these molecules through our partners is likely to happen during the quarter three.

With this, I hand it over to Sandip for financial highlights.

Sandip Neogi — Chief Financial Officer

Thank you, sir. Let me take me you through the top financial parameters now. Revenue: the second quarter revenue was INR1,151 crores as compared to INR888 crores in Q2 FY ’22, growth of around 30%. This growth is mainly attributed to increased business in the U.S. especially in the API segment. The revenue share of noncore molecules stood at 16%, which is higher mainly because of the increased core sales in the current quarter. Even though in percentage terms, the others have decreased, but in absolute numbers showed a marginal growth. The sales breakup as per business verticals and regions are presented in our Investor presentation, which is available on the website. Value addition, which is basically sales minus cost of material consumed. Value addition percentage in Q2 has contracted by 1.1% mainly due to segment mix as in this quarter API sale was more.

EBITDA and EBITDA margin: EBITDA for the quarter was INR243 crores when compared to INR151 crores in the previous year same quarter, an increase of 61% over the previous year mainly on account of increased business across major geographies. R&D: our R&D spend for the quarter was INR25 crores as compared to INR47 crores in the same quarter in the previous year. It is expected that R&D spending will be in the range of INR40 crores to INR45 crores in each quarter going forward. Net debt: our net debt was INR553 crores as compared to INR613 crores in the last quarter mainly on account of repaying of the long-term debt. Our focus on cash collection has also resulted in free cash of INR124 crores in the current quarter. Cash-to-cash cycle: our cash-to-cash cycle was at 141 days in the current quarter compared to 144 days in the previous quarter. The decrease of three days was mainly attributed to a reduction in the receivable days due to factoring of invoices. Operational cash flow: operational cash flow for the quarter was INR218 crores when compared to INR101 crores in the previous year same quarter. Higher operating profits and the focus on working capital management contributed to higher operating cash flow in the current quarter. capex spend during the quarter stood at INR94 crores.

With this, I open the floor for questions.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] We have our first question from the line of Rahul Veera from Abakkus. Please go ahead.

Rahul Veera — Abakkus — Analyst

Hi, sir. Couple of questions from my end. Just wanted to understand is the gross margin on…

Operator

Mr. Veera, you’re not audible sir. Can you please speak louder?

Rahul Veera — Abakkus — Analyst

Hello. Am I audible now?

Operator

Yes. Please go ahead.

Rahul Veera — Abakkus — Analyst

Yeah. Sir, just wanted to understand that is the gross margin on paracetamol lower than the other products? Because sequentially when the sales have gone up in paracetamol specifically, the gross margin is not up to the mark, you know?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

You’re right, Rahul. Gross margin in para is lesser than other products.

Rahul Veera — Abakkus — Analyst

Okay. Okay. And was there any one-off in this paracetamol sales in this quarter or we are seeing this kind of traction going forward as well?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

No, there is no one-off, Rahul. Actually basically the whole thing came from availability of raw material. Now the supply of PAP has stabilized, we see this going forward. Market was not a problem for us. We had marquee customers and they continue to be with us.

Rahul Veera — Abakkus — Analyst

Sure. Sure. And sir, so if given the incremental sales from paracetamol, and that too from U.S. percentage of sales has increased sharply. But we were targeting to penetrate more markets like European or even the LatAm markets, right? So how will this shape up now? How will the ratio move now?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

You mean paracetamol in U.S. compared to other geographies? Was that your question?

Rahul Veera — Abakkus — Analyst

If paracetamol in U.S. increases sharply.

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Yeah.

Rahul Veera — Abakkus — Analyst

A compared to other geographies?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

No, we have some marquee customers in the U.S. and also we are trying to convert most of them from API to finished dosages. And also our European launch of paracetamol formulations is happening now in this quarter Q3. So there will be increases in both segments, but I think U.S. will be a higher share for paracetamol.

Rahul Veera — Abakkus — Analyst

Okay. Okay. Fair point. So sir, any contracts or large key customers that we would have added in the past couple of quarters?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

No, I don’t think so. These are customers who have been with us with increased wallet share we are getting with them.

Rahul Veera — Abakkus — Analyst

Okay. And sir what will be the capacity utilization of our plant for paracetamol as of now?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Paracetamol is around 90%, 95%. Aaround between 90%, 95%.

Rahul Veera — Abakkus — Analyst

Okay. Okay. Fair point, sir. I will come back in the queue, sir.

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Okay.

Operator

Thank you. We have our next question from the line of Krish Mehta from Enam Holdings. Please go ahead.

Krish Mehta — Enam Holdings — Analyst

Thank you for taking my question. I just had a question to clarify on the finance cost given that the debt has come down. Could you explain what contributed to increasing the finance cost for the quarter and what the blended cost of borrowing was?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

I think Sandip, you should take that.

Sandip Neogi — Chief Financial Officer

Yes. So finance cost has increased actually for everybody because of the SOFR rate has increased. So when we started the year and where we are seeing the SOFR now, there is a 3.5% to 4% increase in the SOFR and that has resulted. The spread has not increased for any of us, but SOFR rate increase has actually resulted in kind of cost of borrowing being high.

Krish Mehta — Enam Holdings — Analyst

And how would you view the finance cost over the next few quarters? As you know when debt comes down, how do you view the mix changing?

Sandip Neogi — Chief Financial Officer

We do not see that the SOFR is coming down drastically. If the SOFR continues at that level, we can only assure you that the spread will not go up so obviously it will be in the same range.

Krish Mehta — Enam Holdings — Analyst

Okay. Thank you so much.

Operator

[Operator Instructions] We have our next question from the line of Ashwini Agarwal from Demeter Advisors Llp. Please go ahead.

Ashwini Agarwal — Demeter Advisors Llp — Analyst

Hi. Good afternoon, team. Thank you for taking my question and congratulations on a very, very solid quarter. So couple of questions. I mean your last, say, six to eight quarters have been unusually challenging. First, we saw very high margins because of COVID related shortages in the industry.

Operator

Mr. Agarwal, sorry to interrupt. Can you use the handset, please?

Ashwini Agarwal — Demeter Advisors Llp — Analyst

Yeah. Is this better now?

Operator

Yes. Please go ahead.

Ashwini Agarwal — Demeter Advisors Llp — Analyst

Yeah. So my question is…

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Ashwini, sorry. There’s still an echo. It seems like you’re on speaker, so we’re finding it a little difficult to hear you.

Ashwini Agarwal — Demeter Advisors Llp — Analyst

Let me come back again. Ma’am, can you take the next question and let me…

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

You’re clear now.

Ashwini Agarwal — Demeter Advisors Llp — Analyst

Okay. So what I saying that, I’m trying to figure out the way forward. Last two years has been very challenging for the company because first, we saw exceptional one-off gains because of COVID related shortages actually in metformin and excessive demand for paracetamol and then we saw product shortages and shipping costs coming down. Now at least on the raw material shortages and shipping costs, things are normalizing. The FB contribution to overall revenues has also gone up and we are kind of right-sizing the same across various geographies. So, if I look at the long-term history, value addition has been more or less around 50%. And if I look at the long-term history again, EBITDA margin has been in the region of about say 21%, 22% in some years, but on the lower side, we’ve seen on the higher side [Indecipherable]. Over the next two to three years, where do you see gross margins and EBITDA margins stabilizing at given all the initiatives you’re taking?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Okay. Ashwini, first of all, let me say like you said ’21 and ’22, both are aberrations. ’21 was a positive aberration, ’22 was a negative aberration and ’23 is start of returning to normalcy. But due to uncertainties today in the world, I’m not able to say, how much improvement we’ll make. So, I don’t see any possibility of deterioration, any normal possibility. But in this uncertain world, we don’t know where we will go. So, I think we should be going with an EBITDA of — I always said we’ll be slowly creeping up from our 20%. So we crept a bit and year-on-year we’ll definitely creep up and our target is to get to 25%.

And when it comes to value-add, the situation is it’s the product mix that always dictates. So we are going towards high margin products, but all these things will be visible only after two years onwards. Like I said, it’s Granules 2.0 which is going to transform the company and there we will definitely see higher margins. Meanwhile, we continue to face and mitigate the challenges that are occurring in today’s world, especially price erosion in the US and disruption of supply chains in different parts of the world; initially it was China, now it’s Europe. So, there are many mitigations that are going on, so I cannot see gross margins going up. But definitely once 2.0 takes place, we will definitely see a great upside and we are all looking excitedly for that.

Ashwini Agarwal — Demeter Advisors Llp — Analyst

Okay. Sir, on a more specific basis, could you quantify the size of savings that are possible on shipping rates?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

All I can tell you is we were a — I’ll just give you an example. For a reefer container, prices were as high as I would say $12,000 to $13,000 per container Q1. Q2, it came to around $12,000. But this quarter, we already see $8,500, $8,000 and looks like they’re still going to possibly go down.

Ashwini Agarwal — Demeter Advisors Llp — Analyst

And pre-COVID, these rates were at what, $3,000, $3,500? Would that be a fair guess?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

No. Reefer container would have been around $4,000 to $5,000.

Ashwini Agarwal — Demeter Advisors Llp — Analyst

$4,000 to $5,000. Okay. And would this kind of offset the R&D expense pickup because R&D has obviously helped the EBITDA margin in the current quarter, but R&D will normalize over the next two quarters as you suggest. So will lower shipping costs kind of offset the R&D headwind?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

There are a few areas where we see savings coming in and definitely freight cost is one. If we see in the second quarter, the freight costs have drastically played a very important part of our cost. So freight is one and there are a few other areas where we see which will get offsetting — which will offset the R&D expenditure.

Ashwini Agarwal — Demeter Advisors Llp — Analyst

That’s all I had, sir. Congratulation once again.

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Thank you.

Operator

We have our next question from the line of Rashmi Sancheti from Dolat Capital. Please go ahead.

Rashmi Sancheti — Dolat Capital — Analyst

Yeah. Good evening, and thanks for the opportunity. I’m audible, right?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Yes, Rashmi.

Rashmi Sancheti — Dolat Capital — Analyst

Okay, sir. Sir, so first I want to know about US related to the price erosion. In the fourth quarter you’ll mentioned that Granules is facing the high double-digit price erosion. So what is the current status over there, whether it has really come down or not? And how many new launches have we done in first half? And if you can quantify out of those new launches, how many new MUPS technology launches we have done from Gagillapur?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

I think it’s good that Priyanka takes up this question. Priyanka?

Priyanka Chigurupati — Executive Director

Sure. Hi. To answer your first question in terms of price erosion, there is still quite a bit of price erosion that we are having to deal with. But the good news is that it’s not as drastic as high double digits right now. So the market is slowly beginning to stabilize, but we are positioned and we are positioning ourselves to make sure that we don’t lose out on market share because of price alone.

In terms of the number of launches from MUPS, we’ve done two launches in Q4 of this past year and we have been increasing market share and winning more awards for those two products. Outside of those two products, we will be launching a few products in Q4 of this fiscal and Q1 of next year with MUPS. In addition to that, we did one more controlled substance launch from the US facility.

Rashmi Sancheti — Dolat Capital — Analyst

And how many would be total new launches, which includes MUPS and the other products in first half?

Priyanka Chigurupati — Executive Director

We did about three launches in the first half and going forward in the second half, we’ll be doing about one to two more launches and we haven’t reached our target market shares for these three products yet. So we will be aggressively bidding on these services now.

Rashmi Sancheti — Dolat Capital — Analyst

Okay. And what about metoprolol succinate approval? We add some query on it. Have you expanded to the U.S. FDA or what is the current status over there?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Rashmi, you seem to be knowing more than us about what’s happening.

Rashmi Sancheti — Dolat Capital — Analyst

Pardon, sir.

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

You seem to be knowing more than us about what is happening.

Rashmi Sancheti — Dolat Capital — Analyst

Okay.

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

I don’t think you should — go ahead, Priyanka.

Priyanka Chigurupati — Executive Director

Everything is going on track and we should be able to launch it as planned.

Rashmi Sancheti — Dolat Capital — Analyst

Okay. All right. And related to the paracetamol, the revenue mix has gone up in this quarter. We should take this it both as a pent-up demand because PAP has stabilized or based on some order visibility and all, we believe that paracetamol revenue run rate would be higher in the second half as well as in FY 2024 also?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

The same trend will continue, Rashmi. It’s not a pent-up demand. People were waiting for us to come back on track. And it’s also, like I always said, we cannibalize on other market — other suppliers so it’s a shift from some other supplier to us.

Rashmi Sancheti — Dolat Capital — Analyst

Okay. Understood. And lastly, can you give some direction in terms of revenue growth for API, PFIs and FD because this quarter we have seen some extraordinary growth and even first half the growth is extremely high especially in the API as well as in the PFI segments. I mean, first half would reflect similarly in the second half or we think that there would be some lower growth, which would be due to the season or something in the second half?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

No, we could see some improvement in the second half. But mainly, Rashmi, it’s not revenue that we are looking at and it’s not even the bottom line. It’s the cash that we are generating. So of course without revenue, without bottom line; we cannot get the cash. But it’s also product mix and what business to take, what business not to take that determines the margins. So definitely we will be improving on our cash position and bottom line. So let’s not focus too much on gross margins — sorry, on revenues.

Rashmi Sancheti — Dolat Capital — Analyst

All right, sir. Thank you. that’s it from my side.

Operator

Thank you. We have our next question from the line of Varun Basrur from Julius Baer Wealth Advisors India Private Limited. Please go ahead.

Varun Basrur — Julius Baer Wealth Advisors India Private Limited — Analyst

Yes, good afternoon. Am I audible.

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Yes, Varun

Varun Basrur — Julius Baer Wealth Advisors India Private Limited — Analyst

So a couple of questions. First is what percentage of the finance cost in this quarter is attributable to factoring of receivables? And the second question is of the cash-to-cash cycle, what percentage or what kind of raw materials inventory are we keeping on hand?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Any other question, Varun, or is that it?

Varun Basrur — Julius Baer Wealth Advisors India Private Limited — Analyst

No, no other questions.

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Sandip, you want to go ahead?

Sandip Neogi — Chief Financial Officer

So factoring cost is around 40% of the total finance cost for this quarter. And regarding the inventories, you may want to…

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

The inventory there is — I mean I don’t have just the raw material number with me. It’s the total inventory, which includes inventory here, on the sea and also in the U.S. Last quarter we had 179 days as compared to 182 days in the previous quarter and receivable days have come down, it was 74 from 83 and payable days also have come down from 121 to 112. So overall the net effect is three days on cash-to-cash cycle. And again let me just clarify a bit, Varun. When Sandip said 40% is the cost of factoring. If not we had factored, we would have had to take some working capital debt and the difference is not much. Between factoring cost and working capital PCFC, it’s a marginal difference.

Varun Basrur — Julius Baer Wealth Advisors India Private Limited — Analyst

I understood, yeah. Thank you.

Operator

Thank you. [Operator Instructions] We have our next question from the line of Maitri Parikh from Pi Square Investments. Please go ahead. We are not able to hear you. Your voice is breaking.

Maitri Parikh — Pi Square Investments — Analyst

Can you hear me now.

Operator

Yes please go ahead.

Maitri Parikh — Pi Square Investments — Analyst

Yes. So my first question is that what is our market share in paracetamol domestically and globally if we have the number?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

I don’t think we can give out that information, Maitri. It’s a little sensitive with competition and we prefer not to discuss this in an open forum.

Maitri Parikh — Pi Square Investments — Analyst

Okay. And the second question is that what is the revenue concentration of the Top five customers?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

I think it should be around 30% to 40%, Maitri, a little more than 30% I would guess. I don’t have the number offhand with me. But I can definitely tell you Top 20 customers will not be more than 60%.

Maitri Parikh — Pi Square Investments — Analyst

Okay. The third question that I have is that is the raw materials that we import so what is the percentage of total raw material that we import and from which countries do we import?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Mostly we import from China and Europe, a little bit from US, also US — maybe about 10% of our total imports may be coming from the U.S. And overall our imports should be about 30% of our revenue.

Maitri Parikh — Pi Square Investments — Analyst

Okay. 30% of revenue. And how much are we dependent on China? I mean, if there’s some problem and if we are not able to import from China, do we have the alternative?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Yes, the two materials import from China have been DCDA and PAP and now PAP, there was a shortage in China. That’s streamlined now. We also have Indian manufacturers and other international manufacturers who have come up. So there’s a lot of mitigation that has happened, and we don’t see a very great challenge on this product. On DCDA, we have one supplier out of Europe. So now with the cost of energy going up in Europe, they’re not very economical. Now China is economical. So basically, if you say DCDA, we are still quite dependent on China. And again to add to this, the whole world is dependent on China for metformin — for the intermediate of metformin. No other country makes this except one company in Germany.

Maitri Parikh — Pi Square Investments — Analyst

Okay. No issues. I think that’s all from my side. Thank you.

Operator

Thank you. [Operator Instructions] We have our next question from the line of Tushar Bohra from MK Mutual Fund. Please go ahead.

Tushar Bohra — MK Mutual Fund — Analyst

Yes. Slight correction, it’s MK Ventures. Thanks for the opportunity and congratulations to the management for an excellent set of numbers. Sir, a couple of things. A, I wanted to understand about some of the new initiatives, so details are on the hypo and onco plant, and also the biologic asset that we’ve acquired. If there’s clarity on the strategy regarding biologics as a whole going forward as well as some of the other work that we’re doing under Granules 2.0 if you could sort of explain in more detail.

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

I think this is a question for the passion of Dr. Ram Rao. He’ll be able to speak better.

Dr. K.V.S. Ram Rao — Joint Managing Director & Chief Executive Officer

I think, as I mentioned in my speech, we are focused on the high potential this oncology block and hypo block. I think earlier also we indicated that we are going to focus on the oncology formulations and as discussed and the progress is in the right direction, we are able to see a good traction with the customers in terms of business development deals and also how we can use the capacity utilization there. So I think it is going in the right direction as far as the hypo block is concerned.

Coming to your second point on the entire enzyme fermentation and what R&D assets and capabilities that we have got. We are able to really foray ourselves into enzyme-driven product development, and we have done a proof of concept of a couple of products and we seem to be quite happy in the direction in which the results have come. And very soon we will see this getting commercialized through our enzyme and fermentation technology route into the API manufacturing. So, I think as a part of the strategy what we started in the beginning, as explained in the first quarter, we continue to have the journey and we have made sufficient progress to see that the strategy is now started into the execution mode and definitely fermentation enzyme is much ahead of us.

And also on the continuous process development, we have started looking at couple of products and including DCDA. And as Chairman has pointed out in his speech and as I also told, in the next couple of years we should be able to come out with the commercialization of the continuous process development of this molecule and we are also looking at several others. So, suffice it to say that the strategy that we are now calling it as Granules 2.0 has taken off, both in terms of execution of the products, projects and also reshaping our portfolio as a long-term strategy for the organization.

Tushar Bohra — MK Mutual Fund — Analyst

Thanks. As a follow-up to this, also on the MUPS side and some of the complex generics, we had — we’ve been filing last four years and pretty much last two, two and half years, we’ve got a number of approvals in place, which we’ve steadily been launching in U.S. markets. Just want to understand as an execution where we are vis-a-vis what we were envisaging this portfolio to be, and how soon can we see real traction in the other molecules such that it starts to become a much more meaningful percentage of the total?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Tushar, some of the very important filings which we have made are yet to be approved in the MUPS area. And like Priyanka said, we will see some in Q4 of this year and some in Q1 of next year. So those will be decent products. Meanwhile we have some products which have been approved and we are steadily launching them. And the strategy of going slow, I think it’s better we hear it from Priyanka.

Priyanka Chigurupati — Executive Director

Hi, Tushar. So in terms of going slow, like we’ve always said, Granules will continue to focus on maintaining and gaining market share with a certain threshold of profitability in mind. So in the U.S. market with an increased amount of competition for all the products, our first goal is to maintain security of supply; and two, slowly but steadily market share which involves a little bit of patience and making sure we have a certain amount of inventory ready to go at any given point of time. So if we have to get to a certain large market share, the only way to do it overnight is to cut down the prices drastically, which is not what we plan on doing.

So like I said, we are in the third quarter making — of gaining momentum for two of our biggest — two of the current products on the MUPS block in India and we continue to gain market on those two products where customers themselves have reached out to us saying your competitors are not able to supply, can you do it? So with that, we’re able to make sure that we set our value proposition right in the U.S. market and that’s where we want to be as a company. Going forward, we’ll be doing the same with all the MUPS products coming out of this site.

Tushar Bohra — MK Mutual Fund — Analyst

Great. There was one point based on metformin I think on DCDA on the supply side some issues. I see overall metformin has been slightly flattish for us last couple of quarters. In fact even this quarter Y-o-Y we are flattish. Is it something that due to supply security, supply related concerns, we are not able to fully leverage the potential or do we see this as a transient phase and we should be able to grow back in metformin aggressively?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Yes, Tushar, in the U.S. we already have a decent share and I don’t think we should try to get more share at the cost of margin. So as Priyanka said, we’re going slow. We expect to maintain our margins. There’s price erosion, we can give in some but we cannot give too much. So we would like to stabilize that rather than increasing market share at lower margin. But other geographies, we have just started launching. This quarter we are launching paracetamol products in Europe and possibly next quarter we should be launching some metformin products in Europe and other geographies in the form of formulations. So this should keep growing, but it won’t grow at a very rapid pace. Europe is still virgin, but we’ll do well.

Tushar Bohra — MK Mutual Fund — Analyst

Okay. Quite helpful.

Operator

Mr. Tushar, I request you to come back in the queue.

Tushar Bohra — MK Mutual Fund — Analyst

Sure. Will do so.

Operator

Thank you. We have our next question from the line of Koushik Mohan from Ashika Group. Please go ahead.

Koushik Mohan — Ashika Group — Analyst

Hello. Hi, sir.

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Hi, Koushik.

Koushik Mohan — Ashika Group — Analyst

Hi. Hi, sir. I just wanted to know on the PAP side, sir, do we buy PAP from India?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Yes, we do, Koushik.

Koushik Mohan — Ashika Group — Analyst

So can I know the supplier? Is it from Sadhana Nitro Chem or something like that?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Not from Sadhana, that much I can tell you.

Koushik Mohan — Ashika Group — Analyst

Okay. So what is the Indian prices that we buy, sir?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Prices are almost the same competitive everywhere today. That’s a surplus product, it’s almost same.

Koushik Mohan — Ashika Group — Analyst

So it is as equivalent as the U.S. — China, sorry? It is as equivalent as China?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Yes, a little bit here and there they vary, but more or less same.

Koushik Mohan — Ashika Group — Analyst

Yes, a little bit here and there they vary, but more or less same.

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

We sell a lot of paracetamol API and PFI in Europe and we also do some contract manufacturing of paracetamol tablets for certain customers including some brands. But right now we are launching our own dossiers along with partners. We filed for some products and this quarter we will launch in two countries.

Koushik Mohan — Ashika Group — Analyst

Sir, is there any changes in paracetamol because of the quality of PAP?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

If the quality of that product is bad. The quality of PAP is not bad, it’s fairly decent. It’s of the same quality. We had some problems with one or two new suppliers, but we worked with them to make sure the quality comes out well.

Koushik Mohan — Ashika Group — Analyst

Okay. So there is a new revolution in this PAP right, its nitrobenzene route. How about — do we buy PAP in that route or in any other format of PAP that we’re buying?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Nobody makes it from nitrobenzene today for sale in the market.

Koushik Mohan — Ashika Group — Analyst

Okay. Okay. Thank you. Thanks I got you and Happy Diwali.

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Thanks. Same to you.

Koushik Mohan — Ashika Group — Analyst

Thank you.

Operator

Thank you. [Operator Instructions] We have a next question from the line of Maulik from Anand Rathi. Please go ahead.

Maulik Varia — Anand Rathi — Analyst

Yeah. Good evening Sir. I just have one question.

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Hi Maulik.

Maulik Varia — Anand Rathi — Analyst

So our sales have grown on the API side and mainly from the Paracetamol side. So just wanted to know that is it because of increase in realization of that product or due to increase in volumes of that product?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

It’s actually volume. I don’t know if you were here in the call right from beginning. We mentioned that we have availability of more raw materials and that has led to increased production and increased sale.

Maulik Varia — Anand Rathi — Analyst

Okay. Sorry, I have been missed that. Okay. So it’s clear. Thanks a lot sir.

Operator

Thank you. We have our next question from the line of Suresh Agarwal, an Individual Investor. Please go ahead.

Suresh Agarwal — Individual Investor — Analyst

Good evening, Sir.

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Good evening.

Priyanka Chigurupati — Executive Director

Good evening, Suresh.

Suresh Agarwal — Individual Investor — Analyst

What’s our dividend policy sir?

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Suresh, you know the amount of buyback we did. We will give it back in the form of dividend or buyback, whichever way. Our priority is to make sure the investors are benefited. And if you calculate the amount of money that was given, you can understand what we are planning to do.

Operator

His line is disconnected.

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Okay.

Operator

We’ll move on to the next question from Ashwini Agarwal from Demeter Advisors Llp. Please go ahead.

Ashwini Agarwal — Demeter Advisors Llp — Analyst

Hi. Just a follow-up question from me, I’m referring to your opening remarks where you said that notwithstanding the buyback and the planned capex, you still expect to generate free operating cash flow, which will be used to reduce debt.

And considering that the value addition margins and EBITDA margins are likely to be steady, that kind of hints at very strong second half in revenue growth, and I just want to understand what’s driving that confidence.

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

It’s mainly going to be working capital management, Ashwini. And it’s working with our customers for quicker payments and reducing the receivable days. And also we are working with our suppliers to increase the payable days.

And inventory is a very cautious approach we are taking because if you don’t have enough inventories in the U.S., you could end up with failure to supply penalties, which could be disastrous. So that’s very clear. We need to really study this, but we are very cautious on that.

So to answer your question once again to sum it up, it’s mainly reduction of receivable days and increase of payable days. And also the raw material inventory in India we could possibly reduce, but not the finished product.

Ashwini Agarwal — Demeter Advisors Llp — Analyst

Okay. So essentially working capital is going to get a lot tighter in second half. That’s going to be…

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

All our money — conversion of operational profit in operational cash was not great in the past because all our money was getting sucked into working capital. And we were really — our borrowing was so low — the cost of borrowing, we felt it was okay to — at one point of time it was only 0.6% before the SOFR went up so we didn’t really bother. But now we thought the focus has come on cash and cash alone so we thought let’s get the cash in.

Ashwini Agarwal — Demeter Advisors Llp — Analyst

Okay. Thank you. That’s helpful. Thank you and all the best and Happy Diwali

Sandip Neogi — Chief Financial Officer

Thank you, Ashwini. Happy Diwali to you too.

Operator

Thank you [Operator Instructions] We have a question from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Sir, just one question on the overall investments into onco, hypo and biologic assets till date and how much do you intend to invest maybe in FY ’23 and ’24?

Sandip Neogi — Chief Financial Officer

Onco investment is INR90 crores and for this biotech company we have only invested INR13 crores.

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Going forward he’s asking. We have already given a guidance for this year and next year is going to be INR300 crores. So we don’t expect to invest anything in the onco plant, but on the biologics side we’ll definitely be investing. And after this the investments could be higher after this year, next year, we’ll see what it turns out. But this year, next year will be INR300 crores each.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Fair enough, sir.

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

Thank you.

Operator

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

Dr. Krishna Prasad Chigurupati — Chairman And Managing Director

So ladies and gentlemen, once again thank you very much for joining us today. And I would like to reiterate that we had a — we are working hard to continue the run-up just like we had in Q2 and we will try our best to make sure that we continue to grow profitably. So thank you very much.

Operator

[Operator Closing Remarks]